- Selected Financial Data (All amounts, except common share data, are expressed in millions) (Years Ended December 31)
(a)Consists of cash, investments and investment income due and accrued; (b)As indicated in note 1(g) of the Notes to Consolidated Financial Statements, the adoption by the Company of certain reporting changes mandated by accounting regulatory authorities served to increase assets and liabilities by equal amounts of approximately $1.5 billion at December 31, 1994 and 1993. As permitted, prior years' reports have not been changed retroactively for these changes which became effective in 1993; (c)Total capitalization consists of debt and debt equivalents, preferred stock, and common shareholders'equity; (d)Income taxes were decreased, and net income correspondingly increased by $1.9 ($.03 per share) in 1992, $3.6 ($.07 per share) in 1991 and $5.5 ($.11 per share) in 1990, as a result of amortized fresh start deferred income tax credits all of which resulted from changes in tax regulations effective January 1,1987; (e)See notes 1(h) and (l) of the Notes to Consolidated Financial Statements and note (b) above, for an explanation of accounting changes mandated by accounting regulatory authorities. As permitted, prior year reports have not been changed retroactively for these changes which became effective in 1993; (f)Common share data has been retroactively adjusted for all stock dividends and splits declared through December 31, 1994. Excludes 4,439,267 issued and outstanding common shares, held by a consolidated affiliate, which are eliminated in consolidation and in the calculation of outstanding shares for financial accounting purposes only; (g)Calculated after deduction of preferred stock dividend requirements of $5.1 in 1994, $5.2 in 1993, $6.0 in 1992, $1.3 in 1991 and $1.5 in 1990; (h)Calculated after deduction of preferred stock dividend requirements and after adjustment for post-tax convertible debentures interest of $.9 in 1994, $1.0 in 1993, $2.6 in 1992, $(1.9) in 1991 and $(2.1) in 1990.
Consolidated operations produced positive cash flows for the latest three years. The decline in cash flow from operations in 1994 was due mainly to a substantial drop in title segment revenues and profitability, and a small decline in property and liability insurance premiums. The parent holding company has met its liquidity and capital needs for the past three years through dividends paid by its subsidiaries and through the issuance of debt and equity securities. 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 require the Company to maintain a minimum consolidated tangible net worth and restrict the amount of debt the Company may incur, both of which covenants are being met.
Old Republic's capitalization of $1,719.5 at December 31, 1994 consisted of debt and debt equivalents of $314.7, redeemable convertible preferred stock of $16.8 (excluding $13.8 of such stock classified as a debt equivalent), convertible preferred stock of $3.8, cumulative preferred stock of $54.8, and common shareholders' equity of $1,329.3. The rise in the common shareholders' equity account during the past three years reflects primarily the retention of earnings in excess of dividends declared on outstanding preferred and common shares, and the conversion of debt and preferred stock to common stock. During 1994, the Corporation acquired $8.5 of common stock and $2.6 of cumulative preferred stock in open market transactions. As of year-end 1994, a standing authorization by the Company's Board of Directors permits it to reacquire additional amounts of such shares for a total of up to $38.9 through May 1996.
RESULTS OF OPERATIONS Revenues: Net premiums and fees earned decreased by 1.6% in 1994 and increased by 11.9% and 16.0% in 1993 and 1992, respectively. In 1993 and 1992, property and liability insurance premium increases were due to varying levels of growth in certain parts of the Company's business, but principally among liability coverages. In 1994, lower premium growth due to a continuation of a soft premium rate environment for most insurance coverages, lower participation in involuntary market pools, and the 1993 cancellation of a crop insurance program served to reduce slightly the premium volume. Rising mortgage rates, especially poor conditions in the large California housing and mortgage lending market, and nearly extinct refinancing activity nationwide during most of the year resulted in lower title insurance revenues in 1994. Greater real estate financing activity during 1993 and 1992 led to higher revenues in the title segment. For the past three years, mortgage guaranty premiums increased due to a rise in the amount of renewal and new business, and greater market penetration. Life and disability premium volume increased moderately during the last three years as a result of greater term life and accident insurance production.
