10-Q 1 form10q.htm OLD REPUBLIC INTERNATIONAL CORPORATION FORM 10Q FOR THE PERIOD ENDED JUNE 30, 2009 form10q.htm
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
FORM 10-Q

[x]
Quarterly report pursuant to section 13 or 15(d) of the Security Exchange Act of 1934
 
for the quarterly period ended:  June 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
June 30, 2009
Common Stock / $1 par value
 
240,585,644





There are 39 pages in this report

 
1
 
 

OLD REPUBLIC INTERNATIONAL CORPORATION
 
Report on Form 10-Q / June 30, 2009
 
INDEX
   
   
   
 
PAGE NO.
   
PART I
FINANCIAL INFORMATION:
 
     
 
CONSOLIDATED BALANCE SHEETS
3
     
 
CONSOLIDATED STATEMENTS OF INCOME
4
     
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
4
     
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
5
     
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6 - 13
     
 
MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS
14 - 35
     
 
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
36
     
 
CONTROLS AND PROCEDURES
36
     
PART II
OTHER INFORMATION:
 
     
 
ITEM 1 – LEGAL PROCEEDINGS
37
     
 
ITEM 1A – RISK FACTORS
37
     
 
ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
37
     
 
ITEM 6 – EXHIBITS
37
   
SIGNATURE
38
   
EXHIBIT INDEX
39


 
2
 
 
 
Old Republic International Corporation and Subsidiaries
Consolidated Balance Sheets
($ in Millions, Except Share Data)
   
(Unaudited)
   
   
June 30,
 
December 31,
   
2009
 
2008
Assets
           
Investments:
           
Available for sale:
           
Fixed maturity securities (at fair value) (amortized cost: $7,599.1 and $7,385.2)
 
$
7,834.5
 
$
7,406.9
Equity securities (at fair value) (adjusted cost: $373.3 and $373.3)
   
365.9
   
350.3
Short-term investments (at fair value which approximates cost)
   
979.5
   
888.0
Miscellaneous investments
   
23.7
   
29.7
Total
   
9,203.8
   
8,675.0
Other investments
   
7.8
   
7.8
Total investments
   
9,211.7
   
8,682.9
             
Other Assets:
           
Cash
   
65.5
   
63.9
Securities and indebtedness of related parties
   
18.3
   
17.4
Accrued investment income
   
112.6
   
108.2
Accounts and notes receivable
   
830.6
   
806.7
Federal income tax recoverable: Current
   
16.8
   
41.0
Prepaid federal income taxes
   
221.4
   
463.4
Reinsurance balances and funds held
   
96.0
   
67.6
Reinsurance recoverable:
Paid losses
   
61.7
   
52.2
 
Policy and claim reserves
   
2,516.6
   
2,395.7
Deferred policy acquisition costs
   
216.0
   
222.8
Sundry assets
   
350.9
   
343.8
     
4,506.9
   
4,583.1
Total Assets
 
$
13,718.6
 
$
13,266.0
             
Liabilities, Preferred Stock, and Common Shareholders’ Equity
           
Liabilities:
           
Losses, claims, and settlement expenses
 
$
7,577.5
 
$
7,241.3
Unearned premiums
   
1,110.9
   
1,112.3
Other policyholders' benefits and funds
   
180.5
   
180.7
Total policy liabilities and accruals
   
8,869.0
   
8,534.3
Commissions, expenses, fees, and taxes
   
249.6
   
264.5
Reinsurance balances and funds
   
302.9
   
264.8
Federal income tax payable: Deferred
   
10.8
   
77.3
Debt
   
372.2
   
233.0
Sundry liabilities
   
160.7
   
151.5
Commitments and contingent liabilities
           
Total Liabilities
   
9,965.4
   
9,525.7
             
Preferred Stock  (1)
   
-
   
-
             
Common Shareholders’ Equity:
           
Common stock (1)
   
240.5
   
240.5
Additional paid-in capital
   
408.8
   
405.0
Retained earnings
   
3,036.8
   
3,186.5
Accumulated other comprehensive income (loss)
   
112.0
   
(41.7)
Unallocated ESSOP shares (at cost)
   
(45.0)
   
(50.0)
Treasury stock (at cost)(1)
   
-
   
-
Total Common Shareholders' Equity
   
3,753.1
   
3,740.3
Total Liabilities, Preferred Stock and Common Shareholders’ Equity
 
$
13,718.6
 
$
13,266.0
               
               
(1)  
At June 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 240,585,644 at June 30, 2009 and 240,520,251 at December 31, 2008 were issued. At June 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 June 30, 2009 and December 31, 2008.

See accompanying Notes to Consolidated Financial Statements.

