0000074260-19-000028.txt : 20190508 0000074260-19-000028.hdr.sgml : 20190508 20190508172806 ACCESSION NUMBER: 0000074260-19-000028 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 56 CONFORMED PERIOD OF REPORT: 20190331 FILED AS OF DATE: 20190508 DATE AS OF CHANGE: 20190508 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OLD REPUBLIC INTERNATIONAL CORP CENTRAL INDEX KEY: 0000074260 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 362678171 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10607 FILM NUMBER: 19807814 BUSINESS ADDRESS: STREET 1: 307 N MICHIGAN AVE CITY: CHICAGO STATE: IL ZIP: 60601 BUSINESS PHONE: 3123468100 MAIL ADDRESS: STREET 1: 307 N MICHIGAN AVE CITY: CHICAGO STATE: IL ZIP: 60601 10-Q 1 a1q201910-q.htm 10-Q Document


 
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: March 31, 2019 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: o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes: x No: o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
 
 
Non-accelerated filer    o
Smaller reporting company o
 
 
 
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).Yes: o No: x
Class
 
Shares Outstanding
March 31, 2019
Common Stock / $1 par value
 
302,950,409


There are 53 pages in this report




OLD REPUBLIC INTERNATIONAL CORPORATION
 
Report on Form 10-Q / March 31, 2019
 
INDEX
 
 
 
 
 
 
 
PAGE NO.
 
 
PART I
FINANCIAL INFORMATION:
 
 
 
 
 
CONSOLIDATED BALANCE SHEETS
3
 
 
 
 
CONSOLIDATED STATEMENTS OF INCOME
4
 
 
 
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
5
 
 
 
 
CONSOLIDATED STATEMENTS OF PREFERRED STOCK AND COMMON
 
 
SHAREHOLDERS' EQUITY
6
 
 
 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
7
 
 
 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8 - 19
 
 
 
 
MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS
20 - 49
 
 
 
 
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
50
 
 
 
 
CONTROLS AND PROCEDURES
50
 
 
 
PART II
OTHER INFORMATION:
 
 
 
 
 
ITEM 1 - LEGAL PROCEEDINGS
51
 
 
 
 
ITEM 1A - RISK FACTORS
51
 
 
 
 
ITEM 6 - EXHIBITS
51
 
 
SIGNATURE
52
 
 
EXHIBIT INDEX
53





2


Old Republic International Corporation and Subsidiaries
Consolidated Balance Sheets
($ in Millions, Except Share Data)
 
(Unaudited)
 
 
 
March 31,
 
December 31,
 
2019
 
2018
Assets
 
 
 
Investments:
 
 
 
Available for sale:
 
 
 
Fixed maturity securities (at fair value) (amortized cost: $8,370.5 and $8,285.0)
$
8,443.2

 
$
8,182.8

Short-term investments (at fair value which approximates cost)
351.0

 
354.9

Total
8,794.3

 
8,537.8

Held to maturity:
 
 
 
Fixed maturity securities (at amortized cost) (fair value: $1,052.1 and $1,034.5)
1,039.0

 
1,044.8

Equity securities (at fair value) (cost: $3,041.4 and $3,039.1)
3,738.9

 
3,380.9

Other investments
32.9

 
31.0

Total investments
13,605.2

 
12,994.6

Other Assets:
 
 
 
Cash
92.8

 
100.3

Securities and indebtedness of related parties
25.3

 
28.4

Accrued investment income
95.8

 
92.4

Accounts and notes receivable
1,585.0

 
1,499.4

Federal income tax recoverable: Current
—

 
16.8

Prepaid federal income taxes
129.8

 
129.8

Reinsurance balances and funds held
170.2

 
166.2

Reinsurance recoverable: Paid losses
78.7

 
55.9

 Policy and claim reserves
3,477.3

 
3,428.6

Deferred policy acquisition costs
319.5

 
316.3

Sundry assets
716.6

 
497.8

Total Other Assets
6,691.6

 
6,332.4

Total Assets
$
20,296.9

 
$
19,327.1

Liabilities, Preferred Stock, and Common Shareholders' Equity
 
 
 
Liabilities:
 
 
 
Losses, claims, and settlement expenses
$
9,488.4

 
$
9,471.2

Unearned premiums
2,178.3

 
2,104.9

Other policyholders' benefits and funds
198.8

 
198.6

Total policy liabilities and accruals
11,865.6

 
11,774.8

Commissions, expenses, fees, and taxes
516.8

 
525.4

Reinsurance balances and funds
670.6

 
600.4

Federal income tax payable: Current
22.4

 
—

                                              Deferred
108.8

 
10.3

Debt
975.1

 
981.4

Sundry liabilities
471.6

 
288.3

Commitments and contingent liabilities

 

Total Liabilities
14,631.3

 
14,180.8

Preferred Stock (1)
—

 
—

Common Shareholders' Equity:
 
 
 
