10-Q/A 1 form10qa.htm OLD REPUBLIC INTERNATIONAL CORPORATION FORM 10Q/A FOR SEPTEMBER 30, 2009 form10qa.htm
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
FORM 10-Q/A

[x]
Quarterly report pursuant to section 13 or 15(d) of the Security Exchange Act of 1934
 
for the quarterly period ended:  September 30, 2009 or
   
[  ]
Transition report pursuant to section 13 or 15(d) of the Security Exchange Act of 1934

          Commission File Number:
001-10607
 

 
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 by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one).



Large accelerated filer x
Accelerated filer ¨
   
Non-accelerated filer ¨
Smaller reporting company ¨



Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes:¨ No:x



 
Class
 
Shares Outstanding
September 30, 2009
Common Stock / $1 par value
 
240,654,615





There are 43 pages in this report

 
 
 

Explanatory Note

Rule 10-01(d) of Regulation S-X requires that interim financial statements included in quarterly reports on Form 10-Q be reviewed by an independent registered public accountant using professional standards and procedures for conducting such reviews, as established by the Public Company Accounting Oversight Board (United States), as may be modified or supplemented by the SEC. As indicated in the Company’s November 3, 2009 press release, its registered public accounting firm, PricewaterhouseCoopers LLP (“PwC”) was unable to complete its review of the Company’s interim consolidated financial statements for the three and nine month periods ended September 30, 2009, in accordance with Statement of Auditing Standards No. 100, Interim Financial Information (“SAS 100”), as required by Rule 10-01(d) of Regulation S-X, due to the status of a disagreement with the Company’s accounting treatment of certain third quarter 2009 reinsurance transactions consummated by the Company’s Mortgage Guaranty Group. The nature of the disagreement and the potential impact to the Company’s consolidated financial statements had been disclosed in its Form 8-K filing of November 5, 2009.

On January 21, 2010, Old Republic International Corporation concluded that it was necessary to restate the Company’s previously issued consolidated financial statements for the three and nine month periods ended September 30, 2009, to reflect the resolution of a revenue recognition accounting issue relating to the termination of certain reinsurance agreements (“commutations”) during 2009’s third quarter. The financial statements and other financial information included in this Amendment No. 1 to the Quarterly Report on Form 10-Q have been restated accordingly.

This Form 10-Q/A has not been updated except as required to reflect the effects of the restatement. The restatement also has an effect on previously disclosed data relative to overall and per share earnings as well as segment information. Accordingly, Notes 3 and 6 to the consolidated financial statements have been revised to reflect the restated financial information. Additionally, certain comparative data included in management’s discussion and analysis has been adjusted to reflect the restated financial information. Refer to Note 2 of the consolidated financial statements, “Restatement of Previously Issued Financial Statements,” for the specific line items restated and a more detailed description of the nature of the restatement.

 
2
 
 

OLD REPUBLIC INTERNATIONAL CORPORATION
 
Report on Form 10-Q / September 30, 2009
 
INDEX
   
   
   
 
PAGE NO.
   
PART I
FINANCIAL INFORMATION:
 
     
 
CONSOLIDATED BALANCE SHEETS
4
     
 
CONSOLIDATED STATEMENTS OF INCOME
5
     
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
5
     
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
6
     
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7 – 16
     
 
MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS
17 – 39
     
 
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
40
     
 
CONTROLS AND PROCEDURES
40
     
PART II
OTHER INFORMATION:
 
     
 
ITEM 1 – LEGAL PROCEEDINGS
41
     
 
ITEM 1A – RISK FACTORS
41
     
 
ITEM 6 – EXHIBITS
41
   
SIGNATURE
42
   
EXHIBIT INDEX
43


 
3
 
 

Old Republic International Corporation and Subsidiaries
Consolidated Balance Sheets
($ in Millions, Except Share Data)
   
(Unaudited)
   
   
September 30,
 
December 31,
   
2009
 
2008
   
(As Restated)
   
Assets
           
Investments:
           
Available for sale:
           
Fixed maturity securities (at fair value) (amortized cost: $7,706.2 and $7,385.2)
 
$
8,177.5
 
$
7,406.9
Equity securities (at fair value) (adjusted cost: $373.3 and $373.3)
   
473.5
   
350.3
Short-term investments (at fair value which approximates cost)
   
994.1
   
888.0
Miscellaneous investments
   
23.8
   
29.7
Total
   
9,669.0
   
8,675.0
Other investments
   
7.5
   
7.8
Total investments
   
9,676.5
   
8,682.9
             
Other Assets:
           
Cash
   
54.5
   
63.9
Securities and indebtedness of related parties
   
23.8
   
17.4
Accrued investment income
   
113.2
   
108.2
Accounts and notes receivable
   
962.9
   
806.7
Federal income tax recoverable: Current
   
9.7
   
41.0
Prepaid federal income taxes
   
221.4
   
463.4
Reinsurance balances and funds held
   
99.5
   
67.6
Reinsurance recoverable:
Paid losses
   
62.1
   
52.2
 
Policy and claim reserves
   
2,518.9
   
2,395.7
Deferred policy acquisition costs
   
214.0
   
222.8
Sundry assets
   
351.9
   
343.8
     
4,632.5
   
4,583.1
Total Assets
 
$
14,309.1
 
$
13,266.0
             
Liabilities, Preferred Stock, and Common Shareholders’ Equity
           
Liabilities:
           
Losses, claims, and settlement expenses
 
$
7,806.5
 
$
7,241.3
Unearned premiums
   
1,108.8
   
1,112.3
Other policyholders' benefits and funds
   
180.3
   
180.7
Total policy liabilities and accruals
   
9,095.6
   
8,534.3
Commissions, expenses, fees, and taxes
   
261.2
   
264.5
Reinsurance balances and funds
   
363.7
   
264.8
Federal income tax payable: Deferred
   
83.8
   
77.3
Debt
   
372.2
   
233.0
Sundry liabilities
   
177.3
   
151.5
Commitments and contingent liabilities
           
Total Liabilities
   
10,354.0
   
9,525.7
             
Preferred Stock (1)
   
-
   
-
             
Common Shareholders’ Equity:
           
Common stock (1)
   
240.6
   
240.5
Additional paid-in capital
   
410.7
   
405.0
Retained earnings
   
3,004.2
   
3,186.5
Accumulated other comprehensive income (loss)
   
343.3
   
(41.7)
Unallocated ESSOP shares (at cost)
   
(43.8)
   
(50.0)
Treasury stock (at cost)(1)
   
-
   
-
Total Common Shareholders' Equity
   
3,955.0
   
3,740.3
Total Liabilities, Preferred Stock and Common Shareholders’ Equity
 
$
14,309.1
 
$
13,266.0
               
               
(1)  
At September 30, 2009 and December 31, 2008, there were 75,000,000 shares of $0.01 par value preferred stock authorized, of which no shares were outstanding. As of the same dates, there were 500,000,000 shares of common stock, $1.00 par value, authorized, of which 240,654,615 at September 30, 2009 and 240,520,251 at December 31, 2008 were issued. At September 30, 2009 and December 31, 2008, there were 100,000,000 shares of Class B Common Stock, $1.00 par value, authorized, of which no shares were issued. There were no common shares classified as treasury stock as of September 30, 2009 and December 31, 2008.

See accompanying Notes to Consolidated Financial Statements.

 
4
 
 

Old Republic International Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
($ in Millions, Except Share Data)
   
Quarters Ended
 
Nine Months Ended
   
September 30,
 
September 30,
   
2009
 
2008
 
2009
 
2008
   
(As Restated)
     
(As Restated)
   
Revenues:
                       
Net premiums earned
 
$
866.8
 
$
784.7
 
$
2,326.3
 
$
2,372.5
Title, escrow, and other fees
   
71.8
   
50.4
   
201.6
   
144.9
Total premiums and fees
   
938.7
   
835.2
   
2,528.0
   
2,517.5
Net investment income
   
96.7
   
93.8
   
283.9
   
282.3
Other income
   
5.7
   
7.2
   
20.0
   
24.6
Total operating revenues
   
1,041.2
   
936.3
   
2,831.9
   
2,824.5
Realized investment gains (losses):
                       
From sales
   
.6
   
18.3
   
1.0
   
26.0
From impairments
   
(1.5)
   
(11.5)
   
(1.5)
   
(448.9)
Total realized investment gains (losses)
   
(.9)
   
6.7
   
(.5)
   
(422.8)
Total revenues
   
1,040.2
   
943.1
   
2,831.4
   
2,401.6
                         
Benefits, Claims and Expenses:
                       
Benefits, claims, and settlement expenses
   
669.9
   
679.1
   
1,956.7
   
2,005.2
Dividends to policyholders
   
1.2
   
4.0
   
6.0
   
11.9
Underwriting, acquisition, and other expenses
   
388.3
   
333.2
   
1,060.3
   
1,014.1
Interest and other charges
   
9.8
   
-
   
15.8
   
1.4
Total expenses
   
1,069.4
   
1,016.5
   
3,039.0
   
3,032.8
Income (loss) before income taxes (credits)
   
(29.1)
   
(73.4)
   
(207.6)
   
(631.1)
                         
Income Taxes (Credits):
                       
Current
   
10.9
   
13.5
   
47.5
   
51.8
Deferred
   
(47.5)
   
(38.9)
   
(192.7)
   
(251.2)
Total
   
(36.5)
   
(25.3)
   
(145.2)
   
(199.3)
                         
Net Income (Loss)
 
$
7.4
 
$
(48.0)
 
$
(62.3)
 
$
(431.8)
                         
Net Income (Loss) Per Share:
                       
Basic:
 
$
.03
 
$
(.21)
 
$
(.26)
 
$
(1.87)
Diluted:
 
$
.03
 
$
(.21)
 
$
(.26)
 
$
(1.87)
                         
Average shares outstanding:
Basic
   
235,761,056
   
230,735,600
   
235,563,448
   
230,716,219
 
Diluted
   
235,878,936
   
230,735,600
   
235,563,448
   
230,716,219
Dividends Per Common Share:
                       
Cash
 
$
.17
 
$
.17
 
$
.51
 
$
.50
 
 
Consolidated Statements of Comprehensive Income (Unaudited)
   
Quarters Ended
 
Nine Months Ended
   
September 30,
 
September 30,
   
2009
 
2008
 
2009
 
2008
   
(As Restated)
     
(As Restated)
   
                         
Net income (loss) as reported
 
$
7.4
 
$
(48.0)
 
$
(62.3)
 
$
(431.8)
                         
Other comprehensive income (loss):
                       
Post-tax net unrealized gains (losses) on securities
   
222.9
   
(56.8)
   
367.8
   
(85.2)
Other adjustments
   
8.3
   
(2.7)
   
17.2
   
(7.2)
Net adjustments
   
231.3
   
(59.6)
   
385.1
   
(92.5)
                         
Comprehensive income (loss)
 
$
238.7
 
$
(107.6)
 
$
322.7
 
$
(524.3)

See accompanying Notes to Consolidated Financial Statements.

 
5
 
 

Old Republic International Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
($ in Millions)
   
Nine Months Ended
   
September 30,
   
2009
 
2008
   
(As Restated)
   
Cash flows from operating activities:
           
Net income (loss)
 
$
(62.3)
 
$
(431.8)
Adjustments to reconcile net income (loss) to
           
net cash provided by operating activities:
           
Deferred policy acquisition costs
   
10.5
   
11.3
Premiums and other receivables
   
(155.0)
   
41.5
Unpaid claims and related items
   
478.7
   
612.1
Other policyholders’ benefits and funds
   
(42.7)
   
(8.3)
Income taxes
   
(161.3)
   
(254.6)
Prepaid federal income taxes
   
241.9
   
35.2
Reinsurance balances and funds
   
56.7
   
7.9
Realized investment (gains) losses
   
.5
   
422.8
Accounts payable, accrued expenses and other
   
71.1
   
31.3
Total
   
438.0
   
467.6
             
Cash flows from investing activities:
           
Fixed maturity securities:
           
Maturities and early calls
   
825.1
   
631.0
Sales
   
81.5
   
72.4
Sales of:
           
Equity securities
   
-
   
79.2
Other – net
   
3.5
   
42.7
Purchases of:
           
Fixed maturity securities
   
(1,239.2)
   
(814.7)
Equity securities
   
-
   
(96.9)
Other – net
   
(12.9)
   
(26.4)
Purchase of a business
   
(5.0)
   
(4.3)
Net decrease (increase) in short-term investments
   
(105.1)
   
(267.0)
Other-net
   
(5.4)
   
(.4)
Total
   
(457.5)
   
(384.5)
             
Cash flows from financing activities:
           
Issuance of debentures and notes
   
576.2
   
93.0
Issuance of common shares
   
1.1
   
3.0
Redemption of debentures and notes
   
(447.2)
   
(33.1)
Dividends on common shares
   
(119.9)
   
(115.2)
Other-net
   
-
   
1.9
Total
   
10.0
   
(50.5)
             
Increase (decrease) in cash:
   
(9.4)
   
32.5
Cash, beginning of period
   
63.9
   
54.0
Cash, end of period
 
$
54.5
 
$
86.5
             
Supplemental cash flow information:
           
Cash paid during the period for:
Interest
 
$
4.0
 
$
2.0
 
Income taxes
 
$
16.0
 
$
54.9








See accompanying Notes to Consolidated Financial Statements.

 
6
 
 

OLD REPUBLIC INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
($ in Millions, Except Share Data)

1.
Accounting Policies and Basis of Presentation:

The accompanying consolidated financial statements have been prepared in conformity with the Accounting Standards Codification (“ASC”) promulgated by the Financial Accounting Standards Board (“FASB”) effective July 1, 2009. The ASC does not change accounting principles generally accepted in the United States of America (US GAAP), and basically reorganizes such principles into a compendium of rules grouped by topic.

Pertinent accounting and disclosure pronouncements issued from time to time by the FASB are adopted by the Company as they become effective. The accompanying financial statements incorporate new pronouncements which establish a framework for measuring the fair value of financial assets and provide guidance covering fair value measurements in the current economic environment, recognition of other-than-temporary impairments of debt securities, required disclosure of fair values of financial instruments in interim periods, and evaluation of subsequent events. The Company’s adoption of these pronouncements, which is reflected in the notes to financial statements, results primarily in additional disclosures and has no effect on the conduct of the business and its reported financial condition or net income (loss). As of the date of this report, the Company is not aware of any new accounting or disclosure requirements that would have a material effect on its consolidated financial statements or the conduct of its business.

The financial accounting and reporting process relies on estimates and on the exercise of judgment. In the opinion of management all adjustments, consisting only of normal recurring accruals necessary for a fair presentation of the results have been recorded for the interim periods. Amounts shown in the consolidated financial statements and applicable notes are stated (except as otherwise indicated and as to share data) in millions, which amounts may not add to totals shown due to truncation. Necessary reclassifications are made in prior periods’ financial statements whenever appropriate to conform to the most current presentation. Subsequent events have been evaluated through the issuance dates of both the originally filed (November 6, 2009) and the restated (February 5, 2010) financial statements.

 
7
 
 

2.
Restatement of Previously Issued Financial Statements:

Subsequent to the filing of the Company’s Form 10-Q for the quarter ended September 30, 2009, the Company resolved a revenue recognition accounting issue relating to the termination of certain reinsurance agreements (“commutations”) which occurred during 2009’s third quarter. The resolution of this issue resulted in the conclusion that GAAP requires that certain commutation reinsurance premiums of $82.5 received by Old Republic’s mortgage guaranty insurance subsidiary from lenders’ captive insurers to cover future period’s losses, should have been recognized immediately as income as of the effective date of the reinsurance commutation agreements. Under GAAP, the commutations are treated as the termination of reinsurance arrangements, rather than as transactions in which Old Republic takes on new insurance risk. As a result, premiums received in excess of reinsurance-related receivables previously recorded must be recognized as a gain. In effect, Old Republic recognizes income of $82.5 currently as a result of the commutations, and will recognize the losses that it is now exposed to because of the termination of the reinsurance in future periods’ results when related claim costs are incurred.

Old Republic had originally concluded that the economic substance of the captive commutation agreements called for the deferral of the $82.5 of premiums. The premiums so deferred would have been recognized as income over the future periods during which risk would exist and claims would occur.

Resolution of the issue now requires that Old Republic restate its financial statements for the quarter and nine months ended September 30, 2009. As shown in the following table, the restatement results in an increase of previously reported consolidated premium income of $82.5, and a decrease of the reported post-tax loss by $53.6 ($0.23 per share) for both the third quarter and the first nine months of 2009. As a further result, the common shareholders’ equity account will also be increased by $53.6 ($0.23 per share) as of September 30, 2009.