 
3
 
 
 
Old Republic International Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
($ in Millions, Except Share Data)
   
Quarters Ended
 
Six Months Ended
   
June 30,
 
June 30,
   
2009
 
2008
 
2009
 
2008
Revenues:
                       
Net premiums earned
 
$
737.7
 
$
783.6
 
$
1,459.5
 
$
1,587.7
Title, escrow, and other fees
   
74.0
   
51.9
   
129.7
   
94.4
Total premiums and fees
   
811.8
   
835.5
   
1,589.3
   
1,682.2
Net investment income
   
93.7
   
93.1
   
187.1
   
188.4
Other income
   
6.6
   
8.6
   
14.2
   
17.4
Total operating revenues
   
912.2
   
937.4
   
1,790.7
   
1,888.1
Realized investment gains (losses):
                       
From sales
   
.3
   
6.8
   
.3
   
7.7
From impairments
   
-
   
(437.3)
   
-
   
(437.3)
Total realized investment gains (losses)
   
.3
   
(430.5)
   
.3
   
(429.6)
Total revenues
   
912.6
   
506.9
   
1,791.1
   
1,458.5
                         
Benefits, Claims and Expenses:
                       
Benefits, claims, and settlement expenses
   
637.6
   
680.0
   
1,286.8
   
1,326.0
Dividends to policyholders
   
1.9
   
5.4
   
4.8
   
7.8
Underwriting, acquisition, and other expenses
   
353.3
   
338.6
   
671.9
   
680.9
Interest and other charges
   
5.3
   
.7
   
5.9
   
1.4
Total expenses
   
998.3
   
1,024.9
   
1,969.6
   
2,016.2
Income (loss) before income taxes (credits)
   
(85.6)
   
(518.1)
   
(178.4)
   
(557.7)
                         
Income Taxes (Credits):
                       
Current
   
11.8
   
18.9
   
36.5
   
38.3
Deferred
   
(81.6)
   
(172.1)
   
(145.2)
   
(212.2)
Total
   
(69.8)
   
(153.3)
   
(108.6)
   
(173.9)
                         
Net Income (Loss)
 
$
(15.8)
 
$
(364.7)
 
$
(69.8)
 
$
(383.8)
                         
Net Income (Loss) Per Share:
                       
Basic:
 
$
(.07)
 
$
(1.58)
 
$
(.30)
 
$
(1.66)
Diluted:
 
$
(.07)
 
$
(1.58)
 
$
(.30)
 
$
(1.66)
                         
Average shares outstanding:
Basic
   
235,562,774
   
230,702,352
   
235,414,346
   
230,692,358
 
Diluted
   
235,562,774
   
230,702,352
   
235,414,346
   
230,692,358
Dividends Per Common Share:
                       
Cash
 
$
.17
 
$
.17
 
$
.34
 
$
.33
 
 
 
Consolidated Statements of Comprehensive Income (Unaudited)
                         
Net income (loss) as reported
 
$
(15.8)
 
$
(364.7)
 
$
(69.8)
 
$
(383.8)
                         
Other comprehensive income (loss):
                       
Post-tax net unrealized gains (losses) on securities
   
154.7
   
81.0
   
144.8
   
(28.3)
Other adjustments
   
8.2
   
.7
   
8.8
   
(4.5)
Net adjustments
   
163.0
   
81.8
   
153.7
   
(32.8)
                         
Comprehensive income (loss)
 
$
147.1
 
$
(282.9)
 
$
83.9
 
$
(416.6)
 


See accompanying Notes to Consolidated Financial Statements.

 
4
 
 

Old Republic International Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
($ in Millions)
   
Six Months Ended
   
June 30,
   
2009
 
2008
Cash flows from operating activities:
           
Net income (loss)
 
$
(69.8)
 
$
(383.8)
Adjustments to reconcile net income (loss) to
           
net cash provided by operating activities:
           
Deferred policy acquisition costs
   
7.7
   
6.2
Premiums and other receivables
   
(16.7)
   
23.2
Unpaid claims and related items
   
240.9
   
405.9
Other policyholders’ benefits and funds
   
(27.9)
   
(3.4)
Income taxes
   
(121.1)
   
(213.7)
Prepaid federal income taxes
   
241.9
   
35.2
Reinsurance balances and funds
   
-
   
8.8
Realized investment (gains) losses
   
(.3)
   
429.6
Accounts payable, accrued expenses and other
   
25.9
   
20.7
Total
   
280.4
   
328.8
             
Cash flows from investing activities:
           
Fixed maturity securities:
           
Maturities and early calls
   
488.9
   
477.8
Sales
   
33.9
   
35.2
Sales of:
           
Equity securities
   
-
   
6.1
Other – net
   
2.9
   
37.2
Purchases of:
           
Fixed maturity securities
   
(746.7)
   
(592.9)
Equity securities
   
-
   
(93.8)
Other – net
   
(9.6)
   
(21.3)
Purchase of a business
   
-
   
(4.3)
Net decrease (increase) in short-term investments
   
(90.6)
   
(93.5)
Other-net
   
(7.0)
   
21.4
Total
   
(328.2)
   
