UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(FEE REQUIRED)
For the fiscal year ended: December 31, 2018 OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(NO FEE REQUIRED)
For the transition period from _____________________________ to ______________________________
Commission File Number: 001-10607
OLD REPUBLIC INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | No. 36-2678171 | |
(State or other jurisdiction of | (IRS Employer Identification No.) | |
incorporation or organization) | ||
307 North Michigan Avenue, Chicago, Illinois | 60601 | |
(Address of principal executive office) | (Zip Code) | |
Registrant's telephone number, including area code: 312‑346‑8100 |
Securities registered pursuant to Section 12(b) of the Act: |
Title of each class | Name of Each Exchange on Which Registered |
Common Stock/$1 par value | 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: X/ 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:X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes: X/ No:
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes: X/No:
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S‑K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, 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 x Accelerated filer o
Non-accelerated filer o Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes: / No:X
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, 2018, the last day of the registrant's most recently completed second fiscal quarter, was $5,558,075,381.
The registrant had 302,775,042 shares of Common Stock outstanding as of January 31, 2019.
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.
Title | Part |
Proxy statement for the 2019 Annual Meeting of Shareholders Exhibits as specified in exhibit index (page 112) | III, Items 10, 11, 12, 13 and 14 IV, Item 15 |
______________________________________
There are 113 pages in this report
PART I
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 principally through a number of regulated insurance company subsidiaries organized into three major segments, namely, it's General Insurance Group (property and liability insurance), Title Insurance Group, and the Republic Financial Indemnity Group ("RFIG") (mortgage guaranty ("MI") and consumer credit indemnity ("CCI")) 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.
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Financial Information Relating to Segments of Business (a) ($ in Millions) | |||||||||||
Revenues (b) | |||||||||||
Years Ended December 31: | 2018 | 2017 | 2016 | ||||||||
General | $ | 3,739.4 | $ | 3,531.6 | $ | 3,354.7 | |||||
Title | 2,375.4 | 2,325.0 | 2,244.1 | ||||||||
Corporate & Other - net (c) | 46.3 | 50.1 | 35.4 | ||||||||
Subtotal | 6,161.3 | 5,906.8 | 5,634.3 | ||||||||
RFIG Run-off | 96.1 | 144.6 | 193.2 | ||||||||
Subtotal | 6,257.4 | 6,051.5 | 5,827.6 | ||||||||
Consolidated investment gains (losses) (b) | (235.6 | ) | 211.6 | 72.8 | |||||||
Consolidated | $ | 6,021.8 | $ | 6,263.1 | $ | 5,900.5 | |||||
Pretax Income (Loss) | |||||||||||
Years Ended December 31: | 2018 | 2017 | 2016 | ||||||||
General | $ | 363.9 | $ | 340.3 | $ | 319.9 | |||||
Title | 219.3 | 237.1 | 210.2 | ||||||||
Corporate & Other - net (c) | 40.4 | 9.9 | 13.0 | ||||||||
Subtotal | 623.8 | 587.3 | 543.3 | ||||||||
RFIG Run-off | 49.9 | (73.5 | ) | 69.8 | |||||||
Subtotal | 673.7 | 513.8 | 613.1 | ||||||||
Consolidated investment gains (losses) | (235.6 | ) | 211.6 | 72.8 | |||||||
Consolidated | $ | 438.1 | $ | 725.4 | $ | 686.0 | |||||
Assets | |||||||||||
As of December 31: | 2018 | 2017 | 2016 | ||||||||
General | $ | 16,411.4 | $ | 16,055.5 | $ | 15,305.7 | |||||
Title | 1,452.2 | 1,466.0 | 1,423.0 | ||||||||
Corporate & Other - net (c) | 726.7 | 1,076.8 | 957.9 | ||||||||
Subtotal | 18,590.3 | 18,598.4 | 17,686.7 | ||||||||
RFIG Run-off | 736.7 | 805.0 | 904.8 | ||||||||
Consolidated | $ | 19,327.1 | $ | 19,403.5 | $ | 18,591.6 | |||||
Shareholders' Equity (d) | |||||||||||
As of December 31: | 2018 | 2017 | 2016 | ||||||||
General (d) | $ | 3,024.6 | $ | 3,179.9 | $ | 2,957.2 | |||||
Title (d) | 673.6 | 641.8 | 554.7 | ||||||||
Corporate & Other - net (c) | 1,001.2 | 489.8 | 618.0 | ||||||||
Subtotal | 4,699.5 | 4,311.7 | 4,130.0 | ||||||||
RFIG Run-off | 446.7 | 421.6 | 330.6 | ||||||||
Consolidated | $ | 5,146.2 | $ | 4,733.3 | $ | 4,460.6 | |||||
(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 effective January 1, 2018, 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) | Shareholders' equity excludes intercompany financing arrangements for the following segments: General - $1,222.1, $1,097.1, and $1,007.1 as of December 31, 2018, 2017, and 2016, respectively; Title - $87.9, $97.9, and $143.9 as of December 31, 2018, 2017, and 2016, respectively. |
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General Insurance Group |
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)
______
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Commercial automobile, general liability and workers' compensation insurance policy coverages are typically produced in tandem for many assureds. For 2018, production of workers' compensation direct insurance premiums accounted for approximately 31.4% of consolidated General Insurance Group direct premiums written, while commercial automobile and general liability direct premium production amounted to approximately 32.5% and 12.2%, 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.
Title Insurance Group |
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, 2018, approximately 26% 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 74% 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 losses 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 |
Old Republic's RFIG run-off business consists of its mortgage guaranty and 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. 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. 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.
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.
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
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basis. Coverage for insurance issued in this manner was provided through primary insurance policies (loan level coverage) or pool insurance policies (aggregate coverage). The Company considers transactions designated as bulk insurance to be exposed to higher risk (as determined by such characteristics as origination channel, loan amount, credit quality, and extent of loan documentation) than those designated as other insurance.
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, RMIC's standard model of forecasted results extending through 2022 continues to reflect ultimate profitability for the book of business. In this regard a long-used RMIC standard model indicates that underwriting performance of the book of business should be positive over the run-off period assumed to end on or about December 31, 2022, though there is no guaranty of such an outcome.
As of December 31, 2018, RFIG's mortgage insurance subsidiaries had total statutory capital, inclusive of a contingency reserve of $433.1 million, of $515.0 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. Until year end 2017, CCI underwriting performance was affected negatively by significant litigation costs pertaining to claims settled or otherwise fully provided for through that date.
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 $14.6 million, $18.8 million, and $20.1 million in 2018, 2017 and 2016, 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 $6.8 million, $7.1 million, and $10.3 million in 2018, 2017 and 2016, respectively, was terminated and placed in run off as of year-end 2004.
Consolidated Underwriting Statistics |
The following table reflects underwriting statistics covering premiums and related loss, expense, and policyholders' dividend ratios for the major coverages underwritten in the Company's insurance segments.
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($ in Millions) | |||||||||||||||
Years Ended December 31: | 2018 | 2017 | 2016 | ||||||||||||
General Insurance Group: | |||||||||||||||
Overall Experience: (d) | |||||||||||||||
Net Premiums Earned | $ | 3,277.1 | $ | 3,110.8 | $ | 2,936.3 | |||||||||
Claim Ratio | 72.2 | % | 71.8 | % | 73.0 | % | |||||||||
Expense Ratio | 25.0 | 25.5 | 24.8 | ||||||||||||
Composite Ratio | 97.2 | % | 97.3 | % | 97.8 | % | |||||||||
Experience by Major Coverages: | |||||||||||||||
Commercial Automobile (Principally Trucking): | |||||||||||||||
Net Premiums Earned | $ | 1,206.1 | $ | 1,076.3 | $ | 988.6 | |||||||||
Claim Ratio | 79.3 | % | 76.8 | % | 79.4 | % | |||||||||
Workers' Compensation: | |||||||||||||||
Net Premiums Earned | $ | 1,018.5 | $ | 1,045.2 | $ | 1,072.5 | |||||||||
Claim Ratio | 70.7 | % | 75.5 | % | 76.1 | % | |||||||||
General Liability: | |||||||||||||||
Net Premiums Earned | $ | 203.6 | $ | 195.2 | $ | 163.3 | |||||||||
Claim Ratio | 68.9 | % | 73.1 | % | 77.5 | % | |||||||||
Three Above Coverages Combined: | |||||||||||||||
Net Premiums Earned | $ | 2,428.3 | $ | 2,316.8 | $ | 2,224.5 | |||||||||
Claim Ratio | 74.8 | % | 75.9 | % | 77.6 | % | |||||||||
Financial Indemnity: (a)(d) | |||||||||||||||
Net Premiums Earned | $ | 174.7 | $ | 153.1 | $ | 125.0 | |||||||||
Claim Ratio | 73.8 | % | 62.1 | % | 45.5 | % | |||||||||
Inland Marine and Commercial Multi-Peril: | |||||||||||||||
Net Premiums Earned | $ | 252.8 | $ | 236.7 | $ | 217.9 | |||||||||
Claim Ratio | 62.8 | % | 59.3 | % | 60.9 | % | |||||||||
Home and Automobile Warranty: | |||||||||||||||
Net Premiums Earned | $ | 297.5 | $ | 294.9 | $ | 274.6 | |||||||||
Claim Ratio | 63.5 | % | 60.5 | % | 65.3 | % | |||||||||
Other Coverages: (b) | |||||||||||||||
Net Premiums Earned | $ | 122.2 | $ | 108.1 | $ | 95.2 | |||||||||
Claim Ratio | 51.7 | % | 54.7 | % | 53.4 | % | |||||||||
Title Insurance Group: (c) | |||||||||||||||
Net Premiums Earned | $ | 1,885.6 | $ | 1,827.6 | $ | 1,742.4 | |||||||||
Combined Net Premiums & Fees Earned | $ | 2,336.1 | $ | 2,287.2 | $ | 2,206.6 | |||||||||
Claim Ratio | 2.1 | % | .9 | % | 3.8 | % | |||||||||
Expense Ratio | 90.0 | 90.0 | 87.9 | ||||||||||||
Composite Ratio | 92.1 | % | 90.9 | % | 91.7 | % | |||||||||
RFIG Run-off Business: (d) | |||||||||||||||
Net Premiums Earned | $ | 75.9 | $ | 122.9 | $ | 170.0 | |||||||||
Claim Ratio | 39.4 | % | 160.9 | % | 60.4 | % | |||||||||
Expense Ratio | 21.5 | 16.6 | 12.2 | ||||||||||||
Composite Ratio | 60.9 | % | 177.5 | % | 72.6 | % | |||||||||
All Coverages Consolidated: | |||||||||||||||
Net Premiums & Fees Earned | $ | 5,703.9 | $ | 5,539.7 | $ | 5,333.2 | |||||||||
Claim Ratio | 43.1 | % | 44.7 | % | 44.0 | % | |||||||||
Expense Ratio | 51.6 | 52.0 | 50.6 | ||||||||||||
Composite Ratio | 94.7 | % | 96.7 | % | 94.6 | % | |||||||||
Any necessary reclassifications of prior years' data are reflected in the above table to conform to current presentation.
(a) | Consists principally of fidelity, surety, executive indemnity (directors & officers and errors & omissions), and GAP coverages. |
(b) | Consists principally of aviation and travel accident coverages. |
(c) | Title claim, expense, and composite ratios are calculated on the basis of combined net premiums and fees earned. |
(d) | Consumer credit indemnity coverages are reported within the RFIG Run-off segment and have been excluded from the General Insurance Group. |
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The effect of the reclassified CCI coverage from the General Insurance Group's overall and financial indemnity underwriting statistics to the RFIG Run-off Business are as follows:
($ in Millions) | |||||||||||||||
Years Ended December 31: | 2018 | 2017 | 2016 | ||||||||||||
General insurance overall experience: | |||||||||||||||
Increase (decrease) in net premiums earned | $ | (1.5 | ) | $ | (13.0 | ) | $ | (15.8 | ) | ||||||
Percentage point increase (decrease) in claim ratio | .1 | % | (4.0 | )% | (1.3 | )% | |||||||||
Percentage point increase (decrease) in expense ratio | (.1 | ) | .1 | .1 | |||||||||||
Percentage point increase (decrease) in composite ratio | — | % | (3.9 | )% | (1.2 | )% | |||||||||
Financial Indemnity coverages: | |||||||||||||||
Increase (decrease) in net premiums earned | $ | (1.5 | ) | $ | (13.0 | ) | $ | (15.8 | ) | ||||||
Percentage point increase (decrease) in claim ratio | 1.9 | % | (76.1 | )% | (30.4 | )% | |||||||||
RFIG Run-off Business: | |||||||||||||||
Increase (decrease) in net premiums earned | $ | 1.5 | $ | 13.0 | $ | 15.8 | |||||||||
Percentage point increase (decrease) in claim ratio | (3.8 | )% | 103.3 | % | 26.3 | % | |||||||||
Percentage point increase (decrease) in expense ratio | 1.5 | .1 | .2 | ||||||||||||
Percentage point increase (decrease) in composite ratio | (2.3 | )% | 103.4 | % | 26.5 | % | |||||||||
Net Premiums Earned
With few exceptions, General insurance 2018 earned premiums grew for most types of coverages and markets served. The cumulative effects of recent years’ and ongoing premium rate increases for several insurance products, along with new business production were main contributors to premium growth. The greater premium levels stemmed primarily from commercial automobile (trucking), national accounts, executive indemnity and auto warranties. Positive earned premium trends throughout 2017 were unevenly distributed among various insurance coverages and sources of business. Gains were registered most prominently in commercial automobile (trucking), risk management and national accounts, and home and auto warranty. On the other hand, premium growth was constrained by low volume in a large account contractors book of business faced with a particularly competitive market place, and by reduced opportunities in gas and oil energy services and several smaller industry sectors. Premium volume from the new underwriting facility established in early 2015 also added measurably to earned premiums in all three years.
Growth in Title insurance 2018 premiums and fees reflect a slowdown in housing and mortgage lending activity during the year. The continuation of a generally positive mortgage rate environment and reasonably strong housing and commercial property markets were major factors in the year-over-year gain in premiums and fees in 2017.
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 at least 2011.
Claim Ratios
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:
8
Effect of Prior Periods' | ||||||||||||||
(Favorable)/ | Claim Ratio Excluding | |||||||||||||
Reported | Unfavorable Claim | Prior Periods' Claim | ||||||||||||
Claim Ratio | Reserves Development | Reserves Development | ||||||||||||
2014 | 77.9 | % | 3.9 | % | 74.0 | % | ||||||||
2015 | 74.1 | 1.5 | 72.6 | |||||||||||
2016 | 73.0 | 0.3 | 72.7 | |||||||||||
2017 | 71.8 | 0.7 | 71.1 | |||||||||||
2018 | 72.2 | % | — | % | 72.2 | % | ||||||||
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 by the lessening impacts from developments of prior years' reserve estimates. The claim ratio increase in 2018 resulted from recurring fiscal twelve month reserve evaluations of current and prior years' developing claim experience. Substantially all of this increase stemmed from the past decade's new books of business that are subject to ongoing adjustments to the underwriting and claim management processes. The claim ratio improved in 2017 compared to 2016. While current accident year claim ratios reflected moderate year-over-year declines, these were affected by moderately unfavorable developments of prior years’ reserves. The unfavorable developments were concentrated in the Company’s largest insurance coverages of workers’ compensation and general liability which were partially offset by favorable development trends in commercial automobile (trucking).
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 added 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. 2018's claim costs trended higher as favorable development of prior years’ claim reserve estimates edged down. 2017 claim costs were lower in the face of declining claims activity since the Great Recession years. Favorable developments of reserves established in prior years further reduced 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 | ||||||||||||
2014 | 5.2 | % | (0.8 | )% | 6.0 | % | ||||||||
2015 | 4.9 | (0.6 | ) | 5.5 | ||||||||||
2016 | 3.8 | (1.1 | ) | 4.9 | ||||||||||
2017 | 0.9 | (3.3 | ) | 4.2 | ||||||||||
2018 | 2.1 | % | (2.0 | )% | 4.1 | % | ||||||||
The ratio of RFIG Run-off - mortgage guaranty incurred claim costs to earned premiums were reduced by 27.0, 38.3 and 39.8 percentage points for 2018, 2017 and 2016, respectively. In each instance, the reductions reflect favorable developments of prior years’ claim reserves. MI claim costs for 2017, however, had risen most significantly due to third quarter additional claim provisions of $23.0 which added 20.9 percentage points to the claim ratio for the year.
The much more favorable RFIG Run-off - CCI claim ratio for 2018 reflects the absence of the litigation-induced claim costs and favorable development of previously established claim reserves. The 2017 year-over-year claim ratio comparison was most significantly affected by the additional $107.0 million claim and related expense provisions related to the final settlement and probable dispositions of all known litigated and other claim costs.
The consolidated claim, expense, and composite ratios reflect all the above factors and the changing period-to-period contributions of each segment to consolidated results.
9
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 incurrence of possibly higher or lower than anticipated claim costs due to all of these factors, and to the evolution, interpretation, and expansion of tort law, as well as the effects of unexpected jury verdicts.
In establishing claim reserves, the possible 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 ranging from 3.5% 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 $216.5 million, $240.7 million and $231.9 million, as of December 31, 2018, 2017 and 2016, 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.
10
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, 2018, 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, 2018 and 2017, Old Republic's aggregate indemnity and loss adjustment expense reserves specifically identified with A&E exposures amounted to approximately $105.8 million and $117.4 million gross, respectively, and $74.4 million and $96.4 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 4.3 years (gross) and 5.0 years (net of reinsurance) as of December 31, 2018 and 4.6 years (gross) and 6.3 years (net of reinsurance) as of December 31, 2017. 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, 2018, incurred A&E claim and related loss settlement costs have averaged .2% 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, 2018 and 2017. The status and fair value changes of each of the fixed maturity investments are reviewed at least once per quarter during the year, and estimates of other-than-temporary impairments ("OTTI") in the portfolio's value are evaluated and established at each quarterly balance sheet date.
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:
11
Consolidated Investments | |||||||||||
($ in Millions) | |||||||||||
December 31: | 2018 | 2017 | |||||||||
Available for Sale | |||||||||||
Fixed Maturity Securities: | |||||||||||
U.S. & Canadian Governments | $ | 1,524.4 | $ | 1,552.2 | |||||||
Corporate | 6,658.3 | 6,730.0 | |||||||||
8,182.8 | 8,282.3 | ||||||||||
Short-term Investments | 354.9 | 670.1 | |||||||||
Total available for sale | 8,537.8 | 8,952.4 | |||||||||
Held to Maturity | |||||||||||
Fixed Maturity Securities: | |||||||||||
Tax-Exempt | 1,044.8 | 1,067.4 | |||||||||
Equity Securities | 3,380.9 | 3,265.5 | |||||||||
Other Investments | 31.0 | 32.5 | |||||||||
Total Investments | $ | 12,994.6 | $ | 13,318.0 | |||||||
Sources of Consolidated Investment Income | |||||||||||||||
($ in Millions) | |||||||||||||||
Years Ended December 31: | 2018 | 2017 | 2016 | ||||||||||||
Fixed Maturity Securities: | |||||||||||||||
Taxable Interest | $ | 278.4 | $ | 272.7 | $ | 285.0 | |||||||||
Tax-Exempt Interest | 20.7 | 20.4 | 11.5 | ||||||||||||
299.2 | 293.2 | 296.6 | |||||||||||||
Equity Securities Dividends | 124.0 | 110.9 | 88.2 | ||||||||||||
Other Investment Income: | |||||||||||||||
Interest on Short-term Investments | 9.8 | 5.4 | 2.1 | ||||||||||||
Other Sources | 4.9 | 4.5 | 3.9 | ||||||||||||
14.8 | 9.9 | 6.0 | |||||||||||||
Gross Investment Income | 438.1 | 414.1 | 390.9 | ||||||||||||
Less: Investment Expenses (a) | 6.2 | 4.6 | 3.8 | ||||||||||||
Net Investment Income | $ | 431.8 | $ | 409.4 | $ | 387.0 | |||||||||
__________
(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, $9.2 billion and $9.3 billion at December 31, 2018 and 2017, respectively, represented approximately 48% of consolidated assets for both years, and 65% and 64% of consolidated liabilities, respectively, as of December 31, 2018 and 2017.
12
Credit Quality Ratings of Fixed Maturity Securities (b) | |||||||||
December 31: | 2018 | 2017 | |||||||
(% of total portfolio) | |||||||||
Aaa | 20.9 | % | 21.6 | % | |||||
Aa | 12.8 | 12.9 | |||||||
A | 31.5 | 31.8 | |||||||
Baa | 29.1 | 27.5 | |||||||
Total investment grade | 94.3 | 93.8 | |||||||
All other (c) | 5.7 | 6.2 | |||||||
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 | |||||||||
December 31: | 2018 | 2017 | |||||||
(% of total portfolio) | |||||||||
Maturity Ranges: | |||||||||
Due in one year or less | 7.0 | % | 9.2 | % | |||||
Due after one year through five years | 51.6 | 45.5 | |||||||
Due after five years through ten years | 40.7 | 44.1 | |||||||
Due after ten years through fifteen years | .6 | 1.0 | |||||||
Due after fifteen years | .1 | .2 | |||||||
100.0 | % | 100.0 | % | ||||||
Average Maturity in Years | 4.5 | 4.7 | |||||||
(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 generally represent other insurance companies, and by direct sales. No single source accounted for over 10% of Old Republic's premium volume in 2018.
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 2018, approximately 74% 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.
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
13
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 | |||||||||||
2018 | 2017 | 2016 | |||||||||
United States: | |||||||||||
Northeast | 11.9 | % | 12.3 | % | 12.3 | % | |||||
Mid-Atlantic | 7.3 | 7.5 | 7.9 | ||||||||
Southeast | 20.9 | 20.8 | 20.2 | ||||||||
Southwest | 11.6 | 11.1 | 11.3 | ||||||||
East North Central | 11.2 | 11.8 | 12.1 | ||||||||
West North Central | 10.1 | 10.3 | 10.6 | ||||||||
Mountain | 8.2 | 7.9 | 7.4 | ||||||||
Western | 16.1 | 16.3 | 16.4 | ||||||||
Foreign (Principally Canada) | 2.7 | 2.0 | 1.8 | ||||||||
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, 2018.
14
Major General Insurance Balances Due from Reinsurers | ||||||||||||||||||||
($ in Millions) | % of Total | |||||||||||||||||||
A.M. | Reinsurance Recoverable | Total | Consolidated | |||||||||||||||||
Best | on Paid | on Claim | Exposure | Reinsured | ||||||||||||||||
Reinsurer | Rating | Claims | Reserves | to Reinsurer | Liabilities | |||||||||||||||
Munich Re America, Inc. | A+ | $ | 9.1 | $ | 321.1 | $ | 330.3 | 10.9 | % | |||||||||||
Archway Insurance, Ltd. | Unrated | — | 297.6 | 297.6 | 9.8 | |||||||||||||||
Hannover Ruckversicherungs | A+ | 2.8 | 211.0 | 213.8 | 7.1 | |||||||||||||||
Swiss Reinsurance America Corporation | A+ | 7.5 | 164.2 | 171.8 | 5.7 | |||||||||||||||
AXIS Reinsurance Company | A+ | .2 | 120.6 | 120.8 | 4.0 | |||||||||||||||
Summit Insurance, Ltd. | Unrated | — | 109.2 | 109.3 | 3.6 | |||||||||||||||
Global Vision II | Unrated | — | 105.9 | 105.9 | 3.5 | |||||||||||||||
National WC Reinsurance Pool | Unrated | 1.6 | 93.8 | 95.4 | 3.1 | |||||||||||||||
Endurance Assurance Corporation | A+ | .1 | 88.6 | 88.8 | 2.9 | |||||||||||||||
Trabaja Reinsurance Company | Unrated | 1.4 | 81.5 | 82.9 | 2.7 | |||||||||||||||
$ | 23.0 | $ | 1,594.1 | $ | 1,617.1 | 53.3 | % | |||||||||||||
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 unrecoverable amounts 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 insurers owned by or affiliated with lending institutions, financial and other intermediaries, and 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) $37,700 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
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in December 2007 through the Terrorism Risk Insurance Program Reauthorization Act (the "TRIPRA") of 2007, a seven year extension that expired in December 2014. In January 2015, Congress passed the TRIPRA of 2015 that extended the program through 2020.
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 is $180 million and $200 million for 2019 and 2020, respectively. 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 reaches 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, 2018 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 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.
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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. The Company anticipates additional information security and privacy laws and regulations to be forthcoming.
(g) Employees. As of December 31, 2018, Old Republic and its subsidiaries employed approximately 9,000 persons on a full time basis. Approximately 50% of this total was represented by employees associated with the Company's title insurance segment. A majority of eligible full time employees participate in various pension plans (all of which are frozen) or other plans which provide benefits payable upon retirement. Eligible employees are also covered by hospitalization and major medical insurance, group life insurance, and various savings, profit sharing, and deferred compensation plans. The Company considers its employee relations to be good.
(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 internet 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 internet website (http://www.oldrepublic.com), selecting Investors then SEC Filings to view or print copies of the electronic versions of the Company's reports. The contents of the Company's internet 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
Risk factors are uncertainties and events over which the Company has limited or no control, and which can have a materially adverse effect on its business, results of operations or financial condition. The Company and its business segments are subject to a variety of such risk factors and, within individual segments, each type of insurance coverage may be exposed to risk factors specific to them. The following sections set forth management's evaluation of material risk factors for the Company as a whole and for each business segment. There may be risks which management does not presently consider to be material that may later prove to be material risk factors as well.
Parent Company |
Dividend Dependence and Liquidity
The Company is an insurance holding company with no operations of its own. Substantially all of its assets consist of those used for the business conducted by its insurance subsidiaries. It relies upon dividends from such subsidiaries in order to pay the interest and principal on its debt obligations, dividends to its shareholders, and corporate expenses. The extent to which the insurance subsidiaries are able to declare and pay dividends is subject to regulations under the laws of their states or foreign jurisdictions of domicile. The regulations limit dividends based on the amount of statutory adjusted unassigned surplus or statutory earnings, and require the insurance subsidiaries to maintain minimum amounts of capital, surplus and reserves. Dividends in excess of the ordinary limitations can only be declared and paid with prior regulatory approval, of which there can be no assurance. The inability of the insurance subsidiaries to pay dividends in an amount sufficient to meet the Company's debt service and cash dividends on stock, as well as other cash requirements could result in liquidity issues.
Capitalization
Apart from dividends and interest on intercompany financing arrangements from its subsidiaries, the Company has access to various capital and liquidity resources including holding company investments and the public debt and equity capital markets. The availability of all such capital sources cannot, however, be assured and its cost could be significant at the time capital is raised. At December 31, 2018, the Company's consolidated debt to equity ratio was 19.1%.
Risk Factors Common to the Company and its Insurance Subsidiaries |
Investment Risks
The Company’s investment portfolio consists primarily of highly rated debt securities and large capitalization common stocks. Its investments are subject to market-wide risks and fluctuations, as well as to risks inherent in particular securities. Changing or unprecedented market conditions could materially impact the future valuation of securities in its investment portfolio. This could cause the Company to impair the carrying value of some portion of those debt securities in the future. Volatility or illiquidity in the markets in which the Company holds positions may cause certain other-than-temporary impairments within its portfolio and thus lead to potentially significant adverse effects on the Company’s liquidity, financial condition and operating results.
Income from the Company’s investment portfolio is one of its primary sources of cash flow to support operations and claim payments. Should the Company improperly structure its investment portfolio to meet those future liabilities or should it have unexpected losses, including losses resulting from the forced liquidation of investments before their maturity or under adverse securities markets conditions, the Company could be unable to meet those obligations. The Company’s investments and investment policies are subject to the provisions of state insurance laws, which results in its portfolio
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being predominantly limited to highly rated fixed income securities. Interest rates on fixed income securities have been at historical lows. In the event that interest rates should rise above those of the Company’s fixed income securities, the market value of the Company’s investment portfolio would decline. Any significant decrease in the value of the Company’s investment portfolio could adversely impact its GAAP financial condition, but not necessarily the statutory financial condition of its insurance subsidiaries since their fixed maturities portfolio is generally stated at amortized cost from a regulatory standpoint.
Compared to historical averages, interest rates and investment yields on highly rated investments have generally declined, which has the effect of limiting the investment income the Company can generate. The Company depends on its investments as a source of revenue, and a prolonged period of low investment yields would have an adverse impact on its revenues and could potentially adversely affect its operating results.
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. While the Company’s portfolio consists mostly of highly-rated investments and complies with applicable regulatory requirements, the success of its investment activity is affected by general economic conditions, which may adversely affect the markets for credit and interest-rate-sensitive securities, including the extent and timing of investor participation in these markets, the level and volatility of interest rates and, consequently, the value of fixed-income securities.
Excessive Losses and Loss Expenses
Although the Company's business segments encompass different types of insurance, the greatest risk factor common to all insurance coverages is excessive losses due to unanticipated claims frequency, severity or a combination of both. Many of the factors affecting the frequency and severity of claims depend upon the type of insurance coverage, but others are shared in common. Severity and frequency can be affected by changes in national economic conditions, unexpectedly adverse outcomes in claims litigation, often as a result of unanticipated jury verdicts, changes in court made law, adverse court interpretations of insurance policy provisions resulting in increased liability or new judicial theories of liability, together with unexpectedly high costs of defending claims.
Inadequate Reserves
Reserves are the amounts that an insurance company sets aside for its anticipated policy liabilities. Claim reserves are an estimate of liability for reported unpaid claims as well as defense and claim adjustment expenses, and IBNR claims. It is not possible to calculate precisely what these liabilities will amount to in advance and, accordingly, the reserves represent a best estimate at any point in time. Such estimates are based upon known historical loss data, certain assumptions and expectations of future trends in claim frequency and severity, inflation and other economic considerations. The latter are affected by a variety of factors over which insurers may have little or no control and which may exhibit significant volatility over time.
Reserve estimates are periodically reviewed in light of known developments and, where necessary, they are adjusted and refined as circumstances may warrant. Nevertheless, the reserve setting process is inherently uncertain. If for any of these reasons reserve estimates prove to be inadequate, the Company's subsidiaries can be forced to increase their reported liabilities; such occurrences could result in possibly material adverse impacts on their results of operations and financial condition.
Inadequate Pricing
Premium rates are generally determined on the basis of historical data for claim frequency and severity as well as related production and other expense patterns. In the event ultimate claims and expenses exceed historically projected levels, premium rates are likely to prove insufficient. Premium rate inadequacy may not become evident quickly, may require time to correct, and, much like excessive losses can affect adversely the Company's business, operating results and financial condition.
Liquidity Risk
As indicated above, the Company manages its fixed-maturity investments with a view toward matching the maturities of those investments with the anticipated liquidity needs of its subsidiaries for the payment of claims and expenses. If a subsidiary suddenly experienced greater-than-anticipated liquidity needs for any reason, it could require an injection of funds that might not necessarily be available to meet its obligations at a point in time. Alternatively, invested securities may need to be sold at a loss and thus impact adversely both financial condition and operating results.
Regulatory Environment
The Company's insurance businesses are subject to extensive governmental regulation under state laws in the U.S. and the laws of each of the few other jurisdictions outside the U.S. in which they operate. These regulations relate to such matters as licensing requirements, types of insurance products that may be sold, premium rates, marketing practices, capital and surplus requirements, investment limitations, underwriting limitations, dividend payment limitations, transactions with affiliates, accounting practices, taxation and other matters. While most of the regulation is at the state level in the U.S., the federal government has increasingly expressed an interest in regulating the insurance business and has injected itself through the Graham-Leach-Bliley Act, the Patriot Act, the Dodd-Frank Wall Street Reform and
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Consumer Protection Act of 2009. Likewise, changes in the Internal Revenue Code and other regulations bear directly on the costs of conducting an insurance business through increased compliance expenses.
Apart from the rising costs of compliance, as existing regulations evolve through administrative and court interpretations, and as new regulations are adopted, there is no basis for predicting the impact that changes could have on the Company's businesses in the future. The impact could have a material adverse effect on the manner in which the company's subsidiaries do business, and or their ability to compete, to continue offering their existing products, or to pursue acquisitions and growth opportunities.
Competition
Each of the Company's lines of continuing insurance business is highly competitive and is likely to remain so for the foreseeable future. Moreover, existing competitors and the capital markets have from time to time brought an influx of capital and newly-organized entrants into the industry, and changes in laws have enabled financial institutions, like banks and savings and loans, to sell insurance products. Increases in competition threaten to reduce demand for the Company's insurance products, reduce its market share and growth prospects, and potentially reduce its profitability.
Exposure to Independent Rating Downgrades
The competitive positions of insurance companies in general have come to depend increasingly on independent ratings of their financial strength and claims-paying ability. The rating agencies base their ratings on criteria they establish regarding an insurer's financial strength, operating performance, strategic position and ability to meet its obligations to policyholders. A significant downgrade in the ratings of any of the Company's major policy-issuing subsidiaries could have a materially adverse effect on their ability to compete for new business and retain existing business and, as a result, their operating results and financial condition.
Financial Institutions Risk
The Company's subsidiaries have significant business relationships with financial institutions, particularly national banks. The subsidiaries are the beneficiaries of a considerable amount of security in the form of letters of credit and trusteed funds and investments which they hold as collateral securing the obligations of insureds and certain reinsurers. Some of the banks themselves have subsidiaries that reinsure the Company's business. 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. 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.
Risk Management
The Company has established processes and procedures designed to identify, measure, analyze, monitor and report the types of risk the Company and its subsidiaries are subject to, including operational risk, market risk, credit risk, liquidity risk, investment risk, interest rate risk, legal risk and reputational risk, among others. There are inherent limitations in such processes and procedures, and as a result, there is always the possibility that the Company has not adequately identified or anticipated risks. Such inadequacies could lead to future unexpected losses or expenses.
Legal Risks
The Company and certain of its subsidiaries are from time to time named defendants or otherwise involved in various legal proceedings, including class actions and other litigation or arbitration proceedings with third parties, as well as proceedings by regulatory agencies. Any of these actions could result in judgments, settlements, fines or penalties which could materially adversely affect the Company's or its subsidiaries' business, financial condition or results of operations.
Acquisition Integration Risk
The Company has from time to time grown its business by acquisition and is likely to consider acquisitions in the future. There can never be any assurance that such acquisitions will have positive accretive results. Integration of an acquired business can be costly and complex. The integration of acquisitions already completed, as well as any that may be completed in the future could result in significant unanticipated costs or losses of one sort or another.
Attracting and Retaining Qualified Employees
The Company's and its subsidiaries' employees at all levels are among their most important assets. Should the Company and its subsidiaries for any reason be unable to attract and retain qualified employees, their performance could be materially adversely affected.
Information Technology Systems
To perform day to day operations as well as communicate with customers, business partners and other stakeholders, the Company is reliant 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 use 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
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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 such information confidential, it may be unable to do so in all events, especially with clients, vendors, service providers, and other third parties.
Like other large companies, the Company 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. The Company does maintain cyber risk insurance; however this insurance may not cover all costs associated with the consequences of personal, confidential or proprietary information being compromised.
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 but not limited to:
•Remediation costs, such as liability for stolen assets or information and repairs of system damage;
•Lost revenues resulting from the unauthorized use of proprietary information or any down-time of critical
information technology tools and infrastructure;
•Litigation and legal costs;
•Increased cyber risk insurance premiums;
•Reputational damage that adversely affects customer or investor confidence; and
•Damage to the Company’s competitiveness, stock price and long-term shareholder value.
Furthermore, the Company’s businesses are subject to compliance 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 the Company to litigation and investigations and result in reputational harm, which could have a material adverse effect on its business, cash flows, financial condition and results of operations.
As the breadth and inter-connectedness of the Company’s security infrastructure continues to expand and reliance on technology resources grows, so will the risk of potential privacy and security events. The Company is continuously evaluating and enhancing its privacy and security processes. While the Company takes a risk-based approach and adheres both to statutorily required and commercially reasonable measures to keep systems and data secure, such measures may be insufficient.
In addition to the foregoing, the following are risk factors that are particular to each of the Company's three major business segments.
General Insurance Group |
Catastrophic Losses
While the Company limits the property exposures it assumes, the casualty or liability insurance it underwrites creates an 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, 2020, primary insurers like the Company's general insurance subsidiaries retain significant exposure for terrorist act-related losses.
Long-Tailed Losses
Coverage for general liability is considered long-tailed coverage. Written in most cases on an "occurrence" basis, it often takes longer for covered claims to be reported and become known, adjusted and settled than it does for property claims, for example, which are generally considered short-tailed. The extremely long-tailed aspect of such claims as
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pollution, asbestos, silicosis, manganism (welding rod fume exposure), black lung, lead paint and other toxic tort 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. While the Company believes that it has reasonably estimated its liabilities for such exposures to date, and that its exposures are relatively modest, there is a risk of materially adverse developments in both known and as-yet-unknown claims.
Workers' Compensation Coverage
Workers' compensation coverage is one of the largest lines of insurance written by the Company's General Insurance subsidiaries. The frequency and severity of claims, and the adequacy of reserves for workers' compensation claims and expenses can all be significantly influenced by such risk factors as future wage inflation in states that index benefits, the speed with which injured employees are able to return to work in some capacity, the cost and rate of inflation in medical treatments, the types of medical procedures and treatments, the cost of prescription medications, the frequency with which closed claims reopen for additional or related medical issues, the mortality of injured workers with lifetime benefits and medical treatments, the use of health insurance to cover some of the expenses, the assumption of some of the expenses by states' second injury funds, the use of cost containment practices like preferred provider networks, and the opportunities to recover against third parties through subrogation. Adverse developments in any of these factors, if significant, could have a materially adverse effect on the Company's operating results and financial condition.
Reinsurance
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 it 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.
Reinsurance does not relieve the reinsured company of its primary liability to its insureds in the event of a loss. It merely reimburses the reinsured company. The ability and willingness of reinsurers to honor their counterparty obligations to the Company represent credit risks. Old Republic has no practical basis for evaluating the risks assumed by a reinsurer from sources other than its own. Those risks could result in a significant deterioration of the reinsurer's ability to honor its obligations to the Company, thereby exacerbating credit risk exposure.
Old Republic addresses these risks by limiting its reinsurance placements to those reinsurers it considers the best credit risks. In recent years, however, there has been an ever decreasing number of reinsurers so considered. 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 be forced to reduce the volume of business it writes or retain increased amounts of liability exposure. Because of the declining number of acceptable reinsurers, there is a risk that too much reinsurance risk may become concentrated in too few reinsurers. These concentrations of risk could adversely affect the Company's business, results of operations, and financial condition.
Insureds as Credit Risks
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 utilizing large deductibles, captive insurance risk retentions, or other arrangements whereby the insureds effectively retain and fund varying and at times significant amounts of their losses. Their financial strength and ability to pay are carefully evaluated as part of the underwriting process and monitored periodically thereafter, and their retained exposures are estimated and collateralized based on pertinent credit analysis and evaluation. Because the Company is primarily liable for losses incurred under its policies, the possible failure or inability of insureds to honor their retained liability represents a credit risk. Any subsequently developing shortage in the amount of collateral held would also be a risk, as would the failure or inability of a bank to honor a draw on a collateral trust or a letter of credit issued as collateral. These risk factors could have a materially adverse impact on the Company's results of operations and financial condition.
Guaranty Funds and Residual Markets
In nearly all states, licensed property and casualty insurers are required to participate in guaranty funds through assessments covering a portion of insurance claims against impaired or insolvent property and casualty insurers. Any increase in the number or size of impaired companies would likely result in an increase in the Company's share of such assessments.
Many states have established second injury funds that compensate injured employees for aggravation of prior injuries or conditions. These second injury funds are funded by assessments or premium surcharges.
Residual market or pooling arrangements exist in many states to provide various types of insurance coverage to those that are otherwise unable to find private insurers willing to insure them. All licensed property and casualty insurers writing such coverage voluntarily are required to participate in these residual market or pooling mechanisms.
A material increase in any of these assessments or charges could adversely affect the Company's results of operations and financial condition.
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Prior Approval of Rates
Most of the insurance coverages underwritten by the Company are subject to prior regulatory approval of premium rates in a majority of the states. The process of securing regulatory approval can be time consuming and can impair the Company's ability to effect necessary rate increases in an expeditious manner. Furthermore, there is a risk that the regulators will not approve a requested increase, particularly in regard to workers' compensation insurance with respect to which rate increases often confront strong opposition from local business, organized labor, and political interests.
Title Insurance Group |
Housing and Mortgage Lending Markets
The tightening and collapse of credit markets, the collapse of the housing market, the general decline in the value of real property, the rise in unemployment, and the uncertainty and negative trends in general economic conditions that began in 2006 created a difficult operating environment for the Company's title insurance subsidiaries. While these conditions have since improved to varying degrees, any return of these recessionary conditions could have a materially adverse effect on these subsidiaries' financial condition and results of operation over the near and longer terms. The impact of these conditions was somewhat mitigated both by lower mortgage interest rates, which lead to an increase in mortgage refinancings and by a rise in the number of agents producing business for the Companies' title insurance subsidiaries. Future rises in mortgage interest rates, however, could result in a decline in refinancing activity and reduced housing affordability which, in turn, could result in fewer transactions and reduced title insurance business.
Competition
Business comes to title insurers primarily by referral from real estate agents, lenders, developers and other settlement providers. The sources of business lead to a great deal of competition among title insurers. Although the top four title insurance companies during 2018 accounted for about 85% of industry-wide premium volume, there are numerous smaller companies representing the remainder at the regional and local levels. The smaller companies are an ever-present competitive risk in the regional and local markets where their business connections can give them a competitive edge. Moreover, there is always competition among the major companies for key employees, especially those engaged in business production. Unlike the three other large national title insurers, the Company’s title insurance subsidiaries rely upon independent agencies to produce most of their business. Independent agencies can direct business to any title insurer, whereas owned agencies will typically direct business solely to their parent or affiliated title insurers. The Company’s title subsidiaries are therefore more vulnerable to a loss of business than other title companies that rely on direct production facilities.
Regulation and Litigation
Regulation is also a risk factor for title insurers. The title insurance industry has recently been, and continues to be, under regulatory scrutiny in a number of states with respect to pricing practices, and alleged RESPA violations and unlawful rebating practices. The regulatory investigations could lead to industry-wide reductions in premium rates and escrow fees, the inability to get rate increases when necessary, as well as to changes that could adversely affect the Company's ability to compete for or retain business or raise the costs of additional regulatory compliance.
From time to time the Company's title insurance subsidiaries are named as defendants or are otherwise involved in various legal proceedings, including class actions and other litigated disputes with third parties, and proceedings or civil investigations brought by regulatory agencies. Any resulting adverse judgments, settlements, fines, penalties or other rulings could have, directly or indirectly, a material adverse effect on the Company's financial condition, results of operations or business reputation. Litigation or other disputes between the Company’s mortgage insurance subsidiaries and insured mortgage lenders could also have an adverse effect on the Company’s title insurance subsidiaries if, as a result, the lenders threatened to or discontinued accepting title insurance or title related services from the Company’s title insurers.
Other Risks
Inadequate title searches are among the risk factors faced by the entire industry. When the search is less than thorough or complete, title defects can go undetected and claims result.
Fraud is also a risk factor for all title companies -- sometimes in the form of an agent's or an employee's defalcation of escrowed funds, sometimes in the form of fraudulently issued title insurance policies.
