-----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, BvN1LM/6eO7t7cMgY2LYMeM2jhXGQkv2Op0oM9SEourNlhAzgdrk+f6RCpxkvQY5 QomjPL0yrNm4Y7M/Hqn9Zg== 0000074260-02-000038.txt : 20020809 0000074260-02-000038.hdr.sgml : 20020809 20020809134346 ACCESSION NUMBER: 0000074260-02-000038 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020809 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: 1934 Act SEC FILE NUMBER: 001-10607 FILM NUMBER: 02724365 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 form10qa.txt OR INTERNATIONAL CORPORATION 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 June 30, 2002 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 June 30, 2002 --------------------------- ------------------ Common Stock / $1 par value 120,461,496 There are 14 pages contained in this report. 2 OLD REPUBLIC INTERNATIONAL CORPORATION Report on Form 10-Q / June 30, 2002 INDEX - -------------------------------------------------------------------------------- PAGE NO. -------- PART I FINANCIAL INFORMATION: CONSOLIDATED SUMMARY BALANCE SHEETS 3 CONSOLIDATED SUMMARY STATEMENTS OF INCOME 4 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 5 CONSOLIDATED STATEMENTS OF CASH FLOWS 6 NOTES TO CONSOLIDATED SUMMARY FINANCIAL STATEMENTS 7 - 9 MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS 10 - 12 PART II OTHER INFORMATION 13 & 14 3 OLD REPUBLIC INTERNATIONAL CORPORATION CONSOLIDATED SUMMARY BALANCE SHEETS (Unaudited) ($ in Millions) - ------------------------------------------------------------------------------------------------------------------------------------ June 30, December 31, 2002 2001 --------------- ---------------- Assets Investments: Held to maturity: Fixed maturity securities (at amortized cost) (fair value: $2,126.3 and $2,173.6) $2,043.3 $2,111.8 Other long-term investments (at cost) 58.7 60.8 --------------- ---------------- Total 2,102.1 2,172.7 --------------- ---------------- Available for sale: Fixed maturity securities (at fair value) (cost: $2,727.1 and $2,536.4) 2,825.5 2,610.2 Equity securities (at fair value) (cost: $400.2 and $318.3) 434.2 391.6 Short-term investments (at fair value which approximates cost) 269.6 298.5 --------------- ---------------- Total 3,529.4 3,300.4 --------------- ---------------- Total investments 5,631.5 5,473.1 --------------- ---------------- Other Assets: Cash 65.2 38.0 Accrued investment income 76.1 75.4 Accounts and notes receivable 491.8 447.5 Reinsurance balances and funds held 55.2 60.5 Reinsurance recoverable: Paid losses 49.0 25.0 Policy and claim reserves 1,415.5 1,390.3 Deferred policy acquisition costs 188.6 179.8 Sundry assets 236.1 230.1 --------------- ---------------- 2,577.8 2,447.0 --------------- ---------------- Total Assets $8,209.4 $7,920.2 =============== ================ - ------------------------------------------------------------------------------------------------------------------------------------ Liabilities, Preferred Stock and Common Shareholders' Equity Liabilities: Future policy benefits $102.3 $110.4 Losses, claims and settlement expenses 3,502.4 3,451.0 Unearned premiums 658.9 604.1 Other policyholders' benefits and funds 56.2 53.3 --------------- ---------------- Total policy liabilities and accruals 4,320.0 4,218.8 Commissions, expenses, fees and taxes 147.4 165.8 Reinsurance balances and funds 129.1 121.2 Federal income tax payable: Current 1.1 7.2 Deferred 399.0 376.5 Debt 141.9 159.0 Sundry liabilities 95.7 87.4 --------------- ---------------- Total liabilities 5,234.6 5,136.1 --------------- ---------------- Preferred Stock: Convertible preferred stock --- 0.3 --------------- ---------------- Common Common stock(*) 123.6 122.1 Shareholders' Additional paid-in capital 250.4 219.8 Equity: Retained earnings 2,549.1 2,383.2 Accumulated other comprehensive income 84.2 91.1 Treasury stock (at cost)(*) (32.6) (32.6) --------------- ---------------- Total Common Shareholders' Equity 2,974.8 2,783.7 --------------- ---------------- Total Liabilities, Preferred Stock and Common Shareholders' Equity $8,209.4 $7,920.2 =============== ================ (*) At June 30, 2002 and December 31, 2001 there were 500,000,000 shares of common stock, $1.00 par value, authorized, of which 123,652,868 at June 30, 2002 and 122,168,699 at December 31, 2001 were issued and outstanding. As of the same dates, there were 100,000,000 shares of Class B Common Stock, $1.00 par value, authorized, of which no shares were issued. Common shares classified as treasury stock were 3,191,372 and 3,191,368 as of June 30, 2002 and December 31, 2001, respectively. See accompanying notes.