Common stock (1)
302.9

 
302.7

Additional paid-in capital
1,284.1

 
1,277.6

Retained earnings
4,220.8

 
3,849.8

Accumulated other comprehensive income (loss)
(70.6
)
 
(210.0
)
Unallocated ESSOP shares (at cost)
(71.7
)
 
(73.9
)
Total Common Shareholders' Equity
5,665.6

 
5,146.2

Total Liabilities, Preferred Stock and Common Shareholders' Equity
$
20,296.9

 
$
19,327.1

________

(1)
At March 31, 2019 and December 31, 2018, 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 302,950,409 and 302,714,502 were issued as of March 31, 2019 and December 31, 2018, respectively. At March 31, 2019 and December 31, 2018, there were 100,000,000 shares of Class B Common Stock, $1.00 par value, authorized, of which no shares were issued.

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
 
 
 
March 31,
 
 
 
 
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Net premiums earned
 
 
 
 
$
1,263.4

 
$
1,231.0

Title, escrow, and other fees
 
 
 
 
94.6

 
99.3

Total premiums and fees
 
 
 
 
1,358.1

 
1,330.4

Net investment income
 
 
 
 
112.1

 
105.8

Other income
 
 
 
 
30.4

 
30.6

Total operating revenues
 
 
 
 
1,500.6

 
1,466.8

Investment gains (losses):
 
 
 
 
 
 
 
Realized from actual transactions
 
 
 
 
12.3

 
15.5

Unrealized from changes in fair value of
 
 
 
 
 
 
 
equity securities
 
 
 
 
355.6

 
(152.0
)
Total realized and unrealized investment
 
 
 
 
 
 
 
gains (losses)
 
 
 
 
368.0

 
(136.4
)
Total revenues
 
 
 
 
1,868.6

 
1,330.4

 
 
 
 
 
 
 
 
Benefits, Claims and Expenses:
 
 
 
 
 
 
 
Benefits, claims and settlement expenses
 
 
 
 
598.5

 
590.1

Dividends to policyholders
 
 
 
 
7.5

 
3.8

Underwriting, acquisition, and other expenses
 
 
 
 
733.4

 
728.0

Interest and other charges
 
 
 
 
10.6

 
14.4

Total expenses
 
 
 
 
1,350.1

 
1,336.4

Income (loss) before income taxes (credits)
 
 
 
 
518.5

 
(6.0
)
 
 
 
 
 
 
 
 
Income Taxes (Credits):
 
 
 
 
 
 
 
Current
 
 
 
 
43.7

 
26.0

Deferred
 
 
 
 
62.5

 
(36.1
)
Total
 
 
 
 
106.2

 
(10.1
)
 
 
 
 
 
 
 
 
Net Income (Loss)
 
 
 
 
$
412.2

 
$
4.0

 
 
 
 
 
 
 
 
Net Income (Loss) Per Share:
 
 
 
 
 
 
 
Basic
 
 
 
 
$
1.38

 
$
.01

Diluted
 
 
 
 
$
1.37

 
$
.01

 
 
 
 
 
 
 
 
Average shares outstanding: Basic
 
 
 
 
299,020,956

 
278,116,902

Diluted
 
 
 
 
300,172,853

 
279,528,034



See accompanying Notes to Consolidated Financial Statements.

4


Old Republic International Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Unaudited)
($ in Millions)
 
 
 
Quarters Ended
 
 
 
March 31,
 
 
 
 
 
2019
 
2018
Net Income (Loss) As Reported
 
 
 
 
$
412.2

 
$
4.0

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gains (losses) on securities:
 
 
 
 
 
 
 
Unrealized gains (losses) before reclassifications,
 
 
 
 
 
 
 
not included in the statements of income
 
 
 
 
174.4

 
(148.6
)
Amounts reclassified as realized investment (gains)
 
 
 
 
 
 
 
losses in the statements of income
 
 
 
 
.8

 
(.5
)
Pretax unrealized gains (losses) on securities
 
 
 
 
175.3

 
(149.2
)
Deferred income taxes (credits)
 
 
 
 
36.9

 
(31.3
)
Net unrealized gains (losses) on securities, net of tax
 
 
 
 
138.3

 
(117.8
)
Defined benefit pension plans:
 
 
 
 
 
 
 
Net pension adjustment before reclassifications
 
 
 
 
(2.6
)
 
—

Amounts reclassified as underwriting, acquisition,
 
 
 
 
 
 
 
and other expenses in the statements of income
 
 
 
 
1.0

 
.8

Net adjustment related to defined benefit
 
 
 
 
 
 
 
pension plans
 
 
 
 
(1.5
)
 
.8

Deferred income taxes (credits)
 
 
 
 
(.3
)
 
.1

Net adjustment related to defined benefit pension
 
 
 
 
 
 
 
plans, net of tax
 
 
 
 
(1.2
)
 
.6

Foreign currency translation and other adjustments
 
 
 
 
2.3

 
(3.7
)
Net adjustments
 
 
 
 
139.3

 
(120.9
)
Comprehensive Income (Loss)
 
 
 
 
$
551.6

 
$
(116.8
)



See accompanying Notes to Consolidated Financial Statements.

