SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2020 OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________________________ to ______________________________
|Commission File Number:||001-10607|
OLD REPUBLIC INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
|(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
Securities registered pursuant to Section 12(b) of the Act:
|Title of each class||Trading Symbol(s)||Name of each exchange on which registered|
|Common Stock / $1 par value||ORI||New York Stock Exchange|
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes: ☒ No: ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes: ☐ No: ☒
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: ☒ No: ☐
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes: ☒ No: ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definition of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Smaller reporting company
Emerging growth company
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. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).Yes: ☐ No: ☒
The aggregate fair value of the registrant's voting Common Stock held by non-affiliates of the registrant (assuming, for purposes of this calculation only, that the registrant's directors and executive officers, the registrant's various employee benefit plans and American Business & Mercantile Insurance Mutual, Inc. and its subsidiaries are all affiliates of the registrant), based on the closing sale price of the registrant's common stock on June 30, 2020, the last day of the registrant's most recently completed second fiscal quarter, was $4,514,251,137.
The registrant had 304,182,380 shares of Common Stock outstanding as of January 31, 2021.
Documents incorporated by reference:
The following documents are incorporated by reference into that part of this Form 10-K designated to the right of the document title.
|Proxy statement for the 2021 Annual Meeting of Shareholders|
Exhibits as specified in exhibit index (page 113)
|III, Items 10, 11, 12, 13 and 14|
IV, Item 15
There are 114 pages in this report
Item 1 - Business
(a) General Description of Business. Old Republic International Corporation is a Chicago based holding company engaged in the single business of insurance underwriting and related services. It conducts its operations through a number of regulated insurance company subsidiaries organized into three major segments, namely, it's General Insurance (property and liability insurance), Title Insurance, and the Republic Financial Indemnity Group ("RFIG") Run-off Business. References herein to such groups apply to the Company's subsidiaries engaged in these respective segments of business. The results of a small life and accident insurance business are included within the corporate and other caption of this report. "Old Republic" or "the Company" refers to Old Republic International Corporation and its subsidiaries as the context requires.
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, 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 policyholders and their beneficiaries. To achieve these objectives, adherence to insurance risk management principles is stressed, and asset diversification and quality are emphasized. The underwriting principles encompass:
•Disciplined risk selection, evaluation, and pricing to reduce uncertainty and adverse selection;
•Enhancing the predictability of expected outcomes through insurance of the largest number of homogeneous risks as to each type of coverage;
•Reducing the insurance portfolio risk profile through:
•diversification and spread of insured risks; and
•assimilation of uncorrelated asset and liability exposures across economic sectors that tend to offset or counterbalance one another; and
•Effective management of gross and net limits of liability through appropriate use of reinsurance.
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 capital resources. Investment management aims for stability of income from interest and dividends, protection of capital, and for sufficiency of 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 primary 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, and by investments in large capitalization, highly liquid equity securities.
In light of the above factors, the Company's affairs are managed for the long run and without significant 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 therefore 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- or preferably ten-year intervals. A ten-year period in particular can likely encompass at least one economic and/or underwriting cycle and thereby provide an appropriate time frame for such cycle to run its course, and for premium rate changes and reserved claim costs to be quantified and emerge in financial results with greater finality and effect.
The contributions to consolidated revenues and pretax income, and the assets and shareholders' equity of each Old Republic segment are set forth in the following table. This information should be read in conjunction with the consolidated financial statements, the notes thereto, and the "Management Analysis of Financial Position and Results of Operations" appearing elsewhere in this report.
|Financial Information Relating to Segments of Business (a) ($ in Millions)|
|Years Ended December 31:||2020||2019||2018|
|General (e)||$||3,876.8 ||$||3,920.8 ||$||3,739.4 |
|Title (f)||3,329.3 ||2,778.1 ||2,612.4 |
|Corporate & Other - net (c)||41.4 ||48.5 ||46.3 |
|Subtotal (f)||7,247.6 ||6,747.5 ||6,398.3 |
|RFIG Run-off (e)||60.4 ||76.8 ||96.1 |
|Subtotal (f)||7,308.0 ||6,824.4 ||6,494.4 |
|Consolidated investment gains (losses) (b)||(142.0)||636.1 ||(235.6)|
|Consolidated (f)||$||7,166.0 ||$||7,460.5 ||$||6,258.8 |
|Pretax Income (Loss)|
|Years Ended December 31:||2020||2019||2018|
|General (e)||$||439.8 ||$||370.2 ||$||363.9 |
|Title||344.0 ||230.8 ||219.3 |
|Corporate & Other - net (c)||36.7 ||54.8 ||40.4 |
|Subtotal||820.5 ||655.9 ||623.8 |
|RFIG Run-off (e)||9.8 ||30.3 ||49.9 |
|Subtotal||830.4 ||686.2 ||673.7 |
|Consolidated investment gains (losses)||(142.0)||636.1 ||(235.6)|
|Consolidated||$||688.4 ||$||1,322.4 ||$||438.1 |
|As of December 31:||2020||2019||2018|
|General||$||19,226.1 ||$||17,870.0 ||$||16,411.4 |
|Title||1,920.9 ||1,695.0 ||1,452.2 |
|Corporate & Other - net (c)||1,085.1 ||896.0 ||726.7 |
|Subtotal||22,232.2 ||20,461.1 ||18,590.3 |
|RFIG Run-off||582.9 ||615.1 ||736.7 |
|Consolidated||$||22,815.2 ||$||21,076.3 ||$||19,327.1 |
|Shareholders' Equity (d)|
|As of December 31:||2020||2019||2018|
|General||$||3,832.2 ||$||3,635.1 ||$||3,024.6 |
|Title||974.3 ||821.1 ||673.6 |
|Corporate & Other - net (c)||934.2 ||1,061.3 ||1,001.2 |
|Subtotal||5,740.7 ||5,517.6 ||4,699.5 |
|RFIG Run-off ||445.8 ||482.5 ||446.7 |
|Consolidated||$||6,186.6 ||$||6,000.1 ||$||5,146.2 |
(a) Reference is made to the table in Note 6 of the Notes to Consolidated Financial Statements, incorporated herein by reference, which shows the contribution of each subcategory to the consolidated revenues and pretax income (loss) of Old Republic's insurance industry segments.
(b) Revenues consist of net premiums, fees, net investment and other income earned. Investment gains (losses), which include unrealized gains (losses) on equity securities, are shown on a consolidated basis since the investment portfolio is managed as a whole.
(c) Includes amounts for a small life and accident insurance business as well as those of the parent holding company, its internal corporate services subsidiaries and consolidation elimination adjustments.
(d) Debt balances resulting from intercompany financing arrangements between Corporate & Other and the General and Title segments have been eliminated from the Shareholders' Equity analysis by segment.
(e) Results for the Consumer Credit Indemnity ("CCI") coverages are expected to be immaterial in the remaining run-off periods. Effective July 1, 2019, these results have been reclassified to the General Insurance Segment for all future periods. Previously these results were reflected as part of the RFIG Run-off business.
(f) Reclassification adjustments were made to certain Title segment revenues and expenses in prior periods to conform to the presentation adopted in 2020. See Note 1(c) to the accompanying Notes to Consolidated Financial Statements.
Old Republic's General Insurance segment is best characterized as a commercial lines insurance business with a strong focus on liability insurance coverages. Most of these coverages are provided to businesses, government, and other institutions. The Company does not have a meaningful exposure to personal lines insurance such as homeowners and private automobile coverages, nor does it insure significant amounts of commercial or other real property. In continuance of its commercial lines orientation, Old Republic also focuses on specific sectors of the North American economy, most prominently the transportation (trucking and general aviation), commercial construction, healthcare, education, retail and wholesale trade, forest products, energy, general manufacturing, and financial services industries. In managing the insurance risks it undertakes, the Company employs various underwriting and loss mitigation techniques such as utilization of policy deductibles, captive insurance risk-sharing arrangements, and retrospective rating and policyholder dividend plans. These underwriting techniques are intended to better correlate premium charges with the ultimate claims experience of individual or groups of assureds.
Over the years, the General Insurance Group's operations have been developed steadily through a combination of internal growth, the establishment of additional subsidiaries focused on new types of coverages and/or industry sectors, and through several mergers of smaller companies. As a result, this segment has become widely diversified with a business base encompassing the following major coverages:
Automobile Extended Warranty Insurance (1992): Coverage is provided to the vehicle owner for certain mechanical or electrical repair or replacement costs after the manufacturer's warranty has expired.
Aviation (1983): Insurance policies protect the value of aircraft hulls and afford liability coverage for acts that result in injury, loss of life, and property damage to passengers and others on the ground or in the air.
Commercial Automobile Insurance (1930's): Covers vehicles (mostly trucks) used principally in commercial pursuits. Policies cover damage to insured vehicles and liabilities incurred by an assured for bodily injury and property damage sustained by third parties.
Commercial Multi-Peril ("CMP")(1920's): Policies afford liability coverage for claims arising from the acts of owners or employees, and protection for the physical assets of businesses.
Financial Indemnity: Multiple types of specialty coverages, including most prominently the following four, are underwritten by Old Republic within this financial indemnity products classification.
Errors & Omissions("E&O")/Directors & Officers ("D&O")(1983): E&O liability policies are written for non-medical professional service providers such as lawyers, architects, and consultants, and provide coverage for legal expenses, and indemnity settlements for claims alleging breaches of professional standards. D&O coverage provides for the payment of legal expenses, and indemnity settlements for claims made against the directors and officers of corporations from a variety of sources, most typically shareholders.
Fidelity (1981): Bonds cover the exposures of financial institutions and commercial and other enterprises for losses of monies or debt and equity securities due to acts of employee dishonesty.
Guaranteed Asset Protection ("GAP")(2003): This insurance indemnifies an automobile loan borrower for the dollar value difference between an insurance company's liability for the total loss (remaining cash value) of an insured vehicle and the amount still owed on an automobile loan.
Surety (1981): Bonds are insurance company guarantees of performance by a corporate principal or individual such as for the completion of a building or road project, or payment on various types of contracts.
General Liability (1920's): Protects against liability of an assured which stems from carelessness, negligence, or failure to act, and results in property damage or personal injury to others.
Home Warranty Insurance (1981): This product provides repair and/or replacement coverage for home systems (e.g. plumbing, heating, and electrical) and designated appliances.
Inland Marine (1920's): Coverage pertains to the insurance of property in transit over land and of property which is mobile by nature.
Travel Accident (1970): Coverages provided under these policies, some of which are also underwritten by the Company's Canadian life insurance affiliate, cover monetary losses arising from trip delay and cancellation for individual insureds.
Workers' Compensation (1910's): This coverage is purchased by employers to provide insurance for employees' lost wages and medical benefits in the event of work-related injury, disability, or death.
(Parenthetical dates refer to the year(s) when Old Republic's Companies began underwriting the coverages)
Commercial automobile, general liability and workers' compensation insurance policy coverages are typically produced in tandem for many assureds. For 2020, production of commercial automobile direct insurance premiums accounted for approximately 37.7% of consolidated General Insurance Group direct premiums written, while workers' compensation and general liability direct premium production amounted to approximately 25.0% and 14.2%, respectively, of such consolidated totals.
Approximately 92% of general insurance premiums are produced through independent agency or brokerage channels, while the remaining 8% is obtained through direct production facilities.