4 OLD REPUBLIC INTERNATIONAL CORPORATION CONSOLIDATED SUMMARY STATEMENTS OF INCOME (Unaudited) ($ in Millions, Except Common Share Data) - ------------------------------------------------------------------------------------------------------------------------------------ Quarters Ended Six Months Ended June 30, June 30, --------------------------------- --------------------------------- 2002 2001 2002 2001 ---------------- ---------------- ---------------- ---------------- Revenues: Net premiums earned $512.3 $435.6 $1,001.4 $841.9 Title, escrow and other fees 63.2 66.9 125.9 116.8 ---------------- ---------------- ---------------- ---------------- Sub-total 575.6 502.5 1,127.3 958.8 Net investment income 67.7 68.6 134.8 137.0 Realized investment gains 4.4 8.4 14.1 23.0 Other income 10.0 9.6 20.6 17.8 ---------------- ---------------- ---------------- ---------------- Net revenues 657.9 589.2 1,297.0 1,136.8 ---------------- ---------------- ---------------- ---------------- Expenses: Benefits, claims and settlement expenses 230.3 208.0 455.2 409.8 Underwriting, acquisition and insurance expenses 283.1 247.0 554.3 466.9 Interest and other expenses 2.6 4.9 5.4 10.1 ---------------- ---------------- ---------------- ---------------- Total expenses 516.1 459.9 1,015.0 886.9 ---------------- ---------------- ---------------- ---------------- Income before income taxes and items below 141.8 129.2 281.9 249.8 ---------------- ---------------- ---------------- ---------------- Income Taxes: Currently payable 21.0 23.8 50.4 42.0 Deferred 13.2 14.2 28.3 33.6 ---------------- ---------------- ---------------- ---------------- Total income taxes 34.2 38.0 78.7 75.7 ---------------- ---------------- ---------------- ---------------- 107.5 91.2 203.1 174.1 Other items - net --- 0.3 (0.1) 1.3 ---------------- ---------------- ---------------- ---------------- Net Income: $107.5 $91.5 $203.0 $175.5 ================ ================ ================ ================ Net Income Per Share: Basic $0.89 $0.77 $1.69 $1.48 ================ ================ ================ ================ Diluted $0.88 $0.76 $1.67 $1.46 ================ ================ ================ ================ Dividends Per Common Share: Cash dividends $0.16 $0.15 $0.31 $0.29 ================ ================ ================ ================ Average number of common and common equivalent shares outstanding: Basic 120,456,722 118,783,068 120,431,510 118,774,400 ================ ================ ================ ================ Diluted 121,727,917 120,354,542 121,557,490 120,309,880 ================ ================ ================ ================
See accompanying notes. 5 OLD REPUBLIC INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) ($ in Millions) - ------------------------------------------------------------------------------------------------------------------------------------ Quarters Ended Six Months Ended June 30, June 30, --------------------------------- --------------------------------- 2002 2001 2002 2001 ---------------- ---------------- ---------------- ---------------- Net income as reported $107.5 $91.5 $203.0 $175.5 ---------------- ---------------- ---------------- ---------------- Other comprehensive income (loss): Foreign currency translation adjustment 2.9 1.6 3.1 (0.2) ---------------- ---------------- ---------------- ---------------- Unrealized gains (losses) on securities: Unrealized gains (losses) arising during period 11.6 (0.3) (1.6) 29.5 Less: elimination of pretax realized gains included in income as reported 4.4 8.4 14.1 23.0 ---------------- ---------------- ---------------- ---------------- Pretax unrealized gains (losses) on securities carried at market value 7.2 (8.7) (15.8) 6.4 Deferred income taxes (credits) 2.5 (3.1) (5.8) 2.2 ---------------- ---------------- ---------------- ---------------- Net unrealized gains (losses) on securities 4.6 (5.6) (10.0) 4.2 ---------------- ---------------- ---------------- ---------------- Net adjustments 7.6 (4.0) (6.8) 4.0 ---------------- ---------------- ---------------- ---------------- Comprehensive income $115.1 $87.5 $196.1 $179.5 ================ ================ ================ ================
