-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U7+3AJVLYEgvOOyj9KuvFxT5tkN9YJGYBGK5R0JOzgvupWvqVc16nBpTYqubjGZl jtUVNvKA9zZcAILGXXFT4A== 0000074260-96-000006.txt : 19960329 0000074260-96-000006.hdr.sgml : 19960329 ACCESSION NUMBER: 0000074260-96-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960328 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: OLD REPUBLIC INTERNATIONAL CORP CENTRAL INDEX KEY: 0000074260 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 362678171 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-04625 FILM NUMBER: 96540000 BUSINESS ADDRESS: STREET 1: 307 N MICHIGAN AVE CITY: CHICAGO STATE: IL ZIP: 60601 BUSINESS PHONE: 3123468100 MAIL ADDRESS: STREET 1: 307 N MICHIGAN AVE CITY: CHICAGO STATE: IL ZIP: 60601 10-K 1 1995 ANNUAL FORM 1OK UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended: December 31, 1995 OR _ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from _________________ to _______________ Commission File Number: 0-4625 OLD REPUBLIC INTERNATIONAL CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware No. 36-2678171 - ------------------------------- --------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 307 North Michigan Avenue, Chicago, Illinois 60601 - -------------------------------------------- --------------------------------- (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: 312-346-8100 Securities registered pursuant to Section 12(b) of the Act: Share/Par Value Outstanding Name of each exchange Title of each class February 29, 1996 on which registered - ------------------- ----------------- ----------------------- 5 3/4% Convertible Subordinated Debentures Due August 15, 2002 $99,077,000 ** New York Stock Exchange 8 3/4% Series H Cumulative Preferred Stock 2,192,100 New York Stock Exchange Common Stock/$1 par value 53,288,018 * New York Stock Exchange (*) Excludes 4,439,267 common shares issued, outstanding and held by an affiliate, which are classified as treasury stock for financial accounting purposes only. (**) On February 12, 1996, the Company called for the redemption of all of these convertible subordinated debentures. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was re- quired to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes:_X_/ No:___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part Ill of this Form 10-K or any amendment to this Form 10-K._X_ The aggregate market value of the Company's voting Common Stock held by non-affiliates of the registrant computed by reference to the closing price at which the stock was quoted as of February 29, 1996 was $1,825,114,617. Documents incorporated by reference: - ----------------------------------- The following documents are incorporated by reference into that part of this Form 10-K designated to the right of the document title. Title Part Proxy statement for the 1996 Annual Meeting of Shareholders III, Items 10, 11, 12 and 13 Exhibits as specified in exhibit index (page 52) IV, Item 14 ____________________ There are 54 pages in this report PART I Item 1-Business (a) General Development of Business. Old Republic International Corporation is a Chicago-based insurance holding company with subsidiaries engaged in the general (property & liability), mortgage guaranty, title, and life (life & disability) insurance businesses. In this report, "Old Republic", "the Corporation", or "the Company" refers to Old Republic International Corporation and its subsidiaries as the context requires. The aforementioned insurance segments are organized as the Old Republic General, Mortgage Guaranty, Title, and Life Groups, and references herein to such groups apply to the Company's subsidiaries engaged in the respective segments of business. Financial Information Relating to Segments of Business (a) The contributions to net revenues, and income (loss) before taxes and the cumulative effect of accounting changes of each Old Republic segment are set forth below for the years shown, together with their respective assets at the end of each year. The information below should be read in conjunction with the consolidated financial statements, the notes thereto, and the "Management Analysis of Financial Position and Results of Operations" appearing elsewhere herein.
($ in Millions) ----------------------------------------------------------- Years Ended December 31, ----------------------------------------------------------- Net Revenues (b) Income (Loss) Before Taxes ---------------------------- ---------------------------- 1995 1994 1993 1995 1994 1993 -------- -------- -------- -------- -------- -------- General. . . . . . . . . . . . . . . . . . . . . . $1,056.1 $1,051.4 $1,058.5 $ 171.1 $ 154.2 $ 124.5 Mortgage Guaranty. . . . . . . . . . . . . . . . . 203.9 158.3 118.6 102.8 78.3 61.3 Title. . . . . . . . . . . . . . . . . . . . . . . 326.2 404.7 467.9 4.6 (.2) 32.1 Life . . . . . . . . . . . . . . . . . . . . . . . 58.0 55.7 49.5 7.9 6.4 6.5 Other Operations - Net . . . . . . . . . . . . . . 1.8 .9 1.3 (20.2) (20.6) (21.4) -------- -------- -------- -------- -------- -------- Subtotal. . . . . . . . . . . . . . . . . . . . . 1,646.1 1,671.2 1,696.0 266.2 218.1 203.0 Realized Investment Gains. . . . . . . . . . . . . 49.7 7.7 40.2 49.7 7.7 40.2 -------- -------- -------- -------- -------- -------- Total . . . . . . . . . . . . . . . . . . . . . . $1,695.9 $1,679.0 $1,736.3 $ 316.0 $ 225.8 $ 243.3 ======== ======== ======== ======== ======== ========
Assets at December 31, ---------------------------- 1995 1994 1993 -------- -------- -------- General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,356.8 $5,199.9 $5,075.1 Mortgage Guaranty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 634.0 487.8 408.3 Title. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 415.8 402.4 402.7 Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 328.2 322.7 336.8 Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,593.5 $6,262.9 $6,098.3 ======== ======== ======== __________ (a) Reference is made to the table in Note 7 of the Notes to Consolidated Financial Statements, incorporated herein by reference, which shows the contribution of each subcategory to consolidated net revenues and income or loss before income taxes of Old Republic's insurance industry segments. (b) Revenues consist of net premiums, fees, net investment and other income earned; realized investment gains are shown in total for all groups combined.
General Insurance Group Through its General Insurance Group subsidiaries, the Corporation assumes risks and performs related risk management and marketing services pertaining to a large variety of property and liability commercial insurance coverages. Old Republic does not have a meaningful participation in personal lines of insurance. Liability Coverages: Workers' compensation, general liability (including the general liability portion of commercial package policies), and commercial automobile full coverage protection are the major classes of insurance underwritten for businesses and public entities such as municipalities. Within these classes of insurance, Old Republic specializes in a number of industries, most prominently the transportation, coal and energy services, construction and forest product industries. Such business is primarily produced through agency and brokerage channels. The rates charged for all workers' compensation insurance are generally regulated by the various states. It is therefore possible that the rate increases necessary to cover any expansion of benefits under state laws or increases in claim frequency or severity may not always be granted soon enough to enable insurers to fully recover the amount of the benefits they must pay. During the past ten years, the Corporation has steadily diversified its General Insurance Group business. This diversification has been achieved through a combination of internal growth, the establishment of new subsidiaries, and through selective mergers with other companies. For 1995, production of direct workers' compensation premiums accounted for 28.2% of consolidated direct premiums written by the General Insurance Group. For the same year, general liability and commercial automobile (principally trucking) direct insurance premiums amounted to 12.0% and 39.1%, respectively, of consolidated direct premiums written. During the past decade, specialty programs have also been expanded or initiated to insure corporations' exposures to directors' and officers' and errors and omissions liability, to cover owners and operators of private aircraft for hull and liability exposures, and to insure grain elevators and liquid petroleum gas operations. The Corporation assumes (on both treaty and facultative bases) a moderate amount of reinsurance business produced by other insurance or reinsurance companies. Most of this business encompasses workers' compensation, general and automobile liability lines, as well as a moderate amount of property exposures. Property and Other Coverages: Old Republic's property insurance business includes physical damage insurance on commercial automobile and trucking risks. A small volume of business is represented by fire and other physical perils for houses and commercial properties. All such insurance is produced through agents or financial intermediaries, such as finance companies, and on a reinsurance assumed basis. Fidelity and surety coverages are underwritten through agents by the Old Republic Surety Group, Inc. Old Republic Insured Credit Services, Inc., a wholly-owned subsidiary, has marketed loan and retail installment sales credit guaranty insurance since 1955 through commercial banks and thrift institutions. This coverage provides lenders with a guaranty against defaults on home equity and home improvement loans and installment sales contracts. Auto Warranty and Home Warranty, while still relatively small businesses, are marketed directly by Old Republic through its own employees and selected independent agents. Mortgage Guaranty Group Real estate mortgage loan insurance protects lending institutions against certain losses, generally to the extent of 10% to 35% of the sum of the outstanding amount of each insured mortgage loan, and allowable costs incurred in the event of default by the borrower. The Corporation insures only first mortgage loans, primarily on residential properties having one-to-four family dwelling units. Mortgage Guaranty Insurance premiums originate from savings and loan associations, mortgage bankers and other lending institutions.The Corporation's residential real estate loan insurance business is originated, approximately 21% by savings and loan associations, 65% by commercial bankers and the remaining 14% through other lenders. Increased failures of savings and loan associations and other types of lending institutions have not had and should not have a bearing on the mortgage guaranty or other coverages in the Corporation's business since the profitability of its insurance products is not tied to any significant degree to the financial well-being of these institutions. While it is possible that the failure of a large number of such institutions could increase the competition for sales of certain insurance products to the surviving institutions, it is also likely that other institutions or providers of financial services would emerge to take their place. The Corporation's mortgage guaranty insurance in force at December 31, 1995, was originally produced by approximately 3,600 different lending institutions and about 2,100 such institutions originated business in 1995. Annual, monthly and single premium plans for residential real estate loan insurance are offered. Annual plans provide coverage on a year to year basis with first year premiums being dependent on the loan-to-value ratio and the coverage offered. Annual renewal premiums are charged on the basis of the outstanding loan balance on the anniversary date, or, if selected, on the original loan balance. Monthly plans provide coverage on a month-to-month basis with premiums being dependent on the loan-to-value ratio and the coverage offered. In the case of monthly premium plans, the first month and all renewal months are charged on the basis of the outstanding loan amount on the anniversary date or, if selected, on the original loan balance. Single premium plans provide coverage for a period of three to fifteen years, or the number of years required to amortize a standard mortgage to an 80% loan-to- value ratio, if selected. The premium charged similarly depends on the loan- to-value ratio, the coverage offered, the type of loan instrument (whether fixed rate/fixed payment or an adjustable mortgage loan) and whether the property is to be owner occupied. Approximately 64% of the residential real estate loan insurance in force at December 31, 1995, has been written under annual premium plans. However, the monthly premium plan, a new product that was introduced in 1993, accounted for approximately 88% of the new business written in 1995. The Corporation limits its residential real estate insurance to lenders approved by it and supervised or regulated by federal or state authorities in order to obtain reasonable assurance as to the effectiveness of such institutions' lending practices. A master policy is issued to each approved lender, but the master policy does not obligate the Corporation to issue insurance on any particular loan. To obtain insurance on a specific mortgage loan, an approved lender submits an application, supported by a copy of the borrower's loan application, an appraisal report on the property by either the lender or an independent appraiser, a written credit report on the borrower,an affidavit of the borrower's equity and certain other information. The underwriting department reviews this material and approves or rejects the application, usually on the day it is received. The Corporation generally adheres to the underwriting guidelines published by the Federal Home Loan Mortgage Corporation. Upon approval of an application for insurance of a loan, the Corporation issues a commitment to insure the loan; this is followed by a certificate of insurance when the loan is consummated. Title Insurance Group The title insurance business consists primarily of the issuance of policies to real estate purchasers and investors based upon searches of the public records which contain information concerning interests in real property. The policy insures against losses arising out of defects, liens and encumbrances affecting the insured title and not excluded or excepted from the coverage of the policy. There are two basic types of title insurance policies: lenders' policies and owners' policies. Both are issued for a onetime premium. Most mortgages made in the United States are extended by savings and loan associations, mortgage bankers, savings and commercial banks, state and federal agencies, and life insurance companies. The financial institutions secure title insurance policies to protect their mortgagees' interest in the real property. This protection remains in effect for as long as the mortgagee has an interest in the property. A separate title insurance policy is issued to the owner of the real estate. An owner's policy of title insurance protects an owner's interest in the title to the property. The premiums charged for the issuance of title insurance policies vary with the policy amount and the type of policy issued. The premium is collected in full when the real estate transaction is closed, there being no recurring fee thereafter. In many areas, premiums charged on subsequent policies on the same land may be reduced, depending generally upon the time elapsed between issuance of the previous policies and the nature of the transactions for which the policies are issued. Most of the charge to the consumer relates to title services rendered in conjunction with the issuance of a policy rather than to the possibility of loss due to risks insured against. Accordingly, the service performed by a title insurer relates for the most part to the prevention of loss rather than to the assumption of the risk of loss. In connection with its title insurance operations, the Corporation also provides escrow facilities, services for the disbursement of construction funds, and other services pertaining to real estate transfers. Life Insurance Group Credit & Other Life and Disability: Old Republic markets and writes consumer credit life and disability insurance primarily through consumer finance companies, banks, savings and loan associations and automobile dealers. Approximately one-half of the borrowers insured under consumer credit life insurance are also covered by consumer credit disability protection. Credit life insurance provides for the repayment of a loan, installment purchase, or other debt obligation in the event of the death of the borrower, while credit disability insurance provides for the payment of installments due on such debt while the borrower is disabled. Old Republic has written various conventional life, disability/accident and health insurance coverages for many years, principally on a direct marketing basis through banks and other financial services institutions. Ordinary term life insurance is sold through independent agents and brokers for relatively large face amounts, in both the United States and Canada. Marketing of term life insurance products is aimed principally toward self-employed individuals, professionals, owners of small businesses, and high net worth persons. Annuities: In the past, Old Republic marketed annuity policies, some of which remain outstanding, through securities dealers in New York State. These policies provide for annuity benefits based on premiums paid and accumulating with interest over time. Since 1985, the volume of annuity business has been inconsequential because the Corporation has been unwilling to invest in lower quality or illiquid investments to help assure higher, more competitive guaranteed rates. Consolidated Underwriting Statistics The following table reflects underwriting statistics covering: 1) premiums together with loss, expense, and policyholders' dividend ratios for the major coverages underwritten solely in the General, Mortgage Guaranty and Title in- surance groups, and disability/accident & health coverages underwritten directly or through reinsurance in both the Life and General Insurance groups; 2) a summary of net retained life insurance in force at the end of the years shown:
($ in Millions) Years Ended December 31, 1995 1994 1993 ---------- ---------- ---------- General Insurance Group: Overall Experience: Net Premiums Written. . . . . . . . . . . $ 876.1 $ 851.6 $ 876.7 Net Premiums Earned (a) . . . . . . . . . $ 847.7 $ 860.6 $ 866.3 Loss Ratio. . . . . . . . . . . . . . . . 75% 76% 81% Policyholders' Dividend Ratio . . . . . . 1% 1% (1)% Expense Ratio(a). . . . . . . . . . . . . 26% 26% 26% ---------- ---------- ---------- Composite Ratio . . . . . . . . . . . . . 102% 103% 106% ========== ========== ========== Experience by Major Coverages: Workers' Compensation: Net Premiums Earned (a) . . . . . . . . . $ 187.2 $ 239.4 $ 271.1 Loss Ratio . . . . . . . . . . . . . . . 88% 81% 96% Policyholders' Dividend Ratio . . . . . . 3% 4% (2)% ========== ========== ========== Commercial Automobile (Principally trucking): Net Premiums Earned (a) . . . . . . . . . $ 361.3 $ 321.2 $ 284.1 Loss Ratio . . . . . . . . . . . . . . . 79% 82% 77% ========== ========== ========== General Liability: Net Premiums Earned (a) . . . . . . . . . $ 53.7 $ 54.2 $ 54.0 Loss Ratio . . . . . . . . . . . . . . . 55% 84% 80% ========== ========== ========== Property and Other Coverages: Net Premiums Earned (a) . . . . . . . . . $ 245.5 $ 245.7 $ 257.3 Loss Ratio . . . . . . . . . . . . . . . 69% 62% 69% ========== ========== ========== Mortgage Guaranty Group: Net Premiums Earned (b) . . . . . . . . . $ 175.2 $ 134.5 $ 96.8 Loss Ratio (a) . . . . . . . . . . . . . 34% 28% 26% ========== ========== ========== Title Insurance Group:(b) Net Premiums Earned . . . . . . . . . . . $ 183.3 $ 244.4 $ 249.6 Combined Net Premiums & Fees Earned . . . $ 305.5 $ 384.7 $ 449.4 Loss Ratio:To Net Premiums Earned . . . . 14% 18% 26% :To Net Premiums & Fees Earned. 8% 12% 15% ========== ========== ========== Disability/Accident & Health (c): Net Premiums Earned. . . . . . . . . . . $ 31.2 $ 28.5 $ 20.6 Loss Ratio . . . . . . . . . . . . . . . 44% 46% 59% ========== ========== ========== Net Retained Life Insurance In Force: Ordinary Life . . . . . . . . . . . . . $ 4,063.4 $ 4,230.0 $ 4,046.7 Credit and Other Life. . . . . . . . . . 173.6 193.3 239.8 ---------- ---------- ---------- Total . . . . . . . . . . . . . . . . . $ 4,237.0 $ 4,423.4 $ 4,286.7 ========== ========== ========== __________ (a) Statutory net premiums earned and expense ratios may vary from amounts calculated pursuant to generally accepted accounting principles due to differences in the calculation of unearned premium reserves and acquisition cost under each accounting method. (b) Amounts and ratios reported are determined pursuant to generally accepted accounting principles. (c) Disability/accident & health data reflect the composite experience of the Life and General Insurance segments of business. Accordingly, the General Insurance Group composite experience includes premiums and related costs for disability/accident & health coverages underwritten directly or through reinsurance in such group.
Variations in the loss (including related claim settlement expense) ratios are caused by changes in the frequency and severity of claims incurred, changes in premium rates and the level of premium refunds, and periodic changes in claim and claim expense reserve estimates resulting from ongoing reevaluations of reported and unreported claims and claim expenses. Loss, expense, policyholders' dividends, and composite ratios have been rounded to the nearest percentage point. The loss ratios include loss adjustment expenses where appropriate. Policyholders' dividends are a reflection of changes in loss experience for individual or groups of policies, rather than overall results, and should be viewed in conjunction with loss ratio trends; policyholders' dividends apply principally to workers' compensation insurance. General Insurance Group loss ratios for workers' compensation and liability insurance coverages in particular may fluctuate due to a variety of factors. The inherent volatility of claims experience due to chance events in any one year, greater loss costs emanating from involuntary business (i.e. from industry-wide insurance pools and associations in which participation is basically mandatory), and added provisions for loss costs not recoverable from assuming reinsurers which have experienced financial difficulties are some of the major factors influencing comparisons of loss ratios between years. The Company generally underwrites concurrently workers' compensation, commercial automobile (liability and physical damage), and general liability insurance coverages for a large number of customers. Accordingly, an evaluation of trends in premiums, loss and dividend ratios for these coverages should be considered in light of such a concurrent underwriting approach. The increase in the mortgage guaranty loss ratio is due to an increase in claim frequency, mostly in the California market which has been affected by an economic slowdown for the past several years. The Title Insurance Group loss ratios for the years presented reflect improving loss severity and frequency trends for business underwritten since 1992. In 1993, however, additional claim provisions of $13.3 million covering various escrow losses in process of final settlement increased the loss ratio (as a percentage of premiums and fees earned) by 3 percentage points. The increases in net ordinary life insurance in force in 1994 and 1993 are attributed to the introduction beginning in 1990 of more favorably priced life products that received greater market acceptance. The decrease in net ordinary life insurance in force in 1995 is attributed to competitive market pressures which served to reduce first year premium production. General Insurance Claim Reserves The Corporation's property and liability insurance subsidiaries establish claim reserves which consist of estimates to settle: a) reported claims; b) claims which have been incurred as of each balance sheet date but have not as yet been reported ("IBNR") to the insurance subsidiaries; and c) the direct costs, (such as attorneys' fees which are allocable to individual claims) and indirect costs (such as salaries and rent applicable to the overall administration of the claim department) to administer known and IBNR claims. Such claim reserves, except as to classification in the Consolidated Balance Sheets in terms of gross and reinsured portions, are reported for financial and regulatory reporting purposes at amounts that are substantially the same. The establishment of claim reserves by property and liability insurers, such as the Corporation's General Insurance Group, is a reasonably complex and dynamic process influenced by a large variety of factors. These include past experience applicable to the anticipated costs of various types of claims, continually evolving and changing legal theories emanating from the judicial system, actuarial studies, the professional experience and expertise of the Company's claim departments' personnel or attorneys and independent adjusters retained to handle individual claims, the effect of inflationary trends on future claim settlement costs, and periodic changes in claim frequency patterns such as those caused by natural disasters, illnesses, accidents, or work-related injuries. Consequently, the reserve-setting process relies on the judgments and opinions of a large number of persons, on historical precedent and trends, and on expectations as to future developments. At any point in time, the Company and the industry are exposed to possibly higher than anticipated claim costs due to the aforementioned factors, and to the evolution, interpretation, and expansion of tort law, as well as to the effects of unexpected jury verdicts. In establishing claim reserves, the possible increase in future loss settlement costs caused by inflation is considered implicitly, along with the many other factors cited above. Reserves are generally set to provide for the ultimate cost of all claims. With regard to workers' compensation reserves, however, the ultimate cost of long-term disability or pension-type claims is discounted to present value based on interest rates ranging from 3.5% to 4.0%. The Company, where applicable, uses only such discounted reserves in evaluating the results of its operations, in pricing its products and settling retro- spective and reinsured accounts, in evaluating policy terms and experience, and for other general business purposes. Solely to comply with reporting rules man- dated by the Securities and Exchange Commission, however, Old Republic has made statistical studies of applicable workers' compensation reserves to obtain estimates of the amounts by which claim and claim adjustment expense reserves, net of reinsurance, have been discounted. These studies have resulted in estimates of such amounts at approximately $162.8, $169.1 and $154.3 million, as of December 31, 1995, 1994, and 1993, respectively. It should be noted, however, that these differences between discounted and non-discounted (terminal) reserves are, fundamentally, of an informational nature, and are not indicative of an effect on operating results for any one or series of years for the above-noted reasons, and for the effect of retrospective rating and similar plans as discussed under "Reserves, Reinsurance, and Retrospective Adjustments" elsewhere herein. The Company believes that its overall reserving practices have been consistently applied over many years, and that its aggregate net reserves have resulted in reasonable approximations of the ultimate net costs of claims incurred. However, no representation is made that ultimate net claim and related costs will not be greater or lower than previously established reserves. The following table shows the indicated deficiencies or redundancies for the years 1985 to 1995. In reviewing this tabular data, it should be noted that prior periods' loss payment and development trends may not be repeated in the future due to the large variety of factors influencing the reserving process outlined herein above. With respect to the 1985 and 1986 data in particular, the indicated deficiency pertains largely to adverse claim development for reinsurance assumed business which the Company has de-emphasized since 1986 due to unacceptably high loss ratios. Further, the reserve redundancies or deficiencies shown for all years are not necessarily indicative of the effect on reported results of any one or series of years since retrospective premium and commission adjustments employed in various parts of the Company's business tend to partially or fully offset or negate such effects. (See "Consolidated Underwriting Statistics" above, and "Reserves, Reinsurance, and Retrospective Adjustments" elsewhere herein). The subject of property and liability insurance claim reserves has been written about and analyzed extensively by a large number of professionals and regulators. Accordingly, the above discussion summary must, of necessity, be regarded as a basic outline of the subject and not as a definitive presentation.
($ in Millions/Percentages to Nearest Whole Point) - ----------------------------------------------------------------------------------------------------------------------------------- (a) As of December 31: 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 ---- ---- ---- ---- ---- ---- ----- ---- ---- ---- ---- (b) Liability (1) for unpaid claims and claim adjustment expenses(2): $743 $974 $1,130 $1,271 $1,335 $1,435 $1,540 $1,573 $1,700 $1,768 $1,821 ============================================================================================== (c) Paid (cumulative) as of (3): - ------------------------------- One year later 25% 17% 18% 21% 20% 22% 25% 20% 20% 20% -% Two years later 33 33 33 34 34 37 37 33 33 - - Three years later 42 45 42 44 45 45 45 42 - - - Four years later 51 52 50 52 50 52 51 - - - - Five years later 56 58 56 56 56 56 - - - - - Six years later 61 63 60 60 60 - - - - - - Seven years later 65 65 64 64 - - - - - - - Eight years later 67 69 67 - - - - - - - - Nine years later 70 72 - - - - - - - - - Ten years later 73% -% -% -% -% -% -% -% -% -% -% ============================================================================================== (d) Liability reestimated (i.e., cumulative payments plus reestimated ending liability) as of (4): - -------------------------------- One year later 109% 103% 104% 101% 98% 100% 99% 97% 95% 95% -% Two years later 120 111 104 97 99 100 97 94 91 - - Three years later 117 110 100 98 98 99 96 93 - - - Four years later 117 106 101 98 98 99 97 - - - - Five years later 114 108 101 99 99 100 - - - - - Six years later 116 108 102 99 100 - - - - - - Seven years later 115 109 103 101 - - - - - - - Eight years later 117 111 105 - - - - - - - - Nine years later 118 112 - - - - - - - - - Ten years later 120% -% -% -% -% -% -% -% -% -% -% ============================================================================================= (e) Redundancy (deficiency)(5): For each year-end at (a): -20% -12% -5% -1% -% -% 3% 7% 9% 5% -% ============================================================================================= Average for all year-ends at (a): 0.4% ==== _____ (1) Amounts are reported net of reinsurance recoverable. (2) Excluding unallocated loss adjustment expense reserves. (3) Percent of most recent reestimated liability (line d). Decreases in paid loss percentages may at times reflect the reassumption by the Company of certain previously ceded loss reserves. (4) Percent of beginning liability (line b) for unpaid claims and claim adjustment expenses. (5) Most current liability reestimated (line d) as a percent of beginning liability (line b).
The following table shows an analysis of changes in aggregate reserves for the Company's property and liability insurance claims and claim adjustment expenses (1) for each of the years shown.
($ in Millions) --------------------------------- Years Ended December 31, --------------------------------- 1995 1994 1993 --------- --------- --------- Amount of reserves for unpaid claims and claim adjustment expenses at the beginning of each year, net of reinsurance losses recoverable . $ 1,768.3 $ 1,700.8 $ 1,573.9 --------- --------- --------- Incurred claims and claim adjustment expenses: Provisions for insured events of the current year. . . . . . . . . . . 684.7 705.8 721.7 Change in provision for insured events of prior years. . . . . . . . . (92.6) (89.1) (51.6) --------- --------- --------- Total incurred claims and claim adjustment expenses. . . . . . . . 592.1 616.7 670.0 --------- --------- --------- Payments: Claims and claim adjustment expenses attributable to insured events of the current year . . . . . . . . . . . . . . . . . . . . . 207.1 236.6 246.2 Claims and claim adjustment expenses attributable to insured events of prior years . . . . . . . . . . . . . . . . . . . . . . . 332.4 312.4 296.9 --------- --------- --------- Total payments . . . . . . . . . . . . . . . . . . . . . . . . . . 539.5 549.0 543.1 --------- --------- --------- Amount of reserves for unpaid claims and claim adjustment expenses at the end of each year (2), net of reinsurance losses recoverable . . 1,820.9 1,768.3 1,700.8 Reinsurance losses recoverable (3) . . . . . . . . . . . . . . . . . . . 1,311.8 1,407.4 1,403.0 --------- --------- --------- Amount of reserves for unpaid claims and claim adjustment expenses . . . $ 3,132.7 $ 3,175.7 $ 3,103.8 ========= ========= ========= __________ (1) Excluding unallocated loss adjustment expense reserves. (2) Reserves for incurred but not reported losses amounted to approximately 31.1%, 30.4% and 30.7% of the totals shown as of December 31, 1995, 1994 and 1993, respectively. (3) See Item 6 - Selected Financial Data, note (b).
The data in the two tables above, incorporates the Corporation's estimates for various asbestosis and environmental impairment ("A&E") claims or related costs that have been filed in the normal course of business against a number of its insurance subsidiaries. Such claims relate primarily to policies issued prior to 1985, many during a short period between 1981 and 1982 pursuant to an agency agreement canceled in 1982. During all years and through the current date, the Corporation's insurance subsidiaries have typically issued general liability insurance policies with face amounts ranging between $1 million and $2 million and rarely exceeding $10 million. Such policies have, in turn, been subject to reinsurance cessions which have typically reduced the Corporation's retentions to $500,000 or less as to each claim. The Corporation's reserving methods, particularly as they apply to formula- based reserves, have been established to cover normal claim occurrences as well as unusual exposures such as those pertaining to A&E claims and related costs. At times, however, the Corporation's insurance subsidiaries also establish specific formula and other reserves as part of their overall claim and claim expense reserves. These are intended to cover additional litigation and other costs that are likely to be incurred to protect the Company's interests in litigated cases in particular. At December 31, 1995, the Corporation's aggregate indemnity and loss adjustment expense reserves specifically identified with these A&E exposures amounted to approximately $87.4 million gross, and $60.1 million net of reinsurance. Based on average annual claims payments during the five most recent calendar years, such reserves represented 10.7 years (gross) and 12.7 years (net) of average annual claims payments. Old Republic disagrees with the allegations of liability on virtually all A&E related claims of which it has knowledge on the grounds that exclusions in the policies preclude coverage for nearly all such claims, and that the Corporation never intended to assume such risks. Old Republic's exposure on such claims cannot therefore be calculated by conventional insurance reserving methods for this and a variety of reasons, including: a) the absence of statistically valid data inasmuch as such claims typically involve long reporting delays and very often uncertainty as to the number and identity of insureds against whom such claims have arisen or will arise; and b) the litigation history of such or similar claims for other insurance industry members that has produced court decisions that have been inconsistent with regard to such issues as when the alleged loss occurred, which policies provide coverage, how a loss is to be allocated among potentially responsible insureds and/or their insurance carriers, how policy coverage exclusions are to be interpreted, what types of environmental impairment or toxic tort claims are covered, when the insurer's duty to defend is triggered, how policy limits are to be calculated, and whether clean-up costs constitute property damage. Individual insurance companies and others who have evaluated the potential costs of litigating and settling A&E claims have noted with increasing concern the possibility that resolution of such claims, by applying liability retro- actively in the context of the existing insurance system, could likely bank- rupt or undermine seriously the financial condition of the property and liability insurance industry. In light of this substantial public policy issue, the Corporation is of the view that the courts will not resolve in the near future the litigation gridlock stemming from the non-resolution to date of many environmental claims in particular. In recent times, the Executive Branch and/or the United States Congress have proposed changes in the legislation and rules affecting environmental claims. As of December 31, 1995, however, there is no solid evidence to suggest that forthcoming changes might mitigate or reduce some or all of these claim exposures. Because of the above issues and uncertainties, estimation of reserves for losses and allocated loss adjustment expenses for the above noted types of claims is extremely difficult or impossible. Accordingly, no representation can be made that the Corporation's reserves for such claims and related costs will not prove to be overstated or understated in the future. (b) Investments. In common with other insurance organizations, Old Republic invests most funds provided by operations in income-producing investment securities and bank deposits. All investments must comply with applicable insurance laws and regulations which prescribe the nature, form, quality, and relative amounts of investments which may be made by insurance companies. Generally, these laws and regulations permit insurance companies to invest within varying limitations in state, municipal and federal government obligations, corporate obligations, preferred and common stocks, certain types of real estate, and first mortgage loans. Old Republic's investment policies are also influenced by the terms of the insurance coverages written, by its expectations as to the timing of claim and benefit payments, and by income tax considerations. The following tables show invested assets at the end of the last three years, together with investment income for such years.
Consolidated Investments ($ in Millions) December 31, - ------------------------------------------------------------------------------------------ 1995 1994 1993 ---------- ---------- ---------- Held to Maturity Fixed Maturity Securities: Corporate. . . . . . . . . . . . . . . . . . . . . . $ - $ 1,356.2 $ 1,348.5 Utilities. . . . . . . . . . . . . . . . . . . . . . 995.5 919.3 883.0 Tax-Exempt . . . . . . . . . . . . . . . . . . . . . 717.8 450.7 276.9 Redeemable Preferred Stocks. . . . . . . . . . . . . .7 .8 1.2 ---------- ---------- ---------- 1,714.1 2,727.2 2,509.8 ---------- ---------- ---------- Other Invested Assets: Mortgage Loans . . . . . . . . . . . . . . . . . . . 11.8 14.0 17.0 Policy Loans . . . . . . . . . . . . . . . . . . . . 2.1 2.1 2.1 Collateral Loans . . . . . . . . . . . . . . . . . . .3 .4 .5 Sundry . . . . . . . . . . . . . . . . . . . . . . . 12.6 10.7 - ---------- ---------- ---------- 26.9 27.3 19.8 ---------- ---------- ---------- Total held to maturity . . . . . . . . . . . . . . . 1,741.1 2,754.6 2,529.6 ---------- ---------- ---------- Available for Sale Fixed Maturity Securities: U.S. & Canadian Governments. . . . . . . . . . . . . 812.4 620.3 642.4 Corporate . . . . . . . . . . . . . . . . . . . . . 1,333.6 - - ---------- ---------- ---------- 2,146.0 620.3 642.4 ---------- ---------- ---------- Equity Securities: Perpetual Preferred Stocks . . . . . . . . . . . . . 4.4 4.5 3.8 Common Stocks1 . . . . . . . . . . . . . . . . . . . 21.7 259.2 188.0 ---------- ---------- ---------- 126.1 263.8 191.9 ---------- ---------- ---------- Short-term Investments . . . . . . . . . . . . . . . 312.7 172.1 254.3 ---------- ---------- ---------- Total available for sale . . . . . . . . . . . . . . 2,584.9 1,056.2 1,088.7 ---------- ---------- ---------- Total Investments . . . . . . . . . . . . . . . . . $ 4,326.0 $ 3,810.8 $ 3,618.4 ========== ========== ==========
- ------------------------------------------------------------------------------------------ Sources of Consolidated Investment Income ($ in Millions) Years Ended December 31, - ------------------------------------------------------------------------------------------ 1995 1994 1993 ---------- ---------- ---------- Fixed Maturity Securities: Taxable . . . . . . . . . . . . . . . . . . . $ 203.2 $ 189.6 $ 192.6 Tax-Exempt. . . . . . . . . . . . . . . . . . 27.1 18.6 12.5 Redeemable Preferred Stocks . . . . . . . . . - - - ---------- ---------- ---------- 230.4 208.2 205.2 ---------- ---------- ---------- Equity Securities: Perpetual Preferred Stocks . . . . . . . . . .4 .5 .2 Common Stocks . . . . . . . . . . . . . . . . 5.8 7.0 4.7 ---------- ---------- ---------- 6.3 7.5 5.0 ---------- ---------- ---------- Other Investment Income: Interest on Short-term Investments. . . . . . 13.6 9.7 8.7 Sundry . . . . . . . . . . . . . . . . . . . 8.4 7.9 7.0 ---------- ---------- ---------- 22.0 17.7 15.7 ---------- ---------- ---------- Gross Investment Income . . . . . . . . . . . 258.7 233.6 226.0 Less: Investment Expenses (a) . . . . . . . . 6.8 6.0 5.2 ---------- ---------- ---------- Net Investment Income . . . . . . . . . . . . $ 251.9 $ 227.5 $ 220.7 ========== ========== ========== __________ (a) Investment expenses consist primarily of personnel costs and investment custody service fees.
