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)