(227.9)
             
Cash flows from financing activities:
           
Issuance of debentures and notes
   
549.5
   
3.0
Issuance of common shares
   
.6
   
2.6
Redemption of debentures and notes
   
(411.1)
   
(1.0)
Dividends on common shares
   
(79.9)
   
(76.0)
Other-net
   
(9.6)
   
1.7
Total
   
49.3
   
(69.6)
             
Increase (decrease) in cash:
   
1.5
   
31.1
Cash, beginning of period
   
63.9
   
54.0
Cash, end of period
 
$
65.5
 
$
85.1
             
Supplemental cash flow information:
           
Cash paid during the period for:
Interest
 
$
2.8
 
$
1.2
 
Income taxes
 
$
12.4
 
$
36.7
 
 
 
 
 
 
 

See accompanying Notes to Consolidated Financial Statements.

 
5
 
 

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). The Company evaluated subsequent events through the date the accompanying financial statements were issued, July 31, 2009.

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.

2.
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
 
Six Months Ended
   
June 30,
 
June 30,
   
2009
 
2008
 
2009
 
2008
 
Numerator:
                     
 
Net Income (loss)
$
(15.8)
 
$
(364.7)
 
$
(69.8)
 
$
(383.8)
 
Numerator for basic earnings per share -
                     
 
income (loss) available to common stockholders
 
(15.8)
   
(364.7)
   
(69.8)
   
(383.8)
 
Numerator for diluted earnings per share -
                     
 
income (loss) available to common stockholders
                     
 
after assumed conversions
$
(15.8)
 
$
(364.7)
 
$
(69.8)
 
$
(383.8)
 
Denominator:
                     
 
Denominator for basic earnings per share -
                     
 
weighted-average shares (a)(b)
 
235,562,774
   
230,702,352
   
235,414,346
   
230,692,358
 
Effect of dilutive securities – stock options
 
-
   
-
   
-
   
-
 
Effect of dilutive securities – convertible senior notes
 
-
   
-
   
-
   
-
 
Denominator for diluted earnings per share -
                     
 
adjusted weighted-average shares
                     
 
and assumed conversions (a)(b)
 
235,562,774
   
230,702,352
   
235,414,346
   
230,692,358
 
Earnings per share:
Basic
$
(.07)
 
$
(1.58)
 
$
(.30)
 
$
(1.66)
   
Diluted
$
(.07)
 
$
(1.58)
 
$
(.30)
 
$
(1.66)
                         
 
Anti-dilutive common share equivalents
                     
 
excluded from earning per share computations:
                     
 
Stock options
 
16,030,461
   
15,299,396
   
16,030,461
   
15,299,396
 
Convertible senior notes
 
27,452,271
   
-
   
27,452,271
   
-
 
Total
 
43,482,732
   
15,299,396
   
43,482,732
   
15,299,396
                           
                           
 
(a)
All per share statistics have been restated to reflect all stock dividends and splits declared through June 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.

 
6
 
 
 
3.
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 June 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, or a portion of them, could have been recognized previously as unrealized losses in shareholders’ equity. The Company recognized no OTTI adjustments for the quarter and six months ended June 30, 2009 while recognizing $437.3 of such adjustments for the quarter and six months ended June 30, 2008.

During the second quarter of 2009, the Company has 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.

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:
                       
June 30, 2009:
                       
U.S. & Canadian Governments
 
$
620.8
 
$
41.9
 
$
.1
 
$
662.6
Tax-exempt
   
2,252.9
   
105.6
   
.6
   
2,357.8
Corporates
   
4,725.3
   
142.8
   
54.2
   
4,813.9
   
$
7,599.1
 
$
290.4
 
$
55.0
 
$
7,834.5
                         
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 June 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
 
$
862.6
 
$
870.5
Due after one year through five years
   
4,048.9
   
4,175.2
Due after five years through ten years
   
2,660.5
   
2,761.0
Due after ten years
   
26.9
   
27.7
   
$
7,599.1
 
$
7,834.5
 
 
7
 
 
 
A summary of the Company's equity securities reflecting reported adjusted cost, net of OTTI adjustments of $355.8 at June 30, 2009 and December 31, 2008 follows:

       
Gross
 
Gross
 
Estimated
   
Adjusted
 
Unrealized
 
Unrealized
 
Fair
   
Cost
 
Gains
 
Losses
 
Value
                         
June 30, 2009
 
$
373.3
 
$
49.5
 
$
56.9
 
$
365.9
                         
December 31, 2008
 
$
373.3
 
$
49.6
 
$
72.7
 
$
350.3

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 June 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
June 30, 2009:
                                 
Fixed Maturity Securities:
                                 
U.S. & Canadian Governments
$
6.4
 
$
-
 
$
-
 
$
-
 
$
6.4
 
$
-
Tax-exempt
 
36.9
   
.5
   
6.2
   
.1
   
43.2
   
.6
Corporates
 
681.8
   
25.6
   
470.4
   
28.6
   
1,152.2
   
54.2
Subtotal
 
725.2
   
26.2
   
476.6
   
28.8
   
1,201.9
   
55.0
Equity Securities
 
289.0
   
56.8
   
.1
   
.1
   
289.2
   
56.9
Total
$
1,014.3
 
$
83.0
 
$
476.8
 
$
28.9
 
$
1,491.1
 
$
112.0
                                   
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 June 30, 2009, the Company held 264 fixed maturity and 10 equity securities in an unrealized loss position, representing 13.1% as to fixed maturities and 62.5% as to equity securities of the total number of such issues held by the Company. Of the 264 fixed maturity securities, 102 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.

