-----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, EBvYCevx8XExTZXYOezJu8c5n7+H/mmhm16gyE/JhGUrq99wzUVsfPBEgvbJSB34 z3j/FWmvbEf5bvHqPiR8Eg== 0000074260-99-000017.txt : 19990514 0000074260-99-000017.hdr.sgml : 19990514 ACCESSION NUMBER: 0000074260-99-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OLD REPUBLIC INTERNATIONAL CORP CENTRAL INDEX KEY: 0000074260 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 362678171 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10607 FILM NUMBER: 99619166 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-Q 1 OLD REPUBLIC INTERNATIONAL FORM 10Q SECURITIES AND EXCHANGE COMMISSION OF THE SECURITIES EXCHANGE ACT OF 1934 FORM 10 - Q [X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 1999 or [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 0-4625 OLD REPUBLIC INTERNATIONAL CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware No. 36-2678171 - ------------------------------- ---------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 307 North Michigan Avenue, Chicago, Illinois 60601 - -------------------------------------------------------------------------------- (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: 312-346-8100 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes _X_ No ___ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report. Shares Outstanding Class March 31, 1999 --------------------------- -------------------------- Common Stock / $1 par value 131,821,767 There are 14 pages contained in this report. 2 OLD REPUBLIC INTERNATIONAL CORPORATION Report on Form 10-Q / March 31, 1999 INDEX - -------------------------------------------------------------------------------- PAGE NO. -------- PART I FINANCIAL INFORMATION: CONSOLIDATED SUMMARY BALANCE SHEETS 3 CONSOLIDATED SUMMARY STATEMENTS OF INCOME 4 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 5 CONSOLIDATED STATEMENTS OF CASH FLOWS 6 NOTES TO CONSOLIDATED SUMMARY FINANCIAL STATEMENTS 7 - 9 MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS 10 - 12 PART II OTHER INFORMATION 13 & 14 3 OLD REPUBLIC INTERNATIONAL CORPORATION CONSOLIDATED SUMMARY BALANCE SHEETS (Unaudited) ($ in Millions) - ---------------------------------------------------------------------------------------------------------------------------------- March 31, December 31, 1999 1998 ------------- ------------- Assets Investments: Held to maturity: Fixed maturity securities (at amortized cost) (fair value: $2,392.2 and $2,422.2) $2,323.0 $2,332.3 Other long-term investments (at cost) 33.6 25.1 ------------- ------------- Total 2,356.6 2,357.5 ------------- ------------- Available for sale: Fixed maturity securities (at fair value) (cost: $1,905.5 and $1,877.8) 1,951.3 1,954.4 Equity securities (at fair value) (cost: $117.8 and $117.0) 144.9 164.8 Short-term investments (at fair value which approximates cost) 279.2 377.6 ------------- ------------- Total 2,375.6 2,497.0 ------------- ------------- Total investments 4,732.3 4,854.5 ------------- ------------- Other Assets: Cash 26.7 22.9 Accrued investment income 69.3 71.1 Accounts and notes receivable 313.2 290.0 Reinsurance balances and funds held 81.8 86.3 Reinsurance recoverable: Paid losses 23.3 31.2 Policy and claim reserves 1,281.9 1,292.9 Deferred policy acquisition costs 146.4 143.9 Sundry assets 225.7 226.4 ------------- ------------- 2,168.6 2,165.2 ------------- ------------- Total Assets $6,901.0 $7,019.7 ============= ============= - ---------------------------------------------------------------------------------------------------------------------------------- Liabilities, Preferred Stock and Common Shareholders' Equity Liabilities: Future policy benefits $123.7 $187.6 Losses, claims and settlement expenses 3,378.2 3,406.5 Unearned premiums 352.5 360.1 Other policyholders' benefits and funds 50.8 52.5 ------------- ------------- Total policy liabilities and accruals 3,905.4 4,006.9 Commissions, expenses, fees and taxes 129.7 138.8 Reinsurance balances and funds 133.4 130.5 Federal income tax payable: Current 8.8 6.9 Deferred 179.9 179.8 Debt and debt equivalents 144.4 145.1 Sundry liabilities 97.6 105.9 ------------- ------------- Total liabilities 4,599.5 4,714.2 ------------- ------------- Preferred Stock: Convertible preferred stock 0.9 1.2 ------------- ------------- Common Common stock 156.4 156.3 Shareholders' Additional paid-in capital 625.7 624.5 Equity: Unallocated shares - ESSOP (5.1) (5.1) Retained earnings 1,770.5 1,709.9 Accumulated other comprehensive income 38.3 70.2 Treasury stock (at cost) (285.5) (251.6) ------------- ------------- Total Common Shareholders' Equity 2,300.4 2,304.2 ------------- ------------- Total Liabilities, Preferred Stock and Common Shareholders' Equity $6,901.0 $7,019.7 ============= =============