Old Republic's flagship title insurance company was founded in 1907. The Title Insurance Group's business consists primarily of the issuance of policies to real estate purchasers and investors based upon searches of the public records which contain information concerning interests in real property. The policies insure against losses arising out of defects, liens and encumbrances affecting the insured title and not excluded or excepted from the coverage of the policy. For the year ended December 31, 2020, approximately 25% of the Company's consolidated title premium and related fee income stemmed from direct operations (which include branch offices of its title insurers and wholly owned agency subsidiaries of the Company), while the remaining 75% emanated from independent title agents and underwritten title companies.
There are two basic types of title insurance policies: lenders' policies and owners' policies. Both are issued for a one-time premium. Most mortgages made in the United States are extended by mortgage bankers, savings and commercial banks, state and federal agencies, and life insurance companies. These financial institutions secure title insurance policies to protect their mortgagees' interest in the real property. This protection remains in effect for as long as the mortgagee has an interest in the property. A separate title insurance policy may be issued to the owner of the real estate. An owner's policy of title insurance protects an owner's interest in the title to the property.
The premiums charged for the issuance of title insurance policies vary with the policy amount and the type of policy issued. The premium is collected in full when the real estate transaction is closed, there being no recurring fee thereafter. In many areas, premiums charged on subsequent policies on the same property may be reduced depending generally upon the time elapsed between issuance of the previous policies and the nature of the transactions for which the policies are issued. Most of the charge to the customer relates to title services rendered in conjunction with the issuance of a policy rather than to the possibility of loss due to risks insured against. Accordingly, the cost of services performed by a title insurer relates for the most part to the prevention of loss rather than to the assumption of the risk of loss. Claim costs that do occur result primarily from title search and examination mistakes, fraud, forgery, incapacity, missing heirs and escrow processing errors.
In connection with its title insurance operations, Old Republic also provides escrow closing and construction disbursement services, as well as real estate information products, national default management services, and a variety of other services pertaining to real estate transfers and loan transactions. As lenders and the title insurance industry transition into the evolving digital landscape of eClosings and eMortgages, Old Republic believes it is well positioned with technology and business process innovations to remain competitive in the market.
|Republic Financial Indemnity Group (RFIG) Run-off Business|
Historically, Old Republic's RFIG run-off business consisted of its mortgage guaranty and consumer credit indemnity ("CCI") operations.
Private mortgage insurance protects mortgage lenders and investors from default related losses on residential mortgage loans made primarily to homebuyers who make down payments of less than 20% of the home's purchase price. The mortgage guaranty operation insures only first mortgage loans, primarily on residential properties incorporating one-to-four family dwelling units. Old Republic's mortgage guaranty business was started in 1973.
There are two principal types of private mortgage insurance coverage: "primary" and "pool".
Primary mortgage insurance provides mortgage default protection on individual loans and covers a stated percentage of the unpaid loan principal, delinquent interest, and certain expenses associated with the default and subsequent foreclosure. Traditional primary insurance was issued on an individual loan basis to mortgage bankers, brokers, commercial banks and savings institutions through a network of Company-managed underwriting sites located throughout the country. Traditional primary loans were individually reviewed (except for loans insured under delegated underwriting programs) and priced according to filed premium rates. In underwriting traditional primary business, the Company generally adhered to the underwriting guidelines published by Fannie Mae or Freddie Mac both of which were purchasers of many of the loans the Company insured. Delegated underwriting programs allowed approved lenders to commit the Company to insure loans provided they adhered to predetermined underwriting guidelines. In lieu of paying the stated coverage percentage, the Company may pay the entire claim amount, take title to the mortgaged property, and subsequently sell the property to mitigate its loss.
Bulk and other insurance was issued on groups of loans to mortgage banking customers through a centralized risk assessment and underwriting department. These groups of loans were priced in the aggregate on a bid or negotiated basis. Coverage for insurance issued in this manner was provided through primary insurance policies (loan
level coverage) or pool insurance policies (aggregate coverage). The outstanding amount of in-force policies attributable to bulk business is no longer considered material.
Pool insurance, which is written on a group of loans in negotiated transactions, provides coverage that ranges up to 100% of the net loss on each individual loan included in the pool, subject to provisions regarding deductibles, caps on individual exposures, and aggregate stop loss provisions which limit aggregate losses to a specified percentage of the total original balances of all loans in the pool.
Before insuring any loans, the Company issued to each approved customer a master policy outlining the terms and conditions under which coverage would be provided. Primary business was then produced via the issuance of a commitment/certificate for each loan submitted and approved for insurance. In the case of business providing pool coverage, a separate pool insurance policy was issued covering the particular loans applicable to each transaction.
As to all types of mortgage insurance products, the amount of premium charge depended on various underwriting criteria such as loan-to-value ratios, the level of coverage being provided, the borrower's credit history, the type of loan instrument (whether fixed rate/fixed payment or an adjustable rate/adjustable payment), documentation type, and whether or not the insured property is categorized as an investment or owner occupied property. Coverage is non-cancelable by the Company (except in the case of non-payment of premium or certain master policy violations) and premiums are paid under single, annual, or monthly payment plans. Single premiums are paid at the inception of coverage and provide coverage for the entire policy term. Annual and monthly premiums are renewable on their anniversary dates with the premium charge determined on the basis of the original or outstanding loan amount. The majority of the Company's direct premiums were written under monthly premium plans. Premiums may be paid by borrowers as part of their monthly mortgage payment and passed through to the Company by the servicer of the loan, or paid directly by the originator of, or investor in the mortgage loan.
During 2011, the Company's flagship mortgage guaranty insurance carrier, Republic Mortgage Insurance Company ("RMIC") and its sister company Republic Mortgage Guaranty Insurance Corporation ("RMGIC"), discontinued writing new business in all states and limited themselves to servicing the run-off of their existing business. RMIC has continually evaluated the potential long-term underwriting performance of the run-off book of business based on various modeling techniques. The resulting models take into account actual premium and paid claim experience of prior periods, together with a large number of assumptions and judgments about future outcomes that are highly sensitive to a wide range of estimates. Many of these estimates and underlying assumptions relate to matters over which the Company has no control, including: 1) The conflicted interests, as well as the varying mortgage servicing and foreclosure practices of a large number of insured lending institutions; 2) General economic and industry-specific trends and events; and 3) The evolving or future social and economic policies of the U.S. Government vis-à-vis such critical sectors as the banking, mortgage lending, and housing industries, as well as its policies for resolving the insolvencies and assigning a possible future role to Fannie Mae and Freddie Mac. These matters notwithstanding, a long-used standard model of forecasted results indicates that underwriting performance of the book of business is not expected to have a material impact on Old Republic's consolidated results during the remaining run-off period.
As of December 31, 2020, RFIG's mortgage insurance subsidiaries had total statutory capital, inclusive of a contingency reserve of $316.7 million, of $435.2 million.
CCI policies, which have been issued by the Company since 1954, provide limited indemnity coverage to lenders and other financial intermediaries. The coverage is for the risk of non-payment of loan balances by individual buyers and borrowers. Claim costs are typically affected by unemployment, bankruptcy, and other issues leading to failures to pay. During 2008, the Company ceased the underwriting of new policies and the existing book of business was placed in run-off operating mode. Results for the CCI coverages are expected to be immaterial in the remaining run off periods and effective July 1, 2019, these results have been reclassified to the General Insurance segment for all future periods.
|Corporate and Other Operations|
Corporate and other operations include the accounts of a small life and accident insurance business as well as those of the parent holding company and its internal corporate services subsidiaries that perform cash and investment management, payroll, administrative and marketing services. The life and accident business registered net premium revenues of $12.0 million, $13.4 million, and $14.6 million in 2020, 2019 and 2018, respectively. Life and accident business is conducted in both the United States and Canada and consists mostly of limited product offerings sold through financial intermediaries such as automobile dealers, travel agents, and marketing channels that are also utilized in some of Old Republic's general insurance operations. Production of term life insurance, accounting for net premiums earned of $5.3 million, $5.7 million, and $6.8 million in 2020, 2019 and 2018, respectively, was terminated and placed in run off as of year-end 2004.
|Consolidated Underwriting Statistics|
The following table reflects underwriting statistics covering premiums and related loss, expense, and policyholders' dividend ratios for the major coverages underwritten in the Company's insurance segments.
|($ in Millions)|
|Years Ended December 31:||2020||2019||2018|
|General Insurance Group:|
|Net Premiums Earned||$||3,394.2 ||$||3,432.4 ||$||3,277.1 |
|Claim Ratio||69.9 ||%||71.8 ||%||72.2 ||%|
|Expense Ratio||25.6 ||25.7 ||25.0 |
|Combined Ratio||95.5 ||%||97.5 ||%||97.2 ||%|
|Experience by Major Coverages:|
|Commercial Automobile (Principally Trucking):|
|Net Premiums Earned||$||1,304.5 ||$||1,279.4 ||$||1,206.1 |
|Claim Ratio||80.8 ||%||84.0 ||%||79.3 ||%|
|Net Premiums Earned||$||863.8 ||$||999.2 ||$||1,018.5 |
|Claim Ratio||60.8 ||%||63.2 ||%||70.7 ||%|
|Net Premiums Earned||$||204.7 ||$||227.4 ||$||203.6 |
|Claim Ratio||73.6 ||%||77.8 ||%||68.9 ||%|
|Three Above Coverages Combined:|
|Net Premiums Earned||$||2,373.2 ||$||2,506.1 ||$||2,428.3 |
|Claim Ratio||72.9 ||%||75.1 ||%||74.8 ||%|
|Financial Indemnity: (a)|
|Net Premiums Earned||$||272.7 ||$||218.7 ||$||174.7 |
|Claim Ratio||57.1 ||%||64.0 ||%||73.8 ||%|
|Inland Marine and Commercial Multi-Peril:|
|Net Premiums Earned||$||294.1 ||$||261.8 ||$||252.8 |
|Claim Ratio||58.3 ||%||62.6 ||%||62.8 ||%|
|Home and Automobile Warranty:|
|Net Premiums Earned||$||318.0 ||$||309.3 ||$||297.5 |
|Claim Ratio||68.1 ||%||65.5 ||%||63.5 ||%|
|Other Coverages: (b)|
|Net Premiums Earned||$||142.3 ||$||139.3 ||$||122.2 |
|Claim Ratio||65.3 ||%||52.2 ||%||51.7 ||%|
|Title Insurance Group: (c)(d)|
|Net Premiums & Fees Earned||$||3,286.3 ||$||2,736.0 ||$||2,573.1 |
|Claim Ratio||2.3 ||%||2.5 ||%||1.9 ||%|
|Expense Ratio||88.4 ||90.5 ||90.9 |
|Combined Ratio||90.7 ||%||93.0 ||%||92.8 ||%|
|RFIG Run-off Business: (a)|
|Net Premiums Earned||$||45.1 ||$||59.2 ||$||75.9 |
|Claim Ratio||81.7 ||%||53.5 ||%||39.4 ||%|
|Expense Ratio||30.2 ||25.0 ||21.5 |
|Combined Ratio||111.9 ||%||78.5 ||%||60.9 ||%|
|All Coverages Consolidated: (d)|
|Net Premiums & Fees Earned||$||6,737.8 ||$||6,241.1 ||$||5,940.9 |
|Claim Ratio||37.0 ||%||41.2 ||%||41.4 ||%|
|Expense Ratio||56.3 ||54.1 ||53.5 |
|Combined Ratio||93.3 ||%||95.3 ||%||94.9 ||%|
(a) Includes Fidelity and Surety, Executive Indemnity (E&O and D&O), GAP coverages and, effective July 1, 2019, CCI coverages. Results for the CCI coverages are expected to be immaterial in the remaining run-off periods. Previously these results were reflected as part of the RFIG Run-off business.
