10-Q 1 0001.txt OLD REPUBLIC INTERNATIONAL CORP. FORM 10-Q FILING 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 September 30, 2000 or [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 0-4625 OLD REPUBLIC INTERNATIONAL CORPORATION ------------------------------------------------------------------------------- (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 September 30, 2000 --------------------------- ---------------------- Common Stock / $1 par value 117,794,350 There are 14 pages contained in this report. 2 OLD REPUBLIC INTERNATIONAL CORPORATION Report on Form 10-Q / September 30, 2000 INDEX -------------------------------------------------------------------------------- PAGE NO. -------- PART I FINANCIAL INFORMATION: CONSOLIDATED SUMMARY BALANCE SHEETS 3 CONSOLIDATED SUMMARY STATEMENTS OF INCOME 4 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 5 CONSOLIDATED STATEMENTS OF CASH FLOWS 6 NOTES TO CONSOLIDATED SUMMARY FINANCIAL STATEMENTS 7 - 9 MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS 10 - 12 PART II OTHER INFORMATION 13 & 14 3 OLD REPUBLIC INTERNATIONAL CORPORATION CONSOLIDATED SUMMARY BALANCE SHEETS (Unaudited) ($ in Millions) ----------------------------------------------------------------------------------------------------------------------------------- September 30, December 31, 2000 1999 ---------------- ---------------- Assets Investments: Held to maturity: Fixed maturity securities (at amortized cost) (fair value: $2,062.5 and $2,229.7) $2,062.9 $2,248.8 Other long-term investments (at cost) 54.4 41.7 ---------------- ---------------- Total 2,117.4 2,290.5 ---------------- ---------------- Available for sale: Fixed maturity securities (at fair value) (cost: $2,207.7 and $2,045.5) 2,194.3 2,012.3 Equity securities (at fair value) (cost: $224.1 and $141.9) 268.6 160.1 Short-term investments (at fair value which approximates cost) 292.7 276.5 ---------------- ---------------- Total 2,755.7 2,449.0 ---------------- ---------------- Total investments 4,873.2 4,739.6 ---------------- ---------------- Other Assets: Cash 27.5 17.5 Accrued investment income 70.1 71.3 Accounts and notes receivable 299.8 281.0 Federal income tax recoverable: Current --- 1.4 Reinsurance balances and funds held 65.2 74.8 Reinsurance recoverable: Paid losses 37.3 24.6 Policy and claim reserves 1,340.2 1,350.2 Deferred policy acquisition costs 149.4 151.1 Sundry assets 230.0 226.4 ---------------- ---------------- 2,219.8 2,198.8 ---------------- ---------------- Total Assets $7,093.1 $6,938.4 ================ ================ ----------------------------------------------------------------------------------------------------------------------------------- Liabilities, Preferred Stock and Common Shareholders' Equity Liabilities: Future policy benefits $114.6 $127.2 Losses, claims and settlement expenses 3,385.2 3,433.7 Unearned premiums 391.8 364.7 Other policyholders' benefits and funds 46.3 52.0 ---------------- ---------------- Total policy liabilities and accruals 3,938.1 3,977.8 Commissions, expenses, fees and taxes 140.6 147.3 Reinsurance balances and funds 116.0 120.0 Federal income tax payable: Current 10.2 --- Deferred 260.6 203.0 Debt 225.4 208.3 Sundry liabilities 72.2 82.6 ---------------- ---------------- Total liabilities 4,763.3 4,739.2 ---------------- ---------------- Preferred Stock: Convertible preferred stock 0.7 0.7 ---------------- ---------------- Common Common stock 120.9 156.6 Shareholders' Additional paid-in capital 200.0 627.8 Equity: Unallocated shares - ESSOP --- (2.5) Retained earnings 2,030.2 1,873.9 Accumulated other comprehensive income (loss) 10.3 (17.6) Treasury stock (at cost) (32.6) (439.8) ---------------- ---------------- Total Common Shareholders' Equity 2,329.0 2,198.4 ---------------- ---------------- Total Liabilities, Preferred Stock and Common Shareholders' Equity $7,093.1 $6,938.4 ================ ================
See accompanying notes. 4 OLD REPUBLIC INTERNATIONAL CORPORATION CONSOLIDATED SUMMARY STATEMENTS OF INCOME (Unaudited) ($ in Millions, Except Common Share Data) ----------------------------------------------------------------------------------------------------------------------------------- Quarters Ended Nine Months Ended September 30, September 30, ---------------------------------- ---------------------------------- 2000 1999 2000 1999 ---------------- ---------------- ---------------- ---------------- Revenues: Net premiums earned $386.1 $389.7 $1,144.6 $1,173.2 Title, escrow and other fees 49.9 52.0 139.1 169.4 ---------------- ---------------- ---------------- ---------------- Sub-total 436.0 441.8 1,283.7 1,342.6 Net investment income 68.0 66.0 203.0 196.8 Realized investment gains 7.1 4.4 8.0 26.0 Other income 6.4 6.2 18.2 21.7 ---------------- ---------------- ---------------- ---------------- Net revenues 517.8 518.5 1,513.2 1,587.2 ---------------- ---------------- ---------------- ---------------- Expenses: Benefits, claims and settlement expenses 180.8 