See accompanying notes. 4 OLD REPUBLIC INTERNATIONAL CORPORATION CONSOLIDATED SUMMARY STATEMENTS OF INCOME (Unaudited) ($ in Millions, Except Common Share Data) - ---------------------------------------------------------------------------------------------------------------------------------- Quarters Ended March 31, ------------------------------- 1999 1998 ------------- ------------- Revenues: Net premiums earned $396.1 $359.6 Title, escrow and other fees 57.3 49.8 Net investment income 65.4 68.5 Realized investment gains 14.7 20.0 Other income 7.6 8.4 ------------- ------------- Net revenues 541.2 506.5 ------------- ------------- Expenses: Benefits, claims and settlement expenses 200.9 185.7 Underwriting, acquisition and insurance expenses 231.5 198.2 Interest and other expenses 3.3 3.5 ------------- ------------- Total expenses 435.8 387.5 ------------- ------------- Income before income taxes and items below 105.4 118.9 ------------- ------------- Income Taxes: Currently payable 14.0 23.6 Deferred 18.5 14.3 ------------- ------------- Total income taxes 32.6 37.9 ------------- ------------- 72.7 81.0 Other items - net 1.0 0.5 ------------- ------------- Net Income: $73.8 $81.5 ============= ============= Net Income Per Share: Basic $0.56 $0.58 ============= ============= Diluted $0.55 $0.58 ============= ============= Dividends Per Common Share: Cash dividends $0.100 $0.087 ============= ============= Stock dividends --% 50% ============= ============= Average number of common and common equivalent shares outstanding: Basic 132,581,583 138,541,904 ============= ============= Diluted 133,786,003 140,824,777 ============= =============
See accompanying notes. 5 OLD REPUBLIC INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) ($ in Millions) - ---------------------------------------------------------------------------------------------------------------------------------- Quarters Ended March 31, ------------------------------- 1999 1998 ------------- ------------- Net income as reported $73.8 $81.5 ------------- ------------- Other comprehensive income: Foreign currency translation adjustment 0.3 0.3 ------------- ------------- Unrealized gains (losses) on securities: Unrealized gains (losses) arising during period (35.0) 13.3 Less: elimination of pre-tax realized gains included in income as reported 14.7 20.0 ------------- ------------- Pre-tax unrealized losses on securities (49.7) (6.6) Deferred income tax credits (17.4) (2.3) ------------- ------------- Net unrealized losses on securities (32.3) (4.3) ------------- ------------- Net deletions (31.9) (4.0) ------------- ------------- Comprehensive income $41.8 $77.5 ============= =============
See accompanying notes. 6 OLD REPUBLIC INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) ($ in Millions) - ---------------------------------------------------------------------------------------------------------------------------------- Quarters Ended March 31, ------------------------------- 1999 1998 ------------- ------------- Cash flows from operating activities: Net income $73.8 $81.5 Adjustment to reconcile net income to net cash provided by operating activities: Deferred policy acquisition costs (1.9) 0.1 Premiums and other receivables (9.7) 14.9 Unpaid claims and related items (14.9) (9.6) Future policy benefits and policyholders' funds (10.1) (12.5) Income taxes 19.8 26.2 Reinsurance balances and funds 14.9 (0.3) Accounts payable, accrued expenses and other (15.4) (12.1) ------------- ------------- Total 56.2 88.1 ------------- ------------- Cash flows from investing activities: Sales of fixed maturity securities: Held to maturity: Maturities and early calls 31.4 34.3 Available for sale: Maturities and early calls 24.5 33.2 Other 36.9 50.8 Sales of equity securities 11.2 7.0 Sales of other investments 0.2 1.3 Sales of fixed assets for company use 0.2 0.1 Purchases of fixed maturity securities: Held to maturity (49.0) (88.9) Available for sale (121.4) (103.9) Purchases of equity securities (12.0) (35.4) Purchases of other investments (8.6) (10.6) Purchases of fixed assets for company use (4.1) (8.0) Purchases of investment in subsidiaries --- (1.9) Proceeds from sale of subsidiary 25.3 --- Cash and short-term investments of subsidiary sold (31.4) --- Other-net (8.9) 0.2 ------------- ------------- Total (105.6) (121.8) ------------- ------------- Cash flows from financing activities: Increase in term loans 10.0 4.0 Issuance of preferred and common stocks 1.1 10.5 Issuance of debentures and notes --- 1.1 Repayments of term loans (10.0) --- Redemption of debentures and notes (0.6) (0.6) Dividends on common shares (13.1) (12.0) Dividends on preferred shares --- --- Purchase of treasury stock (33.8) (15.6) Other-net 1.4 0.7 ------------- ------------- Total (45.1) (11.8) ------------- ------------- Increase (decrease) in cash and short-term investments (94.5) (45.5) Cash and short-term investments, beginning of period 400.5 355.0 ------------- ------------- Cash and short-term investments, end of period $306.0 $309.4 ============= ============= Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $0.3 $0.5 ============= ============= Income taxes $11.9 $13.1 ============= =============