As a result of the restatement, the following financial statement line items were adjusted:

   
As Previously
       
   
Reported
 
Adjustments
 
As Restated
 
Consolidated Balance Sheets at September 30, 2009:
         
 
Unearned premiums
$
1,191.3
 
$
(82.5)
 
$
1,108.8
 
Federal income tax payable: deferred
 
54.9
   
28.8
   
83.8
 
Total liabilities
 
10,407.7
   
(53.6)
   
10,354.0
 
Retained earnings
 
2,950.5
   
53.6
   
3,004.2
 
Total common shareholders’ equity
 
3,901.3
   
53.6
   
3,955.0
                   
 
Consolidated Statements of Income
               
 
Quarter ended September 30, 2009
               
 
Net premiums earned
$
784.2
 
$
82.5
 
$
866.8
 
Total revenues
 
957.6
   
82.5
   
1,040.2
 
Income (loss) before income taxes (credits)
 
(111.7)
   
82.5
   
(29.1)
 
Income taxes (credits): deferred
 
(76.4)
   
28.8
   
(47.5)
 
Net income (loss)
 
(46.2)
   
53.6
   
7.4
 
Net income (loss) per share:
               
 
Basic
 
(0.20)
   
0.23
   
0.03
 
Diluted
 
(0.20)
   
0.23
   
0.03
 
Average shares outstanding: diluted
 
235,761,056
   
117,880
   
235,878,936
                   
 
Consolidated Statements of Income
               
 
Nine months ended September 30, 2009
               
 
Net premiums earned
$
2,243.7
 
$
82.5
 
$
2,326.3
 
Total revenues
 
2,748.8
   
82.5
   
2,831.4
 
Income (loss) before income taxes (credits)
 
(290.2)
   
82.5
   
(207.6)
 
Income taxes (credits): deferred
 
(221.6)
   
28.8
   
(192.7)
 
Net income (loss)
 
(116.0)
   
53.6
   
(62.3)
 
Net income (loss) per share:
               
 
Basic
 
(0.49)
   
0.23
   
(0.26)
 
Diluted
 
(0.49)
   
0.23
   
(0.26)
                   
 
Consolidated Statements of Comprehensive Income
               
 
Net income (loss) as reported
$
(46.2)
 
$
53.6
 
$
7.4
 
Comprehensive income (loss)
 
185.0
   
53.6
   
238.7
                   
 
Consolidated Statements of Comprehensive Income
               
 
Nine months ended September 30, 2009
               
 
Net income (loss) as reported
$
(116.0)
 
$
53.6
 
$
(62.3)
 
Comprehensive income (loss)
 
269.0
   
53.6
   
322.7
                   
 
Consolidated Statement of Cash Flows
               
 
Nine months ended September 30, 2009
               
 
Net income (loss)
$
(116.0)
 
$
53.6
 
$
(62.3)
 
Other policyholders' benefits and funds
 
39.7
   
(82.5)
   
(42.7)
 
Income taxes
 
(190.2)
   
28.8
   
(161.3)
 
Total cash flows from operating activities
 
438.0
   
-
   
438.0

 
8
 
 

3.
Common Share Data:

Earnings Per Share - Consolidated basic earnings per share excludes the dilutive effect of common stock equivalents and is computed by dividing net income (loss) available to common stockholders by the weighted-average number of common shares actually outstanding for the period. Diluted earnings per share are similarly calculated with the inclusion of dilutive common stock equivalents. The following table provides a reconciliation of the net income (loss) and number of shares used in basic and diluted earnings per share calculations.

   
Quarters Ended
 
Nine Months Ended
   
September 30,
 
September 30,
   
2009
 
2008
 
2009
 
2008
   
(As Restated)
     
(As Restated)
   
 
Numerator:
                     
 
Net Income (loss)
$
7.4
 
$
(48.0)
 
$
(62.3)
 
$
(431.8)
 
Numerator for basic earnings per share -
                     
 
income (loss) available to common stockholders
 
7.4
   
(48.0)
   
(62.3)
   
(431.8)
 
Numerator for diluted earnings per share -
                     
 
income (loss) available to common stockholders
                     
 
after assumed conversions
$
7.4
 
$
(48.0)
 
$
(62.3)
 
$
(431.8)
 
Denominator:
                     
 
Denominator for basic earnings per share -
                     
 
weighted-average shares (a)(b)
 
235,761,056
   
230,735,600
   
235,563,448
   
230,716,219
 
Effect of dilutive securities - stock options
 
117,880
   
-
   
-
   
-
 
Effect of dilutive securities - convertible senior notes
 
-
   
-
   
-
   
-
 
Denominator for diluted earnings per share -
                     
 
adjusted weighted-average shares
                     
 
and assumed conversions (a)(b)
 
235,878,936
   
230,735,600
   
235,563,448
   
230,716,219
 
Earnings per share:
Basic
$
.03
 
$
(.21)
 
$
(.26)
 
$
(1.87)
   
Diluted
$
.03
 
$
(.21)
 
$
(.26)
 
$
(1.87)
                         
 
Anti-dilutive common share equivalents
                     
 
excluded from earning per share computations:
                     
 
Stock options
 
14,510,299
   
15,284,846
   
15,843,895
   
15,284,846
 
Convertible senior notes
 
27,452,271
   
-
   
27,452,271
   
-
 
Total
 
41,962,570
   
15,284,846
   
43,296,166
   
15,284,846
                           
                           
 
(a)
All per share statistics have been restated to reflect all stock dividends and splits declared through September 30, 2009.
 
(b)
In calculating earnings per share, pertinent accounting rules require that common shares owned by the Company’s Employee Savings and Stock Ownership Plan that are as yet unallocated to participants in the plan be excluded from the calculation. Such shares are issued and outstanding, have the same voting and other rights applicable to all other common shares, and may be sold at any time by the plan.

4.
Investments:

The Company may classify its invested assets in terms of those assets relative to which it either (1) has the positive intent and ability to hold until maturity, (2) has available for sale or (3) has the intention of trading. As of September 30, 2009 and December 31, 2008, substantially all the Company's invested assets were classified as “available for sale.”

Fixed maturity securities classified as “available for sale” and other preferred and common stocks (equity securities) are included at fair value with changes in such values, net of deferred income taxes, reflected directly in shareholders’ equity. Fair values for fixed maturity securities and equity securities are based on quoted market prices or estimates using values obtained from independent pricing services as applicable.

The Company reviews the status and fair value changes of each of its investments on at least a quarterly basis during the year, and estimates of other-than-temporary impairments (“OTTI”) in the portfolio’s value are evaluated and established at each quarterly balance sheet date. In reviewing investments for  OTTI, the Company, in addition to a security’s market price history, considers the totality of such factors as the issuer’s operating results, financial condition and liquidity, its ability to access capital markets, credit rating trends, most current audit opinion, industry and securities markets conditions, and analyst expectations to reach its conclusions. Sudden fair value declines caused by such adverse developments as newly emerged or imminent bankruptcy filings, issuer default on significant obligations, or reports of financial accounting developments that bring into question the validity of previously reported earnings or financial condition, are recognized as realized losses as soon as credible publicly available information emerges to confirm such developments. Absent issuer-specific circumstances that would result in a contrary conclusion, any equity security with an unrealized investment loss amounting to a 20% or greater decline for a six month period is considered OTTI. In the event the Company’s estimate of OTTI is insufficient at any point in time, future periods’ net income (loss) would be adversely affected by the recognition of additional realized or impairment losses, but its financial position would not necessarily be affected adversely inasmuch as such losses,

 
9
 
 

or a portion of them, could have been recognized previously as unrealized losses in shareholders’ equity. The Company recognized OTTI adjustments of $1.5 for the quarter and nine months ended September 30, 2009 while recognizing $11.5 and $448.9 of such adjustments for the quarter and nine months ended September 30, 2008.

During the second quarter of 2009, the Company adopted new accounting pronouncements that provide additional technical guidance to the application of fair value measurements in the current economic environment, modifies the requirements for recognizing OTTI adjustments relating to debt securities, changes the existing impairment model for such securities, modifies the presentation of OTTI adjustments, increases the frequency of and expands already required disclosures relating to OTTI matters, and increases the frequency of fair value disclosures from annual to quarterly reports.

The amortized cost and estimated fair values of fixed maturity securities are as follows:

       
Gross
 
Gross
 
Estimated
   
Amortized
 
Unrealized
 
Unrealized
 
Fair
   
Cost
 
Gains
 
Losses
 
Value
Fixed Maturity Securities:
                       
September 30, 2009:
                       
U.S. & Canadian Governments
 
$
691.5
 
$
48.3
 
$
-
 
$
739.8
Tax-exempt
   
2,225.8
   
150.6
   
-
   
2,376.4
Corporates
   
4,788.8
   
284.8
   
12.4
   
5,061.2
   
$
7,706.2
 
$
483.8
 
$
12.5
 
$
8,177.5
                         
December 31, 2008:
                       
U.S. & Canadian Governments
 
$
631.6
 
$
62.8
 
$
-
 
$
694.4
Tax-exempt
   
2,290.0
   
77.2
   
1.5
   
2,365.7
Corporates
   
4,463.5
   
56.6
   
173.3
   
4,346.7
   
$
7,385.2
 
$
196.8
 
$
175.0
 
$
7,406.9

The amortized cost and estimated fair value of fixed maturity securities at September 30, 2009, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities since borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

       
Estimated
   
Amortized
 
Fair
   
Cost
 
Value
Fixed Maturity Securities:
           
Due in one year or less
 
$
737.3
 
$
747.8
Due after one year through five years
   
4,194.7
   
4,419.8
Due after five years through ten years
   
2,741.4
   
2,975.9
Due after ten years
   
32.7
   
33.8
   
$
7,706.2
 
$
8,177.5

A summary of the Company's equity securities reflecting reported adjusted cost, net of OTTI adjustments totaling $355.8 at September 30, 2009 and December 31, 2008 follows:

       
Gross
 
Gross
 
Estimated
   
Adjusted
 
Unrealized
 
Unrealized
 
Fair
   
Cost
 
Gains
 
Losses
 
Value
                         
September 30, 2009
 
$
373.3
 
$
120.3
 
$
20.2
 
$
473.5
                         
December 31, 2008
 
$
373.3
 
$
49.6
 
$
72.7
 
$
350.3


 
10
 
 

The following table reflects the Company’s gross unrealized losses and fair value, aggregated by category and length of time that individual securities have been in an unrealized loss position employing closing market price comparisons with an issuer’s adjusted cost at September 30, 2009 and December 31, 2008:

 
12 Months or Less
 
Greater than 12 Months
 
Total
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
September 30, 2009:
                                 
Fixed Maturity Securities:
                                 
U.S. & Canadian Governments
$
26.3
 
$
-
 
$
-
 
$
-
 
$
26.3
 
$
-
Tax-exempt
 
6.8
   
-
   
-
   
-
   
6.8
   
-
Corporates
 
102.7
   
.8
   
230.4
   
11.6
   
333.1
   
12.4
Subtotal
 
135.8
   
.8
   
230.4
   
11.6
   
366.3
   
12.5
Equity Securities
 
87.0
   
3.1
   
96.0
   
17.0
   
183.0
   
20.2
Total
$
222.9
 
$
4.0
 
$
326.5
 
$
28.6
 
$
549.4
 
$
32.7
                                   
December 31, 2008:
                                 
Fixed Maturity Securities:
                                 
U.S. & Canadian Governments
$
1.0
 
$
-
 
$
-
 
$
-
 
$
1.0
 
$
-
Tax-exempt
 
60.8
   
1.4
   
7.7
   
-
   
68.5
   
1.5
Corporates
 
1,981.4
   
112.4
   
504.3
   
61.0
   
2,485.8
   
173.4
Subtotal
 
2,043.2
   
113.9
   
512.1
   
61.1
   
2,555.4
   
175.0
Equity Securities
 
247.8
   
72.7
   
-
   
-
   
247.9
   
72.7
Total
$
2,291.1
 
$
186.5
 
$
512.1
 
$
61.2
 
$
2,803.3
 
$
247.7

At September 30, 2009, the Company held 81 fixed maturity and 7 equity securities in an unrealized loss position, representing 4.0% as to fixed maturities and 43.8% as to equity securities of the total number of such issues held by the Company. Of the 81 fixed maturity securities, 52 had been in a continuous unrealized loss position for more than 12 months. The unrealized losses on these securities are primarily attributable to a post-purchase rising interest rate environment and a decline in the credit quality of some issuers. As part of its assessment of other-than-temporary impairment, the Company considers its intent to continue to hold and the likelihood that it will not be required to sell investment securities in an unrealized loss position until cost recovery, principally on the basis of its asset and liability maturity matching procedures. The Company has not sold nor does it expect to sell investments for purposes of generating cash to pay claim or expense obligations.

Beginning in 2008, the Company adopted an accounting pronouncement which establishes a framework for measuring fair value. The pronouncement defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (an exit price) at the measurement date. A fair value hierarchy is established that prioritizes the sources (“inputs”) used to measure fair value into three broad levels: inputs based on quoted market prices in active markets (Level 1); observable inputs based on corroboration with available market data (Level 2); and unobservable inputs based on uncorroborated market data or a reporting entity’s own assumptions (Level 3). In 2009, the Company also adopted a related accounting pronouncement which provides guidance on fair value measurements in the current economic environment and results in more detailed disclosures relative to the Company’s fair value measurements. Following is a description of the valuation methodologies and general classification used for securities measured at fair value.

The Company uses quoted values and other data provided by a nationally recognized independent pricing source as inputs into its quarterly process for determining fair values of its fixed maturity and equity securities. To validate the techniques or models used by pricing sources, the Company’s review process includes, but is not limited to: (i) initial and ongoing evaluation of methodologies used by outside parties to calculate fair value; and (ii) comparing the fair value estimates to its knowledge of the current market and to independent fair value estimates provided by the investment custodian. The independent pricing source obtains market quotations and actual transaction prices for securities that have quoted prices in active markets using its own proprietary method for determining the fair value of securities that are not actively traded. In general, these methods involve the use of “matrix pricing” in which the independent pricing source uses observable market inputs including, but not limited to, investment yields, credit risks and spreads, benchmarking of like securities, broker-dealer quotes, reported trades and sector groupings to determine a reasonable fair value.

Level 1 securities include U.S. and Canadian Treasury notes, publicly traded common stocks, the quoted net asset value (“NAV”) mutual funds, and most short-term investments in highly liquid money market instruments. Level 2 securities generally include corporate bonds, municipal bonds and certain U.S. and Canadian government agency securities. Securities classified within Level 3 include non-publicly traded bonds, short-term investments and common stocks. There were no significant changes in the fair value of assets measured with the use of significant unobservable inputs during the quarter ended September 30, 2009.


 
11
 
 

The following table shows a summary of assets measured at fair value segregated among the various input levels described above:

 
Fair value measurements as of September 30, 2009:
 
Level 1
 
Level 2
 
Level 3
 
Total
Available for sale:
                     
Fixed maturity securities:
                     
U.S. & Canadian Governments
$
294.9
 
$
444.8
 
$
-
 
$
739.8
Tax-exempt
 
-
   
2,376.4
   
-
   
2,376.4
Corporates
 
-
   
5,040.7
   
20.5
   
5,061.2
Equity securities
 
430.4
   
-
   
43.0
   
473.5
Short-term investments
 
987.7
   
-
   
6.3
   
994.1

Investment income is reported net of allocated expenses and includes appropriate adjustments for amortization of premium and accretion of discount on fixed maturity securities acquired at other than par value. Dividends on equity securities are credited to income on the ex-dividend date. Realized investment gains and losses, which result from sales or write-downs of securities, are reflected as revenues in the income state­ment and are determined on the basis of amortized value at date of sale for fixed maturity securities, and cost in regard to equity securities; such bases apply to the specific securities sold. Unrealized investment gains and losses, net of any defer­red income taxes, are recorded directly as a component of accumulated other comprehensive income in shareholders’ equity. At September 30, 2009, the Company and its subsidiaries had no significant amount of non-income producing fixed maturity securities.

The following table reflects the composition of net investment income, net realized gains or losses, and the net change in unrealized invest­ment gains or losses for each of the years shown.