Effective January 1, 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.

 
8
 
 

Level 1 securities include U.S. and Canadian Treasury notes, publicly traded common stocks, net asset value (“NAV”) quoted mutual funds and a substantial portion of short-term investments in highly liquid money market instruments and U.S. and Canadian Treasury bills. 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 June 30, 2009.

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 June 30, 2009:
 
Level 1
 
Level 2
 
Level 3
 
Total
Available for sale:
                     
Fixed maturity securities:
                     
U.S. & Canadian Governments
$
281.0
 
$
381.6
 
$
-
 
$
662.6
Tax-exempt
 
-
   
2,357.8
   
-
   
2,357.8
Corporates
 
-
   
4,793.4
   
20.5
   
4,813.9
Equity securities
 
320.9
   
-
   
44.9
   
365.9
Short-term investments
 
973.2
   
-
   
6.3
   
979.5

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 June 30, 2009, the Company and its subsidiaries had no non-income producing fixed maturity securities.

 
9
 
 

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
 
Six Months Ended
   
June 30,
 
June 30,
   
2009
 
2008
 
2009
 
2008
Investment income from:
                       
Fixed maturity securities
 
$
90.4
 
$
85.4
 
$
179.1
 
$
171.0
Equity securities
   
1.1
   
3.5
   
2.7
   
7.2
Short-term investments
   
1.5
   
3.9
   
4.1
   
9.0
Other sources
   
1.2
   
1.0
   
2.6
   
2.8
Gross investment income
   
94.5
   
94.0
   
188.6
   
190.2
Investment expenses (a)
   
.7
   
.8
   
1.4
   
1.7
    Net investment income
 
$
93.7
 
$
93.1
 
$
187.1
 
$
188.4
                         
Realized gains (losses) on:
                       
Fixed maturity securities:
                       
Gains
 
$
1.0
 
$
1.6
 
$
1.0
 
$
2.7
Losses
   
-
   
-
   
-
   
-
Net
   
.9
   
1.5
   
.9
   
2.6
                         
Equity securities & other long-term investments
   
(.6)
   
(432.1)
   
(.6)
   
(432.2)
Total
   
.3
   
(430.5)
   
.3
   
(429.6)
Income taxes (credits)(b)
   
(33.3)
   
(115.7)
   
(33.3)
   
(115.4)
Net realized gains (losses)
 
$
33.7
 
$
(314.7)
 
$
33.7
 
$
(314.1)
Changes in unrealized investment gains (losses) on:
                       
Fixed maturity securities
 
$
130.0
 
$
(152.2)
 
$
213.3
 
$
(64.9)
Less: Deferred income taxes (credits)
   
45.5
   
(53.3)
   
74.6
   
(22.7)
Net change
 
$
84.5
 
$
(98.9)
 
$
138.6
 
$
(42.1)
                         
Equity securities & other long-term investments
 
$
92.6
 
$
277.0
 
$
9.5
 
$
21.1
Less: Deferred income taxes (credits)
   
22.4
   
97.0
   
3.3
   
7.4
Net change
 
$
70.2
 
$
179.9
 
$
6.2
 
$
13.7
                           

 
(a)
Investment expenses consist of personnel costs and investment management and custody service fees, as well as interest incurred on funds held of $ - and $ - compared to $.1 and $.3 for the quarter and six months ended June 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 underwriting and service income, and judgments about the recoverability of deferred tax assets.

4.
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 $1.4 to their pension plans in the second quarter of 2009, and expect to make cash contributions of approximately $1.5 to their pension plans in the remaining portion of calendar year 2009.