For at least the past 25 years, Old Republic's investment policy has been to acquire and retain primarily investment grade, publicly traded,fixed maturity securities. Accordingly, the Corporation's exposure to so-called "junk bonds", private placements, real estate, mortgage loans, and derivatives is immaterial or non-existent. Management considers investment-grade securities to be those rated by Standard & Poor's Corporation ("Standard & Poor's") or Moody's Investors Service, Inc. ("Moody's") that fall within the top four rating categories or securities which are not rated but have characteristics similar to securities so rated. At December 31, 1995 and December 31, 1994, total investments in default as to principal and/or interest amounted to less than 1% of consolidated assets. The Company's investment policies are not designed to encourage trading of its securities or to maximize the realization of investment gains. While the amount of portfolio turnover varies from year to year, recent years' dispositions of portfolio investments held to maturity are caused principally by calls prior to maturity by issuers. Effective January 1, 1993, the Company reevaluated the classification of its invested assets as to those it (1) has the intent and ability to hold until maturity (generally carried at amortized costs for fixed-maturity securities), (2) has available for sale (carried at fair value with adjustments to equity) or (3) has the intention of trading (carried at fair value with adjustments to income). In November 1995, the Company again reevaluated the classification of invested assets, as permitted by a Special Report issued by the Financial Accounting Standards Board (FASB) in November 1995. As a result, additional fixed maturity securities previously categorized as "held to maturity" were reclassified to the "available for sale" category; the amortized cost of the securities so reclassified was $1,365.7, their fair market value was $1,394.2, and the related net of deferred tax unrealized gain of $18.5 was credited directly to a separate account in shareholders equity at December 31, 1995. Prior years' balance sheets and investment classifications have not been restated nor reclassified to reflect these changes. The Company's invested assets have been classified as either "held to maturity" or "available for sale" as of December 31, 1995, 1994 and 1993. The independent credit quality ratings and maturity distribution for Old Republic's consolidated fixed maturity investments, excluding short-term investments, at December 31, 1995 and December 31, 1994, are shown in the following tables. These investments, $3.8 billion and $3.3 billion at December 31, 1995 and 1994, respectively, represented approximately 59% and 53%, respectively, of consolidated assets, and 79% and 69%, respectively, of consolidated liabilities as of such dates.
- --------------------------------------------------------------------------------- Independent Ratings (a) - --------------------------------------------------------------------------------- December 31, ------------------------ 1995 1994 ------ ------ (% of total portfolio) Aaa . . . . . . . . . . . . . . . . . . . . . . . . 30.9% 30.1% Aa. . . . . . . . . . . . . . . . . . . . . . . . . 28.2 28.8 A . . . . . . . . . . . . . . . . . . . . . . . . . 34.1 33.1 Baa . . . . . . . . . . . . . . . . . . . . . . . . 6.0 6.9 ------ ------ Total investment grade. . . . . . . . . . . . . . . 99.2 98.9 All others (b) . . . . . . . . . . . . . . . . . . .8 1.1 ------ ------ Total . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% ====== ====== __________ (a) Ratings are assigned primarily by Moody's with remaining ratings assigned by Standard & Poor's and converted to the equivalent Moody's rating. (b) "All others" include securities which when purchased were investment grade, non-investment grade or non-rated convertible securities, and other non-rated securities such as small issues of tax exempt bonds.
- -------------------------------------------------------------------------------- Maturity Distribution - -------------------------------------------------------------------------------- December 31, ------------------------ 1995 1994 ------ ------ (% of total portfolio) Due in one year or less . . . . . . . . . . . . . . 7.7% 5.2% Due after one year through five years . . . . . . . 43.1 42.0 Due after five years through ten years. . . . . . . 47.5 50.1 Due after ten years through fifteen years . . . . . .7 1.4 Due after fifteen years . . . . . . . . . . . . . . 1.0 1.3 ------ ------ 100.0% 100.0% ====== ====== Average life (years). . . . . . . . . . . . . . . . 4.7 5.1 ====== ======
(c) Marketing-Workers' compensation, general liability and commercial automobile insurance underwritten for larger commercial enterprises and public entities is marketed primarily through independent insurance agents and brokers with the assistance of Old Republic's trained sales, underwriting, actuarial, and loss control personnel. The remaining property and liability commercial insurance written by Old Republic is obtained through insurance agents or brokers who are independent contractors and generally represent other insurance companies, by direct sales, and through controlled marketing and underwriting joint ventures. A small portion of Old Republic's consolidated insurance premium volume, particularly in its General and Life Insurance Groups, is produced by the mass marketing of specially designed insurance products through consumer-oriented businesses such as consumer finance companies, banks, savings and loan associations, mortgage bankers, automobile dealers, and consumer products dealers. The Corporation has designed ancillary products, such as credit disability, joint life, and loan credit guaranty insurance, for sale through the same sources as its other products. Through the combination of these marketing channels, Old Republic is afforded access to large volume markets without having to invest large sums for mailing, advertising, and other acquisition expenses, or for establishing and administering a large sales organization. No single source accounted for over 10% of Old Republic's premium volume in 1995. Mortgage guaranty insurance is marketed primarily through a direct sales force which calls on savings and loan associations, other lending institutions, and mortgage bankers. No sales commissions or other forms of remuneration are paid to the lending institutions and others for the procurement or development of business. A substantial portion of the Company's title insurance business is referred to it by title insurance agents, builders, lending institutions, real estate developers, realtors, and lawyers. Title insurance is sold through 231 Company offices located in 29 states and through agencies and underwritten title companies in the District of Columbia and all states except Iowa and Oregon. The issuing agents are authorized to issue binders and title insurance policies based on their own search and examination, or on the basis of abstracts and opinions of approved attorneys. Policies are also issued through independent abstract companies (not themselves title insurers) pursuant to underwriting agreements. These agreements generally provide that the underwritten company may cause title policies of the Company to be issued, and the latter is responsible under such policies for any payments to the insured. Typically, the agency or underwritten title company deducts the major portion of the title insurance charge to the consumer as its commission and for services. During 1995, approximately 50% of title insurance premiums and fees were accounted for by policies issued by agents and underwritten title companies. Existing differences in various parts of the country with respect to the acceptance and use of title insurance in real estate sales and loan transactions have a material effect on title insurance growth and operations in the areas concerned. In the Western states and certain urban areas of the East and Midwest, title insurance is widely accepted, with the result that the potential volume of title insurance premium income is large in relation to the volume of real estate activity in those areas. In some other parts of the country, title insurance is not as generally used, particularly in transactions involving residential real estate. Consequently, in those areas, the growth of title insurance depends not only upon market share of the title insurance business within the industry, but also upon the increased use of title insurance in real estate transactions. The volume of real estate activity is also affected by the availability and cost of financing, population growth, family movements and other factors. Also, the title insurance business is seasonal. During the winter months, new building activity is reduced and, accordingly, the Company does less title insurance business relative to new construction during such months than during the rest of the year. The most important factor, insofar as Old Republic's title business is concerned, however, is the rate of activity in the resale market for residential properties. The personal contacts, relationships, and reputations of Old Republic's key executives are a vital element in obtaining and retaining business. Many of the Company's customers produce large amounts of premiums and therefore warrant substantial levels of top executive attention and involvement. In this respect, Old Republic's mode of operation is similar to that of professional reinsurers and commercial insurance brokers, and relies on the marketing, underwriting, and management skills of relatively few key people for large parts of its business. Several types of insurance coverages underwritten by Old Republic, such as credit life and disability, loan credit guaranty, title, and mortgage guaranty insurance, are affected in varying degrees by changes in national economic conditions. During periods of economic recession or rising interest rates, operating and/or claim costs pertaining to such coverages tend to rise disproportionately to revenues and generally result in reduced levels of profitability. At least one insurance subsidiary of Old Republic is licensed to do business in each of the 50 states, the District of Columbia, Puerto Rico, Virgin Islands, Guam, and each of the Canadian provinces; title insurance operations, however, are licensed to do business in 48 states and the District of Columbia, while mortgage insurance subsidiaries are licensed in 50 states and the District of Columbia. Consolidated direct premium volume distributed among the various geographical regions shown was as follows for the past three years:
- -------------------------------------------------------------------------------- Geographical Distribution of Direct Premiums Written - -------------------------------------------------------------------------------- 1995 1994 1993 ------ ------ ------ United States: Northeast. . . . . . . . . . . . . . . . . . . . . 5.0% 5.3% 4.7% Mid-Atlantic . . . . . . . . . . . . . . . . . . . 8.9 10.0 10.6 Southeast. . . . . . . . . . . . . . . . . . . . . 16.6 16.2 15.5 Southwest. . . . . . . . . . . . . . . . . . . . . 13.1 14.3 14.1 East North Central . . . . . . . . . . . . . . . . 17.7 16.2 14.7 West North Central . . . . . . . . . . . . . . . . 16.3 15.2 16.3 Mountain . . . . . . . . . . . . . . . . . . . . . 8.5 8.4 8.0 Western. . . . . . . . . . . . . . . . . . . . . . 11.0 12.5 14.6 Foreign (Principally Canada) . . . . . . . . . . . 2.9 1.9 1.5 ------ ------ ------ Total . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% ====== ====== ======
(d) Reserves, Reinsurance, and Retrospective Adjustments. Old Republic's insurance subsidiaries establish reserves for future policy benefits, unearned premiums, reported claims, claims incurred but not reported, and claim adjustment expenses, as required in the circumstances. Such reserves are based on regulatory accounting requirements and generally accepted accounting principles. In accordance with insurance industry practices, claim reserves are based on estimates of the amounts that will be paid over a period of time and changes in such estimates are reflected in the financial statements when they occur. See "General Insurance Claim Reserves" herein. To maintain premium production within its capacity and limit maximum losses and risks for which it might become liable under its policies, Old Republic, as is the practice in the insurance industry, may cede a portion or all of its premiums and liabilities on certain classes of insurance or blocks of business to other insurers and reinsurers. Although the ceding of insurance does not generally discharge an insurer from its direct liability to a policyholder, it is industry practice to establish the reinsured part of risks as the liability of the reinsurer. Old Republic also employs retrospective premium adjustments, contingent commissions, agency profit and risk-sharing arrangements, and joint underwriting ventures for parts of its business in order to minimize losses for which it might become liable under its insurance policies, and to afford its clients or producers a degree of participation in the risks and rewards associated with such business. Under retrospective arrangements, Old Republic collects additional premiums if losses are greater than originally anticipated and refunds a portion of original premiums if loss costs are lower. Pursuant to contingent commissions, agency profit and other risk-sharing arrangements, the Company adjusts commissions or premiums retroactively to likewise reflect deviations from originally expected loss costs. The amount of premium, commission, or other retroactive adjustments which may be made is either limited or unlimited depending on the Company's evaluation of risks and related contractual arrangements. To the extent that any reinsurance companies, retrospectively rated risks, or producers might be unable to meet their obligations under existing reinsurance or retrospective insurance and commission agreements, Old Republic would be liable for the defaulted amounts. In these regards, however, the Company generally protects itself by withholding funds, or by otherwise collateralizing reinsurance obligations through irrevocable letters of credit, cash, and securities. Old Republic's reinsurance practices with respect to portions of its business also result from its desire to bring its sponsoring organizations and clients into some degree of joint venture relationship. The Corporation may, in exchange for a ceding commission, reinsure up to 100% of the underwriting risk, and the premium applicable to such risk, to insurers owned by or affiliated with lending institutions, sponsors whose customers are insured by Old Republic, or individual clients who have formed "captive" insurance companies. The ceding commissions received compensate Old Republic for performing the direct insurer's functions of underwriting, actuarial, claim settlement, loss control, legal, reinsurance, and administrative services to comply with local and federal regulations, and for providing appropriate risk management services. Remaining portions of Old Republic's business are reinsured with independent insurance or reinsurance companies under various quota share and excess of loss agreements. Reinsurance protection on property and liability operations generally limits the net loss on any one risk to a maximum of (in whole dollars): fire and other physical perils-$300,000; accident and health-$15,000; workers' compensation-$1,000,000; other liability coverages-$750,000; and loan credit guaranty-$200,000. Substantially all the mortgage guaranty insurance business is retained, with the exposure on any one risk currently averaging less than $22,000. Title insurance risk assumptions, based on the title insurance subsidiaries' financial resources, are limited to a maximum of $25,000,000 as to any one policy. The maximum amount of ordinary life insurance retained on any one life by the Life Insurance Group (without reinsurance) is $250,000. (e) Competition. The insurance business is highly competitive and Old Republic competes with many stock and mutual insurance companies. Many of these competitors offer more insurance coverages and have substantially greater financial resources than the Corporation. The rates charged for many of the insurance coverages in which the Corporation specializes, such as credit life and disability insurance, workers' compensation insurance, other property and liability insurance, and title insurance, are primarily regulated by the states and are also subject to extensive competition among major insurance organizations. The basic methods of competition available to Old Republic, aside from rates, are service to customers, expertise in tailoring insurance programs to the specific needs of its clients, efficiency and flexibility of operations, personal involvement by its key executives, and, as to title insurance, accuracy and timely delivery of evidences of title issued. For certain types of coverages, including loan credit guaranty and mortgage guaranty insurance, the Company also competes in varying degrees with the Federal Housing Administration ("FHA") and the Veterans Administration ("VA"). In these regards, the Corporation's insurance subsidiaries compete with the FHA and VA by offering different coverages and by establishing different requirements relative to such factors as interest rates, closing costs, and loan processing charges. The Corporation believes its experience and expertise have enabled it to develop a variety of specialized insurance programs for its customers and to secure state insurance departments' approval of these programs. (f) Government Regulation. In common with all insurance companies, the Corporation's insurance subsidiaries are subject to the regulation and supervision of the jurisdictions in which they do business. The method of such regulation varies, but, generally, regulation has been delegated to state insurance commissioners who are granted broad administrative powers relating to: the licensing of insurers and their agents; the nature of and limitations on investments; approval of policy forms; reserve requirements; and trade practices. In addition to these types of regulation, many classes of insurance, including most of the Corporation's insurance coverages, are subject to rate regulations which require that rates be reasonable, adequate, and not unfairly discriminatory. The Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC") have various qualifying requirements for private mortgage guaranty insurers which write mortgage insurance on loans acquired by the FNMA and FHLMC from mortgage lenders. These requirements include a basic standard calling for the maintenance of a ratio of aggregate insured risk to policyholders' surplus (defined as total statutory capital and surplus plus statutory contingency reserves) of not more than 25 to 1. Other qualifying requirements are designed to insure the financial stability of a private mortgage insurance company by limiting the geographic concentration of insurance risks, by limiting risks on nonresidential real estate insurance to 10% of policyholders' surplus, by maintaining 85% of total admitted assets in marketable securities and other highly liquid investments, and by maintaining a minimum policyholders' surplus of $5 million. Most of the Company's savings and loan association customers for mortgage guaranty insurance are governed by the regulations of the Federal Home Loan Bank Board. A regulation of that Board prohibits savings and loan associations from insuring any loan with a mortgage insurance company if certain relationships exist between such mortgage insurance company and the savings and loan association. Generally, a savings and loan association may not obtain insurance from any mortgage insurance company if (1) any commission, fee or other compensation is paid to the savings and loan association or any of its officers, directors, employees or affiliates, (2) a savings account is maintained by the mortgage insurance company with such savings and loan association, (3) any officer or employee of the mortgage insurance company or its parent company is a director, officer or controlling person of the savings and loan association, or (4) either (a) the association or any director, officer, controlling person or affiliate holds equity securities of the mortgage insurance company or any parent company thereof having a cost in excess of $50,000 or representing more than one percent of any class of equity securities of the company, if its assets are less than $50 million, or one-half percent, if the assets equal or exceed $50 million, or (b) the association and all of its directors, officers, controlling persons or affiliates in the aggregate own equity securities of the mortgage insurance company having a cost in excess of $100,000, or two percent of a company the assets of which are less than $50 million, or one percent, if the assets equal or exceed $50 million. There have been various proposals from time to time with respect to additional regulation of credit life and disability insurance which could have an adverse effect on the consumer credit insurance business. The financial institutions whose customers are insured by Old Republic are also regulated by federal and state authorities whose regulations have a direct effect on certain forms of credit life and disability insurance. The majority of states have also enacted insurance holding company laws which require registration and periodic reporting by insurance companies controlled by other corporations licensed to transact business within their respective jurisdictions. Old Republic's insurance subsidiaries are subject to such legislation and are registered as controlled insurers in those jurisdictions in which such registration is required. Such legislation varies from state to state but typically requires periodic disclosure concerning the corporation which controls the registered insurers, or ultimate holding company, and all subsidiaries of the ultimate holding company, and prior approval of certain intercorporate transfers of assets (including payments of dividends in excess of specified amounts by the insurance subsidiary) within the holding company system. Each state has established minimum capital and surplus requirements to conduct an insurance business. All of the Company's subsidiaries meet or exceed these requirements, which vary from state to state. (g) Employees-As of December 31, 1995, Old Republic employed approximately 5,460 persons on a full time basis. Eligible full time employees participate in various pension plans which provide annuity benefits payable upon retirement. Eligible employees are also covered by hospitalization and major medical insurance, group life insurance, and various profit sharing and deferred compensation plans. The Company considers its employee relations to be good. Item 2-Properties The principal executive offices of the Company are located in the Old Republic Building in Chicago, Illinois. This Company owned building contains 151,000 square feet of floor space of which approximately 50% is occupied by Old Republic, and the remainder is leased to others. In addition to the Company- owned principal executive offices, a subsidiary of the Title Insurance Group partially occupies its headquarters building. This building contains 110,000 square feet of floor space of which approximately 66% is occupied by the Old Republic National Title Insurance Company. The remainder of the building is leased to others. Nine smaller buildings are owned by Old Republic and its subsidiaries in various parts of the country and are primarily used for its business. The carrying value of all buildings and related land at December 31, 1995 was approximately $12.8 million. Certain other operations of the Company and its subsidiaries are directed from leased premises. See Note 5(b) of the Notes to Consolidated Financial Statements for a summary of all material lease obligations. Item 3-Legal Proceedings There are no material legal proceedings against the Company other than those arising in the normal course of business and which generally pertain to claim matters related to insurance policies and contracts issued by the Corporation's insurance subsidiaries. Item 4-Submission of Matters to a Vote of Security Holders None Item 4(a)-Executive Officers of the Registrant Name Age Position - -------------------- --- ------------------------------------- Paul D. Adams 50 Senior Vice President, Chief Financial Officer since 1990 and Treasurer since 1993. Anthony F. Colao 68 Senior Vice President, and Director since 1987. Spencer LeRoy, III 49 Senior Vice President, General Counsel, and Secretary since 1992. William F. Schumann 56 Senior Vice President since 1989. President since 1974 of Old Republic Insured Credit Services, Inc., a wholly-owned subsidiary. William A. Simpson 54 Senior Vice President/Mortgage Guaranty, and Director since 1980. President since 1972 of Republic Mortgage Insurance Company, a wholly-owned subsidiary. A. C. Zucaro 56 Chief Executive Officer, President, Director and Chairman of the Board since 1990, 1981, 1976 and 1993, respectively. The term of office of each officer of the Company expires on the date of the annual meeting of the board of directors, which is generally held in May of each year. There is no family relationship between any of the executive officers named above. Each of these named officers, except Mr. LeRoy, has been employed in executive capacities with the Company and/or its subsidiaries for the past five years. PART II Item 5-Market for the Registrant's Common Stock and Related Security Holder Matters The Company's common stock is traded on the New York Stock Exchange under the symbol "ORI". The high and low closing prices as reported on the New York Stock Exchange, and cash dividends declared for each quarterly period during the past two years were as follows:
Closing Price --------------------- Cash High Low Dividends ------ ------ --------- 1st quarter 1994. . . . . . . . $24.38 $22.00 $ .11 2nd quarter 1994. . . . . . . . 23.38 21.88 .12 3rd quarter 1994. . . . . . . . 23.00 20.88 .12 4th quarter 1994. . . . . . . . $21.88 $18.88 $ .12 ====== ====== ========= 1st quarter 1995. . . . . . . . $25.13 $21.13 $ .12 2nd quarter 1995. . . . . . . . 26.38 24.25 .13 3rd quarter 1995. . . . . . . . 29.50 25.50 .13 4th quarter 1995. . . . . . . . $35.50 $27.13 $ .13 ====== ====== =========
As of January 31, 1996, there were 3,895 registered holders of the Company's Common Stock. See Notes 4(b) and 4(c) of the Notes to Consolidated Financial Statements for a description of certain regulatory restrictions on the payment of dividends by Old Republic's insurance subsidiaries and certain restrictions under the terms of Old Republic's loan agreements. Closing prices have been restated, as necessary, to reflect all stock dividends and splits declared through December 31, 1995.
Item 6-Selected Financial Data (All amounts, except common share data, are expressed in millions) Years Ended December 31 - ----------------------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- FINANCIAL POSITION: Cash and Invested Assets (a) . . . $ 4,415.2 $ 3,906.4 $ 3,723.0 $ 3,332.5 $ 2,933.7 Other Assets (b) . . . . . . . . . 2,178.2 2,356.5 2,375.3 809.1 779.5 Total Assets . . . . . . . . . . . 6,593.5 6,262.9 6,098.3 4,141.6 3,713.2 Liabilities, Other than Debt (b) . 4,587.9 4,543.4 4,480.5 2,698.0 2,503.0 Debt and Debt Equivalents. . . . . 320.5 314.7 282.7 277.8 247.6 Total Liabilities. . . . . . . . . 4,908.4 4,858.1 4,763.3 2,975.8 2,750.6 Preferred Stock . . . . . . . . . 72.5 75.4 78.0 80.8 80.8 Common Shareholders' Equity. . . . 1,612.5 1,329.3 1,256.9 1,084.9 881.7 Total Capitalization (c) . . . . . $ 2,005.6 $ 1,719.5 $ 1,617.7 $ 1,443.6 $ 1,210.2 ========== ========== ========== ========== ========== --------------------------------------------------------------------------------------------------- RESULTS OF OPERATIONS: Net Premiums and Fees Earned . . . $ 1,374.0 $ 1,423.2 $ 1,445.7 $ 1,291.9 $ 1,113.4 Net Investment and Other Income. . 272.1 248.0 250.2 262.3 239.9 Realized Investment Gains. . . . . 49.7 7.7 40.2 62.8 21.1 Net Revenues . . . . . . . . . . . 1,695.9 1,679.0 1,736.3 1,617.0 1,374.5 Benefits, Claims, Settlement Expenses and Dividends . . . . . . 747.9 761.2 811.3 752.1 691.8 Underwriting and Other Expenses. . 631.9 691.9 681.6 614.2 507.3 Income Taxes (d) . . . . . . . . . 103.6 73.4 78.0 75.0 45.2 Income Before Item Below . . . . . 212.7 151.0 166.4 174.7 131.0 Accounting Changes (e) . . . . . . - - 8.6 - - ---------- ---------- ---------- ---------- ---------- Net Income . . . . . . . . . . . . $ 212.7 $ 151.0 $ 175.1 $ 174.7 $ 131.0 ========== ========== ========== ========== ========== --------------------------------------------------------------------------------------------------- COMMON SHARE DATA (f): Net Income: Primary Earnings (g): Income Before Item Below . . . . . $ 3.63 $ 2.55 $ 2.83 $ 3.09 $ 2.48 Accounting Changes . . . . . . . . - - .15 - - ---------- ---------- ---------- ---------- ---------- Net Income . . . . . . . . . . . . $ 3.63 $ 2.55 $ 2.98 $ 3.09 $ 2.48 ========== ========== ========== ========== ========== Fully Diluted Earnings (h): Income Before Item Below . . . . . $ 3.42 $ 2.44 $ 2.69 $ 2.95 $ 2.36 Accounting Changes . . . . . . . . - - .14 - - ---------- ---------- ---------- ---------- ---------- Net Income . . . . . . . . . . . . $ 3.42 $ 2.44 $ 2.83 $ 2.95 $ 2.36 ========== ========== ========== ========== ========== Average Common and Equivalent Shares Outstanding:Primary . . . . 57,273,854 57,207,702 57,077,542 54,516,581 52,408,404 Fully Diluted . 62,068,538 61,657,490 61,519,432 58,317,906 56,480,042 ========== ========== ========== ========== ========== Dividends:Cash . . . . . . . . . . $ .51 $ .47 $ .43 $ .39 $ .37 ========== ========== ========== ========== ========== Stock . . . . . . . . . -% -% -% 100% 10% ========== ========== ========== ========== ========== Book Value . . . . . . . . . . . . $ 30.56 $ 25.79 $ 24.25 $ 21.40 $ 18.81 ========== ========== ========== ========== ========== Common Shares Outstanding. . . . . 52,762,769 51,536,412 51,844,001 50,692,562 46,896,184 ========== ========== ========== ========== ========== - ----------------------------------------------------------------------------------------------------- See Notes on Following Page
Notes to Item 6-Selected Financial Data - ------------------------------------------------------------------------------- (a) Consists of cash, investments and investment income due and accrued; (b) The Company adopted certain reporting changes mandated by accounting regulatory authorities which served to increase assets and liabilities by equal amounts of approximately $1.4 billion at December 31, 1995, and $1.5 billion at December 31, 1994 and 1993. As permitted, prior years' reports have not been changed retroactively for these changes which became effective in 1993; (c) Total capitalization consists of debt and debt equivalents, preferred stock, and common shareholders' equity; (d) Income taxes were decreased, and net income correspondingly increased by $1.9 ($.03 per share) in 1992 and $3.6 ($.07 per share) in 1991, as a result of amortized fresh start deferred income tax credits all of which resulted from changes in tax regulations effective January 1, 1987; (e) See notes 1(h) and (l) of the Notes to Consolidated Financial Statements for an explanation of accounting changes mandated by accounting regulatory authorities. As permitted, prior year reports have not been changed retroactively for these changes which became effective in 1993; (f) Common share data has been retroactively adjusted for all stock dividends and splits declared through December 31, 1995. Excludes 4,439,267 issued and outstanding common shares, held by a consolidated affiliate, which are eliminated in consolidation and in the calculation of outstanding shares for financial accounting purposes only; (g) Calculated after deduction of preferred stock dividend requirements of $4.9 in 1995, $5.1 in 1994, $5.2 in 1993, $6.0 in 1992 and $1.3 in 1991; (h) Calculated after deduction of preferred stock dividend requirements and after adjustment for post-tax convertible debentures interest of $.6 in 1995, $.9 in 1994, $1.0 in 1993, $2.6 in 1992 and $(1.9) in 1991. Item 7-Management Analysis of Financial Position and Results of Operations ($ in Millions, Except Share Data) - -------------------------------------------------------------------------------- OVERVIEW This analysis pertains to the consolidated accounts of Old Republic International Corporation. The Company conducts its business through four major segments, namely its General (property and liability coverages), Mortgage Guaranty, Title, and Life insurance groups. CHANGES IN ACCOUNTING POLICIES In 1993, the Company adopted several changes in accounting policies to comply with Financial Accounting Standards Board (FASB) pronouncements. The resulting adoption of the asset and liability method for calculating deferred income taxes and the recognition of present value liabilities pertaining to post - -retirement health benefits under retirement plans maintained by a few Old Republic subsidiaries increased net income by $8.6 or 15 cents per share (14 cents fully diluted) in the first quarter of 1993. The Company also reexamined the classification of its invested assets which led to reporting such assets as either "held to maturity" or "available for sale"; the effect of these classification changes was to increase assets and the liability for deferred taxes by $25.2 and $8.7, respectively, and common shareholders' equity for the net unrealized appreciation of securities newly reclassified at fair value by $16.4 or 32 cents per common share as of December 31, 1993. In November 1995, the Company reevaluated the classification of invested assets, as permitted by a Special Report issued by the FASB in November 1995. As a result, the Company reclassified from "held to maturity" to "available for sale" certain fixed maturity securities with an amortized cost of $1,365.7, fair value of $1,394.2 and an unrealized gain of $28.4. The unrealized gain, net of deferred income taxes of $9.9, has been credited directly to a separate account in the common shareholders' equity section of the balance sheet in the final quarter of 1995. See Note 1 of the Notes to Consolidated Financial Statements for further details relating to these changes. As permitted by the pertinent FASB pronouncements, prior years' financial statements have not been restated nor reclassified to reflect these changes. In the fourth quarter of 1995, the Company's Mortgage Guaranty Group adopted the accrual method for recording past-due premium revenues and the related premium receivable arising from new monthly premium policies. This new payment mode has emerged as a significant factor for the mortgage guaranty industry since mid-1994. Before adoption of this accrual method, past-due premiums were recognized on receipt of cash. With the adoption of this accrual method, a cumulative increase in net premiums written of $9.8 million, net premiums earned of $6.3 million, and post-tax income of $3.9 million or 6 cents per fully diluted share was reflected in the Company's final quarter and the year of 1995. FINANCIAL POSITION Old Republic's financial position at December 31, 1995 reflected increases in assets of 5.3%, liabilities of 1.0%, and common shareholders' equity of 21.3% when compared to the immediately preceding year-end. At December 31, 1995 and 1994, cash and invested assets represented 67.0% and 62.4% of consolidated assets, respectively. Relatively high short-term investment positions were maintained as of the most recent year-ends to provide necessary liquidity for specific operating needs, and flexibility in investment strategy. Changes in short-term investments reflect a variety of seasonal and intermediate-term factors including seasonal operating cash needs, investment strategy, and expectations as to trends in interest yields. Accordingly, the future level of short-term investments will vary and respond to the dynamics of these factors and may, as a result, increase or decrease from current levels. During 1995 and 1994, the Corporation committed substantially all investable funds in short to intermediate-term fixed maturity securities. In the latter regard, Old Republic continues to adhere to its long-term policy of investing primarily in investment grade, marketable securities; the Corporation has not directed its investable funds to so-called "junk bonds" or derivative types of securities. During 1995, Old Republic's commitment to equity securities decreased by 52.2% vis-a-vis the related invested balance at year-end 1994. As of December 31, 1995, the carrying value of fixed maturity securities in default as to principal or interest was immaterial in relation to consolidated assets or shareholders' equity. Consolidated operations produced positive cash flows for the latest three years. The decline in cash flow from operations in 1994 was due mainly to a substantial drop in title segment revenues and profitability, and a small decline in property and liability insurance premiums. The parent holding company has met its liquidity and capital needs for the past three years through dividends paid by its subsidiaries and through the issuance of debt. The insurance subsidiaries' ability to pay cash dividends to the parent company is generally restricted by law or subject to approval of the insurance regulatory authorities of the states in which they are domiciled. Additionally, the terms of guarantees by the Company of bank loans to the trustee of the Company's Employees Savings and Stock Ownership Plan require the Company to maintain a minimum consolidated tangible net worth and restrict the amount of debt the Company may incur, both of which covenants are being met. Old Republic's capitalization of $2,005.6 at December 31, 1995 consisted of debt and debt equivalents of $320.5, redeemable convertible preferred stock of $17.0 (excluding $11.7 of such stock classified as a debt equivalent), convertible preferred stock of $.6 , cumulative preferred stock of $54.8, and common shareholders' equity of $1,612.5. The rise in the common shareholders' equity account during the past three years reflects primarily the retention of earnings in excess of dividends declared on outstanding preferred and common shares, the conversion of preferred stock to common stock and an increase during 1995 in the carrying value of fixed maturity and equity securities stated at fair value. The Corporation acquired $.9 and $8.5 of common stock in 1995 and 1994, respectively and $2.6 of cumulative preferred stock in 1994 in open market transactions. As of year-end 1995, a standing authorization by the Company's Board of Directors permits Old Republic to reacquire additional amounts of such shares for a total of up to $38.0 through May 1996. In February 1996, the Company called for redemption its 10% debentures of 2018 ($74.0 million principal amount) and its 5.75% convertible subordinated debentures of 2002 ($110.0 million principal amount); redemption of the former will be effected with available funds, while the latter are expected to be converted into approximately 4.3 million Old Republic common shares. As a result of these expected redemptions and conversions, the Company's debt will decline by $184.0 million while its common shareholders equity account will rise by $110.0 million. These transactions are not expected to have a material effect on Old Republic's 1996 earnings. Later in 1996, the Company may, at its sole option, redeem all or part of approximately $54.8 million of its Series "H" cumulative preferred stock and $29.6 million principal amount of its 11.5% debentures maturing in 2015. RESULTS OF OPERATIONS Revenues: Net premiums and fees earned decreased by 3.5% and 1.6% in 1995 and 1994 and increased by 11.9% in 1993. In 1993 property and liability insurance premium increases were due to varying levels of growth in certain parts of the Company's business, but principally among liability coverages. In 1994 and 1995, lower property and liability premium growth was due to a continuation of a soft premium rate environment for most insurance coverages and lower participation in involuntary market pools. For the past three years, mortgage guaranty premiums have increased due to a rise in the amount of renewal and new business, and market expansion. Depressed conditions in the large California housing market and much lower refinancing activity nationwide resulted in reduced title insurance revenues in 1995 and 1994. Greater housing and mortgage refinancing activity during 1993 had led to higher revenues in the title segment. Life and disability premium volume increased moderately during the last three years as a result of greater term life and accident insurance production. Net investment income grew by 10.7% and 3.1% in 1995 and 1994 and was relatively flat in 1993. For each of the past three years, this revenue source was affected by positive consolidated operating cash flows and a concentration of investable assets in interest-bearing, fixed maturity securities. The average annual yield on investments was 6.2%, 6.1% and 6.4% for the years ended December 31, 1995, 1994 and 1993, respectively. This yield pattern reflects at once the relatively short maturity of Old Republic's fixed maturity securities portfolio and changes in interest rates at various times during the past three years. While the Company's investment policies have not been designed to maximize realized investment gains, such gains were higher in 1995 and 1993 than those realized in 1994. Dispositions of securities have been caused principally by calls prior to maturity by issuers and by sales of equity securities. In 1995, approximately 59% of total fixed maturity securities dispositions represented contractual maturities and early calls of existing holdings; for the year 1994 these amounted to approximately 64%. Expenses: Consolidated benefit, claim, and related settlement costs, as a percentage of net premiums and fees earned, were approximately 54% in 1995, 53% in 1994 and 56% in 1993. This consolidated ratio was affected principally by an improving claim ratio for liability insurance coverages. Through 1993 the Corporation's property and liability insurance subsidiaries, along with other companies in the industry, sustained higher loss assessments for residual market (assigned risk) business. In 1995 and 1994, provisions for such assessments declined as a result of the aforementioned reduction in residual market participations by the Company's subsidiaries and by moderately improving premium rates for workers compensation insurance. Additionally, Old Republic's general insurance results for 1994 benefitted from improved underwriting performance in its property and other non-liability lines due to lower loss ratios. Policyholders' dividends incurred mainly for the Corporation's workers compensation insurance coverages for each year reflect changes in the loss ratio for individual experience-rated policies. The loss ratio rose in 1995 and 1994 in the mortgage guaranty insurance line due to a rise in frequency of claim occurrences, mostly in the California market which has been affected by an economic slowdown for the past several years. The title insurance loss ratio in 1995 and 1994 was affected by favorable trends in claims frequency and severity for business underwritten since 1992, while higher than normal claim provisions in 1993 added approximately 3 percentage points to this group's loss ratio. The ratio of consolidated underwriting, acquisition, and insurance expenses to net premiums and fees earned was approximately 44% in 1995, 47% in 1994 and 45% in 1993. Variations in these ratios reflect a continually changing mix of coverages sold and attendant costs of producing business. During the past three years the property and liability expense ratio has remained relatively flat and that of the mortgage guaranty segment has been declining moderately. The title insurance expense ratio was higher in 1994 and 1995 as premiums and fees volume in this segment declined at a faster rate than operating costs. Pre-Tax and Net Income: Income before taxes decreased by 7% and 3% in 1994 and 1993, respectively, and increased by 40% in 1995. General insurance results have trended up during the past five years and have continued as the largest contributor to consolidated earnings, principally as a result of greater investment income; in 1995 and 1994, however, improved earnings in this segment were also affected favorably by better underwriting results. The mortgage guaranty segment reflected significantly improved earnings in each of the last three years due to increased revenues, and, as noted above, a declining expense ratio. Title insurance operating results were much reduced in 1995 and 1994 due to the previously noted decline in revenues, while they increased in 1993 as a result of much greater mortgage refinancing activity. Life and disability operations have posted relatively flat earnings in the past three years. Consolidated pre-tax income for 1995 and 1993 was also affected positively by greater than normal realization of investment gains. The effective consolidated income tax rates were 33% in 1995 and 1994 and 32% in 1993. The rates for each year reflect primarily the varying proportions of pre-tax operating income derived from tax-exempt investment income, on the one hand, and the combination of fully taxable investment income, realized investment gains, and underwriting and service income, on the other hand. In August 1993, the corporate federal income tax rate was increased from 34% to 35% retroactive to January 1, 1993. OTHER INFORMATION Reference is here made to "Financial Information Relating to Segments of Business" appearing elsewhere herein. Historical data pertaining to the operating results, liquidity, and other financial matters applicable to an insurance enterprise such as the Company are not necessarily indicative of results to be achieved in succeeding years. The long-term nature of the insurance business, seasonal and annual patterns in premium production and incidence of claims, changes in yields obtained on invested assets, changes in government policies and free markets affecting inflation rates and general economic conditions, and changes in legal precedents or the application of law affecting the settlement of disputed claims are some of the factors which have a bearing on quarter-to-quarter and year-to-year comparisons and future operating results. Item 8-Financial Statements Listed below are the financial statements included herein: OLD REPUBLIC INTERNATIONAL CORPORATION AND SUBSIDIARIES Page No. -------- Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . 23 Consolidated Statements of Income. . . . . . . . . . . . . . . . . . . 25 Consolidated Statements of Preferred Stock and Common Shareholders' Equity. . . . . . . . . . . . . . . . . . . . . . 26 Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . 27 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . 28 Report of Independent Accountants . . . . . . . . . . . . . . . . . . 48
Old Republic International Corporation and Subsidiaries Consolidated Balance Sheets ($ in Millions) - ----------------------------------------------------------------------------------- December 31, ----------------------- 1995 1994 ---------- ---------- Assets Investments: Held to maturity: Fixed maturity securities (at amortized cost) (fair value: $1,759.0 and $2,582.6) . . . . . . . . . . . $ 1,714.1 $ 2,727.2 Other long-term investments (at cost). . . . . . . . . . . 26.9 27.3 ---------- ---------- 1,741.1 2,754.6 ---------- ---------- Available for sale: Fixed maturity securities (at fair value) (cost: $2,068.9 and $646.8) . . . . . . . . . . . . . . . 2,146.0 620.3 Equity securities (at fair value) (cost: $95.7 and $254.7) . . . . . . . . . . . . . . . . 126.1 263.8 Short-term investments (at fair value which approximates cost) . . . . . . . . . 312.7 172.1 ---------- ---------- 2,584.9 1,056.2 ---------- ---------- 4,326.0 3,810.8 ---------- ---------- Other Assets: Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.4 31.1 Securities and indebtedness of related parties . . . . . . 40.0 41.1 Accrued investment income . . . . . . . . . . . . . . . . 69.7 64.3 Accounts and notes receivable. . . . . . . . . . . . . . . 273.6 244.0 Federal income tax recoverable:Current . . . . . . . . . . - 4.8 Deferred. . . . . . . . . . - 72.4 Reinsurance balances and funds held . . . . . . . . . . . 125.1 142.4 Reinsurance recoverable:Paid losses . . . . . . . . . . . 24.7 25.6 Policy and claim reserves . . . . . . . . . . . . . . . . 1,416.1 1,526.3 Deferred policy acquisition costs. . . . . . . . . . . . . 107.8 101.3 Sundry assets . . . . . . . . . . . . . . . . . . . . . . 190.6 198.1 2,267.4 2,452.0 ---------- ---------- Total Assets . . . . . . . . . . . . . . . . . . . . . . $ 6,593.5 $ 6,262.9 ========== ========== See accompanying Notes to Consolidated Financial Statements.