220.0 565.9 614.1 Underwriting, acquisition and insurance expenses 216.0 241.2 640.3 713.2 Interest and other expenses 5.2 3.4 15.5 10.4 ---------------- ---------------- ---------------- ---------------- Total expenses 402.1 464.6 1,221.8 1,337.7 ---------------- ---------------- ---------------- ---------------- Income before income taxes and items below 115.6 53.9 291.3 249.5 ---------------- ---------------- ---------------- --------------- Income Taxes: Currently payable 24.6 1.6 47.4 18.8 Deferred 11.5 12.3 40.8 54.8 ---------------- ---------------- ---------------- ---------------- Total income taxes 36.1 13.9 88.2 73.6 ---------------- ---------------- ---------------- ---------------- 79.4 39.9 203.0 175.8 Other items - net 0.6 --- 1.8 1.8 ---------------- ---------------- ---------------- ---------------- Net Income: $80.0 $39.9 $204.8 $177.6 ================ ================ ================ ================ Net Income Per Share: Basic $0.68 $0.31 $1.72 $1.36 ================ ================ ================ ================ Diluted $0.67 $0.31 $1.71 $1.35 ================ ================ ================ ================ Dividends Per Common Share: Cash dividends $0.14 $0.13 $0.41 $0.36 ================ ================ ================ ================ Average number of common and common equivalent shares outstanding: Basic 117,788,947 128,183,125 119,224,170 130,536,390 ================ ================ ================ ================ Diluted 119,262,876 128,955,730 120,004,117 131,483,407 ================ ================ ================ ================
See accompanying notes. 5 OLD REPUBLIC INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) ($ in Millions) ----------------------------------------------------------------------------------------------------------------------------------- Quarters Ended Nine Months Ended September 30, September 30, ---------------------------------- ---------------------------------- 2000 1999 2000 1999 ---------------- ---------------- ---------------- ---------------- Net income as reported $80.0 $39.9 $204.8 $177.6 ---------------- ---------------- ---------------- ---------------- Other comprehensive income (loss): Foreign currency translation adjustment (0.6) 0.1 (1.7) 1.2 ---------------- ---------------- ---------------- ---------------- Unrealized gains (losses) on securities: Unrealized gains (losses) arising during period 53.7 (19.8) 54.3 (75.0) Less: elimination of pre-tax realized gains included in income as reported 7.1 4.4 8.0 26.0 ---------------- ---------------- ---------------- ---------------- Pre-tax unrealized gains (losses) on securities carried at market value 46.5 (24.3) 46.2 (101.1) Deferred income taxes (credits) 16.4 (8.5) 16.4 (35.5) ---------------- ---------------- ---------------- ---------------- Net unrealized gains (losses) on securities 30.1 (15.7) 29.8 (65.6) ---------------- ---------------- ---------------- ---------------- Net adjustments 29.4 (15.6) 28.0 (64.3) ---------------- ---------------- ---------------- ---------------- Comprehensive income $109.5 $24.3 $232.9 $113.4 ================ ================ ================ ================
See accompanying notes. 6 OLD REPUBLIC INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) ($ in Millions) ---------------------------------------------------------------------------------------------------------------------------------- Nine Months Ended September 30, ----------------------------------- 2000 1999 ---------------- ---------------- Cash flows from operating activities: Net income $204.8 $177.6 Adjustment to reconcile net income to net cash provided by operating activities: Deferred policy acquisition costs 1.2 (9.4) Premiums and other receivables (21.4) (26.1) Unpaid claims and related items (37.8) (25.2) Future policy benefits and policyholders' funds 12.3 9.1 Income taxes 53.2 43.9 Reinsurance balances and funds (6.8) (1.4) Accounts payable, accrued expenses and other 2.0 19.8 ---------------- ---------------- Total 207.6 188.4 ---------------- ---------------- Cash flows from investing activities: Sales of fixed maturity securities: Held to maturity: Maturities and early calls 204.0 142.4 Available for sale: Maturities and early calls 147.4 111.2 Other 87.0 124.4 Sales of equity securities 29.9 33.0 Sales of other investments 1.9 1.0 Sales of fixed asset for company use 0.8 2.1 Purchases of fixed maturity securities: Held to maturity (19.6) (108.2) Available for sale (399.0) (366.9) Purchases of equity securities (110.6) (42.3) Purchases of other investments (14.7) (15.1) Purchases of fixed assets for company use (9.0) (12.0) Proceeds from sale of subsidiary --- 25.3 Cash and short-term investments of subsidiary sold --- (31.4) Other-net (10.9) (0.1) ---------------- ---------------- Total (92.7) (136.6) ---------------- ---------------- Cash flows from financing activities: Increase in term loans 52.0 28.0 Issuance of preferred and common stocks 7.7 2.8 Repayments of term loans (30.0) (18.0) Redemption of debentures and notes (2.6) (1.9) Dividends on common shares (48.4) (46.7) Dividends on preferred shares --- (0.1) Purchase of treasury stock (66.4) (133.9) Other-net (0.9) 2.3 ---------------- ---------------- Total (88.7) (167.4) ---------------- ---------------- Increase (decrease) in cash and short-term investments 26.1 (115.7) Cash and short-term investments, beginning of period 294.1 400.5 ---------------- ---------------- Cash and short-term investments, end of period $320.2 $284.8 ================ ================ Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $9.7 $5.2 ================ ================ Income taxes $35.7 $28.3 ================ ================