See accompanying notes. 7 OLD REPUBLIC INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED SUMMARY FINANCIAL STATEMENTS (Unaudited) ($ in Millions, Except Share Data) - -------------------------------------------------------------------------------- 1. Accounting Policies and Basis of Presentation: --------------------------------------------- The accompanying consolidated summary financial statements have been prepared in conformity with generally accepted accounting principles as described in the Corporation's latest annual report to shareholders or as disclosed herein. The financial accounting and reporting process relies on estimates and on the exercise of judgement, but in the opinion of management all adjustments, consisting of normal recurring accruals, necessary to a fair presentation of the accompanying statements have been reflected therein. Realized gains or losses on dispositions of investment securities have been reflected in the operating results for each period presented. 2. Common Share Data: ----------------- Common share data has been retroactively adjusted to reflect all stock dividends and splits. The following table provides a reconciliation of the income before extraordinary items and number of shares used in basic and diluted earnings per share calculations. Quarters Ended March 31, ------------------------------- 1999 1998 ------------- ------------- Numerator: Income before extraordinary item......................................... $ 73.8 $ 81.5 Less Preferred stock dividends........................................... -- -- ------------- ------------- Numerator for basic earnings per share - income available to common stockholders............................... 73.7 81.5 Effect of dilutive securities: Convertible preferred stock dividends.................................... -- -- ------------- ------------- Numerator for diluted earnings per share - income available to common stockholders after assumed conversions................................................ $ 73.8 $ 81.5 ============= ============= Denominator: Denominator for basic earnings per share - weighted-average shares............................................... 132,581,583 138,541,904 Effect of dilutive securities: Stock options............................................................ 1,000,773 2,044,854 Convertible preferred stock.............................................. 203,647 238,019 ------------- ------------- Dilutive potential common shares......................................... 1,204,420 2,282,873 ------------- ------------- Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions...................................................... 133,786,003 140,824,777 ============= ============= Basic earnings per share.................................................... $ .56 $ .58 ============= ============= Diluted earnings per share.................................................. $ .55 $ .58 ============= =============
3. Unrealized Appreciation of Investments: -------------------------------------- Cumulative net unrealized gains on fixed maturity securities available for sale and equity securities credited to a separate account in common shareholders' equity amounted to $47.9 at March 31, 1999. Unrealized appreciation of investments, before applicable income taxes of $26.2, at March 31, 1999 included gross unrealized gains and (losses) of $89.3 and $(15.1), respectively. For the quarters ended March 31, 1999 and 1998, net unrealized depreciation of investments, net of deferred income taxes, amounted to $32.3 and $4.3, respectively. 8 4. Information About Segments of Business: -------------------------------------- The Corporation's business segments are organized as the General Insurance (property and liability insurance), Mortgage Guaranty, Title Insurance and Life Insurance Groups. The contributions of Old Republic's insurance industry segments to consolidated revenues and operating results, and certain balance sheet data pertaining thereto are shown in the following tables on the basis of generally accepted accounting principles ("GAAP"). Each of the Corporation's segments underwrites and services only those insurance coverages which may be written by it pursuant to state insurance regulations and corporate charter provisions. Segment Reporting - ------------------------------------------------------------------------------------------------------------------- Quarters Ended March 31, ------------------------------- 1999 1998 ------------- -------------- General Insurance Group: Net premiums earned...................................................... $ 214.0 $ 208.9 Net investment income and other income(a)................................ 