RFIG Run-off Business |
Mortgage Guaranty Business in Run-off; Possible Material Losses, Statutory Capital Impairment, and Receivership
The material increases in mortgage guaranty insurance claims and loss payments that began in 2007 gradually depleted RMIC's statutory capital base and forced it to discontinue writing new business in 2011. The insurance laws of 16 jurisdictions, including RMIC's and RMGIC’s domiciliary state of North Carolina, require a mortgage insurer to maintain a minimum amount of statutory capital relative to risk in force (or a similar measure) in order to continue to write new
22
business. The formulations currently allow for a maximum risk-to-capital ratio of 25 to 1, or alternatively stated, a “minimum policyholder position” (“MPP”) of one-twenty-fifth of the total risk in force. The failure to maintain the prescribed minimum capital level in a particular state generally requires a mortgage insurer to immediately stop writing new business until it reestablishes the required level of capital or receives a waiver of the requirement from a state's insurance regulatory authority. RMIC breached the minimum capital requirement during the third quarter of 2010. RMIC and RMGIC were placed under administrative supervision by the North Carolina Department of Insurance ("NCDOI") in 2012 and ultimately ordered to defer the payment of 40% of all settled claims as a deferred payment obligation ("DPO").
On July 1, 2014, the NCDOI issued a Final Order approving an Amended and Restated Corrective Plan (the "Amended Plan") submitted jointly on April 16, 2014, by RMIC and RMGIC. Under the Amended Plan, RMIC and RMGIC were authorized to pay 100% of their DPOs accrued as of June 30, 2014, and to settle all subsequent valid claims entirely in cash, without establishing any DPOs. In anticipation of receiving this Final Order, ORI invested $125.0 million in cash and securities in RMIC in June 2014. In mid-July 2014, in furtherance of the Final Order, RMIC and RMGIC processed payments of their accumulated DPO balances of approximately $657.0 million relating to fully settled claims charged to periods extending between January 19, 2012 and June 30, 2014. The NCDOI subsequently terminated the summary orders which placed RMIC and RMGIC under administrative supervision effective December 8, 2017, thereby releasing both companies from its supervision as they were eminently solvent.
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.
Premium Income and Long-Term Claim Exposures
Mortgage insurers such as the Company issue long duration, guaranteed renewable policies covering multi-year periods during which exposure to loss exists. Loss exposures typically manifest themselves as recurring losses usually concentrated between the second and fifth year following issuance of any one year's new policies. Additionally, the policies cover catastrophic aggregations of claims such as those that occurred during the Great Recession of 2007 to 2012 which was engendered by substantial market dislocations in the housing and mortgage lending industries, in particular.
The Company's mortgage guaranty premiums stem principally from monthly installment policies. Such premiums are written and earned in the month coverage is effective. Recognition of claim costs, however, occurs only after an insured mortgage loan has missed two or more consecutive monthly payments. Accordingly, GAAP revenue recognition is not appropriately matched to the risk exposure and the consequent recognition of both normal and, most significantly, future catastrophic loss occurrences. As a result, mortgage guaranty GAAP earnings for any individual year or series of years may be materially adversely affected, particularly by cyclical catastrophic loss events such as the mortgage insurance industry experienced between 2007 and 2012. Reported GAAP earnings and financial condition form, in part, the basis for significant judgments and strategic evaluations made by management, analysts, investors, and other users of the financial statements issued by mortgage guaranty companies. The risk exists that such judgments and evaluations are at least partially based on GAAP financial information that does not necessarily match revenues and expenses and is not reflective of the long-term normal and catastrophic risk exposures assumed by mortgage guaranty insurers at any point in time. This risk is inherent in the models on which the run-off of RMIC's and RMGIC's business is based.
Inadequate Loss Reserves
The Company establishes reserves for losses and loss adjustment expenses for its mortgage and consumer credit indemnity insurance coverages based upon loans reported 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 its judgments and assumptions regarding the housing and mortgage markets, unemployment rates and economic trends in general. During the ongoing sustained economic downturn, loss reserve estimates have become subject to even greater uncertainty and volatility. The rate and severity of actual losses could prove to be greater than expected and require the Company to effect substantial increases in its loss reserves. Depending upon the magnitude, such increases could have a materially adverse impact on the Company's mortgage insurance and consumer credit indemnity insurance run-off business and the Company's consolidated results of operations and financial condition. There can be no assurance that the actual losses for the mortgage insurance and consumer credit indemnity coverages will not be materially greater than previously established loss reserves.
Fewer Coverage Rescissions
The Company may rescind its mortgage guaranty and consumer credit indemnity coverages whenever it finds evidence that a loan did not qualify for insurance coverage in the first instance, or that a material misrepresentation had been made in the loan application by the borrower, the lender, and/or its agent. Between 2008 and 2010 the number and rate of coverage rescissions and claim denials rose dramatically. As a result, rescissions reduced materially the percentage of approved claims, and loss reserving estimates have reflected assumptions about the levels of rescission activity. Since 2010 the number and rate of rescissions and denials has continued to decline.
23
Certain policyholders experienced high rates of coverage rescission and instituted litigation or arbitration proceedings challenging the Company's position on rescissions. Whether the current rescission rates continue or decline, it is possible that further litigation or arbitral challenges to the Company's rescissions of coverage could arise. If any of the challenges are successful, they could have a materially adverse effect on the Company's mortgage guaranty and/or consumer credit indemnity run-off insurance business and consolidated operating results and financial position. Even if such challenges should prove unsuccessful, the costs of addressing them through litigation could be substantial.
Item 1B - Unresolved Staff Comments
None
Item 2 - Properties
The principal executive offices of the Company are located in the Old Republic Building in Chicago, Illinois. This Company-owned building contains 151,000 square feet of floor space of which approximately 50% is occupied by Old Republic, and the remainder is leased to others. 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. This building contains 110,000 square feet of floor space of which approximately 95% is occupied by the Title Insurance Group and an affiliated Old Republic subsidiary, with the remainder leased to others. Six smaller buildings are owned by Old Republic and its subsidiaries in various parts of the nation and are primarily used for its business. The carrying value of all owned buildings and related land at December 31, 2018 was $49.1 million.
Certain 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, 2018, the Company did not have material non-claim litigation exposures in its consolidated business for which adequate loss and related expense provisions had not been made.
Item 4 - Mine Safety Disclosures
Not applicable.
PART II
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, 2019, there were 2,071 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, 2018. 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.
24
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, 2018)
Dec 13 | Dec 14 | Dec 15 | Dec 16 | Dec 17 | Dec 18 | ||||||||||||||||||
ORI | $ | 100.00 | $ | 88.85 | $ | 118.44 | $ | 125.65 | $ | 146.81 | $ | 153.39 | |||||||||||
S&P 500 | 100.00 | 113.69 | 115.26 | 129.05 | 157.22 | 150.33 | |||||||||||||||||
Peer Group | 100.00 | 113.38 | 123.49 | 139.31 | 155.21 | 132.29 | |||||||||||||||||
The Peer Group which has been approved by the Compensation Committee of the Company's Board of Directors consists of the following publicly held corporations with which the Company competes in various regards: American Financial Group, Inc., American International Group, Inc., W.R. Berkley Corporation, Chubb Limited, Cincinnati Financial Corporation, CNA Financial Corporation, Fidelity National Financial, Inc., First American Financial Corporation, The Hartford Financial Services Group, Inc., Stewart Information Services Corporation, and Travelers Companies, Inc.
25
Item 6 - Selected Financial Data ($ in millions, except share data) | ||||||||||||||||||||||||
December 31: | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||||||
FINANCIAL POSITION: | ||||||||||||||||||||||||
Cash and Invested Assets (a) | $ | 13,187.4 | $ | 13,536.4 | $ | 12,995.8 | $ | 11,475.5 | $ | 11,291.6 | ||||||||||||||
Other Assets | 6,139.6 | 5,867.1 | 5,595.7 | 5,626.1 | 5,685.2 | |||||||||||||||||||
Total Assets | $ | 19,327.1 | $ | 19,403.5 | $ | 18,591.6 | $ | 17,101.6 | $ | 16,976.9 | ||||||||||||||
Liabilities, Other than Debt | $ | 13,199.4 | $ | 13,221.5 | $ | 12,602.2 | $ | 12,278.9 | $ | 12,099.0 | ||||||||||||||
Debt | 981.4 | 1,448.7 | 1,528.7 | 952.8 | 953.7 | |||||||||||||||||||
Total Liabilities | 14,180.8 | 14,670.2 | 14,130.9 | 13,231.7 | 13,052.8 | |||||||||||||||||||
Preferred Stock | — | — | — | — | — | |||||||||||||||||||
Common Shareholders' Equity | 5,146.2 | 4,733.3 | 4,460.6 | 3,869.8 | 3,924.0 | |||||||||||||||||||
Total Liabilities and Shareholders' Equity | $ | 19,327.1 | $ | 19,403.5 | $ | 18,591.6 | $ | 17,101.6 | $ | 16,976.9 | ||||||||||||||
Total Capitalization (b) | $ | 6,127.6 | $ | 6,182.0 | $ | 5,989.4 | $ | 4,822.7 | $ | 4,877.8 | ||||||||||||||
Years Ended December 31: | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||||||
RESULTS OF OPERATIONS: | ||||||||||||||||||||||||
Net Premiums and Fees Earned | $ | 5,703.9 | $ | 5,539.7 | $ | 5,333.2 | $ | 5,179.4 | $ | 4,811.1 | ||||||||||||||
Net Investment and Other Income | 553.5 | 511.7 | 494.3 | 495.4 | 447.1 | |||||||||||||||||||
Investment Gains (Losses) (c) | (235.6 | ) | 211.6 | 72.8 | 91.3 | 272.3 | ||||||||||||||||||
Net Revenues | 6,021.8 | 6,263.1 | 5,900.5 | 5,766.1 | 5,530.7 | |||||||||||||||||||
Benefits, Claims, and | ||||||||||||||||||||||||
Settlement Expenses | 2,460.7 | 2,478.8 | 2,347.9 | 2,459.3 | 2,514.5 | |||||||||||||||||||
Underwriting and Other Expenses | 3,122.9 | 3,058.8 | 2,866.5 | 2,675.0 | 2,406.6 | |||||||||||||||||||
Pretax Income (Loss) | 438.1 | 725.4 | 686.0 | 631.8 | 609.4 | |||||||||||||||||||
Income Taxes (Credits) | 67.5 | 164.8 | 219.0 | 209.6 | 199.7 | |||||||||||||||||||
Net Income (Loss) | $ | 370.5 | $ | 560.5 | $ | 466.9 | $ | 422.1 | $ | 409.7 | ||||||||||||||
COMMON SHARE DATA: | ||||||||||||||||||||||||
Net Income (Loss): | ||||||||||||||||||||||||
Basic | $ | 1.26 | $ | 2.14 | $ | 1.80 | $ | 1.63 | $ | 1.58 | ||||||||||||||
Diluted | $ | 1.24 | $ | 1.92 | $ | 1.62 | $ | 1.48 | $ | 1.44 | ||||||||||||||
Dividends: Cash (d) | $ | .78 | $ | 1.76 | $ | .75 | $ | .74 | $ | .73 | ||||||||||||||
Book Value | $ | 17.23 | $ | 17.72 | $ | 17.16 | $ | 14.98 | $ | 15.15 | ||||||||||||||
Common Shares (thousands): | ||||||||||||||||||||||||
Outstanding | 302,714 | 269,238 | 262,719 | 261,968 | 260,946 | |||||||||||||||||||
Average: Basic | 294,248 | 262,114 | 259,429 | 259,502 | 258,553 | |||||||||||||||||||
Diluted | 301,016 | 299,387 | 296,379 | 296,088 | 295,073 | |||||||||||||||||||
__________
(a) | Consists of cash, investments and accrued investment income. |
(b) | Total capitalization consists of debt, preferred stock, and common shareholders' equity. |
(c) | Effective January 1, 2018, includes unrealized gains and losses from changes in fair value of equity securities. |
(d) | In late December 2017, the Board declared a special cash dividend of $1.00 per share payable on January 31, 2018. |
26
Item 7 - Management Analysis of Financial Position and Results of Operations
($ in Millions, Except Share Data)
OVERVIEW |
This management analysis of financial position and results of operations pertains to the consolidated accounts of Old Republic International Corporation ("Old Republic", "ORI" or "the Company"). The Company conducts its operations principally through three major regulatory segments, namely, its General (property and liability), Title, and the RFIG (mortgage guaranty and consumer credit indemnity) Run-off Business. A small life and accident insurance business, accounting for .3% of consolidated operating revenues for the year ended December 31, 2018 and .7% of consolidated assets as of that date, is included within the corporate and other caption of this report.
The consolidated accounts are presented in conformity with the Financial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC") of accounting principles generally accepted in the United States of America ("GAAP"). As a publicly held company, Old Republic utilizes GAAP largely to comply with the financial reporting requirements of the Securities and Exchange Commission ("SEC"). From time to time the FASB and the SEC issue various releases, most of which require additional financial statement disclosures and provide related application guidance. Of particular relevance to the Company's financial statements is guidance recently issued by the FASB relative to revenue recognition, recognition and measurement of financial instruments including the addition of equity security unrealized gains and losses in periodic income statements, lease accounting, and accounting for credit losses on financial instruments, all of which are discussed further in the Notes to Consolidated Financial Statements.
As a state regulated financial institution vested with the public interest, however, business of the Company's insurance subsidiaries is managed pursuant to the laws, regulations, and accounting practices of the various states in the U.S. and those of a small number of other jurisdictions outside the U.S. in which they operate. In comparison with GAAP, the statutory accounting practices reflect greater conservatism and comparability among insurers, and are intended to address the primary financial security interests of policyholders and their beneficiaries. Additionally, these practices also affect a significant number of important factors such as product pricing, risk bearing capacity and capital adequacy, the determination of Federal income taxes payable currently among ORI's tax-consolidated entities, and the upstreaming of dividends by insurance subsidiaries to the parent holding company. The major differences between these statutory financial accounting practices and GAAP are summarized in Note 1(a) to the consolidated financial statements included elsewhere in this report.
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. In addition, Management engages in an ongoing assessment of operating risks, such as cybersecurity risks, that could adversely affect the Company's business and reputation.
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.
This management analysis should be read in conjunction with the consolidated financial statements and the footnotes appended to them.
27
EXECUTIVE SUMMARY |
Old Republic International Corporation reported the following consolidated results:
Years Ended December 31: | 2018 | 2017 | 2016 | ||||||||||
Pretax income (loss) | $ | 438.1 | $ | 725.4 | $ | 686.0 | |||||||
Pretax investment gains (losses) included in pretax income (loss) | (235.6 | ) | 211.6 | 72.8 | |||||||||
Pretax income (loss) excluding investment gains (losses) | $ | 673.7 | $ | 513.8 | $ | 613.1 | |||||||
Net income (loss) | $ | 370.5 | $ | 560.5 | $ | 466.9 | |||||||
Net of tax investment gains (losses) included in net income (loss) | (185.9 | ) | 242.4 | 47.3 | |||||||||
Net income (loss) excluding investment gains (losses) | $ | 556.4 | $ | 318.0 | $ | 419.6 | |||||||
As noted on the following pages, performance comparisons among the periods reported upon are affected by two significant events in 2018, and by special operating charges and deferred tax adjustments in 2017. The components of consolidated net income (loss) shown in the above table are also reflected on a per share basis in the Financial Highlights below.
FINANCIAL HIGHLIGHTS | |||||||||||||||||
% Change | |||||||||||||||||
2018 | 2017 | ||||||||||||||||
Years Ended December 31: | 2018 | 2017 | 2016 | vs. 2017 | vs. 2016 | ||||||||||||
SUMMARY INCOME STATEMENTS: | |||||||||||||||||
Revenues: | |||||||||||||||||
Net premiums and fees earned | $ | 5,703.9 | $ | 5,539.7 | $ | 5,333.2 | 3.0 | % | 3.9 | % | |||||||
Net investment income | 431.8 | 409.4 | 387.0 | 5.5 | 5.8 | ||||||||||||
Other income | 121.6 | 102.2 | 107.3 | 18.9 | (4.7 | ) | |||||||||||
Total operating revenues | 6,257.4 | 6,051.5 | 5,827.6 | 3.4 | 3.8 | ||||||||||||
Investment gains (losses): | |||||||||||||||||
Realized from actual transactions | 58.2 | 211.6 | 77.8 | ||||||||||||||
Unrealized from changes in fair value of equity securities | (293.8 | ) | — | — | |||||||||||||
Realized from impairments | — | — | (4.9 | ) | |||||||||||||
Total investment gains (losses) | (235.6 | ) | 211.6 | 72.8 | |||||||||||||
Total revenues | 6,021.8 | 6,263.1 | 5,900.5 | ||||||||||||||
Operating expenses: | |||||||||||||||||
Claim costs | 2,460.7 | 2,478.8 | 2,347.9 | (0.7 | ) | 5.6 | |||||||||||
Sales and general expenses | 3,080.6 | 2,995.7 | 2,816.3 | 2.8 | 6.4 | ||||||||||||
Interest and other costs | 42.2 | 63.0 | 50.2 | (33.0 | ) | 25.5 | |||||||||||
Total operating expenses | 5,583.7 | 5,537.7 | 5,214.5 | 0.8 | % | 6.2 | % | ||||||||||
Pretax income (loss) | 438.1 | 725.4 | 686.0 | ||||||||||||||
Income taxes (credits) | 67.5 | 164.8 | 219.0 | ||||||||||||||
Net income (loss) | $ | 370.5 | $ | 560.5 | $ | 466.9 | |||||||||||
COMMON STOCK STATISTICS: | |||||||||||||||||
Net income (loss) per share: Basic | $ | 1.26 | $ | 2.14 | $ | 1.80 | |||||||||||
Diluted | $ | 1.24 | $ | 1.92 | $ | 1.62 | |||||||||||
Components of net income (loss) per share: | |||||||||||||||||
Basic net income (loss) excluding investment gains (losses) | $ | 1.89 | $ | 1.21 | $ | 1.62 | |||||||||||
Net investment gains (losses): | |||||||||||||||||
Realized from actual transactions | 0.16 | 0.93 | 0.19 | ||||||||||||||
Unrealized from changes in fair value of equity securities | (0.79 | ) | — | — | |||||||||||||
Realized from impairments | — | — | (0.01 | ) | |||||||||||||
Basic net income (loss) | $ | 1.26 | $ | 2.14 | $ | 1.80 | |||||||||||
Diluted net income (loss) excluding investment gains (losses) | $ | 1.86 | $ | 1.11 | $ | 1.46 | |||||||||||
Net investment gains (losses): | |||||||||||||||||
Realized from actual transactions | 0.15 | 0.81 | 0.17 | ||||||||||||||
Unrealized from changes in fair value of equity securities | (0.77 | ) | — | — | |||||||||||||
Realized from impairments | $ | — | $ | — | $ | (0.01 | ) | ||||||||||
Diluted net income (loss) | $ | 1.24 | $ | 1.92 | $ | 1.62 | |||||||||||
Cash dividends on common stock | $ | 0.7800 | $ | 1.7600 | $ | 0.7500 | |||||||||||
Book value per share | 17.23 | 17.72 | 17.16 | (2.8 | )% | 3.3 | % | ||||||||||
Common shares outstanding: Average basic | 294,248,871 | 262,114,533 | 259,429,298 | 12.3 | % | 1.0 | % | ||||||||||
Average diluted | 301,016,076 | 299,387,373 | 296,379,251 | 0.5 | % | 1.0 | % | ||||||||||
Actual, end of period | 302,714,502 | 269,238,727 | 262,719,660 | 12.4 | % | 2.5 | % | ||||||||||
28
Effective January 1, 2018, two significant events transpired that have a bearing on the year-over-year comparability of consolidated pretax and net income. One arises from a rule of the Financial Accounting Standards Board (“FASB”) that requires the inclusion of unrealized investment gains or losses emanating from changes in the fair value of equity (but not fixed maturity) securities in the determination of pre and post-tax income. The second relates to a reduction in nominal Federal corporate income tax rates from 35% to 21%. The impact of the 2018 rate change on the reported 2017 and 2016 effective tax rates is discussed at the bottom of this page.
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 inclusion, starting in 2018, of securities market-driven changes in equity investments’ valuations will most likely produce, as it has in 2018, greater period-to-period fluctuations in reported net income, particularly at times of significant instability or volatility in such markets. This accounting change, however, has no effect, on the determination of such critical elements as current income taxes, debt-to-equity ratios, shareholders’ equity, or, most importantly, the conduct of insurance subsidiaries’ operations and their ability to pay dividends to the ORI holding company parent.
The Financial Highlights table on the previous page shows the components of consolidated pretax and net income to reflect the impact that total realized and, beginning in 2018, unrealized investment gains or losses of equity securities have on period-to-period comparisons. Management uses income exclusive of all investment gains (losses) to analyze, evaluate, and establish accountability for the results of Old Republic’s basic insurance operating performance. Net income, however, is the measure of total profitability according to the tenets of generally accepted accounting principles (“GAAP”).
The table on the following page presents the major segmented elements of the Company’s financial performance. This reflects: 1) the above-cited significant events for 2018, and 2) the special operating charges for 2017 which consisted of: (a) General insurance claims provisions ($8.0) associated with hurricane claim exposures, (b) additional claim and related expense provisions ($130.0) applicable to final settlements and probable dispositions of all known litigated and other claims costs incurred by the Company’s RFIG run-off business during the Great Recession years and their aftermath, (c) charges for additional 2017 estimated employee incentive awards ($32.3), and (d) adjustment of previously estimated life insurance reserves and cost assumptions ($9.5).
In the table on the following page, the amounts shown for: (1) underwriting and related services income (loss) represent net premiums, fees, and other income reduced by claim costs and sales and general expenses; and (2) segmented and consolidated pretax income (loss), excluding investment gains (losses), represent the combination of underwriting and related services income (loss) and net investment income, reduced by interest and other charges.
In general, taxable income stemming from: (a) underwriting and related services, and (b) investments in corporate and federal government debt securities are taxed at the nominal tax rates in effect during the reporting periods, while income emanating from: (c) investments in states’ and their subdivisions’ debt securities, and (d) dividends from equity securities are taxed at a reduced nominal tax rate. The table below shows the effective consolidated income tax rates which result from application of such nominal or nominally-adjusted tax rates to these various components of taxable income.
2017 | |||||||||||
Years Ended December 31: | 2018 | As Reported | As Adjusted* | 2016 | |||||||
Net income (loss) | 15.4 | % | 22.7 | % | 31.4 | % | 31.9 | % | |||
Realized investment gains (losses) | 21.1 | % | (14.6 | )% | 35.0 | % | 35.0 | % | |||
Unrealized investment gains (losses) | (21.1 | )% | N/A | N/A | N/A | ||||||
Net income (loss) excluding investment gains (losses) | 17.4 | % | 38.1 | % | 30.0 | % | 31.6 | % | |||
__________________
* | In the final quarter of 2017, deferred income tax adjustments were made as required to reflect the lower Federal income tax rates which took effect at the beginning of 2018. The adjustments amounted to a deferred income tax charge of $41.8 applied to income excluding investment gains or losses, and a deferred income tax credit of $104.9 applied to investment gains or losses. The 2017 As Adjusted effective income tax rates in the above table reflect the exclusion of such required adjustments. |
29
Major Segmented and Consolidated | |||||||||||||||||||
Elements of Income (Loss) | |||||||||||||||||||
2018 | 2017 | ||||||||||||||||||
Years Ended December 31: | 2018 | 2017 | 2016 | vs. 2017 | vs. 2016 | ||||||||||||||
Net premiums, fees, and other income: | |||||||||||||||||||
General insurance | $ | 3,277.1 | $ | 3,110.8 | $ | 2,936.3 | 5.3 | % | 5.9 | % | |||||||||
Title insurance | 2,336.1 | 2,287.2 | 2,206.6 | 2.1 | 3.6 | ||||||||||||||
Corporate and other | 14.6 | 18.8 | 20.1 | (22.0 | ) | (6.8 | ) | ||||||||||||
Other income | 121.6 | 102.2 | 107.3 | 18.9 | (4.7 | ) | |||||||||||||
Subtotal | 5,749.5 | 5,519.1 | 5,270.5 | 4.2 | 4.7 | ||||||||||||||
RFIG run-off business | 75.9 | 122.9 | 170.0 | (38.2 | ) | (27.7 | ) | ||||||||||||
Consolidated total | $ | 5,825.5 | $ | 5,642.0 | $ | 5,440.5 | 3.3 | % | 3.7 | % | |||||||||
Underwriting and related services income (loss): | |||||||||||||||||||
General insurance | $ | 91.2 | $ | 84.3 | $ | 65.5 | 8.2 | % | 28.8 | % | |||||||||
Title insurance | 185.1 | 206.7 | 181.7 | (10.5 | ) | 13.8 | |||||||||||||
Corporate and other (a) | (21.9 | ) | (28.4 | ) | (17.5 | ) | 22.7 | (62.5 | ) | ||||||||||
Subtotal | 254.3 | 262.6 | 229.7 | (3.2 | ) | 14.4 | |||||||||||||
RFIG run-off business | 29.7 | (95.2 | ) | 46.6 | 131.2 | N/M | |||||||||||||
Consolidated total | $ | 284.0 | $ | 167.3 | $ | 276.3 | 69.7 | % | (39.4 | )% | |||||||||
Consolidated composite ratio: | |||||||||||||||||||
Claim ratio | 43.1 | % | 44.7 | % | 44.0 | % | |||||||||||||
Expense ratio | 51.6 | 52.0 | 50.6 | ||||||||||||||||
Composite ratio | 94.7 | % | 96.7 | % | 94.6 | % | |||||||||||||
Net investment income: | |||||||||||||||||||
General insurance | $ | 341.0 | $ | 318.9 | $ | 312.1 | 6.9 | % | 2.2 | % | |||||||||
Title insurance | 38.8 | 37.3 | 36.2 | 4.2 | 3.1 | ||||||||||||||
Corporate and other | 31.7 | 31.4 | 15.4 | 1.2 | 103.4 | ||||||||||||||
Subtotal | 411.7 | 387.7 | 363.8 | 6.2 | 6.6 | ||||||||||||||
RFIG run-off business | 20.1 | 21.7 | 23.2 | (7.2 | ) | (6.4 | ) | ||||||||||||
Consolidated total | $ | 431.8 | $ | 409.4 | $ | 387.0 | 5.5 | % | 5.8 | % | |||||||||
Interest and other charges: | |||||||||||||||||||
General insurance | $ | 68.3 | $ | 62.9 | $ | 57.6 | |||||||||||||
Title insurance | 4.6 | 6.9 | 7.6 | ||||||||||||||||
Corporate and other (b) | (30.6 | ) | (6.9 | ) | (15.0 | ) | |||||||||||||
Subtotal | 42.2 | 63.0 | 50.2 | ||||||||||||||||
RFIG run-off business | — | — | — | ||||||||||||||||
Consolidated total | $ | 42.2 | $ | 63.0 | $ | 50.2 | (33.0 | )% | 25.5 | % | |||||||||
Segmented and consolidated pretax income | |||||||||||||||||||
(loss) excluding investment gains (losses): | |||||||||||||||||||
General insurance | $ | 363.9 | $ | 340.3 | $ | 319.9 | 6.9 | % | 6.4 | % | |||||||||
Title insurance | 219.3 | 237.1 | 210.2 | (7.5 | ) | 12.8 | |||||||||||||
Corporate and other | 40.4 | 9.9 | 13.0 | N/M | (24.1 | ) | |||||||||||||
Subtotal | 623.8 | 587.3 | 543.3 | 6.2 | 8.1 | ||||||||||||||
RFIG run-off business | 49.9 | (73.5 | ) | 69.8 | 167.9 | (205.4 | ) | ||||||||||||
Consolidated pretax income (loss) excluding | |||||||||||||||||||
investment gains (losses) | 673.7 | 513.8 | 613.1 | 31.1 | % | (16.2 | )% | ||||||||||||
Income taxes (credits) on above (c) | 117.2 | 195.7 | 193.5 | ||||||||||||||||
Net income (loss) excluding | |||||||||||||||||||
investment gains (losses) | 556.4 | 318.0 | 419.6 | ||||||||||||||||
Consolidated pretax investment gains (losses): | |||||||||||||||||||
Realized from actual transactions | 58.2 | 211.6 | 77.8 | ||||||||||||||||
Unrealized from changes in fair value of equity securities | (293.8 | ) | — | — | |||||||||||||||
Realized from impairments | — | — | (4.9 | ) | |||||||||||||||
Consolidated realized and unrealized | |||||||||||||||||||
investment gains (losses) | (235.6 | ) | 211.6 | 72.8 | |||||||||||||||
Income taxes (credits) on investment gains (losses) (c) | (49.6 | ) | (30.8 | ) | 25.5 | ||||||||||||||
Net of tax investment gains (losses) | (185.9 | ) | 242.4 | 47.3 | |||||||||||||||
Net income (loss) | $ | 370.5 | $ | 560.5 | $ | 466.9 | |||||||||||||
Net operating cash flows: | |||||||||||||||||||
Consolidated | $ | 760.5 | $ | 452.8 | $ | 637.3 | 68.0 | % | (29.0 | )% | |||||||||
Exclusive of RFIG run-off business | $ | 837.0 | $ | 765.3 | $ | 739.8 | 9.4 | % | 3.4 | % | |||||||||
(a) Includes general administrative expenses. / (b) Includes net external and internal debt interest costs and consolidation/elimination entries. / (c) See the table at the bottom of the previous page for information about year-end 2017 deferred tax adjustments.
30
General Insurance Segment Results - The table below reflects the major elements affecting this segment’s financial performance for the periods shown. |
General Insurance Business Segment | |||||||||||||||||||
% Change | |||||||||||||||||||
2018 | 2017 | ||||||||||||||||||
Years Ended December 31: | 2018 | 2017 | 2016 | vs. 2017 | vs. 2016 | ||||||||||||||
Net premiums earned | $ | 3,277.1 | $ | 3,110.8 | $ | 2,936.3 | 5.3 | % | 5.9 | % | |||||||||
Net investment income | 341.0 | 318.9 | 312.1 | 6.9 | 2.2 | ||||||||||||||
Other income | 121.3 | 101.8 | 106.2 | 19.1 | (4.1 | ) | |||||||||||||
Operating revenues | 3,739.4 | 3,531.6 | 3,354.7 | 5.9 | 5.3 | ||||||||||||||
Claim costs (a) | 2,365.8 | 2,234.4 | 2,143.1 | 5.9 | 4.3 | ||||||||||||||
Sales and general expenses | 941.3 | 893.8 | 833.9 | 5.3 | 7.2 | ||||||||||||||
Interest and other costs | 68.3 | 62.9 | 57.6 | 8.5 | 9.2 | ||||||||||||||
Operating expenses | 3,375.5 | 3,191.3 | 3,034.7 | 5.8 | 5.2 | ||||||||||||||
Segmented pretax operating income (loss) (b) | $ | 363.9 | $ | 340.3 | $ | 319.9 | 6.9 | % | 6.4 | % | |||||||||
Claim ratio | 72.2 | % | 71.8 | % | 73.0 | % | |||||||||||||
Expense ratio | 25.0 | 25.5 | 24.8 | ||||||||||||||||
Composite ratio | 97.2 | % | 97.3 | % | 97.8 | % | |||||||||||||
__________________
(a) | General insurance pretax results for the year ended December 31, 2017 include hurricane-related claim costs of $8.0. |
(b) | In connection with the run-off mortgage guaranty ("MI") and consumer credit indemnity ("CCI") combination, $3.8, ($121.1) and ($33.8) of pretax operating income (loss) for 2018, 2017, and 2016, respectively, were retained by certain general insurance companies pursuant to various quota share and stop loss reinsurance agreements. All of these amounts, however, have been reclassified such that 100% of the CCI run-off business is reported in the RFIG run-off segment. |
With few exceptions, 2018 earned premiums grew for most types of coverages and markets served. The cumulative effects of recent years’ and ongoing premium rate increases for several insurance products, along with new business production were main contributors to premium growth. The greater premium levels stemmed principally from commercial automobile (trucking), national accounts, executive indemnity and auto warranties. Positive earned premium trends throughout 2017 were unevenly distributed among various insurance coverages and sources of business. Gains were registered most prominently in commercial automobile (trucking), risk management and national accounts, and home and auto warranty. On the other hand, premium growth was constrained by low volume in a large account contractors book of business faced with a particularly competitive market place, and by reduced opportunities in gas and oil energy services and several smaller industry sectors. Premium volume from the new underwriting facility established in early 2015 also added measurably to earned premiums in all three years. Net investment income gained in the context of a slightly higher invested asset base and relatively stable yield environment.
As the table below 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 by the lessening impacts from developments of prior years' reserve estimates. The claim ratio increase in 2018 resulted from recurring fiscal twelve month reserve evaluations of current and prior years' developing claim experience. Substantially all of this increase stemmed from the past decade's new books of business that are subject to ongoing adjustments to the underwriting and claim management processes. 2017’s unfavorable developments were concentrated in the Company’s largest insurance coverages of workers’ compensation and general liability which were partially offset by favorable development trends in commercial automobile (trucking).
Effect of Prior Periods' | ||||||||||||||
(Favorable)/ | Claim Ratio Excluding | |||||||||||||
Reported | Unfavorable Claim | Prior Periods' Claim | ||||||||||||
Claim Ratio | Reserves Development | Reserves Development | ||||||||||||
2014 | 77.9 | % | 3.9 | % | 74.0 | % | ||||||||
2015 | 74.1 | 1.5 | 72.6 | |||||||||||
2016 | 73.0 | 0.3 | 72.7 | |||||||||||
2017 | 71.8 | 0.7 | 71.1 | |||||||||||
2018 | 72.2 | % | — | % | 72.2 | % | ||||||||
As the above table shows, year-over-year operating expenses have remained aligned with earned premiums trends.
Quarterly and even annual claim provisions and the trends they display may not be particularly meaningful indicators of future outcomes for Old Republic’s liability-oriented mix of business. Absent significant economic and insurance industry dislocations in the foreseeable future, it is currently anticipated that reported claim ratios can be expected to fall within targeted averages in the high 60 to low 70 percent range. The current mix of business should reflect an expense ratio
31
ranging between 23 and 25 percent. The expense ratio for 2017 was slightly above this long-term operating objective due to additional charges for estimated employee incentive awards. The slightly higher sales and general expense ratio in 2016 resulted mostly from greater costs incurred in the above-noted underwriting facility, additional litigation cost provisions in the year's second quarter, and by a slightly different premium mix and attendant production costs associated with the business’ responses to recurring changes in insurance market conditions and opportunities.
Title Insurance Segment Results - The table below reflects the major elements affecting this segment’s financial performance for the periods shown. |
Title Insurance Business Segment | ||||||||||||||||||
% Change | ||||||||||||||||||
2018 | 2017 | |||||||||||||||||
Years Ended December 31: | 2018 | 2017 | 2016 | vs. 2017 | vs. 2016 | |||||||||||||
Net premiums and fees earned | $ | 2,336.1 | $ | 2,287.2 | $ | 2,206.6 | 2.1 | % | 3.6 | % | ||||||||
Net investment income | 38.8 | 37.3 | 36.2 | 4.2 | 3.1 | |||||||||||||
Other income | 0.3 | 0.5 | 1.2 | N/M | (56.4 | ) | ||||||||||||
Operating revenues | 2,375.4 | 2,325.0 | 2,244.1 | 2.2 | 3.6 | |||||||||||||
Claim costs | 48.3 | 20.8 | 84.3 | 131.7 | (75.3 | ) | ||||||||||||
Sales and general expenses | 2,103.0 | 2,060.1 | 1,941.8 | 2.1 | 6.1 | |||||||||||||
Interest and other costs | 4.6 | 6.9 | 7.6 | (33.9 | ) | (8.6 | ) | |||||||||||
Operating expenses | 2,156.0 | 2,087.9 | 2,033.8 | 3.3 | 2.7 | |||||||||||||
Segmented pretax operating income (loss) | $ | 219.3 | $ | 237.1 | $ | 210.2 | (7.5 | )% | 12.8 | % | ||||||||
Claim ratio | 2.1 | % | 0.9 | % | 3.8 | % | ||||||||||||
Expense ratio | 90.0 | 90.0 | 87.9 | |||||||||||||||
Composite ratio | 92.1 | % | 90.9 | % | 91.7 | % | ||||||||||||
2018 year-over-year comparison of revenues from title premiums and fees reflect a slowdown in housing and mortgage lending activity during the year. The continuation of a generally positive mortgage rate environment and reasonably strong housing and commercial property markets were major factors in the year-over-year gain in premiums and fees for 2017. By contrast, claim costs for 2018 trended higher as favorable development of prior years’ claim reserve estimates edged down. Claim costs for the prior periods were trending lower in the face of declining claims activity since the Great Recession years. The following table shows recent annual claim ratios and the effect of claim development trends:
Effect of Prior Periods' | ||||||||||||||
(Favorable)/ | Claim Ratio Excluding | |||||||||||||
Reported | Unfavorable Claim | Prior Periods' Claim | ||||||||||||
Claim Ratio | Reserves Development | Reserves Development | ||||||||||||
2014 | 5.2 | % | (0.8 | )% | 6.0 | % | ||||||||
2015 | 4.9 | (0.6 | ) | 5.5 | ||||||||||
2016 | 3.8 | (1.1 | ) | 4.9 | ||||||||||
2017 | 0.9 | (3.3 | ) | 4.2 | ||||||||||
2018 | 2.1 | % | (2.0 | )% | 4.1 | % | ||||||||
Net investment income is reflective of both a relatively stable invested asset base and investment yield environment. The operating expense ratio for the periods reported upon has remained aligned with revenues from premiums and fees.
32
RFIG Run-off Segment Results - The table below reflects the major elements affecting this segment’s financial performance for the periods shown. |
RFIG Run-off Business Segment | |||||||||||||||||||
% Change | |||||||||||||||||||
2018 | 2017 | ||||||||||||||||||
Years Ended December 31: | 2018 | 2017 | 2016 | vs. 2017 | vs. 2016 | ||||||||||||||
A. Mortgage Insurance (MI) | |||||||||||||||||||
Net premiums earned | $ | 74.4 | $ | 109.8 | $ | 154.1 | (32.3 | )% | (28.7 | )% | |||||||||
Net investment income | 19.2 | 20.4 | 22.0 | (5.9 | ) | (7.4 | ) | ||||||||||||
Claim costs (a) | 32.1 | 63.3 | 52.5 | (49.2 | ) | 20.4 | |||||||||||||
MI pretax operating income (loss) | $ | 46.7 | $ | 48.9 | $ | 105.0 | (4.5 | )% | (53.5 | )% | |||||||||
Claim ratio (a) | 43.2 | % | 57.6 | % | 34.1 | % | |||||||||||||
Expense ratio | 20.0 | 16.5 | 12.0 | ||||||||||||||||
Composite ratio | 63.2 | % | 74.1 | % | 46.1 | % | |||||||||||||
B. Consumer Credit Insurance (CCI) | |||||||||||||||||||
Net premiums earned | $ | 1.5 | $ | 13.0 | $ | 15.8 | (88.3 | )% | (17.8 | )% | |||||||||
Net investment income | 0.8 | 1.2 | 1.1 | (29.6 | ) | 12.0 | |||||||||||||
Claim costs (a) | (2.2 | ) | 134.5 | 50.0 | (101.7 | ) | 168.7 | ||||||||||||
CCI pretax operating income (loss) (b) | $ | 3.2 | $ | (122.4 | ) | $ | (35.2 | ) | 102.6 | % | (247.1 | )% | |||||||
Claim ratio (a) | N/M | N/M | 315.9 | % | |||||||||||||||
Expense ratio | N/M | N/M | 13.9 | ||||||||||||||||
Composite ratio | N/M | N/M | 329.8 | % | |||||||||||||||
C. Total MI and CCI run-off business | |||||||||||||||||||
Net premiums earned | $ | 75.9 | $ | 122.9 | $ | 170.0 | (38.2 | )% | (27.7 | )% | |||||||||
Net investment income | 20.1 | 21.7 | 23.2 | (7.2 | ) | (6.4 | ) | ||||||||||||
Claim costs (a) | 29.9 | 197.8 | 102.6 | (84.9 | ) | 92.7 | |||||||||||||
Segmented pretax operating income (loss) (b) | $ | 49.9 | $ | (73.5 | ) | $ | 69.8 | 167.9 | % | (205.4 | )% | ||||||||
Claim ratio (a) | 39.4 | % | 160.9 | % | 60.4 | % | |||||||||||||
Expense ratio | 21.5 | 16.6 | 12.2 | ||||||||||||||||
Composite ratio | 60.9 | % | 177.5 | % | 72.6 | % | |||||||||||||
__________________
(a) | RFIG run-off pretax results for the year ended December 31, 2017 include additional claim and related expense provisions of $130.0 applicable to the final settlements and probable dispositions of all known litigated and other claim costs incurred by the Company’s run-off Financial Indemnity business during the Great Recession years and their aftermath. Of the total charge, $23.0 related to mortgage guaranty claim costs, and $107.0 was attributable to additional claim provisions in the consumer credit indemnity run-off business. |
(b) | In connection with the run-off mortgage guaranty ("MI") and consumer credit indemnity ("CCI") combination, $3.8, ($121.1), and ($33.8) of pretax operating income (loss) for 2018, 2017, and 2016, respectively, were retained by certain general insurance companies pursuant to various quota share and stop loss reinsurance agreements. All of these amounts, however, have been reclassified such that 100% of the CCI run-off business is reported in the RFIG run-off segment. |
Pretax operating results of the run-off MI and CCI business reflect the expected, continuing drop in net earned premiums from declining risk in force. For the CCI coverage in particular, the much lower premiums in 2018 resulted mostly from the 2017 elimination of a major bank business relationship which had been a significant source of both earned premiums and substantially higher litigated claim costs.
The ratios of MI incurred claim costs to earned premiums were reduced by 27.0, 38.3 and 39.8 percentage points for 2018, 2017 and 2016, respectively. In each instance, the reductions reflect favorable developments of prior years’ claim reserves. MI claim costs for 2017, however, had risen most significantly due to third quarter additional claim provisions of $23.0 which added 20.9 percentage points to the claim ratio for the year.
The much more favorable CCI claim ratios for 2018 reflect the absence of the aforementioned litigation-induced claim costs and favorable development of previously established claim reserves. During 2017's third quarter, additional claim provisions in the amount of $107.0 were made to cover the final settlements and probable dispositions of all known litigated and other claim costs incurred during the Great Recession and its aftermath.