Net investment income grew by 3.1% in 1994, was relatively flat in 1993 and grew by 1.0% in 1992. For each of the past three years, the growth in this revenue source was bolstered by positive consolidated operating cash flows and a concentration of investable assets in interest-bearing, fixed maturity securities. The average annual yield on investments was 6.1%, 6.4%, and 7.3% for the years ended December 31, 1994, 1993 and 1992, respectively. This pattern of declining yields reflects at once the relatively short maturity of Old Republic's fixed maturity securities portfolio and a generally declining interest rate environment through the early part of 1994.
Expenses: Consolidated benefit, claim, and related settlement costs, as a percentage of net premiums and fees earned, were approximately 53% in 1994, 56% in 1993 and 58% in 1992. This consolidated ratio was affected principally by an improving claim ratio for property and liability insurance coverages. Through 1993 the Corporation's property and liability insurance subsidiaries, along with other companies in the industry, sustained higher loss assessments for residual market (assigned risk) business. In 1994, provisions for such assessments declined as a result of the aforementioned reduction in residual market participations by the Company's subsidiaries and by moderately improving premium rates for workers compensation insurance. Additionally, Old Republic's general insurance results for 1994 benefitted from improved underwriting performance in its property and other non-liability lines due to lower loss ratios. Policyholders' dividends incurred mainly for the Corporation's workers compensation insurance coverages for each year reflect changes in the loss ratio for individual experience-rated policies. The title insurance loss ratio was affected by higher than normal claim provisions in both 1993 and 1992 which added approximately 3.0% and 3.8%, respectively, to this group's loss ratio. The loss ratio rose in 1994 and 1993 in the mortgage guaranty insurance line due to a rise in frequency of claim occurrences, mostly in the California market which has been affected by an economic slowdown for the past several years.
The ratio of consolidated underwriting, acquisition, and insurance expenses to net premiums and fees earned was approximately 47% in 1994, 45% in 1993 and 46% in 1992. Variations in these ratios reflect a continually changing mix of coverages sold and attendant costs of producing business. In years during which title insurance premiums and fees grow significantly, as in 1993 and 1992 in particular, the consolidated expense ratio tends to rise as production costs for this line are higher than those for most other types of insurance sold by the Company. The ratio's rise during 1994 was due to a significant degree to a 14% drop in title premiums and fees which was not accompanied by a proportional reduction in production and underwriting expenses.
Pre-Tax and Net Income: During 1992 the Company's Title Insurance Group established greater than normal loss provisions of $15.0 as additional funding for various title escrow claims in process of disposition. In the same year, the Company's life insurance subsidiaries recorded previously unrecognized tax recoveries of $1.1 and related interest credits of approximately $12.4 stemming from resolution of various long-standing Internal Revenue Service disputes applicable to taxable years 1969 to 1981. These charges and credits served to increase consolidated revenues by $12.4 and claim costs by $15.0, and to record net current and deferred income tax credits of $1.1. Above normal additions to Title Insurance Group claim reserves during 1993 also affected adversely pre-tax income by approximately $13.3.
Income before taxes decreased by 7% and 3% in 1994 and 1993, respectively, and increased by 43% in 1992. General insurance results have trended up during the past five years and have continued as the major contributor to consolidated earnings, principally as a result of greater investment income. In 1994, however, improved earnings in this segment were favorably affected by better underwriting results. Title insurance operating results declined materially in 1994 due to the previously noted decline in revenues, while they increased in 1993 and 1992 as a result of much greater mortgage refinancing activity. The mortgage guaranty segment reflected significantly improved results in each of the last three years due to increased revenues and favorable overall claims experience, while life and disability operations have posted a secular downward trend in the past three years. Consolidated pre-tax income for 1993 and 1992 was also affected positively by greater than normal realization of investment gains.
