SECURITIES AND EXCHANGE COMMISSION OF THE SECURITIES EXCHANGE ACT OF 1934 FORM 10 - Q [X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period September 30, 2001 or [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 0-4625 OLD REPUBLIC INTERNATIONAL CORPORATION ---------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware No. 36-2678171 - ------------------------------- ---------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 307 North Michigan Avenue, Chicago, Illinois 60601 - ------------------------------------------------------------------------------- (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: 312-346-8100 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes _X_ No ____ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report. Shares Outstanding Class September 30, 2001 --------------------------- -------------------- Common Stock / $1 par value 118,935,654 There are 14 pages contained in this report.
2 OLD REPUBLIC INTERNATIONAL CORPORATION Report on Form 10-Q / September 30, 2001 INDEX - -------------------------------------------------------------------------------- PAGE NO. -------- PART I FINANCIAL INFORMATION: CONSOLIDATED SUMMARY BALANCE SHEETS 3 CONSOLIDATED SUMMARY STATEMENTS OF INCOME 4 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 5 CONSOLIDATED STATEMENTS OF CASH FLOWS 6 NOTES TO CONSOLIDATED SUMMARY FINANCIAL STATEMENTS 7 - 9 MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS 10 - 12 PART II OTHER INFORMATION 13 & 14
<TABLE> 3 OLD REPUBLIC INTERNATIONAL CORPORATION CONSOLIDATED SUMMARY BALANCE SHEETS (Unaudited) ($ in Millions) - ------------------------------------------------------------------------------------------------------------------------------------ September 30, December 31, 2001 2000 ---------------- ---------------- <s> <c> <c> Assets Investments: Held to maturity: Fixed maturity securities (at amortized cost) (fair value: $2,203.9 and $2,106.2) $2,114.8 $2,078.0 Other long-term investments (at cost) 60.6 55.2 ---------------- ---------------- Total 2,175.4 2,133.3 ---------------- ---------------- Available for sale: Fixed maturity securities (at fair value) (cost: $2,344.1 and $2,219.2) 2,434.3 2,232.2 Equity securities (at fair value) (cost: $293.3 and $238.7) 311.8 295.5 Short-term investments (at fair value which approximates cost) 444.0 378.0 ---------------- ---------------- Total 3,190.2 2,905.8 ---------------- ---------------- Total investments 5,365.7 5,039.1 ---------------- ---------------- Other Assets: Cash 66.5 33.0 Accrued investment income 71.9 72.0 Accounts and notes receivable 455.9 302.0 Reinsurance balances and funds held 57.6 71.0 Reinsurance recoverable: Paid losses 33.5 36.1 Policy and claim reserves 1,337.6 1,350.4 Deferred policy acquisition costs 177.4 148.1 Sundry assets 229.8 229.4 ---------------- ---------------- 2,430.5 2,242.2 ---------------- ---------------- Total Assets $7,796.2 $7,281.4 ================ ================ - ------------------------------------------------------------------------------------------------------------------------------------ Liabilities, Preferred Stock and Common Shareholders' Equity Liabilities: Future policy benefits $109.1 $120.6 Losses, claims and settlement expenses 3,384.7 3,389.5 Unearned premiums 606.0 397.5 Other policyholders' benefits and funds 51.1 45.7 ---------------- ---------------- Total policy liabilities and accruals 4,151.0 3,953.4 Commissions, expenses, fees and taxes 150.1 140.9 Reinsurance balances and funds 119.7 119.2 Federal income tax payable: Current 40.8 5.6 Deferred 351.2 289.8 Debt 220.6 238.0 Sundry liabilities 75.8 94.8 ---------------- ---------------- Total liabilities 5,109.6 4,842.0 ---------------- ---------------- Preferred Stock: Convertible preferred stock 0.3 0.7 ---------------- ---------------- Common Common stock 122.1 121.4 Shareholders' Additional paid-in capital 219.1 207.8 Equity: Retained earnings 2,312.1 2,106.4 Accumulated other comprehensive income 65.5 35.6 Treasury stock (at cost) (32.6) (32.6) ---------------- ---------------- Total Common Shareholders' Equity 2,686.3 2,438.7 ---------------- ---------------- Total Liabilities, Preferred Stock and Common Shareholders' Equity $7,796.2 $7,281.4 ================ ================ </TABLE> See accompanying notes.