5


Old Republic International Corporation and Subsidiaries
Consolidated Statements of Preferred Stock
and Common Shareholders' Equity (Unaudited)
($ in Millions)
 
 
 
Quarters Ended
 
 
 
March 31,
 
 
 
2019
 
2018
Convertible Preferred Stock:
 
 
 
 
 
Balance, beginning and end of period
 
 
$
—

 
$
—

 
 
 
 
 
 
Common Stock:
 
 
 
 
 
Balance, beginning of period
 
 
$
302.7

 
$
269.2

Dividend reinvestment plan
 
 
—

 
—

Net issuance of shares under stock based compensation plans
 
 
.2

 
.6

Conversion of senior debentures
 
 
—

 
32.2

Balance, end of period
 
 
$
302.9

 
$
302.1

 
 
 
 
 
 
Additional Paid-in Capital:
 
 
 
 
 
Balance, beginning of period
 
 
$
1,277.6

 
$
815.2

Dividend reinvestment plan
 
 
.2

 
1.0

Net issuance of shares under stock based compensation plans
 
 
2.8

 
10.1

Conversion of senior debentures
 
 
—

 
438.1

Stock based compensation
 
 
2.8

 
2.8

ESSOP shares released
 
 
.5

 
.6

Balance, end of period
 
 
$
1,284.1

 
$
1,267.9

 
 
 
 
 
 
Retained Earnings:
 
 
 
 
 
Balance, beginning of period
 
 
$
3,849.8

 
$
3,206.9

Change in accounting principle
 
 
18.4

 
502.1

Balance, beginning of period, as adjusted
 
 
3,868.3

 
3,708.9

Net income (loss)
 
 
412.2

 
4.0

Dividends on common shares ($.2000 and $.1950 per common share)
 
 
(59.6
)
 
(54.9
)
Balance, end of period
 
 
$
4,220.8

 
$
3,658.1

 
 
 
 
 
 
Accumulated Other Comprehensive Income (Loss):
 
 
 
 
 
Balance, beginning of period
 
 
$
(210.0
)
 
$
474.2

Change in accounting principle
 
 
—

 
(502.1
)
Balance, beginning of period, as adjusted
 
 
(210.0
)
 
(27.9
)
Net unrealized gains (losses) on securities, net of tax
 
 
138.3

 
(117.8
)
Net adjustment related to defined benefit pension plans,
 
 
 
 
 
net of tax
 
 
(1.2
)
 
.6

Foreign currency translation and other adjustments
 
 
2.3

 
(3.7
)
Balance, end of period
 
 
$
(70.6
)
 
$
(148.9
)
 
 
 
 
 
 
Unallocated ESSOP Shares:
 
 
 
 
 
Balance, beginning of period
 
 
$
(73.9
)
 
$
(32.4
)
ESSOP shares released
 
 
2.2

 
1.7

Balance, end of period
 
 
$
(71.7
)
 
$
(30.6
)


See accompanying Notes to Consolidated Financial Statements.

6


Old Republic International Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
($ in Millions)
 
 
Quarters Ended
 
 
March 31,
 
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net income (loss)
 
$
412.2

 
$
4.0

Adjustments to reconcile net income (loss) to
 
 
 
 
net cash provided by operating activities:
 
 
 
 
Deferred policy acquisition costs
 
(3.2
)
 
(6.4
)
Premiums and other receivables
 
(85.7
)
 
(46.4
)
Unpaid claims and related items
 
29.8

 
65.1

Unearned premiums and other policyholders' liabilities
 
12.1

 
41.1

Income taxes
 
101.0

 
(15.0
)
Reinsurance balances and funds
 
43.1

 
20.5

Realized investment (gains) losses from actual transactions
 
(12.3
)
 
(15.5
)
Unrealized investment (gains) losses from changes in fair value
 
 
 
 
of equity securities
 
(355.6
)
 
152.0

Accounts payable, accrued expenses and other
 
(5.3
)
 
(68.7
)
Total
 
136.2

 
130.8

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Fixed maturity securities:
 
 
 
 
Available for sale:
 
 
 
 
Maturities and early calls
 
155.8

 
196.8

Sales
 
126.7

 
144.0

Sales of:
 
 
 
 
Equity securities
 
184.2

 
81.2

Other - net
 
3.0

 
4.7

Purchases of:
 
 
 
 
Fixed maturity securities:
 
 
 
 
Available for sale
 
(369.6
)
 
(324.9
)
Equity securities
 
(172.8
)
 
(103.1
)
Other - net
 
(12.3
)
 
(13.5
)
Net decrease (increase) in short-term investments
 
3.9

 
195.1

Other - net
 
—

 
(1.5
)
Total
 
(80.9
)
 
178.9

 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Issuance of common shares
 
3.2

 
6.2

Redemption of debentures and notes
 
(6.5
)
 