   
Quarters Ended
 
Nine Months Ended
   
September 30,
 
September 30,
   
2009
 
2008
 
2009
 
2008
Investment income from:
                       
Fixed maturity securities
 
$
94.8
 
$
86.6
 
$
273.9
 
$
257.7
Equity securities
   
1.2
   
2.9
   
4.0
   
10.1
Short-term investments
   
.8
   
4.0
   
4.9
   
13.1
Other sources
   
.6
   
1.1
   
3.2
   
3.9
Gross investment income
   
97.5
   
94.7
   
286.2
   
284.9
    Investment expenses (a)     .7      .8      2.2      2.6 
Net investment income
 
$
96.7
 
$
93.8
 
$
283.9
 
$
282.3
                         
Realized gains (losses) on:
                       
Fixed maturity securities:
                       
Gains
 
$
.7
 
$
1.3
 
$
1.7
 
$
4.0
Losses
   
(1.7)
   
-
   
(1.7)
   
-
Net
   
(1.0)
   
1.3
   
-
   
4.0
                         
Equity securities & other long-term investments
   
-
   
5.4
   
(.5)
   
(426.8)
Total
   
(.9)
   
6.7
   
(.5)
   
(422.8)
Income taxes (credits)(b)
   
(20.8)
   
9.4
   
(54.1)
   
(105.9)
Net realized gains (losses)
 
$
19.8
 
$
(2.6)
 
$
53.6
 
$
(316.8)
Changes in unrealized investment gains (losses) on:
                       
Fixed maturity securities
 
$
235.2
 
$
(101.6)
 
$
448.5
 
$
(166.6)
Less: Deferred income taxes (credits)
   
82.3
   
(35.5)
   
156.9
   
(58.3)
Net change
 
$
152.9
 
$
(66.0)
 
$
291.6
 
$
(108.2)
                         
Equity securities & other long-term investments
 
$
107.6
 
$
14.1
 
$
117.2
 
$
35.3
Less: Deferred income taxes (credits)
   
37.6
   
4.9
   
41.0
   
12.3
Net change
 
$
69.9
 
$
9.2
 
$
76.2
 
$
22.9
                           

 
(a)
Investment expenses consist of personnel costs and investment management and custody service fees, as well as interest incurred on funds held of $ - and $.1 compared to $.3 and $.7 for the quarter and nine months ended September 30, 2009 and 2008, respectively.
 
(b)
Reflects primarily the varying proportions of pretax income derived from partially tax sheltered investment income (principally state and municipal tax-exempt interest), the combination of fully taxable investment income, realized investment gains or losses, and judgments about the recoverability of deferred tax assets.


 
12
 
 

5.
Pension Plans:

The Company has three pension plans covering a portion of its work force. All three plans have been closed to new participants since December 31, 2004. It is the Company’s policy to fund the plans’ costs as they accrue. Plan assets are comprised principally of bonds, common stocks and short-term investments. The Companies made cash contributions of approximately $1.5 to their pension plans in the third quarter of 2009, and do not expect to make any additional cash contributions to their pension plans in the remaining portion of calendar year 2009.

6.
Information About Segments of Business:

The Company is engaged in the single business of insurance underwriting. It conducts its operations through a number of regulated insurance company subsidiaries organized into three major segments, namely its General Insurance (property and liability insurance), Mortgage Guaranty and Title Insurance Groups. The results of a small life & health insurance business are included with those of its corporate and minor service operations. Each of the Company’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 results exclude net realized investment gains or losses and other-than-temporary impairments as these are aggregated in the consolidated totals. The contributions of Old Republic’s insurance industry segments to consolidated totals are shown in the following table.

   
Quarters Ended
 
Nine Months Ended
   
September 30,
 
September 30,
   
2009
 
2008
 
2009
 
2008
   
(As Restated)
     
(As Restated)
   
General Insurance Group:
                       
Net premiums earned
 
$
446.7
 
$
500.3
 
$
1,344.9
 
$
1,507.4
Net investment income and other income
   
67.6
   
65.3
   
200.3
   
201.2
Total revenues before realized gains or losses
 
$
514.4
 
$
565.7
 
$
1,545.2
 
$
1,708.7
Income (loss) before income taxes (credits) and
                       
realized investment gains or losses (a)
 
$
43.7
 
$
77.0
 
$
148.4
 
$
223.2
Income tax expense (credits) on above
 
$
10.9
 
$
22.0
 
$
38.3
 
$
63.3
                         
Mortgage Guaranty Group:
                       
Net premiums earned
 
$
221.5
 
$
148.4
 
$
508.4
 
$
445.2
Net investment income and other income
   
25.6
   
24.4
   
76.6
   
73.7
Total revenues before realized gains or losses
 
$
247.2
 
$
172.8
 
$
585.0
 
$
518.9
Income (loss) before income taxes (credits) and
                       
realized investment gains or losses (a)
 
$
(77.8)
 
$
(152.8)
 
$
(360.4)
 
$
(415.9)
Income tax expense (credits) on above
 
$
(28.5)
 
$
(54.8)
 
$
(130.2)
 
$
(149.7)
                         
Title Insurance Group:
                       
Net premiums earned
 
$
181.4
 
$
117.9
 
$
418.9
 
$
357.1
Title, escrow and other fees
   
71.8
   
50.4
   
201.6
   
144.9
Sub-total
   
253.3
   
168.4
   
620.6
   
502.1
Net investment income and other income
   
6.4
   
6.3
   
18.4
   
19.1
Total revenues before realized gains or losses
 
$
259.7
 
$
174.7
 
$
639.0
 
$
521.2
Income (loss) before income taxes (credits) and
                       
realized investment gains or losses (a)
 
$
4.0
 
$
(9.7)
 
$
.6
 
$
(27.0)
Income tax expense (credits) on above
 
$
1.0
 
$
(3.8)
 
$
(.9)
 
$
(10.6)
                         
Consolidated Revenues:
                       
Total revenues of above Company segments
 
$
1,021.3
 
$
913.3
 
$
2,769.3
 
$
2,748.8
Other sources (b)
   
34.0
   
30.6
   
102.1
   
99.7
Consolidated net realized investment gains (losses)
   
(.9)
   
6.7
   
(.5)
   
(422.8)
Consolidation elimination adjustments
   
(14.1)
   
(7.6)
   
(39.5)
   
(24.1)
Consolidated revenues
 
$
1,040.2
 
$
943.1
 
$
2,831.4
 
$
2,401.6
                         
Consolidated Income (Loss) Before Taxes (Credits):
                       
Total income (loss) before income taxes (credits)
                       
and realized investment gains or losses of
                       
above Company segments
 
$
(30.0)
 
$
(85.5)
 
$
(211.3)
 
$
(219.7)
Other sources – net (b)
   
1.8
   
5.3
   
4.3
   
11.4
Consolidated net realized investment gains (losses)
   
(.9)
   
6.7
   
(.5)
   
(422.8)
Consolidated income (loss)
                       
before income taxes (credits)
 
$
(29.1)
 
$
(73.4)
 
$
(207.6)
 
$
(631.1)

 
13
 
 

   
Quarters Ended
 
Nine Months Ended
   
September 30,
 
September 30,
   
2009
 
2008
 
2009
 
2008
   
(As Restated)
     
(As Restated)
   
Consolidated Income Tax Expense (Credits):
                       
Total income tax expense (credits)
                       
for above Company segments
 
$
(16.5)
 
$
(36.6)
 
$
(92.8)
 
$
(97.0)
Other sources – net (b)
   
.8
   
1.8
   
1.7
   
3.6
Income tax expense (credits) on
                       
consolidated net realized investment gains (losses)
   
(20.8)
   
9.4
   
(54.1)
   
(105.9)
Consolidated income tax expense (credits)
 
$
(36.5)
 
$
(25.3)
 
$
(145.2)
 
$
(199.3)

 
September 30,
 
December 31,
 
2009
 
2008
Consolidated Assets:
         
General
$
10,042.0
 
$
9,482.9
Mortgage
 
3,235.5
   
2,973.1
Title
 
851.1
   
762.4
Other assets (b)
 
589.5
   
509.5
Consolidation elimination adjustments
 
(409.1)
   
(462.0)
Consolidated
$
14,309.1
 
$
13,266.0
             
             
 
(a)
Income (loss) before taxes (credits) is reported net of interest charges on intercompany financing arrangements with Old Republic’s holding company parent for the following segments: General - $5.4 and $12.5 compared to $3.5 and $10.3 for the quarter and nine months ended September 30, 2009 and 2008, respectively; Mortgage - $1.7 and $5.5 for the quarter and nine months ended September 30, 2009, respectively; and Title - $1.6 and $3.9 compared to $.5 and $1.8 for the quarter and nine months ended September 30, 2009 and 2008, respectively.
 
(b)
Represents amounts for Old Republic’s holding company parent, minor corporate services subsidiaries, and a small life and health insurance operation.

7.
Commitments and Contingent Liabilities:

Legal proceedings against the Company and its subsidiaries routinely arise in the normal course of business and usually pertain to claim matters related to insurance policies and contracts issued by its insurance subsidiaries. Other, non-routine legal proceedings which may prove to be material to the Company or a subsidiary are discussed below.

Purported class action lawsuits are pending against the Company’s principal title insurance subsidiary, Old Republic National Title Insurance Company (“ORNTIC”) in state and federal courts in Connecticut, New Jersey, Ohio, Pennsylvania and Texas. The plaintiffs allege that ORNTIC failed to give consumers reissue and/or refinance credits on the premiums charged for title insurance covering mortgage refinancing transactions, as required by rate schedules filed by ORNTIC or by state rating bureaus with the state insurance regulatory authorities. The suit in Texas also alleges violation of the federal Real Estate Settlement Procedures Act (“RESPA”). Substantially similar lawsuits are also pending against other unaffiliated title insurance companies in these and other states as well, and additional lawsuits based upon similar allegations could be filed against ORNTIC in the future. Classes have been certified in the Pennsylvania action, and settlement agreements have been reached in the Connecticut and New Jersey actions. Neither settlement is expected to exceed $2.9.

Since early February 2008, some 80 purported consumer class action lawsuits have been filed against the title industry’s principal title insurance companies, their subsidiaries and affiliates, and title insurance rating bureaus or associations in at least 10 states. The suits are substantially identical in alleging that the defendant title insurers engaged in illegal price-fixing agreements to set artificially high premium rates and conspired to create premium rates which the state insurance regulatory authorities could not evaluate and therefore, could not adequately regulate. A number of them have been dismissed and others consolidated. Approximately 57 remain nationwide. ORNTIC is currently among the named defendants in 35 of these actions in 5 states and the Company is a named defendant in 8 of the actions in 1 state. No class has yet been certified in any of these suits against the Company and ORNTIC, and none of the actions against them allege RESPA violations.

National class action suits have been filed against the Company’s subsidiary, Old Republic Home Protection Company (“ORHP”) in the California Superior Court, San Diego, and the U.S. District Court in Birmingham, Alabama. The California suit has been filed on behalf of all persons who made a claim under an ORHP home warranty contract from March 6, 2003 to the present. The suit alleges breach of contract, breach of the implicit covenant of good faith and fair dealing, violations of certain California consumer protection laws and misrepresentation arising out of ORHP’s alleged failure to adopt and implement reasonable standards for the prompt

 
14
 
 

investigation and processing of claims under its home warranty contracts. The suit seeks unspecified damages consisting of the rescission of the class members’ contracts, restitution of all sums paid by the class members, punitive damages, declaratory and injunctive relief. No class has been certified in either action. ORHP has removed the action to the U.S. District Court for the Southern District of California. The Alabama suit alleges that ORHP pays fees to the real estate brokers who market its home warranty contracts and that the payment of such fees is in violation of Section 8(a) of RESPA. The suit seeks unspecified damages, including treble damages under RESPA.

On December 19, 2008, Old Republic Insurance Company and Old Republic Insured Credit Services, Inc. (“Old Republic”) filed suit against Countrywide Bank FSB and Countrywide Home Loans, Inc. (“Countrywide”) in the Circuit Court, Cook County, Illinois seeking a declaratory judgment to rescind or terminate various credit indemnity policies issued to insure loans which Countrywide had securitized. In February of 2009 Countrywide filed a counterclaim alleging a breach of contract, bad faith and seeking a declaratory judgment challenging the factual and procedural bases that Old Republic has relied upon to deny or rescind coverage for individual defaulted loans under those policies. To date, Old Republic has rescinded or denied coverage on more than 11,500 defaulted loans, based upon material misrepresentations either by Countrywide as to the credit characteristics of the loans or by the borrowers in their loan applications.

On December 31, 2009, two of the Company’s mortgage insurance subsidiaries, Republic Mortgage Insurance Company and Republic Mortgage Insurance Company of North Carolina (together “RMIC”) filed a Complaint for Declaratory Judgment in the Supreme Court of the State of New York, County of New York, against Countrywide Financial Corporation, Countrywide Home Loans, Inc., The Bank of New York Mellon Trust Company, N.A., BAC Home Loans Servicing, LP, and Bank of America, N.A. as successor in interest to Countrywide Bank, N.A. (together, “Countrywide”). The suit relates to five mortgage insurance master policies (the “Policies”) issued by RMIC to Countrywide or to The Bank of New York Mellon Trust Company as co-trustee for trusts containing securitized mortgage loans that were originated or purchased by Countrywide. RMIC has rescinded its mortgage insurance coverage on over 1,500 of the loans originally covered under the Policies based upon material misrepresentations of the borrowers in their loan applications or the negligence of Countrywide in its loan underwriting practices or procedures. Each of the rescissions occurred after a borrower had defaulted and RMIC reviewed the claim and loan file submitted by Countrywide. The suit seeks the Court’s review and interpretation of the Policies’ incontestability provisions and its validation of RMIC’s investigation procedures with respect to the claims and underlying loan files.

On January 29, 2010, in response to RMIC’s suit, Countrywide served RMIC with a demand for arbitration under the arbitration clauses of the same Policies. The demand proposes arbitration in Los Angeles, California, and raises largely the same issues as those raised in RMIC’s suit against Countrywide, as well as Countrywide’s and RMIC’s compliance with the terms, provisions and conditions of the Policies. The demand includes a prayer for punitive, compensatory and consequential damages.

Except in the Connecticut and New Jersey actions against the title companies, where settlement agreements have been approved, the ultimate impact of these lawsuits and the arbitration, all of which seek unquantified damages, attorneys’ fees and expenses, is uncertain and not reasonably estimable. The Company and its subsidiaries intend to defend vigorously against each of the aforementioned actions. Although the Company does not believe that these lawsuits will have a material adverse effect on its consolidated financial condition, results of operations or cash flows, there can be no assurance in those regards.

8.
Debt:

On April 29, 2009, the Company completed a public offering of $316.25 aggregate principal amount of Convertible Senior Notes. The notes bear interest at a rate of 8.0% per year, mature on May 15, 2012, and are convertible at any time prior to maturity by the holder into 86.8056 shares of common stock per one thousand dollar note.

Consolidated debt of Old Republic and its subsidiaries is summarized below:

   
September 30, 2009
 
December 31, 2008
   
Carrying
 
Fair
 
Carrying
 
Fair
   
Amount
 
Value
 
Amount
 
Value
8% Convertible Senior Notes due 2012
 
$
316.2
 
$
392.4
 
$
-
 
$
-
Commercial paper due within 180 days with an
                       
average yield of 1.96% and 2.65%, respectively
   
25.1
   
25.1
   
199.5
   
199.5
ESSOP debt with an average yield of 3.88%
                       
and 5.41%, respectively
   
27.9
   
27.9
   
29.5
   
29.5
Other miscellaneous debt
   
2.8
   
2.8
   
3.8
   
3.8
Total debt
 
$
372.2
 
$
448.5
 
$
233.0
 
$
233.0

The Company currently has access to the commercial paper market for up to $150.0.


 
15
 
 

9.
Income Taxes:

Tax positions taken or expected to be taken in a tax return by the Company are recognized in the financial statements when it is more likely than not that the position would be sustained upon examination by tax authorities. There are no tax uncertainties that are expected to result in significant increases or decreases to unrecognized tax benefits within the next twelve month period. The Company views its income tax exposures as primarily consisting of timing differences whereby the ultimate deductibility of a taxable amount is highly certain but the timing of its deductibility is uncertain. Such differences relate principally to the timing of deductions for loss and premium reserves. As in prior examinations, the Internal Revenue Service (IRS) could assert that claim reserve deductions were overstated thereby reducing the Company’s statutory taxable income in any particular year. The Company believes that it establishes its reserves fairly and consistently at each balance sheet date, and that it would succeed in defending its tax position in these regards. Because of the impact of deferred tax accounting, the possible accelerated payment of tax to the IRS would not necessarily affect the annual effective tax rate. Examinations of the Company’s consolidated Federal income tax returns through year-end 2006 have been completed and no significant adjustments have resulted.


 
16
 
 

OLD REPUBLIC INTERNATIONAL CORPORATION
MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS
Nine Months Ended September 30, 2009 and 2008
($ in Millions, Except Share Data)

OVERVIEW

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), Mortgage Guaranty, and Title insurance segments. A small life and health insurance business, accounting for 2.1% of consolidated operating revenues for the nine months ended September 30, 2009 and 1.8% of consolidated assets as of September 30, 2009, is included within the corporate and other caption of this report. The consolidated accounts are presented in conformity with the Accounting Standards Codification (“ASC”). This management analysis should be read in conjunction with the consolidated financial statements and the footnotes appended to them.