See accompanying notes. 7 OLD REPUBLIC INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED SUMMARY FINANCIAL STATEMENTS (Unaudited) ($ 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 Nine Months Ended September 30, September 30, ----------------------------- ----------------------------- 2000 1999 2000 1999 ------------- ------------- ------------- ------------- Numerator: Income before extraordinary item......................... $ 80.0 $ 39.9 $ 204.8 $ 177.6 Less Preferred stock dividends........................... -- -- -- .1 ------------- ------------- ------------- ------------- Numerator for basic earnings per share - income available to common stockholders................ 80.0 39.9 204.7 177.5 Effect of dilutive securities: Convertible preferred stock dividends.................... -- -- -- .1 ------------- ------------- ------------- ------------- Numerator for diluted earnings per share - income available to common stockholders after assumed conversions................................ $ 80.0 $ 39.9 $ 204.8 $ 177.6 ============= ============= ============= ============= Denominator: Denominator for basic earnings per share - weighted-average shares................................ 117,788,947 128,183,125 119,224,170 130,536,390 Effect of dilutive securities: Stock options............................................ 1,341,995 618,647 646,484 762,966 Convertible preferred stock.............................. 131,934 153,958 133,463 184,051 ------------- ------------- ------------- ------------- Dilutive potential common shares......................... 1,473,929 772,605 779,947 947,017 ------------- ------------- ------------- ------------- Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions...................................... 119,262,876 128,955,730 120,004,117 131,483,407 ============= ============= ============= ============= Basic earnings per share................................... $ .68 $ .31 $ 1.72 $ 1.36 ============= ============= ============= ============= Diluted earnings per share................................. $ .67 $ .31 $ 1.71 $ 1.35 ============= ============= ============= =============
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 $20.1 at September 30, 2000. Unrealized appreciation of investments, before applicable deferred income taxes of $11.3, at September 30, 2000 included gross unrealized gains and (losses) of $72.9 and $(41.4), respectively. For the nine months ended September 30, 2000 and 1999, net unrealized appreciation (depreciation) of investments, net of deferred income taxes (credits), amounted to $29.8 and $(65.6), 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 Nine Months Ended September 30, September 30, ----------------------------- ----------------------------- 2000 1999 2000 1999 ------------- ------------- ------------- ------------- General Insurance Group: Net premiums earned.................................... $ 211.3 $ 213.7 $ 632.1 $ 635.9 Net investment income and other income(a).............. 49.2 50.3 148.1 150.6 ------------- ------------- ------------- ------------- Total............................................. $ 260.5 $ 264.0 $ 780.2 $ 786.6 ============= ============= ============= ============= Income before taxes (credits).......................... $ 29.7 $ 2.4 $ 80.3 $ 65.8 ============= ============= ============= ============= Income tax expense (credit)............................ $ 7.0 $ (2.5) $ 17.8 $ 12.4 ============= ============= ============= ============= Mortgage Guaranty Group: Net premiums earned.................................... $ 82.9 $ 72.9 $ 245.1 $ 223.9 Net investment income and other income(a).............. 16.0 13.5 45.4 41.6 ------------- ------------- ------------- ------------- Total............................................. $ 98.9 $ 86.4 $ 290.5 $ 265.5 ============= ============= ============= ============= Income before taxes.................................... $ 65.6 $ 44.4 $ 176.5 $ 130.4 ============= ============= ============= ============= Income tax expense..................................... $ 22.2 $ 14.7 $ 59.4 $ 43.3 ============= ============= ============= ============= Title Insurance Group: Net premiums earned.................................... $ 79.6 $ 93.0 $ 226.4 $ 273.0 Title, escrow and other fees ......................... 