-----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, WbOMd68BOcr0aazU4bOr5sLOjCbkJAhY6xcGrjEW25jnyYc8B8W3MXYBO9zDUtmr lugiRsbyuj8gdov1UcZDVA== 0000074260-99-000019.txt : 19990813 0000074260-99-000019.hdr.sgml : 19990813 ACCESSION NUMBER: 0000074260-99-000019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990812 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: 99685456 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 FORM 10-Q OLD REPUBLIC INTERNATIONAL CORPORATION 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, 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 June 30, 1999 --------------------------- ------------------------- Common Stock / $1 par value 129,309,981 There are 14 pages contained in this report. 2 OLD REPUBLIC INTERNATIONAL CORPORATION Report on Form 10-Q / June 30, 1999 INDEX - -------------------------------------------------------------------------------- PAGE NO. -------- PART I FINANCIAL INFORMATION: CONSOLIDATED SUMMARY BALANCE SHEETS 3 CONSOLIDATED SUMMARY STATEMENTS OF INCOME 4 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 5 CONSOLIDATED STATEMENTS OF CASH FLOWS 6 NOTES TO CONSOLIDATED SUMMARY FINANCIAL STATEMENTS 7 - 9 MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS 10 - 12 PART II OTHER INFORMATION 13 & 14 3 OLD REPUBLIC INTERNATIONAL CORPORATION CONSOLIDATED SUMMARY BALANCE SHEETS (Unaudited) ($ in Millions) - ------------------------------------------------------------------------------------------------------------------------------------ June 30, December 31, 1999 1998 ---------------- ---------------- Assets Investments: Held to maturity: Fixed maturity securities (at amortized cost) (fair value: $2,348.2 and $2,422.2) $2,330.6 $2,332.3 Other long-term investments (at cost) 33.5 25.1 ---------------- ---------------- Total 2,364.1 2,357.5 ---------------- ---------------- Available for sale: Fixed maturity securities (at fair value) (cost: $1,887.7 and $1,877.8) 1,895.6 1,954.4 Equity securities (at fair value) (cost: $118.7 and $117.0) 156.6 164.8 Short-term investments (at fair value which approximates cost) 270.7 377.6 ---------------- ---------------- Total 2,323.0 2,497.0 ---------------- ---------------- Total investments 4,687.2 4,854.5 ---------------- ---------------- Other Assets: Cash 22.1 22.9 Accrued investment income 70.2 71.1 Accounts and notes receivable 309.6 290.0 Reinsurance balances and funds held 77.8 86.3 Reinsurance recoverable: Paid losses 30.1 31.2 Policy and claim reserves 1,289.9 1,292.9 Federal income tax recoverable: Current 4.5 --- Deferred policy acquisition costs 151.0 143.9 Sundry assets 223.9 226.4 ---------------- ---------------- 2,179.4 2,165.2 ---------------- ---------------- Total Assets $6,866.6 $7,019.7 ================ ================ - ----------------------------------------------------------------------------------------------------------------------------------- Liabilities, Preferred Stock and Common Shareholders' Equity Liabilities: Future policy benefits $126.1 $187.6 Losses, claims and settlement expenses 3,351.8 3,406.5 Unearned premiums 359.5 360.1 Other policyholders' benefits and funds 53.4 52.5 ---------------- ---------------- Total policy liabilities and accruals 3,890.9 4,006.9 Commissions, expenses, fees and taxes 141.7 138.8 Reinsurance balances and funds 120.8 130.5 Federal income tax payable: Current --- 6.9 Deferred 194.3 179.8 Debt 140.9 145.1 Sundry liabilities 92.2 105.9 ---------------- ---------------- Total liabilities 4,581.0 4,714.2 ---------------- ---------------- Preferred Stock: Convertible preferred stock 1.0 1.2 ---------------- ---------------- Common Common stock 156.5 156.3 Shareholders' Additional paid-in capital 627.0 624.5 Equity: Unallocated shares - ESSOP (2.5) (5.1) Retained earnings 1,817.4 1,709.9 Accumulated other comprehensive income 21.5 70.2 Treasury stock (at cost) (335.5) (251.6) ---------------- ---------------- Total Common Shareholders' Equity 2,284.5 2,304.2 ---------------- ---------------- Total Liabilities, Preferred Stock and Common Shareholders' Equity $6,866.6 $7,019.7 ================ ================