Old Republic International Corporation and Subsidiaries Consolidated Balance Sheets ($ in Millions) (Continued) - ------------------------------------------------------------------------------------ December 31, ----------------------- 1995 1994 ---------- ---------- Liabilities, Preferred Stock, and Common Shareholders' Equity Liabilities: Future policy benefits . . . . . . . . . . . . . . . . . . $ 186.0 $ 184.9 Losses, claims and settlement expenses . . . . . . . . . . 3,519.8 3,514.7 Unearned premiums . . . . . . . . . . . . . . . . . . . . 406.7 405.5 Other policyholders' benefits and funds. . . . . . . . . . 75.4 79.1 ---------- ---------- Total policy liabilities and accruals4, . . . . . . . . . 188.0 4,184.3 Commissions, expenses, fees and taxes. . . . . . . . . . . 110.3 106.3 Reinsurance balances and funds . . . . . . . . . . . . . . 169.3 162.2 Federal income tax payable:Current . . . . . . . . . . . . 11.5 - Deferred. . . . . . . . . . . . 10.1 - Debt and debt equivalents . . . . . . . . . . . . . . . . 320.5 314.7 Sundry liabilities . . . . . . . . . . . . . . . . . . . . 98.4 90.4 Commitments and contingent liabilities . . . . . . . . . . - - ---------- ---------- Total Liabilities . . . . . . . . . . . . . . . . . . . . 4,908.4 4,858.1 ---------- ---------- Preferred Stock: Redeemable convertible preferred stock (*) . . . . . . . . 17.0 16.8 Convertible preferred stock (*) . . . . . . . . . . . . . .6 3.8 Cumulative preferred stock (*) . . . . . . . . . . . . . . 54.8 54.8 ---------- ---------- Total Preferred Stock . . . . . . . . . . . . . . . . . . 72.5 75.4 ---------- ---------- Common Shareholders' Equity: Common stock(*) . . . . . . . . . . . . . . . . . . . . . . 58.8 57.6 Additional paid-in capital. . . . . . . . . . . . . . . . . 463.4 456.9 Net unrealized appreciation (depreciation) of securities. . 70.3 (10.4) Retained earnings . . . . . . . . . . . . . . . . . . . . . 1,058.3 865.0 Treasury stock (at cost). . . . . . . . . . . . . . . . . . (38.4) (39.8) ---------- ---------- Total Common Shareholders' Equity . . . . . . . . . . . . . 1,612.5 1,329.3 ---------- ---------- Total Liabilities, Preferred Stock and Common Shareholders' Equity . . . . . . . . . . . . . . . $ 6,593.5 $ 6,262.9 ========== ========== __________ (*) At December 31, 1995 and 1994, there were 75,000,000 shares of $0.01 par value preferred stock authorized, of which 25,152,712 in 1995 and 25,632,708 in 1994 were redeemable and/or convertible and cumulative preferred shares issued and outstanding. As of the same dates, there were 250,000,000 shares of common stock, $1.00 par value, authorized, of which 58,811,328 in 1995 and 57,661,291 in 1994 were issued. At December 31, 1995 and 1994 there were 50,000,000 shares of Class B Common Stock, $1.00 par value, authorized, of which no shares were issued. Common shares classified as treasury stock were 6,048,559 and 6,124,879 as of December 31, 1995 and 1994, respectively. See accompanying Notes to Consolidated Financial Statements.
Old Republic International Corporation and Subsidiaries Consolidated Statements of Income ($ in Millions, Except Share Data) - ---------------------------------------------------------------------------------------------- Years Ended December 31, ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- Revenues: Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . $ 1,251.7 $ 1,282.9 $ 1,246.0 Title, escrow, and other fees . . . . . . . . . . . . . . . . . . 122.2 140.3 199.7 Net investment income . . . . . . . . . . . . . . . . . . . . . . 251.9 227.5 220.7 Realized investment gains . . . . . . . . . . . . . . . . . . . . 49.7 7.7 40.2 Other income . . . . . . . . . . . . . . . . . . . . . . . . . . 20.2 20.4 29.5 ---------- ---------- ---------- 1,695.9 1,679.0 1,736.3 ---------- ---------- ---------- Benefits, Losses and Expenses: Benefits, claims, and settlement expenses . . . . . . . . . . . . 740.3 753.5 817.8 Dividends to policyholders . . . . . . . . . . . . . . . . . . . 7.5 7.6 (6.4) Underwriting, acquisition, and insurance expenses . . . . . . . . 605.0 668.5 656.7 Interest and other charges . . . . . . . . . . . . . . . . . . . 26.9 23.3 24.8 ---------- ---------- ---------- 1,379.9 1,453.1 1,492.9 ---------- ---------- ---------- Income before income taxes and items below. . . . . . . . . . . . 316.0 225.8 243.3 ---------- ---------- ---------- Income Taxes:Currently payable . . . . . . . . . . . . . . . . . 63.8 41.8 68.3 Deferred . . . . . . . . . . . . . . . . . . . . . . 39.7 31.5 9.6 ---------- ---------- ---------- Total . . . . . . . . . . . . . . . . . . . . . . . 103.6 73.4 78.0 ---------- ---------- ---------- Income before items below . . . . . . . . . . . . . . . . . . . . 212.4 152.4 165.3 Equity in earnings of unconsolidated subsidiaries and minority interests . . . . . . . . . . . . . . . . . . . . . .2 (1.4) 1.1 ---------- ---------- ---------- Income before cumulative effect of accounting changes . . . . . . 212.7 151.0 166.4 Cumulative effect of accounting changes . . . . . . . . . . . . . - - 8.6 ---------- ---------- ---------- Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 212.7 $ 151.0 $ 175.1 ========== ========== ========== Net Income Per Share: Primary: Before cumulative effect of accounting changes. . . . . . . . . $ 3.63 $ 2.55 $ 2.83 Cumulative effect of accounting changes . . . . . . . . . . . . - - .15 ---------- ---------- ---------- Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.63 $ 2.55 $ 2.98 ========== ========== ========== Fully Diluted: Before cumulative effect of accounting changes . . . . . . . . . $ 3.42 $ 2.44 $ 2.69 Cumulative effect of accounting changes . . . . . . . . . . . . - - .14 ---------- ---------- ---------- Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.42 $ 2.44 $ 2.83 ========== ========== ========== Average number of common and common equivalent shares outstanding:Primary . . . . . . . . . . . . . . 57,273,854 57,207,702 57,077,542 ========== ========== ========== Fully Diluted . . . . . . . . . . . 62,068,538 61,657,490 61,519,432 ========== ========== ========== Dividends Per Common Share: Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .51 $ .47 $ .43 ========== ========== ========== See accompanying Notes to Consolidated Financial Statements.
Old Republic International Corporation and Subsidiaries Consolidated Statements of Preferred Stock and Common Shareholders' Equity ($ in Millions) - ----------------------------------------------------------------------------------------------------------- Years Ended December 31, ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- Redeemable Convertible Preferred Stock: Balance, beginning of year. . . . . . . . . . . . . . . . . . . . $ 16.8 $ 16.6 $ 18.7 Amortization to redemption value capitalized . . . . . . . . . . (1.1) (1.1) (1.0) Converted into common stock. . . . . . . . . . . . . . . . . . . (0.6) - (6.3) Reclassification from debt equivalent. . . . . . . . . . . . . . 2.1 1.3 5.2 ---------- ---------- ---------- Balance, end of year . . . . . . . . . . . . . . . . . . . . . . $ 17.0 $ 16.8 $ 16.6 ========== ========== ========== Convertible Preferred Stock: Balance, beginning of year . . . . . . . . . . . . . . . . . . . $ 3.8 $ 3.9 $ 4.5 Exercise of stock options . . . . . . . . . . . . . . . . . . . .1 .2 - Converted into common stock . . . . . . . . . . . . . . . . . . (3.2) (.3) (.6) Redemption of convertible preferred stock. . . . . . . . . . . . - - - ---------- ---------- ---------- Balance, end of year . . . . . . . . . . . . . . . . . . . . . . $ .6 $ 3.8 $ 3.9 ========== ========== ========== Cumulative Preferred Stock: Balance, beginning of year. . . . . . . . . . . . . . . . . . . . $ 54.8 $ 57.5 $ 57.5 Stock acquired during the year . . . . . . . . . . . . . . . . . - (2.6) - ---------- ---------- ---------- Balance, end of year . . . . . . . . . . . . . . . . . . . . . . $ 54.8 $ 54.8 $ 57.5 ========== ========== ========== Common Stock: Balance, beginning of year. . . . . . . . . . . . . . . . . . . . $ 57.6 $ 57.5 $ 56.3 Dividend reinvestment plan . . . . . . . . . . . . . . . . . . . - - - Exercise of stock options. . . . . . . . . . . . . . . . . . . . .1 - .3 Acquisition of subsidiary. . . . . . . . . . . . . . . . . . . . .5 - - Conversion of convertible preferred stock. . . . . . . . . . . . .4 - .8 ---------- ---------- ---------- Balance, end of year . . . . . . . . . . . . . . . . . . . . . . $ 58.8 $ 57.6 $ 57.5 ========== ========== ========== Additional Paid-in Capital: Balance, beginning of year. . . . . . . . . . . . . . . . . . . . $ 456.9 $ 455.2 $ 444.6 Dividend reinvestment plan . . . . . . . . . . . . . . . . . . . .4 .4 .4 Exercise of stock options. . . . . . . . . . . . . . . . . . . . 2.4 .8 3.8 Acquisition of subsidiary. . . . . . . . . . . . . . . . . . . . .1 - - Conversion of convertible preferred stock. . . . . . . . . . . . 3.5 .3 6.2 ---------- ---------- ---------- Balance, end of year . . . . . . . . . . . . . . . . . . . . . . $ 463.4 $ 456.9 $ 455.2 ========== ========== ========== Net Unrealized Appreciation (Depreciation) of Securities: Balance, beginning of year. . . . . . . . . . . . . . . . . . . . $ (10.4) $ 25.2 $ 8.9 Change for the year, net of deferred tax if any. . . . . . . . . 80.7 (35.7) 16.3 ---------- ---------- ---------- Balance, end of year . . . . . . . . . . . . . . . . . . . . . . $ 70.3 $ (10.4) $ 25.2 ========== ========== ========== Retained Earnings: Balance, beginning of year. . . . . . . . . . . . . . . . . . . . $ 865.0 $ 750.2 $ 606.3 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . 212.7 151.0 175.1 Dividends on common stock. . . . . . . . . . . . . . . . . . . . (26.7) (24.5) (21.6) Dividends on preferred stock . . . . . . . . . . . . . . . . . . (6.7) (7.0) (7.2) Acquisition of subsidiary . . . . . . . . . . . . . . . . . . . 10.6 - - Currency translation adjustments . . . . . . . . . . . . . . . . 3.3 (4.6) (2.2) ---------- ---------- ---------- Balance, end of year . . . . . . . . . . . . . . . . . . . . . . $ 1,058.3 $ 865.0 $ 750.2 ========== ========== ========== Treasury Stock: Balance, beginning of year. . . . . . . . . . . . . . . . . . . . $ (39.8) $ (31.3) $ (31.3) Acquired during the year . . . . . . . . . . . . . . . . . . . . (0.9) (8.5) - Acquisition of subsidiary. . . . . . . . . . . . . . . . . . . . 2.3 - - ---------- ---------- ---------- Balance, end of year . . . . . . . . . . . . . . . . . . . . . . $ (38.4) $ (39.8) $ (31.3) ========== ========== ========== See accompanying Notes to Consolidated Financial Statements.
Old Republic International Corporation and Subsidiaries Consolidated Statements of Cash Flows ($ in Millions) - ----------------------------------------------------------------------------------------------------------- Years Ended December 31, ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- Cash flows from operating activities: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 212.7 $ 151.0 $ 175.1 Change in non-cash items: Deferred policy acquisition costs . . . . . . . . . . . . . . . . (6.8) (5.7) (16.5) Premiums and other receivables . . . . . . . . . . . . . . . . . (29.8) (7.8) (58.1) Unpaid claims and related items . . . . . . . . . . . . . . . . . 104.2 107.5 154.0 Future policy benefits and policyholders' funds . . . . . . . . . 15.3 (18.6) 47.5 Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 56.3 9.2 (.7) Reinsurance balances and funds. . . . . . . . . . . . . . . . . . 24.8 11.1 75.9 Accounts payable, accrued expenses and other. . . . . . . . . . . 18.9 13.7 16.7 ---------- ---------- ---------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 395.6 260.4 394.0 ---------- ---------- ---------- Cash flows from investing activities: Sales of fixed maturity securities: Held to maturity: Maturities and early calls . . . . . . . . . . . . . . . . . . . 123.8 159.3 366.1 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 23.4 133.6 Available for sale: Maturities and early calls . . . . . . . . . . . . . . . . . . . 72.5 31.9 24.4 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139.0 86.3 151.0 Sales of equity securities . . . . . . . . . . . . . . . . . . . . 201.9 30.2 69.3 Sales of other investments . . . . . . . . . . . . . . . . . . . . 4.1 4.7 6.3 Sales of fixed assets for company use. . . . . . . . . . . . . . . 6.8 3.7 2.0 Purchases of fixed maturity securities: Held to maturity . . . . . . . . . . . . . . . . . . . . . . . . (236.9) (411.2) (828.3) Available for sale . . . . . . . . . . . . . . . . . . . . . . . (515.8) (152.3) (140.1) Purchases of equity securities . . . . . . . . . . . . . . . . . . (42.6) (100.8) (133.7) Purchases of other investments . . . . . . . . . . . . . . . . . . (3.8) (12.2) (6.0) Purchases of fixed assets for company use. . . . . . . . . . . . . (7.1) (11.4) (12.1) Other-net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6 1.2 (1.7) ---------- ---------- ---------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (254.3) (347.0) (369.1) ----------- ----------- ---------- Cash flows from financing activities: Increase in term loans . . . . . . . . . . . . . . . . . . . . . . 12.7 34.0 17.4 Issuance of preferred and common stock . . . . . . . . . . . . . . 14.5 1.6 4.7 Issuance of treasury stock . . . . . . . . . . . . . . . . . . . . 2.3 - - Repayments of term loans . . . . . . . . . . . . . . . . . . . . . (4.9) (.5) (6.9) Dividends on common shares . . . . . . . . . . . . . . . . . . . . (26.7) (24.5) (21.6) Dividends on preferred shares. . . . . . . . . . . . . . . . . . . (7.9) (8.2) (8.3) Purchases of treasury stock . . . . . . . . . . . . . . . . . . . (.9) (8.5) - Purchases of cumulative preferred stock. . . . . . . . . . . . . . - (2.6) - Redemption of cumulative preferred stock . . . . . . . . . . . . . - - - Other-net . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.4) .4 7.5 ---------- ---------- ---------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12.3) (8.4) (7.3) ========== ========== ========== Increase (decrease) in cash and short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 128.8 (95.0) 17.5 Cash and short-term investments, beginning of year. . . . . . . . 203.3 298.3 280.7 ---------- ---------- ---------- Cash and short-term investments, end of year . . . . . . . . . . $ 332.1 $ 203.3 $ 298.3 ========== ========== ========== See accompanying Notes to Consolidated Financial Statements.
Old Republic International Corporation and Subsidiaries Notes to Consolidated Financial Statements ($ in Millions, Except as Otherwise Indicated) - ------------------------------------------------------------------------------- Old Republic International Corporation is a Chicago-based insurance holding company with subsidiaries engaged in the general (property & liability), mortgage guaranty, title, and life (life & disability) insurance businesses. In this report, "Old Republic", "the Corporation", or "the Company" refers to Old Republic International Corporation and its subsidiaries as the context requires. The aforementioned insurance segments are organized as the Old Republic General, Mortgage Guaranty, Title, and Life Groups, and references herein to such groups apply to the Company's subsidiaries engaged in the respective segments of business. See Note 7 for a discussion of the Company's business segments. Note 1-Summary of Significant Accounting Policies-The significant accounting policies employed by Old Republic International Corporation and its subsidiaries are set forth in the following summary. (a) Consolidation Practices-The consolidated financial statements include the accounts of the Corporation and those of its major insurance underwriting and service subsidiaries. Non-consolidated insurance marketing and service sub- sidiaries are insignificant and are reflected on the equity basis of accounting. All significant intercompany accounts and transactions have been eliminated in consolidation. (b) Accounting Principles-The Corporation's insurance underwriting subsidiaries maintain their records in conformity with accounting practices prescribed or permitted by state insurance regulatory authorities. In consolidating such subsidiaries, adjustments have been made to conform their accounts with generally accepted accounting principles. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (c) Investments-The Company may classify its invested assets in terms of those assets relative to which it either (1) has the intent and ability to hold until maturity (generally carried at amortized costs for fixed maturity securities), (2) has available for sale (carried at fair value with adjustments to equity, net of deferred income taxes) or (3) has the intention of trading (carried at fair value with adjustments to income); as of December 31, 1995, the Company's invested assets were classified solely as "held to maturity" or "available for sale." In November 1995, the Company reevaluated the classification of invested assets, as permitted by a Special Report issued by the Financial Accounting Standards Board (FASB) in November 1995. As a result, the Company reclassified from "held to maturity" to "available for sale", certain fixed maturity securities with an amortized cost of $1,365.7, fair value of $1,394.2 and an unrealized gain of $28.4. The unrealized gain, net of deferred income taxes of $9.9, has been credited directly to a separate account in the common shareholders' equity section of the balance sheet in the final quarter of 1995. Fixed maturity securities and redeemable preferred stocks classified as "held to maturity" are generally carried at amortized costs while fixed maturity securities classified as "available for sale" in addition to other preferred and common stocks (equity securities) are included at fair value. Fair values for fixed maturity securities are based on quoted market prices or estimated using values obtained from independent pricing services as applicable. Mortgage and policy loans (other long-term investments) are carried on the basis of the lower of unpaid principal balances or estimated realizable value. The aggregate fair value of fixed maturity securities - "held to maturity" at December 31, 1995 was above their carrying values. The amortized cost and estimated fair values of fixed maturity securities are as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- Fixed Maturity Securities: December 31, 1995: Held to maturity: Utilities. . . . . . . . . . . . . . . $ 995.4 $ 30.7 $ 2.5 $ 1,023.7 Tax-exempt . . . . . . . . . . . . . . 717.8 18.1 1.6 734.4 Redeemable preferred stocks . . . . . .7 - - .7 ---------- ---------- ---------- ---------- $ 1,714.1 $ 48.9 $ 4.1 $ 1,759.0 ========== ========== ========== ========== Available for sale: U.S. & Canadian Governments . . . . . $ 776.7 $ 36.0 $ .4 $ 812.4 Corporate . . . . . . . . . . . . . . 1,292.1 44.7 3.3 1,333.6 ---------- ---------- ---------- ---------- $ 2,068.9 $ 80.8 $ 3.7 $ 2,146.0 ========== ========== ========== ========== December 31, 1994: Held to maturity: Corporate . . . . . . . . . . . . . . . $ 1,350.5 $ 1.2 $ 68.5 $ 1,283.3 Utilities . . . . . . . . . . . . . . . 925.0 .8 57.8 868.0 Tax-exempt. . . . . . . . . . . . . . . 450.7 1.4 21.7 430.3 Redeemable preferred stocks . . . . . . .8 - - .7 ---------- ---------- ---------- ---------- $ 2,727.2 $ 3.5 $ 148.1 $ 2,582.6 ========== ========== ========== ========== Available for sale: U.S. & Canadian Governments . . . . . . $ 646.8 $ 1.6 $ 28.1 $ 620.3 ========== ========== ========== ==========
The amortized cost and estimated fair value at December 31, 1995, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Estimated Amortized Fair Cost Value --------- --------- Fixed Maturity Securities: Held to Maturity: Due in one year or less . . . . . . . . . . . . . . . . . $ 77.6 $ 78.2 Due after one year through five years . . . . . . . . . . 712.4 725.3 Due after five years through ten years. . . . . . . . . . 903.6 933.4 Due after ten years . . . . . . . . . . . . . . . . . . . 20.4 21.9 --------- --------- $ 1,714.1 $ 1,759.0 ========= ========= Available for Sale: Due in one year or less . . . . . . . . . . . . . . . . . $ 212.2 $ 214.7 Due after one year through five years . . . . . . . . . . 919.7 942.7 Due after five years through ten years. . . . . . . . . . 893.0 937.1 Due after ten years . . . . . . . . . . . . . . . . . . . 44.0 51.3 --------- --------- $ 2,068.9 $ 2,146.0 ========= =========
A summary of the Company's equity securities follows:
Gross Gross Estimated Unrealized Unrealized Fair Cost Gains Losses Value -------- -------- -------- -------- Equity Securities: December 31, 1995: Common stocks . . . . . . . . . . . . . $ 91.3 $ 33.6 $ 3.2 $ 121.7 Non redeemable preferred stocks . . . . 4.4 - - 4.4 -------- -------- -------- -------- $ 95.7 $ 33.6 $ 3.2 $ 126.1 ======== ======== ======== ======== December 31, 1994: Common stocks . . . . . . . . . . . . . $ 250.0 $ 20.9 $ 11.7 $ 259.2 Non redeemable preferred stocks . . . . 4.6 - .1 4.5 -------- -------- -------- -------- $ 254.7 $ 20.9 $ 11.8 $ 263.8 ======== ======== ======== ========
Investment income is reported net of allocated expenses and includes appropriate adjustments for amortization of premium and accretion of discount on fixed maturity securities acquired at other than par value. Dividends on equity securities are credited to income on the ex-dividend date. Realized investment gains and losses are reflected as revenues in the income statement and are determined on the basis of amortized value at date of sale for fixed maturity securities, and cost in regard to equity securities; such bases apply to the specific securities sold. Unrealized investment gains and losses, net of any deferred income taxes, are recorded directly in a separate account of shareholders' equity. At December 31, 1995, the Corporation and its subsidiaries had non-income producing investments aggregating $0.1. The following table reflects the composition of net investment income and net realized and unrealized investment gains or losses for each of the years shown:
Years Ended December 31, ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- Investment income from: Fixed maturity securities . . . . . . . . . . . $ 230.4 $ 208.2 $ 205.2 Equity securities . . . . . . . . . . . . . . . 6.3 7.5 5.0 Short-term investments. . . . . . . . . . . . . 13.6 9.7 8.7 Other sources . . . . . . . . . . . . . . . . . 8.4 7.9 7.0 ---------- ---------- ---------- Gross investment income . . . . . . . . . . . . 258.7 233.6 226.0 Investment expenses (1) . . . . . . . . . . . . 6.8 6.0 5.2 ---------- ---------- ---------- Net investment income . . . . . . . . . . . . . $ 251.9 $ 227.5 $ 220.7 ========== ========== ========== Realized gains (losses) on: Fixed maturity securities: Held to maturity . . . . . . . . . . . . . . . $ .1 $ 1.1 $ 11.3 ---------- ---------- ---------- Available for sale: Gains . . . . . . . . . . . . . . . . . . . . 4.9 2.0 19.5 Losses . . . . . . . . . . . . . . . . . . . (1.7) (.3) (4.1) ---------- ---------- ---------- Net . . . . . . . . . . . . . . . . . . . . 3.2 1.7 15.4 ---------- ---------- ---------- Total . . . . . . . . . . . . . . . . . . . . 3.3 2.8 26.7 ---------- ---------- ---------- Equity securities . . . . . . . . . . . . . . 47.2 5.3 13.6 Other assets . . . . . . . . . . . . . . . . . (.8) (.5) (.1) ---------- ---------- ---------- Total . . . . . . . . . . . . . . . . . . . . 49.7 7.7 40.2 Income taxes . . . . . . . . . . . . . . . . . 17.5 2.7 14.4 ---------- ---------- ---------- Net realized gains . . . . . . . . . . . . . $ 32.2 $ 5.0 $ 25.7 ========== ========== ========== Unrealized investment gains (losses) on: Fixed maturity securities: Held to maturity (2) . . . . . . . . . . . . . $ 189.0 $ (234.0) $ 37.8 ========== ========== ========== Available for sale . . . . . . . . . . . . . . $ 101.9 $ (50.8) $ 25.2 Less: Deferred income taxes. . . . . . . . . . 35.3 (17.4) 8.7 ---------- ---------- ---------- Net unrealized gains (losses) . . . . . . . . . $ 66.5 $ (33.3) $ 16.4 ========== ========== ========== Equity securities-available for sale. . . . . . $ 21.6 $ (3.2) $ (.7) Less: Deferred income taxes (credits) . . . . . 7.4 (.8) (.6) ---------- ---------- ---------- Net unrealized gains (losses) . . . . . . . . . $ 14.2 $ (2.3) $ (.1) ========== ========== ========== ___________ (1) Investment expenses consist of personnel costs and investment custody service fees. (2) Deferred income taxes do not apply since these securities are carried at amortized cost.
(d) Revenue Recognition-Pursuant to generally accepted accounting principles applicable to the insurance industry, benefits, claims, and expenses are associated with the related revenues by means of the provision for policy benefits, the deferral and subsequent amortization of acquisition costs, and the recognition of incurred benefits, claims and operating expenses. General insurance (property and liability) and level-term credit life insurance premiums are reflected in income on a pro-rata basis. Earned but unbilled premiums are generally taken into income on the billing date, and adjustments for retrospective premiums, commissions and similar charges are accrued on the basis of periodic evaluations of current underwriting experience and contractual obligations. Title insurance premiums are recognized as income upon the substantial completion of the policy issuance process. Title abstract, escrow, service, and other fees are taken into income at the time of closing of the related escrow. First year and renewal mortgage guaranty premiums are recognized as income on a straight-line basis except that a portion of first year premiums received for certain high risk policies is deferred and reported as earned over the estimated policy life, including renewal periods.Single premiums for mortgage guaranty policies covering more than one year are earned on an accelerated basis over the policy term. Ordinary life and annuity premiums are recognized as revenue when due. Decreasing term credit life and credit disabili- ty/accident & health insurance premiums are generally earned on a sum-of-the-years-digits or similar method. (e) Deferred Policy Acquisition Costs-The Corporation's insurance subsidiaries, other than title companies, defer certain costs which vary with and are primarily related to the production of business. Deferred costs consist principally of commissions, premium taxes, marketing, and policy issuance expenses. With respect to most coverages, deferred acquisition costs are amortized on the same basis as the related premiums are earned or,alternatively, over the periods during which premiums will be paid or underwriting and claim services performed. The following table summarizes deferred policy acquisition costs and related data for the years shown:
Years Ended December 31, ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- Deferred, beginning of year . . . . . . . . . . . . $ 101.3 $ 95.5 $ 78.9 ---------- ---------- --------- Acquisition costs deferred: Commissions - net of reinsurance . . . . . . . . . 96.8 110.5 117.1 Premium taxes . . . . . . . . . . . . . . . . . . 33.8 33.8 22.2 Salaries and other marketing expenses. . . . . . . 52.4 52.2 46.9 ---------- ---------- ---------- Sub-total . . . . . . . . . . . . . . . . . . . 183.1 196.8 186.2 Amortization charged to income . . . . . . . . . . (176.6) (191.0) (169.6) ---------- ---------- ---------- Change for the year . . . . . . . . . . . . . . 6.5 5.6 16.6 ---------- ---------- ---------- Deferred, end of year . . . . . . . . . . . . . . . $ 107.8 $ 101.3 $ 95.5 ========== ========== ==========
(f) Future Policy Benefits/Unearned Premiums-General insurance and level term credit life insurance policy liabilities represent unearned premium reserves developed by application of monthly pro-rata factors to premiums in force. Disability/accident & health and decreasing term credit life insurance policy liabilities are calculated primarily on a sum-of-the-years-digits method. Mortgage guaranty unearned premium reserves are calculated primarily on a pro- rata basis. Ordinary life policy liabilities are determined on a level premium method and take into account mortality and withdrawal rates based principally on anticipated company experience; assumed interest rates range from 3.0% to 6.0%. With respect to annuity policies, the liabilities represent the surrender value of such policies during deferral periods, without adjustment for surrender charges; such values are deemed appropriate to provide for ultimate benefit reserves in the event policyholders exercise an annuity benefit option at a later date. At December 31, 1995 and 1994, the Life Insurance Group had $4,237.0 and $4,423.4, respectively, of net life insurance in force. Future policy liabilities and unearned premiums, consisted of the following:
December 31, ----------------------- 1995 1994 ---------- ---------- General Insurance Group . . . . . . . . . . . $ 333.0 $ 323.8 Mortgage Guaranty Group . . . . . . . . . . . 73.6 81.6 Life Insurance Group: Life insurance . . . . . . . . . . . . . . 62.1 58.0 Annuities . . . . . . . . . . . . . . . . . 83.1 91.3 Disability/accident & health. . . . . . . . 40.7 35.6 ---------- ---------- Sub-total . . . . . . . . . . . . . . . . . 186.0 184.9 ---------- ---------- Consolidated . . . . . . . . . . . . . . . . $ 592.7 $ 590.4 ========== ==========
The Company issues, directly or as a reinsurer, certain insurance policies generally categorized as financial guarantees. The major types of guarantees pertain to (a) state, municipal and other general or special revenue bonds, (b) variable interest rate guarantees, and (c) insurance of the future residual value of fixed assets. The types of risks involved include failure by the bond issuer to make timely payment of principal and interest, changes in interest rates, and changes in the future value of fixed assets. The degree of risk pertaining to these insurance products is largely dependent on the effects of general economic cycles and changes in the credit worthiness of issuers whose obligations have been guaranteed. During the past three years, new commitments have been limited to those identified at (a) immediately above. Premiums received for financial guarantee policies are generally earned over the terms of the contract (which may range between 5 and 30 years) or on the basis of current exposure relative to maximum exposure in force; with respect to residual value insurance, that portion of the premium in excess of certain initial underwriting costs is deferred and taken into income when all events leading to the determination of exposure, if any, have occurred. Since losses on financial guarantee insurance products cannot be predicted reliably, the Company's unearned premium reserves serve as the primary income recognition and loss reserving mechanism. When losses become known and determinable, they are paid or placed in reserve and the remaining directly-related unearned premiums are taken into income. No assurance can be given that unearned premiums will be greater or less than ultimate incurred losses on these policies. The following table reflects certain data pertaining to net insurance in force for the Company's financial guarantee business at the dates shown:
Years Ended December 31, ------------------------ 1995 1994 ---------- ---------- Net Insurance in Force: Bonds. . . . . . . . . . . . . . . . . . . . . $ 2,352.2 $ 2,342.8 Variable interest rate . . . . . . . . . . . . .8 1.0 Residual value . . . . . . . . . . . . . . . . .8 .8 Net Unearned Premiums: Bonds . . . . . . . . . . . . . . . . . . . . 14.5 14.8 Variable interest rate . . . . . . . . . . . . .8 1.0 Residual value . . . . . . . . . . . . . . . . $ - $ - ========== ==========
With respect to mortgage guaranty insurance (net insurance in force of $38,862.7 and $30,405.3, at December 31, 1995 and 1994, respectively) the Company's reserving policies are set forth below in Note 1(g). (g) Losses, Claims and Settlement Expenses-Reserves are estimates that provide for the ultimate expected cost of settling unpaid losses and claims reported at each balance sheet date. Losses and claims incurred but not reported, as well as expenses required to settle losses and claims are established on the basis of various criteria, including historical cost experience and anticipated costs of servicing reinsured and other risks. Long-term disability-type workers' compen- sation reserves, however, are discounted to present value based on interest rates ranging from 3.5% to 4%. The establishment of claim reserves is a reasonably complex and dynamic process influenced by a large variety of factors. These include past experience applicable to the anticipated costs of various types of claims, continually evolving and changing legal theories emanating from the judicial system, actuarial studies, the professional experience and expertise of the Company's claim departments' personnel or attorneys and independent adjusters retained to handle individual claims, the effect of inflationary trends on future claim settlement costs, and periodic changes in claim frequency patterns such as those caused by natural disasters, illnesses, accidents, or work-related injuries. Consequently, the reserve-setting process relies on the judgments and opinions of a large number of persons, on historical precedent and trends, and on expectations as to future developments. At any point in time, the Company and the industry are exposed to possibly higher than anticipated claim costs due to the aforementioned factors, and to the evolution, interpretation, and expansion of tort law, as well as to the effects of unexpected jury verdicts. The Company believes that its overall reserving practices have been consistently applied over many years, and that its aggregate net reserves have resulted in reasonable approximations of the ultimate net costs of claims incurred. However, no representation is made that ultimate net claim and related costs will not be greater or lower than previously established reserves. The following table shows an analysis of changes in aggregate reserves for the Company's losses, claims and settlement expenses for each of the years shown.