 
10
 
 

5.
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, and 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
 
Six Months Ended
   
June 30,
 
June 30,
   
2009
 
2008
 
2009
 
2008
General Insurance Group:
                       
Net premiums earned
 
$
440.7
 
$
494.2
 
$
898.1
 
$
1,007.0
Net investment income and other income
   
66.3
   
67.0
   
132.6
   
135.9
Total revenues before realized gains or losses
 
$
507.0
 
$
561.3
 
$
1,030.8
 
$
1,142.9
Income (loss) before income taxes (credits) and
                       
realized investment gains or losses (a)
 
$
46.4
 
$
56.3
 
$
104.6
 
$
146.1
Income tax expense (credits) on above
 
$
11.7
 
$
14.7
 
$
27.3
 
$
41.3
                         
Mortgage Guaranty Group:
                       
Net premiums earned
 
$
141.5
 
$
149.1
 
$
286.8
 
$
296.7
Net investment income and other income
   
24.9
   
24.5
   
50.9
   
49.3
Total revenues before realized gains or losses
 
$
166.5
 
$
173.6
 
$
337.8
 
$
346.1
Income (loss) before income taxes (credits) and
                       
realized investment gains or losses (a)
 
$
(137.9)
 
$
(140.7)
 
$
(282.5)
 
$
(263.1)
Income tax expense (credits) on above
 
$
(49.6)
 
$
(50.6)
 
$
(101.6)
 
$
(94.8)
                         
Title Insurance Group:
                       
Net premiums earned
 
$
138.9
 
$
121.0
 
$
237.5
 
$
239.2
Title, escrow and other fees
   
74.0
   
51.9
   
129.7
   
94.4
Sub-total
   
213.0
   
172.9
   
367.3
   
333.7
Net investment income and other income
   
6.0
   
6.4
   
12.0
   
12.7
Total revenues before realized gains or losses
 
$
219.0
 
$
179.3
 
$
379.3
 
$
346.4
Income (loss) before income taxes (credits) and
                       
realized investment gains or losses (a)
 
$
5.6
 
$
(4.5)
 
$
(3.4)
 
$
(17.2)
Income tax expense (credits) on above
 
$
1.5
 
$
(1.8)
 
$
(2.0)
 
$
(6.8)
                         
Consolidated Revenues:
                       
Total revenues of above Company segments
 
$
892.7
 
$
914.4
 
$
1,748.0
 
$
1,835.5
Other sources (b)
   
32.9
   
30.6
   
68.1
   
69.1
Consolidated net realized investment gains (losses)
   
.3
   
(430.5)
   
.3
   
(429.6)
Consolidation elimination adjustments
   
(13.4)
   
(7.7)
   
(25.3)
   
(16.5)
Consolidated revenues
 
$
912.6
 
$
506.9
 
$
1,791.1
 
$
1,458.5
                         
Consolidated Income (Loss) Before Taxes (Credits):
                       
Total income (loss) before income taxes (credits)
                       
and realized investment gains or losses of
                       
above Company segments
 
$
(85.8)
 
$
(88.9)
 
$
(181.3)
 
$
(134.2)
Other sources – net (b)
   
(.1)
   
1.4
   
2.4
   
6.0
Consolidated net realized investment gains (losses)
   
.3
   
(430.5)
   
.3
   
(429.6)
Consolidated income (loss)
                       
before income taxes (credits)
 
$
(85.6)
 
$
(518.1)
 
$
(178.4)
 
$
(557.7)
                         
Consolidated Income Tax Expense (Credits):
                       
Total income tax expense (credits)
                       
for above Company segments
 
$
(36.4)
 
$
(37.7)
 
$
(76.2)
 
$
(60.3)
Other sources – net (b)
   
-
   
.1
   
.9
   
1.8
Income tax expense (credits) on
                       
consolidated net realized investment gains (losses)
   
(33.3)
   
(115.7)
   
(33.3)
   
(115.4)
Consolidated income tax expense (credits)
 
$
(69.8)
 
$
(153.3)
 
$
(108.6)
 
$
(173.9)

 
11
 
 

 
June 30,
 
December 31,
 
2009
 
2008
Consolidated Assets:
         
General
$
9,760.6
 
$
9,482.9
Mortgage
 
3,103.8
   
2,973.1
Title
 
812.7
   
762.4
Other assets (b)
 
494.7
   
509.5
Consolidation elimination adjustments
 
(453.2)
   
(462.0)
Consolidated
$
13,718.6
 
$
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 - $4.4 and $7.0 compared to $3.2 and $6.8 for the quarter and six months ended June 30, 2009 and 2008, respectively; Mortgage - $1.8 and $3.7 for the quarter and six months ended June 30, 2009, respectively; and Title - $1.3 and $2.3 compared to $.5 and $1.2 for the quarter and six months ended June 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.

6.
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 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 New Jersey and Pennsylvania actions, and a settlement agreement, which is not expected to cost ORNTIC more than $2.2, has been approved in the New Jersey action.

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 67 remain. The Company and ORNTIC are currently among the named defendants in 35 of these actions in 5 states. 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.

Also pending certification as a class action is a suit against ORNTIC and Old Republic Title, Ltd. in the U.S. District Court for the Western District of Washington. Filed in May, 2008, the suit alleges that ORNTIC and its affiliate deceptively charged fees for reconveyancing services they did not perform and split the fees with settlement service providers in violation of RESPA. The action seeks unspecified damages, declaratory and injunctive relief. No class has yet been certified in the action.