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 managed without 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.

EXECUTIVE SUMMARY

Third quarter and year-to-date 2009 mortgage guaranty and consolidated operating results benefited from a GAAP accounting requirement that premiums received for certain, largely non-recurring reinsurance contract terminations (“commutations”), be recognized immediately as income. As a consequence, 2009 pretax operating earnings benefited by $82.5 ($53.6 after tax or $0.23 per share) from such premiums. Substantially all of these premiums will likely be absorbed by loss costs related to the future years’ risk exposures they are designed to cover. Results for 2009 also benefited from much greater market share-driven revenues and a lower expense ratio in the title insurance segment. General insurance operating results throughout 2009 were dampened by the combination of lower earned premiums and higher loss costs for certain insurance coverages.

Net earnings for the latest quarter benefited from and the net loss for this year’s first nine months was reduced by deferred income tax credits of $20.5 ($0.08 per share) and $54.0 ($0.23 per share), respectively. The tax credits, which could not be recognized previously due to the requirements of accounting rules, stem from estimates of losses from other-than-temporary impairments of investments, most of which were originally recorded in the second quarter of 2008.

 
17
 
 

Consolidated Results – The major components of Old Republic’s consolidated results and other data for the periods reported upon are shown below:

 
Quarters Ended September 30,
 
Nine Months Ended September 30,
 
2009
 
2008
 
Change
 
2009
 
2008
 
Change
Operating revenues:
                                 
General insurance
$
514.4
 
$
565.7
 
-9.1
%
 
$
1,545.2
 
$
1,708.7
 
-9.6
%
Mortgage guaranty
 
247.2
   
172.8
 
43.0
     
585.0
   
518.9
 
12.7
 
Title insurance
 
259.7
   
174.7
 
48.7
     
639.0
   
521.2
 
22.6
 
Corporate and other
 
19.8
   
23.0
 
-13.9
     
62.6
   
75.6
 
-17.2
 
Total
$
1,041.2
 
$
936.3
 
11.2
%
 
$
2,831.9
 
$
2,824.5
 
.3
%
Pretax operating income (loss):
                                 
General insurance
$
43.7
 
$
77.0
 
-43.3
%
 
$
148.4
 
$
223.2
 
-33.5
%
Mortgage guaranty
 
(77.8)
   
(152.8)
 
49.1
     
(360.4)
   
(415.9)
 
13.4
 
Title insurance
 
4.0
   
(9.7)
 
142.0
     
0.6
   
(27.0)
 
102.4
 
Corporate and other
 
1.8
   
5.3
 
-65.7
     
4.3
   
11.4
 
-62.2
 
Sub-total
 
(28.1)
   
(80.1)
 
64.8
     
(207.0)
   
(208.3)
 
.6
 
Realized investment gains (losses):
                                 
From sales
 
0.6
   
18.3
         
1.0
   
26.0
     
From impairments
 
(1.5)
   
(11.5)
         
(1.5)
   
(448.9)
     
Net realized investment
                                 
gains (losses)
 
(0.9)
   
6.7
 
N/M
     
(0.5)
   
(422.8)
 
N/M
 
Consolidated pretax income (loss)
 
(29.1)
   
(73.4)
 
60.3
     
(207.6)
   
(631.1)
 
67.1
 
Income taxes (credits)
 
(36.5)
   
(25.3)
 
-44.1
     
(145.2)
   
(199.3)
 
27.1
 
Net income (loss)
$
7.4
 
$
(48.0)
 
115.5
%
 
$
(62.3)
 
$
(431.8)
 
85.6
%

Consolidated underwriting ratio:
                                         
Benefits and claims ratio
 
71.5
%
   
81.8
%
         
77.6
%
   
80.1
%
     
Expense ratio
 
40.5
     
38.8
           
40.8
     
39.0
       
Composite ratio
 
112.0
%
   
120.6
%
         
118.4
%
   
119.1
%
     

Components of diluted
                                 
earnings per share:
                                 
Net operating income (loss)
$
(0.05)
 
$
(0.20)
 
75.0
%
 
$
(0.49)
 
$
(0.50)
 
2.0
%
Net realized investment
                                 
gains (losses)
 
0.08
   
(0.01)
 
N/M
     
0.23
   
(1.37)
 
N/M
 
Net income (loss)
$
0.03
 
$
(0.21)
 
114.3
%
 
$
(0.26)
 
$
(1.87)
 
86.1
%
                                   
Cash dividends paid per share
$
0.17
 
$
0.17
 
-
%
 
$
0.51
 
$
0.50
 
2.0
%
                                     

N/M: Not meaningful

The above table shows both operating and net income (loss) to highlight the effects of realized investment gain or loss recognition and any non-recurring items on period-to-period comparisons. Operating income, however, does not replace net income computed in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) as a measure of total profitability.

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, recognition of estimated losses from write-downs for 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 net operating income, a non-ASC financial measure, to evaluate and better explain operating performance, and believes its use enhances an understanding of Old Republic’s basic business results.

 
18
 
 

General Insurance Results – Pretax operating earnings for this year’s quarterly and year-to-date periods were affected mostly by reduced premium volume and moderately higher claim and expense ratios. The following table shows these effects:
 
General Insurance Group
 
Quarters Ended September 30,
 
Nine Months Ended September 30,
 
2009
 
2008
 
Change
 
2009
 
2008
 
Change
Net premiums earned
$
446.7
 
$
500.3
 
-10.7
%
 
$
1,344.9
 
$
1,507.4
 
-10.8
%
Net investment income
 
64.7
   
61.9
 
4.5
     
191.8
   
189.1
 
1.4
 
Pretax operating income (loss)
$
43.7
 
$
77.0
 
-43.3
%
 
$
148.4
 
$
223.2
 
-33.5
%

Claims ratio
 
77.5
%
   
72.5
%
       
76.1
%
   
72.8
%
   
Expense ratio
 
25.8
     
23.8
         
26.0
     
24.2
     
Composite ratio
 
103.3
%
   
96.3
%
       
102.1
%
   
97.0
%
   

Earned premiums for the large majority of insurance coverages continued to trend lower throughout 2009. As in the recent past, premium growth has been constrained by the combination of a moderately declining rate environment during the past three years or so, and by recessionary economic conditions. These conditions affect such factors as sales and employment levels, both of which are important bases upon which premium rates are applied.

General insurance investment income trends benefited from a greater invested asset base.

Overall claim ratios continued to trend moderately higher in this year’s third quarter and first nine months. 2009 claim experience for the consumer credit indemnity (“CCI”) coverage, however, remained at high levels, adding approximately 7.2 percentage points to the above claim ratios. By contrast CCI claim experience in the third quarter and first nine months of 2008 was additive to general insurance claim ratios by 5.1 and 6.8 percentage points, respectively. Aggregate claim experience for other coverages did not show significantly adverse trends. Production and general operating expenses edged down slightly in 2009 but nonetheless resulted in a higher ratio as the expense reduction lagged a larger drop in earned premiums.

Mortgage Guaranty Results – Year-to-date mortgage guaranty operating results benefited from the captive reinsurance premiums receipts previously noted. Key indicators of this segment’s evolving performance are shown in the following table:

 
Mortgage Guaranty Group
 
Quarters Ended September 30,
 
Nine Months Ended September 30,
 
2009
 
2008
 
Change
 
2009
 
2008
 
Change
Net premiums earned
$
221.5
 
$
148.4
 
49.3
%
 
$
508.4
 
$
445.2
 
14.2
%
Net investment income
 
23.8
   
22.0
 
8.4
     
68.4
   
65.0
 
5.4
 
Pretax operating income (loss)
$
(77.8)
 
$
(152.8)
 
49.1
%
 
$
(360.4)
 
$
(415.9)
 
13.4
%

Claims ratio
 
134.2
%
   
203.1
%
       
170.7
%
   
192.3
%
   
Expense ratio
 
10.9
     
14.8
         
12.6
     
15.8
     
Composite ratio
 
145.1
%
   
217.9
%
       
183.3
%
   
208.1
%
   

Absent the aforementioned effect of the reinsurance commutations, mortgage guaranty earned premiums declined in each of this year’s quarterly periods. The lower premium levels resulted mostly from the more selective underwriting criteria applied since late 2007, from an overall decline in the industry’s business penetration, and from higher premium refunds related to claim rescissions. These factors were attenuated somewhat by relatively high persistency levels for business produced in prior years, and by a continuing decline in premiums ceded to lender-owned (captive) reinsurance companies.

During 2009’s third quarter, Old Republic’s Mortgage Guaranty Group entered into reinsurance termination agreements (“commutations”) with four lender-owned captive reinsurers. As part of the transactions, the Company received reinsurance premiums of $82.5 million to cover losses expected to occur after the contract termination date. Under GAAP, these reinsurance commutations have been treated as the termination of risk transfer reinsurance arrangements rather than transactions in which the Company takes on new or additional insurance risk. As a result of this GAAP characterization, the premiums received have been booked as current income rather than being deferred and subsequently recognized in the future periods during which the related risk will exist and expected claims will occur. The Company estimates that substantially all of these premiums will likely be absorbed by related claim costs thus negating the current appearance of a gain from the transactions. In the above table, the up front recognition of the $82.5 of premiums also has the effect of portraying an increase in net premiums earned for the latest quarter and first nine months of 2009 of 49.3% and 14.2%,respectively, whereas their exclusion through deferral to future at risk periods would have shown an  actual  6.4% and 4.3% decline, respectively. As a further consequence of this GAAP premium recognition methodology, the 2009 loss ratio for the latest quarter and first nine months dropped from 214.0% and 203.8%, respectively, to 134.2% and 170.7%, respectively, and the 2009 pretax operating loss for the third quarter and first nine months of 2009 was reduced from $160.4 and $443.0, respectively, to $77.8 and $360.4, respectively. Excluding these premium recognition effects, quarterly claim ratios for the first nine months of 2009 averaged 203.9% versus a comparable average of 192.2% for 2008. Greater

 
19
 
 

claim rescissions and a moderate decline in expected claim severity during 2009 offset to some degree the impact on claim reserve provisions of a continued uptrend in reported delinquent loans. The components of incurred mortgage guaranty claim ratios are shown in the following table.

   
Mortgage Guaranty Group
   
Quarters Ended
 
Nine Months Ended
   
September 30,
 
September 30,
   
2009
 
2008
 
2009
 
2008
Incurred loss ratio from:
                       
Paid claims
 
57.8
%
 
84.7
%
 
92.5
%
 
66.6
%
Claim reserve provisions
 
156.2
   
118.4
   
111.3
   
125.7
 
Effect of commutations
 
-79.8
   
-
   
-33.1
   
-
 
Total
 
134.2
%
 
203.1
%
 
170.7
%
 
192.3
%

Mortgage guaranty investment income trends benefited from a greater invested asset base.

Title Insurance Results – Old Republic’s title insurance business registered slightly better than break even results for the first nine months of 2009. Key operating performance indicators are shown in the following table:

 
Title Insurance Group
 
Quarters Ended September 30,
 
Nine Months Ended September 30,
 
2009
 
2008
 
Change
 
2009
 
2008
 
Change
Net premiums and fees earned
$
253.3
 
$
168.4
 
50.4
%
 
$
620.6
 
$
502.1
 
23.6
%
Net investment income
 
6.3
   
6.2
 
1.4
     
18.2
   
19.1
 
-4.3
 
Pretax operating income (loss)
$
4.0
 
$
(9.7)
 
142.0
%
 
$
.6
 
$
(27.0)
 
102.4
%

Claims ratio
 
8.3
%
   
7.0
%
       
7.6
%
   
7.0
%
   
Expense ratio
 
91.1
     
102.2
         
94.4
     
102.0
     
Composite ratio
 
99.4
%
   
109.2
%
       
102.0
%
   
109.0
%
   

Growth in title premiums and fees for 2009 periods resulted from greater refinance transactions earlier this year and from the benefit of market share gains emerging from title industry dislocations and consolidations. Claim costs rose at a quicker pace, however, as the Company added moderately to reserve provisions to address recent claim emergence trends. Production and general operating expenses, while relatively lower as a percentage of premium and fees revenues, rose dollar-wise in reflection of greater personnel and other production costs related to the higher revenues attained and anticipated.

Corporate and Other Operations – The Company’s small life and health insurance business and the net costs associated with the parent holding company and internal services subsidiaries produced a much lower gain in this year’s first nine months. Period-to-period variations in the results of these relatively minor elements of Old Republic’s operations usually stem from the volatility inherent to the small scale of its life and health business, fluctuations in the costs of external debt, and net interest on intra-system financing arrangements. A portion of the year-over-year decline in earnings was also due to foreign exchange adjustments for U.S. dollar conversions from the Canadian currency held by a life and health insurance subsidiary.

Cash, Invested Assets, and Shareholders’ Equity – The following table reflects Old Republic’s consolidated cash and invested assets as well as shareholders’ equity at the dates shown:
               
% Change
   
September
 
December
 
September
 
Sept '09/
 
Sept '09/
   
2009
 
2008
 
2008
 
Dec '08
 
Sept '08
Cash and invested assets:
fair value basis
 
$
9,844.3
 
$
8,855.1
 
$
8,733.7
 
11.2
%
 
12.7
%
 
original cost basis
 
$
9,635.0
 
$
9,210.0
 
$
9,143.3
 
4.6
%
 
5.4
%
                               
Shareholders’ equity:
Total
 
$
3,955.0
 
$
3,740.3
 
$
3,914.3
 
5.7
%
 
1.0
%
 
Per common share
 
$
16.77
 
$
15.91
 
$
16.96
 
5.4
%
 
-1.1
%
                               
Composition of shareholders’ equity per share:
                             
Equity before items below
 
$
15.32
 
$
16.10
 
$
16.96
 
-4.8
%
 
-9.7
%
Unrealized investment gains (losses) and other
                             
accumulated comprehensive income (loss)
   
1.45
   
(0.19)
   
-
           
Total
 
$
16.77
 
$
15.91
 
$
16.96
 
5.4
%
 
-1.1
%

Consolidated cash flow from operating activities amounted to $438.0 for the first nine months of 2009 versus $467.6 for the same period in 2008.

The investment portfolio reflects a current allocation of approximately 85% to fixed-maturity securities and 5% to equities.  As has been the case for many years, Old Republic’s invested assets are managed in consideration of

 
20
 
 

enterprise-wide risk management objectives intended to assure solid funding of its subsidiaries’ long-term obligations to insurance policyholders and other beneficiaries, and evaluations of their long-term effect on the stability of capital accounts. The portfolio contains little or no direct insurance risk-correlated asset exposures to real estate, mortgage-backed securities, collateralized debt obligations (“CDO’s”), derivatives, junk bonds, hybrid securities, or illiquid private equity investments. In a similar vein, the Company does not engage in hedging or securities lending transactions, nor does it invest in securities whose values are predicated on non-regulated financial instruments exhibiting amorphous or unfunded counter-party risk attributes.

Substantially all changes in the shareholders’ equity account reflect the Company’s net income or loss, dividend payments to shareholders, and impairments or changes in market valuations of invested assets during the periods shown below:
   
Shareholders’ Equity Per Share
   
Quarter
 
Nine Months
   
Ended
 
Ended
   
September 30,
 
September 30,
   
2009
 
2009
 
2008
Beginning balance
 
$
15.93
 
$
15.91
 
$
19.71
Changes in shareholders’ equity for the periods:
                 
Net operating income (loss)
   
(0.05)
   
(0.49)
   
(0.50)
Net realized investment gains (losses):
                 
From sales
   
-
   
-
   
0.07
From impairments
   
0.08
   
0.23
   
(1.44)
Subtotal
   
0.08
   
0.23
   
(1.37)
Net unrealized investment gains (losses)
   
0.95
   
1.56
   
(0.37)
Total realized and unrealized investment gains (losses)
   
1.03
   
1.79
   
(1.74)
Cash dividends
   
(0.17)
   
(0.51)
   
(0.50)
Stock issuance, foreign exchange, and other transactions
   
0.03
   
0.07
   
(0.01)
Net change
   
0.84
   
0.86
   
(2.75)
Ending balance
 
$
16.77
 
$
16.77
 
$
16.96

Old Republic’s significant investments in the stocks of two leading publicly held mortgage guaranty (“MI”) businesses (MGIC Investment Corp. and The PMI Group) account for a substantial portion of the 2008 realized and unrealized investment losses shown in the above and following tables. Unrealized losses, including losses on securities categorized as other-than-temporarily impaired (“OTTI”), represent the net difference between the most recently established cost and the fair values of the investments at each point in time. The aggregate original and impaired costs, fair value, and latest reported underlying equity values of the aforementioned two mortgage guaranty investments are shown below.