(b) Consists principally of aviation and travel accident coverages.
(c) Title claim, expense, and combined ratios are calculated on the basis of combined net premiums and fees earned.
(d) Reclassification adjustments were made to certain Title segment revenues and expenses in prior periods to conform to the presentation adopted in 2020. See Note 1(c) to the accompanying Notes to Consolidated Financial Statements.
Net Premiums Earned
General insurance net premiums earned were down slightly for 2020. The economic impacts of the COVID-19 pandemic and tightened underwriting standards were mitigated by strong premium rate increases for most insurance products. Declining workers' compensation and general liability premiums were largely offset by rising premiums in commercial auto, financial indemnity and property coverages. With few exceptions, 2019 premiums grew for most types of coverages and markets served. The largest contributions principally stemmed from commercial automobile (trucking), national accounts and executive indemnity coverages.
The Title insurance segment experienced strong growth in premium and fee revenues in 2020 and 2019. This performance was driven by a robust real estate market supported by a continued low interest rate environment, resulting in an increase in home sales and refinance activity.
RFIG Run-off earned premium volume has reflected a continuing decline due to the natural outcome of a run-off book of business devoid of new premium production since 2011.
Variations in claim ratios are typically caused by changes in the frequency and severity of claims incurred, changes in premium rates and the level of premium refunds, and periodic changes in claim and claim expense reserve estimates resulting from ongoing reevaluations of reported and incurred but not reported claims and claim expenses. As demonstrated in the table on the previous page, the Company can therefore experience period-to-period volatility in the underwriting results posted for individual coverages. In light of Old Republic's basic underwriting focus in managing its business, a long-term objective has been to dampen this volatility by diversifying coverages offered and industries served.
The claim ratios include loss adjustment expenses where appropriate. Policyholders' dividends, which apply principally to workers' compensation insurance, are a reflection of changes in loss experience for individual or groups of policies, rather than overall results, and should be viewed in conjunction with claim ratio trends.
The general insurance claim ratios are summarized as follows:
|Effect of Prior Periods'|
|(Favorable)/||Claim Ratio Excluding|
|Reported||Unfavorable Claim||Prior Periods' Claim|
|Claim Ratio||Reserves Development||Reserves Development|
|2016||73.0 ||%||0.3 ||%||72.7 ||%|
|2017||71.8 ||0.7 ||71.1 |
|2018||72.2 ||— ||72.2 |
|2019||71.8 ||0.4 ||71.4 |
|2020||69.9 ||%||(0.8)||%||70.7 ||%|
The Company generally underwrites concurrently workers' compensation, commercial automobile (liability and physical damage), and general liability insurance coverages for a large number of customers. Given this concurrent underwriting approach, an evaluation of trends in premiums, claim and dividend ratios for these individual coverages is more appropriately considered for the aggregate of these coverages. As the table above indicates, claim ratios have been on a fairly consistent downtrend during the past five years. The improvement has arisen from slightly lower estimates of current accident years' claim provisions, and in 2020, by the impacts from developments of prior years' reserve estimates.
Claims are a major cost factor and changes in them reflect continually evolving pricing and risk selection together with variability in loss severity and frequency trends caused by fortuitous and other events. Changes in commercial automobile claim ratios are primarily due to fluctuations in claim severity. Claim ratios for workers' compensation and liability insurance can reflect greater variability due to chance events in any one year, changes in loss costs emanating from participation in involuntary markets (i.e. insurance assigned risk pools and associations in which participation is basically mandatory), and estimated provisions for loss costs not recoverable from assuming reinsurers which may experience financial difficulties from time to time. Additionally, workers' compensation claim costs in particular are affected by a variety of underwriting techniques such as the use of captive reinsurance retentions, retrospective premium plans, and self-insured or deductible insurance programs that are intended to mitigate claim costs over time. Claim ratios for a relatively small book of general liability coverages tend to be highly volatile year to year due to the impact of changes in claim emergence and severity of legacy asbestos and environmental claims exposures.
Title insurance claim ratios have remained in the single digits for a number of years due to a continuation of favorable trends in claims frequency and severity. Favorable developments of reserves established in prior years continued to reduce the claim ratios for the periods shown in the following table:
|Effect of Prior Periods'|
|(Favorable)/||Claim Ratio Excluding|
|Reported||Unfavorable Claim||Prior Periods' Claim|
|Claim Ratio (*)||Reserves Development (*)||Reserves Development (*)|
|2016||3.5 ||%||(1.0)||%||4.5 ||%|
|2017||0.8 ||(3.0)||3.8 |
|2018||1.9 ||(1.8)||3.7 |
|2019||2.5 ||(1.2)||3.7 |
|2020||2.3 ||%||(1.3)||%||3.6 ||%|
(*) Reclassification adjustments were made to certain Title segment revenues and expenses in prior periods to conform to the presentation adopted in 2020. See Note 1(c) to the accompanying Notes to Consolidated Financial Statements.
The RFIG Run-off 2020 claim ratio reflects greater reserve provisions necessitated by elevated delinquencies and the evolving economic impacts of the COVID-19 pandemic. Prior period favorable development is primarily the result of improving trends in claim severity.
Prior to the onset of the COVID-19 pandemic, as indicated in the far right column of the following table, the RFIG Run-off claim ratios had experienced a fairly consistent decline in recent annual periods largely due to a combination of declining new loan defaults and stable-to-improving cure rates for outstanding delinquent loans.
|Effect of Prior Periods'|
|(Favorable)/||Claim Ratio Excluding|
|Reported||Unfavorable Claim||Prior Periods' Claim|
|Claim Ratio||Reserves Development||Reserves Development|
|2016||34.1 ||%||(39.8)||%||73.9 ||%|
|2017||57.6 ||(38.3)||95.9 |
|2018||43.2 ||(27.0)||70.2 |
|2019||55.0 ||(12.5)||67.5 |
|2020||81.7 ||%||(26.5)||%||108.2 ||%|
The consolidated claim, expense, and combined ratios reflect all the above factors and the changing period-to-period contributions of each segment to consolidated results.
General Insurance Claim Reserves
The Company's property and liability insurance subsidiaries establish claim reserves which consist of estimates to settle: a) reported claims; b) claims which have been incurred as of each balance sheet date but have not as yet been reported ("IBNR") to the insurance subsidiaries; and c) the direct costs, (fees and costs which are allocable to individual claims) and indirect costs (such as salaries and rent applicable to the overall management of claim departments) to administer known and IBNR claims. Such claim reserves, except as to classification in the Consolidated Balance Sheets as to gross and reinsured portions and purchase accounting adjustments, are reported for financial and regulatory reporting purposes at amounts that are substantially the same.
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 possibility of 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.
In establishing claim reserves, the potential increase in future loss settlement costs caused by inflation is considered implicitly, along with the many other factors cited above. Reserves are generally set to provide for the ultimate cost of all claims. With regard to workers' compensation reserves, however, the ultimate cost of long-term disability or pension type claims is discounted to present value based on interest rates generally ranging from 3.0% to
4.0%. Where applicable, the Company only uses such discounted reserves in evaluating the results of its operations, in pricing its products and settling retrospective and reinsured accounts, in evaluating policy terms and experience, and for other general business purposes. Solely to comply with reporting rules mandated by the Securities and Exchange Commission, however, Old Republic has made statistical studies of applicable workers' compensation reserves to obtain estimates of the amounts by which claim and claim adjustment expense reserves, net of reinsurance, have been discounted. These studies have resulted in estimates of such amounts at $196.9 million, $209.6 million and $216.5 million, as of December 31, 2020, 2019 and 2018, respectively. It should be noted, however, that these differences between discounted and non-discounted (terminal) reserves are fundamentally of an informational nature, and are not indicative of an effect on operating results for any one or series of years for the above noted reasons.
Early in 2001, the Federal Department of Labor revised the Federal Black Lung Program regulations. The revisions basically require a reevaluation of previously settled, denied, or new occupational disease claims in the context of newly devised, more lenient standards when such claims are resubmitted. Following a number of challenges and appeals by the insurance and coal mining industries, the revised regulations were, for the most part, upheld in June, 2002 and are to be applied prospectively. Since the final quarter of 2001, black lung claims filed or refiled pursuant to these revised regulations have increased, though the volume of new claim reports has abated in recent years.
In March 2010, federal regulations were revised once again as part of the Patient Protection and Affordability Act that reinstates two provisions that can potentially benefit claimants. In response to this most recent legislation and the above noted 2001 change, black lung claims filed or refiled have risen once again. The vast majority of claims filed to date against Old Republic pertain to business underwritten through loss sensitive programs that permit the charge of additional or refund of return premiums to wholly or partially offset changes in estimated claim costs, or to business underwritten as a service carrier on behalf of various industry-wide involuntary market (i.e. assigned risk) pools. A much smaller portion pertains to business produced on a traditional risk transfer basis. The Company has established applicable reserves for claims as they have been reported and for claims not as yet reported on the basis of its historical experience as well as assumptions relative to the effect of the revised regulations.
Old Republic's reserve estimates also include provisions for indemnity and settlement costs for various asbestosis and environmental impairment ("A&E") claims that have been filed in the normal course of business against a number of its insurance subsidiaries. Many such claims relate to policies incepting prior to 1985, including many issued during a short period between 1981 and 1982 pursuant to an agency agreement canceled in 1982. Over the years, the Company's property and liability insurance subsidiaries have typically issued general liability insurance policies with face amounts ranging between $1.0 million and $2.0 million and rarely exceeding $10.0 million. Such policies have, in turn, been subject to reinsurance cessions which have typically reduced the subsidiaries' net retentions to $.5 million or less as to each claim.
Old Republic's exposure to A&E claims cannot be calculated by conventional insurance reserving methods for a variety of reasons, including: a) the absence of statistically valid data inasmuch as such claims typically involve long reporting delays and very often uncertainty as to the number and identity of insureds against whom such claims have arisen or will arise; and b) the litigation history of such or similar claims for insurance industry members which has produced inconsistent court decisions with regard to such questions as to when an alleged loss occurred, which policies provide coverage, how a loss is to be allocated among potentially responsible insureds and/or their insurance carriers, how policy coverage exclusions are to be interpreted, what types of environmental impairment or toxic tort claims are covered, when the insurer's duty to defend is triggered, how policy limits are to be calculated, and whether clean-up costs constitute property damage.
Over time, the Executive Branch and/or the Congress of the United States have proposed or considered changes in the legislation and rules affecting the determination of liability for environmental and asbestosis claims. As of December 31, 2020, however, there is no solid evidence to suggest that possible future changes might mitigate or reduce some or all of these claim exposures. Because of the above issues and uncertainties, estimation of reserves for losses and allocated loss adjustment expenses for A&E claims in particular is much more difficult or impossible to quantify with a high degree of precision. Accordingly, no representation can be made that the Company's reserves for such claims and related costs will not prove to be overstated or understated in the future. At December 31, 2020 and 2019, Old Republic's aggregate indemnity and loss adjustment expense reserves specifically identified with A&E exposures amounted to approximately $127.6 million and $126.8 million gross, respectively, and $82.4 million and $83.3 million net of reinsurance, respectively. Based on average annual claims payments during the five most recent calendar years, such reserves represented a paid loss survival ratio of 6.3 years (gross) and 7.1 years (net of reinsurance) as of December 31, 2020 and 6.3 years (gross) and 7.2 years (net of reinsurance) as of December 31, 2019. Fluctuations in this ratio between years can be caused by the inconsistent pay out patterns associated with these types of claims. For the five years ended December 31, 2020, incurred A&E claim and related loss settlement costs have averaged .3% of average annual General Insurance Group claims and related settlement costs.