49.9 52.0 139.1 169.4 ------------- ------------- ------------- ------------- Subtotal.......................................... 129.6 145.1 365.6 442.5 Net investment income and other income(a).............. 6.1 5.8 18.4 17.1 ------------- ------------- ------------- ------------- Total............................................. $ 135.7 $ 150.9 $ 384.1 $ 459.7 ============= ============= ============= ============= Income before taxes.................................... $ 13.9 $ 4.2 $ 30.4 $ 34.6 ============= ============= ============= ============= Income tax expense..................................... $ 4.7 $ 1.3 $ 10.1 $ 11.6 ============= ============= ============= ============= Life Insurance Group (c): Net premiums earned.................................... $ 12.1 $ 10.1 $ 40.8 $ 40.2 Net investment income and other income(a).............. 2.1 2.1 6.4 6.5 ------------- ------------- ------------- ------------- Total............................................. $ 14.2 $ 12.8 $ 47.3 $ 46.7 ============= ============= ============= ============= Income (loss) before taxes (credits)................... $ 1.5 $ (.4) $ 3.7 $ (1.8) ============= ============= ============= ============= Income tax expense (credit)............................ $ .5 $ (.2) $ .7 $ (.9) ============= ============= ============= =============
9 Reconciliations of Segments to Consolidated --------------------------------------------------------------------------------------------------------------------- Quarters Ended Nine Months Ended September 30, September 30, ----------------------------- ----------------------------- 2000 1999 2000 1999 ------------- ------------- ------------- ------------- Revenues: Total revenues for reportable segments................. $ 509.6 $ 513.7 $ 1,502.2 $ 1,558.6 Net realized investment gains.......................... 7.1 4.4 8.0 26.0 Other revenues......................................... 4.3 2.1 13.7 6.8 Elimination of intersegment revenues (b)............... (3.3) (1.7) (10.8) (4.1) ------------- ------------- ------------- ------------- Total consolidated revenues....................... $ 517.8 $ 518.5 $ 1,513.2 $ 1,587.2 ============= ============= ============= ============= Income before taxes: Total income before taxes of reportable segments....... $ 110.9 $ 50.8 $ 291.0 $ 229.0 Net realized investment gains.......................... 7.1 4.4 8.0 26.0 Other revenues - net................................... (2.4) (1.3) (7.8) (5.2) Elimination of intersegment profits (b)................ --- --- --- (.3) ------------- ------------- ------------- -------------- Income before income taxes and extraordinary items............................... $ 115.6 $ 53.9 $ 291.3 $ 249.5 ============= ============= ============= ==============
--------- In the above tables, net premiums earned on a GAAP basis differ slightly from statutory amounts due to certain differences in calculations of unearned premium reserves under each accounting method. (a) Including unallocated investment income derived from invested capital and surplus funds./(b) Represents results of holding company parent, consolidation eliminating adjustments, and general corporate expenses, as applicable./(c)In the first quarter of 1999, the Company sold its New York subsidiary and with it, its annuity book of business; this had no material effect on Old Republic's consolidated results or financial position. 5. Legal Proceedings Legal proceedings against the Company arise in the normal course of business and generally pertain to claim matters related to insurance policies and contracts issued by the Corporation's insurance subsidiaries. The City and County of San Francisco and certain escrow customers of an underwritten title agency subsidiary headquartered in the State of California have filed law suits alleging that the subsidiary: 1) failed to escheat unclaimed escrow funds; 2) charged for services not necessarily provided; and 3) collected illegal interest payments or fees from banks on the basis of funds held for escrow customers. The subsidiary has in turn conducted an internal review of its records and concluded that it had certain liabilities for part of the issues denoted at (1) and (2). Management believes that the alleged practices denoted in (3) are common within the industry, are not in conflict with various laws and regulations, and that it has meritorious defenses, which will ultimately lead to a successful resolution of these practices. Through September 30, 2000 the subsidiary had paid or otherwise provided reserves aggregating $38.3 million to cover its best estimate of litigation and related costs associated with all these issues. In mid October the California Department of Insurance (CDI) filed a complaint against the above named subsidiary. The complaint alleges violations of certain sections of the Insurance Code that prohibit any form of considerations to induce the referral of business to a title company. The CDI is