   
September 30,
 
December 31,
   
2009
 
2008
 
2007
Total value of the two MI investments:
Original cost
$
416.4
 
$
416.4
 
$
429.7
 
Impaired cost
 
106.8
   
106.8
   
N/A
 
Fair value
 
177.0
   
82.7
   
375.1
 
Underlying equity(*)
$
354.7
 
$
515.9
 
$
679.7
                     
(*) Underlying equity based on latest reports (which may lag by one quarter) issued by investees.

When making investment decisions, management considers the Company’s ability to retain its holdings for a period sufficient to recover their cost and to obtain a competitive long-term total return. It also considers such factors as balance sheet effects of potential changes in market valuations, asset-liability matching objectives, long term ability to hold securities, tax planning considerations, and the investees’ reported book values and ability to continue as going concerns. The above-noted mortgage guaranty holdings were acquired as passive long-term investment additions for a core segment of Old Republic’s business in anticipation of a recovery for the MI industry in 2010. In management’s judgment, the currently depressed market valuations of companies operating in the housing and mortgage-lending sectors of the American economy have been impacted significantly by the cyclical and macroeconomic conditions affecting these sectors, and by the recent dysfunctionality of the banking and mortgage lending industries.

For external financial reporting purposes, however, Old Republic uses relatively short time frames in recognizing OTTI adjustments in its income statement. In this context, absent issuer-specific circumstances that would result in a contrary conclusion, all unrealized investment losses pertaining to any equity security reflecting a 20 percent or greater decline for a six month period is considered OTTI. Unrealized losses that are deemed temporary and all unrealized gains are recorded directly as a separate component of the shareholders’ equity account and in the consolidated statement of comprehensive income. As a result of accounting idiosyncrasies, however, OTTI losses recorded in the income statement of one period can not be offset in the income statement of a subsequent period by fair value gains on the previously impaired securities unless the gains are realized through actual sales. Such unrealized fair value gains can only be recognized through direct credits in the shareholders’ equity account and in the consolidated statement of comprehensive income.

 
21
 
 

Recent Capital Raise – Early in this year’s second quarter the Company obtained gross proceeds of $316.25 through a public offering of 8% Convertible Senior Notes due in 2012. The funds were used mostly to enhance the capital base of the general and title insurance segments, and to repay a portion of commercial paper debt previously incurred to strengthen the capital of the mortgage guaranty segment as of year end 2008. Along with the growth oriented capital additions to businesses with good prospects for the long term, the new funds enhance the stability and resiliency of Old Republic’s consolidated capitalization.

 
22
 
 


DETAILED MANAGEMENT ANALYSIS

FINANCIAL ACCOUNTING AND REPORTING POLICIES

The Company’s annual and interim financial statements incorporate a large number and types of estimates relative to matters which are highly uncertain at the time the estimates are made. The estimation process required of an insurance enterprise is by its very nature highly dynamic inasmuch as it necessitates a continuous evaluation, analysis, and quantification of factual data as it becomes known to the Company. As a result, actual experienced outcomes can differ from the estimates made at any point in time, and thus affect future periods’ reported revenues, expenses, net income (loss), and financial condition.

Old Republic believes that its most critical accounting estimates relate to: a) the determination of other-than-temporary impairments in the value of fixed maturity and equity investments; b) the establishment of deferred acquisition costs which vary directly with the production of insurance premiums; c) the recoverability of reinsured paid and/or outstanding losses; and d) the establishment of reserves for losses and loss adjustment expenses. The major assumptions and methods used in setting these estimates are discussed in the Company’s 2008 Annual Report on Form 10K.

In recent years, the Financial Accounting Standards Board (“FASB”) has issued various releases requiring additional financial statement disclosures, and to provide guidance relative to the application of such releases. Of particular pertinence to the Company’s financial statements are certain disclosures relating to uncertainties affecting income tax provisions, and methodologies for establishing the fair value and recording of other-than-temporary impairments of securities. The requisite disclosures and explanations of those matters have been included in the footnotes to the Company’s financial statements.

FINANCIAL POSITION

The Company’s financial position at September 30, 2009 reflected increases in assets, liabilities, and common shareholders’ equity of 7.9%, 8.7% and 5.7%, respectively, when compared to the immediately preceding year-end. Cash and invested assets represented 68.8% and 66.8% of consolidated assets as of September 30, 2009 and December 31, 2008, respectively. As of September 30, 2009, cash and invested assets increased 11.2% to $9,844.3 as a result of positive operating cash flows, new funds from an April 2009 securities offering, and an increase in the fair value of fixed maturity investments.

Investments - During the first nine months of 2009 and 2008, the Company committed substantially all investable funds to short to intermediate-term fixed maturity securities. At both September 30, 2009 and 2008, approximately 99% of the Company’s investments consisted of marketable securities. Old Republic continues to adhere to its long-term policy of investing primarily in investment grade, marketable securities. The portfolio contains little or no insurance risk-correlated asset exposures to real estate, mortgage-backed securities, collateralized debt obligations (“CDO’s”), derivatives, junk bonds, hybrid securities, or illiquid private equity investments. In a similar vein, the Company does not engage in hedging or securities lending transactions, nor does it invest in securities whose values are predicated on non-regulated financial instruments exhibiting amorphous or unfunded counter-party risk attributes. At September 30, 2009, the Company had no fixed maturity investments in default as to principal and/or interest.

Relatively high short-term maturity investment positions continued to be maintained as of September 30, 2009. Such positions reflect a large variety of seasonal and intermediate-term factors including current operating needs, expected operating cash flows, quarter-end cash flow seasonality, and investment strategy considerations. Accordingly, the future level of short-term investments will vary and respond to the interplay of these factors and may, as a result, increase or decrease from current levels.

The Company does not own or utilize derivative financial instruments for the purpose of hedging, enhancing the overall return of its investment portfolio, or reducing the cost of its debt obligations. With regard to its equity portfolio, the Company does not own any options nor does it engage in any type of option writing. Traditional investment management tools and techniques are employed to address the yield and valuation exposures of the invested assets base. The long-term fixed maturity investment portfolio is managed so as to limit various risks inherent in the bond market. Credit risk is addressed through asset diversification and the purchase of investment grade securities. Reinvestment rate risk is reduced by concentrating on non-callable issues, and by taking asset-liability matching considerations into account. Purchases of mortgage and asset backed securities, which have variable principal prepayment options, are generally avoided. Market value risk is limited through the purchase of bonds of intermediate maturity. The combination of these investment management practices is expected to produce a more stable long-term fixed maturity investment portfolio that is not subject to extreme interest rate sensitivity and principal deterioration.

The fair value of the Company’s long-term fixed maturity investment portfolio is sensitive, however, to fluctuations in the level of interest rates, but not materially affected by changes in anticipated cash flows caused by any prepayments. The impact of interest rate movements on the long-term fixed maturity investment portfolio generally affects net unrealized gains or losses. As a general rule, rising interest rates enhance currently available yields but typically lead to

 
23
 
 

a reduction in the fair value of existing fixed maturity investments. By contrast, a decline in such rates reduces currently available yields but usually serves to increase the fair value of the existing fixed maturity investment portfolio. All such changes in fair value are reflected, net of deferred income taxes, directly in the shareholders’ equity account, and as a separate component of the statement of comprehensive income. Given the Company’s inability to forecast or control the movement of interest rates, Old Republic sets the maturity spectrum of its fixed maturity securities portfolio within parameters of estimated liability payouts, and focuses the overall portfolio on high quality investments. By so doing, Old Republic believes it is reasonably assured of its ability to hold securities to maturity as it may deem necessary in changing environments, and of ultimately recovering their aggregate cost.

Possible future declines in fair values for Old Republic’s bond and stock portfolios would negatively affect the common shareholders’ equity account at any point in time, but would not necessarily result in the recognition of realized investment losses. The Company reviews the status and fair value changes of each of its investments on at least a quarterly basis during the year, and estimates of other-than-temporary impairments in the portfolio’s value are evaluated and established at each quarterly balance sheet date. In reviewing investments for other-than-temporary impairment, the Company, in addition to a security’s market price history, considers the totality of such factors as the issuer’s operating results, financial condition and liquidity, its ability to access capital markets, credit rating trends, most current audit opinion, industry and securities markets conditions, and analyst expectations to reach its conclusions. Sudden fair value declines caused by such adverse developments as newly emerged or imminent bankruptcy filings, issuer default on significant obligations, or reports of financial accounting developments that bring into question the validity of previously reported earnings or financial condition, are recognized as realized losses as soon as credible publicly available information emerges to confirm such developments. Absent issuer-specific circumstances that would result in a contrary conclusion, any equity security with an unrealized investment loss amounting to a 20% or greater decline for a six month period is considered other-than-temporarily-impaired. In the event the Company’s estimate of other-than-temporary impairments is insufficient at any point in time, future periods’ net income (loss) would be affected adversely by the recognition of additional realized or impairment losses, but its financial condition would not necessarily be affected adversely inasmuch as such losses, or a portion of them, could have been recognized previously as unrealized losses.

The following tables show certain information relating to the Company’s fixed maturity and equity portfolios as of the dates shown:

Credit Quality Ratings of Fixed Maturity Securities (a)

   
September 30,
 
December 31,
   
2009
 
2008
Aaa
 
19.3
%
 
20.4
%
Aa
 
21.3
   
24.5
 
A
 
31.4
   
31.4
 
Baa
 
26.1
   
22.0
 
Total investment grade
 
98.1
   
98.3
 
All other (b)
 
1.9
   
1.7
 
Total
 
100.0
%
 
100.0
%
               

 
(a)
Credit quality ratings used are those assigned primarily by Moody’s for U.S. Governments, Agencies and Corporate issuers and by Standard & Poor’s (“S&P”) for U.S. and Canadian Municipal issuers, which are converted to equivalent Moody’s ratings classifications. In the second quarter of 2009, the Company changed its source of credit quality ratings from Moody’s to S&P for U.S. Municipal issuers due to their wider credit coverage. The December 31, 2008 disclosures have been restated to be comparable to the current period classifications. The effect of such change moderately improved the previously reported credit quality ratings.
 
(b)
“All other” includes non-investment grade or non-rated issuers.

Gross Unrealized Losses Stratified by Industry Concentration for Non-Investment Grade Fixed Maturity Securities

   
September 30, 2009
       
Gross
   
Amortized
 
Unrealized
   
Cost
 
Losses
Fixed Maturity Securities by Industry Concentration:
           
Banking
 
$
23.0
 
$
3.8
Retail
   
21.4
   
1.1
Industrial
   
25.8
   
1.0
Consumer Non-durables
   
10.6
   
.3
Other (includes 4 industry groups)
   
31.6
   
.7
Total
 
$
112.6
(c)
$
7.2
               

 (c)
Represents 1.5% of the total fixed maturity securities portfolio.

 
24
 
 


Gross Unrealized Losses Stratified by Industry Concentration for Investment Grade Fixed Maturity Securities

   
September 30, 2009
       
Gross
   
Amortized
 
Unrealized
   
Cost
 
Losses
Fixed Maturity Securities by Industry Concentration:
           
Banking
 
$
48.3
 
$
1.9
REIT
   
34.9
   
1.6
Basic Industry
   
31.6
   
.3
Service
   
6.0
   
.2
Other (includes 13 industry groups)
   
145.2
   
1.1
Total
 
$
266.2
(d)
$
5.3
               

 
(d)
Represents 3.5% of the total fixed maturity securities portfolio.

Gross Unrealized Losses Stratified by Industry Concentration for Equity Securities

   
September 30, 2009
 
       
Gross
 
   
Adjusted
 
Unrealized
 
   
Cost (g)
 
Losses
 
Equity Securities by Industry Concentration:
             
Index Funds
 
$
173.9
 
$
18.6
 
Health Care
   
15.1
   
.7
 
Utilities
   
13.9
   
.6
 
Insurance
   
.2
   
-
 
Total
 
$
203.2
(e)
$
20.2
(f)
                 

 
(e)
Represents 54.4% of the total equity securities portfolio.
 
(f)
Represents 5.4% of the adjusted cost of the total equity securities portfolio, while gross unrealized gains represent 32.2% of the portfolio.
 
(g)
Reported net of other-than-temporary impairment adjustments.

Gross Unrealized Losses Stratified by Maturity Ranges for All Fixed Maturity Securities

   
September 30, 2009
   
Amortized Cost
   
   
of Fixed Maturity Securities
 
Gross Unrealized Losses
       
Non-
     
Non-
       
Investment
     
Investment
   
All
 
Grade Only
 
All
 
Grade Only
Maturity Ranges:
                       
Due in one year or less
 
$
40.3
 
$
15.6
 
$
.3
 
$
.3
Due after one year through five years
   
200.6
   
60.4
   
5.8
   
3.7
Due after five years through ten years
   
133.9
   
36.4
   
6.0
   
3.1
Due after ten years
   
3.9
   
-
   
.2
   
-
Total
 
$
378.8
 
$
112.6
 
$
12.5
 
$
7.2
                           


 
25
 
 


Gross Unrealized Losses Stratified by Duration and Amount of Unrealized Losses

   
September 30, 2009
 
   
Amount of Gross Unrealized Losses
 
   
Less than
         
Total Gross
 
   
20% of
 
20% to 50%
 
More than
 
Unrealized
 
   
Cost
 
of Cost
 
50% of Cost
 
Loss
 
Number of Months in Loss Position:
                         
Fixed Maturity Securities:
                         
One to six months
 
$
.5
 
$
-
 
$
-
 
$
.5
 
Seven to twelve months
   
.2
   
-
   
-
   
.2
 
More than twelve months
   
7.5
   
4.0
   
-
   
11.6
 
Total
 
$
8.4
 
$
4.0
 
$
-
 
$
12.5
 
Equity Securities:
                         
One to six months
 
$
-
 
$
-
 
$
-
 
$
-
 
Seven to twelve months
   
3.1
   
-
   
-
   
3.1
 
More than twelve months
   
16.9
   
-
   
-
   
17.0
 
Total
 
$
20.1
 
$
-
 
$
-
 
$
20.2
 
                           
Number of Issues in Loss Position:
                         
Fixed Maturity Securities:
                         
One to six months
   
21
   
-
   
-
   
21
 
Seven to twelve months
   
8
   
-
   
-
   
8
 
More than twelve months
   
49
   
3
   
-
   
52
 
Total
   
78
   
3
   
-
   
81
(h)
Equity Securities:
                         
One to six months
   
-
   
-
   
-
   
-
 
Seven to twelve months
   
4
   
-
   
-
   
4
 
More than twelve months
   
2
   
1
   
-
   
3
 
Total
   
6
   
1
   
-
   
7
(h)
                             

 
(h)
At September 30, 2009 the number of issues in an unrealized loss position represent 4.0% as to fixed maturities, and 43.8% as to equity securities of the total number of such issues held by the Company.

The aging of issues with unrealized losses employs closing market price comparisons with an issue’s original cost net of other-than-temporary impairment adjustments. The percentage reduction from such adjusted cost reflects the decline as of a specific point in time (September 30, 2009 in the above table) and, accordingly, is not indicative of a security’s value having been consistently below its cost at the percentages and throughout the periods shown.

Age Distribution of Fixed Maturity Securities

   
September 30,
 
December 31,
 
   
2009
 
2008
 
Maturity Ranges:
             
Due in one year or less
 
9.6
%
 
14.0
%
 
Due after one year through five years
 
54.4
   
51.0
   
Due after five years through ten years
 
35.6
   
34.7
   
Due after ten years through fifteen years
 
.4
   
.3
   
Due after fifteen years
 
-
   
-
   
Total
 
100.0
%
 
100.0
%
 
               
Average Maturity in Years
 
4.4
   
4.4
   
Duration (i)
 
3.7
   
3.7
   
                 

 
(i)
Duration is used as a measure of bond price sensitivity to interest rate changes. A duration of 3.7 as of September 30, 2009 implies that a 100 basis point parallel increase in interest rates from current levels would result in a possible decline in the fair value of the long-term fixed maturity investment portfolio of approximately 3.7%.



 
26
 
 


Composition of Unrealized Gains (Losses)

   
September 30,
 
December 31,
 
   
2009
 
2008
 
Fixed Maturity Securities:
             
Amortized cost
 
$
7,706.2
 
$
7,385.2
 
Estimated fair value
   
8,177.5
   
7,406.9
 
Gross unrealized gains
   
483.8
   
196.8
 
Gross unrealized losses
   
(12.5)
   
(175.0)
 
Net unrealized gains (losses)
 
$
471.2
 
$
21.7
 
               
Equity Securities:
             
Original cost
 
$
729.2
 
$
729.2
 
Adjusted cost
   
373.3
   
373.3
 
Estimated fair value
   
473.5
   
350.3
 
Gross unrealized gains
   
120.3
   
49.6
 
Gross unrealized losses
   
(20.2)
   
(72.7)
 
Net unrealized gains (losses)
 
$
100.1
 
$
(23.0)
 

Other Assets - Among other major assets, substantially all of the Company’s receivables are not past due. Reinsurance recoverable balances on paid or estimated unpaid losses are deemed recoverable from solvent reinsurers or have otherwise been reduced by allowances for estimated amounts unrecoverable. Deferred policy acquisition costs are estimated by taking into account the variable costs of producing specific types of insurance policies, and evaluating their recoverability on the basis of recent trends in claims costs. The Company’s deferred policy acquisition cost balances have not fluctuated substantially from period-to-period and do not represent significant percentages of assets or shareholders’ equity.