4 <TABLE> OLD REPUBLIC INTERNATIONAL CORPORATION CONSOLIDATED SUMMARY STATEMENTS OF INCOME (Unaudited) ($ in Millions, Except Common Share Data) - ------------------------------------------------------------------------------------------------------------------------------------ Quarters Ended Nine Months Ended September 30, September 30, ---------------------------------- ---------------------------------- 2001 2000 2001 2000 ---------------- ---------------- ---------------- ---------------- <s> <c> <c> <c> <c> Revenues: Net premiums earned $463.1 $386.1 $1,305.1 $1,144.6 Title, escrow and other fees 61.3 49.9 178.1 139.1 ---------------- ---------------- ---------------- ---------------- Sub-total 524.4 436.0 1,483.2 1,283.7 Net investment income 68.0 68.0 205.1 203.0 Realized investment gains (losses) (2.4) 7.1 20.6 8.0 Other income 9.5 6.4 27.3 18.2 ---------------- ---------------- ---------------- ---------------- Net revenues 599.5 517.8 1,736.3 1,513.2 ---------------- ---------------- ---------------- ---------------- Expenses: Benefits, claims and settlement expenses 222.1 180.8 631.9 565.9 Underwriting, acquisition and insurance expenses 253.3 216.0 720.2 640.3 Interest and other expenses 4.4 5.2 14.6 15.5 ---------------- ---------------- ---------------- ---------------- Total expenses 479.9 402.1 1,366.8 1,221.8 ---------------- ---------------- ---------------- ---------------- Income before income taxes and items below 119.6 115.6 369.5 291.3 ---------------- ---------------- ---------------- ---------------- Income Taxes: Currently payable 27.8 24.6 69.9 47.4 Deferred 10.4 11.5 44.0 40.8 ---------------- ---------------- ---------------- ---------------- Total income taxes 38.2 36.1 113.9 88.2 ---------------- ---------------- ---------------- ---------------- 81.3 79.4 255.5 203.0 Other items - net 1.0 0.6 2.4 1.8 ---------------- ---------------- ---------------- ---------------- Net Income: $82.4 $80.0 $257.9 $204.8 ================ ================ ================ ================ Net Income Per Share: Basic $0.69 $0.68 $2.17 $1.72 ================ ================ =============== ================ Diluted $0.69 $0.67 $2.14 $1.71 ================ ================ =============== ================ Dividends Per Common Share: Cash dividends $0.15 $0.14 $0.44 $0.41 ================ ================ =============== ================ Average number of common and common equivalent shares outstanding: Basic 118,928,107 117,788,947 118,917,122 119,224,170 ================ ================ =============== ================ Diluted 120,260,624 119,262,876 120,336,152 120,004,117 ================ ================ =============== ================ </TABLE> See accompanying notes.
5 <table> OLD REPUBLIC INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) ($ in Millions) - ------------------------------------------------------------------------------------------------------------------------------------ Quarters Ended Nine Months Ended September 30, September 30, ------------------------------------ ------------------------------------ 2001 2000 2001 2000 ---------------- ----------------- ----------------- ----------------- <s> <c> <c> <c> <c> Net income as reported $82.4 $80.0 $257.9 $204.8 ---------------- ----------------- ----------------- ----------------- Other comprehensive income (loss): Foreign currency translation adjustment (1.7) (0.6) (1.9) (1.7) ---------------- ----------------- ----------------- ----------------- Unrealized gains (losses) on securities: Unrealized gains arising during period 40.1 53.7 69.6 54.3 Less: elimination of pre-tax realized gains (losses) included in income as reported (2.4) 7.1 20.6 8.0 ---------------- ----------------- ----------------- ----------------- Pre-tax unrealized gains on securities carried at market value 42.5 46.5 49.0 46.2 Deferred income taxes 14.9 16.4 17.1 16.4 ---------------- ----------------- ----------------- ----------------- Net unrealized gains on securities 27.6 30.1 31.8 29.8 ---------------- ----------------- ----------------- ----------------- Net adjustments 25.9 29.4 29.9 28.0 ---------------- ----------------- ----------------- ----------------- Comprehensive income $108.3 $109.5 $287.9 $232.9 ================ ================= ================= ================= </TABLE> See accompanying notes.
