The principal executive offices of the Company are located in the Old Republic Building in Chicago, Illinois. This Company owned building contains 151,000 square feet of floor space of which approximately 50% is occupied by Old Republic, and the remainder is leased to others. In addition to the Company- owned principal executive offices, a subsidiary of the Title Insurance Group partially occupies its headquarters building. This building contains 110,000 square feet of floor space of which approximately 66% is occupied by the Old Republic National Title Insurance Company. The remainder of the building is leased to others. Nine smaller buildings are owned by Old Republic and its subsidiaries in various parts of the country and are primarily used for its business. The carrying value of all buildings and related land at December 31, 1995 was approximately $12.8 million.
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.
See Note 1 of the Notes to Consolidated Financial Statements for further details relating to these changes. As permitted by the pertinent FASB pronouncements, prior years' financial statements have not been restated nor reclassified to reflect these changes.
The Corporation acquired $.9 and $8.5 of common stock in 1995 and 1994, respectively and $2.6 of cumulative preferred stock in 1994 in open market transactions. As of year-end 1995, a standing authorization by the Company's Board of Directors permits Old Republic to reacquire additional amounts of such shares for a total of up to $38.0 through May 1996.
In February 1996, the Company called for redemption its 10% debentures of 2018 ($74.0 million principal amount) and its 5.75% convertible subordinated debentures of 2002 ($110.0 million principal amount); redemption of the former will be effected with available funds, while the latter are expected to be converted into approximately 4.3 million Old Republic common shares. As a result of these expected redemptions and conversions, the Company's debt will decline by $184.0 million while its common shareholders equity account will rise by $110.0 million. These transactions are not expected to have a material effect on Old Republic's 1996 earnings. Later in 1996, the Company may, at its sole option, redeem all or part of approximately $54.8 million of its Series "H" cumulative preferred stock and $29.6 million principal amount of its 11.5% debentures maturing in 2015.
Net investment income grew by 10.7% and 3.1% in 1995 and 1994 and was relatively flat in 1993. For each of the past three years, this revenue source was affected 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 6.2%, 6.1% and 6.4% for the years ended December 31, 1995, 1994 and 1993, respectively. This yield pattern reflects at once the relatively short maturity of Old Republic's fixed maturity securities portfolio and changes in interest rates at various times during the past three years.
The ratio of consolidated underwriting, acquisition, and insurance expenses to net premiums and fees earned was approximately 44% in 1995, 47% in 1994 and 45% in 1993. Variations in these ratios reflect a continually changing mix of coverages sold and attendant costs of producing business. During the past three years the property and liability expense ratio has remained relatively flat and that of the mortgage guaranty segment has been declining moderately. The title insurance expense ratio was higher in 1994 and 1995 as premiums and fees volume in this segment declined at a faster rate than operating costs.
The effective consolidated income tax rates were 33% in 1995 and 1994 and 32% in 1993. 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.
- Financial Statements Listed below are the financial statements included herein: OLD REPUBLIC INTERNATIONAL CORPORATION AND SUBSIDIARIES Page No. -------- Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . 23 Consolidated Statements of Income. . . . . . . . . . . . . . . . . . . 25 Consolidated Statements of Preferred Stock and Common Shareholders' Equity. . . . . . . . . . . . . . . . . . . . . . 26 Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . 27 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . 28 Report of Independent Accountants . . . . . . . . . . . . . . . . . . 48
sidiaries are insignificant and are reflected on the equity basis of accounting. All significant intercompany accounts and transactions have been eliminated in consolidation.
(c) Investments-The Company may classify 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, net of deferred income taxes) or (3) has the intention of trading (carried at fair value with adjustments to income); as of December 31, 1995, the Company's invested assets were classified solely as "held to maturity" or "available for sale."
In November 1995, the Company reevaluated the classification of invested assets, as permitted by a Special Report issued by the Financial Accounting Standards Board (FASB) in November 1995. As a result, the Company reclassified from "held to maturity" to "available for sale", certain fixed maturity securities with an amortized cost of $1,365.7, fair value of $1,394.2 and an unrealized gain of $28.4. The unrealized gain, net of deferred income taxes of $9.9, has been credited directly to a separate account in the common shareholders' equity section of the balance sheet in the final quarter of 1995.
The amortized cost and estimated fair value at December 31, 1995, 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.
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 completion of the policy issuance process. Title abstract, escrow, service, and other fees are taken into income at the time of closing of the related escrow. 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 disabili-
ty/accident & health insurance premiums are generally earned on a sum-of-the-years-digits or similar method.
At December 31, 1995 and 1994, the Life Insurance Group had $4,237.0 and $4,423.4, respectively, of net life insurance in force. Future policy liabilities and unearned premiums, consisted of the following:
Premiums received for financial guarantee policies are generally earned over the terms of the contract (which may range between 5 and 30 years) or on the basis of current exposure relative to maximum exposure in force; with respect to residual value insurance, that portion of the premium in excess of certain initial underwriting costs is deferred and taken into income when all events leading to the determination of exposure, if any, have occurred. Since losses on financial guarantee insurance products cannot be predicted reliably, the Company's unearned premium reserves serve as the primary income recognition and loss reserving mechanism. When losses become known and determinable, they are paid or placed in reserve and the remaining directly-related unearned premiums are taken into income.