50.1 53.0 ------------- -------------- Total................................................................. $ 264.1 $ 262.0 ============= ============== Income before taxes...................................................... $ 35.3 $ 51.8 ============= ============== Income tax expense....................................................... $ 8.7 $ 15.1 ============= ============== Mortgage Guaranty Group: Net premiums earned...................................................... $ 75.7 $ 71.3 Net investment income and other income(a)................................ 14.1 13.7 ------------- -------------- Total................................................................. $ 89.9 $ 85.1 ============= ============== Income before taxes...................................................... $ 39.7 $ 33.9 ============= ============== Income tax expense....................................................... $ 13.1 $ 11.3 ============= ============== Title Insurance Group: Net premiums earned...................................................... $ 89.1 $ 64.0 Title, escrow and other fees ........................................... 57.3 49.8 ------------- -------------- Sub-total............................................................. 146.4 113.8 Net investment income and other income(a)................................ 5.4 4.9 ------------- -------------- Total................................................................. $ 151.9 $ 118.7 ============= ============== Income before taxes...................................................... $ 16.8 $ 12.5 ============= ============== Income tax expense....................................................... $ 5.7 $ 4.2 ============= ============== Life Insurance Group (c): Net premiums earned...................................................... $ 17.2 $ 15.2 Net investment income and other income(a)................................ 2.1 3.3 ------------- -------------- Total................................................................. $ 19.4 $ 18.6 ============= ============== Income before taxes...................................................... $ .4 $ 1.5 ============= ============== Income tax expense....................................................... $ .1 $ .5 ============= ==============
9 Reconciliations of Segments to Consolidated - ---------------------------------------------------------------------------------------------------------------------------- Quarters Ended March 31, ------------------------------- 1999 1998 ------------- -------------- Revenues: Total revenues for reportable segments................................... $ 525.4 $ 484.6 Net realized investment gains............................................ 14.7 20.0 Other revenues........................................................... 2.3 3.1 Elimination of intersegment revenues(b).................................. (1.2) (1.2) ------------- -------------- Total consolidated revenues........................................... $ 541.2 $ 506.5 ============= ============== Income before taxes: Total income before taxes of reportable segments......................... $ 92.4 $ 99.8 Net realized investment gains............................................ 14.7 20.0 Other sources - net...................................................... (1.6) (.6) Elimination of intersegment profits(b)................................... (.1) (.2) ------------- -------------- Income before income taxes and extraordinary items................................................... $ 105.4 $ 118.9 ============= ==============
- --------- In the above tables, net premiums earned on a GAAP basis differ slightly from statutory amounts due to certain differences in calculations of unearned premium reserves under each accounting method. (a) Including unallocated investment income derived from invested capital and surplus funds./(b) Represents results of holding company parent, consolidation eliminating adjustments, and general corporate expenses, as applicable./(c)In the first quarter of 1999, the Company sold its small annuity book of business; this had no material effect on Old Republic's consolidated results or financial position. 