See accompanying notes. 4 OLD REPUBLIC INTERNATIONAL CORPORATION CONSOLIDATED SUMMARY STATEMENTS OF INCOME (Unaudited) ($ in Millions, Except Common Share Data) - ----------------------------------------------------------------------------------------------------------------------------------- Quarters Ended Six Months Ended June 30, June 30, ---------------------------------- ---------------------------------- 1999 1998 1999 1998 ---------------- ---------------- ---------------- ---------------- Revenues: Net premiums earned $387.3 $391.6 $783.4 $751.2 Title, escrow and other fees 60.0 63.4 117.3 113.3 Net investment income 65.3 67.9 130.7 136.5 Realized investment gains 6.9 5.5 21.6 25.5 Other income 7.8 7.9 15.4 16.4 ---------------- ---------------- ---------------- ---------------- Net revenues 527.4 536.6 1,068.7 1,043.1 ---------------- ---------------- ---------------- ---------------- Expenses: Benefits, claims and settlement expenses 193.1 189.0 394.1 374.7 Underwriting, acquisition and insurance expenses 240.4 227.7 472.0 425.9 Interest and other expenses 3.6 3.5 6.9 7.1 ---------------- ---------------- ---------------- ---------------- Total expenses 437.2 420.3 873.1 807.9 ---------------- ---------------- ---------------- ---------------- Income before income taxes and items below 90.2 116.2 195.6 235.2 ---------------- ---------------- ---------------- ---------------- Income Taxes: Currently payable 3.0 18.5 17.1 42.1 Deferred 23.9 17.7 42.5 32.0 ---------------- ---------------- ---------------- ---------------- Total income taxes 27.0 36.2 59.6 74.1 ---------------- ---------------- ---------------- ---------------- 63.1 80.0 135.9 161.0 Other items - net 0.6 0.3 1.7 0.9 ---------------- ---------------- ---------------- ---------------- Net Income: $63.8 $80.4 $137.6 $161.9 ================ ================ ================ ================ Net Income Per Share: Basic $0.48 $0.58 $1.04 $1.17 ================ ================ ================ ================ Diluted $0.48 $0.57 $1.03 $1.15 ================ ================ ================ ================ Dividends Per Common Share: Cash dividends $0.130 $0.100 $0.230 $0.187 ================ ================ ================ ================= Stock dividends --% --% --% 50% ================ ================ ================ ================ Average number of common and common equivalent shares outstanding Basic 130,774,838 137,756,505 131,717,335 138,261,741 ================ ================ ================ ================ Diluted 131,816,397 139,993,613 132,813,239 140,435,405 ================ ================ ================ ================
See accompanying notes. 5 OLD REPUBLIC INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) ($ in Millions) - ----------------------------------------------------------------------------------------------------------------------------------- Quarters Ended Six Months Ended June 30, June 30, ---------------------------------- ---------------------------------- 1999 1998 1999 1998 ---------------- ---------------- ---------------- ---------------- Net income as reported $63.8 $80.4 $137.6 $161.9 ---------------- ---------------- ---------------- ---------------- Other comprehensive income: Foreign currency translation adjustment 0.7 (1.0) 1.1 (0.7) ---------------- ---------------- ---------------- ---------------- Unrealized gains (losses) on securities: Unrealized gains (losses) arising during period (20.1) 2.8 (55.2) 16.1 Less: elimination of pre-tax realized gains included in income as reported 6.9 5.5 21.6 25.5 ---------------- ---------------- ---------------- ---------------- Pre-tax unrealized losses on securities carried at market value (27.0) (2.7) (76.8) (9.3) Deferred income taxes (credits) (9.5) (1.0) (26.9) (3.3) ---------------- ---------------- ---------------- ---------------- Net unrealized losses on securities (17.5) (1.7) (49.8) (6.0) ---------------- ---------------- ---------------- ---------------- Net adjustments (16.7) (2.7) (48.7) (6.7) ---------------- ---------------- ---------------- ---------------- Comprehensive income $47.1 $77.5 $88.9 $155.1 ================ ================= ================ ================