33
Corporate and Other Operating Results - The combination of a small life and accident insurance business and the net costs associated with the parent holding company and its internal corporate services subsidiaries usually produce highly variable results. Earnings variations stem from volatility inherent to the small scale of the life and accident insurance line, net investment income, and net interest charges (credits) pertaining to external and intra-system financing arrangements. Full year 2018 results were enhanced by the elimination of interest costs related to outstanding external debt converted into ORI common stock in March 2018. Additionally, year-over-year comparisons were particularly affected by a charge of $9.5 resulting from a fourth quarter 2017 review and update of previously established estimates of future interest rates, mortality, and persistency in largely inactive life insurance products. The interplay of these various elements is summarized in the following table: |
Corporate and Other Operations | ||||||||||||
Years Ended December 31: | 2018 | 2017 | 2016 | |||||||||
Net life and accident premiums earned | $ | 14.6 | $ | 18.8 | $ | 20.1 | ||||||
Net investment income | 31.7 | 31.4 | 15.4 | |||||||||
Other operating income | (0.1 | ) | (0.1 | ) | (0.1 | ) | ||||||
Operating revenues | 46.3 | 50.1 | 35.4 | |||||||||
Claim costs | 16.7 | 25.8 | 17.7 | |||||||||
Insurance expenses | 4.8 | 8.2 | 7.8 | |||||||||
Corporate, interest and other expenses - net | (15.6 | ) | 6.1 | (3.2 | ) | |||||||
Operating expenses | 5.9 | 40.2 | 22.4 | |||||||||
Corporate and other pretax operating income | $ | 40.4 | $ | 9.9 | $ | 13.0 | ||||||
Summary Consolidated Balance Sheet - The following table shows Old Republic's consolidated financial position at the dates shown. |
December 31, | |||||||||
2018 | 2017 | ||||||||
Assets: | |||||||||
Cash and fixed maturity securities | $ | 9,683.0 | $ | 10,145.9 | |||||
Equity securities | 3,380.9 | 3,265.5 | |||||||
Other invested assets | 123.4 | 124.9 | |||||||
Cash and invested assets | 13,187.4 | 13,536.4 | |||||||
Accounts and premiums receivable | 1,499.4 | 1,469.7 | |||||||
Federal income tax recoverable: Current | 16.8 | — | |||||||
Prepaid federal income taxes | 129.8 | 114.3 | |||||||
Reinsurance balances recoverable | 3,484.5 | 3,371.8 | |||||||
Sundry assets | 1,008.9 | 911.1 | |||||||
Total | $ | 19,327.1 | $ | 19,403.5 | |||||
Liabilities and Shareholders' Equity: | |||||||||
Policy liabilities | $ | 2,303.5 | $ | 2,176.3 | |||||
Claim reserves | 9,471.2 | 9,237.6 | |||||||
Federal income tax payable: Current | — | 6.5 | |||||||
Deferred | 10.3 | 100.5 | |||||||
Debt | 981.4 | 1,448.7 | |||||||
Sundry liabilities | 1,414.2 | 1,700.5 | |||||||
Shareholders' equity | 5,146.2 | (a) | 4,733.3 | ||||||
Total | $ | 19,327.1 | $ | 19,403.5 | |||||
__________________
(a) Reflects the completed conversion of the 3.75% convertible senior notes into ORI common stock in March, 2018.
34
Cash, Invested Assets, and Shareholders' Equity - The table below shows Old Republic's consolidated cash and invested assets as well as the shareholders' equity balance at the dates shown. |
Cash, Invested Assets, and Shareholders' Equity | ||||||||||||||||||||
% Change | ||||||||||||||||||||
2018 | 2017 | |||||||||||||||||||
As of December 31: | 2018 | 2017 | 2016 | vs. 2017 | vs. 2016 | |||||||||||||||
Cash and invested assets: | ||||||||||||||||||||
Available for sale fixed maturity securities, cash | ||||||||||||||||||||
and other invested assets, carried at fair value | $ | 8,761.7 | $ | 9,203.4 | $ | 9,124.9 | (4.8 | )% | 0.9 | % | ||||||||||
Equity securities, carried at fair value | 3,380.9 | 3,265.5 | 2,896.1 | 3.5 | 12.8 | |||||||||||||||
Held to maturity, carried at amortized cost | 1,044.8 | 1,067.4 | 974.8 | (2.1 | ) | 9.5 | ||||||||||||||
Total per balance sheet | $ | 13,187.4 | $ | 13,536.4 | $ | 12,995.8 | (2.6 | )% | 4.2 | % | ||||||||||
Total at original cost for all | $ | 12,950.6 | $ | 12,783.4 | $ | 12,360.3 | 1.3 | % | 3.4 | % | ||||||||||
Shareholders' equity: Total | $ | 5,146.2 | $ | 4,733.3 | $ | 4,460.6 | 8.7 | % | 6.1 | % | ||||||||||
Per common share | $ | 17.23 | $ | 17.72 | $ | 17.16 | (2.8 | )% | 3.3 | % | ||||||||||
Composition of shareholders' equity per share: | ||||||||||||||||||||
Equity before items below | $ | 17.04 | $ | 16.26 | $ | 15.92 | 4.8 | % | 2.1 | % | ||||||||||
Unrealized investment gains (losses) and other | ||||||||||||||||||||
accumulated comprehensive income (loss) | 0.19 | 1.46 | 1.24 | |||||||||||||||||
Total | $ | 17.23 | $ | 17.72 | $ | 17.16 | (2.8 | )% | 3.3 | % | ||||||||||
Segmented composition of | ||||||||||||||||||||
shareholders' equity per share: | ||||||||||||||||||||
Excluding run-off segment | $ | 15.73 | $ | 16.14 | $ | 15.89 | (2.5 | )% | 1.6 | % | ||||||||||
RFIG run-off segment | 1.50 | 1.58 | 1.27 | |||||||||||||||||
Consolidated total | $ | 17.23 | $ | 17.72 | $ | 17.16 | (2.8 | )% | 3.3 | % | ||||||||||
Old Republic's invested assets portfolio is directed in consideration of enterprise-wide risk management objectives. Most importantly, these are intended to ensure solid funding of the 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.
As of December 31, 2018, the consolidated investment portfolio reflected an allocation of approximately 74% to fixed-maturity and short-term investments, and 26% to high quality, dividend-paying equity securities. The asset quality of the fixed maturity portfolio has remained at high levels.
35
Changes in shareholders' equity per share are reflected in the following table. As shown, these resulted mostly from net income, dividend payments to shareholders, and changes in the value of invested assets carried at fair value.
Shareholders' Equity Per Share | |||||||||||
December 31, | |||||||||||
2018 | 2017 | 2016 | |||||||||
Beginning balance | $ | 17.72 | $ | 17.16 | $ | 14.98 | |||||
Changes in shareholders' equity: | |||||||||||
Net income (loss) excluding net investment gains (losses) | 1.89 | 1.21 | 1.62 | ||||||||
Net of tax realized investment gains (losses): | |||||||||||
From actual transactions | 0.16 | 0.53 | 0.19 | ||||||||
From impairments | — | — | (0.01 | ) | |||||||
From revaluation of deferred taxes | — | 0.40 | — | ||||||||
Subtotal | 0.16 | 0.93 | 0.18 | ||||||||
Net of tax unrealized investment gains (losses) on | |||||||||||
securities carried at fair value: | |||||||||||
Reported in net income (loss) | (0.79 | ) | — | — | |||||||
Reported as other comprehensive income (loss) | (0.59 | ) | 0.28 | 1.12 | |||||||
Subtotal | (1.38 | ) | 0.28 | 1.12 | |||||||
Total net of tax realized and unrealized | |||||||||||
investment gains (losses) | (1.22 | ) | 1.21 | 1.30 | |||||||
Cash dividends (a) | (0.7800 | ) | (1.7600 | ) | (0.7500 | ) | |||||
Debt conversion, stock issuance, and other transactions | (0.38 | ) | (0.10 | ) | 0.01 | ||||||
Net change | (0.49 | ) | 0.56 | 2.18 | |||||||
Ending balance | $ | 17.23 | $ | 17.72 | $ | 17.16 | |||||
Percentage change for the period | (2.8 | )% | 3.3 | % | 14.6 | % | |||||
__________________
(a) | Full year 2017 includes a special cash dividend of $1.00 per share. |
Capitalization - The following table shows the components of ORI’s total capitalization. The most significant change during the year ended December 31, 2018 pertains to the completed conversion of the 3.75% convertible senior notes into ORI common stock in March 2018. |
Capitalization | ||||||||||||
December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
Debt: | ||||||||||||
3.75% Convertible Senior Notes due 2018 | $ | — | $ | 470.6 | $ | 547.8 | ||||||
4.875% Senior Notes due 2024 | 396.8 | 396.2 | 395.6 | |||||||||
3.875% Senior Notes due 2026 | 545.7 | 545.1 | 544.6 | |||||||||
ESSOP debt | — | 4.2 | 8.1 | |||||||||
Other miscellaneous debt | 38.8 | 32.4 | 32.4 | |||||||||
Total debt | 981.4 | 1,448.7 | 1,528.7 | |||||||||
Common shareholders' equity | 5,146.2 | 4,733.3 | 4,460.6 | |||||||||
Total capitalization | $ | 6,127.6 | $ | 6,182.0 | $ | 5,989.4 | ||||||
Capitalization ratios: | ||||||||||||
Debt | 16.0 | % | 23.4 | % | 25.5 | % | ||||||
Common shareholders' equity | 84.0 | 76.6 | 74.5 | |||||||||
Total | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
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DETAILED MANAGEMENT ANALYSIS |
This section of the Management Analysis of Financial Position and Results of Operations is additive to and should be read in conjunction with the Executive Summary which precedes it.
CRITICAL ACCOUNTING ESTIMATES |
The Company's annual financial statements incorporate a large number and types of estimates relative to matters which are highly uncertain at the time the estimates are made. The estimation process required of an insurance enterprise such as Old Republic is by its very nature highly dynamic inasmuch as it necessitates a continuous evaluation, analysis, and quantification of factual data as it becomes known to the Company. As a result, actual experienced outcomes can differ from the estimates made at any point in time and thus affect future periods' reported revenues, expenses, net income or loss, and financial condition.
Old Republic believes that its most critical accounting estimates relate to: a) the determination of other-than-temporary impairments ("OTTI") in the value of investments; b) the valuation of deferred income tax assets; c) the recoverability of reinsured paid and/or outstanding losses; and d) the establishment of reserves for losses and loss adjustment expenses. The major assumptions and methods used in setting these estimates are discussed in the pertinent sections of this Management Analysis and are summarized as follows:
(a) Other-than-temporary impairments in the value of investments:
The Company completes a detailed analysis each quarter to assess whether the decline in the value of any fixed maturity (and prior to 2018, any equity security) investment below its cost basis is deemed other-than-temporary. All securities in an unrealized loss position are reviewed. Prior to 2018, absent issuer-specific circumstances that would result in a contrary conclusion, any equity security with any unrealized investment loss amounting to a 20% or greater decline consecutively during a six month period was considered OTTI. The decline in value of a security deemed OTTI is included as a realized investment loss in the determination of net income and a new cost basis is established for financial reporting purposes.
The Company recognized no OTTI adjustments for the years ended December 31, 2018 and 2017, but $4.9 was recognized in 2016.
(b) The valuation of deferred income tax assets
The Company uses the asset and liability method of calculating deferred income taxes. This method results in the establishment of deferred tax assets and liabilities calculated at currently enacted tax rates that are applicable to the cumulative temporary differences between the financial statement and tax bases of assets and liabilities. Deferred income tax assets are reduced by a valuation allowance when management determines that it is more likely than not that some, or all, of the deferred tax assets will not be realized. At December 31, 2018, 2017 and 2016, the net deferred tax asset (liability) was $(10.3), $(100.5), and $(42.6), respectively. In valuing the gross deferred tax assets, Old Republic considered certain factors including primarily the scheduled reversals of certain deferred tax liabilities, the impact of available carry back and carry forward periods, estimates of future taxable income, and its ability to exercise prudent and feasible tax planning strategies. See Note 1(j) of the Notes to Consolidated Financial Statements for further discussion of the Company's consolidated income tax balances.
(c) The recoverability of reinsured paid and/or outstanding losses
Assets consisting of gross paid losses recoverable from assuming reinsurers, and balance sheet date reserve estimates similarly recoverable in future periods as gross losses are settled and paid, are established at the same time as the gross losses are paid or recorded as reserves. Accordingly, these assets are subject to the same estimation processes and valuations as the related gross amounts as is discussed below. As of the three most recent year ends, paid and outstanding reinsurance recoverable balances ranged between 30.7% and 32.3% and averaged 31.8% of the related gross reserves. See Part I, Item 1(d) for further discussion regarding recoverability of the Company's reinsurance balances.
(d) The reserves for losses and loss adjustment expenses
As discussed in pertinent sections of this management analysis, the reserves for losses and related loss adjustment expenses are based on a wide variety of factors and calculations. Among these the Company believes the most critical are:
• | The establishment of expected claim ratios for at least the two to five most recent accident years, particularly for so-called long-tail coverages as to which information about covered losses emerges and becomes more accurately quantifiable over long periods of time. Long-tail coverages generally include workers' compensation, commercial automobile (trucking) liability, general liability, errors and omissions and directors and officers' liability, as well as title insurance. Gross loss reserves related to such long-tail coverages ranged between 91.1% and 95.0%, and averaged 93.3% of gross consolidated claim reserves as of the three most |
37
recent year ends. Net of reinsurance recoverables, such reserves ranged between 89.0% and 94.8% and averaged 92.3% as of the same dates.
• | Loss trend factors that are considered when establishing the above noted expected claim ratios. These factors take into account such variables as judgments and estimates relative to premium rate trends and adequacy, current and expected interest rates, current and expected social and economic inflation trends, and insurance industry statistical claim trends. |
• | Loss development factors, expected claim rates and average claim costs, all of which are based on Company and/or industry statistics may also be used to project reported and unreported losses for each accounting period. |
Consolidated claim costs developed favorably in the three most recent calendar years. This development had the consequent effect of reducing consolidated annual loss costs for the three most recent years within a range of 3.1% and 5.9%, or by an average of approximately 4.2% per annum. As a percentage of each of these years' consolidated earned premiums and fees, the favorable developments have ranged between 1.4% and 2.8%, and have averaged 1.9%. The variances in prior years' positive or negative claim developments are further discussed within the Incurred Loss Experience section of this document.
In all the above regards the Company anticipates that future periods' financial statements will continue to reflect changes in estimates. As in the past such changes generally result from altered circumstances, the continuum of newly emerging information and its effect on past assumptions and judgments, the effects of securities markets valuations, and changes in inflation rates and future economic conditions beyond the Company's control. As a result, Old Republic cannot predict, quantify, or guaranty the likely impact that probable changes in estimates will have on its future financial condition or results of operations.
FINANCIAL POSITION |
The Company's financial position at December 31, 2018 reflected decreases in assets and liabilities of .4% and 3.3%, respectively, and an increase in common shareholders' equity of 8.7% when compared to the immediately preceding year-end. Cash and invested assets represented 68.2% and 69.8% of consolidated assets as of December 31, 2018 and 2017, respectively. As of year-end 2018, the cash and invested asset base decreased by 2.6% to $13,187.4.
Investments - During 2018 and 2017, the Company committed the majority of investable funds to short to intermediate-term fixed maturity securities and higher yielding publicly traded large capitalization equity securities. At both December 31, 2018 and 2017, approximately 99% of the Company's investments consisted of marketable securities. Old Republic continues to adhere to its long-term policy of investing primarily in investment grade, marketable securities. The 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. At December 31, 2018, the Company had no fixed maturity investments in default as to principal and/or interest.
Short-term maturity investment positions reflect a large variety of seasonal and intermediate-term factors including current operating needs, expected operating cash flows, seasonality of quarterly cash flow, debt maturities, and investment strategy considerations. Accordingly, the future level of short-term investments will vary and respond to the interplay of these factors and may, as a result, increase or decrease from current levels.
The Company does not own or utilize derivative financial instruments for the purpose of hedging, enhancing the overall return of its investment portfolio, or reducing the cost of its debt obligations. With regard to its equity portfolio, the Company does not own any options nor does it engage in any type of option writing. Traditional investment management tools and techniques are employed to address the yield and valuation exposures of the invested assets base. The long-term fixed maturity investment portfolio is managed so as to limit various risks inherent in the bond market. Credit risk is addressed through asset diversification and the purchase of investment grade securities. Reinvestment rate risk is reduced by concentrating on non-callable issues, and by taking asset-liability matching considerations into account. Purchases of mortgage and asset backed securities, which have variable principal prepayment options, are generally avoided. Market value risk is limited through the purchase of bonds of intermediate maturity. The combination of these investment management practices is expected to produce a more stable long-term fixed maturity investment portfolio that is not subject to extreme interest rate sensitivity and principal deterioration.
The fair value of the Company's long-term fixed maturity investment portfolio is sensitive, however, to fluctuations in the level of interest rates, but not materially affected by changes in anticipated cash flows caused by any prepayments. The impact of interest rate movements on the long-term fixed maturity investment portfolio generally affects net unrealized gains or losses. As a general rule, rising interest rates enhance currently available yields but typically lead to a reduction in the fair value of existing fixed maturity investments. By contrast, a decline in such rates reduces currently available yields but usually serves to increase the fair value of the existing fixed maturity investment portfolio. All such changes in fair value of available for sale securities are reflected, net of deferred income taxes, directly in the shareholders' equity account, and as a separate component of the statement of comprehensive income. Fixed maturity securities classified as held to maturity are carried at amortized cost, and therefore, fluctuations in unrealized gains and losses do not impact
38
shareholders' equity. Given the Company's inability to forecast or control the movement of interest rates, Old Republic sets the maturity spectrum of its fixed maturity securities portfolio within parameters of estimated liability payouts, and focuses the overall portfolio on high quality investments. By so doing, Old Republic believes it is reasonably assured of its ability to hold securities to maturity as it may deem necessary in changing environments, and of ultimately recovering their aggregate cost.
Possible future declines in fair values for Old Republic's available for sale fixed maturity portfolio would negatively affect the common shareholders' equity account at any point in time, but would not necessarily result in the recognition of realized investment losses. The status and fair value changes of each of the fixed maturity (and prior to 2018, its equity security) investments are reviewed at least once per quarter during the year, and estimates of other-than-temporary impairments in the portfolio's value are evaluated and established at each quarterly balance sheet date. In reviewing investments for other-than-temporary impairment, the Company, in addition to a security's market price history, considers the totality of such factors as the issuer's operating results, financial condition and liquidity, its ability to access capital markets, credit rating trends, most current audited financial statements, industry and securities markets conditions, and analyst expectations to reach its conclusions. Sudden fair value declines caused by such adverse developments as newly emerged or imminent bankruptcy filings, issuer default on significant obligations, or reports of financial accounting developments that bring into question the validity of the issuer's previously reported earnings or financial condition, are recognized as realized losses as soon as credible publicly available information emerges to confirm such developments. Prior to 2018, absent issuer-specific circumstances that would result in a contrary conclusion, any equity security with an unrealized investment loss amounting to a 20% or greater decline consecutively during a six month period was considered other-than-temporarily-impaired. In the event the Company's estimate of other-than-temporary impairments is insufficient at any point in time, future periods' net income (loss) would be affected adversely by the recognition of additional impairment losses, but its financial condition would not necessarily be affected adversely inasmuch as such losses, or a portion of them, could have been recognized previously as unrealized losses in shareholders' equity.
The following tables show certain information relating to the Company's fixed maturity and equity portfolios as of the dates shown:
Credit Quality Ratings of Fixed Maturity Securities (a) | ||||||
December 31: | 2018 | 2017 | ||||
Aaa | 20.9 | % | 21.6 | % | ||
Aa | 12.8 | 12.9 | ||||
A | 31.5 | 31.8 | ||||
Baa | 29.1 | 27.5 | ||||
Total investment grade | 94.3 | 93.8 | ||||
All other (b) | 5.7 | 6.2 | ||||
Total | 100.0 | % | 100.0 | % | ||
__________
(a) | 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. |
(b) | "All other" includes non-investment grade or non-rated issuers. |
Gross Unrealized Losses Stratified by Industry Concentration for Non-Investment Grade Fixed Maturity Securities | |||||||||||
December 31, 2018 | Amortized Cost | Gross Unrealized Losses | |||||||||
Fixed Maturity Securities by Industry Concentration: | |||||||||||
Energy | $ | 182.7 | $ | 18.8 | |||||||
Health Care | 44.1 | 5.3 | |||||||||
Basic Industry | 44.1 | 2.6 | |||||||||
Industrial | 76.1 | 2.4 | |||||||||
Other (includes 6 industry groups) | 129.0 | 4.9 | |||||||||
Total | $ | 476.1 | (c) | $ | 34.2 | ||||||
__________
(c) | Represents 5.1% of the total fixed maturity portfolio. |
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Gross Unrealized Losses Stratified by Industry Concentration for Investment Grade Fixed Maturity Securities | |||||||||||
December 31, 2018 | Amortized Cost | Gross Unrealized Losses | |||||||||
Fixed Maturity Securities by Industry Concentration: | |||||||||||
Utilities | $ | 864.9 | $ | 18.7 | |||||||
U.S. Government & Agencies | 1,119.3 | 15.4 | |||||||||
Municipals | 693.5 | 13.7 | |||||||||
Industrial | 536.7 | 13.2 | |||||||||
Other (includes 17 industry groups) | 2,783.3 | 57.6 | |||||||||
Total | $ | 5,997.8 | (d) | $ | 118.8 | ||||||
__________
(d) | Represents 64.3% of the total fixed maturity portfolio. |
Gross Unrealized Losses Stratified by Industry Concentration for Equity Securities | |||||||||||
December 31, 2018 | Cost | Gross Unrealized Losses | |||||||||
Equity Securities by Industry Concentration: | |||||||||||
Energy | $ | 386.7 | $ | 60.2 | |||||||
Consumer Non Durable | 268.9 | 52.5 | |||||||||
Technology | 76.6 | 19.8 | |||||||||
Telecom | 135.8 | 18.9 | |||||||||
Other (includes 7 industry groups) | 286.5 | 23.9 | |||||||||
Total | $ | 1,154.8 | (e) | $ | 175.4 | (f) | |||||
__________
(e) | Represents 38.0% of the total equity portfolio. |
(f) | Represents 5.8% of the cost of the total equity portfolio, while gross unrealized gains represent 17.0% of the equity portfolio. |
Gross Unrealized Losses Stratified by Maturity Ranges for All Fixed Maturity Securities | ||||||||||||||||||
Amortized Cost of Fixed Maturity Securities | Gross Unrealized Losses | |||||||||||||||||
December 31, 2018 | All | Non-Investment Grade Only | All | Non- Investment Grade Only | ||||||||||||||
Maturity Ranges: | ||||||||||||||||||
Due in one year or less | $ | 371.3 | $ | 5.9 | $ | 2.1 | $ | — | ||||||||||
Due after one year through five years | 3,219.3 | 273.3 | 61.0 | 14.6 | ||||||||||||||
Due after five years through ten years | 2,859.3 | 188.4 | 88.4 | 18.6 | ||||||||||||||
Due after ten years | 24.0 | 8.5 | 1.4 | .8 | ||||||||||||||
Total | $ | 6,474.0 | $ | 476.1 | $ | 153.0 | $ | 34.2 | ||||||||||
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Gross Unrealized Losses Stratified by Duration and Amount of Unrealized Losses for All Fixed Maturity Securities | ||||||||||||||||||||
Amount of Gross Unrealized Losses | ||||||||||||||||||||
December 31, 2018 | Less than 20% of Cost | 20% to 50% of Cost | More than 50% of Cost | Total Gross Unrealized Loss | ||||||||||||||||
Number of Months in Unrealized Loss Position: | ||||||||||||||||||||
Fixed Maturity Securities: | ||||||||||||||||||||
One to six months | $ | 46.8 | $ | 5.2 | $ | — | $ | 52.0 | ||||||||||||
Seven to twelve months | 35.3 | 1.3 | — | 36.6 | ||||||||||||||||
More than twelve months | 58.1 | 6.1 | — | 64.3 | ||||||||||||||||
Total | $ | 140.2 | $ | 12.7 | $ | — | $ | 153.0 | ||||||||||||
Number of Issues in Unrealized Loss Position: | ||||||||||||||||||||
Fixed Maturity Securities: | ||||||||||||||||||||
One to six months | 530 | 2 | — | 532 | ||||||||||||||||
Seven to twelve months | 321 | 1 | — | 322 | ||||||||||||||||
More than twelve months | 478 | 2 | — | 480 | ||||||||||||||||
Total | 1,329 | 5 | — | 1,334 | (g) | |||||||||||||||
__________
(g) | At December 31, 2018 the number of issues in an unrealized loss position represent 68.1% of the total number of such fixed maturity issues held by the Company. |
The aging of issues with unrealized losses employs balance sheet date fair value comparisons with an issue's cost. The percentage reduction from such cost reflects the decline as of a specific point in time (December 31, 2018 in the above table) and, accordingly, is not indicative of a security's value having been consistently below its cost at the percentages shown nor throughout the periods shown.
Age Distribution of Fixed Maturity Securities | ||||||||||
December 31: | 2018 | 2017 | ||||||||
Maturity Ranges: | ||||||||||
Due in one year or less | 7.0 | % | 9.2 | % | ||||||
Due after one year through five years | 51.6 | 45.5 | ||||||||
Due after five years through ten years | 40.7 | 44.1 | ||||||||
Due after ten years through fifteen years | .6 | 1.0 | ||||||||
Due after fifteen years | .1 | .2 | ||||||||
Total | 100.0 | % | 100.0 | % | ||||||
Average Maturity in Years | 4.5 | 4.7 | ||||||||
Duration (h) | 4.1 | 4.2 | ||||||||
___________
(h) | Duration is used as a measure of bond price sensitivity to interest rate changes. A duration of 4.1 as of December 31, 2018 implies that a 100 basis point parallel increase in interest rates from current levels would result in a possible decline in the fair value of the long-term fixed maturity investment portfolio of approximately 4.1%. |
41
Composition of Unrealized Gains (Losses) | |||||||||||||
December 31: | 2018 | 2017 | |||||||||||
Available for Sale Fixed Maturity Securities: | |||||||||||||
Amortized cost | $ | 8,285.0 | $ | 8,162.2 | |||||||||
Estimated fair value | 8,182.8 | 8,282.3 | |||||||||||
Net unrealized gains (losses) | $ | (102.1 | ) | $ | 120.0 | ||||||||
Components of net unrealized gains (losses): | |||||||||||||
Gross unrealized gains | $ | 37.1 | $ | 147.4 | |||||||||
Gross unrealized losses | (139.2 | ) | (27.3 | ) | |||||||||
Net unrealized gains (losses) | $ | (102.1 | ) | $ | 120.0 | ||||||||
Equity Securities: | |||||||||||||
Original cost | $ | 3,039.1 | $ | 2,629.9 | |||||||||
Estimated fair value | 3,380.9 | 3,265.5 | |||||||||||
Net unrealized gains (losses)(i) | $ | 341.8 | $ | 635.6 | |||||||||
Components of net unrealized gains (losses): | |||||||||||||
Gross unrealized gains | $ | 517.3 | $ | 658.8 | |||||||||
Gross unrealized losses | (175.4 | ) | (23.2 | ) | |||||||||
Net unrealized gains (losses)(i) | $ | 341.8 | $ | 635.6 | |||||||||
___________
(i) | Effective January 1, 2018, unrealized gains and losses from changes in fair value of equity securities are included in total realized and unrealized investment gains (losses) in the consolidated statements of income. |
Other Assets - Among other major assets, substantially all of the Company's receivables are not past due. Reinsurance recoverable balances on paid or estimated unpaid losses are deemed recoverable from solvent reinsurers or have otherwise been reduced by allowances for estimated amounts unrecoverable. Deferred policy acquisition costs are estimated by taking into account the direct costs relating to the successful acquisition of new or renewal insurance contracts and evaluating their recoverability on the basis of recent trends in claims costs. The Company's deferred policy acquisition cost balances have not fluctuated substantially from period-to-period, and do not represent significant percentages of assets or shareholders' equity.
Liquidity - The parent holding company meets its liquidity and capital needs principally through dividends and interest on intercompany financing arrangements paid by its subsidiaries. The insurance subsidiaries' ability to pay cash dividends to the parent company is generally restricted by law or subject to approval of the insurance regulatory authorities of the states in which they are domiciled. The Company can receive up to $507.8 in dividends from its subsidiaries in 2019 without the prior approval of regulatory authorities. The liquidity achievable through such permitted dividend payments is considered sufficient to cover the parent holding company's currently expected cash outflows represented mostly by interest and scheduled repayments on outstanding debt, reasonably anticipated cash dividend payments to shareholders, modest operating expenses, and the near-term capital needs of its operating company subsidiaries.
Capitalization - Old Republic's total capitalization of $6,127.6 at December 31, 2018 consisted of debt of $981.4 and common shareholders' equity of $5,146.2. Changes in the common shareholders' equity account reflect primarily net income for the year then ended, changes in the fair value of fixed maturity securities, dividend payments and the conversion of all the 2018 Convertible Senior Notes into the Company's common stock.
Old Republic has paid a cash dividend without interruption since the World War II year of 1942 (77 years), and it has raised the regular annual cash dividend payment for each of the past 37 years. The dividend rate is reviewed and approved by the Board of Directors on a quarterly basis each year. In establishing each year's cash dividend rate the Company does not follow a strict formulaic approach. Rather, it favors a gradual rise in the annual dividend rate that is largely reflective of long-term consolidated operating earnings trends. Accordingly, each year's dividend rate is set judgmentally in consideration of such key factors as the dividend paying capacity of the Company's insurance subsidiaries, the trends in average annual statutory and GAAP earnings for the five to ten most recent calendar years, and management's long-term expectations for the Company's consolidated business and its individual operating subsidiaries. In late December 2017, the Board declared a special cash dividend of $1.00 per share payable on January 31, 2018.
Under state insurance regulations, the Company's three mortgage guaranty insurance subsidiaries are required to operate at a maximum risk to capital ratio of 25:1 or otherwise hold minimum amounts of capital based on specified formulas. Since the Company's mortgage insurance subsidiaries have discontinued writing new business the risk-to-capital ratio considerations are therefore no longer of consequence.
42
Contractual Obligations - The following table shows certain information relating to the required reporting of contractual obligations as of December 31, 2018:
2019 | 2020 and 2021 | 2022 and 2023 | 2024 and After | Total | |||||||||||||||
Contractual Obligations: | |||||||||||||||||||
Debt | $ | 8.5 | $ | 30.3 | $ | — | $ | 950.0 | $ | 988.8 | |||||||||
Interest on Debt | 41.8 | 82.5 | 81.6 | 83.4 | 289.4 | ||||||||||||||
Operating Leases | 60.4 | 88.5 | 56.8 | 103.6 | 309.4 | ||||||||||||||
Pension Benefits Contributions (a) | 6.5 | 23.5 | 24.5 | 7.6 | 62.1 | ||||||||||||||
Claim & Claim Expense Reserves (b) | 2,464.6 | 2,410.8 | 1,094.4 | 3,501.2 | 9,471.2 | ||||||||||||||
Total | $ | 2,582.3 | $ | 2,636.0 | $ | 1,257.4 | $ | 4,645.8 | $ | 11,121.8 | |||||||||
__________
(a) | Represents estimated minimum funding of contributions for the Old Republic International Salaried Employees Retirement Plan. Funding of the plan is dependent on a number of factors including actual performance versus actuarial assumptions made at the time of the actuarial valuation, as well as the maintenance of certain funding levels relative to regulatory requirements. |
(b) | Amounts are reported gross of reinsurance. As discussed herein with respect to the nature of loss reserves and the estimating process utilized in their establishment, the Company's loss reserves do not have a contractual maturity date. Estimated gross loss payments are based primarily on historical claim payment patterns, are subject to change due to a wide variety of factors, do not reflect anticipated recoveries under the terms of reinsurance contracts, and cannot be predicted with certainty. Actual future loss payments may differ materially from the current estimates shown in the table above. |
RESULTS OF OPERATIONS |
Revenues: Premiums & Fees |
Pursuant to GAAP applicable to the insurance industry, revenues are recognized as follows:
Substantially all general insurance premiums pertain to annual policies and are reflected in income on a pro-rata basis in association with the related benefits, claims and expenses. Earned but unbilled premiums are generally taken into income on the billing date, while adjustments for retrospective premiums, commissions and similar charges or credits are accrued on the basis of periodic evaluations of current underwriting experience and contractual obligations.
Title premium and fee revenues stemming from the Company's direct operations (which include branch offices of its title insurers and wholly owned agency subsidiaries) represent approximately 26% of 2018 consolidated title business revenues. Such premiums are generally recognized as income at the escrow closing date which approximates the policy effective date. Fee income related to escrow and other closing services is recognized when the related services have been performed and completed. The remaining 74% of consolidated title premium and fee revenues is produced by independent title agents and underwritten title companies. Rather than making estimates that could be subject to significant variance from actual premium and fee production, the Company recognizes revenues from those sources upon receipt. Such receipts can reflect a three to four month lag relative to the effective date of the underlying title policy, and are offset concurrently by production expenses and claim reserve provisions.
The Company's mortgage guaranty premiums primarily stem from monthly installments paid on long-duration, guaranteed renewable insurance policies. Such premiums are written and earned in the month coverage is effective. With respect to relatively few annual or single premium policies, earned premiums are largely recognized on a pro-rata basis over the terms of the policies. As described more fully in the RFIG Run-off Business' Risk Factors for premium income and long-term claim exposures, revenue recognition for insured loans is not appropriately matched to the risk exposure and the consequent recognition of both normal and catastrophic loss occurrences.
The major sources of Old Republic's consolidated earned premiums and fees for the periods shown were as follows:
Earned Premiums and Fees | ||||||||||||||||||||||
General | Title | RFIG Run-off | Other | Total | % Change from prior period | |||||||||||||||||
Years Ended December 31: | ||||||||||||||||||||||
2016 | $ | 2,936.3 | $ | 2,206.6 | $ | 170.0 | $ | 20.1 | $ | 5,333.2 | 3.0 | % | ||||||||||
2017 | 3,110.8 | 2,287.2 | 122.9 | 18.8 | 5,539.7 | 3.9 | ||||||||||||||||
2018 | $ | 3,277.1 | $ | 2,336.1 | $ | 75.9 | $ | 14.6 | $ | 5,703.9 | 3.0 | % | ||||||||||
43
With few exceptions, 2018 general insurance earned premiums grew for most types of coverages and markets served. The cumulative effects of recent years’ and ongoing premium rate increases for several insurance products, along with new business production were main contributors to premium growth. The greater premium levels stemmed principally from commercial automobile (trucking), national accounts, executive indemnity and auto warranties. Positive earned premiums trends throughout 2017 were unevenly distributed among various insurance coverages and sources of business. Gains were registered most prominently in commercial automobile (trucking), risk management, national accounts and home and auto warranty. On the other hand, premium growth was constrained by low volume in a large account contractors book of business faced with a particularly competitive market place, and by reduced opportunities in gas and oil energy services and several smaller industry sectors. Premium volume from the new underwriting facility established in early 2015 also added measurably to earned premiums in all three years.
Title Group premium and fee revenues grew by 2.1%, 3.6% and 7.9% in 2018, 2017, and 2016 respectively. 2018 premiums and fees reflect a slowdown in housing and mortgage lending activity during the year. The continuation of a generally positive mortgage rate environment and reasonably strong housing and commercial property markets were major factors in the year-over-year gain in premiums and fees in 2017.
Results of the run-off MI and CCI business reflect the expected, continuing drop in net earned premiums from declining risk in force. For the CCI coverage in particular, the much lower premiums in 2018 resulted mostly from the 2017 elimination of a major bank business relationship which had been a significant source of both earned premiums and substantially higher litigated claim costs.
The percentage allocation of net premiums earned for major insurance coverages in the General Insurance Group was as follows:
General Insurance Earned Premiums by Type of Coverage | |||||||||||||||||
Commercial Automobile (mostly trucking) | Workers' Compensation | Financial Indemnity | Inland Marine and Property | General Liability | Other | ||||||||||||
Years Ended December 31: | |||||||||||||||||
2016 | 33.7 | % | 36.5 | % | 4.3 | % | 7.4 | % | 5.6 | % | 12.5 | % | |||||
2017 | 34.6 | 33.6 | 4.9 | 7.6 | 6.3 | 13.0 | |||||||||||
2018 | 36.8 | % | 31.1 | % | 5.3 | % | 7.7 | % | 6.2 | % | 12.9 | % | |||||
The following table shows the percentage distribution of Title Group premium and fee revenues by production sources:
Title Premium and Fee Production by Source | |||||
Direct Operations | Independent Title Agents & Other | ||||
Years Ended December 31: | |||||
2016 | 27.9 | % | 72.1 | % | |
2017 | 26.9 | 73.1 | |||
2018 | 26.1 | % | 73.9 | % | |
The following tables provide information on production and related risk exposure trends for Old Republic's mortgage guaranty insurance operation:
Earned Premiums | Persistency | ||||||||||||
Premium and Persistency Trends by Type: | Direct | Net | Traditional Primary | Bulk | |||||||||
Years Ended December 31: | |||||||||||||
2016 | $ | 157.1 | $ | 154.1 | 77.7 | % | 72.8 | % | |||||
2017 | 110.4 | 109.8 | 77.9 | 78.2 | |||||||||
2018 | $ | 74.4 | $ | 74.4 | 79.7 | % | 76.3 | % | |||||
The Company's flagship mortgage guaranty insurance carrier ceased the underwriting of new policies effective August 31, 2011 and the existing book of business was placed in run-off operating mode.
While there is no consensus in the marketplace as to the precise definition of "sub-prime", Old Republic generally views loans with credit (FICO) scores less than 620, loans underwritten with reduced levels of documentation and loans with loan to value ratios in excess of 95% as having a higher risk of default. Risk in force concentrations by these attributes are disclosed in the following tables for both traditional primary and bulk production. Premium rates for loans exhibiting greater risk attributes are typically higher in anticipation of potentially greater defaults and claim costs. Additionally, bulk
44
insurance policies, which represent 7.0% of total net risk in force as of year-end 2018, are frequently subject to deductibles and aggregate stop losses which serve to limit the overall risk on a pool of insured loans.
Net Risk in Force | |||||||||||||||
Net Risk in Force By Type: | Traditional Primary | Bulk | Other | Total | |||||||||||
As of December 31: | |||||||||||||||
2016 | $ | 4,987.9 | $ | 359.5 | $ | 20.5 | $ | 5,367.9 | |||||||
2017 | 3,888.0 | 292.4 | 12.1 | 4,192.6 | |||||||||||
2018 | $ | 3,098.3 | $ | 235.3 | $ | 11.2 | $ | 3,345.0 | |||||||
Analysis of Risk in Force | |||||||||||
Risk in Force Distribution By FICO Scores: | FICO less than 620 | FICO 620 to 680 | FICO Greater than 680 | Unscored/ Unavailable | |||||||
Traditional Primary: | |||||||||||
As of December 31: | |||||||||||
2016 | 7.2 | % | 30.5 | % | 61.5 | % | .8 | % | |||
2017 | 7.5 | 31.5 | 60.2 | .8 | |||||||
2018 | 7.9 | % | 32.2 | % | 59.1 | % | .8 | % | |||
Bulk(a): | |||||||||||
As of December 31: | |||||||||||
2016 | 29.9 | % | 32.0 | % | 38.0 | % | .1 | % | |||
2017 | 31.8 | 31.7 | 36.3 | .2 | |||||||
2018 | 33.6 | % | 31.5 | % | 34.8 | % | .1 | % | |||
Risk in Force Distribution By Loan to Value ("LTV") Ratio: | LTV 85.0 and below | LTV 85.01 to 90.0 | LTV 90.01 to 95.0 | LTV Greater than 95.0 | |||||||
Traditional Primary(b): | |||||||||||
As of December 31: | |||||||||||
2016 | 3.8 | % | 32.1 | % | 30.6 | % | 33.5 | % | |||
2017 | 4.0 | 30.9 | 30.5 | 34.6 | |||||||
2018 | 4.1 | % | 30.7 | % | 29.7 | % | 35.5 | % | |||
Bulk(a): | |||||||||||
As of December 31: | |||||||||||
2016 | 46.5 | % | 29.0 | % | 12.3 | % | 12.2 | % | |||
2017 | 45.3 | 29.9 | 12.6 | 12.2 | |||||||
2018 | 43.4 | % | 30.9 | % | 13.1 | % | 12.6 | % | |||
__________
(a) | Bulk pool risk in-force, which represented 8.0% of total bulk risk in-force at December 31, 2018, has been allocated pro-rata based on insurance in-force. |
(b) | The LTV distribution reflects base LTV ratios which are determined prior to the impact of single premiums financed and paid at the time of loan origination. |
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Risk in Force Distribution By Top Ten States:
Traditional Primary | |||||||||||||||||||||||||||||
TX | FL | GA | IL | CA | NC | PA | NJ | VA | MD | ||||||||||||||||||||
As of December 31: | |||||||||||||||||||||||||||||
2016 | 6.4 | % | 7.8 | % | 6.0 | % | 5.8 | % | 4.8 | % | 4.6 | % | 4.4 | % | 4.4 | % | 3.6 | % | 3.8 | % | |||||||||
2017 | 5.9 | 8.1 | 6.0 | 6.1 | 4.8 | 4.4 | 4.3 | 4.6 | 3.7 | 4.2 | |||||||||||||||||||
2018 | 5.5 | % | 8.5 | % | 6.0 | % | 6.4 | % | 4.9 | % | 4.1 | % | 4.3 | % | 4.8 | % | 3.8 | % | 4.6 | % | |||||||||
Bulk (a) | |||||||||||||||||||||||||||||
TX | FL | GA | IL | CA | NY | PA | NJ | OH | MD | ||||||||||||||||||||
As of December 31: | |||||||||||||||||||||||||||||
2016 | 5.3 | % | 8.6 | % | 4.9 | % | 4.2 | % | 12.4 | % | 7.4 | % | 3.7 | % | 4.1 | % | 4.2 | % | 2.6 | % | |||||||||
2017 | 5.4 | 8.3 | 5.1 | 4.4 | 12.4 | 7.8 | 3.8 | 3.4 | 4.4 | 2.7 | |||||||||||||||||||
2018 | 5.6 | % | 8.2 | % | 5.4 | % | 4.6 | % | 12.4 | % | 7.1 | % | 4.0 | % | 2.9 | % | 4.7 | % | 2.8 | % | |||||||||
Risk in Force Distribution By Level of Documentation: | Full Documentation | Reduced Documentation | |||
Traditional Primary: | |||||
As of December 31: | |||||
2016 | 92.4 | % | 7.6 | % | |
2017 | 92.3 | 7.7 | |||
2018 | 92.2 | % | 7.8 | % | |
Bulk (a): | |||||
As of December 31: | |||||
2016 | 68.0 | % | 32.0 | % | |
2017 | 69.4 | 30.6 | |||
2018 | 71.8 | % | 28.2 | % | |
Risk in Force Distribution By Loan Type: | Fixed Rate & ARMs with Resets >=5 Years | ARMs with Resets <5 years | |||
Traditional Primary: | |||||
As of December 31: | |||||
2016 | 97.2 | % | 2.8 | % | |
2017 | 97.2 | 2.8 | |||
2018 | 97.2 | % | 2.8 | % | |
Bulk (a): | |||||
As of December 31: | |||||
2016 | 71.3 | % | 28.7 | % | |
2017 | 70.1 | 29.9 | |||
2018 | 68.6 | % | 31.4 | % | |
__________
(a) | Bulk pool risk in-force, which represented 8.0% of total bulk risk in-force at December 31, 2018, has been allocated pro-rata based on insurance in-force. |
The Company's consumer credit indemnity ("CCI") earned premiums and related risk in force included in the table below have reflected a generally declining trend. The decline is largely due to a discontinuation of active sales efforts since 2008 and from the elimination of a major bank as a source of significant premiums and claims in the third quarter of 2017.The following table shows CCI net premiums earned during the indicated periods and the maximum calculated risk in force at the end of the respective periods. Net earned premiums include additional premium adjustments arising from the variable claim experience of individual policies subject to retrospective rating plans. Risk in force reflects estimates of the maximum risk exposures at the inception of individual policies adjusted for cumulative claim costs and the lower outstanding loan balances attributed to such policies through the end of the periods shown below.