Liquidity - The parent holding company meets its liquidity and capital needs principally through dividends paid by its subsidiaries. From time to time additional cash needs are also met by accessing Old Republic’s commercial paper program and/or the debt and equity capital markets. 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. The Company can receive up to $245.7 in dividends from its subsidiaries in 2009 without the prior approval of regulatory authorities. The liquidity achievable through such permitted dividend payments is considered adequate to cover the parent holding company’s currently expected cash outflows represented mostly by interest and scheduled repayments on outstanding debt, quarterly cash dividend payments to shareholders, modest operating expenses, and the near-term capital needs of its operating company subsidiaries. Old Republic can currently access the commercial paper market for up to $150.0, of which $25.2 was outstanding at September 30, 2009, to meet unanticipated liquidity needs.

Capitalization - Old Republic’s total capitalization of $4,327.2 at September 30, 2009 consisted of debt of $372.2 and common shareholders' equity of $3,955.0. Changes in the common shareholders’ equity account reflect primarily operating results for the period then ended, dividend payments, and changes in market valuations of invested assets. Old Republic has paid cash dividends to its shareholders without interruption since 1942, and has increased the annual rate in each of the past 27 calendar years. The dividend rate is reviewed and approved by the Board of Directors on a quarterly basis during each year. In establishing each year’s cash dividend rate the Company does not follow a strict formulaic approach. Rather, it favors a gradual rise in the annual dividend rate that is largely reflective of long-term consolidated operating earnings trends. Accordingly, each year’s dividend rate is set judgmentally in consideration of such key factors as the dividend paying capacity of the Company’s insurance subsidiaries, the trends in average annual statutory and GAAP earnings for the five most recent calendar years, and management’s long-term expectations for the Company’s consolidated business.

Under certain state insurance regulations, the Company’s three mortgage guaranty insurance subsidiaries are required to operate at a maximum risk to capital ratio of 25:1. If a company’s risk to capital ratio exceeds the limit, absent expressed regulatory approval, it may be prohibited from writing new business until its risk to capital ratio falls below the limit. At September 30, 2009, the statutory risk to capital ratio was 20.9:1 for the combined subsidiaries. All of the segment’s mortgage guaranty insurance companies were within the 25:1 requirement. A continuation of operating losses could further reduce statutory surplus thus increasing the risk to capital ratio which the Company evaluates on a quarterly basis. Old Republic invested $150.0 of capital in its mortgage guaranty segment during the fourth quarter of 2008.

During the second quarter of 2009, additional capital funds of $30.0 and $132.0 were directed to the title and general insurance segments, respectively, to support the expected growth of the business.

The Company has access to various capital resources including dividends from its subsidiaries, holding company investments, undrawn capacity under its commercial paper program, and access to debt and equity capital markets. At September 30, 2009, the Company’s consolidated debt to equity ratio was 9.4%. This relatively low level of financial leverage should provide the Company with additional borrowing capacity to meet its capital commitments.

 
27
 
 


RESULTS OF OPERATIONS

Revenues:  Premiums & Fees

Pursuant to ASC applicable to the insurance industry, revenues are associated with the related benefits, claims, and expenses.

Substantially all general insurance premiums are reflected in income on a pro-rata basis. Earned but unbilled premiums are generally taken into income on the billing date, while adjustments for retrospective premiums, commissions and similar charges or credits are accrued on the basis of periodic evaluations of current underwriting experience and contractual obligations.

The Company’s mortgage guaranty premiums primarily stem from monthly installment policies. Accordingly, substantially all such premiums are generally written and earned in the month coverage is effective. With respect to annual or single premium policies, earned premiums are largely recognized on a pro-rata basis over the terms of the policies.
 
 
Title premium and fee revenues stemming from the Company’s direct operations (which include branch offices of its title insurers and wholly owned agency subsidiaries) represent 40.0% of 2009 consolidated title business revenues. Such premiums are generally recognized as income at the escrow closing date which approximates the policy effective date. Fee income related to escrow and other closing services is recognized when the related services have been performed and completed. The remaining 60.0% of consolidated title premium and fee revenues is produced by independent title agents and underwritten title companies. Rather than making estimates that could be subject to significant variance from actual premium and fee production, the Company recognizes revenues from those sources upon receipt. Such receipts can reflect a three to four month lag relative to the effective date of the underlying title policy, and are offset concurrently by production expenses and claim reserve provisions.

The major sources of Old Republic’s earned premiums and fees for the periods shown were as follows:

 
Earned Premiums and Fees
                     
% Change
                     
from prior
 
General
 
Mortgage
 
Title
 
Other
 
Total
 
period
Years Ended December 31:
                                 
2006
$
1,902.1
 
$
444.3
 
$
980.0
 
$
74.1
 
$
3,400.5
 
.4
%
2007
 
2,155.1
   
518.2
   
850.7
   
77.0
   
3,601.2
 
5.9
 
2008
 
1,989.3
   
592.5
   
656.1
   
80.1
   
3,318.1
 
-7.9
 
Nine Months Ended September 30:
                                 
2008
 
1,507.4
   
445.2
   
502.1
   
62.7
   
2,517.5
 
-6.9
 
2009
 
1,344.9
   
508.4
   
620.6
   
54.0
   
2,528.0
 
.4
 
Quarters Ended September 30:
                                 
2008
 
500.3
   
148.4
   
168.4
   
18.0
   
835.2
 
-9.3
 
2009
$
446.7
 
$
221.5
 
$
253.3
 
$
17.0
 
$
938.7
 
12.4
%

The percentage allocation of net premiums earned for major insurance coverages in the General Insurance Group was as follows:

 
General Insurance Earned Premiums by Type of Coverage
 
Commercial
         
Inland
       
 
Automobile
         
Marine
       
 
(mostly
 
Workers’
 
Financial
 
and
 
General
   
 
trucking)
 
Compensation
 
Indemnity
 
Property
 
Liability
 
Other
   Years Ended December 31:
                                 
2006
39.6
%
 
21.7
%
 
11.0
%
 
10.7
%
 
5.1
%
 
11.9
%
2007
35.0
   
23.5
   
13.8
   
9.3
   
7.8
   
10.6
 
2008
34.9
   
21.0
   
16.1
   
9.7
   
7.5
   
10.8
 
Nine Months Ended September 30:
                                 
2008
34.5
   
21.1
   
16.0
   
9.6
   
7.7
   
11.1
 
2009
35.9
   
22.0
   
13.4
   
9.5
   
8.2
   
11.0
 
Quarters Ended September 30:
                                 
2008
34.8
   
20.8
   
15.7
   
9.3
   
7.4
   
12.0
 
2009
36.3
%
 
22.0
%
 
12.6
%
 
9.3
%
 
8.1
%
 
11.7
%


 
28
 
 

The following tables provide information on production and related risk exposure trends for Old Republic’s Mortgage Guaranty Group:

Mortgage Guaranty Production by Type
   
Traditional
           
New Insurance Written:
 
Primary
 
Bulk
 
Other
 
Total
Years Ended December 31:
                       
2006
 
$
17,187.0
 
$
13,716.7
 
$
583.7
 
$
31,487.5
2007
   
31,841.7
   
10,800.3
   
901.6
   
43,543.7
2008
   
20,861.9
   
3.5
   
1,123.5
   
21,989.0
Nine Months Ended September 30:
                       
2008
   
18,171.6
   
3.5
   
1,096.2
   
19,271.4
2009
   
6,778.9
   
-
   
.5
   
6,779.4
Quarters Ended September 30:
                       
2008
   
4,318.6
   
-
   
383.6
   
4,702.2
2009
 
$
1,993.6
 
$
-
 
$
-
 
$
1,993.6

   
Traditional
           
New Risk Written by Type:
 
Primary
 
Bulk
 
Other
 
Total
Years Ended December 31:
                       
2006
 
$
4,246.8
 
$
1,146.6
 
$
12.2
 
$
5,405.7
2007
   
7,844.5
   
724.5
   
15.2
   
8,584.4
2008
   
4,815.0
   
.6
   
11.8
   
4,827.5
Nine Months Ended September 30:
                       
2008
   
4,213.2
   
.6
   
11.2
   
4,225.2
2009
   
1,439.4
   
-
   
-
   
1,439.4
Quarters Ended September 30:
                       
2008
   
999.7
   
-
   
4.0
   
1,003.8
2009
 
$
428.1
 
$
-
 
$
-
 
$
428.1

   
Earned Premiums
 
Persistency
Premium and Persistency Trends by Type:
         
Traditional
   
Years Ended December 31:
 
Direct
 
Net
 
Primary
 
Bulk
2006
 
$
524.7
 
$
444.3
 
73.1
%
 
70.5
%
2007
   
612.7
   
518.2
 
77.6
   
73.7
 
2008
   
698.4
   
592.5
 
83.9
   
88.4
 
Nine Months Ended September 30:
                       
2008
   
526.0
   
445.2
 
81.4
   
86.3
 
2009
   
496.1
   
508.4
 
83.4
%
 
89.3
%
Quarters Ended September 30:
                       
2008
   
175.3
   
148.4
           
2009
 
$
160.2
 
$
221.5
           

While there is no consensus in the marketplace as to the precise definition of “sub-prime”, Old Republic generally views loans with credit (FICO) scores less than 620, loans underwritten with reduced levels of documentation and loans with loan to value ratios in excess of 95% as having a higher risk of default. Risk in force concentrations by these attributes are disclosed in the following tables for both traditional primary and bulk production. Premium rates for loans exhibiting greater risk attributes are typically higher in anticipation of potentially greater defaults and claim costs. Additionally, bulk insurance policies, which represent 8.6% of total net risk in force, are frequently subject to deductibles and aggregate stop losses which serve to limit the overall risk on a pool of insured loans. As the decline in the housing markets has accelerated and mortgage lending standards have tightened, rising defaults and the attendant increases in reserves and paid claims on higher risk loans have become more significant drivers of increased claim costs.

Net Risk in Force
   
Traditional
           
Net Risk in Force By Type:
 
Primary
 
Bulk
 
Other
 
Total
Years Ended December 31:
                       
2006
 
$
14,582.1
 
$
2,471.1
 
$
578.9
 
$
17,632.2
2007
   
18,808.5
   
2,539.9
   
511.1
   
21,859.5
2008
   
20,463.0
   
2,055.0
   
457.0
   
22,975.1
Quarters Ended September 30:
                       
2008
   
20,489.5
   
2,116.8
   
458.8
   
23,065.2
2009
 
$
19,279.6
 
$
1,849.1
 
$
297.5
 
$
21,426.4


 
29
 
 


Analysis of Risk in Force
           
FICO
   
   
FICO less
 
FICO 620
 
Greater
 
Unscored/
Risk in Force Distribution By FICO Scores:
 
than 620
 
to 680
 
than 680
 
Unavailable
                         
Traditional Primary:
                       
As of December 31:
                       
2006
 
8.5
%
 
32.6
%
 
54.6
%
 
4.3
%
2007
 
8.5
   
33.6
   
55.1
   
2.8
 
2008
 
7.0
   
30.5
   
60.5
   
2.0
 
As of September 30:
                       
2008
 
7.2
   
31.2
   
59.5
   
2.1
 
2009
 
6.6
%
 
29.1
%
 
62.7
%
 
1.6
%
                         
Bulk(a):
                       
   As of December 31:
                       
2006
 
24.1
%
 
35.7
%
 
39.8
%
 
.4
%
2007
 
19.4
   
34.9
   
45.4
   
.3
 
2008
 
18.2
   
33.7
   
47.9
   
.2
 
As of September 30:
                       
2008
 
18.6
   
33.8
   
47.4
   
.2
 
2009
 
17.7
%
 
33.2
%
 
48.9
%
 
.2
%

               
LTV
   
LTV less
 
LTV
 
LTV
 
Greater
Risk in Force Distribution By Loan to Value (“LTV”) Ratio:
 
than 85
 
85 to 90
 
90 to 95
 
than 95
                         
Traditional Primary:
                       
As of December 31:
                       
2006
 
5.0
%
 
37.4
%
 
36.0
%
 
21.6
%
2007
 
4.7
   
34.4
   
32.0
   
28.9
 
2008
 
5.1
   
35.5
   
31.6
   
27.8
 
As of September 30:
                       
2008
 
5.2
   
35.1
   
31.5
   
28.2
 
2009
 
5.3
%
 
36.4
%
 
31.5
%
 
26.8
%
                         
Bulk(a):
                       
   As of December 31:
                       
2006
 
63.4
%
 
23.1
%
 
9.0
%
 
4.5
%
2007
 
62.0
   
20.9
   
9.3
   
7.8
 
2008
 
63.5
   
20.1
   
8.6
   
7.8
 
As of September 30:
                       
2008
 
63.2
   
20.3
   
8.7
   
7.8
 
2009
 
65.5
%
 
18.6
%
 
7.9
%
 
8.0
%

Risk in Force Distribution By Top Ten States:
 

 
Traditional Primary
 
FL
 
TX
 
GA
 
IL
 
OH
 
CA
 
NJ
 
VA
 
NC
 
PA
As of December 31:
                                                         
2006
9.0
%
 
7.5
%
 
5.8
%
 
5.4
%
 
3.7
%
 
3.1
%
 
3.1
%
 
2.8
%
 
4.8
%
 
4.0
%
2007
8.9
   
7.7
   
5.3
   
5.2
   
3.4
   
4.5
   
3.1
   
2.8
   
4.5
   
3.8
 
2008
8.3
   
8.1
   
5.2
   
5.2
   
3.2
   
5.5
   
3.1
   
2.9
   
4.4
   
3.8
 
As of September 30:
                                                         
2008
8.4
   
8.0
   
5.2
   
5.2
   
3.2
   
5.4
   
3.1
   
2.9
   
4.4
   
3.8
 
2009
8.1
%
 
8.4
%
 
5.2
%
 
5.1
%
 
3.1
%
 
5.6
%
 
3.1
%
 
2.9
%
 
4.5
%
 
3.9
%
                                                             

 
(a)
Bulk pool risk in-force, which represented 46.5% of total bulk risk in-force at September 30, 2009, has been allocated pro-rata based on insurance in-force.

 
30
 
 


 
Bulk (a)
 
FL
 
TX
 
GA
 
IL
 
OH
 
CA
 
NJ
 
AZ
 
CO
 
NY
As of December 31:
                                                         
2006
9.4
%
 
4.8
%
 
3.6
%
 
4.5
%
 
3.4
%
 
17.7
%
 
3.2
%
 
4.4
%
 
2.8
%
 
4.6
%
2007
9.3
   
4.8
   
4.2
   
4.1
   
3.1
   
17.5
   
3.4
   
4.2
   
3.0
   
5.5
 
2008
10.0
   
4.6
   
4.0
   
3.9
   
3.1
   
18.2
   
3.4
   
4.3
   
2.9
   
5.4
 
As of September 30:
                                                         
2008
9.9
   
4.6
   
4.0
   
4.0
   
3.1
   
18.2
   
3.4
   
4.3
   
3.0
   
5.3
 
2009
10.3
%
 
4.7
%
 
4.0
%
 
4.0
%
 
3.2
%
 
17.8
%
 
3.4
%
 
4.2
%
 
3.0
%
 
5.3
%


   
Full
 
Reduced
Risk in Force Distribution By Level of Documentation:
 
Docu­-
 
Docu­-
   
mentation
 
Mentation
Traditional Primary:
           
As of December 31:
           
2006
 
89.4
%
 
10.6
%
2007
 
88.0
   
12.0
 
2008
 
90.0
   
10.0
 
   As of September 30:
           
2008
 
89.6
   
10.4
 
2009
 
90.8
%
 
9.2
%
             
Bulk (a):
           
As of December 31:
           
2006
 
51.9
%
 
48.1
%
2007
 
49.6
   
50.4
 
2008
 
49.1
   
50.9
 
   As of September 30:
           
2008
 
49.3
   
50.7
 
2009
 
49.5
%
 
50.5
%

Risk in Force Distribution By Loan Type:
 
Fixed
 
Adjustable
   
Rate
 
Rate
Traditional Primary:
           
As of December 31:
           
2006
 
92.3
%
 
7.7
%
2007
 
94.4
   
5.6
 
2008
 
95.8
   
4.2
 
   As of September 30:
           
2008
 
95.6
   
4.4
 
2009
 
96.1
%
 
3.9
%
             
Bulk (a):
           
As of December 31:
           
2006
 
65.7
%
 
34.3
%
2007
 
70.9
   
29.1
 
2008
 
74.4
   
25.6
 
   As of September 30:
           
2008
 
73.6
   
26.4
 
2009
 
75.4
%
 
24.6
%
               

 
(a)
Bulk pool risk in-force, which represented 46.5% of total bulk risk in-force at September 30, 2009, has been allocated pro-rata based on insurance in-force.


