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| ORI > SEC Filings for ORI > Form 10-K on 1-Mar-2013 | All Recent SEC Filings |
1-Mar-2013
Annual Report
This management analysis of financial position and results of operations pertains to the consolidated accounts of Old Republic International Corporation ("Old Republic" or "the Company"). The Company conducts its operations through three major regulatory segments, namely, its General (property and liability), Title, and the RFIG (mortgage guaranty and consumer credit indemnity) Run-off Business. A small life and accident insurance business, accounting for 1.3% of consolidated operating revenues for the year ended December 31, 2012 and 1.5% of consolidated assets as of that date, is included within the corporate and other caption of this report.
The consolidated accounts are presented in conformity with the Financial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC") of accounting principles generally accepted in the United States of America ("GAAP"). As a publicly held company, Old Republic utilizes GAAP largely to comply with the financial reporting requirements of the Securities and Exchange Commission ("SEC"). From time to time the FASB and the SEC issue various releases most of which require additional financial statement disclosures and provide related application guidance. Of particular relevance to the Company's financial statements is new guidance issued by the FASB relative to the calculation of deferred acquisition costs incurred by insurance entities which is discussed further in Note 1(f) of the Notes to Consolidated Financial Statements.
As a state regulated financial institution vested with the public interest, however, business of the Company's insurance subsidiaries is managed pursuant to the laws, regulations, and accounting practices of the various states in the U.S. and those of a small number of other jurisdictions outside the U.S. in which they operate. In comparison with GAAP, the statutory accounting practices reflect greater conservatism and comparability among insurers, and are intended to address the primary financial security interests of policyholders and their beneficiaries. Additionally, these practices also affect a significant number of important factors such as product pricing, risk bearing capacity and capital adequacy, the determination of Federal income taxes payable currently among ORI's tax-consolidated entities, and the upstreaming of dividends by insurance subsidiaries to the parent holding company. The major differences between these statutory financial accounting practices and GAAP are summarized in Note 1(a) to the consolidated financial statements included elsewhere in this report.
The insurance business is distinguished from most others in that the prices (premiums) charged for various insurance products are set without certainty of the ultimate benefit and claim costs that will emerge or be incurred, often many years after issuance and expiration of a policy. This basic fact casts Old Republic as a risk-taking enterprise managed for the long run. Management therefore conducts the business with a primary focus on achieving favorable underwriting results over cycles, and on the maintenance of financial soundness in support of the insurance subsidiaries' long-term obligations to insurance beneficiaries. To achieve these objectives, adherence to insurance risk management principles is stressed, and asset diversification and quality are emphasized.
In addition to income arising from Old Republic's basic underwriting and related services functions, significant investment income is earned from invested funds generated by those functions and from shareholders' capital. Investment management aims for stability of income from interest and dividends, protection of capital, and sufficient liquidity to meet insurance underwriting and other obligations as they become payable in the future. Securities trading and the realization of capital gains are not objectives. The investment philosophy is therefore best characterized as emphasizing value, credit quality, and relatively long-term holding periods. The Company's ability to hold both fixed maturity and equity securities for long periods of time is in turn enabled by the scheduling of maturities in contemplation of an appropriate matching of assets and liabilities.
In light of the above factors, the Company's affairs are necessarily managed for the long run and without significant regard to the arbitrary strictures of quarterly or even annual reporting periods that American industry must observe. In Old Republic's view, such short reporting time frames do not comport well with the long-term nature of much of its business. Management believes that the Company's operating results and financial condition can best be evaluated by observing underwriting and overall operating performance trends over succeeding five to ten year intervals. Such extended periods can encompass one or two economic and/or underwriting cycles, and thereby provide appropriate time frames for such cycles to run their course and for reserved claim costs to be quantified with greater finality and effect.
This management analysis should be read in conjunction with the consolidated financial statements and the footnotes appended to them.
EXECUTIVE SUMMARY
In late March 2012, the Company combined its General Insurance Group's Consumer Credit Indemnity (CCI) division with its Mortgage Guaranty (MI) business in a renamed Republic Financial Indemnity Group, Inc. ("RFIG") Run-off segment. The two operations, which offer similar insurance coverages, have been in run-off operating mode since 2008 (CCI) and August 2011 (MI), and are inactive from new business production standpoints.