Over the years, the subject of property and liability insurance claim reserves has been written about and analyzed extensively by a large number of professionals and regulators. Accordingly, the above discussion should be regarded as a basic outline of the subject and not as a definitive presentation. The Company believes that its overall reserving practices have been consistently applied over many years, and that its aggregate 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.
(b) Investments. In common with other insurance organizations, Old Republic invests most of its capital and operating funds in income producing securities. Investments must comply with applicable insurance laws and regulations which prescribe the nature, form, quality, and relative amounts of investments which may be made by insurance companies. Generally, these laws and regulations permit insurance companies to invest within varying limitations in state, municipal and federal government obligations, corporate debt, preferred and common stocks, certain types of real estate, and first mortgage loans. For many years, Old Republic's investment policy has therefore been to acquire and retain primarily investment grade, publicly traded, fixed maturity securities, and in more recent years, a greater amount of high yielding publicly traded large capitalization equity securities. The investment policy is also influenced by the terms of the insurance coverages written, by its expectations as to the timing of claim and benefit payments, and by income tax considerations. As a consequence of all these factors, the Company's invested assets portfolio is directed in consideration of enterprise-wide risk management objectives. Most importantly, these are intended to ensure solid funding of insurance subsidiaries' long-term obligations to policyholders and other beneficiaries, as well as the long-term stability of the subsidiaries' capital accounts. To this end, the investment portfolio contains no significant insurance risk-correlated asset exposures to real estate, mortgage-backed securities, collateralized debt obligations ("CDO's"), derivatives, hybrid securities, or illiquid private equity and hedge fund investments. Moreover, the Company does not engage in hedging or securities lending transactions, nor does it invest in securities whose values are predicated on non-regulated financial instruments exhibiting amorphous or unfunded counter-party risk attributes.
Management considers investment grade fixed maturity securities to be those rated by major credit rating agencies that fall within the top four rating categories, or securities which are not rated but have characteristics similar to securities so rated. The Company had no fixed maturity investments in default as to principal and/or interest at December 31, 2020 and 2019. 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") and resulting allowances for credit losses in the portfolio's value are evaluated and established at each quarterly balance sheet date.
The realization of investment gains or losses can be highly discretionary and can be affected by such randomly occurring factors as the timing of individual securities sales, the recording of estimated losses from write-downs of impaired securities, tax-planning and tax-rate change considerations, and modifications of investment management judgments regarding the direction of securities markets or the future prospects of individual investees or industry sectors.
The following tables show invested assets at the end of the last two years, together with investment income for each of the last three years:
|($ in Millions)|
|Available for Sale|
|Fixed Maturity Securities:|
|U.S. & Canadian Governments||$||2,063.2 ||$||1,878.8 |
|Tax-Exempt (a)||1,063.5 ||— |
|Corporate||7,370.0 ||6,917.6 |
|10,496.8 ||8,796.5 |
|Short-term Investments||749.6 ||484.3 |
|Total available for sale||11,246.4 ||9,280.9 |
|Held to Maturity|
|Fixed Maturity Securities:|
|Tax-Exempt (a)||— ||1,021.7 |
|Equity Securities||4,054.8 ||4,030.5 |
|Other Investments||28.8 ||26.0 |
|Total Investments||$||15,330.1 ||$||14,359.2 |
(a) As of June 30, 2020 the Company changed its intent to hold its tax-exempt municipal bond portfolio until maturity and consequently, reclassified these securities from their previous held to maturity designation to available for sale.
|Sources of Consolidated Investment Income|
|($ in Millions)|
|Years Ended December 31:||2020||2019||2018|
|Fixed Maturity Securities:|
|Taxable Interest||$||269.9 ||$||280.0 ||$||278.4 |
|Tax-Exempt Interest||19.8 ||20.3 ||20.7 |
|289.8 ||300.3 ||299.2 |
|Equity Securities Dividends||149.8 ||141.3 ||124.0 |
|Other Investment Income:|
|Interest on Short-term Investments||2.2 ||10.1 ||9.8 |
|Other Sources||3.5 ||5.8 ||4.9 |
|5.8 ||15.9 ||14.8 |
|Gross Investment Income||445.6 ||457.7 ||438.1 |
|Less: Investment Expenses (a)||6.6 ||6.9 ||6.2 |
|Net Investment Income||$||438.9 ||$||450.7 ||$||431.8 |
(a) Investment expenses largely consist of personnel costs and investment management and custody service fees.
The independent credit quality ratings and maturity distribution for Old Republic's consolidated fixed maturity investments, excluding short-term investments, at the end of the last two years are shown in the following tables. These investments, $10.4 billion and $9.8 billion at December 31, 2020 and 2019, respectively, represented approximately 46% and 47% of consolidated assets as of December 31, 2020 and 2019, respectively, and 63% and 65% of consolidated liabilities as of December 31, 2020 and 2019, respectively.
|Credit Quality Ratings of Fixed Maturity Securities (b)|
|(% of total portfolio)|
|Aaa||24.6 ||%||23.9 ||%|
|Aa||13.1 ||13.1 |
|A||33.0 ||32.6 |
|Baa||26.5 ||26.1 |
|Total investment grade||97.2 ||95.7 |
|All other (c)||2.8 ||4.3 |
|Total||100.0 ||%||100.0 ||%|
(b) Credit quality ratings referred to herein are a blend of those assigned by the major credit rating agencies for U.S. and Canadian Governments, Agencies, Corporates and Municipal issuers, which are converted to the above ratings classifications.
(c) "All other" includes non-investment grade or non-rated issuers.
|Age Distribution of Fixed Maturity Securities|
|(% of total portfolio)|
|Due in one year or less||9.8 ||%||10.7 ||%|
|Due after one year through five years||57.0 ||55.6 |
|Due after five years through ten years||31.4 ||33.4 |
|Due after ten years through fifteen years||1.7 ||.3 |
|Due after fifteen years||.1 ||— |
|100.0 ||%||100.0 ||%|
|Average Maturity in Years||4.3||4.1|
(c) Marketing. Commercial automobile (trucking), workers' compensation and general liability insurance underwritten for business enterprises and public entities is marketed primarily through independent insurance agents and brokers with the assistance of Old Republic's trained sales, underwriting, actuarial, and loss control personnel. The remaining property and liability commercial insurance written by Old Republic is obtained through insurance agents or brokers
who are independent contractors and by direct sales. No single source accounted for over 10% of Old Republic's premium volume in 2020.
A substantial portion of the Company's title insurance business is referred to it by title insurance agents, builders, lending institutions, real estate developers, realtors, and lawyers. Title insurance and related real estate settlement products are sold through 274 Company offices and through agencies and underwritten title companies in the District of Columbia and all 50 states. The issuing agents are authorized to issue commitments and title insurance policies based on their own search and examination, or on the basis of abstracts and opinions of approved attorneys. Policies are also issued through independent title companies (not themselves title insurers) pursuant to underwriting agreements. These agreements generally provide that the agency or underwritten company may cause title policies of the Company to be issued, and the latter is responsible under such policies for any payments to the insured. Typically, the agency or underwritten title company deducts the major portion of the title insurance charge to the customer as its commission for services. During 2020, approximately 75% of title insurance premiums and fees were accounted for by policies issued by agents and underwritten title companies.
Title insurance premium and fee revenue is closely related to the level of activity in the real estate market. The volume of real estate activity is affected by the availability and cost of financing, population growth, family movements and other socio-economic factors. Also, the title insurance business is seasonal. During the winter months, new building activity is reduced and, accordingly, the Company produces less title insurance business relative to new construction during such months than during the rest of the year. The most important factors, insofar as Old Republic's title business is concerned, however, are the rates of activity in the resale and refinance markets for residential properties and more recently, growth in commercial title business.
The Company's flagship mortgage guaranty insurance carrier ceased underwriting new policies and the existing book of business was placed in run-off operating mode effective August 31, 2011. Prior to that date, traditional primary mortgage insurance was marketed principally through a direct sales force which called on mortgage bankers, brokers, commercial banks, savings institutions and other mortgage originators. No sales commissions or other forms of remuneration were paid to the lending institutions or others for the procurement or development of business.
The personal contacts, relationships, reputations, and intellectual capital of Old Republic's key executives and other associates responsible for the production of business are a vital element in obtaining and retaining much of its business. Many of the Company's customers produce large amounts of premiums and fees and therefore warrant substantial levels of attention and involvement by these persons. In this respect, Old Republic's mode of operation is similar to that of professional reinsurers and commercial insurance brokers, and relies on the marketing, underwriting, and management skills of relatively few key people for large parts of its business.
Historically, several types of insurance coverages underwritten by Old Republic, such as consumer credit indemnity, title, and mortgage guaranty insurance, have been affected in varying degrees by changes in national economic conditions. During periods when housing activity or mortgage lending are constrained by any combination of rising interest rates, tighter mortgage underwriting guidelines, falling home prices, excess housing supply and/or economic recession, operating and/or claim costs pertaining to such coverages tend to rise disproportionately to revenues and can result in underwriting losses and reduced levels of profitability.
At least one Old Republic general insurance subsidiary is licensed to do business in each of the 50 states, the District of Columbia, Puerto Rico, Virgin Islands, Guam, and each of the Canadian provinces. Title insurance operations are licensed to do business in 50 states, the District of Columbia and Guam. Although not currently writing new business, the mortgage insurance subsidiaries are licensed in 50 states and the District of Columbia. Consolidated direct premium volume distributed among the various geographical regions shown was as follows for the past three years:
|Geographical Distribution of Consolidated Direct Premiums Written|
|Northeast||12.3 ||%||12.2 ||%||11.9 ||%|
|Mid-Atlantic||8.0 ||7.5 ||7.3 |
|Southeast||20.7 ||20.6 ||20.9 |
|Southwest||12.0 ||11.8 ||11.6 |
|East North Central||10.7 ||10.9 ||11.2 |
|West North Central||9.5 ||9.7 ||10.1 |
|Mountain||8.7 ||8.2 ||8.2 |
|Western||16.1 ||16.3 ||16.1 |
|Foreign (Principally Canada)||2.0 ||2.8 ||2.7 |
|Total||100.0 ||%||100.0 ||%||100.0 ||%|
(d) Reserves, Reinsurance, and Retrospective Adjustments. Old Republic's insurance subsidiaries establish reserves for unearned premiums, reported claims, IBNR claims, and claim adjustment expenses, as required in the circumstances. See "General Insurance Claim Reserves" herein.