The effective consolidated income tax rates were 33% in 1994, 32% in 1993, and 30% in 1992. The rates for each year reflect primarily the varying proportions of pre-tax operating income derived from tax-exempt investment income, on the one hand, and the combination of fully taxable investment income, realized investment gains, and underwriting and service income, on the other hand. In August 1993, the corporate federal income tax rate was increased from 34% to 35% retroactive to January 1, 1993. In recent years the Corporation has emphasized purchases of taxable investment securities. Amortization of fresh start benefits stemming from the Tax Reform Act of 1986 (the "TRA") reduced income taxes by $1.9 in 1992.
Historical data pertaining to the operating results, liquidity, and other financial matters applicable to an insurance enterprise such as the Corporation, are not necessarily indicative of results to be achieved in succeeding years. 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, and 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 are some of the factors which have a bearing on year-to-year comparisons and future operating results.
(b) Accounting Principles-The Corporation's insurance underwriting subsidiaries maintain their records in conformity with accounting practices prescribed or permitted by state insurance regulatory authorities. In consolidating such subsidiaries, adjustments have been made to conform their accounts with generally accepted accounting principles.
(c) Investments-The Company classifies its invested assets in terms of those assets relative to which it either (1) has the intent and ability to hold until maturity (generally carried at amortized costs for fixed maturity securities), (2) has available for sale (carried at fair value with adjustments to equity) or (3) has the intention of trading (carried at fair value with adjustments to income). The Company's invested assets are classified as either "held to maturity" or "available for sale."
The amortized cost and estimated fair value at December 31, 1994, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
At December 31, 1994, the Corporation and its subsidiaries had non-income producing investments aggregating $0.4.
General insurance (property and liability) and level-term credit life insurance premiums are reflected in income on a pro-rata basis. Earned but unbilled premiums are generally taken into income on the billing date, and adjustments for retrospective premiums, commissions and similar charges are accrued on the basis of periodic evaluations of current underwriting experience and contractual obligations. Title insurance premiums are recognized as income upon the substantial competition of the policy issuance process. Title abstract, escrow, service, and other fees are taken into income at the time that the services are performed. First year and renewal mortgage guaranty premiums are recognized as income on a straight-line basis except that a portion of first year premiums received for certain high risk policies is deferred and reported as earned over the estimated policy life, including renewal periods. Single premiums for mortgage guaranty policies covering more than one year are earned on an accelerated basis over the policy term. Ordinary life and annuity premiums are recognized as revenue when due. Decreasing term credit life and credit disability/accident & health insurance premiums are generally earned on a sum-of-the-years-digits or similar method.
(f) Future Policy Benefits/Unearned Premiums-See note 1(g) for discussion of FAS No. 113 "Accounting and Reporting for Reinsurance of Short Duration and Long-Duration Contracts". General insurance and level term credit life insurance policy liabilities represent unearned premium reserves developed by application of monthly pro-rata factors to premiums in force. Disability/accident & health and decreasing term credit life insurance policy liabilities are calculated primarily on a sum-of-the-years-digits method. Mortgage guaranty unearned premium reserves are calculated primarily on a pro-rata basis. Ordinary life policy liabilities are determined on a level premium method and take into account mortality and withdrawal rates based principally on anticipated company experience; assumed interest rates range from 3.0% to 6.0%. With respect to annuity policies, the liabilities represent the surrender value of such policies during deferral periods, without adjustment for surrender charges; such values are deemed appropriate to provide for ultimate benefit reserves in the event policyholders exercise an annuity benefit option at a later date.
At December 31, 1994 and 1993, the Life Insurance Group had $4,423.4 and $4,286.7, respectively, of net life insurance in force. Future policy liabilities and unearned premiums, consisted of the following:
All reserves are necessarily based on estimates which are periodically reviewed and evaluated in the light of emerging claim experience and existing circumstances. The resulting changes in estimates are recorded in operations of the periods during which they are made. Return and additional premiums and policyholders dividends, all of which tend to be affected by development of claims in future years, may offset in whole or in part developed claim redundancies on deficiencies for certain coverages such as workers compensation.