(4.7
)
Dividends on common shares (including a special dividend declared in
 
 
 
 
December 2017 and paid in January 2018 of $269.2)
 
(59.6
)
 
(324.1
)
Other - net
 
.1

 
(9.5
)
Total
 
(62.7
)
 
(332.2
)
 
 
 
 
 
Increase (decrease) in cash
 
(7.5
)
 
(22.5
)
Cash, beginning of period
 
100.3

 
125.9

Cash, end of period
 
$
92.8

 
$
103.4

 
 
 
 
 
Supplemental cash flow information:
 
 
 
 
Cash paid (received) during the period for: Interest
 
$
20.7

 
$
29.5

                                                                         Income taxes
 
$
5.3

 
$
5.2



See accompanying Notes to Consolidated Financial Statements.

7


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 Financial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC") of accounting principles generally accepted in the United States of America ("GAAP"). These interim financial statements should be read in conjunction with these notes and those included in the Company's 2018 Annual Report on Form 10-K incorporated herein by reference.

Pertinent accounting and disclosure pronouncements issued from time to time by the FASB are adopted by the Company as they become effective. Recent ones are discussed below.

a) Effective January 1, 2019, the Company adopted FASB guidance on lease accounting which requires balance sheet recognition of all leases with a term greater than 12 months. The Company's adoption of this guidance did not have a material impact on its consolidated financial statements. See Note 7.

b) Effective January 1, 2018, the Company adopted FASB guidance on the recognition and measurement of financial instruments. See Note 3.

c) Effective January 1, 2018, the Company adopted the FASB's comprehensive revenue recognition standard which applies to contracts with customers, except for those that fall within the scope of other standards, such as insurance contracts. The Company’s adoption of this standard did not have an effect on its insurance contract revenues, and based on its evaluation of certain less significant revenue streams generated from contracts with customers, did not have a material impact on the consolidated financial statements taken as a whole.

d) In June 2016, the FASB issued guidance on accounting for credit losses on financial instruments which will be effective in 2020. The guidance will require immediate recognition of expected credit losses for certain financial instruments including (1) reinsurance recoverables, (2) held to maturity securities and (3) accounts and notes receivable. Additionally, the guidance modifies the impairment model for available for sale fixed maturity securities. The Company is currently evaluating the guidance to determine the potential impact of its adoption on its consolidated financial statements.

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 interim periods' results and financial position have been recorded. 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 income (loss) available to common stockholders by the weighted-average number of common shares actually outstanding for the quarterly and year-to-date periods. Diluted earnings per share are similarly calculated with the inclusion of dilutive common stock equivalents. The following table provides a reconciliation of net income (loss) and the number of shares used in basic and diluted earnings per share calculations.

8


 
 
 
Quarters Ended
 
 
 
March 31,
 
 
 
 
 
2019
 
2018
Numerator:
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
$
412.2

 
$
4.0

Numerator for basic earnings per share -
 
 
 
 
 
 
 
income (loss) available to common stockholders
 
 
 
 
412.2

 
4.0

Adjustment for interest expense incurred on
 
 
 
 
 
 
 
assumed conversion of convertible notes
 
 
 
 
—

 
—

Numerator for diluted earnings per share -
 
 
 
 
 
 
 
income (loss) available to common stockholders
 
 
 
 
 
 
 
after assumed conversion of convertible notes
 
 
 
 
$
412.2

 
$
4.0

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Denominator for basic earnings per share -
 
 
 
 
 
 
 
weighted-average shares (a)
 
 
 
 
299,020,956

 
278,116,902

Effect of dilutive securities - stock based
 
 
 
 
 
 
 
   compensation awards
 
 
 
 
1,151,897

 
1,411,132

Effect of dilutive securities - convertible notes
 
 
 
 
—

 
—

Denominator for diluted earnings per share -
 
 
 
 
 
 
 
adjusted weighted-average shares
 
 
 
 
 
 
 
and assumed conversion of convertible notes (a)
 
 
 
 
300,172,853

 
279,528,034

Earnings per share: Basic
 
 
 
 
$
1.38

 
$
.01

Diluted
 
 
 
 
$
1.37

 
$
.01

 
 
 
 
 
 
 
 
Anti-dilutive common stock equivalents
 
 
 
 
 
 
 
excluded from earnings per share computations:
 
 
 
 
 
 
 
Stock based compensation awards
 
 
 
 
3,284,700

 
1,539,500

Convertible senior notes
 
 
 
 
—

 
21,773,776

Total
 
 
 
 
3,284,700

 
23,313,276

__________

(a) 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 not yet allocated to participants in the plan be excluded from the calculation. Such shares are issued and outstanding, and have the same voting and other rights applicable to all common shares.

3. Investments:

The Company classifies its fixed maturity securities as those 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.