10 OLD REPUBLIC INTERNATIONAL CORPORATION MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS Quarters Ended March 31, 1999 and 1998 - -------------------------------------------------------------------------------- OVERVIEW This analysis pertains to the consolidated accounts of Old Republic International Corporation. The Company conducts its business through four major segments, namely its General (property and liability coverages), Mortgage Guaranty, Title, and Life insurance groups. FINANCIAL POSITION Old Republic's financial position at March 31, 1999 reflected decreases in assets, liabilities and common shareholders' equity of 1.7%, 2.4% and .2%, respectively, when compared to the immediately preceding year-end. Cash and invested assets represented 70.0% and 70.5% of consolidated assets as of March 31, 1999 and December 31, 1998 respectively. Consolidated operating cash flow was positive at $56.2 million in the latest quarter, compared to $88.1 million in the same period of 1998, but the invested asset base declined principally as a result of the Company's stock buy-back program and the sale of a largely inactive life insurance subsidiary in early 1999. Relatively high short-term maturity investment positions continued to be maintained as of March 31, 1999 to provide necessary liquidity for specific operating needs and to enhance flexibility in investment strategy. Changes in short-term investments reflect a large variety of seasonal and intermediate-term factors including seasonal operating cash needs, investment strategy, and expectations as to trends in investment yields. Accordingly, the future level of short-term investments will vary and respond to the dynamics of these factors and may, as a result, increase or decrease from current levels. During the first quarter of 1999, the Corporation committed substantially all investable funds in short to intermediate-term fixed maturity securities with an emphasis on tax-exempt bonds. Old Republic continues to adhere to its long-term policy of investing primarily in investment grade, marketable securities; the Corporation has not directed its investable funds to so-called "junk bonds" or derivative types of securities. During the first quarter of 1999, Old Republic's investment in equity securities decreased by 12.0% vis-a-vis the related invested balance at year-end 1998 due to securities sales and unrealized losses during the period. As of March 31, 1999, the carrying value of fixed maturity securities in default as to principal or interest was immaterial in relation to consolidated assets or shareholders' equity. The parent holding company has met its liquidity and capital needs principally through dividends paid by its subsidiaries. The insurance subsidiaries' ability to pay cash dividends to the parent company is generally restricted by law or subject to approval of the insurance regulatory authorities of the states in which they are domiciled. Additionally, the terms of guarantees by the Company of bank loans to the trustee of the Company's Employees Savings and Stock Ownership Plan restrict the amount of debt the Company may incur; this covenant is being met. Old Republic's capitalization of $2.44 billion at March 31, 1999 consisted of debt and debt equivalents of $144.4 million, convertible preferred stock of $.9 million, and common shareholders' equity of $2.30 billion. The decrease in the common shareholders' equity account during the quarter ended March 31, 1999 reflects primarily the retention of earnings in excess of dividend requirements, a moderate decrease during the latest quarter in the value of bonds and stocks carried at market values and the reacquisition of $33.8 million of common shares pursuant to a previously announced stock buy-back program. RESULTS OF OPERATIONS Revenues: Consolidated net premiums and fees earned in the first quarter of 1999 amounted to $453.4 million and were 10.7% above the amount reported for the first quarter of 1998. For the first three months of 1999, the Company's General Insurance Group posted relatively flat earned premium volume of $214.0 million as a result of a continuing soft pricing environment. Premiums for the Mortgage Guaranty Group increased by 6.1% to $75.7 million from $71.3 million in the year-ago quarter. Title Group premium and fee revenues increased 28.6% to $146.4 million in the first quarter of 1999 when compared to the same quarter of 1998. The Mortgage Guaranty Group and the Title Group benefitted from the positive effects of favorable mortgage rates, greater housing price appreciation and strong mortgage finance activity. The Life and Health Group's premium volume increased to $17.2 million, a 13.0% increase when compared to the same quarter of 1998, as a result of greater term life and credit insurance sales. 