Years Ended December 31, ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- Amount of reserves for unpaid claims and claim adjustment expenses at the beginning of each year, net of reinsurance losses recoverable. . . . . . . . . . . . . . . . . . . . . . . . $ 2,096.5 $ 1,989.8 $ 1,836.4 ---------- ---------- ---------- Incurred claims and claim adjustment expenses: Provisions for insured events of the current year . . . . . . . . 864.6 857.3 871.9 Change in provision for insured events of prior years . . . . . . (118.9) (100.4) (54.5) ---------- ---------- ---------- Total incurred claims and claim adjustment expenses . . . . . 745.6 756.8 817.4 ---------- ---------- ---------- Payments: Claims and claim adjustment expenses attributable to insured events of the current year . . . . . . . . . . . . . . . . . . . 251.7 279.9 295.4 Claims and claim adjustment expenses attributable to insured events of prior years . . . . . . . . . . . . . . . . . . . . . . 390.5 370.1 368.6 ---------- ---------- ---------- Total payments . . . . . . . . . . . . . . . . . . . . . . . 642.3 650.1 663.9 ----------- ---------- ---------- Amount of reserves for unpaid claims and claim adjustment expenses at the end of each year, net of reinsurance losses recoverable . . . . . . . . . . . . . . . . . . . . . . . 2,200.2 2,096.5 1,989.8 Reinsurance losses recoverable . . . . . . . . . . . . . . . . . . 1,319.6 1,418.1 1,415.7 ---------- ---------- ---------- Amount of reserves for unpaid claims and claim adjustment expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,519.8 $ 3,514.7 $ 3,405.6 ========== ========== ==========
All reserves are necessarily based on estimates which are periodically reviewed and evaluated in the light of emerging claim experience and changing circumstances. The resulting changes in estimates are recorded in operations of the periods during which they are made. Return and additional premiums and policyholders dividends, all of which tend to be affected by development of claims in future years, may offset in whole or in part developed claim redundancies or deficiencies for certain coverages such as workers compensation. The data in the table above, incorporates the Corporation's estimates for various asbestosis and environmental impairment ("A&E") claims or related costs that have been filed in the normal course of business against a number of its insurance subsidiaries. Many such claims relate to policies issued prior to 1985, and during a short period between 1981 and 1982 pursuant to an agency agreement canceled in 1982. During all years and through the current date, the Corporation's insurance subsidiaries have typically issued general liability insurance policies with face amounts ranging between $1 million and $2 million and rarely exceeding $10 million. Such policies have, in turn, been subject to reinsurance cessions which have typically reduced the Corporation's retentions to $500,000 or less as to each claim. The Corporation's reserving methods, particularly as they apply to formula- based reserves, have been established to cover normal claim occurrences as well as unusual exposures such as those pertaining to A&E claims and related costs. At times, however, the Corporation's insurance subsidiaries also establish specific formula and other reserves as part of their overall claim and claim expense reserves. These are intended to cover additional litigation and other costs that are likely to be incurred to protect the Company's interests in litigated cases in particular. At December 31, 1995, the Corporation's aggregate indemnity and loss adjustment expense reserves specifically identified with these A&E exposures amounted to approximately $87.4 million gross, and $60.1 million net of reinsurance. Based on average annual claims payments during the five most recent calendar years, such reserves represented 10.7 years (gross) and 12.7 years (net) of average annual claims payments. Old Republic disagrees with the allegations of liability on virtually all A&E related claims of which it has knowledge on the grounds that exclusions in the policies preclude coverage for nearly all such claims, and that the Corporation never intended to assume such risks. Old Republic's exposure on such claims cannot therefore be calculated by conventional insurance reserving methods for this and a variety of reasons, including: a) the absence of statistically valid data inasmuch as such claims typically involve long reporting delays and very often uncertainty as to the number and identity of insureds against whom such claims have arisen or will arise; and b) the litigation history of such or similar claims for other insurance industry members that has produced court decisions that have been inconsistent with regard to such issues as when the alleged loss occurred, which policies provide coverage, how a loss is to be allocated among potentially responsible insureds and/or their insurance carriers, how policy coverage exclusions are to be interpreted, what types of environmental impairment or toxic tort claims are covered, when the insurer's duty to defend is triggered, how policy limits are to be calculated, and whether clean-up costs constitute property damage. Individual insurance companies and others who have evaluated the potential costs of litigating and settling A&E claims have noted with increasing concern the possibility that resolution of such claims, by applying liability retroactively in the context of the existing insurance system, could likely bankrupt or undermine seriously the financial condition of the property and liability insurance industry. In the light of this substantial public policy issue, the Corporation is of the view that the courts will not resolve in the near future the litigation gridlock stemming from the non-resolution to date of many environmental claims in particular. In recent times, the Executive Branch and/or the United States Congress have proposed changes in the legislation and rules affecting environmental claims. As of December 31, 1995, however, there is no solid evidence to suggest that forthcoming changes might mitigate or reduce some or all of these claim exposures. Because of the above issues and uncertainties, estimation of reserves for losses and allocated loss adjustment expenses for the above noted types of claims is extremely difficult or impossible. Accordingly, no representation can be made that the Corporation's reserves for such claims and related costs will not prove to be overstated or understated in the future. (h) Income Taxes-The Corporation and most of its subsidiaries file a consolidated tax return and provide for income taxes payable currently. Deferred income taxes included in the accompanying consolidated financial statements pursuant to generally accepted accounting principles will not necessarily become payable/recoverable in the future. Effective January 1, 1993, the Company adopted Financial Accounting Standard (FAS) No. 109 "Accounting for Income Taxes" that required a change to the asset and liability method of calculating deferred income taxes. The cumulative effect of this change resulted in an increase in net income of $13.3, or $.23 per share ($.22 fully diluted) in 1993. This method calls for the establishment of a deferred tax, calculated at currently effective tax rates, for the cumulative temporary differences between financial statement and tax bases of assets and liabilities. The provision for combined current and deferred income taxes reflected in the consolidated statements of income does not bear the usual relationship to operating income before taxes as the result of permanent and other differences between pre-tax income and taxable income determined under existing tax regulations. The more significant differences, their effect on the statutory income tax rate, and the resulting effective income tax rates are summarized below:
Years Ended December 31, ------------------------------ 1995 1994 1993 -------- -------- -------- Statutory tax rate . . . . . . . . . . . . . . . . . . . . 35.0% 35.0% 35.0% Tax rate increases (decreases): Tax-exempt interest . . . . . . . . . . . . . . . . . . . . (2.5) (2.4) (1.4) Dividends received exclusion. . . . . . . . . . . . . . . . (.4) (.9) (.7) Change in tax rate on beginning temporary differences . . . - - (1.2) Other items - net . . . . . . . . . . . . . . . . . . . . . .6 .8 .4 -------- -------- -------- Effective tax rate . . . . . . . . . . . . . . . . . . . . 32.7% 32.5% 32.0% ======== ======== ========
The tax effects of temporary differences that give rise to significant portions of the Company's net deferred tax recoverable (payable) are as follows at the dates shown:
December 31, ---------------------------------- 1995 1994 1993 -------- -------- -------- Deferred Tax Assets: Future policy benefits. . . . . . . . . . . . . . . . . . . . $ 2.2 $ 3.1 $ 1.7 Losses, claims, and settlement expenses . . . . . . . . . . . 179.8 179.8 182.2 Unearned premium reserves . . . . . . . . . . . . . . . . . . (3.0) 1.0 6.2 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.8 8.7 8.7 -------- -------- -------- Total gross deferred tax assets . . . . . . . . . . . . . . . 187.9 192.7 199.0 Less-valuation allowance. . . . . . . . . . . . . . . . . . . 2.5 1.4 3.9 -------- -------- -------- Net deferred tax assets . . . . . . . . . . . . . . . . . . . 185.4 191.3 195.0 -------- -------- -------- Deferred Tax Liabilities: Deferred policy acquisition costs . . . . . . . . . . . . . . 36.7 35.5 34.2 Mortgage guaranty insurers' contingency reserves. . . . . . . 97.2 67.2 43.2 Fixed maturity securities adjusted to cost. . . . . . . . . . 4.4 3.6 4.8 Unrealized investment gains (losses) . . . . . . . . . . . . 37.1 (5.5) 10.2 Title plants and records . . . . . . . . . . . . . . . . . . 3.5 3.4 3.4 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.5 14.5 15.7 -------- -------- -------- Total deferred tax liabilities . . . . . . . . . . . . . . . $ 195.6 $ 118.8 $ 111.9 -------- -------- -------- Net deferred tax asset (liability). . . . . . . . . . . . . . $ (10.2) $ 72.4 $ 83.2 ======== ======== ========
Pursuant to special provisions of the Internal Revenue Code pertaining to mortgage guaranty insurers, a contingency reserve (established in accordance with insurance regulations designed to protect policyholders against extraordinary volumes of claims) is deductible from gross income. The tax benefits obtained from such deductions must, however, be invested in a special type of non-interest bearing U.S. Government Tax and Loss Bond. For Federal income tax purposes, the amounts deducted for the contingency reserve are taken into gross statutory taxable income (a) when the contingency reserve is permitted to be charged for losses under state law or regulation, (b) in the event operating losses are incurred, or (c) in any event upon the expiration of ten years. Life Insurance companies domiciled in the United States and qualifying as life insurers for tax purposes are taxed under special provisions of the Internal Revenue Code. As a result of legislation, 1983 and prior years' tax deferred earnings (cumulatively $20.4 at December 31, 1995) credited to the former memorandum "policyholders' surplus account" will not be taxed unless they are subsequently distributed to shareholders. The Company does not presently anticipate any distribution or payment of taxes on such earnings in the future. As a result of regular examinations of the tax returns for the Corporation and its subsidiaries, the Internal Revenue Service ("IRS") has proposed certain adjustments for additional taxes applicable to the years 1982 to 1993. The proposed adjustments pertain to the timing of certain deductions, the IRS's contention that contractually obligated premium refunds should be treated as dividends, deductions for certain loss and related reserves, a reinsurance transaction, and several other issues not involving material amounts.The Company and its tax counsel believe that substantially all of the proposed material adjustments are without merit, that the Company will be successful in vigorously defending its positions, and that the ultimate adjustments, if any, will not significantly affect its financial condition or results of operations. During 1995 and 1994, certain of the proposed adjustments were finally settled for immaterial amounts. (i) Property and Equipment-Property and equipment is generally depreciated or amortized over the estimated useful lives of the assets, (2 to 45 years), substantially by the straight-line method. Expenditures for maintenance and repairs are charged to income as incurred, and expenditures for major renewals and additions are capitalized. (j) Title Plants and Records-Title plants and records are carried at original cost or appraised value at date of purchase. Such values represent the cost of producing or acquiring interests in title records and indexes and the appraised value of purchased subsidiaries' title records and indexes at dates of acquisition. The cost of maintaining, updating, and operating title records is charged to income as incurred. Title records and indexes are not being amortized since they have an indefinite life and do not diminish in value. (k) Goodwill-The costs of certain purchased subsidiaries in excess of related book values (goodwill) at date of acquisition are being amortized against operations principally over 40 years using the straight-line method. Amortization of goodwill amounted to $3.2 in 1995, $3.1 in 1994 and $3.2 in 1993. (l) Employee Benefit Plans- The Corporation has several pension plans covering a portion of its work force. The plans are defined benefit plans pursuant to which pension payments are based primarily on years of service and employee compensation near retirement. It is the Corporation's policy to fund the plans' costs as they accrue. Plan assets are comprised principally of bonds, common stocks and short-term investments. The components of annual net periodic pension cost (credit) for the plans consisted of the following:
Years Ended December 31, ------------------------------ 1995 1994 1993 -------- -------- -------- Service cost. . . . . . . . . . . . . . . . . . . . $ 3.2 $ 3.4 $ 3.0 Interest cost . . . . . . . . . . . . . . . . . . . 7.6 7.1 6.7 Return on assets. . . . . . . . . . . . . . . . . . (15.5) (5.2) (8.0) Net amortization and deferral . . . . . . . . . . . 5.6 (4.9) (1.7) -------- -------- -------- Net cost (credit) . . . . . . . . . . . . . . . . . $ 1.0 $ .3 $ - ======== ======== ========
The reconciliation of the funded status of the plans is as follows:
December 31, ------------------- 1995 1994 -------- -------- Actuarial present value of benefit obligations: Vested benefit obligations . . . . . . . . . . . . . . . . . $ 87.7 $ 83.4 Nonvested benefit obligations . . . . . . . . . . . . . . . . 2.4 2.1 -------- -------- Accumulated benefit obligations. . . . . . . . . . . . . . . . 90.2 85.5 Excess of projected benefit obligations over accumulated benefit obligations . . . . . . . . . . . . . . . 15.5 15.0 -------- -------- Projected benefit obligations . . . . . . . . . . . . . . . . 105.7 100.5 Plans' assets at fair market value . . . . . . . . . . . . . . 112.6 106.7 -------- -------- Plan assets in excess of projected benefit obligations . . . . 6.9 6.2 Unrecognized net loss . . . . . . . . . . . . . . . . . . . . 3.3 5.5 Prior service cost not yet recognized in net periodic pension cost .5 .6 Remaining unrecognized transition net assets from December 31, 1985 . . . . . . . . . . . . . . . . . . . . . . (4.2) (5.8) -------- -------- Unfunded accrued pension asset recognized in the consolidated balance sheet . . . . . . . . . . . . . . . . . . . . . . . . $ 6.5 $ 6.5 ======== ========
The projected benefit obligations for the plans were determined using the following assumptions at the dates shown:
December 31, ----------------------- 1995 1994 ---------- ---------- Settlement discount rates. . . . . . . . . . . . . . . . . . . 7.4 - 8.0% 7.0 - 8.5% Rates of compensation increase . . . . . . . . . . . . . . . . 4.0 - 6.0% 4.0 - 5.5% Long-term rates of return on assets. . . . . . . . . . . . . . 8.0 - 8.5% 7.5 - 8.5%
The Corporation has a number of profit sharing and other incentive compensation programs for the benefit of a substantial number of its employees. The costs related to such programs are summarized below:
Years Ended December 31, ------------------------------ 1995 1994 1993 -------- -------- -------- Employees Savings and Stock Ownership Plan. . . . . $ 1.2 $ 5.2 $ 1.8 Other profit sharing . . . . . . . . . . . . . . . 3.4 3.2 3.0 Deferred and incentive compensation . . . . . . . . $ 5.2 $ 8.2 $ 12.9 ======== ======== ========
The Company adopted Financial Accounting Standard (FAS) No. 106 "Employers' Accounting for Post-retirement Benefits Other Than Pensions" for health care and life insurance benefit plans as of January 1, 1993. A few Old Republic subsidiaries make available post-retirement health benefits for employees that retired prior to November 30, 1992. FAS No. 106 provides the option of either recognizing the projected future costs of post-retirement benefits as a liability, or amortizing such costs over the average remaining life expectancy of plan participants. Previously such benefits were reported as costs in the period during which they were provided. The Company recognized the accumulated post-retirement benefit liability of $7.0 as of January 1, 1993; this resulted in an after tax charge to net income of $4.6, or $.08 per share ($.08 fully diluted). The Company sponsors a leveraged Employee Savings and Stock Ownership Plan (ESSOP) in which a majority of its employees participate. The ESSOP acquired all of its stock of the Company in 1987 and prior years. Accordingly, it is not required to adopt the American Institute of Certified Public Accountants' SOP No. 93-6, "Employers' Accounting for Employee Stock Ownership Plans." Shares of Company stock owned by the ESSOP are released to participants based on a formula prescribed by the Employee Retirement Income Security Act of 1974, and dividends on released shares are allocated to participants as earnings. The Company's contributions are based on a formula considering growth in net income per share over consecutive five year periods. As of December 31, 1995, there were 22,256,680 Series "D" Redeemable Convertible Preferred Shares and 447,248 Common Shares owned by the ESSOP of which 4,929,467 Series "D" Redeemable Convertible Preferred Shares and 23,050 Common Shares were unreleased and unallocated. There are no repurchase obligations in existence. (See Note 3). (m) Escrow Funds-Segregated cash deposit accounts and the offsetting liabilities for escrow deposits in connection with Title Insurance Group real estate transactions in the same amounts ($299.5 and $198.7 at December 31, 1995 and 1994, respectively) are not included as assets or liabilities in the accompanying consolidated balance sheets as the escrow funds are not available for regular operations. (n) Earnings Per Share-Consolidated primary earnings per share are based upon the weighted average number of shares outstanding during each year, retroactively adjusted for all stock dividends and splits declared through December 31, 1995. Dividend requirements of $4.9 in 1995, $5.1 in 1994 and $5.2 in 1993 on preferred stock have been considered in per share calculations. The average number of common shares used in 1995, 1994 and 1993 earnings per share calculations reflect the pro forma inclusion of 5,165,377, 5,323,170 and 5,476,047 incremental common shares, respectively, which would be issued upon conversion and/or exercise of dilutive convertible preferred and stock option shares. Fully diluted earnings per share are similarly calculated with the inclusion of substantially all convertible securities and stock options includable for each year; no such data is shown when the calculations are anti- dilutive. (o) Cash Flows-For purposes of the Consolidated Statements of Cash Flows, the Company considers short-term investments, consisting of money market funds, certificates of deposit, and commercial paper with maturities of less than 90 days to be cash equivalents. These securities are carried at cost which approximates fair value.
Supplemental cash flow information: Years Ended December 31, ------------------------------ 1995 1994 1993 -------- -------- -------- Cash paid during the year for: Interest. . . . . . . . . . . . . . . . . $ 23.1 $ 19.9 $ 20.0 Income taxes. . . . . . . . . . . . . . . 47.4 61.5 54.1 -------- -------- -------- $ 70.5 $ 81.4 $ 74.1 ======== ======== ========
(p) Concentration of Credit Risk-Excluding U.S. government fixed maturity securities, the Company is not exposed to any significant credit concentration risk. (q) Statement Presentation-Amounts shown in the consolidated financial statements and applicable notes are stated (except as otherwise indicated and as to share data) in millions, which amounts may not add to totals shown due to rounding. Necessary reclassifications are made in prior periods' financial statements whenever appropriate to conform to the most current presentation. Note 2-Investments -Bonds and other investments carried at $163.1 as of December 31, 1995 were on deposit with governmental authorities by the Corporation's insurance subsidiaries to comply with insurance laws. Note 3-Debt and Debt Equivalents-Consolidated debt of Old Republic and its subsidiaries is summarized below:
December 31, ---------------------------------------- 1995 1994 ------------------ ------------------ Carrying Fair Carrying Fair Amount Value Amount Value -------- -------- -------- -------- Commercial paper due within 180 days with an average yield of 5.81% and 6.29%. . . . . . . . . . $ 92.1 $ 92.1 $ 83.2 $ 83.2 Convertible subordinated debentures maturing in 2002 at 5.75% (b)(c). . . . . . . . . . . . . . . . 110.0 148.5 110.0 106.7 Debentures maturing in 2015 at 11.5% . . . . . . . . 29.6 31.8 29.5 32.0 Debentures maturing in 2018 at 10.0%(c). . . . . . . 74.0 79.5 74.0 78.9 Other miscellaneous debt . . . . . . . . . . . . . . 2.9 2.9 4.0 4.0 -------- -------- -------- -------- Total debt . . . . . . . . . . . . . . . . . . . . . 308.8 354.8 300.9 304.9 Redeemable convertible preferred stock classified as a debt equivalent (See (a) below). . . . . . . . 11.7 11.7 13.8 13.8 -------- -------- -------- -------- Total debt and debt equivalents. . . . . . . . . . . $ 320.5 $ 366.5 $ 314.7 $ 318.7 ======== ======== ======== ========
The carrying amount of the Company's commercial paper borrowings approximates its fair value. The fair value of publicly traded debt is based on its quoted market price. Scheduled maturities of the above debt (including redeemable preferred stock classified as a debt equivalent see (a)below) at December 31, 1995 are as follows: 1996: $97.5; 1997: $4.3; 1998: $2.5; 1999: $6.9; 2000: $6.8; 2001 and after $202.3. During 1995, 1994 and 1993, $23.0, $19.8 and $20.0, respectively, of interest expense on debt was charged to consolidated operations. __________ (a) The Company has guaranteed bank loans (balance at December 31, 1995 was $11.7) to a Trust established by the Old Republic Employees Savings and Stock Ownership Plan ("ESSOP").The loans have been used to fund the purchase of Series "B" and Series "D" Redeemable Convertible Preferred Stock from the Company by the trust for the original amount of the loans. The Trust's loan principal repayments (currently scheduled at $2.8 in 1996, $2.7 in 1997, $1.0 in 1998, $2.6 in 1999 and $2.5 in 2000) are expected to be met by annual profit sharing contributions by the Corporation and its participating subsidiaries, while interest payments are to be covered by Trust income, including dividends on the Corporation's stock held by the ESSOP. The interest rate on the Trust's loans of $11.7 is payable quarterly and at rates ranging from 75% to 84% of the prime rate. See Notes 4a and 4b. (b) Each one thousand dollar convertible debenture maturing in 2002, may be converted at any time into 39.024 common shares. See note (c) below. (c) In February 1996, the Company called for the redemption of its 10% debentures maturing in 2018 and its 5.75% convertible subordinated debentures of 2002; redemption of the former will be effected with available funds, while the latter are expected to be converted into approximately 4.3 million Old Republic common shares. Note 4-Shareholders' Equity - All common and preferred share data herein has been retroactively adjusted as applicable for stock dividends or splits declared through December 31, 1995. (a) Preferred Stock-The following table shows certain information pertaining to each of the Corporation's series of preferred shares issued and outstanding:
Redeemable convertible Convertible Cumulative ----------------------- ----------------------- ---------- Preferred Stock Series: "B" "D"(3) "E" "G"(1) "H" ---------- ---------- ---------- ---------- ---------- Annual cumulative dividend rate per share. . . . . . . . . . . . . . $ .148 $ .130 $ 1.00 $ (1) 8 3/4% Conversion ratio of preferred into common shares(2) . . . . . . . . . . . 5 for 1 5 for 1 1 for 3.52 1 for .95 - Conversion right begins. . . . . . . . 1994 Anytime Anytime Anytime - Redemption and liquidation value per share. . . . . . . . . . . $ - $ 1.30 $ - (1) $25.00 Redemption beginning in year . . . . . 1994 1987 1995 (1) (4) Total redemption value (millions). . . $ - $ 29.73 $ - (1) 54.80 Vote per share . . . . . . . . . . . . one one one one - Shares outstanding: December 31, 1994. . . . . . . . . . . 386,075 22,874,402 107,278 72,852 2,192,100 December 31, 1995. . . . . . . . . . . - 22,874,402 - 86,210 2,192,100 ========== ========== ========== =========== ========== __________ (1) The Corporation has authorized up to 1,000,000 shares of Series G Convertible Preferred Stock ("Series G") for issuance pursuant to the Corporation's Stock Option Plan. Series G has been issued under two different designations; the most recent designation being Series G-2 (except as otherwise stated, Series "G" and Series "G-2" are collectively referred to as Series "G"). Each share of Series G pays a floating rate dividend based on the prime rate of interest. At December 31, 1995, the annual dividend rate for Series G and Series G-2 was $.71 per share and $1.96 per share, respectively. Each share of Series G is convertible at any time, after being held six months, into 0.95 shares of Common Stock (See 4(d)). Unless previously converted, Series G shares may be redeemed at the Corporation's sole option five years after their issuance. (2) In the event of a merger in which the Corporation is not the survivor, each series of Preferred Stock must be redeemed at the above redemption value per share. In the event of certain defined Business Combinations or the acquisition of 20% or more of a class of the Corporation's voting securities in certain circumstances, the Series D preferred stock is convertible into common shares at a ratio ranging from 5 for 1 to 2.5 for 1 unless previously converted. (3) Series "D" redeemable convertible preferred stock, substantially all of which is held by the Corporation's employee benefit plans, is adjustable proportionately as to redemption value, dividend rate, and number of shares to reflect any stock dividends or splits declared on the Corporation's common stock, and has a preference as to dividend payments and upon liquidation of the Corporation. (4) On or after December 13, 1996 redeemable at the option of the Corporation, in whole or in part, at a redemption price of $25.00 per share.
(b) Cash Dividend Restrictions-The payment of cash dividends by the Corporation is principally dependent upon the amount of its insurance subsidiaries' statutory policyholders' surplus available for dividend distribution. The insurance subsidiaries' ability to pay cash dividends to the Corporation is in turn generally restricted by law or subject to approval of the insurance regulatory authorities of the states in which they are domiciled. These authorities recognize only statutory accounting practices for determining financial position, results of operations, and the ability of an insurer to pay dividends to its shareholders. Based on 1995 data, the maximum amount of dividends payable to the Corporation by its insurance and a small number of non- insurance company subsidiaries during 1996 without the prior approval of appropriate regulatory authorities is approximately $209.5. However, management does not expect to distribute all such dividends since reinvested earnings are the Corporation's major source of capital to promote its growth, and support its obligations to policyholders. (c) Debt Restrictions-Under the most restrictive covenants, the terms of Old Republic's guaranties relative to loan agreements described in Note 3(a) provide that while loans under such agreements are outstanding, Old Republic will maintain a minimum consolidated tangible net worth (excluding goodwill and net unrealized investment gains or losses, but including title plants and records) of at least $400.0. Such agreements also, among other things, restrict Old Republic from permitting "Debt" to exceed 25% of its consolidated tangible net worth (as adjusted for goodwill and net unrealized investment gains or losses on equity securities) without approval of the lenders. (d) Stock Option Plans-The Corporation has had non-qualified, stock option plans (the 1979, 1985 and 1992 plans) for its key employees and those of its eligible subsidiaries since 1979. The plans provide for the issuance of options for up to 5% of the Old Republic common stock issued and outstanding at any one time. The term of each option is generally 10 years from the date of grant. Under ordinary circumstances, options may be exercised to the extent of 10% of the number of shares covered thereby on and after the date of grant and cumulatively to the extent of an additional 10% on and after each of the first through ninth anniversaries of the date of grant. The Corporation may extend 15 year loans at a prevailing market rate of interest for a portion of the exercise price. Amendments to the plans also enable optionees to, alternatively, exercise their options into Series "G" or Series "G-2" Convertible Preferred Stock. The exercise of options into such Series "G" or Series "G-2" Convertible Preferred stock reduces by 5% the number of equivalent common shares which would otherwise be obtained from the exercise of options into common shares. Under the 1985 and 1992 plans, in the event the market price of Old Republic common stock reaches a preestablished value ("vesting acceleration price"), optionees may exercise their options to the extent of 10% of the number of shares covered by the option for each year that the optionee has been employed by the Corporation or its subsidiaries. Changes in stock options and related information are reflected in the following table (See Note 4(a)(1)).
As of and for the Years Ended December 31, -------------------------------------------------------------------------- 1992 Plan 1985 Plan 1979 Plan --------------------------- ------------------------- ----------------- 1995 1994 1993 1995 1994 1993 1994 1993 --------- ------- ------- ------- ------- ------- ------- ------- Options outstanding . . . . . . . . . . . . . . . 1,213,460 626,925 633,575 591,145 718,710 774,506 - 16,610 Price range: High. . . . . . . . . . . . . . . . . . . . . . $ 26.63 $ 26.13 $ 26.13 $ 12.62 $ 12.62 $ 12.62 $ - $ 5.14 Low . . . . . . . . . . . . . . . . . . . . . . $ 20.50 $ 20.50 $ 20.50 $ 8.74 $ 8.74 $ 8.74 $ - $ 5.14 Shares exercisable. . . . . . . . . . . . . . . . 243,662 127,805 65,858 502,696 628,433 651,644 - 16,610 Options granted . . . . . . . . . . . . . . . . . 624,000 - 610,775 - - - - - Price of options granted: High. . . . . . . . . . . . . . . . . . . . . . $ 26.63 $ - $ 26.13 $ - $ - $ - $ - $ - Low . . . . . . . . . . . . . . . . . . . . . . $ 24.38 $ - $ 25.13 $ - $ - $ - $ - $ - Vesting acceleration price: High . . . . . . . . . . . . . . . . . . . . . $ 39.94 $ 39.19 $ 39.19 $ 18.93 $ 18.93 $ 18.93 $ N/A $ N/A Low . . . . . . . . . . . . . . . . . . . . . . $ 30.75 $ 30.75 $ 30.75 $ 13.11 $ 13.11 $ 13.11 $ N/A $ N/A Options cancelled or forfeited . . . . . . . . . 21,010 6,650 2,000 - 5,687 526 - 184 Options exercised . . . . . . . . . . . . . . . . 16,455 - 200 127,565 50,109 76,113 16,610 200,555 Average price of options exercised . . . . . . . . . . . . . . . . . . . . $ 25.04 $ - $ 25.13 $ 11.44 $ 11.11 $ 11.42 $ 5.14 $ 7.13 ========= ======= ======= ======= ======= ======= ====== =======
Option prices represent the per share market price on the date of grant. No charge is made to earnings in connection with the granting or exercise of nonqualified stock options. In conjunction with the purchase or merger of various companies, the Corporation has assumed the stock option obligations under various qualified and nonqualified stock option plans previously adopted by such companies.These plans were terminated as of the merger dates, and existing options at that date became exercisable into Old Republic common shares at their original price adjusted for the appropriate exchange ratios pertaining to each merger. At December 31, 1995, there were no more options outstanding and exercisable. Options for 5,576; 18,246; and 24,568 were exercised for a total consideration of approximately $0.1, $0.1 and $0.1 during 1995, 1994 and 1993, respectively. In October 1995, the Financial Accounting Standards Boards issued FAS No. 123 "Accounting for Stock Based Compensation". This statement provides two alternatives for accounting for stock based compensation (stock option grants). The Company has elected the alternative to continue to report in accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" and will provide the disclosures as required by FAS No. 123. (e) Common Stock-There were 250,000,000 shares of common stock authorized at December 31, 1995. At the same date, there were 50,000,000 shares of Class "B" common stock authorized but none were issued or outstanding. Class "B" common shares have the same rights as common shares except for being entitled to 1/10th of a vote per share. During 1995, the Corporation issued a total of 661,042 common shares valued at $13.7 to effect two small acquisitions which were not material to Old Republic's financial position or operating results. (f) Undistributed Earnings-The equity of the Corporation in the undistributed earnings, determined in accordance with generally accepted accounting principles, and in the net unrealized investment gains (losses) of its respective subsidiaries at December 31, 1995 amounted to $1,151.9 and $70.1, respectively. Cash dividends declared during 1995, 1994 and 1993, to the Corporation by its subsidiaries amounted to $106.8, $55.4 and $53.9, respectively. (g) Treasury Stock-A total of 5,540,360 common shares issued and outstanding are held by consolidated affiliates. See "Related Party Transactions" herein. (h) Statutory Data-The shareholders' equity and net income, determined in accordance with statutory accounting practices, of the Corporation's insurance subsidiaries was as follows at the dates and for the periods shown:
Shareholders' Equity Net Income -------------------- ------------------------------ December 31, Years Ended December 31, -------------------- ------------------------------ 1995 1994 1995 1994 1993 -------- -------- -------- -------- -------- General Insurance Group. . . . . . $1,129.1 $1,016.2 $ 149.6 $ 116.2 $ 93.2 Mortgage Guaranty Group. . . . . . 133.8 107.6 95.9 74.7 56.3 Title Insurance Group. . . . . . . 125.6 123.5 15.2 6.0 19.2 Life Insurance Group . . . . . . . $ 81.2 $ 82.5 $ 6.9 $ 6.9 $ 3.6 ======== ======== ======== ======== ========
Note 5-Commitments and Contingent Liabilities: (a) Reinsurance-In order to maintain premium production within their capacity and to limit maximum losses for which they might become liable under policies underwritten, Old Republic's insurance subsidiaries, as is the common practice in the insurance industry, cede all or a portion of their premiums and liabilities on certain classes of business to other insurers and reinsurers. Although the ceding of insurance does not ordinarily discharge an insurer from liability to a policyholder, it is industry practice to establish the reinsured part of risks as the liability of the reinsurer. Old Republic also employs retrospective premium, contingent commission, and profit sharing arrangements for parts of its business in order to minimize losses for which it might become liable under insurance policies underwritten by it. To the extent that any reinsurance companies or retrospectively rated risks or producers might be unable to meet their obligations under existing reinsurance or retrospective insurance and agency agreements, Old Republic would be liable for the defaulted amounts. As deemed necessary, reinsurance ceded to other companies is secured by letters of credit, cash, and/or securities. Reinsurance protection for General Insurance operations generally limits the net loss on any one risk to the following maximums (in thousands):fire and other physical perils-$300; accident and health-$15; workers' compensation-$1,000; other liability-$750; and loan credit guaranty-$200. A substantial portion of the mortgage guaranty insurance business is retained, with the exposure on any one risk currently averaging less than $22. Title insurance risk assumptions, based on the title insurance subsidiary's financial resources, are currently limited to $25,000 as to any one policy. The maximum amount of ordinary life insurance retained on any one life by the Life Insurance Group (without reinsurance) is $250. Most of the reinsurance ceded by the Corporation's insurance subsidiaries in the ordinary course of business is placed on a quota share or excess of loss basis. Under quota share reinsurance, the companies remit an agreed upon percentage of their premiums written to assuming companies and are reimbursed for a pro-rata share of claims and commissions incurred and for a ceding commission to cover expenses and costs for underwriting and claim services performed. Under excess of loss reinsurance agreements, the companies are generally reimbursed for losses exceeding contractually agreed-upon levels. The following information relates to reinsurance and related data for the General Insurance, Mortgage Guaranty and Life Insurance Groups for the three years ended December 31, 1995. For the years 1993 to 1995, reinsurance transactions of the Title Insurance Group have not been material.