In order to maintain premium production within its capacity and limit maximum losses for which it might become liable under its policies, Old Republic, as is the common practice in the insurance industry, may cede all or a portion of its premiums and related liabilities on certain classes of insurance, individual policies, or blocks of business to other insurers and reinsurers. Although the ceding of insurance does not ordinarily discharge an insurer from its direct liability to a policyholder, it is industry practice to establish the reinsured part of risks as the liability of the reinsurer. Old Republic also employs retrospective premium and a large variety of risk-sharing procedures and arrangements for parts of its business in order to reduce underwriting losses for which it might become liable under insurance policies it issues, and to afford its customers or producers a degree of participation in the risks and rewards associated with such business. Under retrospective arrangements, Old Republic collects additional premiums if losses are greater than originally anticipated and refunds a portion of original premiums if loss costs are lower. Pursuant to risk sharing arrangements, the Company adjusts production costs or premiums retroactively to likewise reflect deviations from originally expected loss costs. The amount of premium, production costs and other retrospective adjustments which may be made is either limited or unlimited depending on the Company's evaluation of risks and related contractual arrangements.
The following table displays the Company's General Insurance liabilities reinsured by its ten largest reinsurers as of December 31, 2020.
|Major General Insurance Balances Due from Reinsurers|
|($ in Millions)||% of Total|
|Best||on Paid||on Claim||Exposure||Reinsured|
|Archway Insurance, Ltd.||Unrated||$||— ||$||387.1 ||$||387.1 ||10.5 ||%|
|Day One Insurance, Inc.||Unrated||— ||355.0 ||355.0 ||9.6 |
|Munich Re America, Inc.||A+||13.0 ||270.6 ||283.6 ||7.7 |
|Hanover Ruckversicherungs||A+||5.3 ||274.0 ||279.4 ||7.6 |
|AXIS Reinsurance Company||A||1.8 ||163.2 ||165.0 ||4.5 |
|Swiss Reinsurance America Corporation||A+||14.6 ||128.6 ||143.3 ||3.9 |
|Summit Insurance, Ltd.||Unrated||.9 ||137.5 ||138.5 ||3.7 |
|Endurance Assurance Corporation||A+||.8 ||111.8 ||112.6 ||3.0 |
|Partner Reinsurance Company of the U.S.||A+||.3 ||103.1 ||103.4 ||2.8 |
|Transatlantic Reinsurance Company||A+||2.1 ||98.7 ||100.9 ||2.7 |
|$||39.1 ||$||2,030.1 ||$||2,069.2 ||56.0 ||%|
Reinsured liabilities of the Title Insurance Group, RFIG Run-off Group and small life and accident insurance operations are not material.
Reinsurance recoverable asset balances represent amounts due from or credited by assuming reinsurers for paid and unpaid claims and policy reserves. Such reinsurance balances that are recoverable from non-admitted foreign and certain other reinsurers such as captive insurance companies owned by assureds or business producers, as well as similar balances or credits arising from policies that are retrospectively rated or subject to assureds' high deductible retentions are substantially collateralized by irrevocable letters of credit, securities, and other financial instruments. Old Republic evaluates on a regular basis the financial condition of its assuming reinsurers and assureds who purchase its retrospectively rated or high deductible policies. Estimates of credit losses are included in the Company's net claim and claim expense reserves since reinsurance, retrospectively rated and self-insured deductible policies and contracts do not relieve Old Republic from its direct obligations to assureds or their beneficiaries.
Old Republic's reinsurance practices with respect to portions of its business also result from its desire to bring its sponsoring organizations and customers into some degree of joint venture or risk sharing relationship. The Company may, in exchange for a ceding commission, reinsure up to 100% of the underwriting risk, and the premium applicable to such risk, to commercial institutions generally whose customers are insured by Old Republic, or individual customers who have formed captive insurance companies. The ceding commissions received compensate Old Republic for performing the direct insurer's functions of underwriting, actuarial, claim settlement, loss control, legal, reinsurance, and administrative services to comply with local and federal regulations, and for providing appropriate risk management services.
Remaining portions of Old Republic's business are reinsured in most instances with independent insurance or reinsurance companies pursuant to excess of loss agreements. Except as noted in the following paragraph, reinsurance protection on property and liability coverages generally limits the net loss on most individual claims to a maximum of: $5.2 million for workers' compensation; $6.4 million for commercial automobile (trucking) liability; $6.4 million for general liability; $12.0 million for executive protection (directors & officers and errors & omissions); $2.0
million for aviation; and $5.0 million for property coverages. Title insurance risk assumptions are generally limited to a maximum of $500.0 million as to any one policy. The vast majority of title policies issued, however, carry exposures of less than $1.0 million. The average direct primary mortgage guaranty exposure is (in whole dollars) $37,000 per insured loan.
Since January 1, 2005, the Company has had maximum treaty reinsurance coverage of up to $200.0 million for its workers' compensation exposures. Pursuant to regulatory requirements, however, all workers' compensation primary insurers such as the Company remain liable for unlimited amounts in excess of reinsured limits. Other than the substantial concentration of workers' compensation losses caused by the September 11, 2001 terrorist attack on America, to the best of the Company's knowledge there had not been a similar accumulation of claims in a single location from a single occurrence prior to that event. Nevertheless, the possibility continues to exist that non-reinsured losses could, depending on a wide range of severity and frequency assumptions, aggregate several hundred million dollars to an insurer such as the Company. Such aggregation of losses could occur in the event of a catastrophe such as an earthquake that could lead to the death or injury of a large number of persons concentrated in a single facility such as a high rise building.
As a result of the September 11, 2001 terrorist attack on America, the reinsurance industry eliminated coverage from substantially all contracts for claims arising from acts of terrorism. Primary insurers like the Company thus became fully exposed to such claims. Late in 2002, the Terrorism Risk Insurance Act of 2002 (the "TRIA") was signed into law, immediately establishing a temporary federal reinsurance program administered by the Secretary of the Treasury. The program applied to insured commercial property and casualty losses resulting from an act of terrorism, as defined in the TRIA. Congress extended and modified the program in late 2005 through the Terrorism Risk Insurance Revision and Extension Act of 2005 (the "TRIREA"). TRIREA expired on December 31, 2007. Congress enacted a revised program in December 2007 through the Terrorism Risk Insurance Program Reauthorization Act (the "TRIPRA") of 2007. The TRIPRA has been extended on several occasions, most recently on December 20, 2019 for seven years.
The TRIA automatically voided all policy exclusions which were in effect for terrorism related losses and obligated insurers to offer terrorism coverage with most commercial property and casualty insurance lines. The TRIREA revised the definition of "property and casualty insurance" to exclude commercial automobile, burglary and theft, surety, professional liability and farm owners multi-peril insurance. TRIPRA did not make any further changes to the definition of property and casualty insurance, however, it did include domestic acts of terrorism within the scope of the program. Although insurers are permitted to charge an additional premium for terrorism coverage, insureds may reject the coverage. Under TRIPRA, the program's protection is not triggered for losses arising from an act of terrorism until the industry first suffers losses in excess of a prescribed aggregate deductible during any one year. The program deductible trigger was $200 million for 2020. Once the program trigger is met, the program will be responsible for a fixed percentage of the Company's terrorism losses that exceed its deductible which ranges from 85% for 2015 and declines by one percentage point per year until it reached 80% in 2020. The Company's deductible amounts to 20% of direct earned premium on eligible property and casualty insurance coverages. The Company currently reinsures limits on a treaty basis of $195.0 million in excess of $5.0 million for claims arising from certain acts of terrorism for casualty clash and catastrophe workers' compensation liability insurance coverages. The Company also purchases facultative reinsurance on certain accounts in excess of $200.0 million to manage the Company's net exposures.
(e) Competition. The insurance business is highly competitive and Old Republic competes with many stockholder-owned and mutual insurance companies. Many of these competitors offer more insurance coverages and have substantially greater financial resources than the Company. The rates charged for many of the insurance coverages in which the Company specializes, such as workers' compensation insurance, other property and liability insurance and title insurance, are primarily regulated by the states. The basic methods of competition available to Old Republic, aside from rates, are service to customers, expertise in tailoring insurance programs to the specific needs of its clients, efficiency and flexibility of operations, personal involvement by its key executives, and, as to title insurance, accuracy and timely delivery of evidences of title issued.
The Company believes its experience and expertise have enabled it to develop a variety of specialized insurance programs and related services for its customers, and to secure state insurance departments' approval of these programs.
(f) Government Regulation. In common with all insurance companies, Old Republic's insurance subsidiaries are subject to the regulation and supervision of the jurisdictions in which they do business. The method of such regulation varies, but, generally, regulation has been delegated to state insurance commissioners who are granted broad administrative powers relating to: the licensing of insurers and their agents; the nature of and limitations on investments; approval of policy forms; reserve requirements; and trade practices. In addition to these types of regulation, many classes of insurance, including most of the Company's insurance coverages, are subject to rate regulations which require that rates be reasonable, adequate, and not unfairly discriminatory.
The majority of states have also enacted insurance holding company laws which require registration and periodic reporting by insurance companies controlled by other corporations licensed to transact business within their respective jurisdictions. Old Republic's insurance subsidiaries are subject to such legislation and are registered as controlled insurers in those jurisdictions in which such registration is required. Such legislation varies from state to state but typically requires periodic disclosure concerning the corporation which controls the registered insurers, or ultimate holding company, and all subsidiaries of the ultimate holding company, and prior approval of certain intercorporate transfers of assets (including payments of dividends in excess of specified amounts by the insurance subsidiary) within the holding company system. Each state has established minimum capital and surplus requirements
to conduct an insurance business. At December 31, 2020 each of the Company’s General, Title, Mortgage Guaranty and Life and Accident insurance subsidiaries exceeded the minimum statutory capital and surplus requirements.
Data Protection and Cybersecurity
The Company is subject to U.S. laws and regulations that require financial institutions, insurance companies and other businesses to protect the security and confidentiality of personal information and provide notice of their practices relating to the collection and disclosure of personal information. The Company is also subject to laws and regulations requiring notification to affected individuals and regulators of security breaches.
Effective March 1, 2017, the New York Department of Financial Services issued a landmark cybersecurity regulation requiring covered financial services institutions to implement a cybersecurity program designed to protect customer information as well as information technology systems. The regulation imposes specific safeguards as well as governance, risk assessment, monitoring and testing, third party service provider management, incident response and reporting and other requirements.
In October 2017, the National Association of Insurance Commissioners adopted the Insurance Data Security Model Law, which requires insurers, insurance producers and other entities licensed under state insurance laws to develop and maintain a written information security program, conduct risk assessments, oversee the data security practices of third-party service providers and other related requirements. Since the model law’s adoption, numerous states in which the Company operates have approved legislation incorporating the model into statute.
In June 2018, California adopted the California Consumer Privacy Act. This law provides California residents with broad personal data protections and rights related to the use and collection of their personal information. Additional states have adopted similar security and privacy laws and the Company anticipates additional information security and privacy laws and regulations to be forthcoming.
(g) Employees. Old Republic’s approximately 9,000 associates — the Company’s human and intellectual capital — form a key stakeholder group and a most important resource for managing the Company's business. Creating the most appropriate culture and offering professional opportunities are the primary goals of Old Republic’s human capital management. There is significant competition for talent in the insurance industry and the Company’s ability to recruit, retain and develop its associates is a key driver for its long-term success.
As with many elements of the Company’s business, the first and primary level of human capital management occurs in the Company’s operating subsidiaries. This approach reflects the different needs and expectations of each operating subsidiary based on the industry specialization, lines of business, and location of each. In addition, the flexibility of this approach to human capital management benefits the entire enterprise and leads to the identification of methods and solutions that can eventually be used across the entire business.