See accompanying notes. 6 OLD REPUBLIC INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) ($ in Millions) - ----------------------------------------------------------------------------------------------------------------------------------- Six Months Ended June 30, ------------------------------------ 1999 1998 ----------------- ----------------- Cash flows from operating activities: Net income $137.6 $161.9 Adjustment to reconcile net income to net cash provided by operating activities: Deferred policy acquisition costs (6.4) (4.3) Premiums and other receivables (18.6) 2.2 Unpaid claims and related items (49.6) (34.7) Future policy benefits and policyholders' funds (1.8) (17.7) Income taxes 30.5 37.8 Reinsurance balances and funds (0.9) (0.2) Accounts payable, accrued expenses and other 2.3 1.0 ----------------- ----------------- Total 93.0 145.9 ----------------- ----------------- Cash flows from investing activities: Sales of fixed maturity securities: Held to maturity: Maturities and early calls 51.6 83.7 Available for sale: Maturities and early calls 53.9 60.1 Other 83.8 77.0 Sales of equity securities 25.2 10.8 Sales of other investments 0.6 2.5 Sales of fixed assets for company use 1.0 0.5 Purchases of fixed maturity securities: Held to maturity (77.2) (175.6) Available for sale (180.2) (147.6) Purchases of equity securities (26.9) (51.0) Purchases of other investments (8.7) (10.8) Purchases of fixed assets for company use (8.0) (14.4) Proceeds from sale of subsidiary 25.3 --- Cash and short-term investments of subsidiary sold (31.4) --- Other-net 0.1 (2.1) ----------------- ----------------- Total (90.7) (166.7) ----------------- ----------------- Cash flows from financing activities: Increase in term loans 18.0 4.0 Issuance of preferred and common stocks 2.4 14.5 Issuance of debentures and notes --- 0.6 Repayments of term loans (18.0) --- Redemption of debentures and notes (1.6) (0.7) Dividends on common shares (30.0) (25.7) Dividends on preferred shares --- (0.1) Purchase of treasury stock (83.8) (51.4) Other-net 3.1 1.4 ----------------- ----------------- Total (109.9) (57.3) ----------------- ----------------- Increase (decrease) in cash and short-term investments (107.6) (78.1) Cash and short-term investments, beginning of period 400.5 355.0 ----------------- ----------------- Cash and short-term investments, end of period $292.9 $276.8 ================= ================= Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $4.9 $4.9 ================= ================= Income taxes $28.3 $37.9 ================= =================
See accompanying notes. 7 OLD REPUBLIC INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED SUMMARY FINANCIAL STATEMENTS (Unaudited) ($ 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 Six Months Ended June 30, June 30, ----------------------------- ----------------------------- 1999 1998 1999 1998 ------------- ------------- ------------- ------------- Numerator: Income before extraordinary item......................... $ 63.8 $ 80.4 $ 137.6 $ 161.9 Less Preferred stock dividends........................... -- -- -- .1 ------------- ------------- ------------- ------------- Numerator for basic earnings per share - income available to common stockholders............... 63.8 80.3 137.6 161.8 Effect of dilutive securities: Convertible preferred stock dividends................. -- -- -- .1 ------------- ------------- ------------- ------------- Numerator for diluted earnings per share - income available to common stockholders after assumed conversions................................ $ 63.8 $ 80.4 $ 137.6 $ 161.9 ============= ============= ============= ============= Denominator: Denominator for basic earnings per share - weighted-average shares............................... 130,774,838 137,756,505 131,717,335 138,261,741 Effect of dilutive securities: Stock options......................................... 846,464 1,999,091 896,557 1,935,647 Convertible preferred stock........................... 195,095 238,017 199,347 238,017 ------------- ------------- ------------- ------------- Dilutive potential common shares...................... 1,041,559 2,237,108 1,095,904 2,173,664 ------------- ------------- ------------- ------------- Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions...................................... 131,816,397 139,993,613 132,813,239 140,435,405 ============= ============= ============= ============= Basic earnings per share................................... $ .48 $ .58 $ 1.04 $ 1.17 ============= ============= ============= ============= Diluted earnings per share................................. $ .48 $ .57 $ 1.03 $ 1.15 ============= ============= ============= =============