Years Ended December 31, ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- General Insurance Group Written premiums:direct. . . . . . . . . . . . . . . . . . $ 1,118.0 $ 1,170.2 $ 1,160.7 assumed . . . . . . . . . . . . . . . . . 65.2 68.6 111.5 ceded . . . . . . . . . . . . . . . . . . $ 307.0 $ 387.3 $ 396.1 ========== ========== ========== Earned premiums:direct . . . . . . . . . . . . . . . . . . $ 1,099.7 $ 1,174.6 $ 1,170.4 assumed. . . . . . . . . . . . . . . . . . 74.3 78.1 107.6 ceded. . . . . . . . . . . . . . . . . . . $ 322.8 $ 388.6 $ 411.4 ========== ========== ========== Claims ceded . . . . . . . . . . . . . . . . . . . . . . . $ 210.0 $ 277.2 $ 390.9 ========== ========== ========== Mortgage Guaranty Group Written premiums:direct. . . . . . . . . . . . . . . . . . $ 170.3 $ 138.4 $ 125.7 assumed . . . . . . . . . . . . . . . . . - - - ceded . . . . . . . . . . . . . . . . . . $ 2.2 $ 3.2 $ 4.6 ========== ========== ========== Earned premiums:direct . . . . . . . . . . . . . . . . . . $ 178.2 $ 138.3 $ 102.5 assumed. . . . . . . . . . . . . . . . . . - - - ceded. . . . . . . . . . . . . . . . . . . $ 3.0 $ 3.8 $ 5.7 ========== ========== ========== Claims ceded . . . . . . . . . . . . . . . . . . . . . . . $ 1.8 $ 2.3 $ 3.3 ========== ========== ========== Mortgage guaranty insurance in force as of December 31:direct . . . . . . . . . . . . . . . . . . . . $ 39,201.2 $ 31,415.8 $ 25,372.5 assumed. . . . . . . . . . . . . . . . . . . . - .1 .4 ceded. . . . . . . . . . . . . . . . . . . . . $ 338.5 $ 1,010.5 $ 1,346.8 ========== ========== ========== Life Insurance Group Written premiums:direct. . . . . . . . . . . . . . . . . . $ 88.0 $ 80.4 $ 64.5 assumed . . . . . . . . . . . . . . . . . .3 .3 .3 ceded . . . . . . . . . . . . . . . . . . $ 42.4 $ 43.3 $ 33.7 ========== ========== ========== Earned premiums:direct . . . . . . . . . . . . . . . . . . $ 82.5 $ 80.6 $ 71.0 assumed. . . . . . . . . . . . . . . . . . .3 .3 .3 ceded. . . . . . . . . . . . . . . . . . . $ 40.9 $ 41.0 $ 38.3 ========== ========== ========== Life insurance in force as of December 31:direct . . . . . $ 7,747.3 $ 8,742.4 $ 8,848.7 assumed. . . . . - - - ceded . . . . . $ 3,510.2 $ 4,318.9 $ 4,561.9 ========== ========== ========== Disability/accident and health insurance premiums ceded on a quota share basis: To affiliated companies . . . . . . . . . . . . . . . . $ 3.4 $ 3.0 $ 1.1 To unaffiliated companies. . . . . . . . . . . . . . . . 24.7 24.5 18.1 ---------- ---------- ---------- Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 28.1 $ 27.6 $ 19.3 ========== ========== ========== Percentage of direct and assumed premiums . . . . . . . 43.8% 49.9% 53.7% ========== ========== ==========
(b) Leases-Some of the Corporation's subsidiaries maintain their offices in leased premises. Certain of these leases provide for the payment of real estate taxes, insurance, and other operating expenses. At December 31, 1995, aggregate minimum rental commitments (net of expected sub-lease receipts) under noncancellable operating leases of $106.5 are summarized as follows: 1996:$26.8; 1997: $20.6; 1998: $14.5; 1999: $9.1; 2000: $5.7; 2001 and after: $29.5. (c) General-In the normal course of business, the Corporation and its subsidiaries are subject to various contingent liabilities, including possible income tax assessments resulting from tax law interpretations or issues raised by taxing authorities in their regular examinations. Management does not anticipate any significant losses or costs to result from any known or existing contingencies. (d) Legal Proceedings-There are no material legal proceedings other than those arising in the normal course of business and which generally pertain to claim matters related to insurance policies and contracts issued by the Corporation's insurance subsidiaries. Note 6-Consolidated Quarterly Results-Unaudited - Old Republic's consolidated quarterly operating data for the two years ended December 31, 1995 is presented below. In the fourth quarter of 1995, the Company's Mortgage Guaranty Group adopted the accrual method for recording past-due premium revenues and the related premium receivable arising from new monthly premium policies. This new payment mode has emerged as a significant factor for the mortgage guaranty industry since mid-1994. Before adoption of this accrual method, past-due premiums were recognized on receipt of cash. With the adoption this accrual method, a cumulative increase in net premiums written of $9.8 million, net premiums earned of $6.3 million, and post-tax income of $3.9 million or six cents per fully diluted share was reflected in the Company's final quarter and year of 1995. In the opinion of management, all adjustments consisting of normal recurring adjustments necessary to a fair presentation of quarterly results have been reflected in the data which follows. It is also management's opinion, however, that quarterly operating data for insurance enterprises is not indicative of results to be achieved in succeeding quarters or years. The long-term nature of the insurance business, seasonal patterns in premium production and incidence of claims, and changes in yields on invested assets are some of the factors necessitating a review of operating results, changes in shareholders' equity, and cash flows for periods of several years to obtain a proper indicator of performance. The data below should be read in conjunction with the "Management Analysis of Financial Position and Results of Operations":
1st 2nd 3rd 4th Quarter Quarter Quarter Quarter ---------- ---------- ---------- ---------- Year Ended December 31, 1995: Operating Summary: Net premiums, fees, and other income. . . . . $ 320.9 $ 352.3 $ 350.7 $ 369.9 Net investment income and realized gains. . . 64.8 64.3 82.6 89.6 Total revenues . . . . . . . . . . . . . . . 385.8 416.9 433.5 459.6 Benefits, claims, and expenses. . . . . . . . 329.0 354.2 342.2 354.3 Net income. . . . . . . . . . . . . . . . . . $ 39.0 $ 42.0 $ 60.9 $ 70.6 ========== ========== ========== ========== Net income per share:Primary. . . . . . . . . $ .66 $ .72 $ 1.05 $ 1.20 Fully Diluted. . . . . . $ .63 $ .68 $ .99 $ 1.13 ========== ========== ========== ========== Average common and equivalent shares outstanding: Primary . . . . . . . . . . . . . . . . . . 56,938,962 57,021,249 57,122,458 57,870,868 ========== ========== ========== ========== Fully Diluted . . . . . . . . . . . . . . . 61,397,387 61,524,206 61,676,312 62,486,240 ========== ========== ========== ========== 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter ---------- ---------- ---------- ---------- Year Ended December 31, 1994: Operating Summary: Net premiums, fees, and other income. . . . . $ 379.5 $ 368.9 $ 346.1 $ 348.6 Net investment income and realized gains. . . 58.3 57.7 57.6 61.2 Total revenues . . . . . . . . . . . . . . . 438.0 426.9 403.9 410.0 Benefits, claims, and expenses. . . . . . . . 387.7 373.1 347.2 345.0 Net income. . . . . . . . . . . . . . . . . . $ 34.0 $ 36.0 $ 37.8 $ 43.0 ========== ========== ========== ========== Net income per share:Primary. . . . . . . . . $ .57 $ .61 $ .64 $ .73 Fully Diluted. . . . . . $ .55 $ .58 $ .61 $ .70 ========== ========== ========== ========== Average common and equivalent shares outstanding: Primary . . . . . . . . . . . . . . . . . . 57,264,289 57,264,182 57,219,840 57,124,416 ========== ========== ========== ========== Fully Diluted . . . . . . . . . . . . . . . 61,693,146 61,692,856 61,669,829 61,588,211 ========== ========== ========== ========== Note 7-Information About Segments of Business - The contributions of Old Republic's insurance industry segments to consolidated revenues and operating results, and certain balance sheet data pertaining thereto are shown in the following tables on the basis of generally accepted accounting principles ("GAAP"). Each of the Corporation's segments underwrites and services only those insurance coverages which may be written by it pursuant to state insurance regulations and corporate charter provisions, although disability/accident & health coverages may be written directly or indirectly through reinsurance in either the General or Life Insurance segments. In computing the profit or loss before taxes for each segment, the following items have not been added or deducted: general corporate revenues and expenses, parent company interest expense, income taxes, and equity in operating results of, or dividends from, unconsolidated subsidiaries and affiliates. To reconcile the total assets shown for the General, Mortgage Guaranty, Title and Life Groups with total consolidated assets at December 31, 1995 and 1994, adjustments must be made for the parent company assets of $2,056.3 and $1,745.2, and consolidating eliminations of $2,417.5 and $2,143.0, respectively. Revenues and assets connected with foreign operations are not significant in relation to consolidated totals.
Net Revenues - --------------------------------------------------------------------------------- Years Ended December 31, ----------------------------------- 1995 1994 1993 ---------- ---------- ---------- General Insurance Group: Net premiums earned: Liability coverages. . . . . . . . . . . . $ 477.9 $ 509.8 $ 517.5 Property and other coverages . . . . . . . 373.2 354.2 349.0 Net investment (a) and other income. . . . 204.9 187.4 192.0 ---------- ---------- ---------- Total . . . . . . . . . . . . . . . . . . 1,056.1 1,051.4 1,058.5 ---------- ---------- ---------- Mortgage Guaranty Group: Net premiums earned. . . . . . . . . . . . 175.2 134.5 96.8 Net investment (a) and other income. . . . 28.6 23.8 21.8 ---------- ---------- ---------- Total. . . . . . . . . . . . . . . . . . 203.9 158.3 118.6 ---------- ---------- ---------- Title Insurance Group: Net premiums earned . . . . . . . . . . . 183.3 244.4 249.6 Title, escrow and other fees. . . . . . . 122.2 140.2 199.7 ---------- ---------- ---------- Sub-total . . . . . . . . . . . . . . . 305.5 384.7 449.4 Net investment (a) and other income . . . 20.6 20.0 18.5 ---------- ---------- ---------- Total . . . . . . . . . . . . . . . . . . 326.2 404.7 467.9 ========== ========== ========== Life Insurance Group: Annuities: Net premiums earned . . . . . . . . . . . - - .1 Net investment income . . . . . . . . . . 6.1 6.4 6.5 ---------- ---------- ---------- Sub-total . . . . . . . . . . . . . . . 6.1 6.4 6.6 ---------- ---------- ---------- Credit and other life and disability: Net premiums earned. . . . . . . . . . . . 41.9 40.0 32.9 Net investment (a) and other income. . . . 9.9 9.2 9.9 ---------- ---------- ---------- Sub-total . . . . . . . . . . . . . . . . 51.8 49.3 42.9 ---------- ---------- ---------- Total . . . . . . . . . . . . . . . . . 58.0 55.7 49.5 ---------- ---------- ---------- Other Operations - Net (b):. . . . . . . . 1.8 .9 1.3 ---------- ---------- ---------- Consolidated sub-total . . . . . . . . . 1,646.1 1,671.2 1,696.0 Net Realized Gains . . . . . . . . . . . . 49.7 7.7 40.2 ---------- ---------- ---------- Consolidated . . . . . . . . . . . . . . $ 1,695.9 $ 1,679.0 $ 1,736.3 ========== ========== ==========
Income (Loss) Before Taxes (c) - -------------------------------------------------------------------------------- Years Ended December 31, ---------------------------------- 1995 1994 1993 ---------- ---------- ---------- General Insurance Group: Underwriting/service income (loss): Liability coverages. . . . . . . . . . . . . . $ (58.6) $ (65.0) $ (67.4) Property and other coverages . . . . . . . . . 38.6 45.4 21.9 Net investment income (a). . . . . . . . . . . 191.1 173.8 170.1 ---------- ---------- ---------- Total. . . . . . . . . . . . . . . . . . . . . 171.1 154.2 124.5 ---------- ---------- ---------- Mortgage Guaranty Group: Underwriting/service income. . . . . . . . . . 77.6 57.7 43.8 Net investment income (a). . . . . . . . . . . 25.2 20.6 17.5 ---------- ---------- ---------- Total. . . . . . . . . . . . . . . . . . . . . 102.8 78.3 61.3 ---------- ---------- ---------- Title Insurance Group: Underwriting/service income (loss) . . . . . . (13.4) (16.9) 16.2 Net investment income (a). . . . . . . . . . . 18.0 16.7 15.8 ---------- ---------- ---------- Total. . . . . . . . . . . . . . . . . . . . . 4.6 (.2) 32.1 ---------- ---------- ---------- Life Insurance Group: Annuities . . . . . . . . . . . . . . . . . . 2.7 2.4 (.2) Other coverages and net investment income (a). 5.2 3.9 6.7 ---------- ---------- ---------- Total. . . . . . . . . . . . . . . . . . . . . 7.9 6.4 6.5 ========== ========== ========== Other Sources - Net (b): . . . . . . . . . . . (20.2) (20.6) (21.4) ---------- ---------- ---------- Consolidated sub-total . . . . . . . . . . . . 266.2 218.1 203.0 Net Realized Gains . . . . . . . . . . . . . . 49.7 7.7 40.2 ---------- ---------- ---------- Consolidated . . . . . . . . . . . . . . . . . $ 316.0 $ 225.8 $ 243.3 ========== ========== ========== __________ In the above tables, net premiums earned on a GAAP basis differ from statutory amounts as a result of differences in the calculations of unearned premium reserves under each accounting method. (a) Including unallocated investment income derived from invested capital and surplus funds./(b) Represents results of holding company parent, consolidation eliminating adjustments, and general corporate expenses, as applicable./(c) Before cumulative effect of accounting changes as indicated in notes 1(h) and (l).
Assets At Year End - -------------------------------------------------------------------------------- December 31, ------------------------- 1995 1994 ---------- ---------- General Insurance Group . . . . . . . . . . . . . . $ 5,356.8 $ 5,199.9 Mortgage Guaranty Group . . . . . . . . . . . . . . 634.0 487.8 Title Insurance Group . . . . . . . . . . . . . . . 415.8 402.4 Life Insurance Group. . . . . . . . . . . . . . . . 328.2 322.7 Consolidated . . . . . . . . . . . . . . . . . . . $ 6,593.5 $ 6,262.9 ========== ==========
Note 8-Related Party Transactions - At December 31, 1995 and 1994, the Corporation owned 98.85% of the non-voting common shares, and 40% of the voting common and preferred shares of the American Business & Mercantile Insurance Group, Inc., ("AB&M Group" or "Group"), an affiliated insurance holding company engaged in the property and liability reinsurance business.As of the same dates, the American Business & Personal Insurance Mutual, Inc. ("Mutual"), a property & liability mutual insurer owned by its policyholders, held directly or through a subsidiary .04% of the non-voting common shares and 60% of the Group's voting common and preferred shares. At both dates, 1.11% of the Group's non-voting common shares were held by public shareholders. Pursuant to underwriting and investment management agreements, Old Republic receives management fees for administering the affairs of the Group's reinsurance subsidiary and those of the Mutual.Pursuant to reinsurance treaties, the Group and the Mutual are quota share participants in various types of primary or assumed reinsurance contracts produced through Old Republic underwriting facilities. Fees received in the past three years by Old Republic were immaterial. The following table shows reinsurance cessions, retrocessions, and assumptions to or from the Group's reinsurance subsidiary and the Mutual for the last three years.
Ceded to Group Assumed from Mutual Ceded to Mutual ---------------------- ---------------------- ---------------------- 1995 1994 1993 1995 1994 1993 1995 1994 1993 ------ ------ ------ ------ ------ ------ ------ ------ ------ Premiums written. . . . . . $ 12.6 $ 12.5 $ 11.2 $ - $ - $ - $ 3.6 $ 3.6 $ 3.6 Commissions and fees. . . . .8 .7 .6 - - - - - - Losses and loss expenses. . 14.7 14.8 9.9 .1 (.1) (.3) 4.1 4.3 3.5 Loss and loss expense reserves . . . . . . . . . 54.1 51.1 46.4 18.7 20.2 22.5 7.9 6.9 5.6 Unearned premiums . . . . . $ 1.1 $ .9 $ .7 $ - $ - $ - $ .3 $ .3 $ .2 ====== ====== ====== ====== ====== ====== ====== ====== ======
Certain subsidiaries of the Company have sold various accounts receivable to a finance company subsidiary of the Mutual. Total receivables sold as of December 31, 1995 and 1994 amounted to approximately $6.0 and $6.6,respectively. At December 31, 1995 and 1994, the Group held approximately 7.8% and 8.0%, respectively, of Old Republic's issued and outstanding common shares. For financial accounting purposes only, 4,439,267 of such shares have been treated as treasury shares at each respective date in consolidating the Group's accounts with those of the Corporation. In the normal course of business, the Company cedes, on the same terms as apply to unrelated reinsurers, certain parts of its outgoing reinsurance to a foreign reinsurer in which it has an equity interest. Total premiums ceded to this reinsurer amounted to approximately $6.0 in 1995, $6.1 in 1994 and $5.6 in 1993. As of December 31, 1995 and 1994, total premium and loss reserve credits taken on account of cumulative cessions aggregated $65.6 and $67.1, respectively, all of which credits were collateralized by cash, investments and funds held amounting to $73.2 and $69.0, respectively. At December 31, 1995, the Corporation owned 93% of the voting common stock of Employers General Insurance Group, Inc. ("EGI") an affiliated insurance holding company engaged in the property and liability insurance and reinsurance business, primarily in Texas. At such date, 7% of EGI's voting common stock was held by public shareholders. Pursuant to a branch management agreement, EGI supervises the solicitation and underwriting of all lines of insurance that two insurance subsidiaries of Old Republic are authorized to write. EGI's Texas domiciled insurance subsidiary has entered into a quota share reinsurance treaty with an insurance subsidiary of Old Republic. Under the reinsurance treaty, EGI's insurance subsidiary reinsures the net retained amount of business produced by EGI and its subsidiaries. EGI commenced operations in May, 1992, its insurance subsidiary received its license in December, 1993. The following table is a summary of intercompany transactions:
Ceded to EGI ------------------------------- 1995 1994 1993 ------- ------- ------- Premiums written. . . . . . . . . . . . . . . $ 33.8 $ 29.7 $ 47.6 Losses and loss expenses. . . . . . . . . . . 26.4 22.6 30.4 Loss and loss expense reserves. . . . . . . . 42.4 33.3 22.9 Unearned premiums . . . . . . . . . . . . . . $ 12.6 $ 12.3 $ 13.1 ======= ======= =======
EGI has also entered into an investment counsel agreement with Old Republic, pursuant to which Old Republic provides investment advice, accounting services and assistance to EGI in executing purchases and sales of investments. Fees received by Old Republic were immaterial. REPORT OF INDEPENDENT ACCOUNTANTS - ------------------------------------------------------------------------------- To the Board of Directors and Shareholders of Old Republic International Corporation Chicago, Illinois We have audited the accompanying consolidated balance sheets of Old Republic International Corporation and subsidiaries (the "Company") as of December 31, 1995 and 1994, and the related consolidated statements of income, preferred stock and common shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Old Republic International Corporation and subsidiaries as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. As discussed in footnote 1(h) and 1(l) to the consolidated financial statements, the Company changed its method of accounting for income taxes and post-retirement benefits other than pensions in 1993. Coopers & Lybrand L.L.P. Chicago, Illinois March 13, 1996 Item 9-Disagreements on Accounting and Financial Disclosure None. PART III Item 10-Directors and Executive Officers of the Registrant Omitted pursuant to General Instruction G(3). The Company will file with the Commission prior to April 1, 1996 a definitive proxy statement pursuant to Regulation 14A in connection with its Annual Meeting of shareholders to be held on May 24, 1996. See also Item 4(a) in Part I of this report. A list of Directors appears on the "Signature" page of this report. Item 11-Executive Compensation Omitted pursuant to General Instruction G(3). The Company will file with the Commission prior to April 1, 1996 a definitive proxy statement pursuant to Regulation 14A in connection with its Annual Meeting of shareholders to be held on May 24, 1996. Item 12-Security Ownership of Certain Beneficial Owners and Management Omitted pursuant to General Instruction G(3). The Company will file with the Commission prior to April 1, 1996 a definitive proxy statement pursuant to Regulation 14A in connection with its Annual Meeting of shareholders to be held on May 24, 1996. Item 13-Certain Relationships and Related Transactions Omitted pursuant to General Instruction G(3). The Company will file with the Commission prior to April 1, 1996 a definitive proxy statement pursuant to Regulation 14A in connection with its Annual Meeting of shareholders to be held on May 24, 1996. PART IV Item 14-Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Documents filed as a part of this report: 1. Financial statements: See Item 8, Index to Financial Statements. 2. Financial statement schedules will be filed on or before April 30, 1996 under cover of Form 10-K/A. 3. See exhibit index on page 52 of this report. (b) Reports on Form 8-K: 1. No reports on Form 8-K were filed during the fourth quarter of 1995. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized (Name, Title or Principal Capacity, and Date). (Registrant): Old Republic International Corporation By : _________________/s/ A.C. Zucaro _______________ _____3/14/96_____ A. C. Zucaro, Chairman of the Board, Date Chief Executive Officer, President and Director By : ________________/s/ Paul D. Adams_______________ _____3/14/96_____ Paul D. Adams, Senior Vice President, Date Chief Financial Officer and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated (Name, Title or Principal Capacity, and Date). __________________________________ _________________________________ Anthony F. Colao, Director* John W. Popp, Director* Senior Vice President __________________________________ _________________________________ John C. Collopy, Director* William A. Simpson, Director* President of Republic Mortgage Insurance Company _________________________________ _________________________________ Jimmy A. Dew, Director* Arnold L. Steiner, Director* Executive Vice President of Republic Mortgage Insurance Company ________________________________ ________________________________ Kurt W. Kreyling, Director* William R. Stover, Director* ________________________________ ________________________________ Peter Lardner, Director* David Sursa, Director* President of Bituminous Casualty Corporation ________________________________ ________________________________ Wilbur S. Legg, Director William G. White, Jr., Director* * By/S/A. C. Zucaro Attorney-in-fact Date: March 14, 1996 EXHIBIT INDEX An index of exhibits required by item 601 of Regulation S-K follows: (3) Articles of incorporation and by-laws. (A) * Restated Certificate of Incorporation, as amended. (B) * By-laws, as amended (Exhibit 3(b) to Registrant's Annual Report on Form 10-K for 1993). (4) Instruments defining the rights of security holders, including indentures. (A) * Certificates of Designations, as amended, with respect to Series B Cumulative Convertible Preferred Stock, Series D Cumulative Convertible Preferred Stock, Series E Cumulative Convertible Preferred Stock, Series G Convertible Preferred Stock, Series G-2 Convertible Preferred Stock and Series H Cumulative Preferred Stock. (B) * Form of Indenture dated June 1, 1985 between Old Republic International Corporation and Morgan Guaranty Trust Company of New York, as Trustee, regarding the 11 1/2% Sinking Fund Debentures due 2015 (Exhibit 4.3 to Form S-3 Registration Statement No. 2-98167). (C) * Form of Indenture dated as of January 15, 1988 between Old Republic International Corporation and Morgan Guaranty Trust Company of New York as Trustee, regarding the 10% Sinking Fund Debentures due 2018 (Exhibit 4(D) to Registrant's Annual Report on Form 10-K for 1987). (D) * Agreement to furnish certain long term debt instruments to the Securities & Exchange Commission upon request (Exhibit 4(D) on Form 8 dated August 28, 1987). (E) * Rights Agreement dated as of June 26, 1987 between Old Republic International Corporation and Morgan Shareholder Services Trust Company (Exhibit 4 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1987). (F) * Form of Indenture dated as of August 15, 1992 between Old Republic International Corporation and Wilmington Trust Company, as Trustee, regarding the 5 3/4% Convertible Subordinated Debentures due August 15, 2002. (Exhibit 4(G) to Registrant's Annual Report on Form 10-K for 1993). (10) Material contracts. (A) Copy of the restated Old Republic International Corporation Employees Savings and Stock Ownership Plan. (B) Form 11 - K Annual Report of the Old Republic International Employees Savings and Stock Ownership Plan for the year ended December 31, 1995 (To be filed by amendment on Form 10-K). ** (C) Copy of Old Republic International Corporation Key Employees Performance Recognition Plan, as restated. ** (D) * Copy of Old Republic International Corporation Non-qualified Stock Option Plan (Exhibit to Form S-8 Registration Statement No. 2-66302). ** (E) * Amendments to Old Republic International Corporation Non-qualified Stock Option Plan (Exhibit 10(E) to Registrant's Annual Report on Form 10-K for 1991). ** (F) * 1985 Old Republic International Corporation Non-qualified Stock Option Plan A (Exhibit 10.1 to Form S-3 Registration Statement No. 2-98166). ** (G) * Amendments to 1985 Old Republic International Corporation Non-qualified Stock Option Plan A (Exhibit 10(G) to Registrant's Annual Report on Form 10-K for 1991). (Exhibit Index, Continued) (10) Material contracts (Continued) ** (H) * 1985 Old Republic International Corporation Non-qualified Stock Option Plan B (Exhibit 10.2 to Form S-3 Registration Statement No. 2-98166). ** (I) * 1990 Old Republic International Corporation Non-qualified Stock Option Plan (Exhibit 10 to Form S-8 Registration Statement No. 33-37692). ** (J) * 1992 Old Republic International Corporation Non-qualified Stock Option Plan (Exhibit 10 to Form S-8 Registration Statement No. 33-49646). (K) * Old Republic International Corporation Employees Retirement Plan (Exhibit 10(J) to Registrant's Annual Report on Form 10-K for 1991). ** (L) * Old Republic International Corporation Executives Excess Benefits Pension Plan (Exhibit 10.16 to Registration Statement No. 2-95243). ** (M) * Form of Indemnity Agreement between Old Republic International Corporation and each of its directors and certain officers (Exhibit 10 to Form S-3 Registration Statement No. 33-16836). ** (N) * Copy of directors and officers liability and company reimbursement policy dated October 6, 1970 (Exhibit 12(A) to Form S-1 Registration Statement No. 2-41089). (O) * Copy of Bitco Savings Plan (Exhibit 4.3 to Form S-8 Registration Statement No. 33-32439). (P) Form 11-K Annual Report of the Bitco Savings Plan for the year ended December 31, 1995 (To be filed by amendment on Form 10-K). (Q) * Copy of RMIC Corporation Profit-Sharing Plan (Exhibit 10(M) to Registrant's Annual Report on Form 10-K for 1980). ** (R) * Copy of a written description of the RMIC Key Employees Performance Recognition Plan (Exhibit 10(Q) to Registrant's Annual Report on Form 10-K for 1991). (S) * Copy of Great West Casualty Company Profit Sharing Plan (Exhibit 10 to Form S-8 Registration Statement No. 33-52069). (T) Form 11-K Annual Report of the Great West Casualty Company Profit Sharing Plan for the year ended December 31, 1995 (To be filed by amendment on Form 10-K). ** (U) * Copy of deferred compensation agreement dated November 4, 1976, as amended, between RMIC Corporation and William A. Simpson (Exhibit 10(J) to Registrant's Annual Report on Form 10-K for 1980). ** (V) * Copy of deferred compensation agreement dated November 4, 1976, as amended, between RMIC Corporation and Jimmy A. Dew (Exhibit 10(K) to Registrant's Annual Report on Form 10-K for 1980). ** (W) * Copy of Incentive Compensation Plan of The Founders Title Group, Inc. (Exhibit 10(N) to Registrant's Annual Report on Form 10-K for 1980). ** (X) * Copy of part time employment agreement between Old Republic Title Company and John C. Collopy. (Exhibit 10(W) to Registrant's Annual Report on Form 10-K for 1993). (Y) * Placement Agency Agreement dated November 16, 1987 among Old Republic International Corporation, Old Republic Capital Corporation and Merrill Lynch Money Markets Inc. (Exhibit 10.1 to Form S-3 Registration State ment No. 33-16836). (Exhibit Index, Continued) (Z) * Issuing and Paying Agency Agreement dated November 16, 1987 among Old Republic International Corporation, Old Republic Capital Corporation and Morgan Guaranty Trust Company of New York (Exhibit 10.2 to Form S-3 Registration Statement No. 33-16836). (11) Schedule showing computations of average number of common shares outstanding, as used in the calculations of per share earnings for each of the three years ended December 31, 1995, 1994 and 1993. (21) Subsidiaries of the registrant. (23) Consent of Coopers & Lybrand L.L.P. (24) Powers of attorney (28) Consolidated Schedule P (To be filed by amendment.) __________ * Exhibit incorporated herein by reference. ** Denotes a management or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 601 of Regulation S-K. EX-10 2 MATERIAL CONTRACT (A) OLD REPUBLIC INTERNATIONAL CORPORATION EMPLOYEES SAVINGS AND STOCK OWNERSHIP PLAN (As Amended Through December 31, 1994) TABLE OF CONTENTS SECTION I - PURPOSE. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Qualified Plan . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION II - EFFECTIVE DATE - DEFINITIONS. . . . . . . . . . . . . . . . . 2 2.1 Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.2 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.3 Gender and Number. . . . . . . . . . . . . . . . . . . . . . . . 9 SECTION III - ELIGIBILITY. . . . . . . . . . . . . . . . . . . . . . . . . 10 3.1 General Rule . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.2 Secondary Rule . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.4 Notice of Eligibility. . . . . . . . . . . . . . . . . . . . . . 10 3.5 Consent of Participants and Beneficiary Designation. . . . . . . 10 3.6 Contributions By Ineligible Employees. . . . . . . . . . . . . . 10 SECTION IV - CONTRIBUTIONS BY PARTICIPANTS . . . . . . . . . . . . . . . . 11 4.1 Employee Contributions . . . . . . . . . . . . . . . . . . . . . 11 4.2 Change of Rate of Contributions. . . . . . . . . . . . . . . . . 11 4.3 Limitation . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION V - EMPLOYER CONTRIBUTIONS . . . . . . . . . . . . . . . . . . . . 12 5.1 1% Contribution. . . . . . . . . . . . . . . . . . . . . . . . . 12 5.2 Employer Matching Contributions. . . . . . . . . . . . . . . . . 12 5.3 Discretionary Employer Contributions . . . . . . . . . . . . . . 13 5.4 Consequences if Employer Cannot Contribute . . . . . . . . . . . 13 5.5 Cash or in Kind. . . . . . . . . . . . . . . . . . . . . . . . . 13 5.6 No Reversion . . . . . . . . . . . . . . . . . . . . . . . . . . 14 5.7 Return Upon Mistake. . . . . . . . . . . . . . . . . . . . . . . 14 5.8 ACP Discrimination Test. . . . . . . . . . . . . . . . . . . . . 14 5.9 Correction of Excess Aggregate Contributions - ACP Test. . . . . 15 SECTION VI - ADMINISTRATION COMMITTEE. . . . . . . . . . . . . . . . . . . 16 6.1 Members. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 6.2 Secretary. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 6.3 Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 6.4 Majority Vote. . . . . . . . . . . . . . . . . . . . . . . . . . 16 6.5 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . 16 6.6 No Compensation. . . . . . . . . . . . . . . . . . . . . . . . . 17 6.7 Counsel and Agents . . . . . . . . . . . . . . . . . . . . . . . 17 6.8 Records. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 i 6.9 Successor. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 6.10 Claims Procedure . . . . . . . . . . . . . . . . . . . . . . . . 17 6.11 Information from the Employers . . . . . . . . . . . . . . . . . 17 6.12 Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . . . 18 6.13 Funding Policy . . . . . . . . . . . . . . . . . . . . . . . . . 18 SECTION VII - ACCOUNTING PROVISIONS. . . . . . . . . . . . . . . . . . . . 19 7.1 Cash Basis . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 7.2 Taxes and Expenses . . . . . . . . . . . . . . . . . . . . . . . 19 7.3 Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 7.4 Accounts Maintained for Record Keeping Only. . . . . . . . . . . 20 7.5 Allocation of Income and Loss. . . . . . . . . . . . . . . . . . 20 7.6 Allocation of Special 1% Contribution. . . . . . . . . . . . . . 20 7.7 Allocation of Matching Contribution. . . . . . . . . . . . . . . 20 7.8 Allocation of Forfeitures and Discretionary Contributions. . . . 21 7.9 Committee Records. . . . . . . . . . . . . . . . . . . . . . . . 21 7.10 Participant Statements . . . . . . . . . . . . . . . . . . . . . 21 SECTION VIII - INVESTMENT OF THE TRUST FUND. . . . . . . . . . . . . . . . 22 8.1 Separate Investment Funds. . . . . . . . . . . . . . . . . . . . 22 8.2 Fund A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 8.3 Fund B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 8.4 Fund C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 8.5 Fund D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 8.6 Fund E . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 8.7 Fund F . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 8.8 Fund G . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 8.9 Fund O . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 8.10 Purchase of Company Stock. . . . . . . . . . . . . . . . . . . . 23 8.11 Loans to Purchase Company Stock. . . . . . . . . . . . . . . . . 23 8.12 Separate Suspense Account. . . . . . . . . . . . . . . . . . . . 24 SECTION IX - VESTING - FORFEITURES . . . . . . . . . . . . . . . . . . . . 25 9.1 Full Vesting . . . . . . . . . . . . . . . . . . . . . . . . . . 25 9.2 Vesting on Termination of Service. . . . . . . . . . . . . . . . 25 9.3 Breaks in Service and Return to Service. . . . . . . . . . . . . 26 9.4 Source of Restoration of Forfeitures . . . . . . . . . . . . . . 27 9.5 Service of Less than 1,000 Hours . . . . . . . . . . . . . . . . 27 9.6 Vesting Schedule Amendments. . . . . . . . . . . . . . . . . . . 27 SECTION X - RETIREMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 28 10.1 Normal and Late Retirement . . . . . . . . . . . . . . . . . . . 28 10.2 Disability . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 ii SECTION XI - PAYMENT OF BENEFITS . . . . . . . . . . . . . . . . . . . . . 29 11.1 Form . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 11.2 Commencement Date. . . . . . . . . . . . . . . . . . . . . . . . 29 11.3 Installment Distributions. . . . . . . . . . . . . . . . . . . . 30 11.4 Death Benefits . . . . . . . . . . . . . . . . . . . . . . . . . 31 11.5 Deductions for Taxes and Expenses. . . . . . . . . . . . . . . . 32 11.6 Payments to Minors . . . . . . . . . . . . . . . . . . . . . . . 32 11.7 Missing Distributees . . . . . . . . . . . . . . . . . . . . . . 33 11.8 Special QDRO Distribution. . . . . . . . . . . . . . . . . . . . 33 SECTION XII - INCOME OR LOSS . . . . . . . . . . . . . . . . . . . . . . . 34 12.1 Calculation. . . . . . . . . . . . . . . . . . . . . . . . . . . 34 12.2 Valuation. . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION XIII - AMENDMENT . . . . . . . . . . . . . . . . . . . . . . . . . 35 13.1 Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 SECTION XIV - TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . 36 14.1 Right to Terminate . . . . . . . . . . . . . . . . . . . . . . . 36 14.2 Sale or Bankruptcy of Employer . . . . . . . . . . . . . . . . . 36 14.3 Distribution Upon Termination. . . . . . . . . . . . . . . . . . 36 14.4 Power of Trustee . . . . . . . . . . . . . . . . . . . . . . . . 36 14.5 Merger or Consolidation. . . . . . . . . . . . . . . . . . . . . 37 SECTION XV - RESIGNATIONS - REPLACEMENTS . . . . . . . . . . . . . . . . . 38 15.1 Resignation. . . . . . . . . . . . . . . . . . . . . . . . . . . 38 15.2 Vacancy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 SECTION XVI - WITHDRAWALS. . . . . . . . . . . . . . . . . . . . . . . . . 39 16.1 Withdrawals Permitted. . . . . . . . . . . . . . . . . . . . . . 39 16.2 Withdrawals Without Penalty. . . . . . . . . . . . . . . . . . . 39 16.3 Penalty Withdrawals. . . . . . . . . . . . . . . . . . . . . . . 39 16.4 Prohibited Withdrawals . . . . . . . . . . . . . . . . . . . . . 39 16.5 Requests for Withdrawals . . . . . . . . . . . . . . . . . . . . 39 16.6 Limitation on Withdrawals from Fund O. . . . . . . . . . . . . . 40 SECTION XVII - ADDITIONAL EMPLOYERS. . . . . . . . . . . . . . . . . . . . 41 17.1 Adoption by Subsidiaries . . . . . . . . . . . . . . . . . . . . 41 SECTION XVIII - MAXIMUM ADDITIONS. . . . . . . . . . . . . . . . . . . . . 42 18.1 No Other Plans . . . . . . . . . . . . . . . . . . . . . . . . . 42 18.2 Other Defined Contribution Plans . . . . . . . . . . . . . . . . 42 18.3 Other Defined Benefit Plans. . . . . . . . . . . . . . . . . . . 43 18.4 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . 43 iii SECTION XIX - ROLLOVERS. . . . . . . . . . . . . . . . . . . . . . . . . . 45 19.1 Rollover . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 19.2 Plan to Plan Transfer. . . . . . . . . . . . . . . . . . . . . . 45 19.3 Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 SECTION XX - TOP-HEAVY RESTRICTIONS. . . . . . . . . . . . . . . . . . . . 46 20.1 When Applicable. . . . . . . . . . . . . . . . . . . . . . . . . 46 20.2 Top Heavy Ratio. . . . . . . . . . . . . . . . . . . . . . . . . 46 20.3 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . 47 20.4 Top Heavy Limitations. . . . . . . . . . . . . . . . . . . . . . 48 SECTION XXI - SUPPLEMENTAL PROVISIONS RELATING TO EMPLOYEES OF MINNESOTA TITLE FINANCIAL CORPORATION. . . . . . . . . . . 50 21.1 Applicability of this Section. . . . . . . . . . . . . . . . . . 50 21.2 Eligibility and Credit for Service . . . . . . . . . . . . . . . 50 21.3 Treatment of Special Accounts. . . . . . . . . . . . . . . . . . 50 21.4 Treatment of Regular Accounts. . . . . . . . . . . . . . . . . . 50 21.5 Segregated Accounts. . . . . . . . . . . . . . . . . . . . . . . 51 SECTION XXII - MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . 52 22.1 Fiduciary Duties . . . . . . . . . . . . . . . . . . . . . . . . 52 22.2 Assignment of Accounts Prohibited. . . . . . . . . . . . . . . . 52 22.3 Evidence of Actions. . . . . . . . . . . . . . . . . . . . . . . 52 22.4 Restrictions Remain. . . . . . . . . . . . . . . . . . . . . . . 52 22.5 No Contract of Employment. . . . . . . . . . . . . . . . . . . . 52 22.6 No Discrimination. . . . . . . . . . . . . . . . . . . . . . . . 52 22.7 Controlling Law. . . . . . . . . . . . . . . . . . . . . . . . . 53 22.8 Named Fiduciaries. . . . . . . . . . . . . . . . . . . . . . . . 53 SECTION XXIII - DIRECTED INVESTMENT OF PARTICIPANTS' CONTRIBUTIONS . . . . 54 23.1 Two Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 23.2 Change of Investment Election. . . . . . . . . . . . . . . . . . 54 23.3 Election to Transfer and Timing. . . . . . . . . . . . . . . . . 54 23.4 Amount Subject to Being Transferred. . . . . . . . . . . . . . . 54 23.5 Effecting the Election to Transfer . . . . . . . . . . . . . . . 55 23.6 Election as to Future Contributions. . . . . . . . . . . . . . . 55 23.7 Irrevocable. . . . . . . . . . . . . . . . . . . . . . . . . . . 55 SECTION XXIV - DIRECTED INVESTMENT OF EMPLOYER CONTRIBUTIONS -- AGE 55 DIVERSIFICATION. . . . . . . . . . . . . . . . . . 56 24.1 Eligibility. . . . . . . . . . . . . . . . . . . . . . . . . . . 56 24.2 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . 56 24.3 Timing of the Election . . . . . . . . . . . . . . . . . . . . . 56 24.4 Diversification. . . . . . . . . . . . . . . . . . . . . . . . . 57 24.5 Actual Transfer. . . . . . . . . . . . . . . . . . . . . . . . . 57 iv SECTION I - PURPOSE ------------------- 1.1 Introduction. ------------- Effective January l, 1978 the Old Republic International Corporation Employees Savings and Profit Sharing Plan (hereinafter referred to as the "Former Plan") was created to provide retirement income for eligible employees of Old Republic International Corporation and certain other corporations affiliated with the Company which have adopted this Plan. Effective January 1, 1979, January l, 1980, and January 1, 1984 the Former Plan was amended and restated as the Old Republic International Corporation Employees Savings and Stock Ownership Plan (hereinafter referred to as the "Plan"). Effective January l, 1989 the Plan is further restated. 1.2 Qualified Plan. --------------- The Plan and Trust are intended to meet the requirements of Sections 401(a) and 501(a) of the Internal Revenue Code of 1986, as amended from time to time, and the Employee Retirement Income Security Act of 1974, as amended from time to time. The Plan is intended to be a leveraged employee stock ownership plan. SECTION II - EFFECTIVE DATE - DEFINITIONS ----------------------------------------- 2.1 Effective Date. -------------- Originally the Plan was effective as of January l, 1978. The Plan was restated effective as of January l, 1979, January 1, 1980, and January 1, 1984. This restatement shall be effective January l, 1989, except where indicated. 