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Net CCI Earned Premiums | Risk in Force | ||||||
Years Ended December 31: | |||||||
2016 | $ | 15.8 | $ | 699.7 | |||
2017 | 13.0 | 140.9 | |||||
2018 | $ | 1.5 | $ | 70.1 | |||
Revenues: Net Investment Income |
Net investment income is affected by trends in interest and dividend yields for the types of securities in which the Company's funds are invested during each reporting period. The following tables reflect the segmented and consolidated invested asset bases as of the indicated dates, and the investment income earned and resulting yields on such assets. Since the Company can exercise little control over fair values, yields are evaluated on the basis of investment income earned in relation to the cost of the underlying invested assets, though yields based on the fair values of such assets are also shown in the statistics below.
Invested Assets at Cost | Fair Value Adjust- ment | Invested Assets at Fair Value (a) | |||||||||||||||||||||||||
General | Title | RFIG Run-off | Corporate and Other | Total | |||||||||||||||||||||||
As of December 31: | |||||||||||||||||||||||||||
2017 | $ | 9,702.7 | $ | 1,106.2 | $ | 545.9 | $ | 1,206.9 | $ | 12,561.9 | $ | 756.1 | $ | 13,318.0 | |||||||||||||
2018 | $ | 10,162.3 | $ | 1,105.6 | $ | 583.6 | $ | 904.3 | $ | 12,755.9 | $ | 238.6 | $ | 12,994.6 | |||||||||||||
__________
(a) These balances include fixed maturity securities classified as held to maturity which are reported and reflected herein at amortized cost.
Net Investment Income | Yield at | ||||||||||||||||||||||||
General | Title | RFIG Run-off | Corporate and Other | Total | Original Cost | Fair Value | |||||||||||||||||||
Years Ended | |||||||||||||||||||||||||
December 31: | |||||||||||||||||||||||||
2016 | $ | 312.1 | $ | 36.2 | $ | 23.2 | $ | 15.4 | $ | 387.0 | 3.34 | % | 3.23 | % | |||||||||||
2017 | 318.9 | 37.3 | 21.7 | 31.4 | 409.4 | 3.32 | 3.14 | ||||||||||||||||||
2018 | $ | 341.0 | $ | 38.8 | $ | 20.1 | $ | 31.7 | $ | 431.8 | 3.41 | % | 3.28 | % | |||||||||||
Consolidated net investment income increased by 5.5% and 5.8% in 2018 and 2017, respectively. This revenue source is affected by changes in the invested asset base which are mainly driven by consolidated operating cash flows, by a concentration of investable assets in interest-bearing securities, and by changes in market rates of return. The yields for the periods presented also reflect an increasingly greater commitment to high quality dividend paying equity securities.
Revenues: Net Investment Gains (Losses) |
The Company's investment policies are not designed to maximize or emphasize the realization of investment gains. Rather, these policies aim for a stable source of income from interest and dividends, protection of capital, and the providing of sufficient liquidity to meet insurance underwriting and other obligations as they become payable in the future. Dispositions of fixed maturity securities generally arise from scheduled maturities and early calls; in 2018, 2017, and 2016, 76.3%, 68.1% and 76.0%, respectively, of all such dispositions resulted from these occurrences. 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 table reflects the composition of net investment gains or losses for the periods shown. Gains realized in 2017 were substantially higher than those realized in recent years and stem from managed sales of investment portfolio securities whose values had risen to higher than expected levels over the course of 2017's strong securities market.
47
Realized Investment Gains (Losses) from Actual Transactions | Impairment Losses on Securities | Unrealized Gains (Losses) from Changes in Fair Value of Equity Securities | |||||||||||||||||||||||||||||
Fixed Maturity Securities | Equity Securities and Miscel- laneous Investments | Total | Fixed Maturity Securities | Equity Securities and Miscel- laneous Investments | Total | Total Investment Gains (Losses) | |||||||||||||||||||||||||
Years Ended | |||||||||||||||||||||||||||||||
December 31: | |||||||||||||||||||||||||||||||
2016 | $ | 7.8 | $ | 69.9 | $ | 77.8 | $ | (4.9 | ) | $ | — | $ | (4.9 | ) | $ | — | $ | 72.8 | |||||||||||||
2017 | 16.6 | 194.9 | 211.6 | — | — | — | — | 211.6 | |||||||||||||||||||||||
2018 | $ | (4.8 | ) | $ | 63.1 | $ | 58.2 | $ | — | $ | — | $ | — | $ | (293.8 | ) | $ | (235.6 | ) | ||||||||||||
Expenses: Benefits and Claims |
The Company records the benefits, claims and related settlement costs that have been incurred during each accounting period. Total claim costs are affected by the amount of paid claims and the adequacy of reserve estimates established for current and prior years' claim occurrences at each balance sheet date.
The following table shows a breakdown of gross and net of reinsurance claim reserve estimates for major types of insurance coverages as of December 31, 2018 and 2017:
Claim and Loss Adjustment Expense Reserves | |||||||||||||||||||
December 31: | 2018 | 2017 | |||||||||||||||||
Gross | Net | Gross | Net | ||||||||||||||||
Workers' compensation | $ | 4,864.4 | $ | 3,090.0 | $ | 4,752.1 | $ | 2,993.9 | |||||||||||
General liability | 1,117.7 | 556.1 | 1,072.6 | 565.4 | |||||||||||||||
Commercial automobile (mostly trucking) | 1,675.2 | 1,264.9 | 1,524.8 | 1,151.8 | |||||||||||||||
Other coverages | 870.6 | 624.5 | 810.8 | 561.4 | |||||||||||||||
Unallocated loss adjustment expense reserves | 237.5 | 230.4 | 225.1 | 198.8 | |||||||||||||||
Total general insurance reserves | 8,765.6 | 5,766.1 | 8,385.6 | 5,471.5 | |||||||||||||||
Title | 533.4 | 533.4 | 559.7 | 559.7 | |||||||||||||||
RFIG Run-off | 154.5 | 154.5 | 271.7 | 271.7 | |||||||||||||||
Life and accident | 17.7 | 10.8 | 20.4 | 13.5 | |||||||||||||||
Total claim and loss adjustment expense reserves | $ | 9,471.2 | $ | 6,464.9 | $ | 9,237.6 | $ | 6,316.4 | |||||||||||
Asbestosis and environmental claim reserves included | |||||||||||||||||||
in the above general insurance reserves: | |||||||||||||||||||
Amount | $ | 105.8 | $ | 74.4 | $ | 117.4 | $ | 96.4 | |||||||||||
% of total general insurance reserves | 1.2 | % | 1.3 | % | 1.4 | % | 1.8 | % | |||||||||||
The Company's reserve for loss and loss adjustment expenses represents the accumulation of estimates of ultimate losses payable, including incurred but not reported losses and loss adjustment expenses. The establishment of claim reserves by the Company's insurance subsidiaries is a reasonably complex and dynamic process influenced by a large variety of factors as further discussed below. Consequently, reserves established are a reflection of the opinions of a large number of persons, of the application and interpretation of historical precedent and trends, of expectations as to future developments, and of management's judgment in interpreting all such factors. At any point in time, the Company is exposed to the incurrence of possibly higher or lower than anticipated claim costs and the resulting changes in estimates are recorded in operations of the periods during which they are made. Increases to prior reserve estimates are often referred to as unfavorable development whereas any changes that decrease previous estimates of the Company's ultimate liability are referred to as favorable development.
Overview of Loss Reserving Process
Most of Old Republic's consolidated claim and related expense reserves stem from its general insurance business. At December 31, 2018, such reserves accounted for 92.5% and 89.2% of consolidated gross and net of reinsurance reserves, respectively, while similar reserves at December 31, 2017 represented 90.8% and 86.6% of the respective consolidated amounts.
The Company's reserve setting process reflects the nature of its insurance business and the operationally decentralized basis upon which it is conducted. Old Republic's general insurance operations encompasses a large
48
variety of coverages or classes of commercial insurance; it has negligible exposure to personal insurance coverages such as homeowners or private passenger automobile insurance that exhibit wide diversification of risks, significant frequency of claim occurrences, and high degrees of statistical credibility. Additionally, the Company's insurance subsidiaries do not provide significant amounts of insurance protection for premises; most of its property insurance exposures relate to cargo, incidental property, and insureds' inland marine assets. Consequently, the wide variety of policies issued and commercial insurance customers served require that loss reserves be analyzed and established in the context of the unique or different attributes of each block or class of business produced by the Company. For example, accident liability claims emanating from insured trucking companies or from general aviation customers become known relatively quickly, whereas claims of a general liability nature arising from the building activities of a construction company may emerge over extended periods of time. Similarly, claims filed pursuant to errors and omissions or directors and officers' liability coverages are usually not prone to immediate evaluation or quantification inasmuch as many such claims may be litigated over several years and their ultimate costs may be affected by the vagaries of judged or jury verdicts. Approximately 92% of the general insurance group's claim reserves stem from liability insurance coverages for commercial customers which typically require more extended periods of investigation and at times protracted litigation before they are finally settled. As a consequence of these and other factors, Old Republic does not utilize a single, overarching loss reserving approach.
The Company prepares periodic analyses of its loss reserve estimates for its significant insurance coverages. It establishes point estimates for most losses on an insurance coverage line-by-line basis for individual subsidiaries, sub-classes, individual accounts, blocks of business or other unique concentrations of insurance risks such as directors and officers' liability, that have similar attributes. Actuarially or otherwise derived ranges of reserve levels are not utilized as such in setting these reserves. Instead the reported reserves encompass the Company's best point estimates at each reporting date and the overall reserve level at any point in time therefore represents the compilation of a very large number of reported reserve estimates and the results of a variety of formula calculations largely driven by analysis of historical data. Favorable or unfavorable developments of prior year reserves are implicitly covered by the point estimates incorporated in total reserves at each balance sheet date. The Company does not project future variability or make an explicit provision for uncertainty when determining its best estimate of loss reserves. Over the most recent decade actual incurred losses have developed within a reasonable range of their original estimates.
Aggregate loss reserves consist of liability estimates for claims that have been reported ("case") to the Company's insurance subsidiaries and reserves for claims that have been incurred but not yet reported ("IBNR") or whose ultimate costs may not become fully apparent until a future time. Additionally, the Company establishes unallocated loss adjustment expense reserves for loss settlement costs that are not directly related to individual claims. Such reserves are based on prior years' cost experience and trends, and are intended to cover the unallocated costs of claim departments' administration of case and IBNR claims over time. Long-term, disability-type workers' compensation reserves are discounted to present value based on interest rates that range from 3.5% to 4.0%. The amount of discount reflected in the year-end net reserves totaled $216.5, $240.7 and $231.9 as of December 31, 2018, 2017, and 2016, respectively. Interest accretion of $49.0, $20.4, and $24.2 for the years ended December 31, 2018, 2017, and 2016, respectively, was recognized as unfavorable development of prior year reserves within benefits, claims and settlement expenses in the consolidated statements of income.
A large variety of statistical analyses and formula calculations are utilized to provide for IBNR claim costs as well as additional costs that can arise from such factors as monetary and social inflation, changes in claims administration processes, changes in reinsurance ceded and recoverability levels, and expected trends in claim costs and related ratios. Typically, such formulas take into account so-called link ratios that represent prior years' patterns of incurred or paid loss trends between succeeding years, or past experience relative to progressions of the number of claims reported over time and ultimate average costs per claim.
Overall, reserves pertaining to several hundred large individual commercial insurance accounts that exhibit sufficient statistical credibility, and at times may be subject to retrospective premium rating plans or the utilization of varying levels or types of self-insured retentions through captive insurers and similar risk management mechanisms are established on an account by account basis using case reserves and applicable formula-driven methods. Large account reserves are usually set and analyzed for groups of coverages such as workers' compensation, commercial automobile (trucking) and general liability that are typically underwritten jointly for many customers. For certain so-called long-tail categories of insurance such as retained or assumed excess liability or excess workers' compensation, officers and directors' liability, and commercial umbrella liability relative to which claim development patterns are particularly long, more volatile, and immature in their early stages of development, the Company judgmentally establishes the most current accident years' loss reserves on the basis of expected claim ratios. Such expected claim ratios typically reflect currently estimated claim ratios from prior accident years, adjusted for the effect of actual and anticipated rate changes, actual and anticipated changes in coverage, reinsurance, mix of business, and other anticipated changes in external factors such as trends in loss costs or the legal and claims environment. Expected claim ratios are generally used for the two to three most recent accident years depending on the individual class or category of business. As actual claims data emerges in succeeding interim and annual periods, the original accident year claim ratio assumptions are validated or otherwise adjusted sequentially through the application of statistical projection techniques such as the Bornhuetter/Ferguson method which utilizes data from the more mature experience of prior years to arrive at a likely indication of more recent years' loss trends and costs.
Title insurance and related escrow services loss and loss adjustment expense reserves are established as point estimates to cover the projected settlement costs of known as well as IBNR losses related to premium and escrow service revenues of each reporting period. Reserves for known claims are based on an assessment of the facts available to the Company during the settlement process. The point estimates covering all claim reserves take into account IBNR claims based on past experience and evaluations of such variables as changing trends in the types of policies issued, changes
49
in real estate markets and interest rate environments, and changing levels of loan refinancing, all of which can have a bearing on the emergence, number, and ultimate costs of claims.
RFIG Run-off mortgage guaranty insurance reserves for unpaid claims and claim adjustment expenses are recognized only upon an instance of default, defined as an insured mortgage loan for which two or more consecutive monthly payments have been missed. Loss reserves are based on statistical calculations that take into account the number of reported insured mortgage loan defaults as of each balance sheet date, as well as experience-based estimates of loan defaults that have occurred but have not as yet been reported. Further, the loss reserve estimating process takes into account a large number of variables including trends in claim severity, potential salvage recoveries, expected cure rates for reported loan delinquencies at various stages of default, the level of coverage rescissions and claims denials due to material misrepresentation in key underwriting information or non-compliance with prescribed underwriting guidelines, and management judgments relative to future employment levels, housing market activity, and mortgage loan interest costs, demand, and extensions.
The Company has the legal right to rescind mortgage insurance coverage unilaterally as expressly stated in its policy. Moreover, two federal courts that have considered that policy wording have each affirmed that right (See First Tennessee Bank N.A. v. Republic Mortg. Ins. Co., Case No. 2:10-cv-02513-JPM-cgc (W.D. Tenn., Feb. 25, 2011) and JPMorgan Chase Bank N.A. v. Republic Mortg. Ins. Co., Civil Action No. 10-06141 (SRC) (D. NJ, May 4, 2011), each decision citing supporting state law legal precedent). RMIC's mortgage insurance policy provides that the insured represents that all statements made and information provided to it in an application for coverage for a loan, without regard to who made the statements or provided the information, have been made and presented for and on behalf of the insured; and that such statements and information are neither false nor misleading in any material respect, nor omit any fact necessary to make such statements and information not false or misleading in any material respect. According to the policy, if any of those representations are materially false or misleading with respect to a loan, the Company has the right to cancel or rescind coverage for that loan retroactively to commencement of the coverage. Whenever the Company determines that an application contains a material misrepresentation, it either advises the insured in writing of its findings prior to rescinding coverage or exercises its unilateral right to rescind coverage for that loan, stating the reasons for that action in writing and returning the applicable premium. The rescission of coverage in instances of materially faulty representations or warranties provided in applications for insurance is a necessary and prevailing practice throughout the insurance industry. In the case of mortgage guaranty insurance, rescissions have occurred regularly over the years but have been generally immaterial. Since 2008, however, the Company has experienced a much greater incidence of rescissions due to increased levels of observed fraud and misrepresentations in insurance applications pertaining to business underwritten between 2004 and the first half of 2008. As a result, the Company has incorporated certain assumptions regarding the expected levels of coverage rescissions and claim denials in its reserving methodology since 2008. Such estimates, which are evaluated at each balance sheet date, take into account observed as well as historical trends in rescission and denial rates. The table below shows the estimated effects of coverage rescissions and claim denials on loss reserves and settled and incurred losses.
2018 | 2017 | 2016 | |||||||||
Estimated reduction in beginning reserve | $ | 19.0 | $ | 29.6 | $ | 47.5 | |||||
Total incurred claims and settlement expenses reduced | |||||||||||
(increased) by changes in estimated rescissions: | |||||||||||
Current year | .9 | 6.2 | 8.3 | ||||||||
Prior year | (12.3 | ) | (3.7 | ) | (24.8 | ) | |||||
Sub-total | (11.4 | ) | 2.5 | (16.5 | ) | ||||||
Estimated rescission reduction in paid claims | (4.4 | ) | (13.1 | ) | (1.4 | ) | |||||
Estimated reduction in ending reserve | $ | 3.2 | $ | 19.0 | $ | 29.6 | |||||
As noted above, the estimated reduction in ending loss reserves reflects, in large measure, a variety of judgments relative to the level of expected coverage rescissions and claim denials on loans that are in default as of each balance sheet date. The provision for insured events of the current year resulted from actual and anticipated rescissions and claim denials attributable to newly reported delinquencies in each respective year. The provision for insured events of prior years resulted from actual rescission and claim denial activity, reinstatement of previously rescinded or denied claims, or revisions in assumptions regarding expected rescission or claim denial rates on outstanding prior year delinquencies. The trends since 2010 reflect a continuing reduction in the level of actual and anticipated rescission and claim denial rates on total outstanding delinquencies. Claims not paid by virtue of rescission or denial represent the Company's estimated contractual risk, before consideration of the impacts of any reinsurance and deductibles or aggregate loss limits, on cases that are settled by the issuance of a rescission or denial notification. Variances between the estimated rescission and actual claim denial rate are reflected in the periods during which they occur.
Although the insured has no right under the policy to appeal a Company claim decision, the insured may, at any time, contest in writing the Company's findings or action with respect to a loan or a claim. In such cases, the Company considers any additional information supplied by the insured. This consideration may lead to further investigation, retraction or confirmation of the initial determination. If the Company concludes that it will reinstate coverage, it advises the insured in writing that it will do so immediately upon receipt of the premium previously returned. Reserves are not adjusted for potential reversals of rescissions or adverse rulings for loans under dispute since such reversals of claim rescissions and denials have historically been immaterial to the reserve estimation process.
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Incurred Loss Experience
Management believes that the Company's overall reserving practices have been consistently applied over many years. For at least the past ten years, previously established aggregate reserves have produced reasonable estimates of the cumulative ultimate net costs of claims incurred. However, there are no guarantees that such outcomes will continue, and, accordingly, no representation is made that ultimate net claim and related costs will not develop in future years to be greater or lower than currently established reserve estimates. In management's opinion, however, such potential development is not likely to have a material effect on the Company's consolidated financial position, although it could affect materially its consolidated results of operations for any one annual or interim reporting period. See further discussion in this Annual Report on Form 10-K under Item 1A - Risk Factors.
The following table shows an analysis of changes in aggregate reserves for the Company's losses, claims, and settlement expenses for each of the years shown.
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Years Ended December 31: | 2018 | 2017 | 2016 | ||||||||||||
Gross reserves at beginning of year | $ | 9,237.6 | $ | 9,206.0 | $ | 9,120.1 | |||||||||
Less: reinsurance losses recoverable | 2,921.1 | 2,766.1 | 2,732.5 | ||||||||||||
Net reserves at beginning of year: | |||||||||||||||
General Insurance | 5,471.5 | 5,249.9 | 5,053.1 | ||||||||||||
Title Insurance | 559.7 | 602.0 | 580.8 | ||||||||||||
RFIG Run-off | 271.7 | 574.0 | 736.7 | ||||||||||||
Other | 13.5 | 13.8 | 16.9 | ||||||||||||
Sub-total | 6,316.4 | 6,439.8 | 6,387.6 | ||||||||||||
Incurred claims and claim adjustment expenses: | |||||||||||||||
Provisions for insured events of the current year: | |||||||||||||||
General Insurance | 2,346.2 | 2,192.1 | 2,115.1 | ||||||||||||
Title Insurance | 96.1 | 95.2 | 107.7 | ||||||||||||
RFIG Run-off (a) | 56.2 | 297.1 | 171.3 | ||||||||||||
Other | 22.1 | 20.4 | 21.7 | ||||||||||||
Sub-total | 2,520.7 | 2,604.9 | 2,416.0 | ||||||||||||
Change in provision for insured events of prior years: | |||||||||||||||
General Insurance | (.2 | ) | 22.7 | 9.9 | |||||||||||
Title Insurance | (47.7 | ) | (74.3 | ) | (23.4 | ) | |||||||||
RFIG Run-off (a) | (26.2 | ) | (99.2 | ) | (68.7 | ) | |||||||||
Other | (3.5 | ) | (2.9 | ) | (3.8 | ) | |||||||||
Sub-total | (77.8 | ) | (153.8 | ) | (86.1 | ) | |||||||||
Total incurred claims and claim adjustment expenses (a) | 2,442.9 | 2,451.0 | 2,329.9 | ||||||||||||
Payments: | |||||||||||||||
Claims and claim adjustment expenses attributable to | |||||||||||||||
insured events of the current year: | |||||||||||||||
General Insurance | 813.2 | 765.8 | 723.5 | ||||||||||||
Title Insurance | 9.1 | 5.0 | 4.4 | ||||||||||||
RFIG Run-off (b) | 3.7 | 329.4 | 14.5 | ||||||||||||
Other | 16.0 | 13.9 | 14.8 | ||||||||||||
Sub-total | 842.2 | 1,114.3 | 757.4 | ||||||||||||
Claims and claim adjustment expenses attributable to | |||||||||||||||
insured events of prior years: | |||||||||||||||
General Insurance | 1,238.1 | 1,227.3 | 1,204.5 | ||||||||||||
Title Insurance | 65.4 | 58.2 | 58.6 | ||||||||||||
RFIG Run-off (b) | 143.3 | 170.6 | 250.8 | ||||||||||||
Other | 5.2 | 3.9 | 6.1 | ||||||||||||
Sub-total | 1,452.2 | 1,460.1 | 1,520.2 | ||||||||||||
Total payments (b) | 2,294.5 | 2,574.4 | 2,277.6 | ||||||||||||
Amount of reserves for unpaid claims and claim adjustment expenses | |||||||||||||||
at the end of each year, net of reinsurance losses recoverable: | |||||||||||||||
General Insurance | 5,766.1 | 5,471.5 | 5,249.9 | ||||||||||||
Title Insurance | 533.4 | 559.7 | 602.0 | ||||||||||||
RFIG Run-off | 154.5 | 271.7 | 574.0 | ||||||||||||
Other | 10.8 | 13.5 | 13.8 | ||||||||||||
Sub-total | 6,464.9 | 6,316.4 | 6,439.8 | ||||||||||||
Reinsurance losses recoverable | 3,006.3 | 2,921.1 | 2,766.1 | ||||||||||||
Gross reserves at end of year | $ | 9,471.2 | $ | 9,237.6 | $ | 9,206.0 | |||||||||
__________
Excluding the reclassification of CCI from the General Insurance to the RFIG Run-off Business segment, certain elements shown in the preceding table would have been as follows:
52
2018 | 2017 | 2016 | ||||||||||
Change in provision for incurred events of prior years: | ||||||||||||
General Insurance | $ | (6.4 | ) | $ | (34.5 | ) | $ | 2.5 | ||||
RFIG Run-off (a) | (20.1 | ) | (42.0 | ) | (61.3 | ) | ||||||
Payment of claim and claim adjustment expenses attributable to | ||||||||||||
incurred events of the current and prior years: | ||||||||||||
General Insurance | 2,083.0 | 2,297.5 | 1,939.9 | |||||||||
RFIG Run-off (b) | $ | 115.4 | $ | 195.8 | $ | 253.6 | ||||||
(a) | In common with all other insurance coverages, RFIG Run-off mortgage guaranty settled and incurred claim and claim adjustment expenses include only those costs actually or expected to be paid by the Company. As previously noted, changes in mortgage guaranty aggregate case, IBNR, and loss adjustment expense reserves shown below and entering into the determination of incurred claim costs, take into account, among a large number of variables, claim cost reductions for anticipated coverage rescissions and claims denials. |
The RFIG Run-off mortgage guaranty provision for insured events of the current year was reduced by estimated coverage rescissions and claim denials of $.9, $6.2 and $8.3, respectively, for 2018, 2017 and 2016. The provision for insured events of prior years in 2018, 2017 and 2016 was increased by estimated coverage rescissions and claims denials of $12.3, $3.7 and $24.8, respectively. Prior year development was also affected in varying degrees by differences between actual claim settlements relative to expected experience, by reinstatement of previously rescinded or denied claims, and by subsequent revisions of assumptions in regards to claim frequency, severity or levels of associated claim settlement costs which result from consideration of underlying trends and expectations.
The 2017 RFIG Run-off provision for insured events of the current year is inclusive of the claim expense provisions applicable to final settlements and probable dispositions of all known litigated and other claim costs as described further elsewhere in this report.
(b) | Rescissions reduced the Company's paid losses by an estimated $4.4, $13.1, and $1.4 for 2018, 2017, and 2016, respectively. |
The percentage of net claims, benefits and related settlement expenses incurred as a percentage of premiums and related fee revenues of the Company's three major operating segments and for consolidated operations were as follows:
Years Ended December 31: | 2018 | 2017 | 2016 | ||||||
General | 72.2 | % | 71.8 | % | 73.0 | % | |||
Title | 2.1 | .9 | 3.8 | ||||||
RFIG Run-off | 39.4 | 160.9 | 60.4 | ||||||
Consolidated claim ratio | 43.1 | % | 44.7 | % | 44.0 | % | |||
Reconciliation of consolidated ratio: | |||||||||
Provision for insured events of the current year | 44.5 | % | 47.5 | % | 45.6 | % | |||
Change in provision for insured events of prior years: | |||||||||
net (favorable) unfavorable development | (1.4 | ) | (2.8 | ) | (1.6 | ) | |||
Consolidated claim ratio | 43.1 | % | 44.7 | % | 44.0 | % | |||
The consolidated claim ratio reflects the changing effects of period-to-period contributions of each segment to consolidated results, and this ratio's variances within each segment. For the three most recent calendar years, the above table indicates that the one-year development of consolidated reserves at the beginning of each year produced favorable developments in 2018, 2017, and 2016 which on average decreased the consolidated claim ratio by 1.9%.
The percentage of net claims, benefits and related settlement expenses measured against premiums earned by major types of general insurance coverage were as follows:
General Insurance Claim Ratios by Type of Coverage | ||||||||||||||||||||
All Coverages | Workers' Compen-sation | Commercial Automobile (mostly trucking) | General Liability | Financial Indemnity | Inland Marine and Property | Other | ||||||||||||||
Years Ended | ||||||||||||||||||||
December 31: | ||||||||||||||||||||
2016 | 73.0 | % | 76.1 | % | 79.4 | % | 77.5 | % | 45.5 | % | 60.9 | % | 62.2 | % | ||||||
2017 | 71.8 | 75.5 | 76.8 | 73.1 | 62.1 | 59.3 | 59.0 | |||||||||||||
2018 | 72.2 | % | 70.7 | % | 79.3 | % | 68.9 | % | 73.8 | % | 62.8 | % | 60.1 | % | ||||||
53
The general insurance 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 by the lessening impacts from developments of prior years' reserve estimates as more fully described in the Executive Summary of the Management Analysis of Financial Position and Results of Operations.
Unfavorable asbestosis and environmental ("A&E") claim developments, although not material in any of the periods presented, are typically attributable to A&E claim reserves due to periodic re-evaluations of such reserves as well as subsequent reclassifications of other coverages' reserves, most often workers' compensation, deemed assignable to A&E category of losses. Except for a small portion that emanates from ongoing primary insurance operations, a large majority of the A&E claim reserves posted by Old Republic stem mainly from its participations in assumed reinsurance treaties and insurance pools which were discontinued during the 1980's and have since been in run-off status. With respect to the primary portion of gross A&E reserves, Old Republic administers the related claims through its claims personnel as well as outside attorneys, and posted reserves reflect its best estimates of ultimate claim costs. Claims administration for the assumed portion of the Company's A&E exposures is handled by the claims departments of unrelated primary or ceding reinsurance companies. While the Company performs periodic reviews of certain claim files managed by third parties, the overall A&E reserves it establishes respond to the paid claim and case reserve activity reported to the Company as well as available industry statistical data such as so-called survival ratios. Such ratios represent the number of years' average paid losses for the three or five most recent calendar years that are encompassed by an insurer's A&E reserve level at any point in time. According to this simplistic appraisal of an insurer's A&E loss reserve level, Old Republic's average five year paid loss survival ratios stood at 4.3 years (gross) and 5.0 years (net of reinsurance) as of December 31, 2018 and 4.6 years (gross) and 6.3 years (net of reinsurance) as of December 31, 2017. Fluctuations in this ratio between years can be caused by the inconsistent pay out patterns associated with these types of claims. Incurred net losses for A&E claims have averaged .2% of general insurance group net incurred losses for the five years ended December 31, 2018.
A summary of reserve activity, including estimates for IBNR, relating to A&E claims at December 31, 2018 and 2017 is as follows:
December 31: | 2018 | 2017 | ||||||||||||||
Gross | Net | Gross | Net | |||||||||||||
Asbestos: | ||||||||||||||||
Reserves at beginning of year | $ | 86.7 | $ | 75.8 | $ | 89.6 | $ | 76.7 | ||||||||
Loss and loss expenses incurred | (1.1 | ) | (12.2 | ) | 18.3 | 13.5 | ||||||||||
Claims and claim adjustment expenses paid | 10.1 | 7.8 | 21.2 | 14.4 | ||||||||||||
Reserves at end of year | 75.4 | 55.6 | 86.7 | 75.8 | ||||||||||||
Environmental: | ||||||||||||||||
Reserves at beginning of year | 30.6 | 20.6 | 31.6 | 20.4 | ||||||||||||
Loss and loss expenses incurred | 4.0 | 1.3 | 3.2 | 2.7 | ||||||||||||
Claims and claim adjustment expenses paid | 4.3 | 3.1 | 4.1 | 2.4 | ||||||||||||
Reserves at end of year | 30.3 | 18.8 | 30.6 | 20.6 | ||||||||||||
Total asbestos and environmental reserves | $ | 105.8 | $ | 74.4 | $ | 117.4 | $ | 96.4 | ||||||||
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. 2018's claim costs trended higher as favorable development of prior years’ claim reserve estimates edged down as more fully described in the Executive Summary of the Management Analysis of Financial Position and Results of Operations.
The ratios of RFIG Run-off - mortgage guaranty incurred claim costs to earned premiums reflect favorable developments of prior years' claim reserves as further discussed in the Executive Summary of the Management Analysis of Financial Position and Results of Operations. MI claim costs for 2017 rose most significantly, however, due to an additional claim provision of $23.0 which added 20.9 percentage points to the claim ratio for the year.
The much more favorable RFIG Run-off - CCI claim ratio for 2018 reflects the absence of the litigation-induced claim costs and favorable development of previously established claim reserves. The 2017 year-over-year claim ratio comparison was most significantly affected by the additional $107.0 claim and related expense provisions related to the final settlement and probable dispositions of all known litigated and other claim costs.
54
Certain mortgage guaranty average claim-related trends are listed below:
Average Settled Claim Amount (a) | Reported Delinquency Ratio at End of Period | Claims Rescissions and Denials | |||||||||||||||
Traditional Primary | Bulk | Traditional Primary | Bulk | ||||||||||||||
Years Ended December 31: | |||||||||||||||||
2016 | $ | 45,478 | $ | 48,158 | 10.53 | % | 25.78 | % | $ | 1.4 | |||||||
2017 | 47,267 | 51,446 | 10.52 | 23.31 | 13.1 | ||||||||||||
2018 | $ | 47,055 | $ | 54,809 | 9.38 | % | 16.94 | % | $ | 4.4 | |||||||
__________
(a) | Amounts are in whole dollars. |
Traditional Primary Delinquency Ratios for Top Ten States (b): | |||||||||||||||||||||||||||||
TX | FL | GA | IL | CA | NC | PA | MD | NJ | VA | ||||||||||||||||||||
As of December 31: | |||||||||||||||||||||||||||||
2016 | 9.1 | % | 11.8 | % | 8.7 | % | 10.7 | % | 6.1 | % | 8.3 | % | 12.7 | % | 12.8 | % | 23.5 | % | 8.6 | % | |||||||||
2017 | 11.4 | 15.6 | 8.3 | 10.1 | 6.0 | 8.1 | 12.0 | 11.5 | 19.6 | 8.4 | |||||||||||||||||||
2018 | 10.0 | % | 9.8 | % | 7.7 | % | 8.7 | % | 5.8 | % | 9.5 | % | 11.4 | % | 10.5 | % | 14.3 | % | 7.9 | % | |||||||||
Bulk Delinquency Ratios for Top Ten States (b): | |||||||||||||||||||||||||||||
TX | FL | GA | IL | CA | OH | PA | MD | NJ | NY | ||||||||||||||||||||
As of December 31: | |||||||||||||||||||||||||||||
2016 | 20.3 | % | 33.7 | % | 19.6 | % | 23.6 | % | 29.1 | % | 14.1 | % | 28.1 | % | 35.8 | % | 61.0 | % | 53.3 | % | |||||||||
2017 | 20.3 | 34.2 | 17.8 | 21.5 | 26.4 | 15.0 | 25.3 | 24.8 | 50.3 | 44.2 | |||||||||||||||||||
2018 | 14.5 | % | 23.5 | % | 14.5 | % | 19.1 | % | 13.0 | % | 12.4 | % | 21.0 | % | 16.0 | % | 39.7 | % | 32.3 | % | |||||||||
Total Delinquency Ratios for Top Ten States (includes "other" business) (b): | |||||||||||||||||||||||||||||
TX | FL | GA | IL | CA | NC | PA | MD | NJ | VA | ||||||||||||||||||||
As of December 31: | |||||||||||||||||||||||||||||
2016 | 9.8 | % | 13.4 | % | 9.1 | % | 11.3 | % | 9.3 | % | 8.5 | % | 13.5 | % | 13.5 | % | 25.6 | % | 8.7 | % | |||||||||
2017 | 12.1 | 16.9 | 8.8 | 10.6 | 9.2 | 8.4 | 12.8 | 12.0 | 21.1 | 8.6 | |||||||||||||||||||
2018 | 10.4 | % | 10.6 | % | 8.1 | % | 9.2 | % | 6.8 | % | 9.7 | % | 12.0 | % | 10.7 | % | 15.3 | % | 7.9 | % | |||||||||
__________
(b) | As determined by risk in force as of December 31, 2018, these 10 states represent approximately 52.9%, 57.8%, and 52.8%, of traditional primary, bulk, and total risk in force, respectively. |
The following table shows CCI claim-related trends for the periods shown:
Reported Delinquency Ratio at End of Period | Claim Rescissions and Denials | |||||||||||||||||||
CCI Claim Costs | ||||||||||||||||||||
Paid | Incurred | |||||||||||||||||||
Amount | Ratio (a) | Amount | Ratio (a) | |||||||||||||||||
Years Ended | ||||||||||||||||||||
December 31: | ||||||||||||||||||||
2016 | $ | 11.7 | 74.0 | % | $ | 50.0 | 315.9 | % | 2.0 | % | $ | 10.1 | ||||||||
2017 | 304.2 | N/M | 134.5 | N/M | 2.6 | 5.7 | ||||||||||||||
2018 | $ | 31.6 | N/M | $ | (2.2 | ) | N/M | 1.7 | % | $ | .4 | |||||||||
__________
(a) | Percent of net CCI earned premiums. CCI claim ratios include only those costs actually or expected to be paid by the Company and exclude claims not paid by virtue of coverage rescissions and claim denials as well as unsubstantiated claim submissions. Certain claim rescissions and denials may from time to time become the subject of disagreements between the Company and certain individual insureds. Possible future reversals of such rescissions and denials, however, may not necessarily affect the adequacy of previously established claim reserve levels nor fully impact operating results. These effects could be fully or partially negated by the imposition of additional retrospective premiums and/or the limiting effects of maximum policy limits. |
55
Volatility of Reserve Estimates and Sensitivity
There is a great deal of uncertainty in the estimates of loss and loss adjustment expense reserves, and unanticipated events can have both a favorable or unfavorable impact on such estimates. The Company believes that the factors most responsible, in varying and continually changing degrees, for such favorable or unfavorable development are as follows:
General insurance net claim reserves can be affected by lower than expected frequencies of claims incurred but not reported, the effect of reserve discounts applicable to workers' compensation claims, higher than expected severity of litigated claims in particular, governmental or judicially imposed retroactive conditions in the settlement of claims such as noted elsewhere in this document in regard to black lung disease claims, greater than anticipated inflation rates applicable to repairs and the medical benefits portion of claims, and higher than expected IBNR due to the slower and highly volatile emergence patterns applicable to certain types of claims such as those stemming from litigated, assumed reinsurance, or the A&E types of claims noted above.
Title insurance loss reserve levels can be impacted adversely by such developments as reduced loan refinancing activity, the effect of which can be to lengthen the period during which title policies remain exposed to loss emergence. Such reserve levels can also be affected by reductions in either property values or the volume of transactions which, by virtue of the speculative nature of some real estate developments, can lead to increased occurrences of fraud, defalcations or mechanics' liens.
RFIG Run-off mortgage guaranty net claim reserve levels can be influenced adversely by several factors. These include changes in the mix of insured business toward loans that have a higher probability of default, increases in the average risk per insured loan, the levels of estimated rescission and claim denial activity, the deterioration of regional or national economic conditions leading to a reduction in borrowers' income and thus their ability to make payments on outstanding loans, and reductions in housing values and/or increases in housing supply that can raise the rate at which defaults evolve into claims and affect their overall severity.
With respect to Old Republic's small life and accident insurance operations, reserve adequacy may be impacted adversely by greater than anticipated medical care cost inflation as well as greater than expected frequency and severity of claims. In life insurance, as in general insurance, concentrations of insured lives coupled with a catastrophic event would represent the Company's largest exposure.
On a consolidated basis, which includes all coverages provided by the Company, the cumulative development on prior year loss reserves over the past ten years through December 31, 2018 has ranged from 7.0% unfavorable in 2010 to 6.3% favorable in 2014 and averaged 2.0% favorable for the ten years. Although management does not have a practical business reason for making projections of likely outcomes of future loss developments, its analysis and evaluation of Old Republic's existing business mix, current aggregate loss reserve levels, and loss development patterns suggests a reasonable likelihood that 2018 year-end loss reserves could ultimately develop within a range of +/- 5%. The most significant factors impacting the potential reserve development for each of the Company's insurance segments is discussed above. Old Republic has generally experienced favorable overall loss developments for the latest ten-year period. While General Insurance has experienced unfavorable developments of previously established reserves during four of the last five years, the current analysis of loss development factors and economic conditions influencing the Company's insurance coverages point to a position of reserve adequacy. In management's opinion, the other segments' loss reserve development patterns (most notably those associated with title and mortgage insurance) show greater variability due to changes in economic conditions which cannot be reasonably anticipated. Consequently, management believes that using a 5% potential range of reserve development provides a reasonable benchmark for a sensitivity analysis of the Company's consolidated reserves as of December 31, 2018.
Reinsurance Programs
To maintain premium production within its capacity and limit maximum losses and risks for which it might become liable under its policies, Old Republic may cede a portion or all of its premiums and liabilities on certain classes of insurance, individual policies, or blocks of business to other insurers and reinsurers. Further discussion of the Company's reinsurance programs can be found in Part 1 of this Annual Report on Form 10-K.
Subsidiaries within the general insurance segment have generally obtained reinsurance coverage from independent insurance or reinsurance companies pursuant to excess of loss agreements. Under excess of loss reinsurance agreements the Company is generally reimbursed for claim costs exceeding contractually agreed-upon levels. During the three year period ended December 31, 2018, the Company's net retentions have risen gradually within the general insurance segment; however, such changes have not had a material impact on the Company's consolidated financial statements.
Except for relatively few facultative reinsurance cessions covering large risks, the title insurance segment does not utilize a significant amount of reinsurance to manage its insurance risk.
Generally, the RFIG Run-off mortgage guaranty insurance risk has historically been reinsured through excess of loss contracts with insurers owned by or affiliated with lending institutions and financial and other intermediaries whose customers are insured by Old Republic's mortgage insurance subsidiaries. Effective December 31, 2008, the Company discontinued excess of loss reinsurance cessions to lenders' captive insurance companies for all new production originated subsequent to the effective date.
56
The Company does not anticipate any significant changes in its reinsurance programs during 2019.
Expenses: Underwriting Acquisition and Other Expenses |
The following table sets forth the expense ratios registered by each major business segment and in consolidation for the periods shown:
General | Title | RFIG Run-off | Consolidated | ||||||||
Years Ended December 31: | |||||||||||
2016 | 24.8 | % | 87.9 | % | 12.2 | % | 50.6 | % | |||
2017 | 25.5 | 90.0 | 16.6 | 52.0 | |||||||
2018 | 25.0 | % | 90.0 | % | 21.5 | % | 51.6 | % | |||
Variations in the Company's consolidated expense ratios reflect a continually changing mix of coverages sold and attendant costs of producing business in the Company's three largest operating segments. To a significant degree, expense ratios for both the general and title insurance segments are mostly reflective of variable costs, such as commissions or similar charges, that rise or decline along with corresponding changes in premium and fee income. Moreover, general operating expenses can contract or expand in differing proportions due to varying levels of operating efficiencies and expense management opportunities in the face of changing market conditions. The General Insurance expense ratio has remained aligned with earned premiums trends while the 2017 ratio was impacted by charges for estimated employee incentive awards. The Title Insurance expense ratio for the periods reported upon remained aligned with revenues from premiums and fees. Finally, the trends in the RFIG Run-off operating expense ratio are primarily reflective of the continuing decline in net premiums inherent in this run-off operation.
Expenses: Total |
The composite ratios of the above summarized net claims, benefits and underwriting expenses that reflect the sum total of all the factors enumerated above have been as follows:
General | Title | RFIG Run-off | Consolidated | ||||||||
Years Ended December 31: | |||||||||||
2016 | 97.8 | % | 91.7 | % | 72.6 | % | 94.6 | % | |||
2017 | 97.3 | 90.9 | 177.5 | 96.7 | |||||||
2018 | 97.2 | % | 92.1 | % | 60.9 | % | 94.7 | % | |||
Expenses: Income Taxes |
The effective consolidated income tax rates were 15.4%, 22.7%, and 31.9% in 2018, 2017, and 2016, respectively. The rates for each year reflect primarily the varying proportions of pretax operating income (loss) derived from partially tax sheltered investment income (principally tax-exempt interest and dividend income), the combination of fully taxable investment income, investment gains or losses, underwriting and service income, judgments about the recoverability of deferred tax assets, and changes in the federal corporate tax rate.
The Tax Cuts and Jobs Act ("TCJA") was enacted into law on December 22, 2017, thereby requiring that various accounting adjustments be reflected in the consolidated financial statements at year end 2017. The TCJA, among its many elements, lowered the federal corporate tax rate to 21.0% from 35.0%. Accordingly, the Company revalued its deferred tax items in 2017 to reflect the lower tax rate, resulting in a $63.1 income tax credit reflected in the consolidated statements of income.
57
OTHER INFORMATION |
Reference is here made to "Information About Segments of Business" appearing elsewhere herein.