Fixed maturity securities classified as "available for sale" are included at fair value with changes in such values, net of deferred income taxes, reflected directly in shareholders' equity. Fixed maturity securities classified as "held to maturity" are carried at amortized cost. Equity securities are included at fair value with changes in such values reflected as unrealized investment gains (losses) in the consolidated statements of income. Fair values for fixed maturity securities and equity securities are based on quoted market prices or estimates using values obtained from recognized independent pricing services.

The status and fair value changes of each of the fixed maturity investments are reviewed at least once per quarter 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 audited financial statements, 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 the issuer's previously reported earnings or financial condition, are recognized as realized losses as soon as credible publicly available information emerges to confirm such developments. 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 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 directly in shareholders' equity. The Company recognized no OTTI adjustments for the quarters ended March 31, 2019 and 2018.


9


The amortized cost and estimated fair values by type and contractual maturity of fixed maturity securities are shown in the following tables. 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.
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Fixed Maturity Securities by Type:
 
 
 
 
 
 
 
March 31, 2019:
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
U.S. & Canadian Governments
$
1,598.5

 
$
14.1

 
$
5.6

 
$
1,607.0

Corporate
6,771.9

 
95.3

 
31.1

 
6,836.2

 
$
8,370.5

 
$
109.5

 
$
36.8

 
$
8,443.2

 
 
 
 
 
 
 
 
Held to maturity:
 
 
 
 
 
 
 
Tax-exempt
$
1,039.0

 
$
15.9

 
$
2.8

 
$
1,052.1

 
 
 
 
 
 
 
 
December 31, 2018:
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
U.S. & Canadian Governments
$
1,535.3

 
$
5.7

 
$
16.5

 
$
1,524.4

Corporate
6,749.6

 
31.4

 
122.7

 
6,658.3

 
$
8,285.0

 
$
37.1

 
$
139.2

 
$
8,182.8

 
 
 
 
 
 
 
 
Held to maturity:
 
 
 
 
 
 
 
Tax-exempt
$
1,044.8

 
$
3.5

 
$
13.7

 
$
1,034.5


 
Amortized
Cost
 
Estimated
Fair
Value
Fixed Maturity Securities Stratified by Contractual Maturity at March 31, 2019:
 
 
 
Available for sale:
 
 
 
Due in one year or less
$
674.3

 
$
675.5

Due after one year through five years
4,705.2

 
4,738.4

Due after five years through ten years
2,923.2

 
2,956.7

Due after ten years
67.6

 
72.4

 
$
8,370.5

 
$
8,443.2

 
 
 
 
Held to maturity:
 
 
 
Due in one year or less
$
—

 
$
—

Due after one year through five years
207.4

 
208.0

Due after five years through ten years
831.6

 
844.1

Due after ten years
—

 
—

 
$
1,039.0

 
$
1,052.1


The following tables reflect the Company's gross unrealized losses and fair value, aggregated by category and length of time that individual available for sale and held to maturity fixed maturity securities have been in an unrealized loss position. Fair value and issuer's cost comparisons follow:

10


 
Less than 12 Months
 
12 Months or Greater
 
Total
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
March 31, 2019:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed Maturity Securities:
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
  U.S. & Canadian Governments
$
118.0

 
$
—

 
$
859.9

 
$
5.5

 
$
978.0

 
$
5.6

  Corporate
583.0

 
10.1

 
1,328.0

 
20.9

 
1,911.1

 
31.1

 
$
701.1

 
$
10.2

 
$
2,188.0

 
$
26.5

 
$
2,889.1

 
$
36.8

 
 
 
 
 
 
 
 
 
 
 
 
Number of available for sale
 
 
 
 
 
 
 
 
 
 
 
securities in unrealized
 
 
 
 
 
 
 
 
 
 
 
loss position
 
 
129

 
 
 
405

 
 
 
534

 
 
 
 
 
 
 
 
 
 
 
 
Held to maturity:
 
 
 
 
 
 
 
 
 
 
 
  Tax-exempt
$
3.2

 
$
—

 
$
283.2

 
$
2.8

 
$
286.4

 
$
2.8

 
 
 
 
 
 
 
 
 
 
 
 
Number of held to maturity
 
 
 
 
 
 
 
 
 
 
 
securities in unrealized
 
 
 
 
 
 
 
 
 
 
 
loss position
 
 
1

 
 
 
101

 
 
 
102

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed Maturity Securities:
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
  U.S. & Canadian Governments
$
616.7

 
$
8.4

 
$
487.1

 
$
8.1

 
$
1,103.9

 
$
16.5

  Corporate
3,440.8

 
77.9

 
1,096.4

 
44.7

 
4,537.3

 
122.7

 
$
4,057.6

 
$
86.4

 
$
1,583.6

 
$
52.8

 
$
5,641.2

 
$
139.2

 
 
 
 
 
 
 
 
 
 
 
 
Number of available for sale
 
 
 
 
 
 
 
 
 
 
 
securities in unrealized
 
 
 
 
 
 
 
 
 
 
 
loss position
 
 
760

 
 
 
335

 
 
 
1,095

 
 
 
 
 
 
 
 
 
 
 
 
Held to maturity:
 