 
31
 
 

The following table shows the percentage distribution of Title Group premium and fee revenues by production sources:

Title Premium and Fee Production by Source
       
Independent
       
Title
   
Direct
 
Agents &
   
Operations
 
Other
Years Ended December 31:
           
2006
 
32.3
%
 
67.7
%
2007
 
32.1
   
67.9
 
2008
 
36.8
   
63.2
 
Nine Months Ended September 30:
           
2008
 
36.4
   
63.6
 
2009
 
40.0
   
60.0
 
Quarters Ended September 30:
           
2008
 
37.1
   
62.9
 
2009
 
35.7
%
 
64.3
%

Revenues: Net Investment Income

Net investment income is affected by trends in interest and dividend yields for the types of securities in which the Company’s funds are invested during each reporting period. The following tables reflect the segmented and consolidated invested asset bases as of the indicated dates, and the investment income earned and resulting yields on such assets. Since the Company can exercise little control over fair values, yields are evaluated on the basis of investment income earned in relation to the cost of the underlying invested assets, though yields based on the fair values of such assets are also shown in the statistics below.

     
Fair
 
Invested
 
Invested Assets at Adjusted Cost
 
Value
 
Assets at
             
Corporate
     
Adjust-
 
Fair
 
General
 
Mortgage
 
Title
 
and Other
 
Total
 
ment
 
Value
As of December 31:
                                       
2007
$
5,984.9
 
$
1,795.8
 
$
606.0
 
$
252.9
 
$
8,639.7
 
$
121.4
 
$
8,761.2
2008
 
5,618.7
   
2,099.7
   
545.8
   
417.5
   
8,681.8
   
1.0
   
8,682.9
As of September 30:
                                       
2008
 
5,645.5
   
1,983.7
   
576.9
   
343.5
   
8,549.4
   
(9.7)
   
8,539.6
2009
$
5,706.0
 
$
2,378.0
 
$
596.7
 
$
427.7
 
$
9,108.6
 
$
567.9
 
$
9,676.5

 
Net Investment Income
 
Yield at
             
Corporate
     
Original
 
Fair
 
General
 
Mortgage
 
Title
 
and Other
 
Total
 
Cost
 
Value
Years Ended
                                       
December 31:
                                       
2006
$
221.5
 
$
74.3
 
$
26.9
 
$
18.7
 
$
341.6
 
4.52
%
 
4.47
%
2007
 
260.8
   
79.0
   
27.3
   
12.7
   
379.9
 
4.58
   
4.52
 
2008
 
253.6
   
86.8
   
25.1
   
11.6
   
377.3
 
4.27
   
4.33
 
Nine Months Ended
                                       
September 30:
                                       
2008
 
189.1
   
65.0
   
19.1
   
9.0
   
282.3
 
4.28
   
4.35
 
2009
 
191.8
   
68.4
   
18.2
   
5.3
   
283.9
 
4.09
   
4.12
 
Quarters Ended
                                       
September 30:
                                       
2008
 
61.9
   
22.0
   
6.2
   
3.6
   
93.8
 
4.21
   
4.40
 
2009
$
64.7
 
$
23.8
 
$
6.3
 
$
1.7
 
$
96.7
 
4.11
%
 
4.10
%

Revenues: Net Realized Gains (Losses)

The Company's investment policies have not been designed to maximize or emphasize the realization of investment gains. Rather, these policies aim for a stable source of income from interest and dividends, protection of capital, and the providing of sufficient liquidity to meet insurance underwriting and other obligations as they become payable in the future. Dispositions of fixed maturity securities arise mostly from scheduled maturities and early calls; for the first nine months of 2009 and 2008, 91.0% and 89.7%, respectively, of all such dispositions resulted from these occurrences. Dispositions of securities at a realized gain or loss reflect such factors as ongoing assessments of issuers’ business prospects, rotation among industry sectors, changes in credit quality, and tax planning considerations. Additionally,     the amount of net realized gains and losses registered in any one accounting period are affected by the aforementioned

 
32
 
 

assessments of securities’ values for other-than-temporary impairment. As a result of the interaction of all these factors and considerations, net realized investment gains or losses can vary significantly from period-to-period, and in the Company’s view are not indicative of any particular trend or result in the basics of its insurance business.

The following table reflects the composition of net realized gains or losses for the periods shown. A significant portion of Old Republic’s indexed stock portfolio was sold at a gain during 2007, with proceeds redirected to a more concentrated, select list of common stocks expected to provide greater long-term total returns.

 
Realized Gains (Losses) on
       
 
Disposition of Securities
 
Impairment Losses on Securities
   
     
Equity
         
Equity
       
     
securities
         
securities
     
Net
 
Fixed
 
and miscell-
     
Fixed
 
and miscell-
     
realized
 
maturity
 
aneous
     
maturity
 
aneous
     
gains
 
securities
 
investments
 
Total
 
securities
 
investments
 
Total
 
(losses)
Years Ended
                                       
December 31:
                                       
2006
$
2.0
 
$
16.9
 
$
19.0
 
$
-
 
$
-
 
$
-
 
$
19.0
2007
 
2.2
   
68.1
   
70.3
   
-
   
-
   
-
   
70.3
2008
 
(25.0)
   
20.9
   
(4.1)
   
(11.5)
   
(470.7)
   
(482.3)
   
(486.4)
Nine Months Ended
                                       
September 30:
                                       
2008
 
4.0
   
22.0
   
26.0
   
(11.5)
   
(437.3)
   
(448.9)
   
(422.8)
2009
 
1.5
   
(.5)
   
1.0
   
(1.5)
   
-
   
(1.5)
   
(.5)
Quarters Ended
                                       
September 30:
                                       
2008
 
1.3
   
17.0
   
18.3
   
(11.5)
   
-
   
(11.5)
   
6.7
2009
$
.5
 
$
-
 
$
.6
 
$
(1.5)
 
$
-
 
$
(1.5)
 
$
(.9)

Expenses: Benefits and Claims

In order to achieve a necessary matching of premium and fee revenues and expenses, the Company records the benefits, claims and related settlement costs that have been incurred during each accounting period. Total claim costs are affected by the amount of paid claims and the adequacy of reserve estimates established for current and prior years’ claim occurrences at each balance sheet date.

The following table shows a breakdown of gross and net of reinsurance claim reserve estimates for major types of insurance coverages as of September 30, 2009 and December 31, 2008:

   
Claim and Loss Adjustment Expense Reserves
   
September 30, 2009
 
December 31, 2008
   
Gross
 
Net
 
Gross
 
Net
                         
Commercial automobile (mostly trucking)
 
$
1,058.0
 
$
863.6
 
$
1,035.7
 
$
849.8
Workers’ compensation
   
2,238.8
   
1,275.1
   
2,241.6
   
1,271.8
General liability
   
1,276.5
   
640.9
   
1,209.2
   
612.3
Other coverages
   
668.9
   
450.0
   
709.7
   
487.9
Unallocated loss adjustment expense reserves
   
141.9
   
105.6
   
150.6
   
104.9
Total general insurance reserves
   
5,384.3
   
3,335.4
   
5,346.9
   
3,326.9
                         
Mortgage guaranty
   
2,111.4
   
1,854.0
   
1,581.7
   
1,380.6
Title
   
259.7
   
259.7
   
261.2
   
261.2
Life and health
   
27.0
   
20.9
   
28.1
   
22.2
Unallocated loss adjustment expense reserves -
                       
other coverages
   
23.9
   
23.9
   
23.2
   
23.2
Total claim and loss adjustment expense reserves
 
$
7,806.5
 
$
5,494.0
 
$
7,241.3
 
$
5,014.2
Asbestosis and environmental claim reserves included
                       
in the above general insurance reserves:
                       
Amount
 
$
176.4
 
$
138.7
 
$
172.4
 
$
145.0
% of total general insurance reserves
   
3.3%
   
4.2%
   
3.2%
   
4.4%

The Company’s reserve for loss and loss adjustment expenses represents the accumulation of estimates of ultimate losses, including incurred but not reported losses and loss adjustment expenses. The establishment of claim reserves by the Company’s insurance subsidiaries is a reasonably complex and dynamic process influenced by a large variety of factors as further discussed below. Consequently, reserves established are a reflection of the opinions of a large  number of persons, of the application and interpretation of historical precedent and trends, of expectations as to future

 
33
 
 

developments, and of management’s judgment in interpreting all such factors. At any point in time the Company is exposed to possibly higher or lower than anticipated claim costs and the resulting changes in estimates are recorded in operations of the periods during which they are made. Increases to prior reserve estimates are often referred to as unfavorable development whereas any changes that decrease previous estimates of the Company’s ultimate liability are referred to as favorable development.

Overview of Loss Reserving Process

The Company’s reserve setting process reflects the nature of its insurance business and the decentralized basis upon which it is conducted. Old Republic’s general insurance operations encompass a large variety of lines or classes of commercial insurance; it has negligible exposure to personal lines such as homeowners or private passenger automobile insurance that exhibit wide diversification of risks, significant frequency of claim occurrences, and high degrees of statistical credibility. Additionally, the Company’s insurance subsidiaries do not provide significant amounts of insurance protection for premises; most of its property insurance exposures relate to cargo, incidental property, and insureds’ inland marine assets. Consequently, the wide variety of policies issued and commercial insurance customers served require that loss reserves be analyzed and established in the context of the unique or different attributes of each block or class of business produced by the Company. For example, accident liability claims emanating from insured trucking companies or from general aviation customers become known relatively quickly, whereas claims of a general liability nature arising from the building activities of a construction company may emerge over extended periods of time. Similarly, claims filed pursuant to errors and omissions or directors and officers’ (“E&O/D&O”) liability coverages are usually not prone to immediate evaluation or quantification inasmuch as many such claims may be litigated over several years and their ultimate costs may be affected by the vagaries of judged or jury verdicts. Approximately 84% of the general insurance group’s claim reserves stem from liability insurance coverages for commercial customers which typically require more extended periods of investigation and at times protracted litigation before they are finally settled. As a consequence of these and other factors, Old Republic does not utilize a single, overarching loss reserving approach.

The Company prepares periodic analyses of its loss reserve estimates for its significant insurance coverages. It establishes point estimates for most losses on an insurance coverage line-by-line basis for individual subsidiaries, sub-classes, individual accounts, blocks of business or other unique concentrations of insurance risks such as directors and officers’ liability, that have similar attributes. Actuarially or otherwise derived ranges of reserve levels are not utilized as such in setting these reserves. Instead the reported reserves encompass the Company’s best point estimates at each reporting date and the overall reserve level at any point in time therefore represents the compilation of a very large number of reported reserve estimates and the results of a variety of formula calculations largely driven by statistical analysis of historical data. Reserve releases or additions are implicitly covered by the point estimates incorporated in total reserves at each balance sheet date. The Company does not project future variability or make an explicit provision for uncertainty when determining its best estimate of loss reserves, although, as discussed below, over the most recent ten-year period management’s estimates have developed slightly favorably on an overall basis.

Aggregate loss reserves consist of liability estimates for claims that have been reported (“case”) to the Company’s insurance subsidiaries and reserves for claims that have been incurred but not yet reported (“IBNR”) or whose ultimate costs may not become fully apparent until a future time. Additionally, the Company establishes unallocated loss adjustment expense reserves for loss settlement costs that are not directly related to individual claims. Such reserves are based on prior years’ cost experience and trends, and are intended to cover the unallocated costs of claim departments’ administration of case and IBNR claims over time. Long-term, disability-type workers’ compensation reserves are discounted to present value based on interest rates that range from 3.5% to 4.0%.

A large variety of statistical analyses and formula calculations are utilized to provide for IBNR claim costs as well as additional costs that can arise from such factors as monetary and social inflation, changes in claims administration processes, changes in reinsurance ceded and recoverability levels, and expected trends in claim costs and related ratios. Typically, such formulas take into account so-called link ratios that represent prior years’ patterns of incurred or paid loss trends between succeeding years, or past experience relative to progressions of the number of claims reported over time and ultimate average costs per claim.

Overall, reserves pertaining to several hundred large individual commercial insurance accounts that exhibit sufficient statistical credibility, and at times may be subject to retrospective premium rating plans or the utilization of varying levels or types of self-insured retentions through captive insurers and similar risk management mechanisms are established on an account by account basis using case reserves and applicable formula-driven methods. Large account reserves are usually set and analyzed for groups of coverages such as workers’ compensation, commercial auto and general liability that are typically underwritten jointly for many customers. For certain so-called long-tail categories of insurance such as retained or assumed excess liability or excess workers’ compensation, officers and directors’ liability, and commercial umbrella liability relative to which claim development patterns are particularly long, more volatile, and immature in their early stages of development, the Company judgmentally establishes the most current accident years’ loss reserves on the basis of expected loss ratios. Such expected loss ratios typically reflect currently estimated loss ratios from prior accident years, adjusted for the effect of actual and anticipated rate changes, actual and anticipated changes in coverage, reinsurance, mix of business, and other anticipated changes in external factors such as trends in loss costs or the legal and claims environment. Expected loss ratios are generally used for the two to three most recent accident years depending on the individual class or category of business. As actual claims data emerges in succeeding interim

 
34
 
 

and annual periods, the original accident year loss ratio assumptions are validated or otherwise adjusted sequentially through the application of statistical projection techniques such as the Bornhuetter/Ferguson method which utilizes data from the more mature experience of prior years to arrive at a likely indication of more recent years’ loss trends and costs.

Mortgage guaranty insurance reserves for unpaid claims and claim adjustment expenses are established only upon an instance of default, defined as an insured mortgage loan that has missed 2 or more consecutive monthly payments. Loss reserves are based on statistical calculations that take into account the number of reported insured mortgage loan defaults as of each balance sheet date, as well as experience-based estimates of loan defaults that have occurred but have not as yet been reported (“IBNR”). Further, the loss reserve estimating process takes into account a large number of variables including trends in claim severity, potential salvage recoveries, expected cure rates for reported loan delinquencies at various stages of default, the level of policy rescissions for non-compliance with terms of the master policy, and management judgments relative to future employment levels, housing market activity, and mortgage loan interest costs, demand, and extensions. Mortgage guaranty net claim and loss adjustment expense reserves reported as of September 30, 2009 and December 31, 2008 included $106.1 and $67.3 attributable to net IBNR claim estimates at each corresponding balance sheet date.

Title insurance and related escrow services loss and loss adjustment expense reserves are established as point estimates to cover the projected settlement costs of known as well as IBNR losses related to premium and escrow service revenues of each reporting period. Reserves for known claims are based on an assessment of the facts available to the Company during the settlement process. The point estimates covering all claim reserves take into account IBNR claims based on past experience and evaluations of such variables as changing trends in the types of policies issued, changes in real estate markets and interest rate environments, and changing levels of loan refinancing, all of which can have a bearing on the emergence, number, and ultimate costs of claims.

Incurred Loss Experience

Management is of the opinion that the Company’s overall reserving practices have been consistently applied over many years. For at least the past ten years, previously established aggregate reserves have produced reasonable estimates of the cumulative ultimate net costs of claims incurred. However, there are no guarantees that such outcomes will continue, and accordingly, no representation is made that ultimate net claim and related costs will not develop in future years to be greater or lower than currently established reserve estimates. In management’s opinion, however, such potential development is not likely to have a material effect on the Company’s consolidated financial position, although it could affect materially its consolidated results of operations for any one annual or interim reporting period. See further discussion in the Company’s 2008 Annual Report on Form 10-K under Item 1A - Risk Factors.