See accompanying notes. 6 OLD REPUBLIC INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) ($ in Millions) - ------------------------------------------------------------------------------------------------------------------------------------ Six Months Ended June 30, ------------------------------------ 2002 2001 ----------------- ----------------- Cash flows from operating activities: Net income $203.0 $175.5 Adjustment to reconcile net income to net cash provided by operating activities: Deferred policy acquisition costs (7.6) (21.5) Premiums and other receivables (37.2) (126.3) Unpaid claims and related items 34.1 (2.8) Future policy benefits and policyholders' funds 34.4 138.6 Income taxes 21.7 39.7 Reinsurance balances and funds (10.6) 19.5 Accounts payable, accrued expenses and other 11.7 (7.1) ----------------- ----------------- Total 249.7 215.4 ----------------- ----------------- Cash flows from investing activities: Sales of fixed maturity securities: Held to maturity: Maturities and early calls 109.1 139.8 Other 1.1 --- Available for sale: Maturities and early calls 147.6 108.3 Other 82.4 32.3 Sales of equity securities 62.7 41.9 Sales of other investments 1.1 1.6 Sales of fixed assets held for company use 0.6 0.8 Cash and short-term investments of subsidiary acquired 1.7 --- Purchases of fixed maturity securities: Held to maturity (46.4) (129.6) Available for sale (419.7) (304.5) Purchases of equity securities (143.7) (72.6) Purchases of other investments (1.7) (1.8) Purchases of fixed assets held for company use (6.1) (6.6) Other-net (8.5) (1.9) ----------------- ----------------- Total (219.5) (192.0) ----------------- ----------------- Cash flows from financing activities: Issuance of preferred and common stocks 19.9 6.7 Repayments of term loans (15.0) (36.0) Redemption of debentures and notes (2.4) (0.9) Dividends on common shares (37.1) (34.3) Dividends on preferred shares --- --- Purchase of treasury stock --- --- Other-net 2.6 2.0 ----------------- ----------------- Total (32.0) (62.5) ----------------- ----------------- Increase (decrease) in cash and short-term investments (1.8) (39.1) Cash and short-term investments, beginning of period 336.6 411.0 ----------------- ----------------- Cash and short-term investments, end of period $334.8 $371.9 ================= ================= Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $4.7 $7.2 ================= ================= Income taxes $49.2 $34.1 ================= =================
See accompanying notes. 7 OLD REPUBLIC INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED SUMMARY FINANCIAL STATEMENTS (Unaudited) ($ 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 ("GAAP") 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. During the first quarter of 2002, the Company adopted Statement of Financial Accounting Standards No. 142 (FAS 142) " Goodwill and Other Intangible Assets". Under FAS 142, goodwill and certain intangible assets are no longer being amortized against operations but must be tested periodically for possible impairment of their carrying values. The Company completed the transitional goodwill impairment test required by FAS 142 in the first quarter of 2002 and determined that there was no indication of goodwill or intangible asset impairment. 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 Six Months Ended June 30, June 30, --------------------------- --------------------------- 2002 2001 2002 2001 ------------- ------------- ------------- ------------- Numerator: Income before extraordinary item......................... $ 107.5 $ 91.5 $ 203.0 $ 175.5 Less Preferred stock dividends........................... -- -- -- -- ------------- ------------- ------------- ------------- Numerator for basic earnings per share - income available to common stockholders................ 107.5 91.5 203.0 175.5 Effect of dilutive securities: Convertible preferred stock dividends.................... -- -- -- -- ------------- ------------- ------------- ------------- Numerator for diluted earnings per share - income available to common stockholders after assumed conversions................................ $ 107.5 $ 91.5 $ 203.0 $ 175.5 ============= ============= ============= ============= Denominator: Denominator for basic earnings per share - weighted-average shares............................... 120,456,722 118,783,068 120,431,510 118,774,400 Effect of dilutive securities: Stock options............................................ 1,265,685 1,525,552 1,111,234 1,488,707 Convertible preferred stock.............................. 5,510 45,922 14,746 46,773 ------------- ------------- ------------- ------------- Dilutive potential common shares......................... 1,271,195 1,571,474 1,125,980 1,535,480 ------------- ------------- ------------- ------------- Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions...................................... 121,727,917 120,354,542 121,557,490 120,309,880 ============= ============= ============= ============= Basic earnings per share................................... $ 0.89 $ 0.77 $ 1.69 $ 1.48 ============= ============= ============= ============= Diluted earnings per share................................. $ 0.88 $ 0.76 $ 1.67 $ 1.46 ============= ============= ============= =============