Putative 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 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.

 
12
 
 

Except in New Jersey where a settlement agreement has been approved, the ultimate impact of these lawsuits, 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.

7.
Debt:

On April 29, 2009, the Company completed a public offering of $316.2 million 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:

   
June 30, 2009
 
December 31, 2008
   
Carrying
 
Fair
 
Carrying
 
Fair
   
Amount
 
Value
 
Amount
 
Value
8% Convertible senior notes due 2012
 
$
316.2
 
$
332.0
 
$
-
 
$
-
Commercial paper due within 180 days with an
                       
average yield of 2.21% and 2.65%, respectively
   
24.7
   
24.7
   
199.5
   
199.5
ESSOP debt with an average yield of 3.94%
   
27.9
   
27.9
   
29.5
   
29.5
Other miscellaneous debt
   
3.1
   
3.1
   
3.8
   
3.8
Total debt
 
$
372.2
 
$
388.0
 
$
233.0
 
$
233.0

The Company currently has access to the commercial paper market for up to $150.0 of which $24.8 was outstanding as of June 30, 2009.

8.
Income Taxes:

Significant uncertainty in a tax position taken or expected to be taken in a tax return by the Company is 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 affect the annual effective tax rate. The Company’s consolidated Federal income tax returns through year-end 2004 are closed and no significant adjustments have resulted; the IRS commenced its examination of the 2006 consolidated income tax return in October 2008.

A valuation allowance of $20.5 has been established against a deferred tax asset related to the Company’s losses on equity securities at June 30, 2009. In valuing the deferred tax asset, the Company considered certain factors including primarily the scheduled reversals of certain deferred tax liabilities and the impact of available carryback and carryforward periods. Based on these considerations, the Company believes that it is more likely than not that it will realize the benefits of the deferred tax assets related to equity investment losses, net of the existing valuation allowance at June 30, 2009.

 
13
 
 

OLD REPUBLIC INTERNATIONAL CORPORATION
MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS
Six Months Ended June 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 2.3% of consolidated operating revenues for the six months ended June 30, 2009 and 1.8% of consolidated assets as of June 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

The Company’s second quarter operating results, which exclude net realized investment gains or losses, were basically flat year-over-year, while first half 2009 performance reflected a greater operating loss when compared to the same period one year ago. Second quarter operating results were enhanced mostly by lower production and operating expenses in Old Republic’s mortgage guaranty line and much stronger revenue growth in its title insurance segment. General insurance pretax earnings for both the quarter and year-to-date periods were dampened by the combination of lower earned premiums and moderately higher loss costs for certain coverages.

The net loss for the latest quarter and first half was reduced by deferred income tax credits that could not be recognized previously due to the requirements of accounting rules. The tax credits apply to losses from other-than-temporary investment impairments originally recorded in the second quarter of 2008.

 
14
 
 

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

 
Quarters Ended June 30,
 
Six Months Ended June 30,
 
2009
 
2008
 
Change
 
2009
 
2008
 
Change
Operating revenues:
                                 
General insurance
$
507.0
 
$
561.3
 
-9.7
%
 
$
1,030.8
 
$
1,142.9
 
-9.8
%
Mortgage guaranty
 
166.5
   
173.6
 
-4.1
     
337.8
   
346.1
 
-2.4
 
Title insurance
 
219.0
   
179.3
 
22.1
     
379.3
   
346.4
 
9.5
 
Corporate and other
 
19.5
   
22.9
         
42.7
   
52.5
     
Total
$
912.2
 
$
937.4
 
-2.7
%
 
$
1,790.7
 
$
1,888.1
 
-5.2
%
Pretax operating income (loss):
                                 
General insurance
$
46.4
 
$
56.3
 
-17.5
%
 
$
104.6
 
$
146.1
 
-28.4
%
Mortgage guaranty
 
(137.9)
   
(140.7)
 
2.0
     
(282.5)
   
(263.1)
 
-7.4
 
Title insurance
 
5.6
   
(4.5)
 
222.7
     
(3.4)
   
(17.2)
 
80.0
 
Corporate and other
 
(0.1)
   
1.4
         
2.4
   
6.0
     
Sub-total
 
(86.0)
   
(87.5)
 
1.7
     
(178.8)
   
(128.1)
 
-39.6
 
Realized investment gains (losses):
                                 
From sales
 
0.3
   
6.8
         
0.3
   
7.7
     
From impairments
 
-
   
(437.3)
         
-
   
(437.3)
     
     Net realized investment
                                 
     gains (losses)
 
0.3
   
(430.5)
         
0.3
   
(429.6)
     
Consolidated pretax income (loss)
 
(85.6)
   
(518.1)
 
83.5
     
(178.4)
   
(557.7)
 
68.0
 
Income taxes (credits)
 
(69.8)
   
(153.3)
 
54.5
     
(108.6)
   
(173.9)
 