The combination affects the manner in which segmented information is now
presented. The operating results of the combined coverages are therefore shown
as a single run-off book of business within ORI's consolidated operations. Prior
periods' segmented information for the general insurance and RFIG run-off
business segments has therefore been reclassified to provide necessary
consistency in period-to-period operating comparisons. The segment
reclassifications have no effect on the presentation of the underlying
consolidated financial statements.
Financial Highlights
% Change
2012 2011
Years Ended December 31: 2012 2011 2010 vs. 2011 vs. 2010
Operating Revenues:
Excluding run-off business $ 4,474.9 $ 3,965.3 $ 3,317.0 12.9 % 19.5 %
RFIG run-off business 447.3 564.6 676.5 (20.8 ) (16.5 )
Total $ 4,922.2 $ 4,529.9 $ 3,993.5 8.7 % 13.4 %
Net Operating Income (Loss):
Excluding run-off business $ 231.0 $ 257.5 $ 218.9 (10.3 )% 17.7 %
RFIG run-off business (330.8 ) (476.1 ) (259.5 ) 30.5 (83.4 )
Total $ (99.7 ) $ (218.5 ) $ (40.6 ) 54.3 % N/M
Net Income (Loss):
Excluding run-off business $ 253.1 $ 280.5 $ 261.6 (9.8 )% 7.2 %
RFIG run-off business (321.8 ) (421.1 ) (231.4 ) 23.6 (81.9 )
Total $ (68.6 ) $ (140.5 ) $ 30.1 51.1 % N/M
Diluted Earnings Per Share:
Net Operating Income (Loss)
Excluding run-off business $ 0.90 $ 1.01 $ 0.92 (10.9 )% 9.8 %
RFIG run-off business (1.29 ) (1.87 ) (1.08 ) 31.0 (73.1 )
Total $ (0.39 ) $ (0.86 ) $ (0.16 ) 54.7 % N/M
Net Income (Loss)
Excluding run-off business $ 0.99 $ 1.10 $ 1.09 (10.0 )% 0.9 %
RFIG run-off business (1.26 ) (1.65 ) (0.96 ) 23.6 (71.9 )
Total $ (0.27 ) $ (0.55 ) $ 0.13 50.9 % N/M
Cash Dividends Per Share $ 0.71 $ 0.70 $ 0.69 1.4 % 1.4 %
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2012 operating results benefited from substantial improvements in title insurance and much reduced losses in the combined mortgage guaranty ("MI") and consumer credit indemnity ("CCI") run-off books of business. General insurance profits, however, dropped measurably as an increase in claim costs, mostly for the workers' compensation coverage, hindered profitability in Old Republic's largest segment. By contrast, 2011 operating results were enhanced by significant growth in general and title insurance whereas combined MI and CCI deteriorated measurably. In 2010, general insurance profitability was penalized by greater claim costs while title insurance earnings improved slightly. A reduction in combined MI and CCI claim costs led to a much lower 2010 consolidated operating loss.
Consolidated Results - The major components of Old Republic's consolidated results and other data for the periods reported upon are shown below. Any necessary reclassifications of prior years' data are reflected in the table, including the previously noted 2012 reclassification of the CCI coverage from the General Insurance segment to the RFIG run-off business.