seeking a maximum monetary penalty of $3.8 million. The Company has not had sufficient time to evaluate the complaint, and, accordingly, no provision for any liability has been included in the Company's financial statements as of September 30, 2000. In December 1999, a class action lawsuit was filed against one of the Company's mortgage guaranty insurance subsidiaries in the Federal District Court for the Southern District of Georgia. The suit alleges that the subsidiary provided pool insurance and other services to mortgage lenders at preferential, below market prices in return for mortgage insurance business, and that such practices violated the Real Estate Settlement Procedures Act. The Company denies any liability in these regards, has retained legal counsel, and intends to defend itself vigorously. Due in part to the early stages of this lawsuit, the ultimate outcome of this litigation is unknown at the present time. Accordingly, no provision for any liability, including the cost of defense, has been included in the Company's financial statements. 10 OLD REPUBLIC INTERNATIONAL CORPORATION MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS Nine Months Ended September 30, 2000 and 1999 -------------------------------------------------------------------------------- OVERVIEW This analysis pertains to the consolidated accounts of Old Republic International Corporation. The Company conducts its business through four major segments, namely its General (property and liability coverages), Mortgage Guaranty, Title, and Life insurance groups. FINANCIAL POSITION Old Republic's financial position at September 30, 2000 reflected increases in assets, liabilities and common shareholders' equity of 2.2%, 0.5%, and 5.9%, respectively, when compared to the immediately preceding year-end. Cash and invested assets represented 70.1% and 69.6% of consolidated assets as of September 30, 2000 and December 31, 1999, respectively. Consolidated operating cash flow was positive at $207.6 million in the latest nine month period, compared to $188.4 million in the same period of 1999. Relatively high short-term maturity investment positions continued to be maintained as of September 30, 2000 to provide necessary liquidity for specific operating needs and to enhance flexibility in investment strategy. Changes in short-term investments reflect a large variety of seasonal and intermediate-term factors including operating cash needs and investment strategy. Accordingly, the future level of short-term investments will vary and respond to the interplay of these factors and may, as a result, increase or decrease from current levels. During the first nine months of 2000, the Corporation committed substantially all investable funds in short to intermediate-term fixed maturity securities. Old Republic continues to adhere to its long-term policy of investing primarily in investment grade, marketable securities; investable funds have not been directed to so-called "junk bonds" or types of securities categorized as derivaties. During the first nine months of 2000, Old Republic's investment in equity securities increased by 67.8% vis-a-vis the related invested balance at year-end 1999 due to securities acquired and unrealized gains during the period. At September 30, 2000, the Company had no investments in default as to principal and/or interest. The parent holding company has met its liquidity and capital needs principally through dividends paid by its subsidiaries. The insurance subsidiaries' ability to pay cash dividends to the parent company is generally restricted by law or subject to approval of the insurance regulatory authorities of the states in which they are domiciled. Old Republic's capitalization of $2.55 billion at September 30, 2000 consisted of debt of $225.4 million, convertible preferred stock of $.7 million and common shareholders' equity of $2.32 billion. The increase in the common shareholders' equity account during the nine months ended September 30, 2000 reflects primarily the retention of earnings in excess of dividend requirements, an increase in the value of bonds and stocks carried at market values and the reacquisition of $66.4 million of common shares pursuant to previously announced stock buy-back programs. In March 2000, the Company canceled 36.4 million common shares previously reported as treasury stock; this had no effect on total shareholders' equity or financial condition of the Company. RESULTS OF OPERATIONS Revenues: Consolidated net premiums and fees earned for the third quarter of 2000 amounted to $436.0 million, 1.3% below the amount reported for the same quarter of 1999. For the third quarter of 2000, the Company's General Insurance Group reported earned premium volume of $211.3 million, down 1.1% from $213.7 million a year ago. The slight decrease in premium reflects the Company's attempt to obtain rate increases in a market place that remains quite competitive. Mortgage Guaranty Group premiums increased by 13.8% to $82.9 million from $72.9 million in the year-ago quarter. Title Group premium and fee revenues decreased 10.7% to $129.6 million in the third quarter of 2000 when compared to the same quarter of 1999. The decrease in Title Group revenues is due to mortgage lending activity subsiding and refinancings declining significantly as interest rates charged for home mortgages have risen in the past several quarters. The Life Group's premium volume of $12.1 million represents a 20.5% increase over the $10.1 million reported in the year-ago quarter. Consolidated net premiums and fees earned in the first nine months of 2000 amounted to $1.28 billion, or 4.4% less than the amount reported for the same 1999 period. The General Insurance Group's net premiums earned decreased 0.6% to $632.1 million in the first nine months of 2000. The Mortgage Guaranty Group continued to experience volume growth and reported net premiums earned of $245.1 million, an increase of 9.4%. The Title Insurance Group reported premiums and fees in the first nine months of 2000 of $365.6 million, down from $442.5 million in the year-ago period. Life Insurance Group premiums increased 1.6% to $40.8 million during the same 2000 period. The above-cited factors for the third quarter of 2000 had similar effects on first nine months of 2000 premiums and fees revenues. 11 Consolidated net investment income was $203.0 million in the first nine months of 2000 and $68.0 million in the third quarter of 2000 compared to $196.8 million and $66.0 million, respectively, in the same quarter and nine month periods of 1999. This revenue source reflects a slightly higher invested asset base and an up trend in yields obtained on fixed maturity securities. The average annualized yield on investments was approximately 5.6% and 5.5% at the end of September 30, 2000 and 1999, respectively. The Company's investment policies have not been designed to maximize realized investment gains. Realized gains of $8.0 million in the first nine months of 2000 were mostly due to the sale of equity securities. Dispositions of securities were primarily the result of scheduled maturities of bonds and notes and sales of equity securities. For the first nine months of 2000, 80.2 % of total dispositions represented maturities and early calls of existing holdings; for the year ago period in 1999, these transactions amounted to 67.1% of the total dispositions. Expenses: Consolidated benefit, claim and settlement costs, as a percentage of net premiums and fees earned, were approximately 44% and 46% in the first nine months of 2000 and 1999, respectively. For the third quarter of each year, these ratios were 41% in 2000 and 50% in 1999. For both the third quarter and year-to-date periods of the current year, the General Insurance claims ratio continued to reflect relatively high claim severity for commercial automobile (truck) insurance in particular. Compared to second half 1999 experience, however, the impact of this factor was less pronounced. Mortgage Guaranty claim costs were lower during the first nine months of 2000 compared to the same period in 1999 mostly due to a continued decline in loan default rates and much higher cure ratios driven by strong employment and good general economic conditions. Title claims costs were lower in 2000 as a result of declining claims emergence trends. Life Group claim costs benefited in the latest nine months mostly from fewer travel accident claims. The ratio of consolidated underwriting, acquisition and insurance expenses to net premiums and fees earned were approximately 50% and 53% in the first nine months of 2000 and 1999, respectively. These ratios were 50% and 55% for the third quarters of 2000 and 1999, respectively. Variations in these ratios reflect a continually changing mix of coverages sold and attendant costs of producing business. The property and liability segment's expense ratio remained basically flat for the first nine months of 2000 compared to the same period in 1999. The mortgage guaranty segment's expense ratio moved down due to lower costs associated with an enhancement of information systems basically completed in 1999 and a decrease in contract underwriting services. The insurance expense ratio for the title segment was higher in the first nine months of 2000 compared to the same period in 1999 due in part to a decrease in premium and fees volume without a proportional reduction in expenses. Consolidated interest and other charges increased $5.1 million in the first nine months of 2000 versus the same period a year ago due primarily to interest costs on an increased debt level. Pre-Tax and Net Income: Consolidated income before taxes increased by 114.4% in the third quarter and 16.7% in the first nine months of 2000 when compared to the same periods one year ago. The Corporation's General, Mortgage Guaranty and Life Insurance segments reflected higher third quarter and year to date pre-tax operating earnings while the Title Insurance operations posted an increase in pre-tax operating