11 Consolidated net investment income was $65.4 million in the first quarter of 1999 compared to $68.5 million in the same quarter of 1998. This revenue source reflects an invested asset base that is down slightly from a year ago and a greater commitment to tax-exempt fixed maturity securities. The average annualized yield on investments was approximately 5.5% and 5.8% at the end of March 31, 1999 and 1998, respectively. This yield pattern reflects at once the relatively short maturity of Old Republic's fixed maturity securities portfolio, changes in interest rates at various times and the commitment of a larger percentage of investable funds to tax-exempt fixed maturity securities that typically bear lower current yields. The Company's investment policies have not been designed to maximize realized investment gains. Realized gains of $14.7 million in the first quarter of 1999 were mostly due to the sale of equity securities. Dispositions of securities are primarily the result of scheduled maturities of bonds and notes and sales of equity securities. For the first quarter of 1999, 60.3% of total dispositions represented maturities and early calls of existing holdings; for the year 1998 these transactions amounted to 58.3% of the total dispositions. Expenses: Consolidated benefit, claim and settlement costs, as a percentage of net premiums and fees earned, were approximately 44% and 45% in the first quarters of 1999 and 1998, respectively. Consolidated claims experience for property and liability coverages were affected favorably by reduced costs emanating from involuntary workers' compensation pools, but much greater loss costs in transportation insurance lines in particular seriously impacted underwriting performance. Mortgage Guaranty claim costs were lower during the first quarter of 1999 compared to the same period in 1998 mostly due to the stable economic and employment conditions which usually lead to reduced mortgage defaults. Title claims costs were slightly higher in 1999, while Life Group claim costs were higher in the latest quarter due to greater severity of travel accident claims. The ratio of consolidated underwriting, acquisition and insurance expenses to net premiums and fees earned was approximately 51% and 48% in the first quarters of 1999 and 1998, respectively. Variations in these ratios reflect a continually changing mix of coverages sold and attendant costs of producing business. The property and liability segment's expense ratio increased slightly due to a greater increase in operating expenses than premium revenues. The mortgage guaranty segment's expense ratio moved up due to higher costs associated with continued enhancement of information systems and greater contract underwriting services.The title insurance expense ratio was lower in the first quarter of 1999 compared to the same period in 1998 due in part to an increase in premium and fees volume without a proportional increase in expenses. Consolidated interest and other charges were approximately the same for both periods. Pre-Tax and Net Income: Consolidated income before taxes decreased by 8.4% in the first quarter of 1999 when compared to the same period one year ago. The Corporation's Mortgage Guaranty and Title insurance segments reflected higher pre-tax operating earnings; General and Life Insurance operations posted decreases in pre-tax operating earnings in this year's first quarter; and realized gains on sales of securities were lower in the most recent quarterly period. The effective consolidated income tax rate was 31.0% and 31.9% in the first quarters of 1999 and 1998, respectively. The rates for each period reflect primarily the varying proportions of pre-tax operating income derived from tax-sheltered investment income (principally tax-exempt interest) on the one hand, and fully taxable investment and underwriting/service income on the other hand. Year 2000 Issues: The Company and its subsidiaries have been aware for several years of the issues associated with programming codes in existing computer systems as the Year 2000 approaches. Most Old Republic subsidiaries are operated with reasonable autonomy, and, accordingly, Year 2000 issues are independently managed at each of the operating entities. Simply stated, Year 2000 issues stem from computer programs that were written in earlier years with only two digits to specify a year, as opposed to four digits; such programs may therefore be unable to interpret dates beyond 1999, which could cause a system failure or other computer errors that could lead to a disruption of operations. Year 2000 issues could adversely affect the Old Republic subsidiaries' computer systems, and such other systems as communications, facilities management, service-related equipment and systems of customers, vendors and other important third party service providers. Possible adverse consequences include, but are not limited to, the inability to transact business, inability to execute transactions through financial institutions and the occurrence of Year 2000-related losses under certain insurance contracts. Accordingly, the Company could suffer material adverse financial effects if failure by major subsidiaries, significant vendors, important third parties or