37.5
 
Net income (loss)
$
(15.8)
 
$
(364.7)
 
95.6
%
 
$
(69.8)
 
$
(383.8)
 
81.8
%

Consolidated underwriting ratio:
                                 
Benefits and claims ratio
78.8
%
 
82.0
%
       
81.3
%
 
79.3
%
     
Expense ratio
42.3
   
39.1
         
41.0
   
39.1
       
Composite ratio
121.1
%
 
121.1
%
       
122.3
%
 
118.4
%
     

Components of diluted
                                 
earnings per share:
                                 
Net operating income (loss)
$
(0.21)
 
$
(0.22)
 
4.5
%
 
$
(0.44)
 
$
(0.30)
 
-46.7
%
Net realized investment
                                 
     gains (losses)
 
0.14
   
(1.36)
         
0.14
   
(1.36)
     
Net income (loss)
$
(0.07)
 
$
(1.58)
 
95.6
%
 
$
(0.30)
 
$
(1.66)
 
81.9
%
                                   
Cash dividends paid per share
$
0.17
 
$
0.17
 
-
%
 
$
0.34
 
$
0.33
 
3.0
%

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 (loss), however, does not replace net income (loss) computed in accordance with the 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 (loss), 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.

 
15
 
 

General Insurance Results – First half 2009 general insurance pretax operating earnings were largely affected by an approximate 11% reduction in premium volume and slightly higher claims and expense ratios. The following table shows these effects.

 
General Insurance Group
 
Quarters Ended June 30,
 
Six Months Ended June 30,
 
2009
 
2008
 
Change
 
2009
 
2008
 
Change
Net premiums earned
$
440.7
 
$
494.2
 
-10.8
%
 
$
898.1
 
$
1,007.0
 
-10.8
%
Net investment income
 
63.5
   
62.6
 
1.4
     
127.0
   
127.1
 
-0.1
 
Pretax operating income (loss)
$
46.4
 
$
56.3
 
-17.5
%
 
$
104.6
 
$
146.1
 
-28.4
%

Claims ratio
75.9
%
 
76.0
%
     
75.3
%
 
72.9
%
   
Expense ratio
26.8
   
24.5
       
26.2
   
24.5
     
Composite ratio
102.7
%
 
100.5
%
     
101.5
%
 
97.4
%
   

Earned premiums for a large majority of insurance coverages continued to trend lower in this year’s first half. As in the recent past, premium growth has been constrained by the combination of a moderately declining rate environment during the last 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.

Overall claim ratios did not change measurably quarter-over-quarter, but registered a 3.3% rise in the claim ratio to 75.3% in this year’s first half. Except for the consumer credit indemnity (“CCI”) coverage which continued to reflect increases in both loss frequencies and severity due to the downturn in the housing and financial services fields, aggregate claims experience for other coverages did not exhibit significantly adverse trends. Production and general operating expenses edged down in this year’s first half but nonetheless resulted in a moderately higher ratio as the expense reduction lagged the larger drop in earned premiums.

Mortgage Guaranty Results – Mortgage guaranty operating results benefited from lower production and operating expenses, but were affected adversely by slightly higher claim ratios. Key indicators of the Mortgage Guaranty Group’s evolving performance are shown in the following table.

 
Mortgage Guaranty Group
 
Quarters Ended June 30,
 
Six Months Ended June 30,
 
2009
 
2008
 
Change
 
2009
 
2008
 
Change
Net premiums earned
$
141.5
 
$
149.1
 
-5.1
%
 
$
286.8
 
$
296.7
 
-3.3
%
Net investment income
 
22.2
   
21.4
 
3.5
     
44.6
   
42.9
 
3.8
 
Pretax operating income (loss)
$
(137.9)
 
$
(140.7)
 
2.0
%
 
$
(282.5)
 
$
(263.1)
 
-7.4
%

Claims ratio
197.7
%
 
192.5
%
     
198.8
%
 
186.9
%
   
Expense ratio
14.2
   
16.2
       
14.0
   
16.3
     
Composite ratio
211.9
%
 
208.7
%
     
212.8
%
 
203.2
%
   

The decline in earned premium in this year’s first half resulted mostly from the more selective underwriting criteria applied since late 2007, an overall decline in the industry’s business penetration, and from higher premium refunds related to claim rescissions. These factors were attenuated somewhat by rising persistency of business produced in prior years and a decline in reinsurance ceded premiums.

Claim ratios were up slightly year-over-year in both the second quarter and first half of 2009. Greater claim rescissions and a moderate decline in claim severity offset to some extent the impact on claim reserve provisions from a continuing uptrend in outstanding delinquent cases. The effect of periodic paid losses and reserve provisions on reported mortgage guaranty incurred loss ratios is shown in the following table:

   
Quarters Ended
 
Six Months Ended
   
June 30,
 
June 30,
   
2009
 
2008
 
2009
 
2008
Incurred loss ratio from:
                       
Paid losses
 
111.6
%
 
60.0
%
 
109.3
%
 
57.5
%
Reserve provisions
 
86.1
   
132.5
   
89.5
   
129.4
 
Total
 
197.7
%
 
192.5
%
 
198.8
%
 
186.9
%

Mortgage guaranty production and operating expenses declined as a percentage of net premiums earned mostly due to lower personnel and certain other costs. Investment income trends benefited from a greater invested asset base.