At the holding company level, Old Republic emphasizes its corporate culture and coordinates the compensation and benefits philosophy that applies to all operating subsidiaries. Old Republic's culture is one that focuses on managing the business in the best interest of its shareholders and key stakeholders, including associates. The long-term success of Old Republic’s associates means:
•Training & Development – Investment in associates means investment in the business. Old Republic offers many training opportunities, including professional certifications, mentoring programs and leadership training.
•Engagement – Old Republic believes that an engaged workforce will be a successful workforce. The Company seeks to create and maintain engaged associates by offering opportunities to interact with industry, professional and charitable & community organizations.
•Planning Ahead – Offering the right compensation and benefit packages and meaningful opportunities to invest in retirement gives Old Republic associates the opportunity to plan ahead.
The importance of Old Republic’s human capital to the Company’s success was never more clearly demonstrated than during the COVID-19 pandemic. In this challenging environment, Old Republic associates continued to serve customers and operate the Company’s businesses with no meaningful interruption in service. This level of performance was the result of both their dedication and loyalty to the business, as well as the investments made by the Company in information technology, employee training and working arrangements sufficiently flexible for conditions.
(h) Website access. The Company files various reports with the U.S. Securities and Exchange Commission ("SEC"), including its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. The Company's reports are available by visiting the SEC's website (http://www.sec.gov) and accessing its EDGAR database to view or print copies of the electronic versions of the Company's reports. Additionally, the Company's reports can be obtained, free of charge, by visiting its website (http://www.oldrepublic.com), selecting Investors then Financials to view or print copies of the electronic versions of the Company's SEC and other reports. The contents of the Company's website are not intended to be, nor should they be considered incorporated by reference in any of the reports the Company files with the SEC.
Item 1A - Risk Factors
In evaluating the Company, the factors described below should be considered carefully. The occurrence of one or more of these events could significantly and adversely affect the Company’s business, financial condition and results of operations.
RISKS RELATING TO OLD REPUBLIC AND ITS BUSINESSES
The ongoing COVID-19 pandemic and the associated governmental responses could materially adversely affect Old Republic’s business.
The impact of the COVID-19 pandemic has resulted in significant uncertainty, volatility and disruption in the U.S. economy and financial markets. Governmental responses to the pandemic have included shelter-in-place orders, directing many businesses to cease operations and individuals to restrict their movements. These actions have resulted in rapid decreases in economic activity, an increase in unemployment and pressures on the commercial real estate market. For a further discussion of the impact of the pandemic on Old Republic’s business for the year ended December 31, 2020, see “Management Analysis of Financial Position and Results of Operations-COVID-19 Pandemic and Old Republic’s Business.”
In addition, the pandemic caused significant financial market disruptions, most particularly in the first and second quarters of 2020. This had an adverse impact on the Company’s investment portfolio and stock price. While many sectors in which the Company invests have recovered or partially recovered, should the COVID-19 pandemic continue to cause economic disruption, the Company’s investment portfolio could experience continued volatility. For more information on the Company’s investment portfolio performance, see “Management Analysis of Financial Position and Results of Operations-Financial Position.”
While the duration and ultimate effects of the pandemic remain highly uncertain, COVID-19 continues to have an adverse impact on the U.S. economy, which led to increased or continuing restrictions on business activity. A continuing or worsening reduction in economic activity could lead to a meaningful decline in the demand for the Company’s products. The pandemic could also have a more significant impact on Old Republic’s claims experience in future periods, resulting in a decrease in profitability.
Legislative and regulatory responses to COVID-19 could adversely affect Old Republic's business.
Federal, state and local government authorities, including state insurance departments, have taken various actions in response to the pandemic. For example, certain states are considering legislation that would retroactively mandate coverage for losses that are not covered under the terms of insurance policies. Certain state insurance departments are taking regulatory action that creates a presumption of compensability for workers in certain industries. Other regulatory initiatives include requirements to return premium, prevent the collection of premium, and/or prohibit the cancellation or non-renewal of policies. These legislative and regulatory actions, individually or in the aggregate, could adversely affect Old Republic’s business.
Old Republic’s loss reserves are based on estimates and if these prove to be inadequate to cover its actual insured losses, Old Republic’s business, financial condition and results of operations could be adversely affected.
To recognize liabilities for anticipated policy losses, the Company establishes reserves as balance sheet liabilities representing its best estimate of amounts needed to pay reported and unreported losses and the related loss adjustment expenses. It is not possible to calculate precisely what these liabilities will amount to in advance and, accordingly, the reserves represent a best estimate at a point in time. Estimating loss reserves is a difficult, complex and inherently uncertain process involving many variables and subjective judgments. These estimates are based upon known historical loss data, assumptions and expectations of future trends in claim frequency and severity, changes in legal, regulatory and litigation environments, and inflation and other economic considerations.
Moreover, for long-tail coverages, which generally include workers' compensation, commercial automobile (trucking) liability, general liability, errors and omissions and directors’ and officers' liability, as well as title insurance, significant periods of time often elapse between the occurrence of an insured loss, the reporting of the loss to the Company and the payment of that loss. The length of time required to ultimately settle long-tailed claims and the costs associated with resolving these claims, coupled with uncertain and sometimes variable judicial rulings on coverage and policy allocation issues along with the possibility of legislative actions, makes reserving for these exposures highly uncertain and creates a risk of possibly adverse developments in both known and as-yet-unknown claims.
As a result of these uncertainties, the ultimate paid loss and loss adjustment expense may deviate, perhaps substantially, from the point-in-time estimates of such losses and expenses, as reflected in the loss reserves included in the Company’s financial statements. For example, for the years ended December 31, 2020, 2019 and 2018, the Company experienced consolidated favorable development of reserves for losses and loss adjustment expenses incurred in prior years of $83.8 million, $30.9 million and $77.8 million, respectively which had a positive effect on results of operations in those periods. To the extent that loss and loss adjustment expenses exceed initial estimates, the Company will be required to immediately recognize the less favorable experience and increase loss reserves, with a corresponding reduction in net income in the period in which the unfavorable development is identified.
If the Company is unable to accurately underwrite risks and charge competitive yet profitable rates to its policyholders and customers, the Company’s business, financial condition, and results of operations would be materially and adversely affected.
In general, the premiums for the Company’s insurance policies are established at the time a policy is issued and, therefore, before all of the underlying costs are known. Like other insurance companies, Old Republic relies on estimates and assumptions in setting premium rates. Establishing adequate premiums is necessary to generate sufficient revenue to offset losses, loss adjustment expenses and other underwriting costs and to earn an underwriting profit. If the Company does not accurately assess and underwrite the risks that it assumes, it may not charge adequate premiums to cover its losses and expenses, which would negatively affect the Company’s financial condition and results of operations. Alternatively, the Company could set its premiums too high, which could reduce its competitiveness and lead to lower revenues.
Pricing involves the acquisition and analysis of historical loss data, and the projection of future trends, loss costs and expenses, and inflation trends, among other factors, for each of the Company’s products. In order to accurately price its policies, the Company:
● collects and analyzes a substantial volume of data from its insureds;
● develops, tests and applies appropriate projections and rating formulas;
● closely monitors and timely recognizes changes in trends; and;
● seeks to project expected losses for its insureds with reasonable accuracy.
The Company seeks to implement its pricing accurately in accordance with its assumptions, data available to it and its analysis of that data. Given the uncertainties generally inherent in estimates and assumptions, the Company’s ability to undertake these efforts successfully and, as a result, accurately price its policies, is not free from risk.
If the Company is unable to realize its investment objectives, its financial condition and results of operations may be adversely affected.
Investment income is an important component of the Company’s net income and one of its primary sources of cash flow to support operations. As of December 31, 2020, the consolidated investment portfolio reflected an allocation of approximately 74% to fixed-maturity (bonds and notes) and short-term investments, and 26% to equity securities (common stock). For the years ended December 31, 2020, 2019 and 2018, the Company reported $438.9 million, $450.7 million and $431.8 million of net investment income, respectively.
The Company’s investments are subject to market-wide risks and fluctuations, as well as to risks inherent in particular securities. Changing or unprecedented market conditions, such as experienced in the first half of the year as a result of the COVID-19 pandemic, could decrease liquidity and materially impact the future valuation of fixed maturity and equity securities in the investment portfolio.
In structuring its investment portfolio, the Company seeks to align its policyholder obligations and the maturity of its fixed maturity portfolio. As a result of either an unexpected increase in policyholder obligations (e.g., because of an underestimate in reserves) or a short fall in funds available (e.g., because of a default in a fixed maturity investment), the Company could have difficulty in meeting its obligations. In this case, the Company could be forced to liquidate its investments before their maturity or under adverse securities market conditions to obtain the funds necessary to meet its obligations. This could result in unexpected losses in the portfolio. Additionally, the Company may be forced to change its investments or investment policies depending upon regulatory, economic and market conditions, thus affecting the existing or anticipated financial condition and operating needs, including the tax position, of its business. In such circumstances, the Company’s investment objectives may not be achieved, and its financial condition and results of operations may be adversely affected.
Losses due to nonperformance or defaults by counterparties can have a material adverse effect on the Company’s profitability or sources of liquidity.
The Company has credit risk with counterparties associated with investments, premiums receivable and reinsurance recoverables. The Company’s subsidiaries have significant business relationships with financial institutions, particularly national banks. These subsidiaries are the beneficiaries of a significant amount of security in the form of letters of credit, trust funds and investments which certain banks hold as collateral securing the obligations of insureds and certain reinsurers. Other banks are depositories holding large sums of money in escrow accounts established by the Company's title subsidiaries. There is thus a risk of concentrated financial exposures in one or more such banking institutions. These counterparties may default on their obligations to the Company due to bankruptcy, insolvency, lack of liquidity, adverse economic conditions, operational failure, fraud, government intervention and other reasons. If any of these institutions fail or are unable to honor their credit obligations, or if escrowed funds become lost or tied up due to the failure of a bank, the result could have a materially adverse effect on the Company’s business, results of operations and financial condition.
The Company is also exposed to credit risk with its reinsurers. Reinsurance does not discharge the Company’s insurance subsidiaries of their obligations under their insurance policies. The Company’s insurance subsidiaries remain liable to policyholders even if they are unable to make recoveries that they believe they are entitled to receive under their reinsurance contracts. With respect to long-tail coverages, the creditworthiness of the Company’s reinsurers may change before it can recover amounts to which it is entitled. If a reinsurer is unable to meet any of its
obligations to the Company, it would be responsible for all claims and claim settlement expenses for which it would have otherwise received payment from the reinsurer. If the Company is unable to collect amounts recoverable from reinsurers, its business, financial condition and results of operations would be adversely affected.
The Company’s status as a holding company with no direct operations could adversely affect its liquidity and its ability to service debt and pay dividends.
Old Republic is an insurance holding company with no operations of its own that transacts business through its operating subsidiaries. Old Republic’s primary assets are the investments in these operating subsidiaries, and substantially all of the Company’s assets consist of those used for the business conducted by its insurance subsidiaries. Old Republic relies upon dividends and interest from these subsidiaries in order to pay the interest and principal on its debt obligations, dividends to shareholders, and corporate expenses.