various governmental bodies to properly correct Year 2000 issues were to occur. The possible financial impact of all such effects cannot currently be estimated since the Company and its subsidiaries do not operate in a vacuum and cannot control the situations or actions of the various outside entities with which they deal. 12 Old Republic's subsidiaries have substantialy completed, the identification and implementation of changes, and the testing of systems affected by Year 2000 issues. Confirmations of Year 2000 compliance from principal customers, vendors and other important third party relationships are in process of being circulated. While this process is not completed, the Company is not currently aware of any principal customer, vendor, or other important third party whose Year 2000 projects will not be completed in a timely manner. The costs of identifying, implementing and testing the required changes has not been material to operating results. A significant portion of these costs were not incremental as the Company and its subsidiaries have mostly utilized existing resources. The Company's subsidiaries have commenced consideration of contingency plans in the event remediation efforts of Year 2000 issues are unsuccessful. Such plans should be more fully developed in 1999, to the extent deemed applicable and practicable. OTHER INFORMATION Reference is here made to "Financial Information Relating to Segments of Business" appearing elsewhere herein. Historical data pertaining to the operating performance, liquidity, and other financial matters applicable to an insurance enterprise such as Old Republic are not necessarily indicative of results to be achieved in succeeding years. In addition to the factors cited below, the long-term nature of the insurance business, seasonal and annual patterns in premium production and incidence of claims, changes in yields obtained on invested assets, changes in government policies and free markets affecting inflation rates and general economic conditions, and changes in legal precedents or the application of law affecting the settlement of disputed claims can have a bearing on period-to-period comparisons and future operating results. Any forward-looking commentary or inferences contained in this report involve, of necessity, assumptions, uncertainties, and risks that may affect the Company's future performance. With regard to Old Republic's General insurance segment, its results can be affected in particular by the level of market competition which is typically a function of available capital and expected returns on such capital among competitors, the levels of interest and inflation rates, as well as periodic changes in claim frequency and severity patterns caused by natural disasters, weather conditions, accidents, illnesses and work-related injuries. Mortgage Guaranty and Title insurance results can be affected by such factors as changes in national and regional housing demand and values, the availability and cost of mortgage loans, employment trends, and default rates on mortgage loans; mortgage guaranty results may also be affected by various risk-sharing arrangements with business producers as well as the risk management and pricing policies of government sponsored enterprises. Life and disability insurance results can be impacted by the levels of employment and consumer spending, as well as mortality and health trends. At the holding company level, results are affected mostly by the amount of debt outstanding and its cost. Any forward-looking commentaries speak only as of their dates. Old Republic undertakes no obligation to publicly update or revise such comments, whether as a result of new information, future events or otherwise, and accordingly they may not be unduly relied upon. 13 OLD REPUBLIC INTERNATIONAL CORPORATION FORM 10 - Q PART II - OTHER INFORMATION - -------------------------------------------------------------------------------- Item 6 - Reports on Form 8-K - ---------------------------- (a) Reports on Form 8-K 1. The registrant has not filed any reports on Form 8-K during the quarter for which this report is filed. Items other than those listed are omitted because they are not required. 14 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Old Republic International Corporation -------------------------------------- (Registrant) Date: May 13, 1999 ------------------ /s/ Paul D. Adams -------------------------------------- P. D. Adams Senior Vice President & Chief Financial Officer EX-27 2 FDS
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 statement. 1,000,000 3-MOS DEC-31-1999 MAR-31-1999 1,951 2,323 2,392 144 7 0 4,732 26 23 146 6,901 3,501 352 0 50 144 0 0 156 2,144 6,901 396 65 14 7 200 54 180 105 32 73 0 0 0 73 .56 .55 0 0 0 0 0 0 0
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