 
 
 
 
 
 
 
 
 
 
  Tax-exempt
$
271.9

 
$
2.3

 
$
407.7

 
$
11.4

 
$
679.7

 
$
13.7

 
 
 
 
 
 
 
 
 
 
 
 
Number of held to maturity
 
 
 
 
 
 
 
 
 
 
 
securities in unrealized
 
 
 
 
 
 
 
 
 
 
 
loss position
 
 
94

 
 
 
145

 
 
 
239


In the above tables the unrealized losses on fixed income securities are primarily deemed to reflect changes in the interest rate environment. As part of its assessment of other-than-temporary impairments, the Company considers: a) intent to continue to hold the securities, b) the likelihood that it will not be required to sell investment securities in an unrealized loss position until cost recovery, and c) the benefits of its asset and liability maturity matching objectives.

The following table shows cost and fair value information for equity securities:
 
Equity Securities
 

Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
March 31, 2019
$
3,041.4

 
$
744.0

 
$
46.5

 
$
3,738.9

December 31, 2018
$
3,039.1

 
$
517.3

 
$
175.4

 
$
3,380.9


During the first quarter of 2019 and 2018, the Company recognized pretax unrealized investment gains (losses) of $355.6 and $(152.0), respectively, emanating from changes in the fair value of equity securities in the consolidated statements of income. Changes in the fair value of equity securities still held at March 31, 2019 and 2018 were $367.6 and $(131.3), respectively.

Fair Value Measurements - Fair value is defined as the estimated price that is likely to 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

11


date. A fair value hierarchy is established that prioritizes the sources ("inputs") used to measure fair value into three broad levels: Level 1 inputs are based on quoted market prices in active markets; Level 2 observable inputs are based on corroboration with available market data; and Level 3 unobservable inputs are based on uncorroborated market data or a reporting entity's own assumptions. Following is a description of the valuation methodologies and general classification used for financial instruments 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 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) comparisons with other sources including the fair value estimates based on current market quotations, and with independent fair value estimates provided by the independent investment custodian. The independent pricing source obtains market quotations and actual transaction prices for securities that have quoted prices in active markets and uses their 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, quoted net asset value ("NAV") mutual funds, and 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 and equity securities. There were no significant changes in the fair value of assets measured with the use of significant unobservable inputs as of March 31, 2019 and December 31, 2018.

The following tables show a summary of the fair value of financial assets segregated among the various input levels described above:
 
 
Fair Value Measurements
As of March 31, 2019:
 
Level 1
 
Level 2
 
Level 3
 
Total
Available for sale:
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
U.S. & Canadian Governments
 
$
810.3

 
$
796.6

 
$
—

 
$
1,607.0

Corporate
 
—

 
6,825.7

 
10.5

 
6,836.2

Short-term investments
 
351.0

 
—

 
—

 
351.0

Held to maturity:
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
Tax-exempt
 
—

 
1,052.1

 
—

 
1,052.1

Equity securities
 
$
3,737.2

 
$
—

 
$
1.7

 
$
3,738.9

 
 
 
 
 
 
 
 
 
As of December 31, 2018:
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
U.S. & Canadian Governments
 
$
714.0

 
$
810.3

 
$
—

 
$
1,524.4

Corporate
 
—

 
6,647.8

 
10.5

 
6,658.3

Short-term investments
 
354.9

 
—

 
—

 
354.9

Held to maturity:
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
Tax-exempt
 
—

 
1,034.5

 
—

 
1,034.5

Equity securities
 
$
3,379.2

 
$
—

 
$
1.7

 
$
3,380.9


There were no transfers between Levels 1, 2 or 3 during the quarter ended March 31, 2019.

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. At March 31, 2019, the Company and its subsidiaries had no non-income producing fixed maturity or equity securities.

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.

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 periods shown.

12


 
 
 
Quarters Ended
 
 
 
March 31,
 
 
 
 
 
2019
 
2018
Investment income:
 
 
 
 
 
 
 
Fixed maturity securities
 
 
 
 
$
74.6

 
$
74.2

Equity securities
 
 
 
 
35.0

 
30.4

Short-term investments
 
 
 
 
2.4

 
1.9

Other sources
 
 
 
 
1.6

 
.9

Gross investment income
 
 
 
 
113.8

 
107.5

Investment expenses (a)
 
 
 
 
1.7

 
1.7

Net investment income
 
 
 
 
$
112.1

 
$
105.8

 
 
 
 
 
 
 
 
Investment gains (losses):
 
 
 
 
 
 
 
From actual transactions:
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Gains
 
 
 
 
$
—

 
$
.4

Losses
 
 
 
 
(.9
)
 
(.1
)
Net
 
 
 
 
(.9
)
 
.2

Equity securities:
 
 
 
 
 
 
 
Gains
 
 
 
 
41.1

 
14.9

Losses
 
 
 
 
(27.9
)
 
—

Net
 
 
 
 
13.2

 
14.9

Other long-term investments, net
 
 
 