 
16
 
 

Title Insurance Results – Old Republic’s title insurance business registered a quarterly operating gain for the first time since the second quarter of 2007. Key operating performance indicators are shown in the following table:

 
Title Insurance Group
 
Quarters Ended June 30,
 
Six Months Ended June 30,
 
2009
 
2008
 
Change
 
2009
 
2008
 
Change
Net premiums and fees earned
$
213.0
 
$
172.9
 
23.1
%
 
$
367.3
 
$
333.7
 
10.1
%
Net investment income
 
6.0
   
6.3
 
-5.2
     
11.9
   
12.8
 
-7.1
 
Pretax operating income (loss)
$
5.6
 
$
(4.5)
 
222.7
%
 
$
(3.4)
 
$
(17.2)
 
80.0
%

Claims ratio
7.6
%
 
6.8
%
     
7.2
%
 
6.9
%
   
Expense ratio
92.2
   
99.4
       
96.7
   
101.9
     
Composite ratio
99.8
%
 
106.2
%
     
103.9
%
 
108.8
%
   

Growth in net premiums and fees resulted from a surge in refinance activity and the benefit of market share gains stemming from title industry dislocations and consolidations. Claims costs rose at a quicker pace however, as the Company added moderately to reserve provisions to address recent loss 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 half. 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. Substantially all of the year-over-year decline in earnings was due to foreign exchange adjustments for U.S. dollar conversions from the currency of Old Republic’s Canadian 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
   
June
 
December
 
June
 
June '09/
 
June '09/
   
2009
 
2008
 
2008
 
Dec '08
 
June '08
Cash and invested assets:  fair value basis
 
$
9,389.9
 
$
8,855.1
 
$
8,691.0
 
6.0
%
 
8.0
%
                                         :  original cost basis
 
$
9,521.9
 
$
9,210.0
 
$
9,050.6
 
3.4
%
 
5.2
%
                               
Shareholders’ equity:
                             
Total
 
$
3,753.1
 
$
3,740.3
 
$
4,058.9
 
0.3
%
 
-7.5
%
Per common share
 
$
15.93
 
$
15.91
 
$
17.59
 
0.1
%
 
-9.4
%
                               
Composition of shareholders’ equity per share:
                             
Equity before items below
 
$
15.46
 
$
16.10
 
$
17.33
 
-4.0
%
 
-10.8
%
Unrealized investment gains (losses) and other
                             
accumulated comprehensive income (loss)
   
0.47
   
(0.19)
   
0.26
           
Total
 
$
15.93
 
$
15.91
 
$
17.59
 
0.1
%
 
-9.4
%

Consolidated cash flow from operating activities amounted to $280.4 for the first half of 2009 versus $328.8 for the same period in 2008.
 
The investment portfolio reflects a current allocation of approximately 85% to fixed-maturity securities and 4% to equities. As has been the case for many years, Old Republic’s invested assets are managed in consideration of enterprise-wide risk management objectives intended to assure solid funding of its subsidiaries’ long-term obligations to insurance policyholders and other beneficiaries, as well as 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 changes in market valuations and impairments of invested assets during the periods shown below:

 
17
 
 

   
Shareholders’ Equity Per Share
   
Quarter
 
Six Months
   
Ended
 
Ended
   
June 30,
 
June 30,
   
2009
 
2009
 
2008
Beginning balance
 
$
15.47
 
$
15.91
 
$
19.71
Changes in shareholders’ equity for the periods:
                 
Net operating income (loss)
   
(0.21)
   
(0.44)
   
(0.30)
Net realized investment gains (losses):
                 
From sales
   
-
   
-
   
0.02
From impairments
   
0.14
   
0.14
   
(1.38)
Subtotal
   
0.14
   
0.14
   
(1.36)
Net unrealized investment gains (losses)
   
0.65
   
0.61
   
(0.13)
Total realized and unrealized investment gains (losses)
   
0.79
   
0.75
   
(1.49)
Cash dividends
   
(0.17)
   
(0.34)
   
(0.33)
Stock issuance, foreign exchange, and other transactions
   
0.05
   
0.05
   
-
Net change
   
0.46
   
0.02
   
(2.12)
Ending balance
 
$
15.93
 
$
15.93
 
$
17.59

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 realized and unrealized investment losses incurred in 2008, as reflected 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 a point in time. The aggregate original cost, adjusted cost (net of OTTI adjustments), fair value, and latest reported underlying equity values of the aforementioned