% Change
2012 2011
Years Ended December 31: 2012 2011 2010 vs. 2011 vs. 2010
Operating revenues:
General insurance $ 2,699.4 $ 2,488.6 $ 1,986.9 8.5 % 25.3 %
Title insurance 1,707.1 1,391.8 1,238.8 22.7 12.3
Corporate and other 68.3 84.8 91.2 (19.4 ) (7.0 )
Subtotal 4,474.9 3,965.3 3,317.0 12.9 19.5
RFIG run-off business 447.3 564.6 676.5 (20.8 ) (16.5 )
Total $ 4,922.2 $ 4,529.9 $ 3,993.5 8.7 % 13.4 %
Pretax operating income (loss):
General insurance $ 261.0 $ 353.9 $ 316.7 (26.3 )% 11.7 %
Title insurance 73.8 36.2 9.4 103.9 284.5
Corporate and other (2.7 ) (14.6 ) (2.8 ) 81.1 (407.4 )
Subtotal 332.1 375.5 323.2 (11.5 ) 16.2
RFIG run-off business (508.6 ) (727.8 ) (404.8 ) 30.1 (79.8 )
Total (176.4 ) (352.2 ) (81.5 ) 49.9 (332.2 )
Realized investment gains (losses):
From sales 48.1 165.8 110.3
From impairments (0.2 ) (50.2 ) (1.2 )
Net realized investment gains (losses) 47.8 115.5 109.1 (58.6 ) 5.9
Consolidated pretax income (loss) (128.5 ) (236.7 ) 27.6 45.7 N/M
Income taxes (credits) (59.8 ) (96.1 ) (2.5 ) 37.7 N/M
Net income (loss) $ (68.6 ) $ (140.5 ) $ 30.1 51.1 % N/M
Consolidated underwriting ratio:
Including RFIG run-off business
Benefits and claim ratio 61.9 % 68.3 % 63.8 % (9.4 )% 7.1 %
Expense ratio 48.5 % 47.5 % 47.6 % 2.1 % (0.2 )%
Composite ratio 110.4 % 115.8 % 111.4 % (4.7 )% 3.9 %
Excluding RFIG run-off business
Benefits and claim ratio 45.7 % 45.2 % 43.1 % 1.1 % 4.9 %
Expense ratio 52.4 51.2 54.4 2.3 (5.9 )
Composite ratio 98.1 % 96.4 % 97.5 % 1.8 % (1.1 )%
Diluted earnings per share:
Net operating income (loss) $ (0.39 ) $ (0.86 ) $ (0.16 ) 54.7 % N/M
Net realized investment gains (losses) 0.12 0.31 0.29
Net income (loss) $ (0.27 ) $ (0.55 ) $ 0.13 50.9 % N/M
Cash dividends paid per share $ 0.71 $ 0.70 $ 0.69 1.4 % 1.4 %
Components of diluted earnings per share:
Net operating income (loss):
General insurance $ 0.72 $ 0.95 $ 0.89
Title insurance 0.18 0.10 0.03
Corporate and other - (0.04 ) -
Subtotal 0.90 1.01 0.92
RFIG run-off business (1.29 ) (1.87 ) (1.08 )
Total (0.39 ) (0.86 ) (0.16 )
Net realized investment gains (losses) 0.12 0.31 0.29
Net income (loss) $ (0.27 ) $ (0.55 ) $ 0.13
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The preceding tables show operating and net income or loss to highlight the effects of realized investment gain or loss recognition on period-to-period comparisons. The recognition of realized investment gains or losses can be highly discretionary and arbitrary due to such factors as the timing of individual securities sales, recording of estimated losses from write-downs of impaired securities, tax-planning considerations, and changes in investment management judgments relative to the direction of securities markets or the future prospects of individual investees or industry sectors. Likewise, non-recurring items which may emerge from time to time can distort the comparability of the Company's
results from period to period. Accordingly, management uses operating income, a non-GAAP financial measure, to evaluate and better explain operating performance, and believes its use enhances an understanding of Old Republic's core business results. Operating income, however, does not replace net income determined in accordance with GAAP as a measure of total profitability. The composition of realized gains or losses follows:
Years Ended December 31: 2012 2011 2010
Realized gains (losses) from sales of previously impaired securities:
Actual tax basis (loss) on sales $ (2.0 ) $ (154.7 ) $ (44.0 )
Accounting adjustment for impairment charges taken in prior
periods 7.5 157.5 72.2
Net amount included herein 5.4 2.8 28.2
Net realized gains (losses) from sales of all other securities 42.5 163.0 82.1
Net gain (loss) from actual sales 48.1 165.8 110.3
Net realized losses from impairments (.2 ) (50.2 ) (1.2 )
Net realized investment gains (losses) reported herein $ 47.8 $ 115.5 $ 109.1
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General Insurance Results - Operating earnings, with and without the CCI run-off business were lower in 2012 as a whole. As such, 2012 results reflected a reversal of the positive operating outcome in 2011 vis-a-vis 2010. Key indicators of year-over-year performance are shown in the following table:
General Insurance Group
% Change
2012 2011
Years Ended December 31: 2012 2011 2010 vs. 2011 vs. 2010
A. Prior to reclassification and
including CCI run-off business:
Net premiums earned $ 2,366.9 $ 2,167.7 $ 1,782.1 9.2 % 21.6 %
Net investment income 265.0 270.5 260.1 (2.0 ) 4.0