 
—

 
.2

Total from actual transactions
 
 
 
 
12.3

 
15.5

From unrealized changes in fair value of equity securities
 
 
 
 
355.6

 
(152.0
)
Total realized and unrealized investment gains (losses)
 
 
 
 
368.0

 
(136.4
)
Current and deferred income taxes (credits)(b)
 
 
 
 
77.4

 
(28.7
)
Post tax realized and unrealized investment gains (losses)
 
 
 
 
$
290.6

 
$
(107.7
)
 
 
 
 
 
 
 
 
Changes in unrealized investment gains (losses)
 
 
 
 
 
 
 
reflected directly in shareholders' equity:
 
 
 
 
 
 
 
Fixed maturity securities
 
 
 
 
$
174.3

 
$
(148.7
)
Less: Deferred income taxes (credits)
 
 
 
 
36.8

 
(31.3
)
 
 
 
 
 
137.5

 
(117.4
)
 
 
 
 
 
 
 
 
Other long-term investments
 
 
 
 
.9

 
(.4
)
Less: Deferred income taxes (credits)
 
 
 
 
.1

 
—

 
 
 
 
 
.7

 
(.3
)
Net changes in unrealized investment gains (losses)
 
 
 
 
$
138.3

 
$
(117.8
)
__________

(a)
Investment expenses largely consist of personnel costs and investment management and custody service fees.
(b)
Reflects primarily the combination of fully taxable investment gains or losses and judgments about the recoverability of deferred tax assets.

4. Losses, Claims and Settlement Expenses:

The establishment of claim reserves by the Company's insurance subsidiaries is a reasonably complex and dynamic process influenced by a large variety of factors. These factors principally include past experience applicable to the anticipated costs of various types of claims, continually evolving and changing legal theories emanating from the judicial system, recurring accounting, statistical, and actuarial studies, the professional experience and expertise of the Company's claim departments' personnel or attorneys and independent claim adjusters, ongoing changes in claim frequency or severity patterns such as those caused by natural disasters, illnesses, accidents, work‑related injuries, and changes in general and industry-specific economic conditions. Consequently, the reserves established are a reflection of the opinions of a large number of persons, of the application and interpretation of historical precedent and trends, of expectations as to future developments, and of management's judgment in interpreting all such factors. At any point in time, the Company is exposed to the incurrence of possibly higher or lower than anticipated claim costs due to all of these factors, and to the evolution, interpretation, and expansion of tort law, as well as the effects of unexpected jury verdicts.


13


All reserves are therefore based on estimates which are periodically reviewed and evaluated in the light of emerging claim experience and changing circumstances. The resulting changes in estimates are recorded in operations of the periods during which they are made. Return and additional premiums and policyholders' dividends, all of which tend to be affected by development of claims in future years, may offset, in whole or in part, favorable or unfavorable claim developments for certain coverages such as workers' compensation, portions of which are written under loss sensitive programs that provide for such adjustments. The Company believes that its overall reserving practices have been consistently applied over many years, and that its aggregate net reserves have generally resulted in reasonable approximations of the ultimate net costs of claims incurred. However, no representation is made nor is any guaranty given that ultimate net claim and related costs will not develop in future years to be greater or lower than currently established reserve estimates.

The Company’s accounting policy regarding the establishment of claim reserve estimates is described in Note 1(h) to the consolidated financial statements included in Old Republic’s 2018 Annual Report on Form 10-K. The following table shows an analysis of changes in aggregate reserves for the Company's losses, claims and settlement expenses for each of the periods shown.























This space left intentionally blank


14


Summary of changes in aggregate reserves for claims and related costs:
 
Quarters Ended
 
March 31,
 
2019
 
2018
Gross reserves at beginning of period
$
9,471.2

 
$
9,237.6

Less: reinsurance losses recoverable
3,006.3

 
2,921.1

Net reserves at beginning of period:
 
 
 
General Insurance
5,766.1

 
5,471.5

Title Insurance
533.4

 
559.7

RFIG Run-off
154.5

 
271.7

Other
10.8

 
13.5

Sub-total
6,464.9

 
6,316.4

Incurred claims and claim adjustment expenses:
 
 
 
Provisions for insured events of the current year:
 
 
 
General Insurance
584.3

 
546.3

Title Insurance
20.2

 
21.1

RFIG Run-off (a)
11.3

 
18.7

Other
4.6

 
5.7

Sub-total
620.5

 
591.9

Change in provision for insured events of prior years:
 
 
 
General Insurance
(11.5
)
 
15.9

Title Insurance
(5.7
)
 
(8.2
)
RFIG Run-off (a)
(2.8
)
 
(7.2
)
Other
(1.2
)
 
(2.3
)
Sub-total
(21.3
)
 
(1.8
)
Total incurred claims and claim adjustment expenses (a)
599.2

 
590.1

Payments:
 
 
 
Claims and claim adjustment expenses attributable to
 
 
 
   insured events of the current year:
 
 
 