The payment of dividends by the Company’s insurance subsidiaries is restricted by state insurance laws or subject to approval of the insurance regulatory authorities in the jurisdictions in which they are domiciled. These authorities recognize only statutory accounting practices for determining financial position, results of operations and the ability of an insurer to pay dividends to its shareholders. The specific rules governing the payment of dividends by the Company’s insurance subsidiaries vary from jurisdiction to jurisdiction. The Company’s insurance subsidiaries are domiciled in many different jurisdictions. Generally, the insurance subsidiaries are prohibited from paying dividends to the holding company in excess of either the greater or lesser of (depending upon the state involved) 10% of statutory surplus or a portion of statutory net income, without the prior approval of the applicable insurance regulatory authority. Dividends declared during the fiscal years ended December 31, 2020, 2019 and 2018 to the holding company by its subsidiaries amounted to $472.4 million, $399.5 million and $412.3 million, respectively. There can be no assurance that the Company’s subsidiaries will be able to continue to pay such dividends to us in the future. If the Company’s subsidiaries are unable to pay dividends to the holding company in amounts necessary to satisfy existing obligations, the Company’s ability to service its debt and pay dividends to its shareholders would be adversely affected.
Old Republic may not be able to maintain paying dividends at current rates, or at all.
Old Republic has a long history of paying regular quarterly dividends and in recent years has paid special dividends. Any determination to pay either type of dividend to the Company’s stockholders in the future will be at the discretion of the board of directors and will depend on the Company’s results of operations, financial condition and other factors deemed relevant by the board of directors. Old Republic’s ability to pay dividends depends largely on the Company’s subsidiaries’ earnings and operating capital requirements, and is subject to regulatory and other constraints of the subsidiaries, including the effect of any such dividends or distributions on the AM Best rating or other ratings of the insurance subsidiaries. In addition, the Company may choose to retain capital to support growth or further mitigate risk, instead of returning excess capital to its shareholders. As a result, there can be no assurance that Old Republic will be able to maintain paying dividends as it has in the past.
Technology breaches or failures, including cybersecurity incidents, could disrupt the Company’s operations, result in the loss of critical and confidential information and expose the Company to additional liabilities, which could adversely affect its reputation and results of operations.
To perform day to day operations as well as communicate with customers, business partners and other stakeholders, the Company depends upon an array of digital technologies. The Company’s business depends on effective information systems and the integrity and timeliness of the data its information systems use to run its business. The Company uses computer systems to store, retrieve, evaluate and make use of customer, employee, and company data and information. Some internal processes, in turn, rely upon third-party systems and tools. This combination of resources allow business units to provide insurance quotes, process premium payments, make changes to existing policies, file and pay claims, provide customer support, execute transactions and manage investment portfolios. In addition, the Company routinely transmits, receives and stores personal, confidential and proprietary information by email and other electronic means. Although the Company attempts to keep this information confidential, it may be unable to do so in all events, especially with clients, vendors, service providers, and other third parties.
The Company’s systems have in the past been, and will likely continue to be, subjected to cyber threats and other computer related intrusions. Like other large companies, Old Republic is a target of potential cyber and other security threats and must continuously monitor and develop information technology networks and infrastructure to prevent, detect, address and mitigate the risk of threats to data and systems, including malware and computer virus attacks, ransomware, unauthorized access, misuse, denial-of-service attacks, system failures and disruptions. In some cases, such unauthorized access may not be immediately detected and can remain undetected for some time, increasing the severity of the incident. There is no assurance that the Company’s security measures, including information security policies, will provide fully effective protection from such events. Any such cyber incident could have a material adverse effect on the Company’s business, financial condition and results of operations.
Any information security breach of systems or services or breach of a third-party vendor or services provider that results in the loss or unauthorized access of sensitive data could disrupt the Company’s ability to conduct business operations during recovery and any remediation period. In the event of a cyber-attack or other information security incident, systems may be inaccessible to employees, customers or business partners for an extended period of time and employees may be unable to perform their duties for an extended period of time if data or systems are disabled or
destroyed. In addition, a successful cyber-attack or similar information security incident could expose the Company to substantial costs and negative consequences including remediation costs, lost revenues and reputational damage.
Furthermore, Old Republic’s businesses must comply with laws and regulations enacted by U.S. federal and state governments, as well as laws enacted by various regulatory organizations or exchanges relating to the privacy and security of the information of clients, employees or others. These laws and regulations are increasing in complexity and number, change frequently and sometimes conflict. The compromise of personal, confidential or proprietary information could expose the Company to liability under federal and state laws, and subject it to litigation and investigations and result in reputational harm, which could have a material adverse effect on the Company’s business, financial condition and results of operations.
The Company may suffer losses from litigation, which could materially and adversely affect its financial condition and business operations.
Like other large insurance companies, Old Republic continually faces risks associated with litigation of various types, including claims litigation arising in the ordinary course, corporate litigation, and disputes relating to bad faith allegations that could result in the Company incurring losses in excess of policy limits. The Company typically is a party to a variety of litigation matters throughout the year. Litigation is subject to inherent uncertainties, and if there were an outcome unfavorable to the Company, there exists the possibility of a material adverse impact on its results of operations and financial position in the period in which the outcome occurs. Even if an unfavorable outcome does not materialize, the Company still may face substantial expense and disruption associated with the litigation.
The Company competes with a large number of companies in the insurance industry for premium revenues.
Each of the Company's lines of continuing insurance business is highly competitive and is likely to remain so for the foreseeable future. The Company faces competition from specialty insurance companies, underwriting agencies and intermediaries, as well as diversified financial services companies that are significantly larger than it is and that have significantly greater financial, marketing, management and other resources. The Company may also face competition from new sources of capital such as institutional investors seeking access to the insurance market, sometimes referred to as alternative capital, which may depress pricing or limit the Company’s opportunities to write business. The emergence of insurtech companies and other companies that may seek to write business without the appropriate regard for risk and profitability may lead to increased competition for premiums. All of these increases in competition threaten to reduce demand for the Company’s insurance products, reduce its market share and growth prospects, and potentially reduce the Company’s premium revenues and profitability.
If the Company is unable to keep pace with the technological advancements in the insurance industry, its ability to compete effectively could be impaired.
The Company’s operations rely upon complex and expensive information technology systems for interacting with policyholders, brokers and other business partners. The pace at which information systems must be upgraded is continually increasing, requiring an ongoing commitment of significant resources to maintain or upgrade to current standards. Many of the Company’s operating subsidiaries maintain separate IT systems. The Company will need to continue to develop and maintain information technology systems that will allow its insurance subsidiaries to compete effectively. The development of new technologies may result in the Company being competitively disadvantaged if it is unable to upgrade its systems in a timely manner. If the Company is unable to keep pace with the advancements being made in technology, the Company’s ability to compete with other insurance companies that have more advanced technological capabilities will be negatively affected. Further, if the Company is unable to effectively update or replace its key legacy technology systems as they become obsolete or as emerging technology renders them competitively inefficient, the Company’s competitive position and its cost structure could be adversely affected.
Old Republic is subject to extensive governmental regulation, and if the Company fails to comply with these regulations, it can be subject to penalties, including fines and suspensions, which may adversely affect the Company’s realization of its business objectives as well as its financial condition, results of operations and reputation.
Most insurance regulations are designed to protect the interests of policyholders rather than shareholders and other investors. These regulations, generally administered by a department of insurance in each state and territory in which the Company does business, relate to, among other things, policy forms, premium rates, capital requirements, licensing, investments, policy limits, accounting methods and reserving.
State insurance departments also conduct periodic examinations of the conduct and affairs of insurance companies and require the filing of annual, quarterly and other reports relating to financial condition, holding company issues and other matters. At any given time, governmental agencies are examining or investigating certain of the Company’s operations. These include examinations or investigations of market conduct, competitive practices and other regulatory compliance matters. Changes in the level of regulation of the insurance industry or changes in laws or regulations themselves or interpretations by regulatory authorities could adversely affect the Company’s ability to operate its business as currently conducted and adversely affect or inhibit Old Republic’s ability to achieve some or all of its business objectives.
Regulatory authorities have relatively broad discretion to deny or revoke licenses for various reasons, including
the violation of regulations. In some instances, the Company follows practices based on its interpretations of regulations or practices that it believes may be generally followed by the industry. These practices may turn out to be different from the interpretations of regulatory authorities. If the Company does not have the requisite licenses and approvals or does not comply with applicable regulatory requirements, insurance regulatory authorities could initiate investigations or other proceedings, fine the Company, preclude or temporarily suspend the Company from carrying on some or all of its activities or otherwise penalize the Company. This could adversely affect the Company’s ability to operate its business.
In addition to regulations specific to the insurance industry, as a public company, Old Republic is also subject to the rules and regulations of the Securities and Exchange Commission and the New York Stock Exchange (NYSE), each of which regulate many areas such as financial and business disclosures, corporate governance and shareholder matters. Old Republic is also subject to the corporation laws of Delaware, its state of incorporation. At the federal level, among other laws, the Company is subject to the Sarbanes-Oxley Act and the Dodd-Frank Act, each of which regulate corporate governance, executive compensation and other areas, as well as laws relating to federal trade restrictions, privacy/data security and terrorism risk insurance laws. The Company monitors these laws, regulations and rules to assess the Company’s compliance and make appropriate changes as necessary. Implementing such changes may require adjustments to the Company’s business methods, increases to its costs and other changes that could cause the Company to be less competitive in the industry.
RISKS RELATING TO GENERAL INSURANCE
Catastrophic losses, including those caused by natural disasters such as earthquakes or man-made events such as terrorist attacks, are inherently unpredictable and could cause the Company to suffer material financial losses.
While the General Insurance segment does not have a meaningful exposure to homeowners or other real property coverages, the casualty or liability insurance it underwrites creates exposure to claims arising out of catastrophes. The two principal catastrophe exposures are earthquakes and acts of terrorism in areas where there are large concentrations of employees of an insured employer or other individuals who could potentially be injured and assert claims against an insured under workers' compensation policies. Collateral damage to property or persons from acts of terrorism and other calamities could also expose general liability policies.
Following the September 11, 2001 terrorist attack, the reinsurance industry eliminated coverage from substantially all reinsurance contracts for claims arising from acts of terrorism. As discussed elsewhere in this report, the U.S. Congress subsequently passed TRIA, TRIREA, and TRIPRA legislation that required primary insurers to offer coverage for certified acts of terrorism under most commercial property and casualty insurance policies. Although these programs established a temporary federal reinsurance program through December 31, 2027, primary insurers like the Company’s general insurance subsidiaries retain significant exposure for terrorist act-related losses.
Since January 1, 2005, the Company has maintained maximum treaty reinsurance coverage of up to $200 million for workers' compensation exposures. Pursuant to regulatory requirements, however, all workers' compensation primary insurers such as the Company remain liable for unlimited amounts in excess of reinsured limits. Therefore, it is possible that in the event of a catastrophe such as an earthquake that could lead to the death or injury of a large number of persons concentrated in a single place, the Company could experience significant non-reinsured losses if the losses exceeded its reinsurance coverage, which could materially and adversely affect the Company’s financial condition and results of operations.
In addition, natural events such as the COVID-19 pandemic can have a particular impact on certain business lines. For example, the General Insurance segment writes workers’ compensation business covering the continuing care industry, which has been adversely affected by the pandemic. The impact of the pandemic on covered individuals in this sector could cause the Company to experience increased claims and losses, which could also materially and adversely affect the Company’s financial condition and results of operations.
Current economic conditions could adversely affect the Company’s financial condition and results of operations.