8 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 $93.1 at June 30, 2002. Unrealized appreciation of investments, before applicable deferred income taxes of $49.8, at June 30, 2002 included gross unrealized gains and (losses) of $199.5 and ($56.4), respectively. For the six months ended June 30, 2002 and 2001, net unrealized appreciation (depreciation) of investments, net of deferred income taxes (credits), amounted to $(10.0) and $4.2, respectively. 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 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 Six Months Ended June 30, June 30, ----------------------------- ----------------------------- 2002 2001 2002 2001 ------------- ------------- ------------- ------------- General Insurance Group: Net premiums earned....................................... $ 286.3 $ 244.5 $ 555.1 $ 476.5 Net investment income and other income (a)................ 48.7 49.4 96.4 98.6 ------------- ------------- ------------- -------------- Total.................................................. $ 335.1 $ 294.0 $ 651.5 $ 575.1 ============= ============= ============= ============== Income before taxes.................................... $ 45.1 $ 36.3 $ 85.3 $ 71.5 ============= ============= ============= ============== Income tax expense..................................... $ 1.3 $ 9.1 $ 11.9 $ 17.6 ============= ============= ============= ============== Mortgage Guaranty Group: Net premiums earned........................................ $ 91.1 $ 88.6 $ 182.7 $ 175.0 Net investment income and other income (a)................. 21.0 20.1 42.9 39.1 ------------- ------------- ------------- -------------- Total................................................... $ 112.2 $ 108.7 $ 225.6 $ 214.1 ============= ============= ============= ============== Income before taxes..................................... $ 71.5 $ 65.6 $ 141.9 $ 127.2 ============= ============= ============= ============== Income tax expense...................................... $ 24.2 $ 22.2 $ 47.9 $ 43.0 ============= ============= ============= ============== Title Insurance Group: Net premiums earned........................................ $ 125.0 $ 91.5 $ 238.9 $ 165.2 Title, escrow and other fees ............................. 63.2 66.9 125.9 116.8 ------------- ------------- ------------- -------------- Sub-total............................................... 188.3 158.4 364.8 282.1 Net investment income and other income (a)................. 5.7 5.8 11.5 11.7 ------------- ------------- ------------- -------------- Total................................................... $ 194.0 $ 164.3 $ 376.3 $ 293.8 ============= ============= ============= ============== Income before taxes........................................ $ 21.3 $ 20.5 $ 41.5 $ 31.5 ============= ============= ============= ============== Income tax expense......................................... $ 7.3 $ 7.1 $ 14.1 $ 10.8 ============= ============= ============= ============== Life Insurance Group: Net premiums earned....................................... $ 9.8 $ 10.9 $ 24.6 $ 25.1 Net investment income and other income (a)................ 1.5 2.0 3.4 4.0 ------------- ------------- ------------- -------------- Total.................................................. $ 11.4 $ 12.9 $ 28.0 $ 29.2 ============= ============= ============= ============== Income before taxes....................................... $ 1.7 $ 1.2 $ 3.3 $ 2.7 ============= ============= ============= ============== Income tax expense ....................................... $ 0.6 $ 0.4 $ 1.3 $ 1.0 ============= ============= ============= ==============
9 Reconciliations of Segments to Consolidated - ------------------------------------------------------------------------------------------------------------------------------------ Quarters Ended Six Months Ended June 30, June 30, ----------------------------- ----------------------------- 2002 2001 2002 2001 ------------- ------------- ------------- ------------- Revenues: Total revenues for reportable segments................. $ 652.9 $ 580.0 $ 1,281.6 $ 1,112.3 Net realized investment gains.......................... 4.4 8.4 14.1 23.0 Other revenues......................................... 1.4 3.4 3.1 7.3 Elimination of intersegment revenues (b)............... (0.8) (2.6) (1.9) (5.9) ------------- ------------- ------------- ------------- Total consolidated revenues......................... $ 657.9 $ 589.2 $ 1,297.0 $ 1,136.8 ============= ============= ============= ============== Income before taxes: Total income before taxes of reportable segments....... $ 139.7 $ 123.7 $ 272.1 $ 233.0 Net realized investment gains.......................... 4.4 8.4 14.1 23.0 Other revenues - net................................... (2.4) (3.0) (4.3) (6.2) ------------- ------------- ------------- ------------- Income before income taxes and extraordinary items................................. $ 141.8 $ 129.2 $ 281.9 $ 249.8 ============= ============= ============= ==============