2.2 Definitions. ----------- As used herein, the following terms shall have the meaning set after each: (a) "Affiliated Company" shall mean: (1) a Subsidiary as defined in subparagraph 2.2(w) except that eighty percent (80%) shall replace fifty percent (50%) each time the latter occurs in that subparagraph; (2) a partnership or other entity which is controlled directly or indirectly eighty percent (80%) or more by the Company but only for the period during which such control exists; (3) a corporation, partnership, or other entity which owns directly or indirectly eighty percent (80%) or more of the voting stock of the Company but only for the period during which ownership exists; (4) a corporation, partnership, or other entity which an entity specified in subparagraph (3) above owns or controls in a manner as specified in subparagraphs (1) or (2) above, but only for the period during which such ownership or control exists; (5) a corporation, partnership, or other entity which is a member of an affiliated service group with the Company, as defined in Section 414(m) of the Code, but only for the period during which such affiliation exists; and (6) a corporation, partnership, or other entity which is required to be aggregated with the Company pursuant to Section 414 of the Code, but only for the period during which such aggregation is required. (b) "Allocation Date" shall mean the close of the last business day of the semiannual accounting periods which together comprise a Plan Year. (c) "Annual Additions" shall mean with respect to any Participant the sum of the following amounts allocated to his Accounts during the Plan Year under this Plan or any other defined contribution plan sponsored by the Employers: (1) all Employer contributions; 2 (2) all forfeitures; (3) all Employee contributions; (4) amounts allocated after March 31, 1984 to an individual medical account, as defined in Code Section 415(l)(2), which is part of a defined benefit plan maintained by the Company; and (5) amounts derived from contributions paid or accrued after December 31, 1985, in taxable years ending after that date, which are attributable to post-retirement medical benefits allocated to a separate account of a Key Employee of a welfare benefit fund maintained by the Company. (d) "Annual Net Profit" shall mean the net profit of each Employer as calculated by the chief accounting officer or any other person designated by the Board of Directors of the Employer in accordance with generally accepted accounting principles, except that no deduction or addition shall be made for net operating loss carryovers, and realized or unrealized capital gains and losses and gains from the sale of property used in trade or business as defined in Section 1231(b) of the Code,and any extraordinary credits or charges shall not be included. "Annual Net Profit" of the Company shall mean the consolidated Annual Net Profit of the Company. (e) "Beneficiary" shall mean any person (other than a Participant),estate, trust or organization entitled to receive benefits hereunder. (f) "Calculation Year" shall mean the Company's fiscal year immediately preceding the year for which the Company contribution is being calculated. (g) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (h) "Committee" shall mean the Administration Committee appointed pursuant to Section VI of this Plan. (i) "Company" shall mean Old Republic International Corporation, a corporation organized under the laws of the State of Delaware. (j) "Company Stock" shall mean shares of any class of stock, preferred or common, of the Company. (k) "Compensation" shall mean a Participant's total wages, salaries, and other amounts received by a Participant from an Employer during the calendar year that are required to be reported as wages on the Participant's Form W-2 including, but not limited to, compensation for services on the basis of a percentage of profits and bonuses. However, for the purposes of the Plan,the amount of a Participant's Compensation for any year is limited to $200,000 ($150,000,effective for Plan Years beginning on or after January 1, 1994), as adjusted by the Secretary of the Treasury 3 under Section 415(d) of the Code. For purposes of computing the above dollar limitation, the rules of Section 414(q)(6) of the Code shall apply, except that the term "family" shall include only the Participant's spouse and lineal descendants under age 19 at the close of the year. If, as a result of the application of such rules the adjusted dollar limitation is exceeded, then the limitation shall be prorated among the affected individuals in proportion to each such individual's Compensation determined under this subparagraph prior to the application of this limitation. In addition, the term "Compensation" shall not include: (1) contributions to this Plan or another pension or profit sharing plan that are not includable in the Participant's gross income in the year of contribution; (2) a distribution from this Plan or another funded plan of deferred compensation to a Participant, regardless of whether such distribution is includable in the Participant's gross income in the year of distribution; (3) amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by a Participant either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (4) amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and (5) other amounts which receive special tax benefits, such as premiums for group term life insurance (but only to the extent that the premiums are not includable in the gross income of the Participant). (l) "Employee" shall mean any individual employed by an Employer. "Employee" shall include "Leased Employees" within the meaning of Section 414(n)(2) of the Code. "Employee" shall include officers but shall not include directors who are not otherwise officers or employees. "Employee" shall not include individuals employed on a temporary basis which means that when they are hired they are hired for a limited period of less than one year. (m) "Employer" and "Employers" shall mean the Company and each other corporation which with the consent of the Company, adopts this Plan as provided in Section XVII hereof. As of the effective date of this restated Plan the Employers other than the Company are listed in Schedule A attached hereto and made a part hereof. (n) "ERISA" shall mean Public Law No. 93-406, the Employee Retirement Income Security Act of 1974, as amended from time to time. (o) "Highly Compensated Employee" shall mean a Participant described in Section 414(q) of the Code and the regulations thereunder. Generally, Section 414(q) provides that a Highly Compensated Employee is an Employee who during the Plan Year or preceding Plan Year: 4 (1) was at any time a 5% owner of the Company or an Affiliated Company during the Plan Year or the preceding Plan Year; (2) received compensation from the Company or an Affiliated Company in excess of $75,000 during the 12-month period preceding the Plan Year (as adjusted for cost-of-living increases under Section 415(d) of the Code); (3) received compensation from the Company or an Affiliated Company in excess of $50,000 during the 12-month period preceding the Plan Year (as adjusted for cost-of-living increases under Section 415(d) of the Code) and was in the top 20% of the most highly paid Employees for such year; or (4) was at any time an officer of the Company and received compensation greater than 50% of the amount in effect under Section 415(b)(1)(A) of the Code (as adjusted for cost-of-living increases under Section 415(d) of the Code); (5) any Employee of the Company or an Affiliated Company who is an Employee described in subparagraphs (2), (3), or (4) above when such subparagraphs are modified to substitute the current Plan Year for the 12-month period preceding the Plan Year and one of the 100 Employees receiving the most compensation during the Plan Year; or (6) a former Employee who, with respect to the Company or an Affiliated Company, separated from service in a prior Plan Year and was in such Plan Year a Highly Compensated Employee in either the Plan Year in which he terminated service or any Plan Year ending on or after the Employee's 55th birthday. For purposes of this subparagraph, "compensation" shall mean compensation as defined in Code Section 415(c)(3), including amounts contributed which are excludible from gross income under Code Sections 125, 402(a)(8), 402(h), or 403(b), and shall be limited to $200,000 ($150,000 for Plan Years beginning on or after January 1, 1994), as adjusted by the Secretary of the Treasury to include cost-of-living increases under Code Sections 401(a)(17) and 415(d)). In addition, if an Employee is a family member of either a 5% or more owner of the Company or an Affiliated Employer or a Highly Compensated Employee who is one of the 10 top Employees when ranked on the basis of compensation, then such family member shall not be considered a separate Employee, and the compensation,benefits, and contributions of such Employee shall be aggregated with the 5% owner or Highly Compensated Employee. For purposes of this subparagraph, a "family member" shall mean a spouse, a lineal descendant or ascendant, or the spouse of a lineal descendant or ascendant. (p) "Hour of Service" shall mean the following: (1) each hour for which an Employee is paid, or entitled to payment, for the performance of duties for an Employer during the applicable Plan Year; 5 (2) each hour for which an Employee is paid, or entitled to payment, by an Employer on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty military duty or leave of absence. Notwithstanding the preceding sentence, (i) No more than 501 Hours of Service are required to be credited under this subparagraph 2.2(p)(2) to an Employee on account of any single continuous period during which the Employee performs no duties (whether or not such period occurs in a single Plan Year); (ii) An hour for which an Employee is directly or indirectly paid, or entitled to payment, on account of a period during which no duties are performed is not required to be credited to the Employee if such payment is made or due under a plan maintained solely for the purpose of complying with applicable workmen's compensation, or unemployment compensation or disability insurance laws; and (iii) Hours of Service are not required to be credited for a payment which solely reimburses an Employee for medical or medically related expenses incurred by the Employee. For purposes of this subparagraph 2.2(p)(2), a payment shall be deemed to be made by or due from the Employer regardless of whether such payment is made by or due from the Employer directly, or indirectly through, among others, a trust fund, or insurer, to which the Employer contributes or pays premiums and regardless of whether contributions made or due to the trust fund, insurer or other entity are for the benefit of particular Employees or are on behalf of a group of Employees in the aggregate. (3) each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Employer. The same Hours of Service shall not be credited both under sub- paragraph 2.2(p)(l) or subparagraph 2.2(p)(2), as the case may be and under this subparagraph 2.2(p)(3). (4) For the purpose of counting Hours of Service for eligibility and vesting, service with an Affiliated Company immediately preceding or immediately succeeding service with an Employer shall be treated as service with the Employer. An Employee who is paid on a salaried basis shall receive credit for no fewer than 190 Hours of Service for each month during which he works at least one hour. In the case of a payment which is made or due on account of a period during which an Employee performs no duties, and which results in the crediting of Hours of Service under subparagraph 2.2(p)(2), or in the case of an award or agreement for back pay, to the extent that such award or agreement is made with respect to a period described in subpara- graph 2.2(p)(2), the number of Hours of Service to be credited shall be determined on the basis of the rules set forth in 29 Code of Federal 6 Regulations Section 2530.200b-2(b). The crediting of Hours of Service to the appropriate computation period shall be made on the basis of the rules set forth in 29 Code of Federal Regulations Section 2530.200b-2(b) and (c). (q) "Normal Retirement Date" shall mean the day on which an Employee attains age sixty-five. (r) "One Year Break in Service" shall mean any Plan Year during which a Participant has not completed more than five hundred (500) Hours of Service with the Employers, except for a Plan Year in which the Employee retires, dies, or suffers permanent disability. Solely for purposes of determining whether an Employee has incurred a "Break in Service," an Employee who is absent from work for any period on or after January 1, 1985: (i) by reason of the Employee's pregnancy; (ii) by reason of the birth of a child of the Employee; (iii) by reason of the placement of a child with the Employee in connection with the adoption of such child by the Employee; or (iv) for purposes of caring for such child for a period beginning immediately following such birth or placement, shall be credited with the Hours of Service which would normally have been credited to the Employee but for such absence, or 8 Hours of Service for each day of such absence if the Plan is unable to determine the number of Hours of Service that would normally have been credited to the Employee but for such absence; provided, however, that the total amount of Hours of Service credited by reason of any such pregnancy or placement shall not exceed 501 Hours of Service. Hours of Service credited pursuant to the preceding sentence shall be credited only to the Plan Year during which the absence commenced if a One Year Break in Service would be prevented by the crediting of such Hours to such Plan Year, or if the Hours are not required to prevent a One Year Break in Service for such Plan Year, then only to the immediately following Plan Year. (s) "Participant" shall mean an Employee who becomes eligible to participate in this Plan pursuant to Section III hereof. (t) "Plan" shall mean this Old Republic International Corporation Employees Savings and Stock Ownership Plan as amended from time to time. (u) "Plan Year" shall mean the twelve month period beginning January l and ending December 31. (v) "Recognized Compensation" of any Participant for any year shall mean a Participant's total wages, fees for professional services and other amounts received by a Participant during the calendar year (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with Adopting Employers to the extent that the amounts are includable in gross, and excluding the following: (1) contributions to this Plan or another pension or profit sharing plan that are not includable in the Participant's gross income in the year of contribution; 7 (2) a distribution from this Plan or another funded plan of deferred compensation to a Participant, regardless of whether such distribution is includable in the Participant's gross income in the year of distribution; (3) amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by a Participant either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (4) amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; (5) other amounts which receive special tax benefits, such as premiums for group term life insurance (but only to the extent that the premiums are not includable in the gross income of the Participant); and (6) commissions. Recognized Compensation shall include contributions made on behalf of the Participant pursuant to the Participant's salary reduction agreement under any plan sponsored by an Employer which plan meets the requirements of either sections 401(a) and 401(k) of the Code or section 125 of the Code; provided, however, for the purposes of the Plan, the amount of a Participant's Recognized Compensation for any year is limited to $200,000 ($150,000, effective for Plan Years beginning on or after January 1, 1994), as adjusted by the Secretary of the Treasury under Section 415(d) of the Code. For purposes of computing the above dollar limitation, the rules of Section 414(q)(6) of the Code shall apply, except that the term "family" shall include only the Participant's spouse and lineal descendants under age 19 at the close of the year. (w) "Subsidiary" shall mean any corporation of which more than fifty percent (50%) of the voting stock now is, or hereafter shall be, owned directly or indirectly by the Company, but only during the period more than fifty percent (50%) of such voting stock is so owned by the Company. (x) "Trust" shall mean the Old Republic International Corporation Employees Savings and Stock Ownership Trust, as amended from time to time. (y) "Trust Fund" shall mean all the money and other property held by the Trustee under the Trust. (z) "Trustee" shall mean the Trustee or Trustees of the Trust acting from time to time. (aa) "Year of Service" shall mean: 8 (1) For Plan Years beginning after December 31, 1977, each Plan Year during which an Employee has completed one thousand (1,000) or more Hours of Service with the Employer. (2) For Plan Years ending before January l, 1978, each year an Employee was employed by an Employer. 2.3 Gender and Number. ----------------- Wherever appropriate, words used in this Plan in the singular include the plural, and the masculine include the feminine. 9 SECTION III - ELIGIBILITY ------------------------- 3.1 General Rule. ------------ Each present or future Employee shall become a Participant on the January l following his date of hire, provided he completes one thousand (l,000) or more Hours of Service during his first twelve (12) months of employment with an Employer. 3.2 Secondary Rule. --------------- If an Employee fails to meet the requirements of paragraph 3.l above, he shall become a Participant as of the first day of the Plan Year beginning after his date of hire or any Plan Year thereafter during which he completes one Year of Service with an Employer. 3.3 Leased Employees. ---------------- Leased employees within the meaning of Section 414(n)(2) of the Code shall not be eligible to participate in this Plan under either the General Rule of paragraph 3.1 or the Secondary Rule of paragraph 3.2. 3.4 Notice of Eligibility. --------------------- An Employer shall give each Employee written notice of his becoming a Participant in the Plan within a reasonable period after he becomes a Participant. 3.5 Consent of Participants and Beneficiary Designation. --------------------------------------------------- Each Participant shall execute a written statement on a form or forms to be provided by the Committee, such written statement to provide the following: (a) the designation by the participant of his Beneficiary or Beneficiaries who shall be entitled to receive distributions under the Plan in the event of such Participant's death; and (b) the consent by the Participant to be bound by any decision or action taken in good faith as a result of the Committee's determination of facts in applying the provisions of the Plan. 3.6 Contributions By Ineligible Employees. ------------------------------------- Because an Employee is permitted to contribute as of the January 1 following his date of hire, it is possible for an Employee to begin to make contributions pursuant to paragraph 4.1 before he actually completes 1,000 Hours of Service during his first twelve (12) months of employment. If such an employee fails to meet the 1,000 Hours of Service requirement either in his first twelve months of employment or his first full Plan Year of employment and therefore fails to be eligible to become a Participant although he actually had made contributions to the Plan, his contributions shall remain in the Plan and shall be treated in the same manner as contributions of a Participant, provided that he shall not share in the Company Matching Contributions for the Plan Year during which he is not a Participant. 10 SECTION IV - CONTRIBUTIONS BY PARTICIPANTS ------------------------------------------ 4.1 Employee Contributions. ---------------------- A Participant may but is not required to contribute each Plan Year not less than l% nor more than 15% in whole percentages of his annual Recognized Compensation limited to $150,000. Amounts of a Participant's contributions up to 5% (beginning in 1990, 6%) of his Recognized Compensation may create additional Employer contributions pursuant to paragraph 5.2 hereof. 4.2 Change of Rate of Contributions. ------------------------------- Any contributions by a Participant pursuant to this Section IV shall be withheld by his Employer each payday and remitted by it periodically (at least quarterly) to the Trustee. Within the prescribed limits, a Participant may change the percentage of his compensation to be contributed pursuant to paragraph 4.l hereof. Any such change shall take effect on the January l or the July l following receipt by his Employer of a written request of such change from the Participant. 4.3 Limitation. ---------- Participant contributions for any Plan Year pursuant to this Section IV shall be limited as provided in paragraph 5.8. 11 SECTION V - EMPLOYER CONTRIBUTIONS ---------------------------------- 5.1 1% Contribution. --------------- For each Plan Year beginning prior to January 1, 1990 each Employer shall contribute to the Plan on behalf of each of the Participants employed by the Employer an amount equal to l% of the Recognized Compensation paid to the Participant during the year. For the purposes of this Section V and paragraphs 7.6 through 7.8, "employed by the Employer" means that the Employee is employed for at least l,000 Hours of Service during the Plan Year and is employed by the Employer on the last day of the Plan Year, provided, however, that a Person who dies or who retires after attaining his Normal Retirement Date will be deemed to be employed on the last day of the Plan Year of his death or his retirement. 5.2 Employer Matching Contributions. ------------------------------- In addition to the contribution pursuant to paragraph 5.1 hereof, for the 1989 Plan Year, each Employer shall contribute to the Plan on behalf of each of the Participants employed by the Employer an amount equal to a percentage of the first l% of a Participant's Recognized Compensation contributed by the Employer plus a percentage of the amounts (not to exceed 5%) contributed by the Participant pursuant to Section IV hereof and not withdrawn during the Plan Year pursuant to Section XVI as set forth in Schedule B attached hereto and made a part hereof. For each Plan Year beginning after December 31, 1989, each Employer shall contribute to the Plan on behalf of each Participant who contributes to the Plan a percentage of the amounts (not to exceed 6%) contributed by the Participant pursuant to Section IV hereof and not withdrawn during the Plan Year pursuant to Section XVI. The matching percentage to be contributed by the Employer each Plan Year shall be based upon the percentage increase in average operating earnings per share for the most recent five year periods. This percentage increase in average operating earnings per share is obtained by comparing the average operating earnings per share for the Company for the five years ending with the Calculation Year, with the same average for the five years ending the year prior to the Calculation Year. Operating earnings per share are determined pursuant to generally accepted accounting principles and are equal to net income per share exclusive of realized capital gains or losses. The matching percentage is set forth in the following schedule: Percentage of Percentage increase in average operating earnings per share Recognized for the most recent 5 years ending with the Calculation Year Compensation over the average for the 5 years ending with the Plan Year Contributed prior to the Calculation Year Less than 6% 6% to 9% 9.01% to 15% 15.01% to 20% Over 20% ------------ -------- ------------ ------------- -------- Up to 1.00% 30%* 40%* 65%* 100%* 140%* 1.01% to 2.00% 28% 38% 63% 98% 138% 2.01% to 3.00% 26% 36% 61% 96% 136% 3.01% to 4.00% 24% 34% 59% 94% 134% 4.01% to 5.00% 22% 32% 57% 92% 132% 12 5.01% to 6.00% 20% 30% 55% 90% 130% 6.01% to 15.00% None None None None None *Employer Contributions as a percentage of Employee's contribution. Notwithstanding anything to the contrary, no Employer Matching Contribution shall be made for 1993. 5.3 Discretionary Employer Contributions. ------------------------------------ In addition to the contributions set forth in paragraphs 5.1 and 5.2 hereof each Employer may contribute such additional amounts as the Board of Directors of the Employer may determine from time to time. The amount of the Employers' contributions are subject to the following limitations: (a) No contributions shall be made by any of the Employers for any Plan Year if the Annual Net Profit Before Taxes for all Employers in the aggregate for such year is less than $2,500,000. (b) No contribution shall be made on behalf of any Participant if the allocation of such contribution to his account would be contrary to the provisions of Section XVIII. In the event the allocation of any contribution to any Participant would be contrary to the provisions of Section XVIII hereof, the amount of the Employer contribution shall be reduced to the extent necessary to comply with Section XVIII. (c) No contribution shall be made by any Employer for any Plan Year which contribution exceeds the maximum amount deductible by it for such year under Section 404 of the Code or any comparable section of any future legislation which amends, supplements or supersedes said section. 5.4 Consequences if Employer Cannot Contribute. ------------------------------------------ If an Employer cannot contribute to the full extent required by paragraphs 5.l and 5.2 hereof because of the limitations of paragraph 5.3(c) and if the deficiencies in such contributions are not entirely made-up by another Employer, contributions pursuant to paragraphs 5.l and 5.2 hereof on behalf of Partici- pants employed by the Employer shall be reduced in the same proportion that the contributions made bear to the contributions that would have been made but for such limitations. 5.5 Cash or in Kind. --------------- Employer contributions for any year may be made wholly or partly in cash or other property and the transfer of any such property to the Trustee shall be at the fair market value of the property as determined by the Employer at the time of such transfer. Each Employer shall pay to the Trustee its contribution to the Plan for each Plan Year within the time prescribed by law, including extensions of time, for the filing of its federal income tax return for the Plan Year. 13 5.6 No Reversion. ------------ Except for the provisions of paragraph 5.7 hereof, in no event shall any part of the Trust Fund revert to an Employer or be used for purposes other than for the exclusive benefit of Participants in this Plan or their Beneficiaries. 5.7 Return Upon Mistake. ------------------- Notwithstanding anything herein to the contrary, an Employer may request that a contribution which was made by a mistake of fact or conditioned upon the qualification of the Plan under Section 401 of the Code which condition was not met, or which was conditioned upon the deductibility of the contribution under Section 404 of the Code and was disallowed, shall be returned to the Employer within one year after the payment of the contribution, denial of qualification, or the disallowance of the deduction (to the extent disallowed) respectively. 5.8 ACP Discrimination Test. ----------------------- Participant contributions pursuant to Section IV and Matching Employer Contributions to this Plan for any Plan Year shall not exceed the maximum amount permitted under Code Section 401(m)(2) and Treasury Regulation Section 1.401(m) - -1(b)(2) of the regulations thereunder. These provisions are incorporated herein by reference and generally require that: (a) the ACP for eligible Highly Compensated Employees not exceed that of all other eligible Participants by more than two percentage points, and that the ACP for eligible Highly Compensated Employees be not more than that of all other eligible Employees multiplied by 2.0; or (b) the ACP of eligible Highly Compensated Employees not exceed that of the other eligible Participants multiplied by 1.25. For purposes of this paragraph, the "ACP" for an individual Employee for a Plan Year shall be the ratio of the sum of employee contributions and Employer Matching Contributions made to the Plan on behalf of such Employee for the Plan Year to the Employee's Compensation for the portion of the Plan Year during which he is a Participant. However, if the Plan is aggregated with one or more other plans described under Code section 401(a) in order to meet the requirements of Code sections 401(a)(4) or 410(b), all such plans shall be aggregated for purposes of computing the ACP. The "ACP" of a group of Employees for a Plan Year shall be the average of the ACPs of the Employees in the group. For purposes of calculating the ACP, an Employer Matching Contribution shall be taken into account for a Plan Year only if it is made on account of the Employee's contributions for the Plan Year, is allocated to the Employee's accounts during the Plan Year, and is actually paid to the Trust within 12 months following the last day of the Plan Year. 14 5.9 Correction of Excess Aggregate Contributions - ACP Test. ------------------------------------------------------- (a) To the extent necessary to meet the requirements of paragraph 5.8 hereof, Participant contributions pursuant to paragraph 4.1 and the corresponding Employer Matching Contributions allocated with respect thereto for Highly Compensated Employees shall be reduced, beginning with the highest ACPs until either such requirements are satisfied or the next highest ACP of a Highly Compensated Employee is reached. This process shall continue until the Plan conforms to the requirements described in paragraph 5.8. However, if a Highly Compensated Employee's ACP is determined by use of the family aggregation rules under Code section 414(q)(6) and if such ACP must be reduced pursuant to Treasury Regulation Section 1.401(m)-1(e)(2), such Highly Compensated Employee's ACP shall be reduced by allocating the excess contributions for the family group among the family members in proportion to each family member's Matching Employer Contributions. (b) Employee contributions for a Plan Year reduced pursuant to sub- paragraph (a) above shall be distributed to Highly Compensated Employees together with any income and minus any loss allocable to such excess aggregate contributions for the Plan Year of contribution on or before March 15 following the end of the Plan Year, but in no event later than the close of the following Plan Year. (c) For Plan Years beginning before January 1, 1991, Employer Matching Contributions reduced pursuant to subparagraph (a) above shall be distributed to Highly Compensated Employees together with any income and minus any loss allocable to such excess aggregate contributions for the Plan Year of contribution on or before March 15 following the end of the Plan Year, but in no event later than the close of the following Plan Year. For Plan Years beginning on or after January 1, 1991, Employer Matching Contributions reduced pursuant to subparagraph (a) above together with any income and minus any loss allocable to such excess contributions for the Plan Year of contribution shall be forfeited as of the end of the Plan Year for which the contribution was made. Notwithstanding any other provisions herein regarding the allocation of forfeitures, forfeitures pursuant to this subparagraph (c) shall be applied first to reduce the Employer Matching Contributions or Discretionary Employer Contributions for the year the excess arose, and to reduce Employer Matching Contributions or Discretionary Employer Contributions for future years as soon as possible. 15 SECTION VI - ADMINISTRATION COMMITTEE ------------------------------------- 6.1 Members. ------- An Administration Committee consisting of three or more members shall be appointed by a majority of the Boards of Directors of the Company. Any member of the Committee may but need not be an employee, director, officer, or stockholder of an Employer. 6.2 Secretary. --------- The Committee will appoint a Secretary, who may but need not be a member of the Committee; and any documents required to be filed with, or any notice required to be given to the Committee will be properly filed or given if mailed by registered mail or delivered to the Secretary of the Committee in care of the Company. 6.3 Duties. ------ The Committee shall have the duty and authority to interpret and construe this Plan in regard to all questions of eligibility, the status and rights of Participants, Beneficiaries, and other persons hereunder, and the manner and time of the payment of any benefits hereunder. It shall direct the Trustee as to the names of payees and the time, amount and manner of the payment of benefits under Section XI hereof. The Committee shall furnish to Participants forms for the designation of Beneficiaries, and shall maintain a file of Participants' Beneficiary designations. In general, it shall be charged with the overall management of the plan of employee benefits herein provided for, subject to the powers and duties of the Trustee with respect to the Trust Fund. 6.4 Majority Vote. ------------- The decision of the Committee as to any matter relating to this Plan shall be determined by a majority vote or other affirmative expression of a majority of the members. Its decision or action on any matters within its discretion, after proper notification and opportunity for review have been given in accordance with paragraph 6.10 hereof, shall be final and conclusive as to the parties hereto and as to all Participants, Beneficiaries, and other persons claiming any rights hereunder, provided that no member of the Committee shall participate in any decision specifically affecting his own interest in the Trust. The Trustee shall be fully protected in acting upon the decision of the Committee as set forth in writing over the signature of the Secretary or a majority of its members. The Trustee shall be entitled to rely upon the names of Committee members as last certified to by the Company, and to rely upon the name of the Secretary of the Committee as last certified to by a majority of its members. 6.5 Indemnification. --------------- The Company shall indemnify and save the members of the Committee, and each of them, harmless from the effects and consequences of their acts, omissions, and conduct in their official capacity, except to the extent that such effects and consequences shall result from their own willful misconduct. 16 6.6 No Compensation. --------------- No member of the Committee shall receive any compensation or fee for his services, but the Company shall reimburse the Committee members for any necessary expenditures incurred in the discharge of their duties as Committee members. 6.7 Counsel and Agents. ------------------ The Committee may employ such counsel (who may be of counsel for an Employer) and agents, and may arrange for such clerical and other services as it may require in carrying out the provisions of this Plan. 6.8 Records. ------- The Committee shall keep a record of all its proceedings and shall keep or cause to be kept all such books of account, records and other data as may be necessary or advisable in its judgment for the administration of the plan of employee benefits herein provided. 6.9 Successor. --------- In the event the Committee for any reason ceases to function, the Company shall thereafter have the power and authority granted to the Committee and the duties imposed upon it by this Agreement. 6.10 Claims Procedure. ---------------- The Committee shall notify in writing any Participant or Beneficiary whose claim for benefits under the Plan has been denied, setting forth the specific reasons for such denial, written in a manner calculated to be understood by the Participant whose claim for benefits has been denied. As to any Participant or Beneficiary whose claim for benefits has been denied, the Committee shall afford such Participant or Beneficiary a reasonable opportunity for a full and fair review by the Committee of the decision denying the claim. 6.10 Information from the Employers. ------------------------------ Each Employer shall furnish the Committee with the following information from time to time as shall be necessary to carry out this plan: (a) compensation of each Participant for each year; (b) change in the employment status of a Participant, involving: 17 (1) voluntary resignation (2) dismissal (3) other termination of employment; e.g., an Employee's temporary layoff becoming permanent (4) retirement on account of age (5) permanent disability (6) death (7) Hours of Service (c) such other data and information possessed by the Employer as the Committee may require in the performance of its duties hereunder. The Employer's determination as to these matters shall be final and binding on all persons. 6.12 Voting Rights. ------------- Each Participant shall have the right to exercise the voting rights of the number of shares of Company Stock held in the Trust the value of which has been allocated to his accounts. If a Participant does not exercise his voting rights, the Committee shall have the authority to exercise such voting rights. Further the Committee shall have the authority and right to exercise the voting rights of Company Stock held in the Trust the value of which has not been allocated to a Participant's account. 6.13 Funding Policy. -------------- The Committee shall from time to time, but in no event less than once each Plan Year, consider and establish, or reconsider and reestablish, a funding policy which will encompass the short-term and long-term goals for income and appreciation of Funds A, C, D, E, F, G, and O. The Committee may consult with investment advisers or other advisers as the Committee in its discretion deems necessary. The Committee shall then communicate this funding policy to the Trustee or others who are responsible for the investment management of the Trust Fund. 18 SECTION VII - ACCOUNTING PROVISIONS 7.1 Cash Basis. ---------- All accounting of the Plan and Trust, other than the allocations and credits of net income or net loss, and Employer contributions as of each Allocation Date as provided hereafter, shall be rendered on a cash basis. 7.2 Taxes and Expenses. ------------------ All taxes of any and all kinds whatsoever that may be levied or assessed under existing or future laws upon this Plan, or any income thereof, shall be paid by the Trustee from the Trust Fund. The expenses incurred by the Committee in the administration of the Plan including fees for legal, accounting, investment, custodial, and other services rendered to the Committee or to the Trustee, and all other proper charges and expenses of the Committee shall be paid by the Trustee from the Trust Fund. If the Committee determines that an expense is attributable directly to any specific Fund hereunder, the Committee in its discretion may direct that such expense be charged to the particular Fund creating the expense. 7.3 Accounts. -------- The Committee shall maintain two separate accounts for each Participant, one to be known as his Individual Contribution Account and the second as his Employer Contribution Account. The following items shall be credited to or charged against the accounts of each person as provided herein: (a) his share in the contributions of the Employers; (b) his own contributions to the Trust; (c) his share in the net income or net loss of the Trust; (d) payments from his account; (e) shares in the forfeitures from the accounts of other Participants -- that is, the part of another Participant's share which, upon his incurring a One Year Break in Service as provided by Section IX does not vest in him but remains in the Trust Fund. The credits and charges provided by (a) and (e) shall be made on the last Allocation Date of each Plan Year. The credits and charges provided by (c) shall be made as of each Allocation Date. The contributions of each Participant for each Plan Year provided by (b) shall be allocated and credited to this Individual Contribution Account periodically when received by the Trustee. Payments from an Account shall be charged to the Account when paid. 19 7.4 Accounts Maintained for Record Keeping Only. ------------------------------------------- Separate accounts or records may be maintained for operational and accounting purposes for each Fund, but, except as provided in Section VIII hereof, no such account shall be considered as segregating any funds or property in each Fund from any other funds or property contained in such Fund. In no event shall maintenance of an account or record designated as the account of a person having a credit in the Plan mean that such person shall have a greater or lesser interest than that due him under the terms of this Plan. No person having a credit in the Plan shall have any specific title in any specific asset in the Trust. 7.5 Allocation of Income and Loss. ----------------------------- (a) Except as provided in subparagraph (b) below, as of each Allocation Date, and on each other date as may be determined by the Committee, the Committee shall determine and allocate the net income or net loss of each Fund in the Trust, as determined pursuant to paragraph 12.1 hereof, among and shall credit or charge it to the accounts of each Participant having an interest in the Fund on the date such allocation of income and loss is made. Such allocations shall be made in the proportion that the net credit in the Accounts of each such person in the respective Fund on said date bears to the total net credits in the Accounts of all such persons in the respective Fund on said date. The allocation of income and loss shall be made prior to any other allocation as of that date and shall be based on the actual earnings and losses credited or charged to Funds in which the Participants' Accounts are invested pursuant to Section VIII hereof. (b) $1,860,088 of the income for the six-month period ending on June 30, 1993, shall be allocated on the basis of the amounts contributed by Participants pursuant to Section IV hereof during 1993 and not withdrawn during 1993 pursuant to Section XVI; provided, however, that no Participant shall receive an allocation under this subparagraph (b) if the total of the allocations under this subparagraph (b) together with the Annual Additions exceeds the Maximum Permissible Amount (as defined in paragraph 18.4(c)). To the extent that an allocation cannot be made as a result of the forgoing provision, it shall be allocated in accordance with general provisions of subparagraph (a) hereof. 7.6 Allocation of Special 1% Contribution. ------------------------------------- As of the last Allocation Date of each Plan Year prior to January 1, 1990, the Committee shall allocate to the Employer Contribution Account of each Participant who is employed by an Employer on said Allocation Date the contribution made on his behalf by his Employer pursuant to the first sentence of paragraph 5.l hereof. 7.7 Allocation of Matching Contribution. ----------------------------------- As of the last Allocation Date of each Plan Year, the Committee shall allocate to the Employer Contribution Account of each Participant who is employed by an Employer on said Allocation Date the matching contribution made on the Employee's behalf by his Employer pursuant to the schedule in paragraph 5.2 hereof (or in Schedule B for Plan Years prior to 1990). 20 7.8 Allocation of Forfeitures and Discretionary Contributions. --------------------------------------------------------- (a) Discretionary Contributions. As of the last Allocation Date of each Plan Year the Committee shall allocate the balance of each Employer's contribution, if any, made pursuant to paragraph 5.3 hereof to the Employer Contribution Accounts of Participants employed by the Employer on said Allocation Date in the proportion that the total Recognized Compensation of each such Participant bears to the total Recognized Compensation of all such Participants. (b) Forfeitures Prior to 1990. As of the last Allocation Date of each Plan Year ending prior to January 1, 1990 the Committee shall allocate the forfeitures from the accounts of Participants to the Employer Contribution Accounts of all Participants employed by an Employer on said Allocation Date in the proportion that the total Recognized Compensation of each such Participant bears to the total Recognized Compensation of all such Participants. (c) Forfeitures After 1989. As of the last Allocation Date of each Plan Year ending after January 1, 1990 the Committee shall allocate the forfeitures from the accounts of Participants to the Employer Contribution Accounts of all Participants who have made contributions during the Plan Year pursuant to Section IV hereof and who are employed by an Employer on said Allocation Date in the proportion that the total Recognized Compensation of each such Participant bears to the total Recognized Compensation of all such Participants who made contributions. 7.9 Committee Records. ----------------- The accounts and records of the Committee shall be open to inspection and audit at all reasonable times by any person designated by an Employer. Such records shall contain all authorizations, directions and other information furnished or received by an Employer, the Committee and the Trustee. 