<table> 6 OLD REPUBLIC INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) ($ in Millions) - ------------------------------------------------------------------------------------------------------------------------------------ Nine Months Ended September 30, ------------------------------------ 2001 2000 ----------------- ----------------- <s> <c> <c> Cash flows from operating activities: Net income $257.9 $204.8 Adjustment to reconcile net income to net cash provided by operating activities: Deferred policy acquisition costs (29.8) 1.2 Premiums and other receivables (43.1) (21.4) Unpaid claims and related items 24.8 (37.8) Future policy benefits and policyholders' funds 70.1 12.3 Income taxes 79.7 53.2 Reinsurance balances and funds 18.8 (6.8) Accounts payable, accrued expenses and other 16.0 2.0 ----------------- ----------------- Total 394.6 207.6 ----------------- ----------------- Cash flows from investing activities: Sales of fixed maturity securities: Held to maturity: Maturities and early calls 212.4 204.0 Available for sale: Maturities and early calls 195.3 147.4 Other 39.7 87.0 Sales of equity securities 45.7 29.9 Sales of other investments 2.4 1.9 Sales of fixed assets for company use 1.3 0.8 Purchases of fixed maturity securities: Held to maturity (250.9) (19.6) Available for sale (364.9) (399.0) Purchases of equity securities (100.1) (110.6) Purchases of other investments (2.7) (14.7) Purchases of fixed assets for company use (10.0) (9.0) Other-net (3.6) (10.9) ----------------- ----------------- Total (235.5) (92.7) ----------------- ----------------- Cash flows from financing activities: Increase in term loans 30.0 52.0 Issuance of preferred and common stocks 8.7 7.7 Repayments of term loans (47.0) (30.0) Redemption of debentures and notes (0.9) (2.6) Dividends on common shares (52.2) (48.4) Dividends on preferred shares --- --- Purchase of treasury stock --- (66.4) Other-net 1.8 (0.9) ----------------- ----------------- Total (59.6) (88.7) ----------------- ----------------- Increase (decrease) in cash and short-term investments 99.4 26.1 Cash and short-term investments, beginning of period 411.0 294.1 ----------------- ----------------- Cash and short-term investments, end of period $510.5 $320.2 ================= ================= Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $8.2 $9.7 ================= ================= Income taxes $31.8 $35.7 ================= ================= </TABLE> See accompanying notes.
7 OLD REPUBLIC INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED SUMMARY FINANCIAL STATEMENTS (Unaudited) ($ in Millions, Except Share Data) - -------------------------------------------------------------------------------- 1. Accounting Policies and Basis of Presentation: The accompanying consolidated summary financial statements have been prepared in conformity with generally accepted accounting principles as described in the Corporation's latest annual report to shareholders or as disclosed herein. The financial accounting and reporting process relies on estimates and on the exercise of judgement, but in the opinion of management all adjustments, consisting of normal recurring accruals, necessary to a fair presentation of the accompanying statements have been reflected therein. Realized gains or losses on dispositions of investment securities have been reflected in the operating results for each period presented. 2. Common Share Data: Common share data has been retroactively adjusted to reflect all stock dividends and splits. The following table provides a reconciliation of the income before extraordinary items and number of shares used in basic and diluted earnings per share calculations. <table> Quarters Ended Nine Months Ended September 30, September 30, ---------------------------- ---------------------------- 2001 2000 2001 2000 ------------- ------------- ------------- ------------- <s> <c> <c> <c> <c> Numerator: Income before extraordinary item......................... $ 82.4 $ 80.0 $ 257.9 $ 204.8 Less Preferred stock dividends........................... -- -- -- -- Numerator for basic earnings per share - income available to common stockholders................ 82.4 80.0 257.9 204.7 Effect of dilutive securities: Convertible preferred stock dividends.................... -- -- -- -- ------------- ------------- ------------- ------------- Numerator for diluted earnings per share - income available to common stockholders after assumed conversions................................ $ 82.4 $ 80.0 $ 257.9 $ 204.8 ============= ============= ============= ============= Denominator: Denominator for basic earnings per share - weighted-average shares................................ 118,928,107 117,788,947 118,917,122 119,224,170 Effect of dilutive securities: Stock options............................................ 1,288,446 1,341,995 1,373,168 646,484 Convertible preferred stock.............................. 