The percentage of net claims, benefits and related settlement expenses incurred as a percentage of premiums and related fee revenues of the Company’s three major operating segments and for its consolidated results were as follows:

   
General
 
Mortgage
 
Title
 
Consolidated
Years Ended December 31:
                       
2006
 
65.9
%
 
42.8
%
 
5.9
%
 
45.3
%
2007
 
67.8
   
118.8
   
6.6
   
60.2
 
2008
 
73.0
   
199.3
   
7.0
   
81.8
 
Nine Months Ended September 30:
                       
2008
 
72.8
   
192.3
   
7.0
   
80.1
 
2009
 
76.1
   
170.7
   
7.6
   
77.6
 
Quarters Ended September 30:
                       
2008
 
72.5
   
203.1
   
7.0
   
81.8
 
2009
 
77.5
%
 
134.2
%
 
8.3
%
 
71.5
%


 
35
 
 

The percentage of net claims, benefits and related settlement expenses measured against premiums earned by major types of general insurance coverage were as follows:

   
General Insurance Claims Ratios by Type of Coverage
       
Commercial
         
Inland
       
       
Automobile
         
Marine
       
   
All
 
(mostly
 
Workers’
 
Financial
 
and
 
General
   
   
Coverages
 
trucking)
 
Compensation
 
Indemnity
 
Property
 
Liability
 
Other
Years Ended
                                         
December 31:
                                         
2006
 
65.9
%
 
75.4
%
 
74.5
%
 
40.6
%
 
55.0
%
 
57.5
%
 
55.6
%
2007
 
67.8
   
74.0
   
70.9
   
69.6
   
54.9
   
59.9
   
55.9
 
2008
 
73.0
   
76.1
   
69.4
   
95.0
   
60.5
   
64.4
   
53.9
 
Nine Months Ended
                                         
September 30:
                                         
2008
 
72.8
   
74.8
   
67.4
   
98.9
   
62.3
   
61.1
   
53.7
 
2009
 
76.1
   
72.1
   
71.5
   
119.0
   
64.0
   
65.7
   
60.0
 
Quarters Ended
                                         
September 30:
                                         
2008
 
72.5
   
77.3
   
63.8
   
92.5
   
72.8
   
53.4
   
52.6
 
2009
 
77.5
%
 
72.2
%
 
68.5
%
 
116.7
%
 
70.0
%
 
76.5
%
 
63.6
%

The overall general insurance claims ratio reflects reasonably consistent trends for the past three years. To a large extent this major cost factor reflects pricing and risk selection improvements that have been applied since 2001, together with elements of reduced loss severity and frequency. The higher claim ratio for financial indemnity coverages in 2008, 2007, and in the first nine months 2009 was driven principally by greater claim frequencies experienced in Old Republic’s consumer credit indemnity coverage. During the three most recent calendar years, the general insurance group experienced favorable development of prior year loss reserves primarily due to the commercial automobile and the E&O/D&O (financial indemnity) lines of business; these were partially offset by unfavorable development in excess workers’ compensation coverages and for ongoing development of asbestos and environmental (“A&E”) exposures (general liability). Unfavorable developments attributable to A&E claim reserves are due to periodic re-evaluations of such reserves as well as subsequent reclassifications of other coverages’ reserves, typically workers’ compensation, deemed assignable to A&E types of losses.

Except for a small portion that emanates from ongoing primary insurance operations, a large majority of the A&E claim reserves posted by Old Republic stem mainly from its participations in assumed reinsurance treaties and insurance pools which were discontinued fifteen or more years ago and have since been in run-off status. With respect to the primary portion of gross A&E reserves, Old Republic administers the related claims through its claims personnel as well as outside attorneys, and posted reserves reflect its best estimates of ultimate claim costs. Claims administration for the assumed portion of the Company’s A&E exposures is handled by the claims departments of unrelated primary or ceding reinsurance companies. While the Company performs periodic reviews of certain claim files managed by third parties, the overall A&E reserves it establishes respond to the paid claim and case reserve activity reported to the Company as well as available industry statistical data such as so-called survival ratios. Such ratios represent the number of years’ average paid losses for the three or five most recent calendar years that are encompassed by an insurer’s A&E reserve level at any point in time. According to this simplistic appraisal of an insurer’s A&E loss reserve level, Old Republic’s average five year survival ratios stood at 8.4 years (gross) and 11.5 years (net of reinsurance) as of September 30, 2009 and 7.3 years (gross) and 9.9 years (net of reinsurance) as of December 31, 2008. Fluctuations in this ratio between years can be caused by the inconsistent pay out patterns associated with these types of claims. Incurred net losses for A&E claims have averaged 2.4% of general insurance group net incurred losses for the five years ended December 31, 2008.

The mortgage guaranty claims ratios, absent the effect of the third quarter 2009 reinsurance commutation transactions, have continued to rise in recent periods, principally as a result of higher reserve provisions and paid losses. Reserve additions have been increasing as a result of higher levels of reported delinquencies as well as increased expectations as to claim frequencies and severities. Claim severity has trended upward primarily due to loans with larger unpaid principal balances and corresponding risk becoming delinquent along with a lower level of mitigation potential due to housing depreciation trends. Expectations of greater claim frequency are impacted by several factors, including the number of loans entering into default, the level of rescission activity, the outlook for the housing market, tightening lending standards which affect borrowers’ ability to refinance troubled loans, the aging of the bulk business, and the overall declining state of the economy. As a consequence of the previously mentioned GAAP accounting requirement for reinsurance contract terminations, the 2009 loss ratio for the latest quarter and first nine months dropped from 214.0% and 203.8%, respectively, to 134.2% and 170.7%, respectively.


 
36
 
 

Average mortgage guaranty paid claims, and certain delinquency ratio data as of the end of the periods shown are listed below:
   
Average Paid Claim
   
   
Amount (a)
 
Delinquency Ratio
   
Traditional
     
Traditional
   
   
Primary
 
Bulk
 
Primary
 
Bulk
Years Ended December 31:
                       
2006
 
$
25,989
 
$
21,846
 
4.41
%
 
3.29
%
2007
   
32,214
   
34,951
 
5.47
   
6.85
 
2008
   
43,532
   
56,481
 
10.34
   
17.17
 
Nine Months Ended September 30:
                       
2008
   
41,401
   
56,047
 
8.36
   
13.80
 
2009
   
48,389
   
60,804
 
15.04
%
 
27.57
%
Quarters Ended September 30:
                       
2008
   
44,649
   
61,023
           
2009
 
$
45,919
 
$
59,640
           
                           

 
(a)
Amounts are in whole dollars.

 
Traditional Primary Delinquency Ratios for Top Ten States (b):
 
FL
 
TX
 
GA
 
IL
 
OH
 
CA
 
NJ
 
VA
 
NC
 
PA
As of December 31:
                                                         
2006
2.7
%
 
4.5
%
 
6.1
%
 
4.5
%
 
7.8
%
 
2.9
%
 
4.1
%
 
2.6
%
 
4.6
%
 
4.8
%
2007
7.7
   
4.5
   
7.2
   
5.4
   
8.1
   
6.7
   
5.4
   
4.1
   
4.8
   
5.2
 
2008
21.9
   
7.1
   
11.1
   
10.8
   
11.0
   
19.8
   
11.4
   
8.1
   
7.6
   
7.7
 
As of September 30:
                                                         
2008
17.1
   
5.7
   
9.2
   
8.5
   
9.5
   
15.9
   
9.1
   
6.5
   
6.0
   
6.6
 
2009
31.2
%
 
9.2
%
 
16.2
%
 
17.1
%
 
14.7
%
 
28.5
%
 
18.9
%
 
12.5
%
 
10.8
%
 
10.6
%

 
Bulk Delinquency Ratios for Top Ten States (b):
 
FL
 
TX
 
GA
 
IL
 
OH
 
CA
 
NJ
 
NY
 
CO
 
AZ
As of December 31:
                                                         
2006
1.6
%
 
4.0
%
 
4.4
%
 
4.2
%
 
9.3
%
 
1.6
%
 
3.5
%
 
4.4
%
 
3.3
%
 
1.0
%
2007
7.8
   
5.4
   
7.3
   
8.6
   
10.6
   
7.0
   
6.6
   
6.6
   
5.8
   
5.1
 
2008
27.0
   
10.2
   
16.3
   
19.1
   
17.1
   
22.4
   
16.0
   
13.8
   
9.8
   
18.2
 
As of September 30:
                                                         
2008
21.4
   
8.0
   
13.3
   
15.7
   
15.0
   
17.6
   
12.9
   
11.5
   
8.0
   
13.9
 
2009
42.5
%
 
14.5
%
 
23.6
%
 
31.3
%
 
21.1
%
 
37.5
%
 
30.0
%
 
23.7
%
 
15.2
%
 
34.0
%

 
Total Delinquency Ratios for Top Ten States (includes “other” business) (b):
 
FL
 
TX
 
GA
 
IL
 
OH
 
CA
 
NJ
 
NY
 
NC
 
PA
As of December 31:
                                                         
2006
2.0
%
 
4.1
%
 
5.2
%
 
3.1
%
 
7.3
%
 
1.4
%
 
3.6
%
 
4.0
%
 
3.3
%
 
4.3
%
2007
6.9
   
4.5
   
6.7
   
5.0
   
8.0
   
5.5
   
5.5
   
5.4
   
4.1
   
5.1
 
2008
21.3
   
7.2
   
11.2
   
10.2
   
11.4
   
17.2
   
12.1
   
10.8
   
6.8
   
8.1
 
As of September 30:
                                                         
2008
16.7
   
5.8
   
9.3
   
8.2
   
9.8
   
13.6
   
9.7
   
8.8
   
5.4
   
6.9
 
2009
33.3
%
 
9.7
%
 
16.6
%
 
17.8
%
 
15.4
%
 
30.9
%
 
21.6
%
 
17.8
%
 
10.0
%
 
11.7
%
                                                             

 
(b)
As determined by risk in force as of September 30, 2009, these 10 states represent approximately 50.0%, 59.9%, and 50.4%, of traditional primary, bulk, and total risk in force, respectively.

The title insurance loss ratios remain in the single digits due to a continuation of favorable trends in claims frequency and severity for business underwritten since 1992 in particular. Though still reasonably contained, the increases in claim ratios for the first nine months of 2009 and the years 2008 and 2007 are reflective of the continuing downturn in the housing and related mortgage lending industries.

Reinsurance Programs

To maintain premium production within its capacity and limit maximum losses and risks for which it might become liable under its policies, Old Republic may cede a portion or all of its premiums and liabilities on certain classes of insurance, individual policies, or blocks of business to other insurers and reinsurers. Further discussion of the Company’s reinsurance programs can be found in Part 1 of the Company’s 2008 Annual Report on Form 10-K.


 
37
 
 


Expenses: Underwriting Acquisition and Other Expenses

The following table sets forth the expense ratios registered by each major business segment and in consolidation for the periods shown:

   
General
 
Mortgage
 
Title
 
Consolidated
Years Ended December 31:
                       
2006
 
24.4
%
 
22.5
%
 
93.6
%
 
44.7
%
2007
 
24.1
   
17.7
   
98.1
   
41.3
 
2008
 
24.2
   
15.7
   
103.6
   
39.1
 
Nine Months Ended September 30:
                       
2008
 
24.2
   
15.8
   
102.0
   
39.0
 
2009
 
26.0
   
12.6
   
94.4
   
40.8
 
Quarters Ended September 30:
                       
2008
 
23.8
   
14.8
   
102.2
   
38.8
 
2009
 
25.8
%
 
10.9
%
 
91.1
%
 
40.5
%

Variations in the Company’s consolidated expense ratios reflect a continually chang­ing mix of coverages sold and attendant costs of producing business in the Company’s three largest business segments. To a significant degree, expense ratios for both the general and title insurance segments are mostly reflective of variable costs, such as commissions or similar charges, that rise or decline along with corresponding changes in premium and fee income, as well as changes in general operating expenses which can contract or expand in differing proportions due to varying levels of operating efficiencies and expense management opportunities in the face of changing market conditions. As a consequence of the previously mentioned GAAP accounting requirement for reinsurance contract terminations, the 2009 expense ratio for the latest quarter and first nine months dropped from 17.3% and 15.1%, respectively, to 10.9% and 12.6%, respectively.

Expenses: Total

The composite ratios of the above summarized net claims, benefits and underwriting expenses that reflect the sum total of all the factors enumerated above have been as follows:

   
General
 
Mortgage
 
Title
 
Consolidated
Years Ended December 31:
                       
2006
 
90.3
%
 
65.3
%
 
99.5
%
 
90.0
%
2007
 
91.9
   
136.5
   
104.7
   
101.5
 
2008
 
97.2
   
215.0
   
110.6
   
120.9
 
Nine Months Ended September 30:
                       
2008
 
97.0
   
208.1
   
109.0
   
119.1
 
2009
 
102.1
   
183.3
   
102.0
   
118.4
 
Quarters Ended September 30:
                       
2008
 
96.3
   
217.9
   
109.2
   
120.6
 
2009
 
103.3
%
 
145.1
%
 
99.4
%
 
112.0
%

Expenses: Income Taxes

The effective consolidated income tax rates (credits) were (125.5)% and (70.0)% in the third quarter and first nine months of 2009, compared to (34.6%) and (31.6%) in the third quarter and first nine months of 2008. The rates for each year reflect primarily the varying proportions of pretax operating income (loss) derived from partially tax sheltered investment income (principally state and municipal tax-exempt interest), the combination of fully taxable investment income, realized investment gains or losses, and underwriting and service income, and judgments about the recoverability of deferred tax assets.

 
OTHER INFORMATION

Reference is here made to “Information About Segments of Business” appearing elsewhere herein.

Historical data pertaining to the operating results, liquidity, and other performance indicators 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 and other claims can have a bearing on period-to-period comparisons and future operating results.

 
38
 
 

Some of the oral or written statements made in the Company’s reports, press releases, and conference calls following earnings releases, can constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Of necessity, any such forward-looking statements involve 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, and periodic changes in claim frequency and severity patterns caused by natural disasters, weather conditions, accidents, illnesses, work-related injuries, and unanticipated external events. Mortgage Guaranty and Title Insurance results can be affected by similar factors and by 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, in particular, 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 health insurance earnings can be affected by the levels of employment and consumer spending, variations in mortality and health trends, and changes in policy lapsation rates. At the parent holding company level, operating earnings or losses are generally reflective of the amount of debt outstanding and its cost, interest income on temporary holdings of short-term investments, and period-to-period variations in the costs of administering the Company’s widespread operations.

A more detailed listing and discussion of the risks and other factors which affect the Company’s risk-taking insurance business are included in Part I, Item 1A – Risk Factors, of the Company’s 2008 Annual Report to the Securities and Exchange Commission, which Item is specifically incorporated herein by reference.

Any forward-looking statements or commentaries speak only as of their dates. Old Republic undertakes no obligation to publicly update or revise any and all such comments, whether as a result of new information, future events or otherwise, and accordingly they may not be unduly relied upon.

 
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OLD REPUBLIC INTERNATIONAL CORPORATION
 

Item 3 - Quantitative and Qualitative Disclosure About Market Risk

Market risk represents the potential for loss due to adverse changes in the fair value of financial instruments as a result of changes in interest rates, equity prices, foreign exchange rates and commodity prices. Old Republic’s primary market risks consist of interest rate risk associated with investments in fixed maturities and equity price risk associated with investments in equity securities. The Company has no material foreign exchange or commodity risk.

Old Republic’s market risk exposures at September 30, 2009, have not materially changed from those identified in the Company’s 2008 Annual Report on Form 10-K.

Item 4 - Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s principal executive officer and its principal financial officer have evaluated the Company’s disclosure controls and procedures as of the end of the period covered by this quarterly report. Based upon their evaluation, the principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective for the above referenced evaluation period.

Changes in Internal Control

During the three month period ended September 30, 2009, there were no changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



 
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OLD REPUBLIC INTERNATIONAL CORPORATION
FORM 10-Q
PART II – OTHER INFORMATION
 

Item 1 – Legal Proceedings

The information contained in Note 7 “Commitments and Contingent Liabilities” of the Notes to Consolidated Financial Statements filed as Part 1 of this Quarterly Report on Form 10-Q is incorporated herein by reference.

Item 1A – Risk Factors

There have been no material changes with respect to the risk factors disclosed in the Company’s 2008 Annual Report on Form 10-K.

Item 6 – Exhibits

(a) Exhibits

 
31.1
Certification by Aldo C. Zucaro, Chief Executive Officer, pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 
31.2
Certification by Karl W. Mueller, Chief Financial Officer, pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 
32.1
Certification by Aldo C. Zucaro, Chief Executive Officer, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 
32.2
Certification by Karl W. Mueller, Chief Financial Officer, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 
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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:
February 5, 2010
   
       
       
        /s/ Karl W. Mueller
     
Karl W. Mueller
Senior Vice President,
Chief Financial Officer, and
Principal Accounting Officer

 
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EXHIBIT INDEX


Exhibit
   
No.
 
Description
     
31.1
 
Certification by Aldo C. Zucaro, Chief Executive Officer, pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2
 
Certification by Karl W. Mueller, Chief Financial Officer, pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1
 
Certification by Aldo C. Zucaro, Chief Executive Officer, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2
 
Certification by Karl W. Mueller, Chief Financial Officer, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


 
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