Historical data pertaining to the operating results, liquidity, and other performance indicators applicable to an insurance enterprise such as Old Republic are not necessarily indicative of results to be achieved in succeeding years. In addition to the factors cited below, the long-term nature of the insurance business, seasonal and annual patterns in premium production and incidence of claims, changes in yields obtained on invested assets, changes in government policies and free markets affecting inflation rates and general economic conditions, and changes in legal precedents or the application of law affecting the settlement of disputed and other claims can have a bearing on period-to-period comparisons and future operating results.
Some of the oral or written statements made in the Company's reports, press releases, and conference calls following earnings releases, can constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Of necessity, any such forward-looking statements involve assumptions, uncertainties, and risks that may affect the Company's future performance. With regard to Old Republic's General Insurance segment, its results can be affected, in particular, by the level of market competition, which is typically a function of available capital and expected returns on such capital among competitors, the levels of interest and inflation rates, and periodic changes in claim frequency and severity patterns caused by natural disasters, weather conditions, accidents, illnesses, work-related injuries, and unanticipated external events. Title Insurance and RFIG Run-off results can be affected by similar factors and by changes in national and regional housing demand and values, the availability and cost of mortgage loans, employment trends, and default rates on mortgage loans. Life and accident insurance earnings can be affected by the levels of employment and consumer spending, variations in mortality and health trends, and changes in policy lapsation rates. At the parent holding company level, operating earnings or losses are generally reflective of the amount of debt outstanding and its cost, interest income on temporary holdings of short-term investments, and period-to-period variations in the costs of administering the Company's widespread operations.
The General Insurance, Title Insurance and Corporate and Other Segments and the RFIG Run-off business maintain customer information and rely upon technology platforms to conduct business. As a result, each of those businesses and the Company are subject to cyber risk. Many of the Company's operating subsidiaries, maintain separate IT systems which reduces the enterprise-wide risks of potential cybersecurity incidents. However, given the potential magnitude of a significant breach, the Company continually evaluates on an enterprise-wide basis its IT hardware, security infrastructure and business practices to respond to these risks and to detect and remediate in a timely manner significant cybersecurity incidents or business process interruptions.
A more detailed listing and discussion of the risks and other factors which affect the Company's risk-taking insurance business are included in Part I, Item 1A - Risk Factors, of this Annual Report to the Securities and Exchange Commission, which Item is specifically incorporated herein by reference.
Any forward-looking statements or commentaries speak only as of their dates. Old Republic undertakes no obligation to publicly update or revise any and all such comments, whether as a result of new information, future events or otherwise, and accordingly they may not be unduly relied upon.
58
Item 7A - Quantitative and Qualitative Disclosure About Market Risk ($ in Millions) |
Market risk represents the potential for loss due to adverse changes in the fair value of financial instruments as a result of changes in interest rates, equity prices, foreign exchange rates and commodity prices. Old Republic's primary market risks consist of interest rate risk associated with investments in fixed maturities and equity price risk associated with investments in equity securities. The Company has no material foreign exchange or commodity risk.
The Company does not own or utilize derivative financial instruments for the purpose of hedging, enhancing the overall return of its investment portfolio, or reducing the cost of its debt obligations. With regard to its equity portfolio, the Company does not own any options nor does it engage in any type of option writing. Traditional investment management tools and techniques are employed to address the yield and valuation exposures of the invested assets base. The long-term fixed maturity investment portfolio is managed so as to limit various risks inherent in the bond market. Credit risk is addressed through asset diversification and the purchase of investment grade securities. Reinvestment rate risk is reduced by concentrating on non-callable issues, and by taking asset-liability matching considerations into account. Purchases of mortgage and asset backed securities, which have variable principal prepayment options, are generally avoided. Market value risk is limited through the purchase of bonds of intermediate maturity. The combination of these investment management practices is expected to produce a more stable long-term fixed maturity investment portfolio that is not subject to extreme interest rate sensitivity and principal deterioration.
The fair value of the Company's long-term fixed maturity investment portfolio is sensitive, however, to fluctuations in the level of interest rates, but not materially affected by changes in anticipated cash flows caused by any prepayments. The impact of interest rate movements on the long-term fixed maturity investment portfolio generally affects net unrealized gains or losses. As a general rule, rising interest rates enhance currently available yields but typically lead to a reduction in the fair value of existing fixed maturity investments. By contrast, a decline in such rates reduces currently available yields but usually serves to increase the fair value of the existing fixed maturity investment portfolio. All such changes in fair value of available for sale securities are reflected, net of deferred income taxes, directly in the shareholders' equity account, and as a separate component of the statement of comprehensive income. Fixed maturity securities classified as held to maturity are carried at amortized cost, and therefore, fluctuations in unrealized gains and losses do not impact shareholders' equity. Given the Company's inability to forecast or control the movement of interest rates, Old Republic sets the maturity spectrum of its fixed maturity securities portfolio within parameters of estimated liability payouts, and focuses the overall portfolio on high quality investments. By so doing, Old Republic believes it is reasonably assured of its ability to hold securities to maturity as it may deem necessary in changing environments, and of ultimately recovering their aggregate cost.
The following table illustrates the hypothetical effect on the fixed income and equity investment portfolios resulting from movements in interest rates and fluctuations in the equity securities markets, using the S&P 500 index as a proxy, at December 31, 2018:
Estimated Fair Value | Hypothetical Change in Interest Rates or S&P 500 | Estimated Fair Value After Hypothetical Change in Interest Rates or S&P 500 | |||||||||
Interest Rate Risk: | |||||||||||
Fixed Maturities | $ | 9,217.4 | 100 | basis point rate increase | $ | 8,844.1 | |||||
200 | basis point rate increase | 8,470.8 | |||||||||
100 | basis point rate decrease | 9,590.7 | |||||||||
200 | basis point rate decrease | $ | 9,964.0 | ||||||||
Equity Price Risk: | |||||||||||
Equity Securities | $ | 3,380.9 | 10 | % | increase in the S&P 500 | $ | 3,664.9 | ||||
20 | % | increase in the S&P 500 | 3,948.9 | ||||||||
10 | % | decline in the S&P 500 | 3,096.9 | ||||||||
20 | % | decline in the S&P 500 | $ | 2,812.9 | |||||||
59
Item 8 - Financial Statements and Supplementary Data |
Listed below are the consolidated financial statements included herein for Old Republic International Corporation and Subsidiaries:
Page No. | |
Consolidated Balance Sheets | 61 |
Consolidated Statements of Income | 62 |
Consolidated Statements of Comprehensive Income | 63 |
Consolidated Statements of Preferred Stock and Common Shareholders' Equity | 64 |
Consolidated Statements of Cash Flows | 65 |
Notes to Consolidated Financial Statements | 66 - 94 |
Report of Independent Registered Public Accounting Firm | 95 - 96 |
60
Old Republic International Corporation and Subsidiaries | |||||||
Consolidated Balance Sheets | |||||||
($ in Millions, Except Share Data) | |||||||
December 31, | |||||||
2018 | 2017 | ||||||
Assets | |||||||
Investments: | |||||||
Available for sale: | |||||||
Fixed maturity securities (at fair value) (amortized cost: $8,285.0 and $8,162.2) | $ | 8,182.8 | $ | 8,282.3 | |||
Short-term investments (at fair value which approximates cost) | 354.9 | 670.1 | |||||
Total | 8,537.8 | 8,952.4 | |||||
Held to maturity: | |||||||
Fixed maturity securities (at amortized cost) (fair value: $1,034.5 and $1,069.2) | 1,044.8 | 1,067.4 | |||||
Equity securities (at fair value) (cost: $3,039.1 and $2,629.9) | 3,380.9 | 3,265.5 | |||||
Other investments | 31.0 | 32.5 | |||||
Total investments | 12,994.6 | 13,318.0 | |||||
Other Assets: | |||||||
Cash | 100.3 | 125.9 | |||||
Securities and indebtedness of related parties | 28.4 | 12.8 | |||||
Accrued investment income | 92.4 | 92.4 | |||||
Accounts and notes receivable | 1,499.4 | 1,469.7 | |||||
Federal income tax recoverable: Current | 16.8 | — | |||||
Prepaid federal income taxes | 129.8 | 114.3 | |||||
Reinsurance balances and funds held | 166.2 | 141.6 | |||||
Reinsurance recoverable: Paid losses | 55.9 | 60.5 | |||||
Policy and claim reserves | 3,428.6 | 3,311.3 | |||||
Deferred policy acquisition costs | 316.3 | 297.8 | |||||
Sundry assets | 497.8 | 458.8 | |||||
Total Other Assets | 6,332.4 | 6,085.5 | |||||
Total Assets | $ | 19,327.1 | $ | 19,403.5 | |||
Liabilities, Preferred Stock, and Common Shareholders' Equity | |||||||
Liabilities: | |||||||
Losses, claims, and settlement expenses | $ | 9,471.2 | $ | 9,237.6 | |||
Unearned premiums | 2,104.9 | 1,971.5 | |||||
Other policyholders' benefits and funds | 198.6 | 204.7 | |||||
Total policy liabilities and accruals | 11,774.8 | 11,413.9 | |||||
Commissions, expenses, fees, and taxes | 525.4 | 547.7 | |||||
Reinsurance balances and funds | 600.4 | 566.9 | |||||
Federal income tax payable: Current | — | 6.5 | |||||
Deferred | 10.3 | 100.5 | |||||
Debt | 981.4 | 1,448.7 | |||||
Sundry liabilities | 288.3 | 585.8 | |||||
Commitments and contingent liabilities | |||||||
Total Liabilities | 14,180.8 | 14,670.2 | |||||
Preferred Stock (1) | — | — | |||||
Common Shareholders' Equity: | |||||||
Common stock (1) | 302.7 | 269.2 | |||||
Additional paid-in capital | 1,277.6 | 815.2 | |||||
Retained earnings | 3,849.8 | 3,206.9 | |||||
Accumulated other comprehensive income (loss) | (210.0 | ) | 474.2 | ||||
Unallocated ESSOP shares (at cost) | (73.9 | ) | (32.4 | ) | |||
Total Common Shareholders' Equity | 5,146.2 | 4,733.3 | |||||
Total Liabilities, Preferred Stock and Common Shareholders' Equity | $ | 19,327.1 | $ | 19,403.5 | |||
________
(1) | At December 31, 2018 and 2017, there were 75,000,000 shares of $0.01 par value preferred stock authorized, of which no shares were outstanding. As of the same dates, there were 500,000,000 shares of common stock, $1.00 par value, authorized, of which 302,714,502 and 269,238,727 were issued as of December 31, 2018 and 2017, respectively. At December 31, 2018 and 2017, there were 100,000,000 shares of Class B Common Stock, $1.00 par value, authorized, of which no shares were issued. |
See accompanying Notes to Consolidated Financial Statements.
61
Old Republic International Corporation and Subsidiaries | |||||||||||
Consolidated Statements of Income | |||||||||||
($ in Millions, Except Share Data) | |||||||||||
Years Ended December 31, | |||||||||||
2018 | 2017 | 2016 | |||||||||
Revenues: | |||||||||||
Net premiums earned | $ | 5,253.4 | $ | 5,080.2 | $ | 4,868.9 | |||||
Title, escrow, and other fees | 450.5 | 459.5 | 464.2 | ||||||||
Total premiums and fees | 5,703.9 | 5,539.7 | 5,333.2 | ||||||||
Net investment income | 431.8 | 409.4 | 387.0 | ||||||||
Other income | 121.6 | 102.2 | 107.3 | ||||||||
Total operating revenues | 6,257.4 | 6,051.5 | 5,827.6 | ||||||||
Investment gains (losses): | |||||||||||
Realized from actual transactions | 58.2 | 211.6 | 77.8 | ||||||||
Unrealized from changes in fair value of equity securities | (293.8 | ) | — | — | |||||||
Realized from impairments | — | — | (4.9 | ) | |||||||
Total realized and unrealized investment gains (losses) | (235.6 | ) | 211.6 | 72.8 | |||||||
Total revenues | 6,021.8 | 6,263.1 | 5,900.5 | ||||||||
Benefits, Claims and Expenses: | |||||||||||
Benefits, claims and settlement expenses | 2,440.9 | 2,459.2 | 2,329.8 | ||||||||
Dividends to policyholders | 19.8 | 19.5 | 18.1 | ||||||||
Underwriting, acquisition, and other expenses | 3,080.6 | 2,995.7 | 2,816.3 | ||||||||
Interest and other charges | 42.2 | 63.0 | 50.2 | ||||||||
Total expenses | 5,583.7 | 5,537.7 | 5,214.5 | ||||||||
Income (loss) before income taxes (credits) | 438.1 | 725.4 | 686.0 | ||||||||
Income Taxes (Credits): | |||||||||||
Current | 114.1 | 132.6 | 190.1 | ||||||||
Deferred | (46.5 | ) | 32.2 | 28.8 | |||||||
Total | 67.5 | 164.8 | 219.0 | ||||||||
Net Income (Loss) | $ | 370.5 | $ | 560.5 | $ | 466.9 | |||||
Net Income (Loss) Per Share: | |||||||||||
Basic | $ | 1.26 | $ | 2.14 | $ | 1.80 | |||||
Diluted | $ | 1.24 | $ | 1.92 | $ | 1.62 | |||||
Average shares outstanding: Basic | 294,248,871 | 262,114,533 | 259,429,298 | ||||||||
Diluted | 301,016,076 | 299,387,373 | 296,379,251 | ||||||||
See accompanying Notes to Consolidated Financial Statements.
62
Old Republic International Corporation and Subsidiaries | |||||||||||
Consolidated Statements of Comprehensive Income | |||||||||||
($ in Millions) | |||||||||||
Years Ended December 31, | |||||||||||
2018 | 2017 | 2016 | |||||||||
Net Income (Loss) As Reported | $ | 370.5 | $ | 560.5 | $ | 466.9 | |||||
Other comprehensive income (loss): | |||||||||||
Unrealized gains (losses) on securities: | |||||||||||
Unrealized gains (losses) before reclassifications, not | |||||||||||
included in the statements of income | (226.4 | ) | 325.0 | 522.3 | |||||||
Amounts reclassified as realized investment (gains) | |||||||||||
losses in the statements of income | 3.1 | (211.6 | ) | (72.8 | ) | ||||||
Pretax unrealized gains (losses) on securities | (223.2 | ) | 113.4 | 449.4 | |||||||
Deferred income taxes (credits) | (46.9 | ) | 39.5 | 157.2 | |||||||
Net unrealized gains (losses) on securities, net of tax | (176.3 | ) | 73.9 | 292.1 | |||||||
Defined benefit pension plans: | |||||||||||
Net pension adjustment before reclassifications | 3.6 | (28.2 | ) | (1.3 | ) | ||||||
Amounts reclassified as underwriting, acquisition, | |||||||||||
and other expenses in the statements of income | 3.2 | .5 | .6 | ||||||||
Net adjustment related to defined benefit | |||||||||||
pension plans | 6.9 | (27.7 | ) | (.7 | ) | ||||||
Deferred income taxes (credits) | 1.4 | (9.7 | ) | (.2 | ) | ||||||
Net adjustment related to defined benefit pension | |||||||||||
plans, net of tax | 5.4 | (18.0 | ) | (.4 | ) | ||||||
Foreign currency translation and other adjustments | (11.1 | ) | 9.5 | 2.6 | |||||||
Net adjustments | (182.0 | ) | 65.4 | 294.4 | |||||||
Comprehensive Income (Loss) | $ | 188.5 | $ | 626.0 | $ | 761.4 | |||||
See accompanying Notes to Consolidated Financial Statements.
63
Old Republic International Corporation and Subsidiaries | |||||||||||
Consolidated Statements of Preferred Stock | |||||||||||
and Common Shareholders' Equity | |||||||||||
($ in Millions) | |||||||||||
Years Ended December 31, | |||||||||||
2018 | 2017 | 2016 | |||||||||
Convertible Preferred Stock: | |||||||||||
Balance, beginning and end of year | $ | — | $ | — | $ | — | |||||
Common Stock: | |||||||||||
Balance, beginning of year | $ | 269.2 | $ | 262.7 | $ | 261.9 | |||||
Dividend reinvestment plan | — | — | — | ||||||||
Net issuance of shares under stock based compensation plans | 1.1 | 1.3 | .6 | ||||||||
Conversion of senior debentures | 32.2 | 5.1 | — | ||||||||
Balance, end of year | $ | 302.7 | $ | 269.2 | $ | 262.7 | |||||
Additional Paid-in Capital: | |||||||||||
Balance, beginning of year | $ | 815.2 | $ | 713.8 | $ | 698.0 | |||||
Dividend reinvestment plan | 1.7 | .8 | .8 | ||||||||
Net issuance of shares under stock based compensation plans | 15.7 | 15.0 | 6.7 | ||||||||
Conversion of senior debentures | 438.1 | 73.8 | — | ||||||||
Issuance of shares | — | — | 1.2 | ||||||||
Stock based compensation | 4.1 | 4.1 | .7 | ||||||||
ESSOP shares released | 2.6 | 7.3 | 6.2 | ||||||||
Balance, end of year | $ | 1,277.6 | $ | 815.2 | $ | 713.8 | |||||
Retained Earnings: | |||||||||||
Balance, beginning of year | $ | 3,206.9 | $ | 3,199.6 | $ | 2,926.5 | |||||
Reclassification - change in accounting principle | 502.1 | — | — | ||||||||
Balance, beginning of year, as adjusted | 3,708.9 | 3,199.6 | 2,926.5 | ||||||||
Net income (loss) | 370.5 | 560.5 | 466.9 | ||||||||
Dividends on common shares ($.78, $1.76 and $.75 per common share) | (229.6 | ) | (468.0 | ) | (193.8 | ) | |||||
Reclassification of income tax effects of the Tax Cuts and Jobs Act | — | (85.1 | ) | — | |||||||
Balance, end of year | $ | 3,849.8 | $ | 3,206.9 | $ | 3,199.6 | |||||
Accumulated Other Comprehensive Income (Loss): | |||||||||||
Balance, beginning of year | $ | 474.2 | $ | 323.6 | $ | 29.2 | |||||
Reclassification - change in accounting principle | (502.1 | ) | — | — | |||||||
Balance, beginning of year, as adjusted | (27.9 | ) | 323.6 | 29.2 | |||||||
Net unrealized gains (losses) on securities, net of tax | (176.3 | ) | 73.9 | 292.1 | |||||||
Net adjustment related to defined benefit pension plans, | |||||||||||
net of tax | 5.4 | (18.0 | ) | (.4 | ) | ||||||
Foreign currency translation and other adjustments | (11.1 | ) | 9.5 | 2.6 | |||||||
Reclassification of income tax effects of the Tax Cuts and Jobs Act | — | 85.1 | — | ||||||||
Balance, end of year | $ | (210.0 | ) | $ | 474.2 | $ | 323.6 | ||||
Unallocated ESSOP Shares: | |||||||||||
Balance, beginning of year | $ | (32.4 | ) | $ | (39.2 | ) | $ | (45.8 | ) | ||
ESSOP shares released | 8.4 | 6.8 | 6.6 | ||||||||
Purchase of unallocated ESSOP shares | (50.0 | ) | — | — | |||||||
Balance, end of year | $ | (73.9 | ) | $ | (32.4 | ) | $ | (39.2 | ) | ||
See accompanying Notes to Consolidated Financial Statements.
64
Old Republic International Corporation and Subsidiaries | |||||||||||
Consolidated Statements of Cash Flows | |||||||||||
($ in Millions) | |||||||||||
Years Ended December 31, | |||||||||||
2018 | 2017 | 2016 | |||||||||
Cash flows from operating activities: | |||||||||||
Net income (loss) | $ | 370.5 | $ | 560.5 | $ | 466.9 | |||||
Adjustments to reconcile net income (loss) to | |||||||||||
net cash provided by operating activities: | |||||||||||
Deferred policy acquisition costs | (18.4 | ) | (23.3 | ) | (18.3 | ) | |||||
Premiums and other receivables | (29.3 | ) | (79.3 | ) | (59.2 | ) | |||||
Unpaid claims and related items | 148.4 | (123.7 | ) | 31.4 | |||||||
Unearned premiums and other policyholders' liabilities | 95.1 | 152.7 | 77.6 | ||||||||
Income taxes | (69.5 | ) | 49.5 | 40.6 | |||||||
Prepaid federal income taxes | (15.5 | ) | (31.8 | ) | (19.1 | ) | |||||
Reinsurance balances and funds | 13.5 | 25.3 | 33.1 | ||||||||
Realized investment (gains) losses from actual transactions | (58.2 | ) | (211.6 | ) | (72.8 | ) | |||||
Unrealized investment (gains) losses from changes in fair value | |||||||||||
of equity securities | 293.8 | — | — | ||||||||
Accounts payable, accrued expenses and other | 30.0 | 134.5 | 157.0 | ||||||||
Total | 760.5 | 452.8 | 637.3 | ||||||||
Cash flows from investing activities: | |||||||||||
Fixed maturity securities: | |||||||||||
Available for sale: | |||||||||||
Maturities and early calls | 964.0 | 1,000.6 | 967.9 | ||||||||
Sales | 299.1 | 468.4 | 306.2 | ||||||||
Sales of: | |||||||||||
Equity securities | 402.6 | 698.5 | 419.1 | ||||||||
Other - net | 19.4 | 30.0 | 56.6 | ||||||||
Purchases of: | |||||||||||
Fixed maturity securities: | |||||||||||
Available for sale | (1,421.9 | ) | (1,607.2 | ) | (1,166.2 | ) | |||||
Held to Maturity | — | (114.5 | ) | (632.1 | ) | ||||||
Equity securities | (752.5 | ) | (727.2 | ) | (928.4 | ) | |||||
Other - net | (51.6 | ) | (54.3 | ) | (47.5 | ) | |||||
Purchase of a business | (13.1 | ) | — | — | |||||||
Net decrease (increase) in short-term investments | 314.2 | 11.8 | (12.1 | ) | |||||||
Other - net | .1 | (.1 | ) | — | |||||||
Total | (239.5 | ) | (293.9 | ) | (1,036.4 | ) | |||||
Cash flows from financing activities: | |||||||||||
Issuance of debentures and notes | — | — | 576.8 | ||||||||
Issuance of common shares | 13.1 | 17.8 | 8.4 | ||||||||
Redemption of debentures and notes | (4.7 | ) | (3.9 | ) | (3.5 | ) | |||||
Purchase of unallocated ESSOP shares | (50.0 | ) | — | — | |||||||
Dividends on common shares (including a special dividend declared | |||||||||||
in December 2017 and paid in January 2018 of $269.2) | (498.8 | ) | (198.8 | ) | (193.8 | ) | |||||
Other - net | (6.0 | ) | 6.4 | (2.8 | ) | ||||||
Total | (546.5 | ) | (178.5 | ) | 385.0 | ||||||
Increase (decrease) in cash: | (25.6 | ) | (19.7 | ) | (14.1 | ) | |||||
Cash, beginning of year | 125.9 | 145.7 | 159.8 | ||||||||
Cash, end of year | $ | 100.3 | $ | 125.9 | $ | 145.7 | |||||
Supplemental cash flow information: | |||||||||||
Cash paid (received) during the period for: Interest | $ | 50.8 | $ | 62.5 | $ | 40.9 | |||||
Income taxes | $ | 137.2 | $ | 106.3 | $ | 178.6 | |||||
See accompanying Notes to Consolidated Financial Statements.
65
Old Republic International Corporation and Subsidiaries |
Notes to Consolidated Financial Statements |
($ in Millions, Except as Otherwise Indicated) |
Old Republic International Corporation is a Chicago-based insurance holding company with subsidiaries engaged mainly in the general (property and liability), title, and mortgage guaranty ("MI") and consumer credit indemnity ("CCI") run-off businesses. These insurance subsidiaries are organized as the Old Republic General Insurance, Title Insurance and RFIG Run-off Business Groups, and references herein to such groups apply to the Company's subsidiaries engaged in the respective segments of business. A small life and accident insurance business is included in the corporate and other caption of this report. In this report, "Old Republic", or "the Company" refers to Old Republic International Corporation and its subsidiaries as the context requires.
Note 1 - Summary of Significant Accounting Policies - The significant accounting policies employed by Old Republic International Corporation and its subsidiaries are set forth in the following summary.
(a) Accounting Principles - The Company's insurance subsidiaries are managed pursuant to the laws and regulations of the various states in which they operate. As a result, the subsidiaries operate their business in the context of such laws and regulation, and maintain their accounts in conformity with accounting practices prescribed or permitted by various states' insurance regulatory authorities. Federal income taxes and dividends to shareholders are based on financial statements and reports complying with such practices. The statutory accounting requirements vary from the Financial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC") of accounting principles generally accepted in the United States of America ("GAAP") in the following major respects: (1) the costs of selling insurance policies are charged to operations immediately, while the related premiums are recognized as income over the terms of the policies; (2) investments in fixed maturity securities designated as available for sale are generally carried at amortized cost rather than their estimated fair value; (3) changes in the fair value of equity securities are recorded directly in earned surplus and not through the income statement as required under GAAP effective January 1, 2018; (4) certain assets classified as "non-admitted assets" are excluded from the balance sheet through a direct charge to earned surplus; (5) changes in deferred income tax assets or liabilities are recorded directly in earned surplus and not through the income statement; (6) mortgage guaranty contingency reserves intended to provide for future catastrophic losses are established as a liability through a charge to earned surplus whereas, GAAP does not allow provisions for future catastrophic losses; (7) title insurance premium reserves, which are intended to cover losses that will be reported at a future date are based on statutory formulas, and changes therein are charged in the income statement against each year's premiums written; (8) certain required formula-derived reserves for general insurance in particular are established for claim reserves in excess of amounts considered adequate by the Company as well as for credits taken relative to reinsurance placed with other insurance companies not licensed in the respective states, all of which are charged directly against earned surplus; and (9) surplus notes are classified as surplus rather than a liability. In consolidating the statutory financial statements of its insurance subsidiaries, the Company has therefore made necessary adjustments to conform their accounts with GAAP. The following table reflects a summary of all such adjustments:
66
Shareholders' Equity | Net Income (Loss) | ||||||||||||||||||
December 31, | Years Ended December 31, | ||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2016 | |||||||||||||||
Statutory totals of insurance | |||||||||||||||||||
company subsidiaries (a): | |||||||||||||||||||
General | $ | 3,847.3 | $ | 3,903.7 | $ | 290.5 | $ | 348.9 | $ | 270.3 | |||||||||
Title | 503.1 | 545.7 | 110.5 | 127.9 | 113.1 | ||||||||||||||
RFIG Run-off | 88.0 | 86.6 | 44.9 | 50.5 | 100.9 | ||||||||||||||
Life & Accident | 39.8 | 41.4 | .9 | 1.8 | 2.3 | ||||||||||||||
Sub-total | 4,478.2 | 4,577.4 | 446.8 | 529.1 | 486.6 | ||||||||||||||
GAAP totals of non-insurance company | |||||||||||||||||||
subsidiaries and consolidation adjustments | 715.8 | 283.4 | 8.8 | (59.9 | ) | (.9 | ) | ||||||||||||
Unadjusted totals | 5,194.0 | 4,860.8 | 455.6 | 469.2 | 485.7 | ||||||||||||||
Adjustments to conform to GAAP statements: | |||||||||||||||||||
Deferred policy acquisition costs | 194.8 | 177.6 | 17.2 | 11.7 | 2.0 | ||||||||||||||
Investment adjustment | (65.5 | ) | 124.3 | (198.2 | ) | — | — | ||||||||||||
Non-admitted assets | 111.1 | 80.8 | — | — | — | ||||||||||||||
Deferred income taxes | (63.9 | ) | (92.3 | ) | 38.7 | 34.7 | (34.0 | ) | |||||||||||
Mortgage contingency reserves | 433.1 | 395.9 | — | — | — | ||||||||||||||
Title insurance premium reserves | 545.8 | 522.5 | 23.3 | 27.1 | 27.0 | ||||||||||||||
Loss reserves | (440.4 | ) | (478.8 | ) | 38.3 | 40.5 | (15.0 | ) | |||||||||||
Surplus notes | (744.5 | ) | (839.5 | ) | — | — | — | ||||||||||||
Sundry adjustments | (18.6 | ) | (18.2 | ) | (4.4 | ) | (22.9 | ) | 1.2 | ||||||||||
Total adjustments | (48.2 | ) | (127.6 | ) | (85.0 | ) | 91.0 | (19.0 | ) | ||||||||||
Consolidated GAAP totals | $ | 5,146.2 | $ | 4,733.3 | $ | 370.5 | $ | 560.5 | $ | 466.9 | |||||||||
(a) | The insurance laws of the respective states in which the Company’s insurance subsidiaries are incorporated prescribe minimum capital and surplus requirements for the lines of business they are licensed to write. For domestic property and casualty and life and accident insurance companies the National Association of Insurance Commissioners also prescribes risk-based capital ("RBC") requirements. The RBC is a measure of statutory capital in relationship to a formula-driven definition of risk relative to a company’s balance sheet and mix of business. The combined RBC ratio of our primary General insurance subsidiaries was 657% and 651% of the company action level RBC at December 31, 2018 and 2017, respectively. The minimum capital requirements for the Company’s Title Insurance subsidiaries are established by statute in the respective states of domicile. The minimum regulatory capital requirements are not significant in relationship to the recorded statutory capital of the Company’s Title and Life & Accident insurance subsidiaries. At December 31, 2018 and 2017 each of the Company’s General, Title, RFIG and Life and Accident insurance subsidiaries exceeded the minimum statutory capital and surplus requirements. Refer to Note 1(s) - Regulatory Matters for a discussion regarding the RFIG Run-off group. |
The preparation of financial statements in conformity with either statutory practices or GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates.
(b) Consolidation Practices - The consolidated financial statements include the accounts of the Company and those of all of its majority owned insurance underwriting and service subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
(c) Statement Presentation - Amounts shown in the consolidated financial statements and applicable notes are stated (except as otherwise indicated and as to share data) in millions, which amounts may not add to totals shown due to truncation. The consolidated financial statements reflect an immaterial adjustment of $11.0 post-tax (or 0.28%) to previously reported shareholders' equity as of January 1, 2015. The adjustment relates to immaterial expense accruals pertaining to the earlier period. Necessary reclassifications are made in prior periods' financial statements whenever appropriate to conform to the most current presentation.
(d) Investments - The Company classifies its fixed maturity securities in terms of those assets relative to which it either (1) has the positive intent and ability to hold until maturity, (2) has available for sale or (3) has the intention of trading.
Fixed maturity securities classified as "available for sale" are included at fair value with changes in such values, net of deferred income taxes, reflected directly in shareholders' equity. Fixed maturity securities classified as "held to maturity" are carried at amortized cost. Equity securities are included at fair value and effective January 1, 2018, changes in such values are reflected as unrealized investment gains (losses) in the consolidated statements of income. Prior to that date, these changes were reflected directly in shareholders' equity. Fair values for fixed maturity securities and equity securities are based on quoted market prices or estimates using values obtained from recognized independent pricing services.
67
The status and fair value changes of each of the fixed maturity (and prior to 2018, its equity security) investments are reviewed at least once per quarter during the year, and estimates of other-than-temporary impairments ("OTTI") in the portfolio's value are evaluated and established at each quarterly balance sheet date. In reviewing investments for OTTI, the Company, in addition to a security's market price history, considers the totality of such factors as the issuer's operating results, financial condition and liquidity, its ability to access capital markets, credit rating trends, most current audited financial statements, industry and securities markets conditions, and analyst expectations to reach its conclusions. Sudden fair value declines caused by such adverse developments as newly emerged or imminent bankruptcy filings, issuer default on significant obligations, or reports of financial accounting developments that bring into question the validity of the issuer's previously reported earnings or financial condition, are recognized as realized losses as soon as credible publicly available information emerges to confirm such developments. Prior to 2018, absent issuer-specific circumstances that would result in a contrary conclusion, any equity security with an unrealized investment loss amounting to a 20% or greater decline consecutively during a six month period was considered OTTI. In the event the Company's estimate of OTTI is insufficient at any point in time, future periods' net income (loss) would be adversely affected by the recognition of additional impairment losses, but its financial position would not necessarily be affected adversely inasmuch as such losses, or a portion of them, could have been recognized previously as unrealized losses in shareholders' equity. The Company recognized no OTTI adjustments for the years ended December 31, 2018 and 2017 and a $4.9 OTTI adjustment for the year ended December 31, 2016.
The amortized cost and estimated fair values by type and contractual maturity of fixed maturity securities are shown in the following tables. Expected maturities will differ from contractual maturities since borrowers may have the right to call or repay obligations with or without call or prepayment penalties.
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||
Cost and Fair Value of Fixed Maturity Securities by Type: | |||||||||||||||
December 31, 2018: | |||||||||||||||
Available for sale: | |||||||||||||||
U.S. & Canadian Governments | $ | 1,535.3 | $ | 5.7 | $ | 16.5 | $ | 1,524.4 | |||||||
Corporate | 6,749.6 | 31.4 | 122.7 | 6,658.3 | |||||||||||
$ | 8,285.0 | $ | 37.1 | $ | 139.2 | $ | 8,182.8 | ||||||||
Held to maturity: | |||||||||||||||
Tax-exempt | $ | 1,044.8 | $ | 3.5 | $ | 13.7 | $ | 1,034.5 | |||||||
December 31, 2017: | |||||||||||||||
Available for sale: | |||||||||||||||
U.S. & Canadian Governments | $ | 1,554.3 | $ | 6.5 | $ | 8.7 | $ | 1,552.2 | |||||||
Corporate | 6,607.8 | 140.8 | 18.6 | 6,730.0 | |||||||||||
$ | 8,162.2 | $ | 147.4 | $ | 27.3 | $ | 8,282.3 | ||||||||
Held to maturity: | |||||||||||||||
Tax-exempt | $ | 1,067.4 | $ | 10.0 | $ | 8.3 | $ | 1,069.2 | |||||||
Amortized Cost | Estimated Fair Value | ||||||
Fixed Maturity Securities Stratified by Contractual Maturity at December 31, 2018: | |||||||
Available for sale: | |||||||
Due in one year or less | $ | 650.4 | $ | 650.3 | |||
Due after one year through five years | 4,643.4 | 4,604.3 | |||||
Due after five years through ten years | 2,921.7 | 2,856.3 | |||||
Due after ten years | 69.4 | 71.7 | |||||
$ | 8,285.0 | $ | 8,182.8 | ||||
Held to maturity: | |||||||
Due in one year or less | $ | — | $ | — | |||
Due after one year through five years | 171.6 | 170.1 | |||||
Due after five years through ten years | 873.1 | 864.4 | |||||
Due after ten years | — | — | |||||
$ | 1,044.8 | $ | 1,034.5 | ||||
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Bonds and other investments with a statutory carrying value of $855.2 as of December 31, 2018 were on deposit with governmental authorities by the Company's insurance subsidiaries to comply with insurance laws.
The following table reflects the Company's gross unrealized losses and fair value, aggregated by category and length of time that individual available for sale and held to maturity fixed maturity securities have been in an unrealized loss position. Fair value and issuer's cost comparisons follow:
Less than 12 Months | 12 Months or Greater | Total | |||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
December 31, 2018: | |||||||||||||||||||||||
Fixed Maturity Securities: | |||||||||||||||||||||||
Available for sale: | |||||||||||||||||||||||
U.S. & Canadian Governments | $ | 616.7 | $ | 8.4 | $ | 487.1 | $ | 8.1 | $ | 1,103.9 | $ | 16.5 | |||||||||||
Corporate | 3,440.8 | 77.9 | 1,096.4 | 44.7 | 4,537.3 | 122.7 | |||||||||||||||||
$ | 4,057.6 | $ | 86.4 | $ | 1,583.6 | $ | 52.8 | $ | 5,641.2 | $ | 139.2 | ||||||||||||
Number of available for sale | |||||||||||||||||||||||
securities in unrealized | |||||||||||||||||||||||
loss position | 760 | 335 | 1,095 | ||||||||||||||||||||
Held to maturity: | |||||||||||||||||||||||
Tax-exempt | $ | 271.9 | $ | 2.3 | $ | 407.7 | $ | 11.4 | $ | 679.7 | $ | 13.7 | |||||||||||
Number of available for sale | |||||||||||||||||||||||
securities in unrealized | |||||||||||||||||||||||
loss position | 94 | 145 | 239 | ||||||||||||||||||||
December 31, 2017: | |||||||||||||||||||||||
Fixed Maturity Securities: | |||||||||||||||||||||||
Available for sale: | |||||||||||||||||||||||
U.S. & Canadian Governments | $ | 1,080.9 | $ | 8.6 | $ | 29.5 | $ | — | $ | 1,110.5 | $ | 8.7 | |||||||||||
Corporate | 1,660.9 | 15.0 | 145.9 | 3.6 | 1,806.9 | 18.6 | |||||||||||||||||
$ | 2,741.9 | $ | 23.6 | $ | 175.5 | $ | 3.7 | $ | 2,917.4 | $ | 27.3 | ||||||||||||
Number of held to maturity | |||||||||||||||||||||||
securities in unrealized | |||||||||||||||||||||||
loss position | 526 | 56 | 582 | ||||||||||||||||||||
Held to maturity: | |||||||||||||||||||||||
Tax-exempt | $ | 321.9 | $ | 4.8 | $ | 134.7 | $ | 3.4 | $ | 456.6 | $ | 8.3 | |||||||||||
Number of available for sale | |||||||||||||||||||||||
securities in unrealized | |||||||||||||||||||||||
loss position | 112 | 48 | 160 | ||||||||||||||||||||
In the above tables the unrealized losses on fixed income securities are primarily deemed to reflect changes in the interest rate environment. As part of its assessment of other-than-temporary impairments, the Company considers its intent to continue to hold the securities, and the likelihood that it will not be required to sell investment securities in an unrealized loss position until cost recovery, principally in consideration of its asset and liability maturity matching objectives.
The following table shows cost and fair value information for equity securities:
Equity Securities | |||||||||||||||
Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||
December 31, 2018 | $ | 3,039.1 | $ | 517.3 | $ | 175.4 | $ | 3,380.9 | |||||||
December 31, 2017 | $ | 2,629.9 | $ | 658.8 | $ | 23.2 | $ | 3,265.5 | |||||||
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At December 31, 2017, the Company held 9 equity securities that had been in an unrealized loss position for less than12 months. Effective January 1, 2018, the Company adopted a new accounting standard which requires the recognition of changes in fair value of equity securities in net income. The effect is shown in the accompanying consolidated financial statements. The cumulative-effect adjustment resulting from the adoption of the new standard was to reclassify $502.1 from accumulated other comprehensive income to retained earnings; total shareholders' equity remained unchanged. During 2018, the Company recognized pretax unrealized investment gains (losses) of $(293.8) emanating from changes in the fair value of equity securities in the consolidated statements of income. Changes in the fair value of equity securities still held at December 31, 2018 was $(244.8) for the year ended December 31, 2018.
Fair Value Measurements - Fair value is defined as the estimated price that is likely to be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (an exit price) at the measurement date. A fair value hierarchy is established that prioritizes the sources ("inputs") used to measure fair value into three broad levels: Level 1 inputs are based on quoted market prices in active markets; Level 2 observable inputs are based on corroboration with available market data; and Level 3 unobservable inputs are based on uncorroborated market data or a reporting entity's own assumptions. Following is a description of the valuation methodologies and general classification used for financial instruments measured at fair value.
The Company uses quoted values and other data provided by a nationally recognized independent pricing source as inputs into its quarterly process for determining fair values of fixed maturity and equity securities. To validate the techniques or models used by pricing sources, the Company's review process includes, but is not limited to: (i) initial and ongoing evaluation of methodologies used by outside parties to calculate fair value; and (ii) comparisons with other sources including the fair value estimates based on current market quotations, and with independent fair value estimates provided by the independent investment custodian. The independent pricing source obtains market quotations and actual transaction prices for securities that have quoted prices in active markets and uses their own proprietary method for determining the fair value of securities that are not actively traded. In general, these methods involve the use of "matrix pricing" in which the independent pricing source uses observable market inputs including, but not limited to, investment yields, credit risks and spreads, benchmarking of like securities, broker-dealer quotes, reported trades and sector groupings to determine a reasonable fair value.
Level 1 securities include U.S. and Canadian Treasury notes, publicly traded common stocks, quoted net asset value ("NAV") mutual funds, and short-term investments in highly liquid money market instruments. Level 2 securities generally include corporate bonds, municipal bonds, and certain U.S. and Canadian government agency securities. Securities classified within Level 3 include non-publicly traded bonds and equity securities. There were no significant changes in the fair value of assets measured with the use of significant unobservable inputs as of December 31, 2018 and December 31, 2017.
The following tables show a summary of the fair value of financial assets segregated among the various input levels described above:
Fair Value Measurements | ||||||||||||||||
As of December 31, 2018: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Available for sale: | ||||||||||||||||
Fixed maturity securities: | ||||||||||||||||
U.S. & Canadian Governments | $ | 714.0 | $ | 810.3 | $ | — | $ | 1,524.4 | ||||||||
Corporate | — | 6,647.8 | 10.5 | 6,658.3 | ||||||||||||
Short-term investments | 354.9 | — | — | 354.9 | ||||||||||||
Held to maturity: | ||||||||||||||||
Fixed maturity securities: | ||||||||||||||||
Tax-exempt | — | 1,034.5 | — | 1,034.5 | ||||||||||||
Equity securities | $ | 3,379.2 | $ | — | $ | 1.7 | $ | 3,380.9 | ||||||||
As of December 31, 2017: | ||||||||||||||||
Available for sale: | ||||||||||||||||
Fixed maturity securities: | ||||||||||||||||
U.S. & Canadian Governments | $ | 761.4 | $ | 790.8 | $ | — | $ | 1,552.2 | ||||||||
Corporate | — | 6,719.5 | 10.5 | 6,730.0 | ||||||||||||
Short-term investments | 670.1 | — | — | 670.1 | ||||||||||||
Held to maturity: | ||||||||||||||||
Fixed maturity securities: | ||||||||||||||||
Tax-exempt | — | 1,069.2 | — | 1,069.2 | ||||||||||||
Equity securities | $ | 3,264.4 | $ | — | $ | 1.1 | $ | 3,265.5 | ||||||||
There were no transfers between Levels 1, 2 or 3 during 2018 or 2017.
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Investment income is reported net of allocated expenses and includes appropriate adjustments for amortization of premium and accretion of discount on fixed maturity securities acquired at other than par value. Dividends on equity securities are credited to income on the ex-dividend date.
Investment gains and losses, which result from sales or write-downs of securities, are reflected as revenues in the income statement and are determined on the basis of amortized value at date of sale for fixed maturity securities, and cost in regard to equity securities; such bases apply to the specific securities sold. Effective January 1, 2018, as above noted, unrealized gains and (losses) from changes in fair value of equity securities are recorded as investment gains (losses) in the income statement. Unrealized investment gains (losses) on fixed maturity securities, net of any deferred income taxes, are recorded directly as a component of accumulated other comprehensive income in shareholders' equity. At December 31, 2018, the Company and its subsidiaries had no non-income producing fixed maturity or equity securities.
The following table reflects the composition of net investment income, net realized gains or losses, and the net change in unrealized investment gains or losses for each of the years shown.