earnings in this year's third quarter and a decrease in the first nine months. Realized gains on sales of securities were higher for the most recent quarter and significantly lower for the current year to date period. The effective consolidated income tax rate was 31% and 30% in the third quarter and nine month period of 2000, respectively, and 26% and 29% in the third quarter and nine month period of 1999, respectively. The rates for each period reflect primarily the varying proportions of pre-tax operating income derived from tax-sheltered investment income (principally tax-exempt interest) on the one hand, and fully taxable investment and underwriting/service income on the other hand. Year 2000 Issues: Year 2000 issues relate primarily to computer programs which were written with only a two-digit designation for many years. Such programs are often unable to interpret dates beyond 1999 and as a result may fail or lead to computer errors which could create a disruption in operations. Prior to December 31, 1999, the Company and its subsidiaries completed an implementation of changes and tests of those computer systems and programs that had been identified as being affected by Year 2000 issues. They also received confirmations of Year 2000 compliance from certain principal customers, vendors and other third parties with whom they have significant business relationships. The Company and its subsidiaries had also developed contingency plans for operations in the event Year 2000 issues were to arise in spite of the changes and tests effected. The costs of identifying, implementing and testing the required changes were not material to the Company's consolidated operating results. A significant portion of these costs were not incremental as the Company and its subsidiaries generally used existing resources. 12 In the current year, no issues are known to have developed nor to have affected adversely the Company or any of its subsidiaries. Although the Company considers it increasingly unlikely, it is possible that Year 2000 issues may have arisen but are not yet known. The aforementioned contingency plans are deemed appropriate to address such subsequent events; no significant additional costs are being anticipated with respect to Year 2000 issues. OTHER INFORMATION Reference is here made to "Financial Information Relating to Segments of Business" appearing elsewhere herein. Historical data pertaining to the operating performance, liquidity, and other financial matters applicable to an insurance enterprise such as Old Republic are not necessarily indicative of results to be achieved in succeeding years. In addition to the factors cited below, the long-term nature of the insurance business, seasonal and annual patterns in premium production and incidence of claims, changes in yields obtained on invested assets, changes in government policies and free markets affecting inflation rates and general economic conditions, and changes in legal precedents or the application of law affecting the settlement of disputed claims can have a bearing on period-to-period comparisons and future operating results. Any forward-looking commentary or inferences contained in this report involve, of necessity, assumptions, uncertainties, and risks that may affect the Company's future performance. With regard to Old Republic's General Insurance segment, its results can be affected in particular by the level of market competition which is typically a function of available capital and expected returns on such capital among competitors, the levels of interest and inflation rates, as well as periodic changes in claim frequency and severity patterns caused by natural disasters, weather conditions, accidents, illnesses and work-related injuries. Mortgage Guaranty and Title insurance results can be affected by such factors as changes in national and regional housing demand and values, the availability and cost of mortgage loans, employment trends, and default rates on mortgage loans; mortgage guaranty results may also be affected by various risk-sharing arrangements with business producers as well as the risk management and pricing policies of government sponsored enterprises. Life and disability insurance results can be impacted by the levels of employment and consumer spending, as well as mortality and health trends. At the holding company level, operating earnings or losses are generally affected by the amount of debt outstanding and its cost, as well as interest income on temporary short-term investments. Any forward-looking commentaries speak only as of their dates. Old Republic undertakes no obligation to publicly update or revise such comments, whether as a result of new information, future events or otherwise, and accordingly they may not be unduly relied upon. 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: November 10, 2000 ------------------- /s/ Paul D. Adams --------------------------------------- P. D. Adams Senior Vice President & Chief Financial Officer