- --------- 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. 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 Federal Department of Labor has revised the Federal Black Lung Program regulations effective January 19, 2001. These new regulations, which require a re-evaluation of previously settled or denied occupational disease claims, were challenged by the insurance and coal mining industries in a lawsuit filed in the United States District Court for the District of Columbia. The challenge was summarily dismissed by the Court and an appeal was filed by the insurance and coal mining industries before the United States Court of Appeals for the D.C. Circuit. The Court of Appeals upheld the regulations, for the most part, to be applied on a non- retroactive basis. It also remanded the regulations back to the Department of Labor to make certain changes. Further challenges are anticipated as the revised regulations are applied in actual claims. At this time, the potential impact on gross and net of reinsurance reserves or retrospectively rated policies due to the revised regulations is not measurable. 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 Court ruled in favor of a summary judgement motion filed by the Company's subsidiary and dismissed the lawsuit. The class plaintiffs appealed and the U.S. Court of Appeals for the Eleventh Circuit vacated the judgement and remanded the case back to the District Court. The Company's subsidiary has filed a motion seeking a summary judgement on grounds asserted in its earlier motion but not considered by the District Court. The ultimate outcome of this litigation is unknown at the present time. Accordingly, no provision for any liability, including the additional cost of defense, has been included in the Company's financial statements. 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 lawsuits 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 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). The subsidiary defended against the alleged practice denoted at (3) on the grounds that such practices are common within the industry, are not in conflict with any laws or regulations, and other meritorious defenses. The consolidated lawsuits have been tried and a judgement rendered, affirming in part and denying in part the subsidiary's defenses. In the aggregate, the judgement, excluding post-judgement interest, amounts to approximately $33.0 million. The subsidiary has appealed the judgement, and management believes that the judgement will be substantially reduced on appeal. Through June 30, 2002, the subsidiary has continually evaluated its exposures since the litigation began and has paid or otherwise provided cumulatively $46.9 million including its best estimate of its remaining liability and costs associated with all these issues. 10 OLD REPUBLIC INTERNATIONAL CORPORATION MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS Six Months Ended June 30, 2002 and 2001 - -------------------------------------------------------------------------------- OVERVIEW This analysis pertains to the consolidated accounts of Old Republic International Corporation which are presented on the basis of generally accepted accounting principles ("GAAP"). The Company conducts its business through four separate segments, namely its General (property and liability coverages), Mortgage Guaranty, Title, and Life insurance groups. CHANGE IN ACCOUNTING POLICIES During the first quarter of 2002, the Company adopted Statement of Financial Accounting Standards No. 142 (FAS 142) " Goodwill and Other Intangible Assets". Under FAS 142, goodwill and certain intangible assets are no longer being amortized against operations but must be tested periodically for possible impairment of their carrying values. The Company completed the transitional goodwill impairment test required by FAS 142 in the first quarter of 2002 and determined that there was no indication of goodwill or intangible asset impairment. FINANCIAL POSITION Old Republic's financial position at June 30, 2002 reflected increases in assets, liabilities and common shareholders' equity when compared to the immediately preceding year-end of 3.7%, 1.9% and 6.9%, respectively. Cash and invested assets represented 70.3% and 70.5% of consolidated assets as of June 30, 2002 and December 31, 2001, respectively. Consolidated operating cash flow was positive at $249.7 million in the latest six month period, compared to $215.4 million in the same period of 2001. The increase in consolidated operating cash flow was largely due to greater contributions by the Company's three largest operating segments. In 2002, the invested asset base increased 3.3% to $5.77 billion when compared to the immediately preceding year-end principally as a result of greater operating cash flow. Relatively high short-term maturity investment positions continued to be maintained as of June 30, 2002. Short-term investment positions reflect a large variety of seasonal and intermediate-term factors including current operating needs, expected operating cash flows, and