Years Ended December 31: | 2018 | 2017 | 2016 | |||||||||
Investment income from: | ||||||||||||
Fixed maturity securities | $ | 299.2 | $ | 293.2 | $ | 296.6 | ||||||
Equity securities | 124.0 | 110.9 | 88.2 | |||||||||
Short-term investments | 9.8 | 5.4 | 2.1 | |||||||||
Other sources | 4.9 | 4.5 | 3.9 | |||||||||
Gross investment income | 438.1 | 414.1 | 390.9 | |||||||||
Investment expenses (a) | 6.2 | 4.6 | 3.8 | |||||||||
Net investment income | $ | 431.8 | $ | 409.4 | $ | 387.0 | ||||||
Investment gains (losses): | ||||||||||||
From actual transactions: | ||||||||||||
Fixed maturity securities: | ||||||||||||
Gains | $ | 2.4 | $ | 22.1 | $ | 15.3 | ||||||
Losses | (7.2 | ) | (5.4 | ) | (7.5 | ) | ||||||
Net | (4.8 | ) | 16.6 | 7.8 | ||||||||
Equity securities: | ||||||||||||
Gains | 71.9 | 217.8 | 95.1 | |||||||||
Losses | (10.4 | ) | (23.0 | ) | (25.4 | ) | ||||||
Net | 61.4 | 194.7 | 69.7 | |||||||||
Other long-term investments, net | 1.6 | .1 | .2 | |||||||||
Total from actual transactions | 58.2 | 211.6 | 77.8 | |||||||||
From unrealized changes in fair value of equity securities | (293.8 | ) | — | — | ||||||||
From impairments | — | — | (4.9 | ) | ||||||||
Total realized and unrealized investment gains (losses) | (235.6 | ) | 211.6 | 72.8 | ||||||||
Current and deferred income taxes (credits)(b)(c) | (49.6 | ) | (30.8 | ) | 25.5 | |||||||
Post tax realized and unrealized investment gains (losses) | $ | (185.9 | ) | $ | 242.4 | $ | 47.3 | |||||
Changes in unrealized investment gains (losses) | ||||||||||||
reflected directly in shareholders' equity on: | ||||||||||||
Fixed maturity securities | $ | (221.9 | ) | $ | (31.2 | ) | $ | 119.4 | ||||
Less: Deferred income taxes (credits) | (46.6 | ) | (10.7 | ) | 41.9 | |||||||
(175.2 | ) | (20.5 | ) | 77.5 | ||||||||
Equity securities & other long-term investments | (1.3 | ) | 144.7 | 330.0 | ||||||||
Less: Deferred income taxes (credits) | (.2 | ) | 50.2 | 115.3 | ||||||||
(1.0 | ) | 94.4 | 214.6 | |||||||||
Net changes in unrealized investment gains (losses) | $ | (176.3 | ) | $ | 73.9 | $ | 292.1 | |||||
__________
(a) | Investment expenses largely consist of personnel costs and investment management and custody service fees. |
(b) | Reflects primarily the combination of fully taxable investment gains or losses and judgments about the recoverability of deferred tax assets. |
(c) | Includes $104.9, for 2017, of deferred income tax credits to adjust to the new 21% tax rate of 2018 pertaining to unrealized gains (losses) as of December 31, 2017. Deferred income taxes on unrealized gains (losses) would normally be a part of the statement of comprehensive income rather than the income statement. |
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In June 2016, the FASB issued guidance on accounting for credit losses on financial instruments which will be effective in 2020. The guidance will require immediate recognition of expected credit losses for certain financial instruments including (1) reinsurance recoverables, (2) held to maturity securities and (3) accounts and notes receivable. Additionally, the guidance modified the impairment model for available for sale fixed maturity securities. The Company is currently evaluating the guidance to determine the potential impact of its adoption on the Company's consolidated financial statements.
(e) Revenue Recognition - Pursuant to GAAP applicable to the insurance industry, revenues are recognized as follows:
Substantially all general insurance premiums pertain to annual policies and are reflected in income on a pro-rata basis in association with the related benefits, claims, and expenses. Earned but unbilled premiums are generally taken into income on the billing date, while adjustments for retrospective premiums, commissions and similar charges or credits are accrued on the basis of periodic evaluations of current underwriting experience and contractual obligations.
Title premium and fee revenues stemming from the Company's direct operations (which include branch offices of its title insurers and wholly owned agency subsidiaries) represent 26% of 2018, 27% of 2017 and 28% of 2016 consolidated title business revenues. Such premiums are generally recognized as income at the escrow closing date which approximates the policy effective date. Fee income related to escrow and other closing services is recognized when the related services have been performed and completed. The remaining title premium and fee revenues are produced by independent title agents and underwritten title companies. Rather than making estimates that could be subject to significant variance from actual premium and fee production, the Company recognizes revenues from those sources upon receipt. Such receipts can reflect a three to four month lag relative to the effective date of the underlying title policy, and are offset concurrently by production expenses and claim reserve provisions.
The Company's mortgage guaranty premiums primarily stem from monthly installments paid on long-duration, guaranteed renewable insurance policies. Such premiums are written and earned in the month coverage is effective. With respect to relatively few annual or single premium policies, earned premiums are largely recognized on a pro-rata basis over the terms of the policies. Recognition of normal or catastrophic claim costs, however, occurs only upon an instance of default, defined as the occurrence of two or more consecutively missed monthly payments. Accordingly, GAAP revenue recognition for insured loans is not appropriately matched to the risk exposure and the consequent recognition of both normal and most significantly, future catastrophic loss occurrences for which current reserve provisions are not permitted. As a result, mortgage guaranty GAAP earnings for any individual year or series of years may be materially adversely affected, particularly by cyclical catastrophic loss events such as the mortgage insurance industry experienced between 2007 and 2012. Reported GAAP earnings and financial condition form, in part, the basis for significant judgments and strategic evaluations made by management, analysts, investors, and other users of the financial statements issued by mortgage guaranty companies. The risk exists that such judgments and evaluations are at least partially based on GAAP financial information that does not match revenues and expenses and is therefore not reflective of the long-term normal and catastrophic risk exposures assumed by mortgage guaranty insurers at any point in time.
The Company recognized total contract revenue from customers of $166.8, $155.1 and $151.4 during 2018, 2017 and 2016, respectively. Of these amounts, approximately $105.4 (63.2%), $97.1 (62.6%) and $92.7 (61.2%) were generated from claims handling and related ancillary services (i.e. risk control services) provided to customers within the Company’s General Insurance segment. Claims handling revenues are recognized on a straight-line basis over the contract period (generally one year) which is commensurate with the entity’s efforts relative to claims adjudication. The related ancillary services revenues are recognized as services are provided and invoiced to the customer. Additionally, revenues from contracts with customers generated from the Company’s Title Insurance segment, consisting primarily of valuation and default title services, and software licensing arrangements totaled $55.8 (33.5%), $52.5 (33.9%) and $53.0 (35.0%) for the years ended December 31, 2018, 2017 and 2016, respectively. Such revenues are generally recognized at a point in time upon completion and invoicing of the services, or in the case of software maintenance agreements, on a straight-line basis over the life of the contract (generally one year).
(f) Deferred Policy Acquisition Costs - Various insurance subsidiaries of the Company defer direct costs related to the successful production of business. Deferred costs consist principally of commissions, premium taxes and policy issuance expenses.
With respect to most coverages, deferred acquisition costs are amortized on the same basis as the related premiums are earned or, alternatively, over the periods during which premiums will be paid. To the extent that future revenues on existing policies are not adequate to cover related costs and expenses, deferred policy acquisition costs are charged to earnings.
The following table shows a reconciliation of deferred acquisition costs between succeeding balance sheet dates.
72
Years Ended December 31: | 2018 | 2017 | 2016 | |||||||||
Deferred, beginning of year | $ | 297.8 | $ | 274.0 | $ | 255.4 | ||||||
Acquisition costs deferred: | ||||||||||||
Commissions - net of reinsurance | 332.2 | 308.7 | 253.0 | |||||||||
Premium taxes | 123.5 | 117.1 | 107.8 | |||||||||
Salaries and other underwriting expenses | 52.3 | 51.9 | 51.4 | |||||||||
Sub-total | 508.1 | 477.8 | 412.3 | |||||||||
Amortization charged to income | (489.6 | ) | (454.0 | ) | (393.7 | ) | ||||||
Change for the year | 18.5 | 23.7 | 18.6 | |||||||||
Deferred, end of year | $ | 316.3 | $ | 297.8 | $ | 274.0 | ||||||
(g) Unearned Premiums - Unearned premium reserves are generally calculated by application of pro-rata factors to premiums in force. At December 31, 2018 and 2017, unearned premiums consisted of the following:
As of December 31: | 2018 | 2017 | ||||||
General Insurance Group | $ | 2,101.8 | $ | 1,966.4 | ||||
RFIG Run-off Business | 3.0 | 5.1 | ||||||
Total | $ | 2,104.9 | $ | 1,971.5 | ||||
(h) Losses, Claims and Settlement Expenses - The establishment of claim reserves by the Company's insurance subsidiaries is a reasonably complex and dynamic process influenced by a large variety of factors. These factors principally include past experience applicable to the anticipated costs of various types of claims, continually evolving and changing legal theories emanating from the judicial system, recurring accounting, statistical, and actuarial studies, the professional experience and expertise of the Company's claim departments' personnel or attorneys and independent claim adjusters, ongoing changes in claim frequency or severity patterns such as those caused by natural disasters, illnesses, accidents, work‑related injuries, and changes in general and industry-specific economic conditions. Consequently, the reserves established are a reflection of the opinions of a large number of persons, of the application and interpretation of historical precedent and trends, of expectations as to future developments, and of management's judgment in interpreting all such factors. At any point in time, the Company is exposed to the incurrence of possibly higher or lower than anticipated claim costs due to all of these factors, and to the evolution, interpretation, and expansion of tort law, as well as the effects of unexpected jury verdicts.
All reserves are therefore based on estimates which are periodically reviewed and evaluated in the light of emerging claim experience and changing circumstances. The resulting changes in estimates are recorded in operations of the periods during which they are made. Return and additional premiums and policyholders' dividends, all of which tend to be affected by development of claims in future years, may offset, in whole or in part, favorable or unfavorable claim developments for certain coverages such as workers' compensation, portions of which are written under loss sensitive programs that provide for such adjustments. The Company believes that its overall reserving practices have been consistently applied over many years, and that its aggregate net reserves have generally resulted in reasonable approximations of the ultimate net costs of claims incurred. However, no representation is made nor is any guaranty given that ultimate net claim and related costs will not develop in future years to be greater or lower than currently established reserve estimates.
General Insurance reserves are established to provide for the ultimate expected cost of settling unpaid losses and claims reported at each balance sheet date. Such reserves are based on continually evolving assessments of the facts available to the Company during the settlement process which may stretch over long periods of time. Long-term disability or pension type workers' compensation reserves are discounted to present value based on interest rates ranging from 3.5% to 4.0%. The amount of discount reflected in the year-end net reserves totaled $216.5, $240.7, and $231.9 as of December 31, 2018, 2017, and 2016, respectively. Interest accretion of $49.0, $20.4 and $24.2 for the years ended December 31, 2018, 2017, and 2016, respectively, was recognized as unfavorable development of prior year reserves within benefits, claims and settlement expenses in the consolidated statements of income. Losses and claims incurred but not reported ("IBNR"), as well as expenses required to settle losses and claims are established on the basis of a large number of formulas that take into account various criteria, including historical cost experience and anticipated costs of servicing reinsured and other risks. As applicable, estimates of possible recoveries from salvage or subrogation opportunities are considered in the establishment of such reserves. Overall claim and claim expense reserves incorporate amounts covering net estimates of unusual claims such as those emanating from asbestosis and environmental ("A&E") exposures as discussed below. Such reserves can affect claim costs and related claim ratios for such insurance coverages as general liability, commercial automobile (truck), workers' compensation, and property.
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.
73
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 increased. 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 and $2.0 and rarely exceeding $10.0. Such policies have, in turn, been subject to reinsurance cessions which have typically reduced the subsidiaries' net retentions to $.5 or less as to each claim. Old Republic's exposure to A&E claims cannot, however, be calculated by conventional insurance reserving methods for a variety of reasons, including: a) the absence of statistically valid data inasmuch as such claims generally 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 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, 2018, 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, 2018 and 2017, Old Republic's aggregate indemnity and loss adjustment expense reserves specifically identified with A&E exposures amounted to $105.8 and $117.4 gross, respectively, and $74.4 and $96.4 net of reinsurance, respectively. Old Republic's average five year paid loss survival ratios stood at 4.3 years (gross) and 5.0 years (net of reinsurance) as of December 31, 2018 and 4.6 years (gross) and 6.3 years (net of reinsurance) as of December 31, 2017. Fluctuations in this ratio between years can be caused by the inconsistent pay out patterns associated with these types of claims.
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.
Title insurance and related escrow services loss and loss adjustment expense reserves are established as point estimates to cover the projected settlement costs of known as well as IBNR losses related to premium and escrow service revenues of each reporting period. Reserves for known claims are based on an assessment of the facts available to the Company during the settlement process. The point estimates covering all claim reserves take into account IBNR claims based on past experience and evaluations of such variables as changing trends in the types of policies issued, changes in real estate markets and interest rate environments, and changing levels of loan refinancing, all of which can have a bearing on the emergence, number, and ultimate cost of claims.
RFIG Run-off mortgage guaranty insurance reserves for unpaid claims and claim adjustment expenses are recognized only upon an instance of default, defined as an insured mortgage loan for which two or more consecutive monthly payments have been missed. Loss reserves are based on statistical calculations that take into account the number of reported insured mortgage loan defaults as of each balance sheet date, as well as experience-based estimates of loan defaults that have occurred but have not as yet been reported. Further, the loss reserve estimating process takes into account a large number of variables including trends in claim severity, potential salvage recoveries, expected cure rates for reported loan delinquencies at various stages of default, the level of coverage rescissions and claims denials due to material misrepresentation in key underwriting information or non-compliance with prescribed underwriting guidelines, and management judgments relative to future employment levels, housing market activity, and mortgage loan interest costs, demand, and extensions.
The Company has the legal right to rescind mortgage insurance coverage unilaterally as expressly stated in its policy. Moreover, two federal courts that have considered that policy wording have each affirmed that right (See First Tennessee Bank N.A. v. Republic Mortg. Ins. Co., Case No. 2:10-cv-02513-JPM-cgc (W.D. Tenn., Feb. 25, 2011) and JPMorgan Chase Bank N.A. v. Republic Mortg. Ins. Co., Civil Action No. 10-06141 (SRC) (D. NJ, May 4, 2011), each decision citing supporting state law legal precedent). RMIC's mortgage insurance policy provides that the insured represents that all statements made and information provided to it in an application for coverage for a loan, without regard to who made the statements or provided the information, have been made and presented for and on behalf of the insured; and that such statements and information are neither false nor misleading in any material respect, nor omit any fact necessary to make such statements and information not false or misleading in any material respect. According to the policy, if any
74
of those representations are materially false or misleading with respect to a loan, the Company has the right to cancel or rescind coverage for that loan retroactively to commencement of the coverage. Whenever the Company determines that an application contains a material misrepresentation, it either advises the insured in writing of its findings prior to rescinding coverage or exercises its unilateral right to rescind coverage for that loan, stating the reasons for that action in writing and returning the applicable premium. The rescission of coverage in instances of materially faulty representations or warranties provided in applications for insurance is a necessary and prevailing practice throughout the insurance industry. In the case of mortgage guaranty insurance, rescissions have occurred regularly over the years but have been generally immaterial. Since 2008, however, the Company has experienced a much greater incidence of rescissions due to increased levels of observed fraud and misrepresentations in insurance applications pertaining to business underwritten between 2004 and the first half of 2008. As a result, the Company has incorporated certain assumptions regarding the expected levels of coverage rescissions and claim denials in its reserving methodology since 2008. Such estimates, which are evaluated at each balance sheet date, take into account observed as well as historical trends in rescission and denial rates. The table below shows the estimated effects of coverage rescissions and claim denials on loss reserves and settled and incurred losses.
2018 | 2017 | 2016 | |||||||||
Estimated reduction in beginning reserve | $ | 19.0 | $ | 29.6 | $ | 47.5 | |||||
Total incurred claims and settlement expenses reduced | |||||||||||
(increased) by changes in estimated rescissions: | |||||||||||
Current year | .9 | 6.2 | 8.3 | ||||||||
Prior year | (12.3 | ) | (3.7 | ) | (24.8 | ) | |||||
Sub-total | (11.4 | ) | 2.5 | (16.5 | ) | ||||||
Estimated rescission reduction in paid claims | (4.4 | ) | (13.1 | ) | (1.4 | ) | |||||
Estimated reduction in ending reserve | $ | 3.2 | $ | 19.0 | $ | 29.6 | |||||
As above-noted, the estimated reduction in ending loss reserves reflects, in large measure, a variety of judgments relative to the level of expected coverage rescissions and claim denials on loans that are in default as of each balance sheet date. The provision for insured events of the current year resulted from actual and anticipated rescissions and claim denials attributable to newly reported delinquencies in each respective year. The provision for insured events of prior years resulted from actual rescission and claim denial activity, reinstatement of previously rescinded or denied claims, or revisions in assumptions regarding expected rescission or claim denial rates on outstanding prior year delinquencies. The trends since 2010 reflect a continuing reduction in the level of actual and anticipated rescission and claim denial rates on total outstanding delinquencies. Claims not paid by virtue of rescission or denial represent the Company's estimated contractual risk, before consideration of the impacts of any reinsurance and deductibles or aggregate loss limits, on cases that are settled by the issuance of a rescission or denial notification. Variances between the estimated rescission and actual claim denial rate are reflected in the periods during which they occur.
Although the insured has no right under the policy to appeal a Company claim decision, the insured may, at any time, contest in writing the Company's findings or action with respect to a loan or a claim. In such cases, the Company considers any additional information supplied by the insured. This consideration may lead to further investigation, retraction or confirmation of the initial determination. If the Company concludes that it will reinstate coverage, it advises the insured in writing that it will do so immediately upon receipt of the premium previously returned. Reserves are not adjusted for potential reversals of rescissions or adverse rulings for loans under dispute since such reversals of claim rescissions and denials have historically been immaterial to the reserve estimation process.
In addition to the above reserve elements, the Company establishes reserves for loss settlement costs that are not directly related to individual claims. Such reserves are based on prior years' cost experience and trends, and are intended to cover the unallocated costs of claim departments' administration of known and IBNR claims.
The following table shows an analysis of changes in aggregate reserves for the Company's losses, claims and settlement expenses for each of the years shown.
75
Years Ended December 31: | 2018 | 2017 | 2016 | ||||||||
Gross reserves at beginning of year | $ | 9,237.6 | $ | 9,206.0 | $ | 9,120.1 | |||||
Less: reinsurance losses recoverable | 2,921.1 | 2,766.1 | 2,732.5 | ||||||||
Net reserves at beginning of year: | |||||||||||
General Insurance | 5,471.5 | 5,249.9 | 5,053.1 | ||||||||
Title Insurance | 559.7 | 602.0 | 580.8 | ||||||||
RFIG Run-off | 271.7 | 574.0 | 736.7 | ||||||||
Other | 13.5 | 13.8 | 16.9 | ||||||||
Sub-total | 6,316.4 | 6,439.8 | 6,387.6 | ||||||||
Incurred claims and claim adjustment expenses: | |||||||||||
Provisions for insured events of the current year: | |||||||||||
General Insurance | 2,346.2 | 2,192.1 | 2,115.1 | ||||||||
Title Insurance | 96.1 | 95.2 | 107.7 | ||||||||
RFIG Run-off (a) | 56.2 | 297.1 | 171.3 | ||||||||
Other | 22.1 | 20.4 | 21.7 | ||||||||
Sub-total | 2,520.7 | 2,604.9 | 2,416.0 | ||||||||
Change in provision for insured events of prior years: | |||||||||||
General Insurance | (.2 | ) | 22.7 | 9.9 | |||||||
Title Insurance | (47.7 | ) | (74.3 | ) | (23.4 | ) | |||||
RFIG Run-off (a) | (26.2 | ) | (99.2 | ) | (68.7 | ) | |||||
Other | (3.5 | ) | (2.9 | ) | (3.8 | ) | |||||
Sub-total | (77.8 | ) | (153.8 | ) | (86.1 | ) | |||||
Total incurred claims and claim adjustment expenses (a) | 2,442.9 | 2,451.0 | 2,329.9 | ||||||||
Payments: | |||||||||||
Claims and claim adjustment expenses attributable to | |||||||||||
insured events of the current year: | |||||||||||
General Insurance | 813.2 | 765.8 | 723.5 | ||||||||
Title Insurance | 9.1 | 5.0 | 4.4 | ||||||||
RFIG Run-off (b) | 3.7 | 329.4 | 14.5 | ||||||||
Other | 16.0 | 13.9 | 14.8 | ||||||||
Sub-total | 842.2 | 1,114.3 | 757.4 | ||||||||
Claims and claim adjustment expenses attributable to | |||||||||||
insured events of prior years: | |||||||||||
General Insurance | 1,238.1 | 1,227.3 | 1,204.5 | ||||||||
Title Insurance | 65.4 | 58.2 | 58.6 | ||||||||
RFIG Run-off (b) | 143.3 | 170.6 | 250.8 | ||||||||
Other | 5.2 | 3.9 | 6.1 | ||||||||
Sub-total | 1,452.2 | 1,460.1 | 1,520.2 | ||||||||
Total payments (b) | 2,294.5 | 2,574.4 | 2,277.6 | ||||||||
Amount of reserves for unpaid claims and claim adjustment expenses | |||||||||||
at the end of each year, net of reinsurance losses recoverable: | |||||||||||
General Insurance | 5,766.1 | 5,471.5 | 5,249.9 | ||||||||
Title Insurance | 533.4 | 559.7 | 602.0 | ||||||||
RFIG Run-off | 154.5 | 271.7 | 574.0 | ||||||||
Other | 10.8 | 13.5 | 13.8 | ||||||||
Sub-total | 6,464.9 | 6,316.4 | 6,439.8 | ||||||||
Reinsurance losses recoverable | 3,006.3 | 2,921.1 | 2,766.1 | ||||||||
Gross reserves at end of year | $ | 9,471.2 | $ | 9,237.6 | $ | 9,206.0 | |||||
__________
Excluding the reclassification of CCI from the General Insurance to the RFIG Run-off Business segment, certain elements shown in the preceding table would have been as follows:
76
2018 | 2017 | 2016 | ||||||||||
Change in provision for incurred events of prior years: | ||||||||||||
General Insurance | $ | (6.4 | ) | $ | (34.5 | ) | $ | 2.5 | ||||
RFIG Run-off (a) | (20.1 | ) | (42.0 | ) | (61.3 | ) | ||||||
Payment of claim and claim adjustment expenses attributable to | ||||||||||||
incurred events of the current and prior years: | ||||||||||||
General Insurance | 2,083.0 | 2,297.5 | 1,939.9 | |||||||||
RFIG Run-off (b) | $ | 115.4 | $ | 195.8 | $ | 253.6 | ||||||
(a) | In common with all other insurance coverages, RFIG Run-off mortgage guaranty settled and incurred claim and claim adjustment expenses include only those costs actually or expected to be paid by the Company. As previously noted, changes in mortgage guaranty aggregate case, IBNR, and loss adjustment expense reserves shown below and entering into the determination of incurred claim costs, take into account, among a large number of variables, claim cost reductions for anticipated coverage rescissions and claims denials. |
The RFIG Run-off mortgage guaranty provision for insured events of the current year was reduced by estimated coverage rescissions and claims denials of $.9, $6.2 and $8.3, respectively, for 2018, 2017 and 2016. The provision for insured events of prior years in 2018, 2017 and 2016 was increased by estimated coverage rescissions and claims denials of $12.3, $3.7 and $24.8, respectively. Prior year development was also affected in varying degrees by differences between actual claim settlements relative to expected experience, by reinstatement of previously rescinded or denied claims, and by subsequent revisions of assumptions in regards to claim frequency, severity or levels of associated claim settlement costs which result from consideration of underlying trends and expectations.
The 2017 RFIG Run-off provision for insured events of the current year is inclusive of the claim expense provisions applicable to final settlements and probable dispositions of all known litigated and other claim costs as described further elsewhere in this report.
(b) | Rescissions reduced the Company's paid losses by an estimated $4.4, $13.1, and $1.4 for 2018, 2017, and 2016, respectively. |
For the three most recent calendar years, the above table indicates that the one-year development of consolidated reserves at the beginning of each year produced favorable developments of 1.2%, 2.4%, and 1.3% for 2018, 2017 and 2016, respectively, with average favorable annual developments of 1.7%. The Company believes that the factors most responsible, in varying and continually changing degrees, for favorable or unfavorable reserve developments include, as to many general insurance coverages, the effect of reserve discounts applicable to workers' compensation claims, higher than expected severity of litigated claims in particular, governmental or judicially imposed retroactive conditions in the settlement of claims such as noted above in regard to black lung disease claims, greater than anticipated inflation rates applicable to repairs and the medical portion of claims in particular, and higher than expected claims incurred but not reported due to the slower and highly volatile emergence patterns applicable to certain types of claims such as those stemming from litigated, assumed reinsurance, or the A&E types of claims noted above. In 2018, 2017, and 2016, the Company experienced unfavorable developments of previously established reserves concentrated in its largest insurance coverages. Title claim costs were lower in the face of declining claims activity since the Great Recession years. As to mortgage guaranty and the CCI coverage, changes in favorable or unfavorable reserve development result from differences in originally estimated salvage and subrogation recoveries, sales and prices of homes that can impact claim costs upon the disposition of foreclosed properties, changes in regional or local economic conditions and employment levels, the number of coverage rescissions and claims denials due to material misrepresentation in key underwriting information or non-compliance with prescribed underwriting guidelines, the extent of loan refinancing activity that can reduce the period of time over which a policy remains at risk, and lower than expected frequencies of claims incurred but not reported.
The following represents the Company's incurred and paid loss development tables for the major types of insurance coverages as of December 31, 2018. The information about incurred and paid claims development for the years ended December 31, 2009 to 2017 is presented as supplementary information.
77
Workers' Compensation | |||||||||||||||||||||||||||||||||||
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance (Undiscounted) | As of December 31, 2018 | ||||||||||||||||||||||||||||||||||
Total of Incurred-but-Not-Reported Liabilities Plus Expected Development on Reported Claims | Cumulative Number of Reported Claims* | ||||||||||||||||||||||||||||||||||
For the Years Ended December 31, | |||||||||||||||||||||||||||||||||||
Accident | Supplementary Information (Unaudited) | ||||||||||||||||||||||||||||||||||
Year | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | |||||||||||||||||||||||||
2009 | $ | 520.7 | $ | 516.9 | $ | 534.7 | $ | 544.4 | $ | 542.9 | $ | 559.8 | $ | 564.6 | $ | 563.8 | $ | 562.3 | $ | 566.8 | $ | 23.8 | 55,944 | ||||||||||||
2010 | 485.1 | 480.0 | 521.5 | 545.3 | 569.1 | 563.1 | 564.0 | 563.5 | 563.2 | 22.9 | 57,758 | ||||||||||||||||||||||||
2011 | 558.6 | 567.3 | 595.3 | 622.5 | 643.0 | 641.7 | 649.3 | 634.9 | 52.2 | 53,313 | |||||||||||||||||||||||||
2012 | 629.3 | 647.2 | 670.6 | 678.1 | 676.4 | 671.1 | 660.5 | 83.8 | 49,888 | ||||||||||||||||||||||||||
2013 | 700.9 | 705.3 | 716.9 | 722.7 | 726.3 | 717.2 | 114.8 | 48,983 | |||||||||||||||||||||||||||
2014 | 780.9 | 792.8 | 786.4 | 784.9 | 777.0 | 181.3 | 54,088 | ||||||||||||||||||||||||||||
2015 | 794.3 | 792.6 | 787.3 | 785.5 | 239.6 | 55,074 | |||||||||||||||||||||||||||||
2016 | 756.1 | 752.9 | 745.7 | 280.7 | 52,149 | ||||||||||||||||||||||||||||||
2017 | 727.0 | 713.9 | 298.7 | 51,041 | |||||||||||||||||||||||||||||||
2018 | 698.6 | 413.9 | 40,872 | ||||||||||||||||||||||||||||||||
Total | $ | 6,863.8 | (A) | ||||||||||||||||||||||||||||||||
* Reported claims are accumulated on an individual claimant basis and exclude external reinsurance assumed and participation in residual market pools as claim frequency information is not available. | |||||||||||||||||||||||||||||||||||
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance | |||||||||||||||||||||||||||||||||
For the Years Ended December 31, | |||||||||||||||||||||||||||||||||
Accident | Supplementary Information (Unaudited) | ||||||||||||||||||||||||||||||||
Year | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | |||||||||||||||||||||||
2009 | $ | 113.8 | $ | 263.6 | $ | 351.4 | $ | 404.2 | $ | 440.2 | $ | 469.4 | $ | 468.1 | $ | 478.8 | $ | 487.7 | $ | 494.5 | |||||||||||||
2010 | 118.9 | 279.8 | 370.1 | 427.9 | 464.0 | 466.5 | 482.8 | 496.1 | 507.2 | ||||||||||||||||||||||||
2011 | 112.6 | 266.7 | 361.4 | 424.0 | 469.8 | 503.4 | 526.4 | 539.7 | |||||||||||||||||||||||||
2012 | 113.1 | 265.8 | 361.8 | 426.7 | 469.5 | 496.6 | 518.4 | ||||||||||||||||||||||||||
2013 | 107.6 | 274.3 | 381.2 | 449.8 | 501.9 | 526.8 | |||||||||||||||||||||||||||
2014 | 116.9 | 293.7 | 397.1 | 466.0 | 499.5 | ||||||||||||||||||||||||||||
2015 | 109.0 | 274.9 | 379.3 | 435.1 | |||||||||||||||||||||||||||||
2016 | 102.5 | 253.5 | 334.4 | ||||||||||||||||||||||||||||||
2017 | 99.6 | 244.6 | |||||||||||||||||||||||||||||||
2018 | 94.8 | ||||||||||||||||||||||||||||||||
Total | $ | 4,195.5 | (B) | ||||||||||||||||||||||||||||||
Net incurred claims and allocated claim adjustment expenses (A) | $ | 6,863.8 | |||||||||||||||||||||||||||||||
Less: net paid claims and allocated claim adjustment expenses (B) | 4,195.5 | ||||||||||||||||||||||||||||||||
Sub-total | 2,668.3 | ||||||||||||||||||||||||||||||||
All outstanding liabilities before 2009, net of reinsurance | 638.2 | ||||||||||||||||||||||||||||||||
Liabilities for claims and allocated claim adjustment expenses, net of reinsurance | $ | 3,306.5 | |||||||||||||||||||||||||||||||
78
General Liability | |||||||||||||||||||||||||||||||||||
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance (Undiscounted) | As of December 31, 2018 | ||||||||||||||||||||||||||||||||||
Total of Incurred-but-Not-Reported Liabilities Plus Expected Development on Reported Claims | Cumulative Number of Reported Claims* | ||||||||||||||||||||||||||||||||||
For the Years Ended December 31, | |||||||||||||||||||||||||||||||||||
Accident | Supplementary Information (Unaudited) | ||||||||||||||||||||||||||||||||||
Year | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | |||||||||||||||||||||||||
2009 | $ | 88.6 | $ | 87.9 | $ | 88.2 | $ | 83.1 | $ | 89.7 | $ | 107.6 | $ | 107.4 | $ | 105.3 | $ | 102.5 | $ | 103.3 | $ | 4.6 | 6,138 | ||||||||||||
2010 | 68.4 | 67.8 | 66.6 | 64.7 | 70.4 | 69.6 | 68.6 | 68.6 | 67.9 | 4.6 | 5,372 | ||||||||||||||||||||||||
2011 | 72.5 | 71.5 | 72.9 | 80.0 | 95.8 | 96.0 | 94.6 | 94.4 | 8.8 | 4,726 | |||||||||||||||||||||||||
2012 | 95.0 | 91.2 | 89.2 | 100.9 | 107.2 | 109.6 | 108.2 | 11.6 | 5,265 | ||||||||||||||||||||||||||
2013 | 95.7 | 96.7 | 96.5 | 107.8 | 106.7 | 106.0 | 13.0 | 5,506 | |||||||||||||||||||||||||||
2014 | 107.0 | 110.4 | 109.3 | 111.0 | 117.0 | 22.7 | 5,962 | ||||||||||||||||||||||||||||
2015 | 96.0 | 96.3 | 99.2 | 102.3 | 26.9 | 5,477 | |||||||||||||||||||||||||||||
2016 | 92.4 | 96.7 | 98.8 | 39.8 | 83,134 | ||||||||||||||||||||||||||||||
2017 | 111.2 | 121.4 | 50.4 | 460,485 | |||||||||||||||||||||||||||||||
2018 | 120.5 | 72.0 | 379,861 | ||||||||||||||||||||||||||||||||
$ | 1,040.4 | (A) | |||||||||||||||||||||||||||||||||
* Reported claims are accumulated on an individual claimant basis and exclude external reinsurance assumed and participation in residual market pools as claim frequency information is not available. The increases beginning in 2016 are due to the addition of a national account with higher frequency yet lower severity than the existing book of business. | |||||||||||||||||||||||||||||||||||
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance | |||||||||||||||||||||||||||||||||
For the Years Ended December 31, | |||||||||||||||||||||||||||||||||
Accident | Supplementary Information (Unaudited) | ||||||||||||||||||||||||||||||||
Year | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | |||||||||||||||||||||||
2009 | $ | 2.4 | $ | 7.8 | $ | 25.5 | $ | 37.0 | $ | 50.3 | $ | 67.8 | $ | 77.1 | $ | 85.3 | $ | 87.9 | $ | 92.8 | |||||||||||||
2010 | 3.9 | 10.8 | 20.8 | 31.1 | 44.3 | 52.1 | 55.5 | 56.4 | 59.6 | ||||||||||||||||||||||||
2011 | 2.5 | 12.1 | 26.0 | 43.6 | 58.6 | 68.9 | 75.3 | 80.7 | |||||||||||||||||||||||||
2012 | 5.5 | 18.8 | 36.0 | 50.8 | 67.4 | 75.8 | 86.4 | ||||||||||||||||||||||||||
2013 | 4.0 | 13.6 | 34.3 | 58.4 | 76.1 | 85.1 | |||||||||||||||||||||||||||
2014 | 5.8 | 15.8 | 31.9 | 52.8 | 73.5 | ||||||||||||||||||||||||||||
2015 | 6.3 | 16.0 | 29.5 | 47.4 | |||||||||||||||||||||||||||||
2016 | 7.1 | 18.5 | 34.8 | ||||||||||||||||||||||||||||||
2017 | 5.7 | 25.9 | |||||||||||||||||||||||||||||||
2018 | 6.9 | ||||||||||||||||||||||||||||||||
$ | 593.5 | (B) | |||||||||||||||||||||||||||||||
Net incurred claims and allocated claim adjustment expenses (A) | $ | 1,040.4 | |||||||||||||||||||||||||||||||
Less: net paid claims and allocated claim adjustment expenses (B) | 593.5 | ||||||||||||||||||||||||||||||||
Sub-total | 446.9 | ||||||||||||||||||||||||||||||||
All outstanding liabilities before 2009, net of reinsurance | 109.2 | ||||||||||||||||||||||||||||||||
Liabilities for claims and allocated claim adjustment expenses, net of reinsurance | $ | 556.1 | |||||||||||||||||||||||||||||||
79
Commercial Automobile | |||||||||||||||||||||||||||||||||||
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance (Undiscounted) | As of December 31, 2018 | ||||||||||||||||||||||||||||||||||
Total of Incurred-but-Not-Reported Liabilities Plus Expected Development on Reported Claims | Cumulative Number of Reported Claims* | ||||||||||||||||||||||||||||||||||
For the Years Ended December 31, | |||||||||||||||||||||||||||||||||||
Accident | Supplementary Information (Unaudited) | ||||||||||||||||||||||||||||||||||
Year | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | |||||||||||||||||||||||||
2009 | $ | 538.0 | $ | 491.0 | $ | 459.2 | $ | 437.9 | $ | 434.1 | $ | 424.9 | $ | 407.0 | $ | 402.7 | $ | 401.5 | $ | 399.1 | $ | 1.5 | 79,213 | ||||||||||||
2010 | 578.8 | 531.6 | 506.7 | 500.1 | 496.6 | 494.9 | 479.9 | 473.7 | 473.5 | 4.6 | 92,188 | ||||||||||||||||||||||||
2011 | 584.2 | 575.5 | 551.4 | 543.8 | 549.9 | 549.0 | 539.3 | 537.2 | 5.8 | 96,782 | |||||||||||||||||||||||||
2012 | 617.0 | 605.1 | 579.6 | 575.0 | 573.1 | 559.5 | 558.9 | 8.5 | 98,034 | ||||||||||||||||||||||||||
2013 | 654.6 | 649.8 | 668.5 | 669.6 | 660.2 | 646.8 | 13.6 | 96,979 | |||||||||||||||||||||||||||
2014 | 678.9 | 689.2 | 691.7 | 688.7 | 689.3 | 16.8 | 103,175 | ||||||||||||||||||||||||||||
2015 | 712.4 | 710.5 | 729.9 | 721.6 | 29.2 | 104,704 | |||||||||||||||||||||||||||||
2016 | 755.9 | 769.0 | 786.1 | 42.8 | 109,950 | ||||||||||||||||||||||||||||||
2017 | 788.7 | 819.1 | 21.4 | 115,579 | |||||||||||||||||||||||||||||||
2018 | 883.2 | 11.0 | 114,157 | ||||||||||||||||||||||||||||||||
$ | 6,515.3 | (A) | |||||||||||||||||||||||||||||||||
* Reported claims are accumulated on an individual claimant basis and exclude external reinsurance assumed and participation in residual market pools as claim frequency information is not available. | |||||||||||||||||||||||||||||||||||
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance | |||||||||||||||||||||||||||||||||
For the Years Ended December 31, | |||||||||||||||||||||||||||||||||
Accident | Supplementary Information (Unaudited) | ||||||||||||||||||||||||||||||||
Year | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | |||||||||||||||||||||||
2009 | $ | 177.8 | $ | 269.2 | $ | 325.1 | $ | 358.6 | $ | 377.0 | $ | 386.8 | $ | 394.0 | $ | 396.6 | $ | 397.1 | $ | 397.3 | |||||||||||||
2010 | 200.0 | 305.8 | 372.7 | 423.8 | 449.4 | 460.0 | 465.7 | 466.6 | 467.6 | ||||||||||||||||||||||||
2011 | 223.1 | 352.7 | 436.2 | 483.2 | 511.6 | 523.0 | 525.0 | 526.6 | |||||||||||||||||||||||||
2012 | 229.0 | 351.4 | 442.9 | 498.6 | 525.9 | 540.0 | 544.8 | ||||||||||||||||||||||||||
2013 | 248.3 | 398.1 | 511.1 | 578.1 | 612.0 | 623.3 | |||||||||||||||||||||||||||
2014 | 267.4 | 430.5 | 536.9 | 606.1 | 641.0 | ||||||||||||||||||||||||||||
2015 | 265.1 | 438.9 | 542.0 | 626.4 | |||||||||||||||||||||||||||||
2016 | 290.2 | 469.7 | 585.2 | ||||||||||||||||||||||||||||||
2017 | 307.9 | 512.0 | |||||||||||||||||||||||||||||||
2018 | 330.0 | ||||||||||||||||||||||||||||||||
$ | 5,254.8 | (B) | |||||||||||||||||||||||||||||||
Net incurred claims and allocated claim adjustment expenses (A) | $ | 6,515.3 | |||||||||||||||||||||||||||||||
Less: net paid claims and allocated claim adjustment expenses (B) | 5,254.8 | ||||||||||||||||||||||||||||||||
Sub-total | 1,260.4 | ||||||||||||||||||||||||||||||||
All outstanding liabilities before 2009, net of reinsurance | 4.5 | ||||||||||||||||||||||||||||||||
Liabilities for claims and allocated claim adjustment expenses, net of reinsurance | $ | 1,264.9 | |||||||||||||||||||||||||||||||
80
The following represents a reconciliation of the incurred and paid loss development tables to total claim and loss adjustment expense reserves as reported in the consolidated balance sheet.
December 31, | |||||||
2018 | 2017 | ||||||
Net claim and allocated loss adjustment expense reserves: | |||||||
Workers' compensation (a) | $ | 3,090.0 | $ | 2,993.9 | |||
General liability | 556.1 | 565.4 | |||||
Commercial automobile | 1,264.9 | 1,151.8 | |||||
Three above coverages combined | 4,911.1 | 4,711.2 | |||||
Other short-duration insurance coverages | 624.5 | 561.4 | |||||
Subtotal | 5,535.6 | 5,272.6 | |||||
Reinsurance recoverable on claim reserves: | |||||||
Workers' compensation | 1,774.3 | 1,758.2 | |||||
General liability | 561.5 | 507.2 | |||||
Commercial automobile | 410.2 | 372.9 | |||||
Three above coverages combined | 2,746.2 | 2,638.4 | |||||
Other short-duration insurance coverages | 246.1 | 249.4 | |||||
Subtotal | 2,992.3 | 2,887.8 | |||||
Insurance coverages other than short-duration | 660.5 | 764.8 | |||||
Unallocated loss adjustment expense reserves | 282.6 | 312.2 | |||||
943.2 | 1,077.1 | ||||||
Gross claim and loss adjustment expense reserves | $ | 9,471.2 | $ | 9,237.6 | |||
__________
(a) | The amount of discount reflected in the year-end net reserves totaled $216.5 and $240.7 as of December 31, 2018 and 2017, respectively. |
The table below is supplementary information and presents the historical average annual percentage payout of incurred claims by age, net of reinsurance.
Supplementary Information (Unaudited) | ||||||||||||||||||||
Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Year 7 | Year 8 | Year 9 | Year 10 | |||||||||||
Workers' compensation | 16.1 | % | 23.3 | % | 14.2 | % | 9.3 | % | 6.3 | % | 3.7 | % | 2.4 | % | 2.1 | % | 1.8 | % | 1.2 | % |
General liability | 4.9 | % | 10.3 | % | 15.7 | % | 16.7 | % | 16.3 | % | 11.1 | % | 7.6 | % | 5.0 | % | 3.5 | % | 4.8 | % |
Commercial automobile | 39.5 | % | 23.3 | % | 15.2 | % | 10.0 | % | 5.1 | % | 2.2 | % | 1.1 | % | .4 | % | .2 | % | — | % |
(i) Reinsurance - The cost of reinsurance is recognized over the terms of reinsurance contracts. Amounts recoverable from reinsurers for loss and loss adjustment expenses are estimated in a manner consistent with the claim liability associated with the reinsured business. The Company evaluates the financial condition of its reinsurers on a regular basis. Allowances are established for amounts deemed uncollectible and are included in the Company's net claim and claim expense reserves.
(j) Income Taxes - The Company and most of its subsidiaries file a consolidated tax return and provide for income taxes payable currently. Deferred income taxes included in the accompanying consolidated financial statements will not necessarily become payable or recoverable in the future. The Company uses the asset and liability method of calculating deferred income taxes. This method results in the establishment of deferred tax assets and liabilities, calculated at currently enacted tax rates that are applied to the cumulative temporary differences between the financial statement and tax bases of assets and liabilities.
The Tax Cuts and Jobs Act ("TCJA") was enacted into law on December 22, 2017, thereby requiring that various accounting adjustments be reflected in the consolidated financial statements at year-end 2017. The TCJA, among its many elements, lowered the nominal federal corporate tax rate to 21.0% from 35.0%. Accordingly, the Company revalued its deferred tax items in 2017 to reflect the lower tax rate, resulting in a $63.1 income tax credit reflected in the consolidated statements of income.