44,071 131,934 45,862 133,463 ------------- ------------- ------------- ------------- Dilutive potential common shares......................... 1,332,517 1,473,929 1,419,030 779,947 ------------- ------------- ------------- ------------- Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions...................................... 120,260,624 119,262,876 120,336,152 120,004,117 ============= ============= ============= ============= Basic earnings per share................................... $ 0.69 $ 0.68 $ 2.17 $ 1.72 ============= ============= ============= ============= Diluted earnings per share................................. $ 0.69 $ 0.67 $ 2.14 $ 1.71 ============= ============= ============= ============= </table> 3. Unrealized Appreciation of Investments: Cumulative net unrealized gains on fixed maturity securities available for sale and equity securities credited to a separate account in common shareholders' equity amounted to $77.1 at September 30, 2001. Unrealized appreciation of investments, before applicable deferred income taxes of $41.6, at September 30, 2001 included gross unrealized gains and (losses) of $173.6 and ($54.8), respectively. For the nine months ended September 30, 2001 and 2000, net unrealized appreciation of investments, net of deferred income taxes, amounted to $31.8 and $29.8, respectively.
8 4. Information About Segments of Business The Corporation's business segments are organized as the General Insurance property and liability insurance), Mortgage Guaranty, Title Insurance and Life Insurance Groups. The contributions of Old Republic's insurance industry segments to consolidated revenues and operating results, and certain balance sheet data pertaining thereto are shown in the following tables on the basis of generally accepted accounting principles ("GAAP"). Each of the Corporation's segments underwrites and services only those insurance coverages which may be written by it pursuant to state insurance regulations and corporate charter provisions. <table> Segment Reporting -------------------------------------------------------------------------------------------------------------------------------- Quarters Ended Nine Months Ended September 30, September 30, ---------------------------- ---------------------------- 2001 2000 2001 2000 ------------- ------------- ------------- ------------- <s> <c> <c> <c> <c> General Insurance Group: Net premiums earned.................................... $ 257.7 $ 211.3 $ 734.2 $ 632.1 Net investment income and other income (a)............. 48.0 49.2 146.7 148.1 ------------- ------------- ------------- ------------- Total............................................. $ 305.8 $ 260.5 $ 880.9 $ 780.2 ============= ============= ============= ============= Income before taxes.................................... $ 36.1 $ 29.7 $ 107.7 $ 80.3 ============= ============= ============= ============= Income tax expense..................................... $ 9.0 $ 7.0 $ 26.7 $ 17.8 ============= ============= ============= ============= Mortgage Guaranty Group: Net premiums earned.................................... $ 86.9 $ 82.9 $ 262.0 $ 245.1 Net investment income and other income (a)............. 20.9 16.0 60.1 45.4 ------------- ------------- ------------- ------------- Total............................................. $ 107.9 $ 98.9 $ 322.1 $ 290.5 ============= ============= ============= ============= Income before taxes.................................... $ 65.9 $ 65.6 $ 193.1 $ 176.5 ============= ============= ============= ============= Income tax expense..................................... $ 22.2 $ 22.2 $ 65.3 $ 59.4 ============= ============= ============= ============= Title Insurance Group: Net premiums earned.................................... $ 105.1 $ 79.6 $ 270.4 $ 226.4 Title, escrow and other fees ......................... 61.3 49.9 178.1 139.1 ------------- ------------- ------------- ------------- Subtotal.......................................... 166.5 129.6 448.6 365.6 Net investment income and other income (a)............. 5.9 6.1 17.7 18.4 ------------- ------------- ------------- ------------- Total............................................. $ 172.4 $ 135.7 $ 466.3 $ 384.1 ============= ============= ============== ============= Income before taxes.................................... $ 21.3 $ 13.9 $ 52.8 $ 30.4 ============= ============= ============== ============= Income tax expense..................................... $ 7.4 $ 4.7 $ 18.2 $ 10.1 ============= ============= ============== ============= Life Insurance Group: Net premiums earned.................................... $ 13.2 $ 12.1 $ 38.4 $ 40.8 Net investment income and other income (a)............. 1.9 2.1 5.9 6.4 ------------- ------------- ------------- ------------- Total............................................. $ 15.1 $ 14.2 $ 44.4 $ 47.3 ============= ============= ============= ============= Income before taxes.................................... $ 1.2 $ 1.5 $ 4.0 $ 3.7 ============= ============= ============= ============= Income tax expense..................................... $ 0.4 $ 0.5 $ 1.4 $ 0.7 ============= ============= ============= ============= </table>