investment strategy. Accordingly, the future level of short-term investments will vary and respond to the interplay of these factors and may, as a result, increase or decrease from current levels. During the first six months of 2002, 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 derivatives. During the first six months of 2002, Old Republic's investment in equity securities increased 10.9% in relation to the related invested balance at year-end 2001 due to portfolio additions offset partially by net unrealized losses. At June 30, 2002, the carrying value of bond and note investments in default as to principal and/or interest was immaterial in relation to consolidated assets or shareholders' equity. The Company does not own or utilize derivative financial instruments for the purpose of hedging, enhancing the overall return of its investment portfolio, or reducing the cost of its debt obligations. Traditional investment management tools and techniques are employed to address the yield and valuation exposures of its invested assets base. The long-term fixed maturity investment portfolio is managed so as to limit various risks inherent in the bond market. Credit risk is addressed through asset diversification and the purchase of investment grade securities. Reinvestment rate risk is controlled by concentrating on non-callable issues, and by taking asset-liability matching practices into account; purchases of mortgage and asset backed securities, which have variable principal prepayment options, are generally avoided. Market value risk is limited through the purchase of bonds of intermediate maturity. The combination of these investment management tenets is expected to produce a more stable long-term fixed maturity investment portfolio that is not subject to extreme interest rate sensitivity and principal deterioration. The market value of the Company's long-term fixed maturity investment portfolio is sensitive, however, to fluctuations in the level of interest rates, but not materially affected by changes in anticipated cash flows caused by any prepayments. The impact of interest rate movements on the long-term fixed maturity investment portfolio generally affects net realized gains or losses when securities are sold. With a market value of approximately $4.95 billion, the long-term fixed maturity investment portfolio has an average maturity of 4.0 years and an indicated duration of 3.5. With regard to its $431.6 million common stock portfolio, the Company does not own nor engage in any type of option writing. Possible declines in values for Old Republic's bond and stock portfolios would affect negatively the level of the common shareholders' equity account at any point in time, but would not necessarily result in the recognition of realized investment losses as a likely combination of positive operating cash flow and the scheduled emergence of bond maturities should provide sufficient funds to meet obligations to policyholders and claimants, as well as debt service and cash dividend requirements at the holding company level. 11 Among other major assets, substantially all of the Company's accounts and notes receivable are not past due, and reinsurance receivable balances on paid or estimated unpaid losses are deemed to be fairly stated and recoverable from responsible reinsurers. 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. During 2002, the Company used a part of available cash flow to redeem a portion of its commercial paper outstanding, thereby reducing consolidated debt by approximately $15.0 million. Old Republic's capitalization of $3.11 billion at June 30, 2002 consisted of debt of $141.9 million, a minor amount of convertible preferred stock, and common shareholders' equity of $2.97 billion. The increase in the common shareholders' equity account during the six months ended June 30, 2002 reflects primarily the retention of earnings in excess of dividend requirements, partially offset by a decline in the value of investments carried at market values. At its March 21, 2002 meeting, the Company's Board of Directors authorized the reacquisition of up to $200.0 million of common shares as market conditions warrant during the two year period from that date. RESULTS OF OPERATIONS Revenues: Consolidated net premiums and fees earned in the second quarter of 2002 amounted to $575.6 million versus $502.5 million in the year ago period. For the second quarter of 2002, the Company's General Insurance Group reported earned premium volume of $286.3 million, up 17.1% from $244.5 million a year ago. The Company believes that this positive trend reflects the pricing and risk selection improvements it has been effecting for the past three years. Premiums for the Mortgage Guaranty Group increased by 2.8% to $91.1 million from $88.6 million in the year-ago quarter. Title Insurance Group premium and fee revenues increased 18.8% to $188.3 million