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 $30.4 at June 30, 1999. Unrealized appreciation of investments, before applicable income taxes of $16.6, at June 30, 1999 included gross unrealized gains and (losses) of $67.8 and $(20.7), respectively. For the six months ended June 30, 1999 and 1998, net unrealized depreciation of investments, net of deferred income taxes, amounted to $49.8 and $6.0, 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 Six Months Ended June 30, June 30, ----------------------------- ----------------------------- 1999 1998 1999 1998 ------------- ------------- ------------- ------------- General Insurance Group: Net premiums earned.................................... $ 208.2 $ 227.7 $ 422.2 $ 436.7 Net investment income and other income(a).............. 50.2 52.0 100.3 105.1 ------------- ------------- ------------- ------------- Total ................................................ $ 258.4 $ 279.8 $ 522.5 $ 541.9 ============= ============= ============= ============= Income before taxes.................................... $ 27.9 $ 48.8 $ 63.3 $ 100.6 ============= ============= ============= ============= Income tax expense..................................... $ 6.2 $ 13.5 $ 15.0 $ 28.7 ============= ============= ============= ============= Mortgage Guaranty Group: Net premiums earned.................................... $ 75.3 $ 72.7 $ 151.0 $ 144.1 Net investment income and other income(a).............. 13.8 13.3 28.0 27.1 ------------- ------------- ------------- ------------- Total ................................................ $ 89.2 $ 86.1 $ 179.1 $ 171.2 ============= ============= ============= ============= Income before taxes.................................... $ 46.1 $ 42.4 $ 85.9 $ 76.4 ============= ============= ============= ============= Income tax expense..................................... $ 15.4 $ 14.2 $ 28.6 $ 25.5 ============= ============= ============= ============= Title Insurance Group: Net premiums earned.................................... $ 90.8 $ 78.0 $ 180.0 $ 142.0 Title, escrow and other fees ......................... 60.0 63.4 117.3 113.3 ------------- ------------- ------------- ------------- Sub-total.............................................. 150.9 141.5 297.3 255.4 Net investment income and other income(a).............. 5.8 5.2 11.3 10.1 ------------- ------------- ------------- ------------- Total ................................................ $ 156.7 $ 146.7 $ 308.7 $ 265.5 ============= ============= ============= ============= Income before taxes.................................... $ 13.5 $ 18.8 $ 30.3 $ 31.4 ============= ============= ============= ============= Income tax expense..................................... $ 4.5 $ 6.4 $ 10.2 $ 10.6 ============= ============= ============= ============= Life Insurance Group (c): Net premiums earned.................................... $ 12.8 $ 13.0 $ 30.1 $ 28.2 Net investment income and other income(a).............. 2.2 3.6 4.3 7.0 ------------- ------------- ------------- ------------- Total ................................................ $ 15.0 $ 16.6 $ 34.4 $ 35.2 ============= ============= ============= ============= Income (loss) before taxes (credits)................... $ (1.8) $ 2.1 $ (1.3) $ 3.6 ============= ============= ============= ============= Income tax expense (credit)............................ $ (.8) $ .7 $ (.7) $ 1.2 ============= ============= ============= =============
9 Reconciliations of Segments to Consolidated -------------------------------------------------------------------------------------------------------------------------- Quarters Ended Six Months Ended June 30, June 30, ----------------------------- ----------------------------- 1999 1998 1999 1998 ------------- ------------- ------------- ------------- Revenues: Total revenues for reportable segments................. $ 519.5 $ 529.4 $ 1,044.9 $ 1,014.0 Net realized investment gains.......................... 6.9 5.5 21.6 25.5 Other revenues......................................... 2.3 2.7 4.6 5.8 Elimination of intersegment revenues (b)............... (1.3) (1.1) (2.5) (2.4) ------------- ------------- ------------- ------------- Total consolidated revenues..................... $ 527.4 $ 536.6 $ 1,068.7 $ 1,043.1 ============= ============= ============= ============= Income before taxes: Total income before taxes of reportable segments....... $ 85.7 $ 112.2 $ 178.2 $ 212.1 Net realized investment gains.......................... 6.9 5.5 21.6 25.5 Other revenues - net................................... (2.3) (1.3) (3.9) (1.9) Elimination of intersegment profits (b)................ (.1) (.2) (.2) (.5) ------------- ------------- ------------- ------------- Income before income taxes and extraordinary items............................. $ 90.2 $ 116.2 $ 195.6 $ 235.2 ============= ============= ============= =============