The data in the table above, incorporates the Corporation's estimates for various environmental impairment and asbestos-related claim or related costs that have been filed in the normal course of business against a number of its insurance subsidiaries. Such claims relate primarily to policies issued prior to 1985, many during a short period between 1981 and 1982 pursuant to an agency agreement canceled in 1982. During all years and through the current date, the Corporation's insurance subsidiaries have typically issued general liability insurance policies with face amounts ranging between $1 million and $2 million and rarely exceeding $10 million. Such policies have, in turn, been subject to reinsurance cessions which have typically reduced the Corporation's retentions to $500,000 or less as to each claim.
A summary of deferred income taxes applicable to the year ended December 31, 1992, calculated on a historical basis prior to adoption FAS 109 follows:
(k) Goodwill-The costs of certain purchased subsidiaries in excess of related book values (goodwill) at date of acquisition are being amortized against operations principally over 40 years using the straight-line method. Amortization of goodwill amounted to $3.1 in 1994, $3.2 in 1993 and $3.0 in 1992.
(l) Employee Benefit Plans- The Corporation has several pension plans covering approximately half of its employees. The plans are defined benefit plans pursuant to which pension payments are based primarily on years of service and employee compensation near retirement. It is the Corporation's policy to fund the plans' costs as they accrue. Plan assets are comprised principally of bonds, common stocks and short-term investments.
The projected benefit obligations for the plans were determined using the following assumptions at the dates shown:
The Company sponsors a leveraged Employee Savings and Stock Ownership Plan (ESSOP) for a majority of its employees. The ESSOP acquired all of its stock of the Company in 1987 and prior years. Accordingly, it is not required to adopt the American Institute of Certified Public Accountants' SOP No. 93-6, "Employers' Accounting for Employee Stock Ownership Plans." Shares' of the Company stock owned by the ESSOP are released to participants based on a formula prescribed by the Employee Retirement Income Security Act of 1974, and dividends on released shares are allocated to participants as earnings. The Company's contributions are based on a formula considering historical net income per share. As of December 31, 1994, there were 22,256,680 Series "D" Redeemable Preferred Shares and 479,449 Common Shares owned by the ESSOP of which 5,877,584 Series "D" Redeemable Preferred Shares and 27,483 Common Shares were unreleased and unallocated. There are no repurchase obligations in existence. (See Note 3).
Note 2-Investments - Bonds and other investments carried at $161.6 as of December 31, 1994 were on deposit with governmental authorities by the Corporation's insurance subsidiaries to comply with insurance laws.
Scheduled maturities of the above debt (including redeemable preferred stock classified as a debt equivalent see (a)below) at December 31, 1994 are as follows: 1995: $92.1; 1996: $5.5; 1997: $4.2; 1998: $2.5; 1999: $4.2; 2000 and after $210.3. During 1994, 1993 and 1992, $19.8, $20.0 and $18.1, respectively, of interest expense on debt was charged to consolidated operations.
Note 4-Shareholders' Equity - All common and preferred share data herein has been retroactively adjusted as applicable for stock dividends or splits declared through December 31, 1994.
Changes in stock options and related information are reflected in the following table (See Note 4(a)(1) above).
Option prices represent the per share market price on the date of grant. No charge is made to earnings in connection with the granting or exercise of nonqualified stock options.
(e) Common Stock-There were 250,000,000 shares of common stock authorized at December 31, 1994. At the same date, there were 50,000,000 shares of Class "B" common stock authorized but none were issued or outstanding. Class "B" common shares have the same rights as common shares except for being entitled to 1/10th of a vote per share.