Benefits and claims costs 1,808.9 1,562.9 1,374.7 15.7 13.7
Pretax operating income (loss) $ 186.0 $ 304.3 $ 172.7 (38.9 )% 76.2 %
Claim ratio 76.4 % 72.1 % 77.1 % 6.0 % (6.5 )%
Expense ratio 25.5 24.8 25.9 2.8 (4.2 )
Composite ratio 101.9 % 96.9 % 103.0 % 5.2 % (5.9 )%
B. All CCI run-off business
reclassification(*):
Net premiums earned $ 42.4 $ 58.3 $ 87.9 (27.1 )% (33.7 )%
Net investment income .1 - - N/M N/M
Claim costs 112.8 102.9 225.4 9.7 (54.4 )
Pretax operating income (loss) $ (74.9 ) $ (49.6 ) $ (143.9 ) (51.0 )% (65.5 )%
Claim ratio 265.7 % 176.5 % 256.4 % 50.5 % (31.2 )%
Expense ratio 11.0 8.7 7.4 26.4 17.6
Composite ratio 276.7 % 185.2 % 263.8 % 49.4 % (29.8 )%
C. After reclassification /
Total Excluding all CCI run-off
business:
Net premiums earned $ 2,324.4 $ 2,109.4 $ 1,694.2 10.2 % 24.5 %
Net investment income 264.9 270.5 260.1 (2.1 ) 4.0
Benefits and claims costs 1,696.0 1,460.0 1,149.3 16.2 27.0
Pretax operating income (loss) $ 261.0 $ 353.9 $ 316.7 (26.3 )% 11.7 %
Benefits and claim ratio 73.0 % 69.2 % 67.8 % 5.5 % 2.1 %
Expense ratio 25.7 25.2 26.9 2.0 (6.3 )
Composite ratio 98.7 % 94.4 % 94.7 % 4.6 % (.3 )%
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(*) In connection with the previously noted MI / CCI combination, $70.9 of pretax operating losses for all of 2012 are retained by certain general insurance companies pursuant to various quota share and stop loss reinsurance agreements. All of these amounts, however, have been reclassified and are included for segment reporting purposes such that table (B) above incorporates 100% of the CCI run-off business results.
Favorable premium trends for workers' compensation and liability insurance lines within Old Republic's construction, trucking, and large account risk management business were mainly responsible for premium growth throughout 2012. Moderate rate improvements garnered in the past twenty-four months or so, and the strengthening though slow pace of U.S. economic activity were major underlying factors in this regard.
As in other segments of Old Republic's business, general insurance net investment income reflected slight downtrends. While operating cash flow has remained positive and additive to the invested asset base, market yields on quality securities to which investments and reinvestments of funds are committed remained in a weakened state.
As indicated in section (C) of the above table, the general insurance composite underwriting ratio for 2012 was up by single digits when compared with 2011. Higher loss costs for the aggregated commercial automobile (trucking), general liability, and workers' compensation coverages were most responsible for this uptrend, though workers' compensation produced the greatest adverse impact. The general expense ratio was affected negatively by approximately 1.6 percentage points for all of 2012, for charges related to previously deferred policy acquisition costs no longer amortizable and fully charged to 2012 operations. These charges arose from new Financial Accounting Standards Board guidance that took effect on January 1, 2012.
Title Insurance Results - Old Republic's title insurance business registered
consistently positive operating momentum during 2012. Key performance indicators
are shown below:
Title Insurance Group
% Change
2012 2011
Years Ended December 31: 2012 2011 2010 vs. 2011 vs. 2010
Net premiums and fees earned $ 1,677.4 $ 1,362.4 $ 1,211.0 23.1 % 12.5 %
Net investment income 27.3 27.3 26.5 (.1 ) 3.0
Claim costs 120.8 105.7 96.8 14.3 9.1
Pretax operating income (loss) $ 73.8 $ 36.2 $ 9.4 103.9 % 284.5 %
Claim ratio 7.2 % 7.8 % 8.0 % (7.7 )% (2.5 )%
Expense ratio 89.6 91.2 93.0 (1.8 ) (1.9 )
Composite ratio 96.8 % 99.0 % 101.0 % (2.2 )% (2.0 )%
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Growth in title insurance premiums and fees benefited from a combination of factors. Key among these were market share gains emanating from title industry dislocations and consolidation during the past four years or so, and greater levels of mortgage refinancing activity in more recent quarters. Claim ratios for 2012 were moderately lower in relation to 2011 as frequency and severity trends abated somewhat. 2011 claim ratios were slightly lower in relation to 2010's as claim frequency and severity abated. Year-over-year expense ratio comparisons benefited from continued rationalization of an expense structure more accommodative of current and future growth prospects.