Negative trends in employment rates can adversely affect Old Republic’s workers’ compensation business. If the Company’s customers reduce their workforce levels, the level of workers’ compensation insurance coverage they require and, as a result the premiums that the Company charges, would be reduced, and if the customer ceases operations, it will not renew its policy. For example, the pandemic's impact on employment levels, businesses, and other economic activities contributed to a reduction in net written and earned premium and fee revenues in the General Insurance segment for the year ended December 31, 2020. If the pandemic continues unabated, or current economic conditions do not improve, Old Republic could experience future decreases in business activity, which could have an adverse effect on the Company’s financial condition and results of operation.
If the Company is not able to obtain reinsurance on favorable terms, its business, financial condition and results of operations could be adversely affected.
Reinsurance is a contractual arrangement whereby one insurer (the reinsurer) assumes some or all of the risk exposure written by another insurer (the reinsured). The Company depends on reinsurance to manage its risks both in
terms of the amount of coverage it is able to write, the amount it is able to retain for its own account, and the price at which the Company is able to write it. The availability of reinsurance and its price, however, are generally determined in the reinsurance market by conditions beyond the Company’s control.
Because reinsurance does not relieve the Company of its primary liability to insureds in the event of a loss, the ability of reinsurers to honor their counterparty obligations to the Company represents credit risk. The Company attempts to mitigate this risk by limiting reinsurance placements to those reinsurers it considers the best credit risks. In recent years, however, there has been an ever decreasing number of acceptable reinsurers. There can be no assurance that the Company will be able to find the desired or even adequate amounts of reinsurance at favorable rates from acceptable reinsurers in the future. If unable to do so, the Company would have greater exposure to catastrophic losses and be forced to reduce the volume of business written or retain increased amounts of liability exposure. In either case, any reduction or other changes in the Company’s reinsurance could adversely affect the Company's business, results of operations, and financial condition.
Losses due to defaults by insureds with which the Company has entered into risk sharing arrangements could adversely affect its profitability.
A significant amount of Old Republic's liability and workers' compensation business, particularly for large commercial insureds, is written on the basis of risk sharing underwriting methods. These methods may include the use of large deductibles, captive insurance risk retentions, or other arrangements by which the insureds effectively retain and fund all or a portion of the losses experience. An insured’s financial strength and ability to pay are carefully evaluated as part of the underwriting process and monitored periodically thereafter. In addition, the exposure retained by an insured is estimated and collateralized based on a credit analysis and evaluation. Because the Company is primarily liable for losses incurred under its policies, the failure or inability of insureds to honor their retained liability represents a credit risk. If the Company incorrectly estimates the proper amount of collateral or if there is an impediment to the Company accessing that collateral, it could have a material adverse effect on the General Insurance segment’s profitability, results of operation and financial condition.
RISKS RELATING TO TITLE INSURANCE
The Title segment’s products and services and claims experience may suffer as a result of deteriorations in the real estate market.
Demand for the products and services provided by the Title segment is generally dependent on the strength of the real estate market and the frequency of real estate transactions. If real estate market conditions and real estate values decline, the number of real estate transactions may decrease, as a result of high or increasing mortgage interest rates and limited or decreasing availability of credit, including commercial and residential mortgage funding. Historically, increasing foreclosure activity has led to an increase in claims. These factors may adversely affect both net premiums and fees earned and profitability in the segment.
A significant portion of the Title segment’s business is generated by independent title agents and underwritten insurance companies. If this segment’s products and services become less attractive to these independent title agents, or if there is a decrease in the amount of title industry business placed by independent title agents, it could have a material adverse impact on this segment.
For the year ended December 31, 2020, approximately $2.4 billion or 75% of the Title segment’s consolidated premium and related fee income was produced by independent title agents. The other three large national title insurers generate a higher percentage of their business through employees or owned insurance agencies. Independent title agents can direct business to any title insurer, whereas owned agencies will typically direct business solely to their parent or affiliated title insurers. If the products and services provided by competitors are more attractive to independent title agents, or if the number of, or amount of business produced by, independent title agents decreases, the segment’s business may be adversely affected.
Because independent title agents issue a significant portion of the Title segments policies and operate with substantial independence from the business, the independent operations of these title agents could adversely affect the financial condition and profitability of this segment.
The Title segment issues a significant portion of its policies through title agents that operate largely independently and without direct supervision. The independent agents typically perform title searches and examinations and make underwriting decisions for which the Title segment bears the risk. The activities of these independent title agents are governed by contract. While the Title business has policies to audit and monitor their activities, there is no guarantee that these title agents will fulfill their contractual obligations. For example, an independent agent may issue a policy that is in excess of contractual limits or the independent title agent may not adhere to required underwriting standards. The Title segment’s contracts with agents generally limit an agent’s liability for losses. However, under certain circumstances, the segment may be liable to third parties for actions (including defalcations) or omissions of these agents. In certain states a title insurer may be held liable for the actions or omissions of its agents in those states, regardless of contractual limitations imposed on an agent’s activities. As a result, the use of independent title agents could result in increased claims and an increase in other costs and expenses.
Regulation of title insurance rates could adversely affect the Title segment.
Title insurance rates are subject to extensive regulation, which varies from state to state. In many states the approval of the applicable state insurance regulator is required prior to implementing a rate change. These regulations could hinder the Title segment’s ability to promptly adapt to changing market dynamics through price adjustments, which could adversely affect its results of operations, particularly in a rapidly declining market.
Florida represents approximately 19% of the Title segment consolidated premium and related fee income, respectively. The Title segment’s business may be adversely affected by business or regulatory conditions that disproportionately affect Florida.
Florida is the largest source of revenue for the Title segment. In the aggregate in 2020, Florida accounted for approximately 19% of total segment consolidated premium and related fee income. As a result of the significant income associated with this state, the Title segment is exposed to adverse business or regulatory conditions that significantly or disproportionally affect this state. For example, a declining business climate or real estate market that is localized in this state could have an adverse effect on the segment’s results of operations. Adverse regulatory developments, including reductions in rates or increased regulatory or capital requirements in this state could similarly adversely affect the segment’s business, financial condition and results of operations.
Because the Company does not obtain reinsurance on certain large commercial title policies, a title failure or other claim on such a policy could adversely affect the Title segment and the Company.
The Title segment’s commercial business involves the issuance of title policies on commercial properties. Policies insuring title on large commercial properties (or aggregations of many smaller properties) may have policy exposure extending into the hundreds of millions of dollars. Historically, the segment has not obtained reinsurance on its large commercial policies. Given the large policy limits, a significant loss on one of these policies would have a material adverse effect on the Title segment and the Company.
RISKS RELATING TO THE RFIG-RUNOFF SEGMENT
A failure to adequately reserve for losses could materially adversely affect the RFIG Run-off segment.
The Company establishes reserves for losses and loss adjustment expenses for its RFIG Run-off segment based upon loans reported by mortgage servicers to be in default, as well as estimates of those in default but not yet reported. The reserves are best estimates by management and take into consideration many variables including the number of reported defaults, the payment status of those defaults, the segment’s historical loss data and management’s assumptions and expectations regarding future trends in housing and mortgage markets, unemployment rates and the economy in general.
Estimating reserves for mortgage guaranty exposures is an inherently uncertain process insofar as it is based on information reported by third parties and is subject to changes in economic conditions which could have a material impact on ultimate losses and loss adjustment expenses. See “Old Republic’s loss reserves are based on estimates and if its loss reserves prove to be inadequate to cover its actual insured losses, Old Republic’s business, financial condition and results of operations could be adversely affected” above.
Claim reserve estimates for the RFIG Run-off segment rely on the accuracy and timeliness of information provided by mortgage servicers with regards to the number and payment status of mortgage loans in default. Inaccuracies or delays in the reporting of default information could adversely affect the level of carried reserves or the timing in which such reserves or changes therein are recorded. With regard to changes in economic trends and conditions, periods of sustained economic distress such as those experienced during the Great Recession of 2007-2012 or, more recently, by the adverse economic effects of the COVID-19 pandemic, subject estimates of loss reserves to an even greater degree of uncertainty and volatility.
The Coronavirus Aid, Relief, and Economic Security Act of 2020 (the CARES Act) introduced foreclosure moratoriums and established a forbearance option for borrowers suffering hardships induced by the pandemic. The RFIG Run-off segment loss reserves take into account expectations regarding the potential mitigating effects of the foreclosure moratoriums and loan forbearance provisions of the CARES Act and other loss mitigation programs implemented by mortgage servicers and governmental agencies which have oversight over mortgage servicing. The impact of the CARES Act or similar loss mitigation programs and efforts on the segment’s ultimate claim costs is unknown and will likely depend on the duration and severity of the pandemic.
As a result of these risk factors the rate and severity of actual losses could prove to be greater than expected and could require the Company to effect substantial increases in its loss reserves. Depending upon the magnitude, such increases could have a material adverse impact on the segment’s capital position and the Company's consolidated results of operations and financial condition. There can be no assurance that the actual losses for the RFIG segment will not be materially greater than previously established loss reserves.
Item 1B - Unresolved Staff Comments
Item 2 - Properties
The principal executive offices of the Company are located in the Company-owned Old Republic Building in Chicago, Illinois. In addition to its Chicago building, the Company owns one other major office building. A subsidiary of the Title Insurance Group owns and partially occupies its operations headquarters building in Minneapolis, Minnesota. Certain smaller buildings are owned by Old Republic and its subsidiaries in various parts of the nation and are primarily used for its business.
Other operations of the Company and its subsidiaries are directed from leased premises. See Note 4(b) of the Notes to Consolidated Financial Statements for a summary of all material lease obligations.
Item 3 - Legal Proceedings
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. At December 31, 2020, the Company had no material non-claim litigation exposures in its consolidated business.
Item 4 - Mine Safety Disclosures
Item 5 - Market for the Registrant's Common Equity, Related Security Holder Matters and Issuer Purchases of Equity Securities
The Company's common stock is traded on the New York Stock Exchange under the symbol "ORI". As of January 31, 2021, there were 2,090 registered holders of the Company's Common Stock. See Note 3(c) of the Notes to Consolidated Financial Statements for a description of certain regulatory restrictions on the payment of dividends by Old Republic's insurance subsidiaries.
Comparative Five Year Performance Graphs for Common Stock
The following table, prepared on the basis of market and related data furnished by Standard & Poor's Total Return Service, reflects total market return data for the most recent five calendar years ended December 31, 2020. For purposes of the presentation, the information is shown in terms of $100 invested at the close of trading on the last trading day preceding the first day of the fifth preceding year. The $100 investment is deemed to have been made either in Old Republic Common Stock, in the S&P 500 Index of common stocks, or in an aggregate of the common shares of the Peer Group of publicly held insurance businesses selected by Old Republic. The cumulative total return assumes reinvestment of cash dividends on a pretax basis. The information utilized to prepare the following table has been obtained from sources believed to be reliable, but no representation is made that it is accurate or complete in all respects.
Comparison of Five Year Total Market Return
OLD REPUBLIC INTERNATIONAL CORPORATION vs. S&P 500 vs. Peer Group
(For the five years ended December 31, 2020)
|Dec 15||Dec 16||Dec 17||Dec 18||Dec 19||Dec 20|
|ORI||$||100.00 ||$||106.21 ||$||124.13 ||$||130.15 ||$||153.25 ||$||141.53 |
|S&P 500||100.00 ||111.96 ||136.40 |