Note 5-Commitments and Contingent Liabilities: (a) Reinsurance-In order to maintain premium production within their capacity and to limit maximum losses for which they might become liable under policies underwritten, Old Republic's insurance subsidiaries, as is the common practice in the insurance industry, cede all or a portion of their premiums and liabilities on certain classes of business to other insurers and reinsurers. Although the ceding of insurance does not ordinarily discharge an insurer from liability to a policyholder, it is industry practice to establish the reinsured part of risks as the liability of the reinsurer. Old Republic also employs retrospective premium, contingent commission, and profit sharing arrangements for parts of its business in order to minimize losses for which it might become liable under insurance policies underwritten by it. To the extent that any reinsurance companies or retrospectively rated risks or producers might be unable to meet their obligations under existing reinsurance or retrospective insurance and agency agreements, Old Republic would be liable for the defaulted amounts. As deemed necessary, reinsurance ceded to other companies are secured by letters of credit, cash, and/or securities.
Reinsurance protection for General Insurance operations generally limits the net loss on any one risk as follows (in thousands): fire and other physical perils-$300; accident and health-$15; workers' compensation-$1,000; other liability-$600; and loan credit guaranty-$200. Title insurance risk assumptions, based on the title insurance subsidiary's financial resources, are currently limited to $25,000 as to any one policy. A substantial portion of the mortgage guaranty insurance business is retained, with the exposure on any one risk currently averaging less than $20. The maximum amount of ordinary life insurance retained on any one life by the Life Insurance Group (without reinsurance) is $250.
The following information relates to reinsurance and related data for the General Insurance, Mortgage Guaranty and Life Insurance Groups for the three years ended December 31, 1994. For the years 1992 to 1994, reinsurance transactions of the Title Insurance Group have not been material.
(b) Leases-Some of the Corporation's subsidiaries maintain their offices in leased premises. Certain of these leases provide for the payment of real estate taxes, insurance, and other operating expenses. At December 31, 1994, aggregate minimum rental commitments (net of expected sub-lease receipts) under noncancellable operating leases of $106.2 are summarized as follows: 1995: $26.1; 1996: $19.8; 1997: $14.2; 1998: $10.1; 1999: $7.0; 2000 and after: $28.7.
Note 6-Consolidated Quarterly Results-Unaudited - Old Republic's consolidated quarterly operating data for the two years ended December 31, 1994 is presented below. In the opinion of management, all adjustments consisting of normal recurring adjustments necessary to a fair presentation of quarterly results have been reflected in the data which follows. It is also management's opinion, however, that quarterly operating data for insurance enterprises is not indicative of results to be achieved in succeeding quarters or years. The long-term nature of the insurance business, seasonal patterns in premium production and incidence of claims, and changes in yields on invested assets are some of the factors necessitating a review of operating results, changes in shareholders' equity, and cash flows for periods of several years to obtain a proper indicator of performance. The data below should be read in conjunction with the "Management Analysis of Financial Position and Results of Operations":
Note 8-Related Party Transactions - At December 31, 1994 and 1993, the Corporation owned 98.85% of the non-voting common shares, and 40% of the voting common and preferred shares of the American Business & Mercantile Insurance Group, Inc., ("AB&M Group" or "Group"), an affiliated insurance holding company engaged in the property and liability reinsurance business. As of the same dates, the American Business & Mercantile Insurance Mutual, Inc. ("Mutual"), a property & liability mutual insurer owned by its policyholders, held directly or through a subsidiary .04% of the non-voting common shares and 60% of the Group's voting common and preferred shares. At both dates, 1.11% of the Group's non-voting common shares were held by public shareholders.
In the normal course of business, the Company cedes, on the same terms as apply to unrelated reinsurers, certain parts of its outgoing reinsurance to a foreign reinsurer in which it has an equity interest. Total premiums ceded to this reinsurer amounted to approximately $6.1 in 1994, $5.6 in 1993 and $5.8 in 1992. As of December 31, 1994 and 1993, total premium and loss reserve credits taken on account of cumulative cessions aggregated $67.1 and $63.7, respectively, all of which credits were collateralized by cash, investments and funds held amounting to $69.0 and $70.7, respectively.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Old Republic International Corporation and subsidiaries as of December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles.
As discussed in footnote 1(g), 1(h) and 1(l) to the consolidated financial statements, the Company changed its method of accounting for ceded reinsurance, income taxes and post retirement benefits other than pensions in 1993.