The Internal Revenue Service ("IRS") requires the Company's insurance subsidiaries to discount loss reserves using either company specific payment patterns, or industry average tables published by the IRS. The Company has previously
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elected to follow the IRS industry average tables. The TCJA requires the IRS to publish tables linking the interest rates used to discount loss reserves to the corporate bond yield curve as opposed to the Federal mid-term rates used under the old law. In December of 2018, the IRS published the updated tables. Accordingly, the Company recorded an adjustment based on the application of the new IRS published discount rates to ending December 31, 2017 loss reserves which resulted in an increase to deferred tax assets of approximately $36.5 and a corresponding increase to deferred tax liabilities. The deferred tax liability is being amortized into taxable income over 8 years, with no impact to the Company's effective tax rate.
Furthermore, the Company elected to early adopt income tax accounting guidance issued by the FASB in February 2018, which allows for the reclassification of the income tax effects of TCJA on items within accumulated other comprehensive income to retained earnings. The reclassification adjustment, which consisted of the revaluation of net deferred taxes on net unrealized gains (losses) on securities and pension adjustments, resulted in an increase to accumulated other comprehensive income and a corresponding decrease to retained earnings of $85.1 as of December 31, 2017.
The provision for combined current and deferred income taxes (credits) reflected in the consolidated statements of income does not bear the usual relationship to income before income taxes (credits) as the result of permanent and other differences between pretax income or loss and taxable income or loss determined under existing tax regulations. The more significant differences, their effect on the statutory income tax rate (credit), and the resulting effective income tax rates (credits) are summarized below:
Years Ended December 31: | 2018 | 2017 | 2016 | ||||||
Statutory tax rate (credit) | 21.0 | % | 35.0 | % | 35.0 | % | |||
Tax rate increases (decreases): | |||||||||
Tax-exempt interest | (.8 | ) | (.8 | ) | (.5 | ) | |||
Dividends received exclusion | (2.4 | ) | (3.2 | ) | (2.6 | ) | |||
Foreign income (loss) reattribution | (.1 | ) | (.1 | ) | (.1 | ) | |||
Impact of tax rate change on deferred tax inventory | — | (8.7 | ) | — | |||||
Meals & entertainment | .5 | .3 | .3 | ||||||
Prior year adjustments | (2.4 | ) | — | (.3 | ) | ||||
Other items - net | (.4 | ) | .2 | .1 | |||||
Effective tax rate (credit) | 15.4 | % | 22.7 | % | 31.9 | % | |||
The tax effects of temporary differences that give rise to significant portions of the Company's net deferred tax assets (liabilities) are as follows at the dates shown:
December 31: | 2018 | 2017 | 2016 | |||||||||
Deferred Tax Assets: | ||||||||||||
Losses, claims, and settlement expenses | $ | 189.8 | $ | 159.2 | $ | 337.7 | ||||||
Pension and deferred compensation plans | 47.8 | 49.1 | 71.5 | |||||||||
Impairment losses on investments | — | .2 | 1.7 | |||||||||
Net operating loss carryforward | 15.8 | 17.9 | 33.3 | |||||||||
AMT credit carryforward | 9.0 | 9.6 | 9.6 | |||||||||
Other temporary differences | 18.0 | 18.2 | 33.6 | |||||||||
Total deferred tax assets | 280.8 | 254.5 | 487.5 | |||||||||
Deferred Tax Liabilities: | ||||||||||||
Unearned premium reserves | 33.4 | 30.5 | 48.5 | |||||||||
Deferred policy acquisition costs | 62.6 | 59.5 | 91.7 | |||||||||
Mortgage guaranty insurers' contingency reserves | 86.5 | 77.9 | 114.3 | |||||||||
Amortization of fixed maturity securities | 2.6 | 3.0 | 5.8 | |||||||||
Net unrealized investment gains | 57.4 | 164.2 | 232.6 | |||||||||
Title plants and records | 2.9 | 2.9 | 4.9 | |||||||||
Tax reform transition adjustment on unpaid losses, claims and | ||||||||||||
settlement expenses | 32.0 | — | — | |||||||||
Other temporary differences | 13.4 | 16.9 | 31.9 | |||||||||
Total deferred tax liabilities | 291.0 | 355.1 | 529.9 | |||||||||
Net deferred tax assets (liabilities) | $ | (10.3 | ) | $ | (100.5 | ) | $ | (42.6 | ) | |||
At December 31, 2018, the Company had available net operating loss ("NOL") carryforwards of $75.6 which will expire in years 2022 through 2029, and a $9.0 alternative minimum tax ("AMT") credit carryforward which does not expire. The NOL carryforward is subject to the limitations set by Section 382 of the Internal Revenue Code and is available to reduce future years' taxable income by a maximum of $9.8 each year until expiration.
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In valuing the deferred tax assets, the Company considered certain factors including primarily the scheduled reversals of certain deferred tax liabilities, estimates of future taxable income, the impact of available carryback and carryforward periods, as well as the availability of certain tax planning strategies. The Company estimates that all gross deferred tax assets at year-end 2018 will more likely than not be fully realized.
Pursuant to special provisions of the Internal Revenue Code pertaining to mortgage guaranty insurers, a contingency reserve (established in accordance with insurance regulations designed to protect policyholders against extraordinary volumes of claims) is deductible from gross income. The deduction is allowed only to the extent that U.S. government non-interest bearing tax and loss bonds are purchased and held in an amount equal to the tax benefit attributable to such deduction. For Federal income tax purposes, amounts deducted from the contingency reserve are taken into gross statutory taxable income in the period in which they are released. Contingency reserves may be released when incurred losses exceed thresholds established under state law or regulation, upon special request and approval by state insurance regulators, or in any event, upon the expiration of ten years. For 2018 tax purposes, the Company recognized a contingency reserve deduction of $41.0 and consequently, will acquire the necessary U.S. Treasury Tax and Loss Bonds in 2019.
Tax positions taken or expected to be taken in a tax return by the Company are recognized in the financial statements when it is more likely than not that the position would be sustained upon examination by tax authorities. To the best of management's knowledge there are no tax uncertainties that are expected to result in significant increases or decreases to unrecognized tax benefits within the next twelve month period. The Company views its income tax exposures as primarily consisting of timing differences whereby the ultimate deductibility of a taxable amount is highly certain but the timing of its deductibility is uncertain. Such differences relate principally to the timing of deductions for loss and premium reserves. As in prior examinations, the Internal Revenue Service (IRS) could assert that claim reserve deductions were overstated thereby reducing the Company's statutory taxable income in any particular year. The Company believes that it establishes its reserves fairly and consistently at each balance sheet date, and that it would succeed in defending its tax position in these regards. Because of the impact of deferred tax accounting, the possible accelerated payment of tax to the IRS would not necessarily affect the annual effective tax rate. The Company classifies interest and penalties as income tax expense in the consolidated statement of income. Although the Company is not currently under audit by the IRS, 2015 and subsequent tax years remain open and are subject to examination.
(k) Property and Equipment - Property and equipment is generally depreciated or amortized over the estimated useful lives of the assets, (2 to 27 years), substantially by the straight-line method. Depreciation and amortization expenses related to property and equipment were $27.6, $27.2 and $29.6 in 2018, 2017, and 2016, respectively. Expenditures for maintenance and repairs are charged to income as incurred, and expenditures for major renewals and additions are capitalized.
(l) Title Plants and Records - Title plants and records are carried at original cost or appraised value at the date of purchase. Such values represent the cost of producing or acquiring interests in title records and indexes and the appraised value of purchased subsidiaries' title records and indexes at dates of acquisition. The cost of maintaining, updating, and operating title records is charged to income as incurred. Title records and indexes are ordinarily not amortized unless events or circumstances indicate that the carrying amount of the capitalized costs may not be recoverable.
(m) Goodwill and Intangible Assets - The following table presents the components of the Company's goodwill balance:
General | Title | RFIG Run-off | Other | Total | |||||||||||||||
January 1, 2017 | $ | 116.2 | $ | 44.3 | $ | — | $ | .1 | $ | 160.7 | |||||||||
Acquisitions | — | — | — | — | — | ||||||||||||||
Impairments | — | — | — | — | — | ||||||||||||||
December 31, 2017 | 116.2 | 44.3 | — | .1 | 160.7 | ||||||||||||||
Acquisitions | — | 13.2 | — | — | 13.2 | ||||||||||||||
Impairments | — | — | — | — | — | ||||||||||||||
December 31, 2018 | $ | 116.2 | $ | 57.5 | $ | — | $ | .1 | $ | 174.0 | |||||||||
Goodwill resulting from business combinations is not amortizable against operations but must be tested annually for possible impairment of its continued value. Intangible assets with definitive lives are amortized against future operating results; whereas indefinite-lived intangibles are tested annually for impairment. Annual testing did not result in any impairment charges for the periods presented. Reporting units with goodwill balances had estimated fair values in excess of their carrying values.
(n) Employee Benefit Plans - The Company had an active pension plan (the "Plan") covering a portion of its work force until December 31, 2013. The Plan is a defined benefit plan pursuant to which pension payments are based primarily on years of service and employee compensation near retirement. The Plan was closed to new participants and benefits were frozen as of December 31, 2013. As a result, eligible employees retain all of the vested rights as of the effective date of the freeze. While additional benefits no longer accrue, the Company's cumulative obligation continues to be subject to further adjustment due to changes in actuarial assumptions such as expected mortality and changes in interest rates.
The funded status of a pension plan is measured as of December 31 of each year, as the difference between the fair value of plan assets and the projected benefit obligation. The underfunded status of the Plan is recognized as a net pension liability; offsetting entries are reflected as a component of shareholders' equity in accumulated other
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comprehensive income, net of deferred taxes. The effects of these measurements and the resulting funded status of the Plan are reflected below.
Years Ended December 31: | 2018 | 2017 | 2016 | |||||||||
Projected Benefit Obligation | ||||||||||||
Projected benefit obligation at beginning of year | $ | 579.2 | $ | 537.5 | $ | 523.7 | ||||||
Increases (decreases) during the year attributable to: | ||||||||||||
Interest cost | 20.8 | 22.5 | 23.2 | |||||||||
Actuarial (gains) losses | (44.4 | ) | 42.0 | 12.5 | ||||||||
Benefits paid | (25.4 | ) | (22.8 | ) | (21.9 | ) | ||||||
Net increase (decrease) for the year | (49.1 | ) | 41.6 | 13.7 | ||||||||
Projected benefit obligation at end of year | $ | 530.1 | $ | 579.2 | $ | 537.5 | ||||||
Years Ended December 31: | 2018 | 2017 | 2016 | |||||||||
Fair Value of Net Assets Available for Plan Benefits | ||||||||||||
Fair value of net assets available for plan benefits | ||||||||||||
At beginning of the year | $ | 453.7 | $ | 427.1 | $ | 409.2 | ||||||
Increases (decreases) during the year attributable to: | ||||||||||||
Actual return on plan assets | (12.0 | ) | 44.5 | 39.9 | ||||||||
Sponsor contributions | 14.0 | 4.8 | — | |||||||||
Benefits paid | (25.4 | ) | (22.8 | ) | (21.9 | ) | ||||||
Net increase (decrease) for year | (23.5 | ) | 26.6 | 17.9 | ||||||||
Fair value of net assets available for plan benefits | ||||||||||||
At end of the year | $ | 430.2 | $ | 453.7 | $ | 427.1 | ||||||
Funded Status | $ | (99.8 | ) | $ | (125.4 | ) | $ | (110.3 | ) | |||
Amounts recognized in accumulated other comprehensive income | $ | (137.1 | ) | $ | (142.0 | ) | $ | (117.0 | ) | |||
Funding of the plan is dependent on a number of factors including actual performance versus actuarial assumptions made at the time of the actuarial valuation, as well as the maintenance of certain funding levels relative to regulatory requirements. The Company expects to make cash contributions of $6.5 in calendar year 2019.
Net periodic pension expense (income) recognized during 2018, 2017 and 2016 was $(6.6), $(5.0), and $(2.9), respectively.
The projected benefit obligation and net periodic benefit cost for the Plan were determined using the following weighted-average assumptions:
Projected Benefit Obligation | Net Periodic Benefit Cost | ||||||||||||||
As of December 31: | 2018 | 2017 | 2018 | 2017 | 2016 | ||||||||||
Settlement discount rates | 4.40 | % | 3.70 | % | 3.70 | % | 4.30 | % | 4.55 | % | |||||
Long-term rates of return on plans' assets | N/A | N/A | 7.00 | % | 7.25 | % | 7.25 | % | |||||||
The assumed settlement discount rates were determined by matching the current estimate of the Plan's projected cash outflows against spot rate yields on a portfolio of high quality bonds as of the measurement date. To develop the expected long-term rate of return on assets assumption, historical returns and the future return expectations for each asset class, as well as the target asset allocation of the pension portfolio were considered. The investment policy of the Plan takes into account the matching of assets and liabilities, appropriate risk aversion, liquidity needs, the preservation of capital, and the attainment of modest growth. The weighted-average asset allocations of the Plan were as follows:
Investment Policy Asset Allocation % Range Target | ||||||||
As of December 31: | 2018 | 2017 | ||||||
Equity securities: | ||||||||
Common shares of Company stock | 13.5 | % | 13.3 | % | ||||
Other | 67.7 | 70.9 | ||||||
Sub-total | 81.2 | 84.2 | 40% to 80% | |||||
Fixed maturity securities | 15.6 | 12.5 | 15% to 60% | |||||
Other | 3.2 | 3.3 | 1% to 10% | |||||
Total | 100.0 | % | 100.0 | % | ||||
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Quoted values and other data provided by the respective investment custodians are used as inputs for determining fair value of the Plan's debt and equity securities. The custodians are understood to obtain market quotations and actual transaction prices for securities that have quoted prices in active markets and use their own proprietary method for determining the fair value of securities that are not actively traded. In general, these methods involve the use of "matrix pricing" in which the investment custodian uses observable inputs, including, but not limited to, investment yields, credit risks and spreads, benchmarking of like securities, broker-dealer quotes, reported trades and sector groupings to determine a reasonable fair value.
The following tables present a summary of the Plan's assets segregated among the various input levels described in Note 1(d).
Fair Value Measurements | ||||||||||||||||
As of December 31, 2018: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Equity securities: | ||||||||||||||||
Common shares of Company stock | $ | 58.2 | $ | — | $ | — | $ | 58.2 | ||||||||
Other | 272.0 | — | — | 272.0 | ||||||||||||
Sub-total | 330.2 | — | — | 330.2 | ||||||||||||
Fixed maturity securities | 4.0 | 63.2 | — | 67.3 | ||||||||||||
Other | 8.4 | — | 3.9 | 12.3 | ||||||||||||
Total at fair value | $ | 342.7 | $ | 63.2 | $ | 3.9 | 409.9 | |||||||||
Securities at net asset value | 20.3 | |||||||||||||||
Total | $ | 430.2 | ||||||||||||||
As of December 31, 2017: | ||||||||||||||||
Equity securities: | ||||||||||||||||
Common shares of Company stock | $ | 60.4 | $ | — | $ | — | $ | 60.4 | ||||||||
Other | 306.6 | — | — | 306.6 | ||||||||||||
Sub-total | 367.1 | — | — | 367.1 | ||||||||||||
Fixed maturity securities | 4.0 | 52.5 | — | 56.6 | ||||||||||||
Other | 9.0 | — | 3.0 | 12.0 | ||||||||||||
Total at fair value | $ | 380.2 | $ | 52.5 | $ | 3.0 | 435.8 | |||||||||
Securities at net asset value | 17.9 | |||||||||||||||
Total | $ | 453.7 | ||||||||||||||
Level 1 assets include U.S. Treasury notes, publicly traded common stocks, mutual funds and short-term investments. Level 2 assets generally include corporate and government agency bonds. Level 3 assets primarily consist of an immediate participation guaranteed fund.
The benefits expected to be paid as of December 31, 2018 for the next 10 years are as follows: 2019: $28.7; 2020: $29.9; 2021: $32.4; 2022 $31.9; 2023: $32.7 and for the five years after 2023: $168.4.
The Company has a number of profit sharing and other incentive compensation programs for the benefit of a substantial number of its employees. The costs related to such programs are summarized below:
Years Ended December 31: | 2018 | 2017 | 2016 | |||||||||
ESSOP | $ | 12.9 | $ | 15.6 | $ | 12.8 | ||||||
Other profit sharing plans | 20.7 | 17.8 | 12.2 | |||||||||
Cash and deferred incentive compensation | $ | 46.7 | $ | 68.5 | $ | 36.8 | ||||||
A majority of the Company's employees participate in the ESSOP. Company contributions are provided in the form of Old Republic common stock. Dividends on shares are allocated to participants as earnings, and likewise invested in Company stock; dividends on unallocated shares are used to pay debt service costs. The Company's annual contributions are based on a formula that takes the growth in net operating income per share over consecutive five year periods into account. During 2015, the ESSOP purchased 2,200,000 shares of Old Republic common stock for $34.0. The purchases were financed by a loan from the Company. During 2018, the ESSOP purchased 2,383,625 shares of Old Republic common stock for $50.0. The purchases were financed by loans to the ESSOP from participating subsidiaries. As of December 31, 2018, there were 15,522,110 Old Republic common shares owned by the ESSOP, of which 11,040,882 were allocated to employees' account balances. There are no repurchase obligations in existence. See Note 3(b).
(o) Escrow Funds - Segregated cash deposit accounts and the offsetting liabilities for escrow deposits in connection with Title Insurance Group real estate transactions in the same amounts ($1,701.0 and $1,502.6 at December 31, 2018 and 2017, respectively) are not included as assets or liabilities in the accompanying consolidated balance sheets as the escrow funds are not available for regular operations.
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(p) Earnings Per Share - Consolidated basic earnings per share excludes the dilutive effect of common stock equivalents and is computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares actually outstanding for the year. Diluted earnings per share are similarly calculated with the inclusion of dilutive common stock equivalents. The following table provides a reconciliation of net income (loss) and the number of shares used in basic and diluted earnings per share calculations.
Years Ended December 31: | 2018 | 2017 | 2016 | |||||||||
Numerator: | ||||||||||||
Net income (loss) | $ | 370.5 | $ | 560.5 | $ | 466.9 | ||||||
Numerator for basic earnings per share - | ||||||||||||
income (loss) available to common stockholders | 370.5 | 560.5 | 466.9 | |||||||||
Adjustment for interest expense incurred on | ||||||||||||
assumed conversion of convertible notes | 3.1 | 14.0 | 14.6 | |||||||||
Numerator for diluted earnings per share - | ||||||||||||
income (loss) available to common stockholders | ||||||||||||
after assumed conversion of convertible notes | $ | 373.6 | $ | 574.5 | $ | 481.5 | ||||||
Denominator: | ||||||||||||
Denominator for basic earnings per share - | ||||||||||||
weighted-average shares (a) | 294,248,871 | 262,114,533 | 259,429,298 | |||||||||
Effect of dilutive securities - stock based compensation awards | 1,398,329 | 1,589,286 | 1,260,094 | |||||||||
Effect of dilutive securities - convertible notes | 5,368,876 | 35,683,554 | 35,689,859 | |||||||||
Denominator for diluted earnings per share - | ||||||||||||
adjusted weighted-average shares | ||||||||||||
and assumed conversion of convertible notes (a) | 301,016,076 | 299,387,373 | 296,379,251 | |||||||||
Earnings per share: Basic | $ | 1.26 | $ | 2.14 | $ | 1.80 | ||||||
Diluted | $ | 1.24 | $ | 1.92 | $ | 1.62 | ||||||
Anti-dilutive common stock equivalents | ||||||||||||
excluded from earning per share computations: | ||||||||||||
Stock based compensation awards | — | 1,380,000 | 1,676,175 | |||||||||
__________
(a) In calculating earnings per share, pertinent accounting rules require that common shares owned by the Company's Employee Savings and Stock Ownership Plan that are as yet unallocated to participants in the plan be excluded from the calculation. Such shares are issued and outstanding, and have the same voting and other rights applicable to all other common shares.
(q) Concentration of Credit Risk - The Company is not exposed to material concentrations of credit risks as to any one issuer of investment securities.
(r) Stock Based Compensation - As periodically amended, the Company has had a stock based compensation plan in effect for certain eligible key employees since 1978. Under the 2016 Incentive Compensation Plan (the "Plan"), 15.0 million shares became available for future awards. The maximum number of options available as of December 31, 2018 for future issuance under this amended plan was approximately 10.5 million shares.
The exercise price of stock options is equal to the closing market price of the Company's common stock on the date of grant, and the contractual life of the grant is generally ten years from the date of the grant. Options granted may be exercised to the extent of 10% of the number of shares covered thereby as of December 31st of the year of the grant and, cumulatively, to the extent of an additional 15%, 20%, 25% and 30% on and after the second through fifth calendar years, respectively. Effective in 2014, options granted to employees who meet certain retirement eligibility provisions are fully vested on the date of grant.
The following table presents the stock based compensation expense and income tax benefit recognized in the financial statements:
Years Ended December 31: | 2018 | 2017 | 2016 | |||||||||
Stock based compensation expense | $ | 3.8 | $ | 3.5 | $ | 3.1 | ||||||
Income tax benefit | $ | .8 | $ | 1.2 | $ | 1.0 | ||||||
The fair value of each stock option award is estimated on the date of grant using the Black-Scholes-Merton Model. The following table presents the key assumptions used to value the awards granted during the periods presented. Expected volatilities are based on the historical experience of Old Republic's common stock. The expected term of stock
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options represents the period of time that stock options granted are assumed to be outstanding. The Company uses historical data to estimate the effect of stock option exercise and employee departure behavior; groups of employees that have similar historical behavior are considered separately for valuation purposes. The risk-free rate of return for periods within the contractual term of the share option is based on the U.S. Treasury rate in effect at the time of the grant.
2018 | 2017 | 2016 | ||||||
Expected volatility | .20 | .22 | .26 | |||||
Expected dividends | 4.03 | % | 3.97 | % | 4.32 | % | ||
Expected term (in years) | 7 | 7 | 7 | |||||
Risk-free rate | 2.81 | % | 2.29 | % | 1.77 | % | ||
A summary of stock option activity under the plan as of December 31, 2018, 2017 and 2016, and changes in outstanding options during the years then ended is presented below:
As of and for the Years Ended December 31, | |||||||||||||||||||||||
2018 | 2017 | 2016 | |||||||||||||||||||||
Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | ||||||||||||||||||
Outstanding at beginning of year | 6,565,019 | $ | 15.76 | 8,243,025 | $ | 15.77 | 9,875,574 | $ | 16.60 | ||||||||||||||
Granted | 1,539,500 | 20.98 | 1,403,500 | 19.98 | 1,230,050 | 18.14 | |||||||||||||||||
Exercised | 881,917 | 12.86 | 1,337,881 | 12.65 | 619,874 | 12.18 | |||||||||||||||||
Forfeited and expired | 59,035 | 16.54 | 1,743,625 | 21.60 | 2,242,725 | 21.71 | |||||||||||||||||
Outstanding at end of year | 7,163,567 | 17.24 | 6,565,019 | 15.76 | 8,243,025 | 15.77 | |||||||||||||||||
Exercisable at end of year | 4,556,350 | $ | 15.83 | 4,228,259 | $ | 14.42 | 6,095,111 | $ | 15.59 | ||||||||||||||
Weighted average fair value of | |||||||||||||||||||||||
options granted during the year (a) | $ | 2.71 | per share | $ | 2.81 | per share | $ | 2.77 | per share | ||||||||||||||
__________
(a) Based on the Black-Scholes option pricing model and the assumptions outlined above.
A summary of stock options outstanding and exercisable at December 31, 2018 follows:
Options Outstanding | Options Exercisable | |||||||||||||||||
Weighted - Average | Weighted Average Exercise Price | |||||||||||||||||
Exercise Prices | Year(s) of Grant | Number Out- Standing | Remaining Contractual Life | Exercise Price | Number Exercisable | |||||||||||||
$10.48 | 2009 | 79,220 | 0.25 | $ | 10.48 | 79,220 | $ | 10.48 | ||||||||||
$12.08 | 2010 | 161,340 | 1.25 | 12.08 | 161,340 | 12.08 | ||||||||||||
$12.33 | 2011 | 346,980 | 2.25 | 12.33 | 346,980 | 12.33 | ||||||||||||
$10.80 | 2012 | 386,063 | 3.25 | 10.80 | 386,063 | 10.80 | ||||||||||||
$12.57 | 2013 | 510,047 | 4.25 | 12.57 | 510,047 | 12.57 | ||||||||||||
$16.06 | 2014 | 795,470 | 5.25 | 16.06 | 795,470 | 16.06 | ||||||||||||
$15.26 | 2015 | 835,264 | 6.25 | 15.26 | 624,521 | 15.26 | ||||||||||||
$18.14 | 2016 | 1,159,218 | 7.25 | 18.14 | 668,390 | 18.14 | ||||||||||||
$19.98 | 2017 | 1,354,665 | 8.25 | 19.98 | 571,503 | 19.98 | ||||||||||||
$20.98 | 2018 | 1,535,300 | 9.25 | 20.98 | 412,816 | 20.98 | ||||||||||||
Total | 7,163,567 | $ | 17.24 | 4,556,350 | $ | 15.83 | ||||||||||||
As of December 31, 2018, there was $3.0 of total unrecognized compensation cost related to nonvested stock-based compensation arrangements granted under the plan. That cost is expected to be recognized over a weighted average period of approximately 3 years.
The cash received from stock option exercises, the total intrinsic value of stock options exercised, and the actual tax benefit realized for the tax deductions from option exercises are as follows:
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2018 | 2017 | 2016 | |||||||||
Cash received from stock option exercise | $ | 11.3 | $ | 16.9 | $ | 7.5 | |||||
Intrinsic value of stock options exercised | 7.5 | 10.5 | 3.9 | ||||||||
Actual tax benefit realized for tax deductions from stock options exercised | $ | 1.5 | $ | 3.6 | $ | 1.3 | |||||
At December 31, 2018, the Company had restricted common stock issued to certain employees which are expected to vest over a weighted average period of approximately 3 years. During the vesting period, restricted shares are nontransferable and subject to forfeiture. Compensation expense for the restricted stock award is recognized over the vesting period of the award and was immaterial for the years ended December 31, 2018, 2017 and 2016.
In March 2016, the FASB issued guidance intended to simplify certain aspects of accounting for share-based payment award transactions which became effective beginning in 2017. The Company's adoption of this guidance did not have a material impact on the consolidated financial statements.
(s) Regulatory Matters - The material increases in mortgage guaranty insurance claims and loss payments that began in 2007 gradually depleted RMIC's statutory capital base and forced it to discontinue writing new business in 2011. The insurance laws of 16 jurisdictions, including RMIC's and its sister company, Republic Mortgage Guaranty Insurance Corporation ("RMGIC’s") domiciliary state of North Carolina, require a mortgage insurer to maintain a minimum amount of statutory capital relative to risk in force (or a similar measure) in order to continue to write new business. The formulations currently allow for a maximum risk-to-capital ratio of 25 to 1, or alternatively stated, a “minimum policyholder position” (“MPP”) of one-twenty-fifth of the total risk in force. The failure to maintain the prescribed minimum capital level in a particular state generally requires a mortgage insurer to immediately stop writing new business until it reestablishes the required level of capital or receives a waiver of the requirement from a state's insurance regulatory authority. RMIC breached the minimum capital requirement during the third quarter of 2010. RMIC and its sister company RMGIC were placed under administrative supervision by the North Carolina Department of Insurance ("NCDOI") in 2012 and ultimately ordered to defer the payment of 40% of all settled claims as a deferred payment obligation ("DPO").
On July 1, 2014, the NCDOI issued a Final Order approving an Amended and Restated Corrective Plan (the "Amended Plan") submitted jointly on April 16, 2014, by RMIC and RMGIC. Under the Amended Plan, RMIC and RMGIC were authorized to pay 100% of their DPOs accrued as of June 30, 2014, and to settle all subsequent valid claims entirely in cash, without establishing any DPOs. In anticipation of receiving this Final Order, ORI invested $125.0 in cash and securities in RMIC in June 2014. In mid-July 2014, in furtherance of the Final Order, RMIC and RMGIC processed payments of their accumulated DPO balances of approximately $657.0 relating to fully settled claims charged to periods extending between January 19, 2012 and June 30, 2014. The NCDOI subsequently terminated the summary orders which placed RMIC and RMGIC under administrative supervision effective December 8, 2017, thereby releasing both companies from its supervision as they were eminently solvent.
As of December 31, 2018, RFIG's mortgage insurance subsidiaries had total statutory capital, inclusive of a contingency reserve of $433.1, of $515.0, which was $395.5 above the required MPP of $119.5.
Note 2 - Debt - Consolidated debt of Old Republic and its subsidiaries is summarized below:
December 31: | 2018 | 2017 | ||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
3.75% Convertible Senior Notes due 2018 | $ | — | $ | — | $ | 470.6 | $ | 652.2 | ||||||||
4.875% Senior Notes due 2024 | 396.8 | 415.6 | 396.2 | 430.3 | ||||||||||||
3.875% Senior Notes due 2026 | 545.7 | 523.3 | 545.1 | 553.9 | ||||||||||||
ESSOP debt | — | — | 4.2 | 4.2 | ||||||||||||
Other miscellaneous debt | 38.8 | 38.8 | 32.4 | 32.5 | ||||||||||||
Total debt | $ | 981.4 | $ | 977.9 | $ | 1,448.7 | $ | 1,673.2 | ||||||||
On August 26, 2016, the Company completed a public offering of $550.0 aggregate principal amount of Senior Notes. The notes bear interest at a rate of 3.875% per year and mature on August 26, 2026.
On September 23, 2014, the Company completed a public offering of $400.0 aggregate principal amount of Senior Notes. The notes bear interest at a rate of 4.875% per year and mature on October 1, 2024.
In early March, 2011 the Company completed a public offering of $550.0 aggregate principal amount of Convertible Senior Notes with a maturity date of March 15, 2018. During 2017, $79.0 of the Notes were converted into 5,146,127 common shares and during the first quarter 2018, the Company's outstanding aggregate principal amount was converted into 32,229,787 shares of common stock.
Scheduled maturities of the above debt at the respective year ends are as follows: 2019: $8.5; 2020: $8.6; 2021: $21.6; 2022: $0; 2023 and after: $950.0. During 2018, 2017 and 2016, $47.2, $64.5 and $50.9, respectively, of interest expense on debt was charged to consolidated operations.
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Fair Value Measurements - The Company utilizes indicative market prices, which incorporate recent actual market transactions and current bid/ask quotations to estimate the fair value of outstanding debt securities that are classified within Level 2 of the fair value hierarchy as presented below. The Company uses an internally generated interest yield market matrix table, which incorporates maturity, coupon rate, credit quality, structure and current market conditions to estimate the fair value of its outstanding debt securities that are classified within Level 3.
The following table shows a summary of financial liabilities disclosed, but not carried, at fair value, segregated among the various input levels described in Note 1(d) above:
Carrying | Fair | |||||||||||||||||||
Value | Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Financial Liabilities: | ||||||||||||||||||||
Debt: | ||||||||||||||||||||
December 31, 2018 | $ | 981.4 | $ | 977.9 | $ | — | $ | 939.0 | $ | 38.8 | ||||||||||
December 31, 2017 | $ | 1,448.7 | $ | 1,673.2 | $ | — | $ | 1,636.5 | $ | 36.7 | ||||||||||
Note 3 - Shareholders' Equity
(a) Preferred Stock - At December 31, 2018, there were 75,000,000 shares of preferred stock authorized. The Company has designated one series of preferred stock: 10,000,000 shares of Series A Junior Participating Preferred Stock (Series A). No shares have been issued or are outstanding. The Series A Stock, if and when issued, shall pay a dividend of the greater of $1.00 or 100 times (subject to adjustment) the aggregate per share amount (payable in kind) of all non-cash dividend or other distributions, other than a dividend payable in shares of common stock declared on the common stock of the Company. Each share of Series A stock shall have 100 votes on each matter submitted to a vote of the shareholders.
(b) Common Stock - At December 31, 2018, there were 500,000,000 shares of common stock authorized. At the same date, there were 100,000,000 shares of Class "B" common stock authorized, though none were issued or outstanding. Class "B" common shares have the same rights as common shares except for being entitled to 1/10th of a vote per share.
Common stock held by the ESSOP is classified as a charge to the common shareholders' equity account until it is allocated to participating employees' accounts contemporaneously with the repayment of the ESSOP debt incurred for its acquisition. Such unallocated shares are not considered outstanding for purposes of calculating earnings per share. Dividends on unallocated shares are used to pay debt service costs.
(c) Cash Dividend Restrictions - The payment of cash dividends by the Company is principally dependent upon the amount of its insurance subsidiaries' statutory policyholders' surplus available for dividend distribution. The insurance subsidiaries' ability to pay cash dividends to the Company is in turn generally restricted by law or subject to approval of the insurance regulatory authorities of the states 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. Based on year-end 2018 data, the maximum amount of dividends payable to the Company by its insurance and a small number of non-insurance company subsidiaries during 2019 without the prior approval of appropriate regulatory authorities is approximately $507.8. Cash dividends declared during 2018, 2017 and 2016 to the Company by its subsidiaries amounted to $412.3, $367.3 and $317.6, respectively.
(d) Cash Dividends - In late December 2017 the Board declared a special cash dividend of $1.00 per share which was paid on January 31, 2018.
Note 4 - Commitments and Contingent Liabilities:
(a) Reinsurance and Retention Limits - In order to maintain premium production within their capacity and to limit maximum losses for which they might become liable under its policies, Old Republic's insurance subsidiaries, as is the common practice in the insurance industry, may cede all or a portion of their 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. To the extent that any reinsurance companies, retrospective related risks, or producers might be unable to meet their obligations under existing reinsurance, retrospective insurance and production agreements, Old Republic would be liable for the defaulted amounts. In these regards, however, the Company generally protects itself by withholding funds, by securing indemnity agreements, by obtaining surety bonds, or by otherwise collateralizing such obligations through irrevocable letters of credit, cash or securities.
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 for workers' compensation; $6.4 for commercial automobile (trucking) liability; $6.4 for general liability; $12.0 for executive protection (directors & officers and errors & omissions); $2.0 for aviation; and $5.0 for property coverages. Title insurance risk assumptions are generally limited to a maximum of $500.0 as to any one policy. The vast majority of title policies issued, however, carry exposures of less than $1.0. The average direct primary mortgage guaranty exposure is (in whole dollars) $37,700 per insured loan.
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Since January 1, 2005, the Company has had maximum treaty reinsurance coverage of up to $200.0 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, a seven year extension that expired December 2014. In January 2015, Congress passed the TRIPRA of 2015 that extended the program through 2020.
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 is $180 and $200 for 2019 and 2020, respectively. 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% in 2015 and declines by one percentage point per year until it reaches 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 in excess of $5.0 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 to manage the Company's net exposure.
Reinsurance ceded by the Company's insurance subsidiaries in the ordinary course of business is typically placed on an excess of loss basis. Under excess of loss reinsurance agreements, the companies are generally reimbursed for losses exceeding contractually agreed‑upon levels. Quota share reinsurance is most often effected between the Company's insurance subsidiaries and industry-wide assigned risk plans or captive insurers owned by assureds. Under quota share reinsurance, the Company remits to the assuming entity an agreed-upon percentage of premiums written and is reimbursed for underwriting expenses and proportionately related claims costs.
Reinsurance recoverable asset balances represent amounts due from or credited by assuming reinsurers for paid and unpaid claims and premium reserves. Such reinsurance balances are recoverable from non-admitted foreign and certain other reinsurers such as captive insurance companies owned by assureds, 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 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 self-insured deductible policies. Estimates of unrecoverable amounts totaling $- and $15.9 at December 31, 2018 and 2017, respectively, 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.
At December 31, 2018, the Company's General Insurance Group's ten largest reinsurers represented approximately 53% of the total consolidated reinsurance recoverable on paid and unpaid losses, with Munich Re America, Inc. the largest reinsurer representing 10.9% of the total recoverable balance. Of the balances due from these ten reinsurers, 57.2% was recoverable from A or better rated reinsurance companies, 5.9% from an industry-wide insurance assigned risk pool, 30.3% from foreign unrated companies, and 6.6% from domestic unrated companies.
The following information relates to reinsurance and related data for the General Insurance and RFIG Run-off Groups for the three years ended December 31, 2018. Reinsurance transactions of the Title Insurance Group and small life and accident insurance operation are not material.
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Years Ended December 31: | 2018 | 2017 | 2016 | ||||||||||
General Insurance Group | |||||||||||||
Written premiums: | Direct | $ | 4,673.4 | $ | 4,422.4 | $ | 4,091.6 | ||||||
Assumed | 58.1 | 59.0 | 48.4 | ||||||||||
Ceded | $ | 1,351.1 | $ | 1,236.2 | $ | 1,134.7 | |||||||
Earned premiums: | Direct | $ | 4,534.8 | $ | 4,307.5 | $ | 4,005.3 | ||||||
Assumed | 55.8 | 49.7 | 50.8 | ||||||||||
Ceded | $ | 1,313.5 | $ | 1,246.4 | $ | 1,119.8 | |||||||
Claims ceded | $ | 745.0 | $ | 728.0 | $ | 620.6 | |||||||
RFIG Run-off Business | |||||||||||||
Written premiums: | Direct | $ | 73.9 | $ | 119.0 | $ | 168.6 | ||||||
Assumed | — | — | — | ||||||||||
Ceded | $ | — | $ | .5 | $ | 2.9 | |||||||
Earned premiums: | Direct | $ | 75.9 | $ | 123.5 | $ | 173.0 | ||||||
Assumed | — | — | — | ||||||||||
Ceded | $ | — | $ | .5 | $ | 2.9 | |||||||
Claims ceded | $ | — | $ | — | $ | .1 | |||||||
Mortgage Guaranty Insurance in force as of December 31: | |||||||||||||
Direct | $ | 13,100.5 | $ | 16,543.9 | $ | 21,370.9 | |||||||
Assumed | — | — | — | ||||||||||
Ceded | $ | — | $ | 2.4 | $ | 14.3 | |||||||
(b) Leases - Some of the Company's subsidiaries maintain their offices in leased premises. A number of these leases provide for the payment of real estate taxes, insurance, and other operating expenses. Rental expenses for leased premises amounted to $57.9, $55.0 and $52.6 in 2018, 2017 and 2016, respectively. In addition, several of the Company's subsidiaries also lease other equipment resulting in lease expense of $11.0, $10.2 and $10.8 for the same periods. At December 31, 2018, aggregate minimum rental commitments (net of expected sub-lease receipts) under noncancellable operating leases are summarized as follows: 2019: $60.4; 2020: $48.9; 2021: $39.5; 2022: $32.7; 2023: $24.0; 2024 and after: $103.6.
In February 2016, the FASB issued guidance on lease accounting which will be effective in 2019 and requires balance sheet recognition of all leases with a term greater than 12 months. The Company anticipates that its transition adjustment will result in the establishment of a right of use asset and lease liability which is currently estimated to be less than 2.0% of consolidated assets and liabilities. The Company therefore has concluded that its prospective adoption of this guidance will not have a material impact on its consolidated financial statements.
(c) General - In the normal course of business, the Company and its subsidiaries are subject to various contingent liabilities, including possible income tax assessments resulting from tax law interpretations or issues raised by taxing or regulatory authorities in their regular examinations, catastrophic claim occurrences not indemnified by reinsurers such as noted at 4(a) above, or failure to collect all amounts on its investments or balances due from assureds and reinsurers. The Company does not have a basis for anticipating any significant losses or costs that could result from any known or existing contingencies.
From time to time, in order to assure possible liquidity needs, the Company may guaranty the timely payment of principal and/or interest on certain intercompany balances, debt, or other securities held by some of its insurance and non-insurance affiliates. At December 31, 2018, the aggregate principal amount of such guaranties was $12.5.
(d) 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 year-end 2018, the Company did not have material non-claim litigation exposures in its consolidated business for which adequate claim and related expense provisions had not been made.
Note 5 - Consolidated Quarterly Results - Unaudited - Old Republic's consolidated quarterly operating results for the two years ended December 31, 2018 is presented below. In management's opinion, however, quarterly operating results for insurance enterprises such as the Company is not indicative of results to be achieved in succeeding quarters or years. The long-term nature of the insurance business, seasonal and cyclical factors affecting premium production, the fortuitous nature and, at times, delayed emergence of claims, and changes in yields on invested assets are some of the factors necessitating a review of operating results, changes in shareholders' equity, and cash flows for periods of several years to obtain a proper indicator of performance trends. The data below should be read in conjunction with the "Management Analysis of Financial Position and Results of Operations".
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In management's opinion, normal recurring adjustments necessary for a fair statement of quarterly results have been reflected in the data which follows.
1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | ||||||||||||
Year Ended December 31, 2018: | |||||||||||||||
Operating Summary: | |||||||||||||||
Net premiums, fees, and other income | $ | 1,361.0 | $ | 1,450.4 | $ | 1,535.2 | $ | 1,478.8 | |||||||
Net investment income and investment gains (losses) | (30.6 | ) | 180.2 | 244.5 | (197.9 | ) | |||||||||
Total revenues | 1,330.4 | 1,630.7 | 1,779.7 | 1,280.9 | |||||||||||
Benefits, claims, and expenses | 1,336.4 | 1,384.0 | 1,444.6 | 1,418.5 | |||||||||||
Net income (loss) | $ | 4.0 | $ | 197.7 | $ | 275.2 | $ | (106.5 | ) | ||||||
Net income (loss) per share: Basic | $ | .01 | $ | .66 | $ | .92 | $ | (.36 | ) | ||||||
Diluted | $ | .01 | $ | .66 | $ | .92 | $ | (.36 | ) | ||||||
Average shares outstanding: | |||||||||||||||
Basic | 278,116,902 | 299,738,944 | 299,006,345 | 299,080,914 | |||||||||||
Diluted | 279,528,034 | 301,075,469 | 300,374,004 | 299,080,914 | |||||||||||
Year Ended December 31, 2017: | |||||||||||||||
Operating Summary: | |||||||||||||||
Net premiums, fees, and other income | $ | 1,328.6 | $ | 1,391.0 | $ | 1,453.9 | $ | 1,468.3 | |||||||
Net investment income and investment gains (losses) | 116.1 | 107.9 | 139.1 | 257.8 | |||||||||||
Total revenues | 1,444.8 | 1,499.0 | 1,593.0 | 1,726.2 | |||||||||||
Benefits, claims, and expenses | 1,280.1 | 1,352.7 | 1,533.3 | 1,371.5 | |||||||||||
Net income (loss) | $ | 113.1 | $ | 101.6 | $ | 46.1 | $ | 299.6 | |||||||
Net income (loss) per share: Basic | $ | .43 | $ | .39 | $ | .18 | $ | 1.13 | |||||||
Diluted | $ | .39 | $ | .35 | $ | .17 | $ | 1.01 | |||||||
Average shares outstanding: | |||||||||||||||
Basic | 260,784,905 | 261,080,770 | 261,380,896 | 264,041,834 | |||||||||||
Diluted | 298,239,349 | 298,313,246 | 298,529,626 | 300,846,014 | |||||||||||
Note 6 - Information About Segments of Business - The Company is 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 its' General Insurance Group (property and liability insurance), Title Insurance Group and the Republic Financial Indemnity Group Run-off Business. The results of a small life and accident insurance business are included with those of the parent holding company and its internal corporate services subsidiaries. Each of the Company's segments underwrites and services only those insurance coverages which may be written by it pursuant to state insurance regulations and corporate charter provisions.