9 <table> Reconciliations of Segments to Consolidated ----------------------------------------------------------------------------------------------------------------------------- Quarters Ended Nine Months Ended September 30, September 30, ----------------------------- ----------------------------- 2001 2000 2001 2000 ------------- ------------- ------------- ------------- <s> <c> <c> <c> <c> Revenues: Total revenues for reportable segments................. $ 601.4 $ 509.6 $ 1,713.7 $ 1,502.2 Net realized investment gains (losses) ................ (2.4) 7.1 20.6 8.0 Other revenues......................................... 2.7 4.3 10.0 13.7 Elimination of intersegment revenues (b)............... (2.1) (3.3) (8.0) (10.8) ------------- ------------- ------------- ------------- Total consolidated revenues....................... $ 599.5 $ 517.8 $ 1,736.3 $ 1,513.2 ============= ============= ============= ============= Income before taxes: Total income before taxes of reportable segments....... $ 124.6 $ 110.9 $ 357.7 $ 291.0 Net realized investment gains (losses) ................ (2.4) 7.1 20.6 8.0 Other revenues - net................................... (2.5) (2.4) (8.8) (7.8) ------------- ------------- ------------- ------------- Income before income taxes and extraordinary items............................... $ 119.6 $ 115.6 $ 369.5 $ 291.3 ============= ============= ============= ============= </table> -------- 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) Including unallocated investment income derived from invested capital and surplus funds. /(b) Represents results of holding company parent, consolidation eliminating adjustments, and general corporate expenses, as applicable. 5. Legal Proceedings Legal proceedings against the Company arise in the normal course of business and generally pertain to claim matters related to insurance policies and contracts issued by the Corporation's insurance subsidiaries. The Federal Department of Labor has revised the Federal Black Lung Program regulations effective January 19, 2001. These new regulations, which might require a re-evaluation of previously settled or denied workers' compensation claims, are being challenged in court by the insurance and coal mining industries. At this time, the outcome of this challenge is uncertain and the potential impact on gross and net of reinsurance reserves or retrospective rating policies due to the revised regulations is not measurable. In December 1999, a class action lawsuit was filed against one of the Company's mortgage guaranty insurance subsidiaries in the Federal District Court for the Southern District of Georgia. The suit alleges that the subsidiary provided pool insurance and other services to mortgage lenders at preferential, below market prices in return for mortgage insurance business, and that such practices violated the Real Estate Settlement Procedures Act. The Court ruled in favor of a summary judgement motion filed by the Company's subsidiary and dismissed the law suit. The class plaintiffs have appealed and the appeal is currently before the U.S. Court of Appeals for the Eleventh Circuit. The ultimate outcome of this litigation is unknown at the present time. Accordingly, no provision for any liability, including the additional cost of defense, has been included in the Company's financial statements. The City and County of San Francisco and certain escrow customers of an underwritten title agency subsidiary headquartered in the State of California have filed law suits alleging that the subsidiary: 1) failed to escheat unclaimed escrow funds; 2) charged for services not necessarily provided; and 3) collected illegal interest payments or fees from banks on the basis of funds held for escrow customers. The subsidiary has in turn conducted an internal review of its records and concluded that it had certain liabilities for part of the issues denoted at (1) and (2). Management believes that the alleged practices denoted at (3) are common within the industry, are not in conflict with various laws and regulations, and that it has meritorious defenses which will ultimately lead to a successful resolution of these practices. Through September 30, 2001, as the litigation has progressed on several fronts and additional information has come to its attention, the subsidiary has continually re-evaluated its exposures and it has paid or otherwise provided cumulatively $45.3 million since mid-1998 as its best estimate of litigation and related costs associated with all these issues.