The Corporation's reserving methods, particularly as they apply to formula- based reserves, have been established to cover normal claim occurrences as well as unusual exposures such as those pertaining to A&E claims and related costs. At times, however, the Corporation's insurance subsidiaries also establish specific formula and other reserves as part of their overall claim and claim expense reserves. These are intended to cover additional litigation and other costs that are likely to be incurred to protect the Company's interests in litigated cases in particular. At December 31, 1995, the Corporation's aggregate indemnity and loss adjustment expense reserves specifically identified with these A&E exposures amounted to approximately $87.4 million gross, and $60.1 million net of reinsurance. Based on average annual claims payments during the five most recent calendar years, such reserves represented 10.7 years (gross) and 12.7 years (net) of average annual claims payments.
(h) Income Taxes-The Corporation and most of its subsidiaries file a consolidated tax return and provide for income taxes payable currently. Deferred income taxes included in the accompanying consolidated financial statements pursuant to generally accepted accounting principles will not necessarily become payable/recoverable in the future. Effective January 1, 1993, the Company adopted Financial Accounting Standard (FAS) No. 109 "Accounting for Income Taxes" that required a change to the asset and liability method of calculating deferred income taxes. The cumulative effect of this change resulted in an increase in net income of $13.3, or $.23 per share ($.22 fully diluted) in 1993. This method calls for the establishment of a deferred tax, calculated at currently effective tax rates, for the cumulative temporary differences between financial statement and tax bases of assets and liabilities.
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, 1995.
Changes in stock options and related information are reflected in the following table (See Note 4(a)(1)).
In conjunction with the purchase or merger of various companies, the Corporation has assumed the stock option obligations under various qualified and nonqualified stock option plans previously adopted by such companies.These plans were terminated as of the merger dates, and existing options at that date became exercisable into Old Republic common shares at their original price adjusted for the appropriate exchange ratios pertaining to each merger. At December 31, 1995, there were no more options outstanding and exercisable. Options for 5,576; 18,246; and 24,568 were exercised for a total consideration of approximately $0.1, $0.1 and $0.1 during 1995, 1994 and 1993, respectively.
In October 1995, the Financial Accounting Standards Boards issued FAS No. 123 "Accounting for Stock Based Compensation". This statement provides two alternatives for accounting for stock based compensation (stock option grants). The Company has elected the alternative to continue to report in accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" and will provide the disclosures as required by FAS No. 123.
(e) Common Stock-There were 250,000,000 shares of common stock authorized at December 31, 1995. 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.
(f) Undistributed Earnings-The equity of the Corporation in the undistributed earnings, determined in accordance with generally accepted accounting principles, and in the net unrealized investment gains (losses) of its respective subsidiaries at December 31, 1995 amounted to $1,151.9 and $70.1, respectively. Cash dividends declared during 1995, 1994 and 1993, to the Corporation by its subsidiaries amounted to $106.8, $55.4 and $53.9, respectively.
(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, 1995, aggregate minimum rental commitments (net of expected sub-lease receipts) under noncancellable operating leases of $106.5 are summarized as follows: 1996:$26.8; 1997: $20.6; 1998: $14.5; 1999: $9.1; 2000: $5.7; 2001 and after: $29.5.
Pursuant to underwriting and investment management agreements, Old Republic receives management fees for administering the affairs of the Group's reinsurance subsidiary and those of the Mutual.Pursuant to reinsurance treaties, the Group and the Mutual are quota share participants in various types of primary or assumed reinsurance contracts produced through Old Republic underwriting facilities. Fees received in the past three years by Old Republic were immaterial. The following table shows reinsurance cessions, retrocessions, and assumptions to or from the Group's reinsurance subsidiary and the Mutual for the last three years.
At December 31, 1995 and 1994, the Group held approximately 7.8% and 8.0%, respectively, of Old Republic's issued and outstanding common shares. For financial accounting purposes only, 4,439,267 of such shares have been treated as treasury shares at each respective date in consolidating the Group's accounts with those of the Corporation.
At December 31, 1995, the Corporation owned 93% of the voting common stock of Employers General Insurance Group, Inc. ("EGI") an affiliated insurance holding company engaged in the property and liability insurance and reinsurance business, primarily in Texas. At such date, 7% of EGI's voting common stock was held by public shareholders.
EGI has also entered into an investment counsel agreement with Old Republic, pursuant to which Old Republic provides investment advice, accounting services and assistance to EGI in executing purchases and sales of investments. Fees received by Old Republic were immaterial.
We have audited the accompanying consolidated balance sheets of Old Republic International Corporation and subsidiaries (the "Company") as of December 31, 1995 and 1994, and the related consolidated statements of income, preferred stock and common shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
As discussed in footnote 1(h) and 1(l) to the consolidated financial statements, the Company changed its method of accounting for income taxes and post-retirement benefits other than pensions in 1993.