The Company does not derive over 10% of its consolidated revenues from any one customer. Revenues and assets connected with foreign operations are not significant in relation to consolidated totals.
The General Insurance Group provides property and liability insurance primarily to commercial clients. Old Republic does not have a meaningful participation in personal insurance coverages. Commercial automobile (trucking) and workers' compensation are the largest types of coverages underwritten by the General Insurance Group, accounting for 32.5% and 31.4%, respectively, of the Group's direct premiums written in 2018. The remaining premiums written by the General Insurance Group are derived largely from a wide variety of coverages, including general liability, general aviation, directors and officers indemnity, fidelity and surety indemnities, and home and auto warranties.
The title insurance 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 policy insures against losses arising out of defects, loans and encumbrances affecting the insured title and not excluded or excepted from the coverage of the policy.
Private mortgage insurance produced by the RFIG Run-off Business 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 RFIG Run-off mortgage guaranty operations insures only first mortgage loans, primarily on residential properties having one-to-four family dwelling units. CCI policies 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.
The accounting policies of the segments parallel those described in the summary of significant accounting policies pertinent thereto.
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Segmented and Consolidated Results | ||||||||||||
Years Ended December 31: | 2018 | 2017 | 2016 | |||||||||
General Insurance: | ||||||||||||
Net premiums earned | $ | 3,277.1 | $ | 3,110.8 | $ | 2,936.3 | ||||||
Net investment income and other income | 462.3 | 420.8 | 418.4 | |||||||||
Total revenues excluding investment gains (losses) | $ | 3,739.4 | $ | 3,531.6 | $ | 3,354.7 | ||||||
Segment pretax operating income (loss) (a)(c) | $ | 363.9 | $ | 340.3 | $ | 319.9 | ||||||
Income tax expense (credits) on above | $ | 62.6 | $ | 170.6 | $ | 94.6 | ||||||
Title Insurance: | ||||||||||||
Net premiums earned | $ | 1,885.6 | $ | 1,827.6 | $ | 1,742.4 | ||||||
Title, escrow and other fees | 450.5 | 459.5 | 464.2 | |||||||||
Sub-total | 2,336.1 | 2,287.2 | 2,206.6 | |||||||||
Net investment income and other income | 39.2 | 37.8 | 37.4 | |||||||||
Total revenues excluding investment gains (losses) | $ | 2,375.4 | $ | 2,325.0 | $ | 2,244.1 | ||||||
Segment pretax operating income (loss) (a) | $ | 219.3 | $ | 237.1 | $ | 210.2 | ||||||
Income tax expense (credits) on above | $ | 46.2 | $ | 79.7 | $ | 74.3 | ||||||
RFIG Run-off Business: | ||||||||||||
Net premiums earned | $ | 75.9 | $ | 122.9 | $ | 170.0 | ||||||
Net investment income and other income | 20.1 | 21.7 | 23.2 | |||||||||
Total revenues excluding investment gains (losses) | $ | 96.1 | $ | 144.6 | $ | 193.2 | ||||||
Segment pretax operating income (loss) (d) | $ | 49.9 | $ | (73.5 | ) | $ | 69.8 | |||||
Income tax expense (credits) on above | $ | 10.1 | $ | (77.0 | ) | $ | 24.0 | |||||
Consolidated Revenues: | ||||||||||||
Total revenues of above Company segments | $ | 6,211.0 | $ | 6,001.4 | $ | 5,792.1 | ||||||
Other sources (b) | 169.1 | 170.3 | 130.4 | |||||||||
Consolidated investment gains (losses): | ||||||||||||
Realized from actual transactions | 58.2 | 211.6 | 72.8 | |||||||||
Unrealized from changes in fair value of equity securities | (293.8 | ) | — | — | ||||||||
Total realized and unrealized investment gains (losses) | (235.6 | ) | 211.6 | 72.8 | ||||||||
Consolidation elimination adjustments | (122.7 | ) | (120.1 | ) | (94.9 | ) | ||||||
Consolidated revenues | $ | 6,021.8 | $ | 6,263.1 | $ | 5,900.5 | ||||||
Consolidated Pretax Income (Loss): | ||||||||||||
Total segment pretax operating income (loss) of | ||||||||||||
above Company segments | $ | 633.2 | $ | 503.9 | $ | 600.0 | ||||||
Other sources - net (b) | 40.4 | 9.9 | 13.0 | |||||||||
Consolidated investment gains (losses): | ||||||||||||
Realized from actual transactions | 58.2 | 211.6 | 72.8 | |||||||||
Unrealized from changes in fair value of equity securities | (293.8 | ) | — | — | ||||||||
Total realized and unrealized investment gains (losses) | (235.6 | ) | 211.6 | 72.8 | ||||||||
Consolidated income (loss) before income taxes (credits) | $ | 438.1 | $ | 725.4 | $ | 686.0 | ||||||
Consolidated Income Tax Expense (Credits): | ||||||||||||
Total income tax expense (credits) of above Company segments | $ | 119.0 | $ | 173.3 | $ | 193.0 | ||||||
Other sources - net (b) | (1.8 | ) | 22.4 | .4 | ||||||||
Income tax expense (credits) on consolidated realized | ||||||||||||
and unrealized investment gains (losses) | (49.6 | ) | (30.8 | ) | 25.5 | |||||||
Consolidated income tax expense (credits) | $ | 67.5 | $ | 164.8 | $ | 219.0 | ||||||
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December 31: | 2018 | 2017 | ||||||||
Consolidated Assets: | ||||||||||
General Insurance | $ | 16,411.4 | $ | 16,055.5 | ||||||
Title Insurance | 1,452.2 | 1,466.0 | ||||||||
RFIG Run-off Business | 736.7 | 805.0 | ||||||||
Total assets of above company segments | 18,600.3 | 18,326.6 | ||||||||
Other assets (b) | 1,028.9 | 1,440.9 | ||||||||
Consolidation elimination adjustments | (302.2 | ) | (364.0 | ) | ||||||
Consolidated assets | $ | 19,327.1 | $ | 19,403.5 | ||||||
__________
In the above tables, net premiums earned on a GAAP basis differ slightly from statutory amounts due to certain differences in calculations of unearned premium reserves under each accounting method.
(a) | Segment pretax operating income (loss) is reported net of interest charges on intercompany financing arrangements with Old Republic's holding company parent for the following segments: General - $68.0, $57.2 and $51.9 for the years ended December 31, 2018, 2017, and 2016, respectively; Title - $6.1, $7.8 and $8.4 for the years ended December 31, 2018, 2017, and 2016, respectively. |
(b) | Includes amounts for a small life and accident insurance business as well as those of the parent holding company and its internal corporate services subsidiaries. |
(c) | General Insurance income before taxes (credits) for 2017 includes hurricane-related claim costs of $8.0. |
(d) | RFIG Run-off segment pretax operating income (loss) for 2017 include additional claim and related expense provisions of $130.0. These costs apply to the final settlements and probable dispositions of all known litigated and other claim costs incurred by the Company's run-off Financial Indemnity business during the Great Recession years and their aftermath. |
Note 7 - Transactions with Affiliates:
The Company is affiliated with a policyholder owned mutual insurer, American Business & Mercantile Insurance Mutual, Inc. ("AB&M" or "the Mutual") whose formation it sponsored in 1981. The Mutual is managed through a service agreement with several Old Republic subsidiaries. AB&M's underwriting operations are limited to certain types of coverages not provided by Old Republic, and to a small amount of intercompany reinsurance placements. The following table shows certain unaudited information reflective of such business:
Assumed from Old Republic | Ceded to Old Republic | |||||||||||||||||||||||
Years Ended December 31: | 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | ||||||||||||||||||
Premiums earned | $ | 2.3 | $ | 3.0 | $ | 3.8 | $ | .4 | $ | .5 | $ | .6 | ||||||||||||
Commissions and fees | .7 | .6 | 1.0 | — | — | — | ||||||||||||||||||
Losses and loss expenses | (2.3 | ) | 2.0 | 4.5 | (.5 | ) | .1 | .8 | ||||||||||||||||
Loss and loss expense reserves | 11.9 | 15.0 | 15.3 | 4.0 | 4.9 | 5.2 | ||||||||||||||||||
Unearned premiums | $ | — | $ | — | $ | 1.4 | $ | — | $ | .1 | $ | .1 | ||||||||||||
As of December 31, 2018 and 2017, the Mutual's statutory capital included surplus notes due to Old Republic of $10.5 out of total statutory capital of $36.5 and $32.7, respectively. AB&M's accounts are not consolidated with Old Republic's since it is owned by its policyholders and, in any event, their inclusion would not have a significant effect on Old Republic's consolidated financial statements.
94
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |
To the stockholders and board of directors
Old Republic International Corporation:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Old Republic International Corporation and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, preferred stock and common shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes and financial statement schedules I to VI (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Change in Accounting Principle
As discussed in Note 1(d) to the consolidated financial statements, the Company changed its method of accounting for equity securities measured at fair value with changes in the fair value recognized through income effective January 1, 2018 due to the adoption of ASU 2016-01, Financial Instruments.
Basis for Opinion
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting under Item 9A of the 2018 Annual Report on Form 10-K. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
95
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
We have served as the Company’s auditor since 2010.
Chicago, Illinois
February 28, 2019
96
Management's Responsibility for Financial Statements
Management is responsible for the preparation of the Company's consolidated financial statements and related information appearing in this report. Management believes that the consolidated financial statements fairly reflect the form and substance of transactions and that the financial statements reasonably present the Company's financial position and results of operations in conformity with generally accepted accounting principles. Management also has included in the Company's financial statement amounts that are based on estimates and judgments which it believes are reasonable under the circumstances.
The independent registered public accounting firm has advised that they audit the Company's consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board, as stated in its reports, included herein.
The Board of Directors of the Company has an Audit Committee composed of six non-management Directors. The committee meets periodically with financial management, the internal auditors and the independent registered public accounting firm to review accounting, control, auditing and financial reporting matters.
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A - Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company's principal executive officer and its principal accounting officer have evaluated the Company's disclosure controls and procedures as of the end of the period covered by this annual report. Based upon their evaluation, the principal executive officer and principal accounting officer have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective for the above referenced evaluation period.
Changes in Internal Control
During the three month period ended December 31, 2018, there were no changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal accounting officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
The Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Based on our evaluation under the framework in Internal Control - Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2018. KPMG LLP, an independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of December 31, 2018. Their report is shown on page 95 in this Annual Report.
Item 9B - Other Information
Pursuant to the requirements of Section 303A.12(a) of the New York Stock Exchange Listed Company Manual, the Company has filed the Annual CEO Certification with the New York Stock Exchange on June 22, 2018.
97
PART III
Item 10 - Directors, Executive Officers, and Corporate Governance
Executive Officers of the Registrant
The following table sets forth certain information as of December 31, 2018, regarding the senior officers of the Company:
Name | Age | Position |
Charles S. Boone | 65 | Senior Vice President - Investments since August 2001. |
John R. Heitkamp, Jr. | 64 | Senior Vice President, Secretary and General Counsel since July 2014. |
Karl W. Mueller | 59 | Senior Vice President and Chief Financial Officer since October 2004. |
R. Scott Rager | 70 | Executive Vice Chairman of the Board since June 2018; Senior Vice President - General Insurance since July 2006. |
Craig R. Smiddy | 54 | President and Chief Operating Office since June 2018; President and Chief Operating Officer of Old Republic General Insurance Companies since August 2015 and August 2013, respectively. Prior to joining Old Republic, Mr. Smiddy was President of the Specialty Markets Division of Munich Reinsurance America, Inc. |
Rande K. Yeager | 70 | Senior Vice President - Title Insurance since March 2003; Chairman and Chief Executive Officer of Old Republic Title Insurance Companies since July 2010 and March 2002 respectively. |
Aldo C. Zucaro | 79 | Chairman of the Board, Chief Executive Officer, and Director since 1993, 1990 and 1976, respectively; Chairman and Chief Executive Officer of Republic Financial Indemnity Group, Inc. since December 2013. |
The term of office of each officer of the Company expires on the date of the annual meeting of the board of directors, which is generally held in May of each year. There is no family relationship between any of the executive officers named above. Each of these named officers have been employed in senior capacities with the Company and/or its subsidiaries for the past five years.
The Company will file with the Commission a definitive proxy statement pursuant to Regulation 14a in connection with its Annual Meeting of Shareholders to be held on May 24, 2019. A list of Directors appears on the "Signature" page of this report. Information about the Company's directors is contained in the Company's definitive proxy statement for the 2018 Annual Meeting of shareholders, which is incorporated herein by reference.
The Company has adopted a code of ethics that applies to its principal executive officer and principal financial officer. A copy has been filed with the Commission and appears as Exhibit (14) in the exhibit index under item 15. The Company has also posted the text of its code of ethics on its internet website at www.oldrepublic.com.
Item 11 - Executive Compensation
Information with respect to this Item is incorporated herein by reference to the section entitled "Executive Compensation" in the Company's proxy statement in connection with the Annual Meeting of Shareholders to be held on May 24, 2019, which will be on file with the Commission.
Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information with respect to this Item is incorporated herein by reference to the sections entitled "General Information" and "Principal Holders of Securities" in the Company's proxy statement to be filed with the Commission in connection with the Annual Meeting of Shareholders to be held on May 24, 2019.
98
Item 13 - Certain Relationships and Related Transactions
Information with respect to this Item is incorporated herein by reference to the sections entitled "Procedures for the Approval of Related Person Transactions" and "The Board of Directors Responsibilities and Independence" contained in the Company's Proxy Statement in connection with the Annual Meeting of Shareholders to be held on May 24, 2019, which will be on file with the Commission.
Item 14 - Principal Accountant Fees and Services
Information with respect to this Item is incorporated herein by reference to the paragraphs following Item 2 concerning the "Ratification of the Selection of an Independent Registered Public Accounting Firm" contained in the Company's Proxy Statement in connection with the Annual Meeting of Shareholders to be held on May 24, 2019, which will be on file with the Commission.
PART IV
Item 15 - Exhibits
Documents filed as a part of this report:
1. Financial statements: See Item 8, Index to Financial Statements.
2. See exhibit index on page 112 of this report.
3. Financial Statement Schedules.
99
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized (Name, Title or Principal Capacity, and Date).
(Registrant): Old Republic International Corporation
By: | /s/ Aldo C. Zucaro | 02/28/19 |
Aldo C. Zucaro, Chairman of the Board, | Date | |
Chief Executive Officer and Director | ||
By: | /s/ Karl W. Mueller | 02/28/19 |
Karl W. Mueller, Senior Vice President, | Date | |
Chief Financial Officer, and | ||
Principal Accounting Officer | ||
_____________________________________________________________________________________________
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated (Name, Title or Principal Capacity, and Date).
/s/ Steven J. Bateman | /s/ Glenn W. Reed | |
Steven J. Bateman, Director* | Glenn W. Reed, Director* | |
/s/ Harrington Bischof | /s/ Arnold L. Steiner | |
Harrington Bischof, Director* | Arnold L. Steiner, Director* | |
/s/ Jimmy A. Dew | /s/ Fredricka Taubitz | |
Jimmy A. Dew, Director* | Fredricka Taubitz, Director* | |
/s/ John M. Dixon | /s/ Charles F. Titterton | |
John M. Dixon, Director* | Charles F. Titterton, Director* | |
/s/ Charles J. Kovaleski | /s/ Dennis P. Van Mieghem | |
Charles J. Kovaleski, Director* | Dennis P. Van Mieghem, Director* | |
/s/ Spencer LeRoy, III | /s/ Steven Walker | |
Spencer LeRoy, III, Director* | Steven Walker, Director* | |
* By /s/ Aldo C. Zucaro
Attorney-in-fact
Date: February 28, 2019
100
INDEX TO FINANCIAL STATEMENT SCHEDULES | ||
OLD REPUBLIC INTERNATIONAL CORPORATION AND SUBSIDIARIES | ||
Schedule | I - | Summary of Investments - Other than Investments in Related Parties as of December 31, 2018 |
Schedule | II - | Condensed Financial Information of Registrant as of December 31, 2018 and 2017 and for the years ended December 31, 2018, 2017 and 2016 |
Schedule | III - | Supplementary Insurance Information for the years ended December 31, 2018, 2017 and 2016 |
Schedule | IV - | Reinsurance for the years ended December 31, 2018, 2017 and 2016 |
Schedule | V - | Valuation and Qualifying Accounts for the years ended December 31, 2018, 2017 and 2016 |
Schedule | VI - | Supplemental Information Concerning Property - Casualty Insurance Operations for the years ended December 31, 2018, 2017 and 2016 |
Schedules other than those listed are omitted for the reason that they are not required, are not applicable or that equivalent information has been included in the financial statements, notes thereto, or elsewhere herein. | ||
101
OLD REPUBLIC INTERNATIONAL CORPORATION AND SUBSIDIARIES | ||||||||||||
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES | ||||||||||||
As of December 31, 2018 | ||||||||||||
($ in Millions) | ||||||||||||
Column A | Column B | Column C | Column D | |||||||||
Type of investment | Cost (1) | Fair Value | Amount at which shown in balance sheet | |||||||||
Available for sale: | ||||||||||||
Fixed maturity securities: | ||||||||||||
United States Government and | ||||||||||||
government agencies and authorities | $ | 1,401.6 | $ | 1,391.2 | $ | 1,391.2 | ||||||
Foreign government | 133.7 | 133.1 | 133.1 | |||||||||
Corporate, industrial and all other | 6,749.6 | 6,658.3 | 6,658.3 | |||||||||
8,285.0 | $ | 8,182.8 | 8,182.8 | |||||||||
Short-term investments | 354.9 | 354.9 | ||||||||||
Total | 8,639.9 | 8,537.8 | ||||||||||
Equity securities: | ||||||||||||
Non-redeemable preferred stocks | .6 | $ | 1.1 | 1.1 | ||||||||
Common stocks: | ||||||||||||
Banks, trusts and insurance companies | 127.7 | 186.2 | 186.2 | |||||||||
Industrial, miscellaneous and all other | 2,910.8 | 3,193.5 | 3,193.5 | |||||||||
3,039.1 | $ | 3,380.9 | 3,380.9 | |||||||||
Held to maturity: | ||||||||||||
Fixed maturity securities: | ||||||||||||
States, municipalities and political subdivisions | 1,044.8 | 1,044.8 | ||||||||||
Other investments | 31.0 | 31.0 | ||||||||||
Total Investments | $ | 12,754.9 | $ | 12,994.6 | ||||||||
__________
(1) | Represents original cost of equity securities, and as to fixed maturities, original cost reduced by repayments and adjusted for amortization of premium or accrual of discount. |
102
OLD REPUBLIC INTERNATIONAL CORPORATION AND SUBSIDIARIES | |||||||
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT | |||||||
BALANCE SHEETS | |||||||
OLD REPUBLIC INTERNATIONAL CORPORATION (PARENT COMPANY) | |||||||
($ in Millions) | |||||||
December 31, | |||||||
2018 | 2017 | ||||||
Assets: | |||||||
Bonds and notes | $ | 10.5 | $ | 10.5 | |||
Short-term investments | 6.2 | 272.9 | |||||
Cash | 5.0 | 20.0 | |||||
Investments in, and indebtedness of related parties | 6,276.3 | 6,365.6 | |||||
Other assets | 86.0 | 88.1 | |||||
Total Assets | $ | 6,384.2 | $ | 6,757.3 | |||
Liabilities and Common Shareholders' Equity: | |||||||
Liabilities: | |||||||
Accounts payable and accrued expenses | $ | 150.2 | $ | 473.3 | |||
Debt and debt equivalents | 975.0 | 1,448.7 | |||||
Indebtedness to affiliates and subsidiaries | 112.7 | 101.9 | |||||
Commitments and contingent liabilities | |||||||
Total Liabilities | 1,238.0 | 2,024.0 | |||||
Common Shareholders' Equity: | |||||||
Common stock | 302.7 | 269.2 | |||||
Additional paid-in capital | 1,277.6 | 815.2 | |||||
Retained earnings | 3,849.8 | 3,206.9 | |||||
Accumulated other comprehensive income (loss) | (210.0 | ) | 474.2 | ||||
Unallocated ESSOP shares (at cost) | (73.9 | ) | (32.4 | ) | |||
Total Common Shareholders' Equity | 5,146.2 | 4,733.3 | |||||
Total Liabilities and Common Shareholders' Equity | $ | 6,384.2 | $ | 6,757.3 | |||
See accompanying Notes to Condensed Financial Statements. | ||
103
OLD REPUBLIC INTERNATIONAL CORPORATION AND SUBSIDIARIES | |||||||||||
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT | |||||||||||
STATEMENTS OF INCOME | |||||||||||
OLD REPUBLIC INTERNATIONAL CORPORATION (PARENT COMPANY) | |||||||||||
($ in Millions) | |||||||||||
Years Ended December 31, | |||||||||||
2018 | 2017 | 2016 | |||||||||
Revenues: | |||||||||||
Investment income from subsidiaries | $ | 101.7 | $ | 100.1 | $ | 76.3 | |||||
Real estate and other income | 5.0 | 4.8 | 4.7 | ||||||||
Other investment income | 2.0 | 2.0 | .7 | ||||||||
Total revenues | 108.9 | 107.0 | 81.7 | ||||||||
Expenses: | |||||||||||
Interest - subsidiaries | 2.1 | .4 | .3 | ||||||||
Interest - other | 47.0 | 64.5 | 50.9 | ||||||||
Real estate and other expenses | 4.6 | 3.8 | 4.1 | ||||||||
General expenses, taxes and fees | 15.3 | 12.6 | 11.5 | ||||||||
Total expenses | 69.1 | 81.5 | 66.9 | ||||||||
Revenues, net of expenses | 39.7 | 25.4 | 14.8 | ||||||||
Federal income taxes (credits) | 1.5 | 34.1 | 4.4 | ||||||||
Income (loss) before equity in earnings (losses) of subsidiaries | 38.2 | (8.6 | ) | 10.4 | |||||||
Equity in Earnings (Losses) of Subsidiaries: | |||||||||||
Dividends received | 412.3 | 367.4 | 317.6 | ||||||||
Earnings (losses) in excess of dividends | (80.0 | ) | 201.7 | 138.9 | |||||||
Net Income (Loss) | $ | 370.5 | $ | 560.5 | $ | 466.9 | |||||
See accompanying Notes to Condensed Financial Statements. | ||
104
OLD REPUBLIC INTERNATIONAL CORPORATION AND SUBSIDIARIES | |||||||||||
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT | |||||||||||
STATEMENTS OF CASH FLOWS | |||||||||||
OLD REPUBLIC INTERNATIONAL CORPORATION (PARENT COMPANY) | |||||||||||
($ in Millions) | |||||||||||
Years Ended December 31, | |||||||||||
2018 | 2017 | 2016 | |||||||||
Cash flows from operating activities: | |||||||||||
Net income (loss) | $ | 370.5 | $ | 560.5 | $ | 466.9 | |||||
Adjustments to reconcile net income (loss) to | |||||||||||
net cash provided by operating activities: | |||||||||||
Accounts receivable | .2 | (.1 | ) | .2 | |||||||
Income taxes - net | (23.4 | ) | 41.9 | (8.5 | ) | ||||||
Excess of equity in net (income) loss | |||||||||||
of subsidiaries over cash dividends received | 80.0 | (201.9 | ) | (138.9 | ) | ||||||
Accounts payable, accrued expenses and other | 2.2 | 7.9 | 12.3 | ||||||||
Total | 429.6 | 408.2 | 332.1 | ||||||||
Cash flows from investing activities: | |||||||||||
Sale of fixed assets for company use | — | — | .3 | ||||||||
Net repayment (issuance) of notes to related parties | (114.2 | ) | 7.3 | (665.2 | ) | ||||||
Net decrease (increase) in short-term investments | 266.6 | (69.0 | ) | (54.9 | ) | ||||||
Investment in, and indebtedness of related parties-net | (104.0 | ) | (178.7 | ) | 2.6 | ||||||
Total | 48.3 | (240.4 | ) | (717.1 | ) | ||||||
Cash flows from financing activities: | |||||||||||
Issuance of debentures and notes | — | — | 576.8 | ||||||||
Net receipt (repayment) of notes and loans from related parties | 50.7 | 17.3 | (2.7 | ) | |||||||
Issuance of common shares | 13.1 | 17.8 | 8.4 | ||||||||
Redemption of debentures and notes | (4.7 | ) | (3.9 | ) | (3.5 | ) | |||||
Purchase of unallocated ESSOP shares | (50.0 | ) | — | — | |||||||
Dividends on common shares | (498.8 | ) | (198.8 | ) | (193.8 | ) | |||||
Other - net | (3.1 | ) | (.2 | ) | (1.5 | ) | |||||
Total | (492.8 | ) | (167.8 | ) | 383.5 | ||||||
Increase (decrease) in cash | (14.9 | ) | — | (1.5 | ) | ||||||
Cash, beginning of year | 20.0 | 19.9 | 21.4 | ||||||||
Cash, end of year | $ | 5.0 | $ | 20.0 | $ | 19.9 | |||||
See accompanying Notes to Condensed Financial Statements. | ||
105
OLD REPUBLIC INTERNATIONAL CORPORATION AND SUBSIDIARIES |
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT |
NOTES TO CONDENSED FINANCIAL STATEMENTS |
($ in Millions) |
Note 1 - Summary of Significant Accounting Policies
Old Republic International Corporation's ("the Company" or "Old Republic") condensed financial statements are presented in accordance with the Financial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC") of accounting principles generally accepted in the United States of America ("GAAP") and should be read in conjunction with the consolidated financial statements and notes thereto of Old Republic International Corporation and Subsidiaries included in its Annual Report on Form 10-K.
Note 2 - Investments in Consolidated Subsidiaries
Old Republic International Corporation's investments in consolidated subsidiaries are reflected in the condensed financial statements in accordance with the equity method of accounting. Undistributed earnings in excess of dividends received are recorded as separate line items in the condensed statements of income.
Note 3 - Debt
On August 26, 2016, the Company completed a public offering of $550.0 aggregate principal amount of Senior Notes. The notes bear interest at a rate of 3.875% per year and mature on August 26, 2026.
On September 23, 2014, the Company completed a public offering of $400.0 aggregate principal amount of Senior Notes. The notes bear interest at a rate of 4.875% per year and mature on October 1, 2024.
In early March, 2011 the Company completed a public offering of $550.0 aggregate principal amount of Convertible Senior Notes with a maturity date of March 15, 2018. During 2017, $79.0 of the Notes were converted into 5,146,127 common shares and during the first quarter 2018, the Company's outstanding aggregate principal amount was converted into 32,229,787 shares of common stock.
In 2008, the Company secured a ten year $30.0 bank loan to enable its Employees Savings and Stock Ownership Plan ("ESSOP") to purchase Old Republic common stock. Principal amount of $4.2 was outstanding as of December 31, 2017. The average yield of the ESSOP bank loan was 4.57% at December 31, 2017.
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OLD REPUBLIC INTERNATIONAL CORPORATION AND SUBSIDIARIES | ||||||||||||||||||||
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION | ||||||||||||||||||||
For the Years Ended December 31, 2018, 2017 and 2016 | ||||||||||||||||||||
($ in Millions) | ||||||||||||||||||||
Column A | Column B | Column C | Column D | Column E | Column F | |||||||||||||||
Segment | Deferred Policy Acquisition Costs | Losses, Claims and Settlement Expenses | Unearned Premiums | Other Policyholders' Benefits and Funds | Premium Revenue | |||||||||||||||
Year Ended December 31, 2018: | ||||||||||||||||||||
Insurance Underwriting: | ||||||||||||||||||||
General Insurance Group | $ | 314.1 | $ | 5,766.1 | $ | 1,696.4 | $ | 130.8 | $ | 3,277.1 | ||||||||||
Title Insurance Group | — | 533.4 | — | 6.3 | 1,885.6 | |||||||||||||||
RFIG Run-off Business | — | 154.5 | 3.0 | — | 75.9 | |||||||||||||||
Corporate & Other (1) | 2.2 | 10.8 | — | 44.6 | 14.6 | |||||||||||||||
Reinsurance Recoverable (2) | — | 3,006.3 | 405.4 | 16.8 | — | |||||||||||||||
Consolidated | $ | 316.3 | $ | 9,471.2 | $ | 2,104.9 | $ | 198.6 | $ | 5,253.4 | ||||||||||
Year Ended December 31, 2017: | ||||||||||||||||||||
Insurance Underwriting: | ||||||||||||||||||||
General Insurance Group | $ | 294.3 | $ | 5,471.5 | $ | 1,597.3 | $ | 130.2 | $ | 3,110.8 | ||||||||||
Title Insurance Group | — | 559.7 | — | 6.8 | 1,827.6 | |||||||||||||||
RFIG Run-off Business | — | 271.7 | 5.1 | — | 122.9 | |||||||||||||||
Corporate & Other (1) | 3.4 | 13.5 | — | 46.4 | 18.8 | |||||||||||||||
Reinsurance Recoverable (2) | — | 2,921.1 | 369.0 | 21.1 | — | |||||||||||||||
Consolidated | $ | 297.8 | $ | 9,237.6 | $ | 1,971.5 | $ | 204.7 | $ | 5,080.2 | ||||||||||
Year Ended December 31, 2016: | ||||||||||||||||||||
Insurance Underwriting: | ||||||||||||||||||||
General Insurance Group | $ | 266.4 | $ | 5,249.9 | $ | 1,455.8 | $ | 123.1 | $ | 2,936.3 | ||||||||||
Title Insurance Group | — | 602.0 | — | 7.3 | 1,742.4 | |||||||||||||||
RFIG Run-off Business | — | 574.0 | 8.6 | — | 170.0 | |||||||||||||||
Corporate & Other (1) | 7.5 | 13.8 | — | 37.9 | 20.1 | |||||||||||||||
Reinsurance Recoverable (2) | — | 2,766.1 | 378.4 | 23.5 | — | |||||||||||||||
Consolidated | $ | 274.0 | $ | 9,206.0 | $ | 1,842.9 | $ | 192.0 | $ | 4,868.9 | ||||||||||
__________
(1) | 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. |
(2) | In accordance with GAAP, reinsured losses and unearned premiums are to be reported as assets. Assets and liabilities were, as a result, increased by corresponding amounts of approximately $3.4 billion, $3.3 billion, and $3.1 billion at December 31, 2018, 2017 and 2016, respectively. This accounting treatment does not have any effect on the Company's results of operations. |
107
OLD REPUBLIC INTERNATIONAL CORPORATION AND SUBSIDIARIES | ||||||||||||||||||||
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION | ||||||||||||||||||||
For the Years Ended December 31, 2018, 2017 and 2016 | ||||||||||||||||||||
($ in Millions) | ||||||||||||||||||||
Column A | Column G | Column H | Column I | Column J | Column K | |||||||||||||||
Segment | Net Investment Income | Benefits, Claims, Losses and Settlement Expenses | Amortization of Deferred Policy Acquisition Costs | Other Operating Expenses | Premiums Written | |||||||||||||||
Year Ended December 31, 2018: | ||||||||||||||||||||
Insurance Underwriting: | ||||||||||||||||||||
General Insurance Group | $ | 341.0 | $ | 2,365.8 | $ | 488.4 | $ | 521.2 | $ | 3,380.4 | ||||||||||
Title Insurance Group | 38.8 | 48.3 | — | 2,107.7 | 1,885.6 | |||||||||||||||
RFIG Run-off Business | 20.1 | 29.9 | — | 16.3 | 73.9 | |||||||||||||||
Corporate & Other (1) | 31.7 | 16.7 | 1.2 | (12.0 | ) | 14.6 | ||||||||||||||
Reinsurance Recoverable (2) | — | — | — | — | — | |||||||||||||||
Consolidated | $ | 431.8 | $ | 2,460.7 | $ | 489.6 | $ | 2,633.2 | $ | 5,354.7 | ||||||||||
Year Ended December 31, 2017: | ||||||||||||||||||||
Insurance Underwriting: | ||||||||||||||||||||
General Insurance Group | $ | 318.9 | $ | 2,234.4 | $ | 449.9 | $ | 506.8 | $ | 3,245.2 | ||||||||||
Title Insurance Group | 37.3 | 20.8 | — | 2,067.0 | 1,827.6 | |||||||||||||||
RFIG Run-off Business | 21.7 | 197.8 | — | 20.3 | 118.4 | |||||||||||||||
Corporate & Other (1) | 31.4 | 25.7 | 4.1 | 10.3 | 18.8 | |||||||||||||||
Reinsurance Recoverable (2) | — | — | — | — | — | |||||||||||||||
Consolidated | $ | 409.4 | $ | 2,478.8 | $ | 454.0 | $ | 2,604.7 | $ | 5,210.1 | ||||||||||
Year Ended December 31, 2016: | ||||||||||||||||||||
Insurance Underwriting: | ||||||||||||||||||||
General Insurance Group | $ | 312.1 | $ | 2,143.1 | $ | 389.1 | $ | 502.4 | $ | 3,005.3 | ||||||||||
Title Insurance Group | 36.2 | 84.3 | — | 1,949.4 | 1,742.4 | |||||||||||||||
RFIG Run-off Business | 23.2 | 102.6 | — | 20.8 | 165.6 | |||||||||||||||
Corporate & Other (1) | 15.4 | 17.7 | 4.6 | — | 20.1 | |||||||||||||||
Reinsurance Recoverable (2) | — | — | — | — | — | |||||||||||||||
Consolidated | $ | 387.0 | $ | 2,347.9 | $ | 393.7 | $ | 2,472.8 | $ | 4,933.6 | ||||||||||
__________
(1) | 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. |
(2) | In accordance with GAAP, reinsured losses and unearned premiums are to be reported as assets. Assets and liabilities were, as a result, increased by corresponding amounts of approximately $3.4 billion, $3.3 billion, and $3.1 billion at December 31, 2018, 2017 and 2016, respectively. This accounting treatment does not have any effect on the Company's results of operations. |
108
OLD REPUBLIC INTERNATIONAL CORPORATION AND SUBSIDIARIES | ||||||||||||||||||
SCHEDULE IV - REINSURANCE | ||||||||||||||||||
For the years ended December 31, 2018, 2017 and 2016 | ||||||||||||||||||
($ in Millions) | ||||||||||||||||||
Column A | Column B | Column C | Column D | Column E | Column F | |||||||||||||
Gross amount | Ceded to other companies | Assumed from other companies | Net amount | Percentage of amount assumed to net | ||||||||||||||
Year Ended December 31, 2018: | ||||||||||||||||||
Life insurance in force | $ | 3,383.2 | $ | 1,865.4 | $ | — | $ | 1,517.7 | — | % | ||||||||
Premium Revenues: | ||||||||||||||||||
General Insurance | $ | 4,534.8 | $ | 1,313.5 | $ | 55.8 | $ | 3,277.1 | 1.7 | % | ||||||||
Title Insurance | 1,883.3 | — | 2.3 | 1,885.6 | .1 | |||||||||||||
RFIG Run-off | 75.9 | — | — | 75.9 | — | |||||||||||||
Life and Health Insurance: | ||||||||||||||||||
Life insurance | 11.9 | 5.0 | — | 6.8 | — | |||||||||||||
Accident and health insurance | 22.3 | 14.5 | — | 7.8 | — | |||||||||||||
Total Life & Health Insurance | 34.3 | 19.6 | — | 14.6 | — | |||||||||||||
Consolidating adjustments | — | (3.4 | ) | (3.4 | ) | — | — | |||||||||||
Consolidated | $ | 6,528.4 | $ | 1,329.7 | $ | 54.6 | $ | 5,253.4 | 1.0 | % | ||||||||
Year Ended December 31, 2017: | ||||||||||||||||||
Life insurance in force | $ | 4,860.6 | $ | 2,552.5 | $ | — | $ | 2,308.0 | — | % | ||||||||
Premium Revenues: | ||||||||||||||||||
General Insurance | $ | 4,307.5 | $ | 1,246.4 | $ | 49.7 | $ | 3,110.8 | 1.6 | % | ||||||||
Title Insurance | 1,825.7 | .2 | 2.0 | 1,827.6 | .1 | |||||||||||||
RFIG Run-off | 123.5 | .5 | — | 122.9 | — | |||||||||||||
Life and Health Insurance: | ||||||||||||||||||
Life insurance | 13.3 | 6.2 | — | 7.1 | — | |||||||||||||
Accident and health insurance | 26.4 | 14.7 | — | 11.6 | — | |||||||||||||
Total Life & Health Insurance | 39.8 | 20.9 | — | 18.8 | — | |||||||||||||
Consolidating adjustments | — | (3.7 | ) | (3.7 | ) | — | — | |||||||||||
Consolidated | $ | 6,296.6 | $ | 1,264.5 | $ | 48.1 | $ | 5,080.2 | .9 | % | ||||||||
Year Ended December 31, 2016: | ||||||||||||||||||
Life insurance in force | $ | 5,825.9 | $ | 3,005.6 | $ | — | $ | 2,820.3 | — | % | ||||||||
Premium Revenues: | ||||||||||||||||||
General Insurance | $ | 4,005.3 | $ | 1,119.8 | $ | 50.8 | $ | 2,936.3 | 1.7 | % | ||||||||
Title Insurance | 1,740.5 | — | 1.9 | 1,742.4 | .1 | |||||||||||||
RFIG Run-off | 173.0 | 2.9 | — | 170.0 | — | |||||||||||||
Life and Health Insurance: | ||||||||||||||||||
Life insurance | 15.8 | 5.0 | — | 10.8 | — | |||||||||||||
Accident and health insurance | 31.9 | 22.5 | — | 9.3 | — | |||||||||||||
Total Life & Health Insurance | 47.7 | 27.5 | — | 20.1 | — | |||||||||||||
Consolidating adjustments | — | (7.0 | ) | (7.0 | ) | — | — | |||||||||||
Consolidated | $ | 5,966.7 | $ | 1,143.4 | $ | 45.7 | $ | 4,868.9 | .9 | % | ||||||||
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OLD REPUBLIC INTERNATIONAL CORPORATION AND SUBSIDIARIES | ||||||||||||||||||||
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS | ||||||||||||||||||||
For the years ended December 31, 2018, 2017 and 2016 | ||||||||||||||||||||
($ in Millions) | ||||||||||||||||||||
Column A | Column B | Column C | Column D | Column E | ||||||||||||||||
Additions | ||||||||||||||||||||
Description | Balance at Beginning of Period | Charged to Costs and Expenses | Charged to Other Accounts - Describe | Deductions - Describe | Balance at End of Period | |||||||||||||||
Year Ended December 31, 2018: | ||||||||||||||||||||
Deducted from Asset Accounts: | ||||||||||||||||||||
Reserve for unrecoverable | ||||||||||||||||||||
reinsurance (1) | $ | 15.9 | $ | — | $ | — | $ | (15.9 | ) | $ | — | |||||||||
Year Ended December 31, 2017: | ||||||||||||||||||||
Deducted from Asset Accounts: | ||||||||||||||||||||
Reserve for unrecoverable | ||||||||||||||||||||
reinsurance | $ | 15.9 | $ | — | $ | — | $ | — | $ | 15.9 | ||||||||||
Year Ended December 31, 2016: | ||||||||||||||||||||
Deducted from Asset Accounts: | ||||||||||||||||||||
Reserve for unrecoverable | ||||||||||||||||||||
reinsurance | $ | 15.9 | $ | — | $ | — | $ | — | $ | 15.9 | ||||||||||
__________
(1) | Reflects the reduction of allowances for unrecoverable reinsurance no longer deemed necessary. |
110
OLD REPUBLIC INTERNATIONAL CORPORATION AND SUBSIDIARIES |
SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING |
PROPERTY-CASUALTY INSURANCE OPERATIONS |
For the years ended December 31, 2018, 2017 and 2016 |
($ in Millions) |
Column A | Column B | Column C | Column D | Column E | ||||||||||||
Affiliation With Registrant (1) | Deferred Policy Acquisition Costs | Reserves for Unpaid Claims and Claim Adjustment Expenses (2) | Discount, If Any, Deducted in Column C | Unearned Premiums (2) | ||||||||||||
Year Ended December 31: | ||||||||||||||||
2018 | $ | 314.1 | $ | 5,756.0 | $ | 216.5 | $ | 1,696.4 | ||||||||
2017 | 294.3 | 5,495.3 | 240.7 | 1,597.3 | ||||||||||||
2016 | 266.4 | 5,443.4 | 231.9 | 1,455.8 | ||||||||||||
Column A | Column F | Column G | Column H | |||||||||||||
Net Investment Income | Claims and Claim Adjustment Expenses Incurred Related to | |||||||||||||||
Affiliation With Registrant (1) | Earned Premiums | Current Year | Prior Years | |||||||||||||
Year Ended December 31: | ||||||||||||||||
2018 | $ | 3,278.6 | $ | 341.9 | $ | 2,350.2 | $ | (6.4 | ) | |||||||
2017 | 3,123.8 | 320.2 | 2,383.8 | (34.5 | ) | |||||||||||
2016 | 2,952.1 | 313.3 | 2,172.5 | 2.5 | ||||||||||||
Column A | Column I | Column J | Column K | |||||||||||||
Affiliation With Registrant (1) | Amortization of Deferred Policy Acquisition Costs | Paid Claims and Claim Adjustment Expenses | Premiums Written | |||||||||||||
Year Ended December 31: | ||||||||||||||||
2018 | $ | 488.4 | $ | 2,083.0 | $ | 3,382.0 | ||||||||||
2017 | 449.9 | 2,297.5 | 3,257.2 | |||||||||||||
2016 | 389.1 | 1,939.9 | 3,021.8 | |||||||||||||
__________
(1) | Includes consolidated property-casualty entities. The amounts relating to the Company's unconsolidated property-casualty subsidiaries and the proportionate share of the registrant's and its subsidiaries' 50%-or-less owned property-casualty equity investees are immaterial and have, therefore, been omitted from this schedule. |
(2) | See note (2) to Schedule III. |
111
EXHIBIT INDEX | |||
An index of exhibits required by Item 601 of Regulation S-K follows: | |||
(3) | Articles of incorporation and by-laws. | ||
(A) | * | ||
(B) | * | ||
(4) | Instruments defining the rights of security holders, including indentures. | ||
(A) | * | ||
(B) | * | Agreement to furnish certain long-term debt instruments to the Securities & Exchange Commission upon request. (Exhibit 4(D) to Registrant's Form 8 dated August 28, 1987). | |
(C) | * | ||
(D) | * | ||
(E) | * | ||
(F) | * | ||
(G) | * | ||
(10) | Material contracts. | ||
** | (A) | ||
** | (B) | * | |
** | (C) | * | |
** | (D) | * | |
** | (E) | * | |
** | (F) | ||
(H) | * | ||
(21) | |||
(23.1) | |||
(24) | |||
112
(Exhibit Index, Continued)
(31.1) | |||
(31.2) | |||
(32.1) | |||
(32.2) | |||
(101.INS) | XBRL Instance Document | ||
(101.SCH) | XBRL Taxonomy Extension Schema | ||
(101.CAL) | XBRL Taxonomy Extension Calculation Linkbase | ||
(101.DEF) | XBRL Taxonomy Extension Definition Linkbase | ||
(101.LAB) | XBRL Taxonomy Extension Label Linkbase | ||
(101.PRE) | XBRL Taxonomy Extension Presentation Linkbase | ||
* | Exhibit incorporated herein by reference. |
** | Denotes a management or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 601 of Regulation S-K. |
113