RFIG Run-off Business Results - The table below reflects RFIG's comparative results before and after the previously noted combination of mortgage guaranty and consumer credit indemnity run-off coverages.
RFIG Run-off Business
% Change
2012 2011
Years Ended December 31: 2012 2011 2010 vs. 2011 vs. 2010
A. Prior to reclassification /
Excluding CCI run-off business:
Net premiums earned $ 368.0 $ 444.9 $ 498.8 (17.3 )% (10.8 )%
Net investment income 36.2 59.2 84.9 (38.9 ) (30.3 )
Claim costs 797.5 1,057.1 766.2 (24.6 ) 38.0
Pretax operating income (loss) $ (433.6 ) $ (678.1 ) $ (260.8 ) 36.1 % (160.0 )%
Claim ratio 216.7 % 237.6 % 153.6 % (8.8 )% 54.7 %
Expense ratio 10.4 23.9 14.4 (56.5 ) 66.0
Composite ratio 227.1 % 261.5 % 168.0 % (13.2 )% 55.7 %
B. All CCI run-off business
reclassification(*):
Net premiums earned $ 42.4 $ 58.3 $ 87.9 (27.1 )% (33.7 )%
Net investment income .1 - - N/M N/M
Claim costs 112.8 102.9 225.4 9.7 (54.4 )
Pretax operating income (loss) $ (74.9 ) $ (49.6 ) $ (143.9 ) (51.0 )% (65.5 )%
Claim ratio 265.7 % 176.5 % 256.4 % 50.5 % (31.2 )%
Expense ratio 11.0 8.7 7.4 26.4 17.6
Composite ratio 276.7 % 185.2 % 263.8 % 49.4 % (29.8 )%
C. After reclassification /
Total RFIG run-off MI and CCI business:
Net premiums earned $ 410.5 $ 503.2 $ 586.8 (18.4 )% (14.2 )%
Net investment income 36.3 59.3 85.0 (38.7 ) (30.3 )
Claim costs 910.4 1,160.1 991.7 (21.5 ) 17.0
Pretax operating income (loss) $ (508.6 ) $ (727.8 ) $ (404.8 ) 30.1 % (79.8 )%
Claim ratio 221.8 % 230.5 % 169.0 % (3.8 )% 36.4 %
Expense ratio 10.4 22.1 13.3 (52.9 ) 66.2
Composite ratio 232.2 % 252.6 % 182.3 % (8.1 )% 38.6 %
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(*) In connection with the previously noted MI / CCI combination, $70.9 of pretax operating losses for all of 2012 are retained by certain general insurance companies pursuant to various quota share and stop loss reinsurance agreements. All of these amounts, however, have been reclassified and are included for segment reporting purposes such that table (B) above incorporates 100% of the CCI run-off business results.
Mortgage guaranty earned premiums continued to decline throughout 2012. The gradual depletion of a book of business in run-off operating mode, together with premium refunds related to claim rescission activity and the termination of new business production since August, 2011 were major factors leading to the decline.
Net investment income fell as a consequence of a lower invested asset base eroded by declining premium volumes and ongoing claim disbursements, and a pervasively low yield environment for the investment portfolio.
2012 MI claim costs were lower as a continuing downtrend in newly reported cases, relatively stable cure rates, and lower paid claim levels more than offset reduced provisions for claim rescissions or denials, and assumptions of greater defaults headed to foreclosure. Lower operating expenses for 2012 reflect ongoing cost reductions geared to a run-off operating mode.
Table (B) above shows 100% of CCI results fully reclassified for segment reporting purposes. 2012 operating performance for this coverage was impacted by much greater claim costs. These were driven by higher estimates of continuing claim litigation expenses and reduced expectations of salvage recoveries on cumulative claims incurred to date.
As reported in earlier periods, the Company's flagship mortgage guaranty insurance carrier, Republic Mortgage Insurance Company ("RMIC"), had been . . .
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