- --------- 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 Six Months Ended June 30, 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 June 30, 1999 reflected decreases in assets, liabilities and common shareholders' equity of 2.2%, 2.8% and .9%, respectively, when compared to the immediately preceding year-end. Cash and invested assets represented 69.6% and 70.5% of consolidated assets as of June 30, 1999 and December 31, 1998 respectively. Consolidated operating cash flow was positive at $93.0 million in the latest six month period, compared to $145.9 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, the sale of a largely inactive life insurance subsidiary in early 1999 and a decrease in the value of bonds and stocks carried at market value. Relatively high short-term maturity investment positions continued to be maintained as of June 30, 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 six months 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 six months of 1999, Old Republic's investment in equity securities decreased by 5.0% vis-a-vis the related invested balance at year-end 1998 due to securities sales and unrealized losses during the period. At June 30, 1999, 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. 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 $2.42 billion at June 30, 1999 consisted of debt of $140.9 million, convertible preferred stock of $1.0 million, and common shareholders' equity of $2.28 billion. The decrease in the common shareholders' equity account during the six months ended June 30, 1999 reflects primarily the retention of earnings in excess of dividend requirements, a decrease in the value of bonds and stocks carried at market values and the reacquisition of $83.8 million of common shares pursuant to previously announced stock buy-back programs. RESULTS OF OPERATIONS Revenues: Consolidated net premiums and fees earned for the second quarter of 1999 amounted to $447.3 million, 1.7% below the amount reported for the same quarter of 1998. For the second quarter of 1999, the Company's General Insurance Group posted a decrease in earned premium volume of $19.5 million as a result of a continuing soft pricing environment in this industry segment. Mortgage Guaranty Group premiums increased by 3.5% to $75.3 million from $72.7 million in the year-ago quarter. Title Group premium and fee revenues increased 6.6% to $150.9 million in the second 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 relatively low mortgage rates, high employment trends and greater housing price appreciation. The Life and Health Group's premium volume decreased to $12.8 million, a 1.1% decrease when compared to the same quarter of 1998. 11 Consolidated net premiums and fees earned in the first half of 1999 amounted to $900.8 million, or 4.2% above the amount reported for the same 1998 period. The General Insurance Group's net premiums earned decreased 3.3% to $422.2 million in the first half of 1999. The Mortgage Guaranty Group continued to experience volume growth and reported net premiums earned of $151.0 million, an increase of 4.8%. The Title Insurance Group reported premiums and fees in the first half of $297.3 million, up from $255.4 million in the year-ago period. Life and health premiums also rose 6.5% to $30.1 million during the same 1999 period, but remained at approximately 3% of consolidated premiums and fees. The above-cited factors for the second quarter of 1999 had similar effects on first half 1999 premiums and fees revenues. Consolidated net investment income was $130.7 million in the first half of 1999 and $65.3 million in the second quarter of 1999 compared to $136.5 million and $67.9 million, respectively, in the same quarter and six month period 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 June 30, 1999 and 1998, respectively. This yield pattern reflects at once the relatively short maturity of Old Republic's fixed maturity securities portfolio, 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 $21.6 million in the first half of 1999 were mostly due to the sale of equity securities. Dispositions of securities were primarily the result of scheduled maturities of bonds and notes and sales of equity securities. For the first six months of 1999, 55.7% 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 43% in the first six months of 1999 and 1998, respectively. For the second quarter of each year, these ratios were 43% in 1999 and 42% in 1998. Consolidated claims experience for property and liability coverages was 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 six months of 1999 compared to the same period in 1998 mostly due to stable economic and employment conditions which usually lead to reduced mortgage defaults. Title claims costs were basically stable in both periods, while Life Group claim costs were higher in the latest six months due to greater frequency and severity of travel accident and ordinary term life claims. The ratio of consolidated underwriting, acquisition and insurance expenses to net premiums and fees earned were approximately 52% and 50% in the first six months of 1999 and 1998, respectively. These ratios were 54% and 51% for the second 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 remained basically flat for the first half of 1999 compared to the same period in 1998. The mortgage guaranty segment's expense ratio moved up due to higher costs associated with continued enhancement of information systems and relatively high contract underwriting services. The title insurance expense ratio was higher in the first half of 1999 compared to the same period in 1998 due mostly to generally higher salary and information services costs. Consolidated interest and other charges were approximately the same for both periods. Pre-Tax and Net Income: Consolidated income before taxes decreased by 24.8% in the second quarter and 17.0% in the first six months of 1999 when compared to the same periods one year ago. The Corporation's Mortgage Guaranty segment reflected higher second quarter and year to date pre-tax operating earnings; General, Title and Life Insurance operations posted decreases in pre-tax operating earnings in this year's second quarter and first six months; realized gains on sales of securities were higher in the most recent quarter and lower for the current year to date period. The effective consolidated income tax rate was 30% and 31% in the second quarter and six month period of 1999, respectively, and 31% and 32% in the second quarter and six month period of 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. 12 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. Old Republic's subsidiaries have substantially 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 have not been material to operating results. A significant portion of these costs was 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 the third and fourth quarters of 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, 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 4 - Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ (a) The annual meeting of registrant's shareholders was held on May 21, 1999. (b) Proxies for the meeting were solicited by management pursuant to Regulation 14A under the Security Exchange Act of 1934. There was no solicitation in opposition to management's nominees for directors as listed in the proxy statement and all such nominees were elected. (c) At the meeting, the shareholders voted on the following matter: 1. The election of four Class III directors. There were at least 104,801,180 affirmative votes for each director and no more than 1,100,898 votes withheld. Item 6 - Reports on Form 8-K - ---------------------------- (a) Reports on Form 8-K 1. The registrant has not filed any reports on Form 8-K during the quarter for which this report is filed. Items other than those listed are omitted because they are not required. 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 12, 1999 ----------------------- /s/ Paul D. Adams -------------------------------------- Paul 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 statements. 1,000,000 6-MOS DEC-31-1999 JUN-30-1999 1,895 2,330 2,348 156 7 0 4,687 22 30 151 6,866 3,477 359 0 53 140 0 0 156 2,128 6,866 783 130 21 15 394 108 363 195 59 137 0 0 0 137 1.04 1.03 0 0 0 0 0 0 0
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