in the second quarter of 2002 when compared to the same quarter of 2001 as a result of higher mortgage financing and refinancing activity. Life Insurance Group premium volume decreased to $9.8 million, a decrease of 9.7%, when compared to the same quarter of 2001. Consolidated net premiums and fees earned in the first half of 2002 amounted to $1.12 billion, a 17.6% increase from the amount reported for the same 2001 period. The General Insurance Group's net premiums earned increased 16.5% to $555.1 million in the first half of 2002. The Mortgage Guaranty Group continued to experience volume growth and reported net premiums earned of $182.7 million, an increase of 4.4%. The Title Insurance Group reported premiums and fees in the first half of 2002 of $364.8 million, up from $282.1 million in the year-ago period. Life Insurance Group premiums declined 2.0% to $24.6 million during the same 2002 period. The above-cited factors for the second quarter of 2002 had similar effects on first half 2002 premium and fee revenues. Consolidated net investment income of $134.8 million in the first half of 2002 and $67.7 million in the second quarter of 2002 were down from $137.0 million and $68.6 million, respectively, in the same quarter and six month period of 2001 due to the prevailing lower yield environment. The average annualized yield on investments was approximately 4.9% and 5.4% at the end of June 30, 2002 and 2001, respectively. Yield trends reflect at once the relatively short maturity of Old Republic's fixed maturity securities portfolio, a prevailing lower yield environment during the first half of 2002, and an increase in equity investments which typically provide lower current yields. The Company's investment policies have not been designed to maximize realized investment gains. Net realized gains of $14.1 million in the first half of 2002, compared to $23.0 million in the prior year period, were substantially due to the disposition of equity securities. Dispositions of fixed maturity securities arise mostly from scheduled maturities and early calls; for the first six months of 2002 and 2001, 75.4% and 88.5%, respectively, of all such dispositions resulted from these factors. Expenses: Consolidated benefit, claim and settlement costs, as a percentage of net premiums and fees earned, were approximately 40% and 43% in the first six months of 2002 and 2001, respectively. For the second quarter of each year, these ratios were approximately 40% in 2002 and 41% in 2001. For both the second quarter and year-to-date periods of the current year, the consolidated claims ratio for property and liability coverages was affected positively by the previously noted increase in premiums earned and improved risk selection. The Mortgage Guaranty Group's claims ratio was significantly lower during the second quarter and first six months of 2002 due to better than expected trends in the resumption of payments on loans temporarily in default and in the severity of loss payments. Title claims costs were up moderately in 2002, while Life Insurance Group claim costs were lower in the latest quarter and six month period. Consolidated benefit, claim, and related settlement costs for each of the Company's business segments are affected by the adequacy of reserves established for current and prior years' claim occurrences. Such reserves are recorded on a case by case basis and by means of a large number of formulas and calculations to cover known as well as incurred but not as yet reported claims at each balance sheet date. In the aggregate, the Company's record in establishing such reserves has not indicated deficiencies for many years. However, the reserves posted by insurers such as the Company are necessarily based on a wide variety of estimates, can be affected by lagging claim emergence or reporting delays, and their ultimate disposition is subject to a multitude of economic, political, judicial and societal factors that cannot be anticipated or quantified accurately. Accordingly, there can be no guaranty that such reserves will always be on the mark, and any redundancies or deficiencies would be recorded in the periods during which they emerge and are quantified. 12 The ratio of consolidated underwriting, acquisition and insurance expenses to net premiums and fees earned was approximately 49% for both the second quarter and first six month periods of 2002 and 2001. 