General Insurance
100.5

 
104.2

Title Insurance
.1

 
.1

RFIG Run-off
—

 
—

Other
1.3

 
2.2

Sub-total
102.0

 
106.7

Claims and claim adjustment expenses attributable to
 
 
 
   insured events of prior years:
 
 
 
General Insurance
426.7

 
368.0

Title Insurance
14.1

 
13.6

RFIG Run-off
24.4

 
34.0

Other
2.0

 
2.4

Sub-total
467.3

 
418.1

Total payments
569.3

 
524.8

Amount of reserves for unpaid claims and claim adjustment expenses
 
 
 
at the end of each period, net of reinsurance losses recoverable:
 
 
 
General Insurance
5,811.6

 
5,561.5

Title Insurance
533.6

 
558.7

RFIG Run-off
138.5

 
249.1

Other
10.8

 
12.2

Sub-total
6,494.7

 
6,381.7

Reinsurance losses recoverable
2,993.7

 
2,890.7

Gross reserves at end of period
$
9,488.4

 
$
9,272.4

__________

(a)
In common with all other insurance coverages, RFIG Run-off mortgage guaranty settled and incurred claim and claim adjustment expenses include only those costs actually or expected to be paid by the Company. Changes in mortgage guaranty aggregate case, IBNR, and loss adjustment expense reserves entering into the determination of incurred claim costs, take into account, among a large number of variables, claim cost reductions for anticipated

15


coverage rescissions and claims denials. Estimates of coverage rescissions and claim denials are no longer material to Old Republic's consolidated financial statements.

5. Employee Benefit Plans:

The Company had an active pension plan (the "Plan") covering a portion of its work force until December 31, 2013. The Plan is a defined benefit plan pursuant to which pension payments are based primarily on years of service and employee compensation near retirement. The Plan was closed to new participants and benefits were frozen as of December 31, 2013. As a result, eligible employees retained all of the vested rights as of the effective date of the freeze. While additional benefits no longer accrue, the Company's cumulative obligation continues to be subject to further adjustment due to changes in actuarial assumptions such as expected mortality and changes in interest rates. Net periodic pension costs for the quarterly periods ended March 31, 2019 and 2018 were not material to Old Republic's consolidated statements of income.


6. Information About Segments of Business:

Old Republic is engaged in the single business of insurance underwriting and related services. The Company conducts its operations through a number of regulated insurance company subsidiaries organized into three major segments, namely its General Insurance Group (property and liability insurance), Title Insurance Group, and the Republic Financial Indemnity Group ("RFIG") Run-off Business. The results of a small life and accident insurance business are included with those of the parent holding company and its internal corporate services subsidiaries. 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 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.









This space left intentionally blank










16


Segmented and Consolidated Results:
 
 
 
Quarters Ended
 
 
 
March 31,
 
 
 
 
 
2019
 
2018
General Insurance:
 
 
 
 
 
 
 
Net premiums earned
 
 
 
 
$
831.5

 
$
791.2

Net investment income and other income
 
 
 
 
118.5

 
113.5

Total revenues excluding investment gains (losses)
 
 
 
 
$
950.0

 
$
904.8

Segment pretax operating income (loss) (a)
 
 
 
 
$
108.3

 
$
83.3

Income tax expense (credits) on above
 
 
 
 
$
20.8

 
$
11.5

 
 
 
 
 
 
 
 
Title Insurance:
 
 
 
 
 
 
 
Net premiums earned
 
 
 
 
$
412.2

 
$
414.5

Title, escrow and other fees
 
 
 
 
94.6

 
99.3

Sub-total
 
 
 
 
506.9

 
513.8

Net investment income and other income
 
 
 
 
10.4

 
9.7

Total revenues excluding investment gains (losses)
 
 
 
 
$
517.3

 
$
523.6

Segment pretax operating income (loss) (a)
 
 
 
 
$
20.5

 
$
29.5

Income tax expense (credits) on above
 
 
 
 
$
4.3

 
$
6.3

 
 
 
 
 
 
 
 
RFIG Run-off Business:
 
 
 
 
 
 
 
Net premiums earned
 
 
 
 
$
16.2

 
$
21.3

Net investment income and other income
 
 
 
 
4.5

 
5.3

Total revenues excluding investment gains (losses)
 
 
 
 
$
20.7

 
$
26.7

Segment pretax operating income (loss)
 
 
 
 
$
8.2

 
$
10.9

Income tax expense (credits) on above
 
 
 
 
$
1.6

 
$
2.2

 
 
 
 
 
 
Consolidated Revenues:
 
 
 
 
 
 
 
Total revenues of above Company segments
 
 
 
 
$
1,488.1

 
$
1,455.2

Other sources (b)
 
 
 
 
44.0

 
41.4

Consolidated investment gains (losses):
 
 
 
 
 
 
 
Realized from actual transactions
 
 
 
 
12.3

 
15.5

Unrealized from changes in fair value of equity securities
 
 
 
 
355.6

 
(152.0
)