7.10 Participant Statements. ---------------------- As soon as practicable after the end of each Plan Year the Committee will provide each Participant with a statement of his account balances as of the last Allocation Date of such year. 21 SECTION VIII - INVESTMENT OF THE TRUST FUND ------------------------------------------- 8.1 Separate Investment Funds. ------------------------- The assets of the Trust Fund shall be separated and segregated into six separate and distinct investment funds. The Committee may create additional investment funds or eliminate any investment fund at any time. Funds A and O shall consist of amounts allocated to Individual Contribution Accounts (Participants' contributions and earnings thereon). Fund B shall consist entirely of amounts allocated to Employer Contribution Accounts (Employers' contributions, forfeitures and earnings thereon). Funds E, F and G shall consist of amounts directed by Participants to be transferred from Fund B pursuant to the diversification provision of Section XXIV hereof. The Funds shall be invested as described below. 8.2 Fund A. ------ Fund A, the general investment fund, shall be invested in a diversified portfolio of shares of common and preferred stock, other equity investments and fixed income securities, property, both real and personal, corporate and government bonds, notes and debentures and other fixed income investments. 8.3 Fund B. ------- Fund B shall be invested and reinvested entirely in Company Stock. Employer cash contributions shall be invested in Company Stock as soon as it is practicable after receipt by the Trustee. In making such purchases the Trustee shall give due regard to the trading volume of Company Stock at the time of such purchases and accordingly regulate the amount and timing of such purchases in order to minimize the effect on market price fluctuations which may be caused by such purchases. All purchases of Company Stock shall be subject to any applicable federal or state securities laws and shall be made in accordance with all applicable rules and regulations promulgated thereunder. The Trustee may purchase Company Stock directly from the Company. 8.4 Fund C. ------ [RESERVED] 8.5 Fund D. ------ [RESERVED] 8.6 Fund E. ------ Fund E, the money market fund, shall be invested in a diversified portfolio of short term fixed income securities, such as U. S. Treasury bills, corporate commercial paper and certificates of deposit with safety of principal as a primary goal. 22 8.7 Fund F. ------ Fund F, the intermediate bond fund shall be invested primarily in United States Government obligations, state and municipal bonds, corporate bonds, notes and debentures, commercial paper, certificates of deposit with maturities of not greater than five years and shares of regulated investment companies whose investments are limited to fixed income securities and United States Government obligations with such maturities. 8.8 Fund G. ------ Fund G, shall be invested in a diversified portfolio of shares of common and preferred stock, property, both real and personal, and in shares of regulated investment companies whose investments are limited to such corporate stock investments. 8.9 Fund O. ------ Fund O shall be invested in accordance with the directions of the Committee in real estate and stocks and bonds as described in Section 4.5 of the agreement creating the Trust. 8.10 Purchase of Company Stock. ------------------------- To effectuate the primary purpose of this Plan, that is, the distribution of benefits under the Plan in the form of Company Stock, the Trustee shall purchase Company Stock and continue to hold such Company Stock in Fund B, including any Company Stock contributed by the Company, for purposes of distribution to Participants and their Beneficiaries notwithstanding any otherwise applicable rule or principle relating to (i) diversification of trust assets, or (ii) the speculative character of trust investments, or (iii) the lack of a fair return on Company Stock commensurate with the prevailing rate, or (iv) lack of marketability or income provided by Trust assets, or (v) the probable continual fluctuation in the market value of Trust assets. 8.11 Loans to Purchase Company Stock. ------------------------------- The Trustee upon direction of the Committee shall have the power and authority to borrow or raise money for the purposes of this Plan, including, but not limited to loans for the purpose of acquiring Company Stock, in such amount, and upon such terms and conditions, as the Committee shall deem advisable; and, for any sum so borrowed, to issue its promissory note as Trustee, and to secure the repayment thereof by pledging only that part of the Trust Fund consisting of Company Stock purchased with the proceeds of the loan; and no person lending money to the Trustee shall be bound to see to the application of the money lent or to inquire into the validity, expediency, or propriety of any such borrowing. 23 8.12 Separate Suspense Account. ------------------------- If Company Stock is purchased with such a loan, it will be accounted for in a separate suspense account on the books of the Plan and Trust. Its value will not be allocated to accounts of Participants except as released under the following formula: Each Plan Year during the duration of the loan, the number of shares of Company Stock which is released shall equal the number of the shares of Company Stock held in the suspense account immediately before the release multiplied by a fraction, the numerator of which is the amount of the principal and interest paid on the loan for the year; the denominator of which is the numerator plus the principal and interest of the loan to be paid for all future years. The number of future years under the loan must be definitely ascertainable. If the interest rate under the loan is variable, the interest to be paid in future years shall be computed by using the interest rate applicable as of the end of the Plan Year. Income earned on securities held in the suspense account can be used to pay both interest and principal on the loan used to acquire the securities. 24 SECTION IX - VESTING - FORFEITURES 9.1 Full Vesting. ------------ The entire amount of the credit in the accounts of a deceased Participant or a Participant who reaches his Normal Retirement Date or actually retires for disability prior thereto, plus any amount allocated to his accounts thereafter as provided by paragraphs 7.5, 7.6, 7.7, and 7.8, hereof, shall be vested and shall be paid to the person or persons entitled thereto at the times and in the manner provided by Section XI hereof. 9.2 Vesting on Termination of Service. --------------------------------- A portion of the amount of the credits in the accounts of a Participant as of the Allocation Date coinciding with or next preceding the day he terminates his service with all Affiliated Companies for any reason other than his death, retirement on or after his Normal Retirement Date, or retirement for disability shall be paid to the person or person entitled thereto at the times and in the manner provided by Section XI hereof. The amount to be paid shall be known as a "vested interest", and shall be equal to the sum of the following: (a) the total credit in his Individual Contribution Account; (b) an amount equal to the following percentage of his credit in his Employer Contribution Account: Completed Years Portion of Credit of Service with To be Paid the Employers (Vested Interest) --------------- ----------------- One 0% Two 0% Three 20% Four 40% Five 60% Six 80% Seven or more 100% (c) and any net income or net loss allocated to his accounts thereafter, as provided by paragraph 7.5 hereof. (d) Notwithstanding the foregoing to the contrary each Participant whose vested percentage as of December 31, 1988 was greater than the percentage shown in subparagraph (b) above shall continue to be vested in no smaller a percentage than he was on December 31, 1988. Increases 25 in his vesting percentage for service on and after January 1, 1989 shall be based upon the schedule contained in subparagraph (b) above. Except as to his vested interest, the balance of the credits in the accounts of a Participant in this Plan who is not fully vested shall cease and be terminated immediately upon his termination of service with all Affiliated Companies. The Committee shall direct the Trustee to transfer out of such Participant's Employer Contribution Account as of the time of his termination of service the balance in excess of the amount vested in him, as a forfeiture to be distributed among the Employer Contribution Accounts of the other Participants according to the procedure provided by paragraph 7.8 hereof. The percentage to be applied in (b) shall be applied to the Employer Contribution Account balance as of the Allocation Date immediately preceding his date of termination before any credits are made to his accounts pursuant to paragraphs 7.5, 7.6, 7.7, and 7.8 hereof. 9.3 Breaks in Service and Return to Service. --------------------------------------- (a) If a former Participant who has not incurred five consecutive One Year Breaks in Service returns to work for an Employer, he shall again become a Participant as of the first date after his termination during which he again completes an Hour of Service. His Years of Service earned prior to his termination of service shall be restored. Any amounts that were forfeited when he terminated shall not be restored, except pursuant to paragraphs 9.3(b) and (c) below. (b) If a partially vested Participant terminates and receives or begins to receive the balances in his Accounts prior to incurring five consecutive One Year Breaks in Service and thereafter returns to the service of an Employer as an Employee under the Plan, and prior to his Repayment Date repays to his Employer Contribution Account the amount previously distributed to him from the Account, the Committee shall, at the end of the Plan Year in which the Participant repays the amount to his Account, allocate to his Employer Contribution Account the amount necessary to restore the Employer Contribution Account balance in the Account prior to his termination. "Repayment Date" shall mean the earlier of: (1) the date the Participant incurs five consecutive One Year Breaks in Service after his distribution has begun; or (2) the end of the five year period beginning with the Participant's return to service with an Employer as an Employee. (c) If a former Participant who returns to work for an Employer prior to incurring five consecutive One Year Breaks in Service had not begun to receive a distribution of the balances in his Accounts, any amounts that were forfeited upon his termination of service shall be restored as set forth in paragraph 9.4 below. (d) If partially or fully vested former Participant returns to work for an Employer, his prior Years of Service shall be restored no matter how 26 many One Year Breaks in Service he has incurred. If a former Participant who has no vested interest incurs a five consecutive One Year Breaks in Service, then he shall forfeit his prior Years of Service. 9.4 Source of Restoration of Forfeitures. ------------------------------------ The amount necessary to restore the balances in a returned Participant's Employer Contribution Account shall come from amounts forfeited from the Employer Contribution Accounts of those Participants who terminated during the year. In the event that such forfeitures are insufficient to restore the Account, the Company shall contribute the additional amounts required. 9.5 Service of Less than 1,000 Hours. -------------------------------- A Plan Year in which a Participant completes between 501 and 999 (inclusive) Hours of Service with an Employer shall not be treated either as a One Year Break in Service or a year which a Year of Service is earned. 9.6 Vesting Schedule Amendments. --------------------------- Upon an amendment changing the vesting schedule contained in paragraph 9.2 hereof, the vested interest of an Employee who is a Participant on the date such an amendment is adopted (or the date such an amendment is effective, if later) shall not, immediately following the date of the amendment, be less than his vested interest prior to such amendment. A Participant who has completed three or more Years of Service may after such an amendment elect during the vesting election period to have his vested interest determined without regard to such an amendment. For purposes of this paragraph the "vesting election period" begins on the date the vesting schedule is amended, and ends 60 days following the later of: (a) the date the amendment is adopted; (b) the date the amendment is effective; or (c) the date the Participant is given written notice of the amendment. An election pursuant to this paragraph may be made only by an individual who is a Participant at the time of such an election and shall be irrevocable. Notwithstanding the foregoing, no election will be provided to a Participant whose vested interest under the amendment is at all times equal to or greater than his vested interest under the Plan without regard to the amendment. 27 SECTION X - RETIREMENT ---------------------- 10.1 Normal and Late Retirement. -------------------------- Retirement for age shall occur if the Participant terminates his service with the Employers on or after his attaining age 65. A Participant may retire later than on the Participant's Normal Retirement Date, and in such event (i) he shall continue to participate in the Employer's contributions, forfeitures, and the benefits of the Trust as any other Participant, and (ii) his retirement shall occur on the day his employment with his Employer is terminated. 10.2 Disability. ---------- Retirement on account of permanent disability shall occur on the day that the Employer determines, based upon an independent doctor's examination and certificate, a Participant is under such physical or mental disability that he is no longer capable of rendering satisfactory service to it. This provision shall be applied in a nondiscriminatory manner to all Participants similarly situated. 28 SECTION XI - PAYMENT OF BENEFITS -------------------------------- 11.1 Form. ---- Upon retirement of a Participant for age or disability, or upon any other termination of employment the vested portion of the Participant's Employer Contribution Account shall be paid to the Participant at the election of the Participant either in (a) cash or (b) Common Stock of the Company (based upon fair market values on the date of distribution). Balances representing fractional shares of Common Stock shall be distributed in cash. The balance of a Participant's Individual Contribution Account payable upon retirement for age or disability or upon any other termination of employment shall be paid to the Participant in cash. If the Participant elects a cash distribution of his Employer Contribution Account, both his Employer Contribution Account and his Individual Contribution Account may, at the election of the Participant, be paid: (a) in one lump sum distribution; (b) in the case of an "eligible rollover distribution" as defined in Code Section 401(a)(31)(C) after December 31, 1992, in a direct transfer of all or a portion of the distribution to an "eligible retirement plan" as defined in Code Section 401(a)(31)(D); provided, however, that any such transfer is $200 or more; or (c) in substantially equal annual or more frequent installments paid over a reasonable period of time not to exceed the life expectancy of the Participant, the joint life expectancy of the Participant and his spouse, or the joint life expectancy of the Participant and his designated Beneficiary as set forth in paragraph 11.3 below. If the Participant who is terminating his employment has made individual contributions which have not been credited to his account at the time of distribution, such amounts shall be returned without interest. All distributions required under this Section shall be determined and made in accordance with the Income Tax Regulations under Code Section 401(a)(9), including the minimum distribution incidental benefit requirement of Section 1.401(a)(9)-2 of the Regulations. Notwithstanding anything herein to the contrary, the provisions of this paragraph and the other provisions of this Section which are intended to reflect the requirements of Code Section 401(a)(9) shall override any contrary provisions elsewhere in this Plan. 11.2 Commencement Date. ----------------- (a) If the vested portion of a Participant's vested account balances does not exceed $3,500, a distribution (or a transfer after December 31, 1992) will commence on or before 90 days after the end of the Plan Year in which his employment with all Employers and Affiliated Companies terminates. 29 (b) If the vested portion of a Participant's Account balances exceeds $3,500, a distribution (or transfer after December 31, 1992) under the above paragraph will commence within 90 days after the end of the Plan Year in which occurs the later of the Participant's Normal Retirement Date, the Participant's 10th anniversary of participation in the Plan, or the date his employment with all Employers and Affiliated Companies terminates. If requested by a Participant, a distribution (or transfer after December 31, 1992) may commence on or before 90 days after the end of the Plan Year in which the Participant's employment with all Employers and Affiliated Companies terminates. If a distribution is one to which sections 401(a)(11) and 417 of the Internal Revenue Code do not apply, such distribution may commence less than 30 days after the notice required under section 1.411(a)-11(c) of the Income Tax Regulations is given, provided that: (1) the plan administrator clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (2) the Participant, after receiving the notice, affirmatively elects a distribution. (c) Notwithstanding anything herein to the contrary, distributions must commence no later than the April 1 of the calendar year following the calendar year in which a Participant attains age 70-1/2. (d) The distribution to any individual who retired, died or terminated his service prior to January 1, 1989 shall be governed by the terms of the Plan in effect on the date he terminated, died or retired. 11.3 Installment Distributions. ------------------------- (a) If a Participant's benefit is to be distributed over (1) a period not extending beyond the life expectancy of the Participant or the joint life and last survivor expectancy of the Participant and the Participant's designated Beneficiary or (2) a period not extending beyond the life expectancy of the designated Beneficiary, the amount required to be distributed for each calendar year, beginning with distributions for the first calendar year for which distributions are required must at least equal the quotient obtained by dividing the Participant's vested Account balances at the beginning of the calendar year by the number of years in the distribution period. (b) For calendar years beginning before January 1, 1989, if the Participant's spouse is not the designated Beneficiary, the method of distribution selected must assure that at least 50% of the present value of the amount available for distribution is paid within the life expectancy of the Participant. (c) For calendar years beginning after December 31, 1988, if the Participant's spouse is not the designated Beneficiary, the amount to be 30 distributed each year, beginning with distributions for the first calendar year for which distributions are required shall not be less than the quotient obtained by dividing the Participant's vested Account balances at the beginning of the calendar year by the applicable divisor determined from the table set forth in Q&A-4 of Section 1.401(a)(9)-2 of the Income Tax Regulations. (d) The minimum distribution for the calendar year during which the Participant attains age 70-1/2 must be made no later than the April 1 of the following calendar year. The minimum distribution for calendar years beginning after a Participant attains age 70-1/2 must be made on or before December 31 of that calendar year. (e) For purposes of this Section, the term "life expectancy" or "joint and last survivor expectancy" means the life expectancy or joint and last survivor expectancy computed by use of the expected return multiples in Tables V and VI of Section 1.72-9 of the Income Tax Regulations calculated using the attained age of the Participant (or designated Beneficiary) as of the Participant's (or designated Beneficiary's) birthday in the applicable calendar year reduced by one for each calendar year which has elapsed since the date life expectancy was first calculated. If life expectancy is being recalculated, the applicable life expectancy shall be the life expectancy as so recalculated. Unless otherwise elected by the Participant (or spouse) by the time distributions are required to begin, life expectancies shall be recalculated annually. Such election shall be irrevocable as to the Participant (or spouse) and shall apply to all subsequent years. The life expectancy of a nonspouse Beneficiary may not be recalculated. 11.4 Death Benefits. -------------- (a) If a Participant dies after distribution of his interest has begun, the remaining portion of such interest will continue to be distributed at least as rapidly as under the method of distribution being used prior to the Participant's death. (b) Upon the death of a Participant before a distribution or transfer of his credit in the Trust has begun, the amount payable under paragraph 9.l hereof shall be paid in Common Stock or in cash as described in paragraph 11.l hereof beginning on or before the ninetieth day next after his death occurs, to the following person or persons in the order designated: (1) to the Participant's surviving spouse, if any; provided in the case of an "eligible rollover distribution" as defined in Code Section 401(a)(31)(C) after December 31, 1992, in a direct transfer of all or a portion of the distribution to an "eligible retirement plan" as defined in Code Section 401(a)(31)(D); provided, however, that any such transfer is $200 or more; (2) if the Participant is not survived by a spouse, or if the Participant is survived by a spouse but the spouse consents in accordance with the procedure set forth below, to such Beneficiary or Beneficiaries as the Participant designated in writing upon such form or forms furnished by the Committee and delivered to the Committee within his lifetime; 31 (3) in the event a Beneficiary dies prior to the receipt of his share of such account, the undisbursed portion of his share shall be paid to such other Beneficiary or Beneficiaries, and in such amount to each (if more than one), as said Participant shall have designated. If more than one Beneficiary has been designated without specifying the share to each, distribution shall be made equally to such of the designated Beneficiaries as shall be living; or (4) if a Participant's spouse does not survive him and if no Beneficiary has been named by said Participant, or if all of the designated Beneficiaries predecease him or die while there is still a credit in his accounts, such credit shall be paid in a lump sum to his executors or administrators; provided that if no executors or administrators are appointed within sixty (60) days after his death, the Committee shall direct the Trustee to pay such credit to such person or persons as the Committee in its sole discretion may determine. A Beneficiary designation filed with the Committee and bearing the latest date of execution shall be conclusive upon all persons of the designation of the Beneficiary or Beneficiaries named therein, provided however that no such designation naming someone other than the Participant's spouse shall be effective if the spouse survives the Participant unless the Participant's spouse consents to such election, the consent acknowledges the effect of such election, and the consent is witnessed by a Plan representative or a notary public, or the Participant establishes to the satisfaction of the Plan Administrator that the consent may not be obtained because there is no spouse, because the spouse cannot be found, or because of other reasonable excuse. 11.5 Deductions for Taxes and Expenses. --------------------------------- Before making payment of the credit in the accounts of a deceased Participant to the persons entitled thereto as designated by the Committee, the Trustee may deduct from the credit such amount as in its sole discretion it deems proper to protect itself against liability on account of all taxes and penalties or other additions thereto and interest thereon, by whatever government imposed, which may be levied or assessed upon or by reason of the death of such deceased Participant and out of the amount so deducted may discharge any such liability and shall pay the balance to the persons so designated. 11.6 Payments to Minors. ------------------ During the minority or other legal disability of any person to whom payments are to be made, such payments may be made in the discretion of the Committee in any one or more of the following ways: (a) directly to said person; (b) to the legal guardian or conservator of said person; 32 (c) to any relative of said person, to be expended by such relative for the care, support, education, and maintenance of said person; or (d) directly expending the same for said purposes for the benefit of said person. The Trustee and the Committee shall not be required to see to the application of any payments so made to any of said persons, but his or their receipts shall be a full discharge to the Trustee and the Committee. 11.7 Missing Distributees. -------------------- If the Committee notifies a Participant or a Beneficiary designated in accordance with this Section in writing at his last known address that he is entitled to benefits under the Plan and the Participant or Beneficiary fails to claim his benefits within two calendar years after notification, his benefits will be distributed to one or more of the Participant's or Beneficiary's relatives by blood, adoption or marriage, as the Committee decides. If the Committee cannot locate an appropriate relative within one additional year, the benefit shall be forfeited, provided, however, that if the Participant or an appropriate relative subsequently applies for the benefit, the benefit shall be reinstated. 11.8 Special QDRO Distribution. ------------------------- If the Committee receives a domestic relations order that meets the requirements of Section 414(p) of the Code except that it provides for an immediate distribution of the alternate payee's interest in the Participant's Accounts, the Committee shall honor such an order as a Qualified Domestic Relations Order within the meaning of Section 414(p) of the Code and make the distribution in accordance with the order. 33 SECTION XII - INCOME OR LOSS ---------------------------- 12.1 Calculation. ----------- The net income or net loss of each Fund for each semiannual accounting period ending on an Allocation Date shall be the difference between the fair market value of the Fund on the Allocation Date, as determined by the Trustee (as provided in paragraph 12.2 below) and the sum of the following: (a) the total of all the account balances in the Fund of all persons having credits in the Trust on said date; (b) Employer contributions which have been received by the Trustee but have not yet been credited to the account balances in the Fund; and (c) in the case of Fund B, amounts transferred out as forfeitures and charged to account balances during the semiannual accounting period ending on the Allocation Date under paragraph 9.2 hereof. 12.2 Valuation. --------- Semiannually as of each Allocation Date, the Committee shall cause the Company to obtain an appraisal of the Company Stock held in Fund B and the Trustee shall determine and inform the Committee of, the fair market value of Funds A, C, D, E, F, G, and O and any other assets held in Fund B. The latter determination may be made in part or entirely by the Trustee, or in part or entirely by such other persons, or with such other help, as the Trustee in its sole discretion shall deem desirable. In determining the fair market value of Fund assets, current market prices or quotations shall be used for those assets for which they are available. As to all other assets, the Trustee shall use such values as it deems fair; and its determination shall be conclusive upon all persons. 34 SECTION XIII - AMENDMENT ------------------------ 13.1 Amendment. --------- 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 vest or revest in an Employer any interest in the assets of the plan, or any part thereof, or to change the rights, powers, or duties of the Trustee without its consent, or to deprive any Participant of his then vested interest if any, in this Plan. 35 SECTION XIV - TERMINATION ------------------------- 14.1 Right to Terminate. ------------------ The Company reserves the right either with or without formal action to terminate this Plan. Each Employer reserves the right to permanently discontinue its contributions to the Trust. In the event that an Employer permanently discontinues its contributions to the Trust, or that the Company terminates this Plan, or that this plan is partially terminated under operation of law, the accounts of the affected Participants shall be fully vested and nonforfeitable. 14.2 Sale or Bankruptcy of Employer. ------------------------------ In the event an Employer shall be judicially declared bankrupt or insolvent, or shall be dissolved, merged or consolidated, or in the event any other person or corporation shall acquire an Employer or substantially all of the assets of an Employer, the accounts of the Participants employed by such Employer, shall be fully vested. 14.3 Distribution Upon Termination. ----------------------------- Upon the termination of this Plan or the discontinuance of contributions by an Employer, the Trustee may reserve such reasonable amounts as in its sole discretion it shall deem necessary to provide for payment of: (a) any of its expenses or taxes then or thereafter due or payable, and (b) any sums then or thereafter chargeable against the Trust Fund for which it may be liable. The credits in the accounts of Participants shall become 100% vested upon termination of the Plan. As soon as practicable after the Plan is terminated, the Trustee shall distribute the balance of the Trust Fund in lump sum payments to the persons having credits in the Trust in the proportion that the net credit in the accounts of each such person bears to the total net credits in the accounts of all such persons. The Trustee may, in its discretion, make distributions in cash or partially or wholly in kind. At no time shall any part of the corpus or income of the Trust Fund be used for, or diverted to, purposes other than for the exclusive benefit of the Participants or their Beneficiaries. 14.4 Power of Trustee. ---------------- From and after the date of the termination of this Plan, and until the final distribution of the Trust Fund, the Trustee shall continue to have all the powers provided under the Plan and Trust as are necessary and expedient for the orderly liquidation and distribution of the Trust Fund. 36 14.5 Merger or Consolidation. ----------------------- In the case of any merger or consolidation with, or transfer of assets and liabilities to, any other plan, provisions shall be made so that each Participant in the Plan on the date thereof (if the Plan then terminated) would receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately prior to the merger, consolidation or transfer (if the Plan had then terminated). Affected Participants will be notified of a termination or partial termination as required by ERISA. 37 SECTION XV - RESIGNATIONS - REPLACEMENTS ---------------------------------------- 15.1 Resignation. ----------- Any member of the Committee may resign and his resignation shall become effective ten (10) days after notice thereof has been personally delivered or sent by registered mail to the Secretary of the Company at the principal office of the Company. The Employers by resolutions of a majority of their Boards of Directors shall have the power to remove any member of the Committee from office at any time. 15.2 Vacancy. ------- The Boards of Directors of a majority of the Employers may fill any vacancy in the membership of the Committee or appoint additional members to the Committee. The Board of Directors of the Company shall give prompt written notice of any such action to the other Committee members and the Trustee. Any Committee members shall have the same power and authority as their predecessors hereunder. While there is a vacancy in the membership of the Committee, the remaining Committee members shall have the same powers and authorities as the full Committee until the vacancy is filled. 38 SECTION XVI - WITHDRAWALS ------------------------- 16.1 Withdrawals Permitted. --------------------- A Participant may make withdrawals from his Individual Contribution Account in accordance with the provision of this Section. 16.2 Withdrawals Without Penalty. --------------------------- A Participant may withdraw in any Plan Year the sum of the following without penalty: (a) his own voluntary contributions made in prior years which were not subject to the matching, i.e. contributions in excess of 6% of his Compensation (5% for Plan Years ending prior to January 1, 1990); and (b) the lesser of (i) $15,000 or (ii) 50% of the balance in his Individual Contribution Account as of the semi-annual Allocation Date immediately preceding the date the withdrawal request is received by the Committee reduced by his own voluntary contributions in excess of 6% of his Compensation (5% for Plan Years ending prior to January 1, 1990). 16.3 Penalty Withdrawals. ------------------- If a Participant wishes to withdraw more than the amounts permitted in paragraph 16.2, he may make such a withdrawal, but he will incur a penalty. The penalty shall be that he may not again contribute to the Plan until the January l which is coincident with or immediately following the one year anniversary of the effective date of the withdrawal which creates the penalty. In addition, the Participant who incurs a penalty will not receive an Employer Matching Contribution for the Plan Year in which the penalty period ends. 16.4 Prohibited Withdrawals. ---------------------- A Participant may not withdraw contributions made during the year of withdrawal nor may he withdraw any amounts from his Employer Contribution Accounts. 16.5 Requests for Withdrawals. ------------------------ All requests for withdrawals must be made in writing to the Committee. Withdrawals shall be paid in cash. Payments shall be made within ninety (90) days following the first January l or July l which follows the date the request for withdrawal is received by the Committee. The withdrawal shall be effective as of said January 1 or July 1. 39 16.6 Limitation on Withdrawals from Fund O. ------------------------------------- Notwithstanding the foregoing, if a withdrawal is requested by a Participant who has all or a portion of his Individual Contribution Account invested in Fund O, the payment of the portion of his Individual Contribution Account invested in Fund O may be deferred until the one year anniversary of the January 1 or July 1 as of which the payment would have been made pursuant to Paragraph 16.5 hereof but for this paragraph. If in the Committee's sole discretion an additional delay is necessary to permit a fair and orderly liquidation of all or a portion of the assets held in Fund O, the payment can be deferred an additional period of time not to exceed one year. 40 SECTION XVII - ADDITIONAL EMPLOYERS ----------------------------------- 17.1 Adoption by Subsidiaries. ------------------------ Any Subsidiary (as defined in subparagraph 2.2(w) hereof) which is authorized by the Company to do so, may adopt this Plan by resolution of its Board of Directors. 41 SECTION XVIII - MAXIMUM ADDITIONS --------------------------------- 18.1 No Other Plans. -------------- If an Employer (as defined in subparagraph 18.4(d) hereof) does not maintain any other qualified plan in addition to this Plan, the following limitations shall apply: (a) The amount of the Annual Addition which may be allocated under this Plan to any Participant's Account during any Plan Year shall not exceed the Maximum Permissible Amount. (b) If the Annual Addition under this Plan on behalf of a Participant is to be reduced as of any allocation date as a result of subparagraph (a), such reduction shall be disposed of as follows: (1) first, any Employee contributions made pursuant to paragraph 4.1 hereof, to the extent the return would reduce the excess amount, shall be returned to the Participant; (2) second, such reduction shall be accomplished by reallocating Company contributions made pursuant to paragraph 5.1 hereof and forfeitures, subject to the limitations of subparagraph (a) hereof, to the Company Contribution Accounts of the remaining Participants. To the extent that any Company Contributions or forfeitures cannot be reallocated to a Participant's Company Contribution Account because of the limitations of subparagraph (a), they shall be placed in a suspense account for reallocation in later Plan Years. 18.2 Other Defined Contribution Plans. -------------------------------- If an Employer maintains one or more other defined contribution plans in addition to this Plan, the following limitations shall apply: (a) The amount of Annual Addition which may be allocated under this Plan to any Participant's Account as of any allocation date shall not exceed the Maximum Permissible Amount (based upon Recognized Compensation up to such allocation date) reduced by the sum of any allocations of Annual Additions previously made to the Participant's Accounts under this Plan and any other such plans maintained by the Employer within the Plan Year. (b) If a Participant's Annual Addition under this Plan and all such other plans results in an Excess Amount, such Excess Amount shall be deemed to consist of the amounts last allocated. (c) If an allocation date of this Plan coincides with an allocation date of any other plan described in subparagraph (a) hereof, the amount of Annual Additions to be allocated on behalf of a Participant under this Plan as of such date shall be an amount to be allocated under this Plan without regard to this Section multiplied by the lesser of 1 or a fraction, the numerator of which is the amount described in subparagraph (a) during the Plan Year and the denominator of which is the amount that would otherwise be allocated on this allocation date under all plans without regard to this Section. 42 (d) Any Excess Amount attributed to this Plan shall be disposed of as provided in paragraph 18.1(b). 18.3 Other Defined Benefit Plans. --------------------------- If an Employer maintains one or more defined benefit plans in addition to this Plan, then notwithstanding any other provisions of the Plan the following limitations shall apply: (a) The sum of a Participant's Defined Benefit Plan Fraction and his Defined Contribution Plan Fraction shall not exceed 1.0 for any Plan Year. (b) If in any Plan Year the sum of a Participant's Defined Benefit Plan Fraction and Defined Contribution Plan Fraction would otherwise exceed 1.0, the Annual Additions under this Plan shall be reduced in the manner set forth in paragraph 18.1(b) to the extent necessary to comply with subparagraph (a) hereof. 18.4 Definitions. ----------- The terms used in this Section XVIII shall have the following definitions: (a) "Defined Benefit Plan Fraction" means a fraction, the numerator of which is the Projected Annual Benefit payable to a Participant under all defined benefit plans sponsored by the Employer as of the close of the current Plan Year and the denominator of which is the lesser of (1) 1.25 multiplied by the dollar limitation in effect under Section 415(b)(1)(A) of the Code for such year; or (2) 1.4 multiplied by the compensation limitation in effect under Section 415(b)(1)(B) of the Code for such year. (b) "Defined Contribution Plan Fraction" means a fraction, the numerator of which is the aggregate amount of the Annual Additions made to a Participant's accounts under this Plan or any other defined contribution plans sponsored by the Employer as of the close of the current Plan Year and the denominator of which is the sum of the lesser of (1) or (2) for such year and for each prior Year of Service with the Employer (regardless of whether any such defined contribution plan was in existence during those years) where: (1) is the product of 1.25 multiplied by the dollar limitation in effect under Section 415(c)(1)(A) of the Internal Revenue Code for such year (determined without regard to Section 415(c)(6) of the Code); and 43 (2) is the product of 1.4 multiplied by the amount which may be taken into account under Section 415(c)(1)(B) of the Code (or Section 415(c)(7) or (8), if applicable); provided, however, that the Committee may elect that the account for each Participant for all years ending before January 1, 1983, under (i) and (ii) above shall be determined pursuant to the special transitional rule provided in Section 415(e)(6) of the Code. (c) "Maximum Permissible Amount" means with respect to any Participant for a Plan Year the lesser of: (1) $30,000, or if greater, one-fourth (1/4) of the dollar limitation set forth in Section 415(b)(1)(A) of the Code; or (2) twenty-five percent (25%) of his Recognized Compensation for the Plan Year. (d) "Employer" means the Employers, as defined in subparagraph 2.2(p) hereof, plus any Affiliated Company, as defined in subpara- graph 2.2(a) hereof. (e) "Projected Annual Benefit" means the annual benefit to which a Participant in a defined benefit plan would be entitled under the terms of the plan based upon the following assumptions: (1) the Participant will continue employment until reaching normal retirement age as determined under the terms of the plan (or current age, if later); (2) the Participant's compensation will remain the same until the Participant attains normal retirement age; and (3) all other factors used to determine benefits under the plan for the Plan Year under consideration will remain constant for all future Plan Years. (f) "Recognized Compensation" means compensation as defined in Code Section 415(c)(3) and the Regulations thereunder. 44 SECTION XIX - ROLLOVERS ----------------------- 19.1 Rollover. -------- A Participant may with the approval of the Committee transfer to this Plan all or part of a distribution received from another plan qualified under Section 401(a) or 403(a) of the Code (hereinafter the "Other Plan") provided: (a) the transfer occurs on or before the sixtieth day following his receipt of the distribution from the Other Plan or, if such distribution had previously been deposited in an Individual Retirement Account (as defined in Section 408 of the Code), the transfer occurs on or before the sixtieth day following distribution from the Individual Retirement Account; (b) no part of the amount being transferred constitutes any amounts considered contributed by him to the Other Plan within the meaning of Section 402(e)(4)(D)(i) of the Code; (c) the distribution from the Other Plan is on account of the termination of the Other Plan, or permanent discontinuance of contributions to the Other Plan (if it is a profit-sharing or stock bonus plan), or the distribution otherwise qualifies as a lump sum distribution within the meaning of Section 402(e)(4)(A) of the Code without reference to Section 402(e)(4)(B) of the Code; (d) no part of the amount being transferred was attributable to contributions made on behalf of the Participant while he was a key employee in a top heavy plan. (See definitions of "key employee" and "top-heavy plan" in Section XX hereof.) An Employee may make a rollover pursuant to this Section although he has not yet met the Plan's age and service requirements for participation in the Plan. 19.2 Plan to Plan Transfer. --------------------- In addition to a transfer pursuant to paragraph 19.1 hereof, a participant may with the approval of the Committee transfer directly to this Plan any amounts held for him under any other plan qualified under Section 401(a) or 403(a) of the Code. 19.3 Procedures. ---------- The Committee shall develop such procedures, and may require such information from a Participant desiring to make a transfer pursuant to this Section as it deems necessary or desirable to determine that the proposed transfer will meet the requirements of this Section. Upon approval by the Committee, the amount being transferred shall be deposited in the Trust and allocated to the Participant's Rollover Account. The Participant will be fully vested in the balance in his Rollover Account. 