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 declined slightly due to a greater increase in premium revenues than operating expenses, while the Mortgage Guaranty segment's expense ratio rose slightly in this year's second quarter and six month period. The insurance expense ratio for the title segment was lower in the first half of 2002 compared to the same period in 2001 due in part to an increase in premium and fees volume and good controls on operating expenses. Consolidated interest and other corporate charges decreased in the first half of 2002 due primarily to reduced interest costs on a gradually lower debt level. Pretax and Net Income: Consolidated income before taxes increased by 9.7% in the second quarter of 2002 and 12.8% in the first six months of 2002 when compared to the same periods one year ago. General Insurance Group results improved meaningfully in the second quarter due to better underwriting experience. Further growth of Mortgage Guaranty Group income from underwriting and investments, and accelerated growth in premiums and fees from greater refinancing activity which benefitted the Title Insurance Group in particular, also led to greater contributions to pretax operating earnings in the current year's second quarter. The effective consolidated income tax rate was 24.2% and 27.9% in the second quarter and six month period of 2002, respectively, and 29.4% and 30.3% for the second quarter and six month period of 2001, respectively. The second quarter and first half 2002 effective tax rates were reduced and net earnings were enhanced by tax and related interest recoveries of $10.9 million due to the favorable resolution of tax issues dating back to the Company's 1987 tax return. Otherwise, the rates for each period reflect primarily the varying proportions of pretax operating income derived from partially tax-sheltered investment income (principally tax-exempt interest) on the one hand, and the combination of fully taxable investment income, realized investments gains, and underwriting/service income on the other hand. 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, work-related injuries, and unanticipated external events. 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 holdings of 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 4 - Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ (a) The annual meeting of registrant's shareholders was held on May 24, 2002. (b) Proxies for the meeting were solicited by management pursuant to Regulation 14A under the Security Exchange Act of 1934. There was no solicitation in opposition to management's nominees for directors as listed in the proxy statement and all such nominees were elected. (c) At the meeting, the shareholders voted on the following matters: 1. The election of four Class III directors. There were at least 86,333,715 affirmative votes for each director and no more than 25,302,618 votes withheld for any single director. 2. The approval of the 2002 Old Republic International Corporation Non-Qualified Stock Option Plan. The shareholders approved this Plan by a vote of 85,299,875 shares for the Plan, 13,629,300 shares against and 742,707 shares abstaining. 3. Shareholder Proposal. The Company's Secretary received a notice from a shareholder in December, 2001 stating that he intended to present a resolution at the Annual Shareholder Meeting concerning the appointment of at least one woman director. In accordance with the rules of the Securities and Exchange Commission, this proposal was included in the Company's proxy solicitation materials. The shareholder, however, did not appear, in person or by proxy, to present his proposal. As a result, the proposal was not presented. However, if the proposal had been presented it would have failed. There were 11,372,687 shares voted for, 79,963,438 shares voted against and 8,335,757 shares that abstained from voting. 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: August 8, 2002 -------------- /s/ John S. Adams --------------------------------------- John S. Adams Senior Vice President & Chief Financial Officer EX-99 2 exhibit99.txt CERTIFICATION OF PERIODIC REPORT Exhibit 99 CERTIFICATION OF PERIODIC REPORT -------------------------------- I, Aldo C. Zucaro, Chairman of the Board and Chief Executive Officer of Old Republic International Corporation (the "Company"), hereby certify, pusuant to the requirements of Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (3) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended June 30, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o (d)); and (4) the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 9, 2002 /s/ Aldo C. Zucaro ------------------------- Aldo C. Zucaro Chairman of the Board and Chief Executive Officer Exhibit 99 CERTIFICATION OF PERIODIC REPORT -------------------------------- I, John S. Adams, Senior Vice President and Chief Financial Officer of Old Republic International Corporation (the "Company"), hereby certify, pusuant to the requirements of Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (3) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended June 30, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o (d)); and (4) the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 9, 2002 /s/ John S. Adams ------------------------- John S. Adams Senior Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----