45 SECTION XX - TOP-HEAVY RESTRICTIONS ----------------------------------- 20.1 When Applicable. --------------- (a) The provisions of this Section shall become effective in any Plan Year beginning after December 31, 1983 in which the Plan is a Top-Heavy Plan. The Plan shall be a Top-Heavy Plan if with respect to a Plan Year the Top-Heavy Ratio exceeds sixty percent (60%) and the Plan is not part of a required or permissive aggregation group of plans. (b) If this Plan is a part of a required aggregation group of plans but not part of a permissive aggregation group and the Top-Heavy Ratio for the group of plans exceeds sixty percent (60%),the Plan will be Top-Heavy. If this Plan is a part of a required aggregation group and part of a permissive aggregation group of plans and the Top-Heavy Ratio for the permissive aggregation group exceeds sixty percent (60%), the Plan will be Top-Heavy. 20.2 Top Heavy Ratio. --------------- For purposes of this Section, Top-Heavy Ratio shall mean the following: (a) If the Company or an Affiliated Company does not maintain a defined benefit plan that has or has had accrued benefits during the 5-year period ending on the Determination Date, the Top-Heavy Ratio is a fraction calculated as of the Determination Date, the numerator of which is the sum of the account balances for all Key Employees under this Plan and all other defined contribution plans maintained by the Company or an Affiliated Company (including account balances distributed in the five-year period ending on the Determination Date), and the denominator of which is the sum of all account balances under this Plan and such other plans on that date. Both the numerator and the denominator are adjusted to reflect any contributions that are due but unpaid as of the Determination Date. (b) If the Company or an Affiliated Company maintains one or more defined benefit plans that has or has had accrued benefits during the 5-year period ending on the Determination Date, the Top-Heavy Ratio is a fraction, the numerator of which is the sum of account balances for all Key Employees under this Plan and all other defined contribution plans sponsored by the Company or an Affiliated Company plus the present value of accrued benefits for Key Employees under the defined benefit plans sponsored by the Company or an Affiliated Company which cover a Key Employee. The denominator is the sum of the account balances under this Plan and such other defined contribution plans sponsored by the Company or an Affiliated Company plus the present value of accrued benefits under the defined benefit plans for all Participants. Both the numerator and denominator of the Top-Heavy Ratio are adjusted for any distribution made in the five-year period ending on the Determination Date and any contribution due but unpaid as of the Determination Date. For purposes of (a) and (b) above, the value of account balances and the present value of accrued benefits will be determined as of the Allocation Date that falls on the Determination Date. The account balances and accrued benefits of a Participant will be disregarded if: (i) the Participant is not 46 a Key Employee but was a Key Employee in a prior year or (ii) the Participant has not been credited with an Hour of Service for the Company or an Affiliated Company at any time during the five (5) year period ending on the Determination Date. The calculation of the Top-Heavy Ratio, and the extent to which distributions, rollovers, and transfers are taken into account will be made in accordance with Section 416 of the Code and the regulations thereunder. When aggregating plans, the value of account balances and accrued benefits will be calculated with reference to the Determination Dates that fall within the same calendar year. 20.3 Definitions. ----------- The terms used in this Section, shall have the following meanings: (a) "Determination Date" with respect to any Plan Year shall mean the last day of the preceding Plan Year, or in the case of the first Plan Year, the last day of such Plan Year. (b) "Key Employee" shall mean each Employee or former Employee (and the Beneficiaries of such Employee) who at any time during the determination period was: (1) an officer of the Company or an Affiliated Company having an annual Recognized Compensation in excess of 50% of the dollar limitation in effect under Code Section 415(b)(1)(A) for such year, provided, however, that the maximum number of officers is limited to the lesser of: a. fifty (50); or b. the greater of three (3) Employees or ten percent (10%) of all Employees. (2) an owner (or considered an owner under Code Section 318) of more than a 1/2% interest as well as one of the 10 largest interests in the Company or an Affiliated Company if such individual's Recognized Compensation exceeds the dollar limitation under Code Section 415(c)(1)(A) for such year; (3) a 5% or more owner of an Employer; or (4) a 1% or more owner of an Employer who has an annual Recognized Compensation of more than $150,000. The determination period of the Plan is the Plan Year containing the Determination Date and the four preceding Plan Years. The deter- mination of who is a Key Employee will be made in accordance with Section 416(i)(1) of the Code and the regulations thereunder. (c) "Permissive Aggregation Group" shall mean the required aggregation group of plans plus any other plan or plans of the 47 Company which, when considered as a group with the required aggregation group, would continue to satisfy the requirements of Sections 401(a)(4) and 410 of the Code. (d) "Recognized Compensation" shall mean compensation as defined in Code Section 415(c)(3), including amounts that are contributed pursuant to a salary reduction agreement and which are excludible from the Employee's gross income under Code Sections 125, 402(a)(8), 401(h), or 403(b). Recognized Compensation shall be limited to $200,000 ($150,000 for plan years beginning on or after January 1, 1993), as adjusted by the Secretary of the Treasury to include cost-of-living increases under Code Sections 401(a)(17) and 415(d). (e) "Required Aggregation Group" shall mean: (1) each qualified plan of an Employer in which at least one Key Employee participates, and (2) any other qualified plan of an Employer which enables a plan described in (1) to meet the requirements of Sections 401(a)(4) and 410 of the Code. 20.4 Top Heavy Limitations. --------------------- For any Plan Year in which the Plan is a Top-Heavy Plan, the limitations of this Section shall apply to this Plan: (a) (1) Except as otherwise provided in (2) below, in allocating Employer Contributions pursuant to paragraphs 7.6 through 7.8 hereof, the provisions of those paragraphs and paragraph 5.1 limiting the allocation to those Participants who completed 1,000 or more Hours of Service during the Plan Year shall be inoperative until each Participant receives a share of the Company Contribution equal to three percent (3%) of his Recognized Compensation. Any excess shall then be allocated on the basis provided in paragraphs 7.6 through 7.8 hereof. (2) The provisions of subparagraph (1) above shall not apply to any Participant to the extent that the Participant is covered under any other plan or plans of the Company and the minimum allocation or benefit requirement will be met in the other plan or plans. (b) Subparagraphs 18.4(a) and (b) hereof shall be read by substituting "1.00" for "1.25" wherever it appears therein unless: (1) the Plan provides a minimum benefit equal to that specified in subparagraph (a) above, with "four percent (4%)" being substituted for "three percent (3%)" wherever it appears therein; and 48 (2) the Plan is not Top-Heavy within the meaning of paragraph 20.1 with "ninety percent (90%)" being substituted for "sixty percent (60%)," wherever it appears therein. (c) For any Plan Year in which the Plan is a Top-Heavy Plan, paragraph 9.2(b) shall be read by substituting the following table for the table that otherwise appears in that paragraph: YEARS OF SERVICE VESTED PERCENTAGE ---------------- ----------------- Less than 2 0% 2 but less than 3 20% 3 but less than 4 40% 4 but less than 5 60% 5 but less than 6 80% 6 or more 100% 49 SECTION XXI - SUPPLEMENTAL PROVISIONS RELATING TO EMPLOYEES OF MINNESOTA TITLE FINANCIAL CORPORATION ----------------------------------------------------- 21.1 Applicability of this Section. ----------------------------- Notwithstanding any of the provisions of this Plan which may be in conflict with this Section XXI, the following provisions shall apply to all employees of Minnesota Title Financial Corporation and all wholly owned subsidiaries (hereinafter collectively referred to as "Minnesota Title"). 21.2 Eligibility and Credit for Service. ---------------------------------- Prior to January 1, 1980, Minnesota Title Financial Corporation maintained the Minnesota Title Financial Corporation Profit Sharing Plan (hereinafter referred to as the "Minnesota Title Plan"). All participants in the Minnesota Title Plan (hereinafter referred to as "Minnesota Title Plan Participants") shall become participants in this Plan as of January 1, 1980. All other employees of Minnesota Title shall become eligible to participate in this Plan when they meet the eligibility requirements set forth in Section III hereof. Credit for Years of Service shall be given for service with Minnesota Title before January 1, 1980 using the definition of Service set forth in this Plan, provided that no changes shall be made in the eligibility and vesting rules applicable to Minnesota Title Plan Participants and Minnesota Title employees that will affect their participation or vesting in the Minnesota Title Plan prior to January 1, 1980. 21.3 Treatment of Special Accounts. ----------------------------- Presently the types of accounts maintained for each employee in the Minnesota Title Plan include Segregated Accounts, Regular Accounts, and Special Accounts. Each Minnesota Title Plan Participant is being given the option of withdrawing the balance in his Special Account as of December 31, 1979. If the Minnesota Title Plan Participant does not withdraw the balance in his Special Account, it will be transferred to this Plan, invested in Fund A and credited to his Individual Contribution Account so that he will continue to have a fully vested interest in said balance. After January 1, 1980, the amount credited to the Individual Contribution Account may be withdrawn pursuant to the provisions of Section XVI hereof as if it were a voluntary employee contribution in excess of 5% (6% after December 31, 1989) of Compensation. Any future income earned on said Account shall be subject to withdrawal in accordance with Section XVI hereof. 21.4 Treatment of Regular Accounts. ----------------------------- The balance in each Minnesota Title Plan Participant's Regular Account shall be credited to the individual Employer Contribution account under this Plan and invested in Fund B hereof. A Minnesota Title Plan Participant shall be vested in his Employer Contribution Account in accordance with the vesting schedule set forth in paragraph 9.2 hereof which is at least equal to and in some cases more favorable than the vesting schedule set forth in the Minnesota Title Plan. There are separate regular accounts established for Minnesota Title Plan Participants who were 50 participants in the title Insurance Company of the South Employees Profit Sharing Agreement and Trust. The Minnesota Title Plan Participants who have such accounts shall continue to be vested in those accounts in the same percentage as they were on December 31, 1979. Vesting thereafter shall continue at the rate of 10% per Year of Service. 21.5 Segregated Accounts. ------------------- Balances in each Minnesota Title Plan Participant's Segregated Account shall continue to be administered and invested as set forth in Section 11.7 of the Minnesota Title Plan provided that no future elections can be made to transfer funds to a new Segregated Account and that no additional Employer contributions shall be allocated or transferred to any such existing Accounts after December 31, 1979. 51 SECTION XXII - MISCELLANEOUS ---------------------------- 22.1 Fiduciary Duties. ---------------- In discharging their respective duties, the Trustee and the Committee shall act solely in the interests of the Participants and Beneficiaries of the Plan with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. 22.2 Assignment of Accounts Prohibited. --------------------------------- No money or property in the hands of the Trustee and no benefits under this Plan or interest in the Trust shall be pledged, assigned, transferred, sold, or in any manner whatsoever anticipated, charged, or encumbered by a Participant or his Beneficiaries, or in any manner be liable in the possession of the trustee for the debts, contracts, obligations or engagements of any person having an interest in the trust Fund, voluntary or involuntary, or for any claims, legal or equitable, against any such person. 22.3 Evidence of Actions. ------------------- Any decision of an Employer required in carrying out this Plan shall be evidenced by a resolution of its Board of Directors certified over the signature of its Secretary or Assistant Secretary under the corporate seal. 22.4 Restrictions Remain. ------------------- If this Plan ceases to be a leveraged employee stock ownership plan, qualifying employer securities acquired with the proceeds of a loan made pursuant to paragraph 8.5 will continue after the loan is paid to be subject to the restrictions contained in the Treasury Regulations governing leveraged employee stock ownership plans concerning certain puts, calls and other options. 22.5 No Contract of Employment. ------------------------- Participation in this Plan shall not give any Participant the right to be retained in the service of an Employer, or any right or interest in this Plan other than as herein provided. 22.6 No Discrimination. ----------------- Where any action is to be taken by an Employer, the Committee or Trustee hereunder, it will be taken in a manner that will not discriminate in favor of stockholders, officers or highly-paid employees. 52 22.7 Controlling Law. --------------- To the extent not superseded by ERISA, this Plan shall be construed, enforced and administered according to the laws of the State of Illinois. 22.8 Named Fiduciaries. ----------------- The "Named Fiduciaries" of this Plan are (1) the Employers, (2) the Committee, (3) the Trustee and (4) any Investment Manager appointed under the Trust. The Named Fiduciaries shall have only those specific powers, duties, responsibilities, and obligations as are specifically given them under this Agreement. No Named Fiduciary guarantees the Trust Fund in any manner against investment loss or depreciation in asset value. The Company shall be the Plan Administrator as defined in Section 414(g) of the Code. 53 SECTION XXIII - DIRECTED INVESTMENT OF PARTICIPANTS' CONTRIBUTIONS ------------------------------------------------------------------ 23.1 Two Funds. --------- The Committee and the Trustee shall establish two funds, Fund A and Fund O as set forth in Paragraph 8.1 hereof. The Trustee's investment authority is more fully described in Sections Three and Four of the Trust. The income or loss of each Fund shall be credited to or charged against the accounts of Participants in the particular Fund. Each Participant shall elect on a form furnished by the Committee what percentage of his individual contribution made pursuant to Paragraph 4.1 hereof shall be invested in Funds A and O. 23.2 Change of Investment Election. ----------------------------- A Participant may elect to change his investment election between the two Funds for future allocations to his account subject to the following: (a) the election must be in whole percentages; (b) the election shall be effective only as of the first day of the Semi-annual Accounting Period following the Committee's receipt of a completed application; and (c) to be effective on the Semi-annual Accounting Period, the election must be made on a form provided by the Committee and be received by the Committee at least 20 days prior to such effective date. 23.3 Election to Transfer and Timing. ------------------------------- A Participant (but not a Former Participant) may, during the year, elect to have a percentage of his account in Fund A transferred to and invested in Fund O. An election under this Section shall be made by a Participant executing and delivering to the Committee written notice thereof on a form furnished by the Committee. An election can be made during the period January 1 through May 31 inclusive ("1st Election Period") or July 1 through November 30 inclusive ("2nd Election Period.") An election received by the Committee during the 1st Election Period shall be effective and transfer made as of the following July 1 based upon the Participant's adjusted account balance on January 1 of the 1st Election Period. An election received by the Committee during the 2nd Election Period shall be effective and transfer made as of the following January 1 based upon the Participant's adjusted account balance as of July 1 of the 2nd Election Period. Any election received by the Committee between June 1 and June 30 inclusive or between December 1 and December 31 inclusive shall be void and of no effect. 23.4 Amount Subject to Being Transferred. ----------------------------------- The election shall specify the amount to be transferred as a whole number multiple of $100 and may not exceed the Participant's adjusted account balance in Fund A on January 1 (for the 1st Election Period) or July 1 (for the 2nd Election Period.) For the purposes of this Section "adjusted account 54 balance in Fund A on January 1 . . . or July 1" shall mean the Participant's Individual Contribution Account balance in Fund A on January 1 or July 1 reduced by any withdrawals made during the Election Period and adjusted for transfers to Fund O made as of January 1 or July 1 of the Election Period as a result of a prior election. 23.5 Effecting the Election to Transfer. ---------------------------------- The Committee shall direct the Trustee to transfer on January 1 (for the 2nd Election Period) or July 1 (for the 1st Election Period) following the election, the amount from Fund A to Fund O as is required to comply with the elections timely filed with the Committee. The amount to be transferred will not be affected by earnings, losses, Company contributions or forfeitures allocated as of June 30 (for the 1st Election Period) or December 31 (for the 2nd Election Period) immediately following the election. The amount transferred to Fund O will be charged against the Participant's account balance in Fund A on January 1 or July 1 of the year following the election. 23.6 Election as to Future Contributions. ----------------------------------- An election filed with the Committee pursuant to paragraphs 23.3 through 23.5, hereof will not affect the future contributions of the Participant. Future contributions will be deposited and invested in accordance with the election under paragraph 23.1 hereof unless the Participant makes a change of election in accordance with Paragraph 23.2 hereof 23.7 Irrevocable. ----------- Once a transfer to Fund O is made, the election is irrevocable. Assets cannot be transferred from Fund O to Fund A. The Participant may revoke the election as to the deposit of future contributions at any time upon thirty days' written notice to the Committee. Upon receipt of such notice, the Committee shall direct the Trustee to take the appropriate action to effect the Participant's election. The Committee shall prepare the necessary forms and procedures to effect the foregoing provisions of this Section. 55 SECTION XXIV - DIRECTED INVESTMENT OF EMPLOYER CONTRIBUTIONS -- AGE 55 DIVERSIFICATION --------------------------------------- 24.1 Eligibility. ----------- When a Participant attains age 55 and has completed 10 Years of Participation in the Plan, he shall be eligible to direct the investment of a portion of Company Stock held in his accounts in accordance with the provisions of this Section, provided however if on the December 31 immediately preceding the Qualified Election Period (as defined in 24.2(b) below) the value of the Company Stock held in the Participant's accounts in excess of the value of the Company Stock held in the Participant's accounts on December 31, 1986, adjusted for changes in fair market value since said date, is less than $500 he shall not be eligible for a Qualified Election. 24.2 Definitions. ----------- (a) "Qualified Participant" shall mean a Participant who has attained age 55 and has completed 10 Years of Participation in the Plan. (b) "Qualified Election Period" shall mean the 5 Plan Year period beginning with the Plan Year after the Plan Year in which the Participant first becomes a Qualified Participant. (c) "Qualified Election" shall mean an election by a Qualified Participant to transfer part or all of his Qualified Portion to one or more of Funds E, F or G. (d) "Qualified Portion" shall mean for each of the first 4 Plan Years in the Election Period: (1) 25% of the total value of the Participant's Company Stock held in his accounts as of the December 31 immediately prior to the January 1 that begins the 90 day election period in excess of the total value of the Company Stock held in the Participant's accounts on January 1, 1986, adjusted for changes in fair market value since said date, reduced by (2) the value of Fund B previously transferred pursuant to a Qualified Election. For the last Plan Year in the Election Period "Qualified Portion" has the same meaning except that 25% is changed to 50% in clause (1) of this subparagraph. 24.3 Timing of the Election. ---------------------- To make a Qualified Election, a Qualified Participant must make an election on a form furnished by the Committee within the 90 day period after the close of one or more of the Plan Years within the Qualified Election Period. 56 24.4 Diversification. --------------- A Qualified Participant may direct the investment of the Qualified Portion among Accounts E, F, and G in such percentages as he elects. 24.5 Actual Transfer. --------------- The Committee shall direct the Trustee to make the transfers to Funds E, F, and G in accordance with the Qualified Elections timely received by it. Such transfers shall be effected no later than 90 days after the last day during which the Qualified Election can be made. IN WITNESS WHEREOF, the Employers have caused this plan to be signed by their duly qualified officers and caused their corporate seals to be hereunto affixed on this First day of December, 1994. OLD REPUBLIC INTERNATIONAL CORPORATION By:________/s/ A. C. Zucaro___________ President ATTEST: ______/s/ Spencer LeRoy, III______ Secretary 57 OLD REPUBLIC INTERNATIONAL CORPORATION EMPLOYEES SAVINGS AND STOCK OWNERSHIP PLAN SCHEDULE A LIST OF EMPLOYERS Bitco Corporation Brummel Bros., Inc. Old Republic Union Company Chicago Underwriting Group, Inc. Employers General Insurance Group, Inc. Great West Casualty Company Insured Credit Services, Inc., a Delaware corporation, and its subsidiaries International Business & Mercantile REassurance Company J. Huell Briscoe and Associates, Inc. Old Republic National Title, a Minnesota corporation, and all of its wholly owned subsidiaries as of January 1, 1980 Old Republic Asset Management Corporation Old Republic Dealers Service Corporation Old Republic General Services, Inc. Old Republic Home Protection Company Old Republic Insurance Company Old Republic Life Insurance Company Old Republic Life Insurance Company of New York Old Republic Minnehoma Insurance Company Old Republic RE, Inc. 58 Old Republic Risk Management, Inc. Old Republic Standard Underwriters Old Republic Surety Company ORDESCO, Inc. Phoenix Aviation Managers, Inc. RMIC Corporation Old Republic Western Title Company 59 SCHEDULE B Employer Matching Contribution For 1989 Percentage of Percentage increase in Average Operating Earnings Per Share for Recognized the Most Recent 5 Years ending with the Calculation Year over Compensation the Average of the 5 Years ending with the Plan Year prior to Contributed the Calculation Year Less 6 to 7 to 8 to 9 to 10 to 12 to More than 6% 6.99% 7.99% 8.99% 9.99% 11.99% 20% than 20% 1.00%* 50%** 65%** 75%** 80%** 90%** 95%** 100%** 125%** 1.01% to 2.00% 48% 63% 73% 78% 88% 93% 98% 123% 2.01% to 3.00% 46% 61% 71% 76% 86% 91% 96% 121% 3.01% to 4.00% 44% 59% 69% 74% 84% 89% 94% 119% 4.01% to 5.00% 42% 57% 67% 72% 82% 87% 92% 117% 5.01% to 6.00% 40% 55% 65% 70% 80% 85% 90% 115% 6.01% to 15.00% No additional matching contribution *For Plan Years prior to 1990, this 1% is contributed by the Employer pursuant to paragraph 5.1. **Employer Contributions as a percentage of Employee's contribution. 60 EX-10 3 MATERIAL CONTRACT (C) 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 January 1, 1978. 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 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. "OCEO" shall mean the Office of the Chief Executive Officer of the Company. The members of the OCEO are designated by the Board of Directors. -1- 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 under the Plan pursuant to Article Six of the Plan, (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- 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 (irrespective of the treatment of such amounts under GAAP) and extraordinary credits or charges. 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 (irrespective of the treatment of such amounts under GAAP) and extraordinary credits or charges. -3- 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 (irrespective of the treatment of such amounts under GAAP) and extraordinary credits or charges. 2.18 "Earnings Per Share" shall mean earnings per share calculated in accordance with AICPA Accounting Principles Board Opinion No. 15. 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; (b) 5% Excess Return on Equity; and (c) one and one-half percent (1-1/2%) of Eligible Employees Base Salaries. 2.21 "Earnings Per Share Multiplier" shall mean a percentage of the increase in the 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% = 10% 10.01 to 15.00% = 20% 15.01 to 20.00% = 30% Over 20% = 40% 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. -4- 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. 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 year. The Performance Recognition Pool for any year shall be equal to the lesser of: (a) the Profit Sharing Base for the Calculation Year; or (b) a percentage of the Eligible Employees Base Salaries, ranging from 25% to 45%, inclusive, determined on the basis of the following scale: Percent by Which Current Year's Return on Equity Exceeds ROE Target for the Year Salary Cap/Spread ------------------------------- ----------------- 0 - 10% 25.0% 25.0 - 27.50% 10 - 20 + 0.25 point for each 1% 27.50% - 30.50% 20 - 30 + 0.30 point for each 1% -5- 30.50% - 34.00% 30 - 40 + 0.35 point for each 1% 34% - 38% 4 0 - 50 + 0.40 point for each 1% 38% - 43% 50 - 60 + 0.50 point for each 1% 60% and Above: Uniform 60 - 70 45% Cap 70 - 100 100 - 130 130 - 160 160 - 190 Over 190% 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 OCEO shall, in consultation with the Committee, designate the Employees employed by the Employers during any part of such Year who will be eligible to share in the Performance Recognition Pool for that Year. 5.2 On or before June 30 the Performance Recognition Pool for that 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, as the OCEO and the Committee in their discretion and judgment deem appropriate, 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 -6- 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, out of the remaining portion of the Performance Recognition Pool there shall be allocated among and credited to the Accounts of Eligible Employees for the year (and who were during such year members of the OCEO) such amounts as the Committee in its sole judgment deems appropriate. (c) Thirdly, 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 (but who during such year were not members of the OCEO) as the OCEO in its discretion deems appropriate, provided, however, the OCEO may, in its discretion, reserve up to 50% of any one year's Pool which will not be allocated currently. The OCEO 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. Members of the OCEO shall participate in any future allocation of such carry forwards as may be approved by the Committee. 5.3 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 OCEO 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 OCEO's expectations as to the future contributions of individual Employees to the continued success of the Company and such other factors as the OCEO 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 -7- 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 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 OCEO 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 terminates his service for any reason other than his 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 because he did not make a withdrawal in a prior year plus (b) the following percentage of the balance of his 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% 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. -8- 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 20 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 his 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 his 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 vested Account balance shall be paid to him 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 attaining age 55 or (b) the 12th month after his termination of employment. 6.6 If an Employee becomes disabled while employed by an Employer but prior to receiving his Account, his Account balance shall be paid to him in 40 substantially equal quarterly installments beginning on the first day of the calendar quarter following the month during which he becomes disabled. For purposes of this Article, an Employee shall be deemed to be disabled if he is totally and permanently disabled within the meaning of his Employer's group employee disability policy or eligible for disability benefits under the Social Security Act. 6.7 If an Employee is eligible for no other benefits under this Plan, his Account balance shall become nonforfeitable and be paid to him in a lump sum on the first day of the calendar quarter following the date on which occurs any of the following events: (a) a dissolution or liquidation of the Company; (b) the merger or consolidation of the Company with another corporation in which the Company is not the surviving corporation; or (c) the change in any one year of more than 50% of the members of the Board of Directors of the Company if one or more of the new directors were not nominated by the Board of Directors of the Company. -9- If there is a carry forward balance not allocated pursuant to Section 5.2 (c) when an event described in (a), (b) or (c) above 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 an event described in paragraphs (b) or (c) of this Section 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 death. If an Employee dies while employed by an employer or after he has begun to receive his benefits under this Plan, his Account balance (or the remainder of his Account balance if his benefits had already commenced) shall be paid to the beneficiary or beneficiaries designated by the Employer (or, in the absence of such designation, to his 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 unqualified to handle his own affairs, the Committee may direct that any payments which would otherwise be payable to the Employee shall be paid (in the same 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 Account balance to him (or his beneficiary in the -10- case of death, or his guardian or to the person or institution caring for him in the event that he is adjudged incompetent or considered by the Committee to be unable to manage his 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 termination of employment with an Employer hereunder to hold himself available to the Company and his Employer for reasonable consultation inasfar as his health permits; (b) shall not for a period of three years after his termination of employment with an Employer hereunder, either as an individual on his 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 Employer within any area of the United States in which his Employer or the Company is then doing business, providing Employee has had access to any of the Company's or his 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 Employer's or the Company s customers with whom Employee has had contact as an Employee in the exercise of his duties and responsibilities hereunder with the intent or purpose to perform for such customer the same or -11- 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 employment. If the Committee determines that an Employee has refused to make himself available for consultation or violated his agreement, the Committee may, by written notice to such Employee, cause his 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 Account balance. If after the sending of such notice the Committee finds that the Employee has continued to refuse to consult or continue to compete with the Company or his 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 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 this two-year period. All Accounts shall be fully vested and distribution shall be made in accordance with Section 6.4 hereof. -12- 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. 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 is any conflict between such numbers and headings and the text hereof, the text shall control. -13- 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 14th day of March, 1996. OLD REPUBLIC INTERNATIONAL CORPORATION By________/s/ A.C. Zucaro____________ President Attest: _____/s/ Spencer LeRoy, III______ Secretary EX-11 4 EARNINGS PER SHARE COMPUTATION Exhibit (11)
OLD REPUBLIC INTERNATIONAL CORPORATION EARNINGS PER SHARE EXHIBIT (In Millions) - ------------------------------------------------------------------------------- Primary EPS Years Ended December 31, ------------------------ 1995 1994 1993 ---- ---- ---- Weighted average number of common shares actually outstanding. . . . . . . . . . . . . . 52.1 51.8 51.6 Weighted average number of incremental shares for common stock equivalents: Redeemable and/or convertible preferred stock. . 4.7 4.9 5.0 Stock Options. . . . . . . . . . . . . . . . . . .4 .3 .4 ------ ------ ------ Weighted average number of common shares and common stock equivalents outstanding - primary. . . . . 57.2 57.2 57.0 ====== ====== ====== Net income for the period. . . . . . . . . . . . $212.7 $151.0 $175.1 Less dividends applicable to appropriate series of redeemable and convertible preferred stock . 4.9 5.1 5.2 ------ ------ ------ Adjusted net income - primary. . . . . . . . . . $207.7 $145.9 $169.8 ====== ====== ====== Earnings per share - primary . . . . . . . . . . $ 3.63 $ 2.55 $ 2.98 ====== ====== ======
Fully Diluted EPS Years Ended December 31, ------------------------ 1995 1994 1993 ---- ---- ---- Weighted average number of common shares and common stock equivalents outstanding - primary 57.2 57.2 57.0 Weighted average number of incremental shares for common stock equivalents: Redeemable and/or convertible preferred stock/debentures . . . . . . . . . . . . . . . 4.4 4.4 4.4 Stock options . . . . . . . . . . . . . . . . . .3 - - ------ ------ ------ Weighted average number of common shares and common stock equivalents outstanding - fully diluted 62.0 61.6 61.5 ====== ====== ====== Adjusted net income - primary. . . . . . . . . . $207.7 $145.9 $169.8 Adjustment for dividends/interest applicable to appropriate series of redeemable and convertible preferred stock/debentures. . . . . . . . . . . 4.2 4.2 4.2 ------ ------ ------ Adjusted net income - fully diluted. . . . . . . $212.0 $150.1 $174.0 ====== ====== ====== Earnings per share - fully diluted . . . . . . . $ 3.42 $ 2.44 $ 2.83 ====== ====== ======
EX-21 5 SUBSIDIARIES OF REGISTRANT Exhibit (21) ------------
Subsidiaries of the registrant (As of December 31, 1995) - ---------------------------------------------------------------- Percentage of Voting Securities Owned by State of Immediate Name Organization Parent - ------------------------------------------------------- -------------- ------------ OLD REPUBLIC INTERNATIONAL CORPORATION Delaware --- - ------------------------------------------------------- Old Republic Capital Corporation Delaware 100% ----------------------------------------------------- Old Republic Nucorp, Inc. Delaware 100% ----------------------------------------------------- Old Republic Title Company of Sacramento California 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 93% Employers General Insurance Company Texas 100% Employers General Insurance, Ltd. Bermuda 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 Ins. Managers, Inc. Delaware 100% Old Republic Home Protection Company, Inc. California 100% Old Republic Insurance Company Pennsylvania 100% Old Republic Insured Credit Services, Inc. Illinois 100% Old Republic Lloyds of Texas Texas 100% Old Republic Northern Holdings, Inc. Delaware 93% Old Republic Mercantile Insurance Company Arizona 100% Old Republic Risk Management, Inc. Delaware 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 93% 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 90% Aerie REassurance Company, Ltd. Bermuda 100% Reliable Canadian Holdings, Ltd. Ontario(Canada) 100% RELCAN-DISCC, Ltd. Ontario(Canada) 100% DISCC, Enterprise, Inc. Ontario(Canada) 100% Old Republic Insurance Company of Canada Ontario(Canada) 100% Old Republic International Reinsurance Group, Inc. Delaware 100% American Business & Mercantile Insurance Group, Inc. Delaware 40% American Business & Mercantile REassurance Co. Delaware 100% American Treaty Management Corporation Delaware 100% International Business & Mercantile REassurance Co. Illinois 100% Old Republic RE, Inc. Delaware 100% Sierra Reinsurance Services, Inc. Delaware 100% 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% 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 100% Old Republic Title Company of Bell County Texas 100% Old Republic Title Company of Cleburne Texas 100% Old Republic Title Company of Conroe Texas 54% 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% Southwest Land Title Co. of Fort Worth, Inc. Texas 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 Title Company of Ventura County 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% Old Republic Life Insurance Group, Inc. Delaware 100% ----------------------------------------------------- Old Republic Dealer Service Corporation Delaware 100% ORDESCO Life & Accident Insurance Company Arizona 100% Old Republic Life Insurance Company Illinois 100% Old Republic Canadian Holdings, Ltd. Ontario(Canada) 100% Reliable Life Insurance Company Ontario(Canada) 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 Assurance Company Arizona 100% Inter Capital Leasing and Finance Corporation Delaware 100% Inter Capital Realty Corporation Delaware 100% Ridgefield International, Inc. Delaware 100% Inter West Assurance Company, Ltd. Bermuda 100% Remington General Assurance Limited Bermuda 100% * Owned by its policyholders
EX-23 6 CONSENT OF INDEPENDENT ACCOUNTANTS 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. 2-66302, 33-38528, 33-49646, 33-32439, 2-80883, 33-52069) and on Form S-3 (File Nos. 33-49864 and 33-54104) of our report dated March 13, 1996 on our audits of the consolidated financial statements of Old Republic International Corporation as of December 31, 1995 and 1994, and for the years ended December 31, 1995, 1994 and 1993, which report is included in this Annual Report on Form 10-K. Coopers & Lybrand L.L.P. Chicago, Illinois March 27, 1996 EX-24 7 POWERS OF ATTORNEY 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 14th day of March, 1996. /s/ William G. White, Jr. --------------------------- William G. White, Jr. WITNESS: /s/ Spencer LeRoy, III -------------------------- /s/ Paul D. Adams -------------------------- 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 14th day of March, 1996. /s/ Peter Lardner ------------------- Peter Lardner WITNESS: /s/ Spencer LeRoy, III -------------------------- /s/ Paul D. Adams -------------------------- 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 14th day of March, 1996. /s/ Anthony F. Colao ---------------------- Anthony F. Colao WITNESS: /s/ Spencer LeRoy, III -------------------------- /s/ Paul D. Adams -------------------------- 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 14th day of March, 1996. /s/ Kurt W. Kreyling ---------------------- Kurt W. Kreyling WITNESS: /s/ Spencer LeRoy, III -------------------------- /s/ Paul D. Adams -------------------------- 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 14th day of March, 1996. /s/ John C. Collopy --------------------- John C. Collopy WITNESS: /s/ Spencer LeRoy, III -------------------------- /s/ Paul D. Adams -------------------------- 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 14th day of March, 1996. /s/ David Sursa ----------------- David Sursa WITNESS: /s/ Spencer LeRoy, III -------------------------- /s/ Paul D. Adams -------------------------- 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 14th day of March, 1996. /s/ Jimmy A. Dew ------------------ Jimmy A. Dew WITNESS: /s/ Spencer LeRoy, III -------------------------- /s/ Paul D. Adams -------------------------- 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 14th day of March, 1996. /s/ John W. Popp ------------------ John W. Popp WITNESS: /s/ Spencer LeRoy, III -------------------------- /s/ Paul D. Adams -------------------------- 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 14th day of March, 1996. /s/ William A. Simpson ------------------------ William A. Simpson WITNESS: /s/ Spencer LeRoy, III -------------------------- /s/ Paul D. Adams -------------------------- 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 14th day of March, 1996. /s/ Arnold L. Steiner ----------------------- Arnold L. Steiner WITNESS: /s/ Spencer LeRoy, III -------------------------- /s/ Paul D. Adams -------------------------- 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 14th day of March, 1996. /s/ William R. Stover ----------------------- William R. Stover WITNESS: /s/ Spencer LeRoy, III -------------------------- /s/ Paul D. Adams -------------------------- EX-27 8 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM OLD REPUBLIC INTERNATIONAL'S CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 YEAR DEC-31-1995 DEC-31-1995 2,146 1,714 1,759 126 11 0 4,326 19 24 107 6,593 3,705 406 0 75 320 17 55 58 1,553 6,593 1,251 251 49 142 740 176 455 316 103 212 0 0 0 212 3.63 3.42 1,768 684 (92) 207 332 1,820 0
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