10 OLD REPUBLIC INTERNATIONAL CORPORATION MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS Nine Months Ended September 30, 2001 and 2000 - -------------------------------------------------------------------------------- OVERVIEW This analysis pertains to the consolidated accounts of Old Republic International Corporation. The Company conducts its business through four major segments, namely its General (property and liability coverages), Mortgage Guaranty, Title, and Life insurance groups. FINANCIAL POSITION Old Republic's financial position at September 30, 2001, reflected increases in assets, liabilities and common shareholders' equity when compared to the immediately preceding year-end of 7.1%, 5.5% and 10.2%, respectively. Cash and invested assets represented 70.6% of consolidated assets as of both September 30, 2001 and December 31, 2000. Consolidated operating cash flow, including the temporary benefit of $34.7 million resulting from a recent modification in the federal income tax payment schedule, was positive at $394.6 million in the latest nine month period, compared to $207.6 million in the same period of 2000. Relatively high short-term maturity investment positions continued to be maintained as of September 30, 2001, to provide necessary liquidity for specific operating needs and to enhance flexibility in investment strategy. Changes in short-term investments reflect a large variety of seasonal and intermediate-term factors including expected operating cash flows and investment strategy. 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. During the first nine months of 2001, the Corporation committed substantially all investable funds in short to intermediate-term fixed maturity securities and equity securities. Old Republic continues to adhere to its long-term policy of investing primarily in investment grade, marketable securities; investable funds have not been directed to so-called "junk bonds" or types of securities categorized as derivatives. During the first nine months of 2001, Old Republic's investment in equity securities increased slightly in relation to the related invested balance at year-end 2000. At September 30, 2001, the carrying value of bond and note investments in default as to principal and/or interest was immaterial in relation to consolidated assets or shareholders' equity. The parent holding company has met its liquidity and capital needs principally through dividends 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. Old Republic's capitalization of $2.90 billion at September 30, 2001, consisted of debt of $220.6 million, convertible preferred stock of $0.3 million, and common shareholders' equity of $2.68 billion. The increase in the common shareholders' equity account during the nine months ended September 30, 2001, reflects primarily the retention of earnings in excess of dividend requirements and an increase in the value of bonds and stocks carried at market value. RESULTS OF OPERATIONS Revenues: Consolidated net premiums and fees earned for the third quarter of 2001 amounted to $524.4 million versus $436.0 million in the year ago period. For the third quarter of 2001, the Company's General Insurance Group reported earned premium volume of $257.7 million, up 21.9% from $211.3 million a year ago. The Company believes that this positive trend reflects the pricing and risk selection improvements it has been effecting for the past two years or so. Premiums for the Mortgage Guaranty Group increased by 4.9% to $86.9 million from $82.9 million in the year-ago quarter. Title Group premium and fee revenues increased 28.5% to $166.5 million in the third quarter of 2001 when compared to the same quarter of 2000 as a result of greater refinancing activity and a relatively strong housing market. Life Group premium volume increased to $13.2 million, up 8.9% when compared to the same quarter of 2000. Consolidated net premiums and fees earned in the first nine months of 2001 amounted to $1.48 billion, a 15.5% increase from the amount reported for the same 2000 period. The General Insurance Group's net premiums earned increased 16.2% to $734.2 million in the first nine months of 2001. The Mortgage Guaranty Group continued to experience volume growth and reported net premiums earned of $262.0 million, an increase of 6.9%. The Title Insurance Group reported premiums and fees in the first nine months of 2001 of $448.6 million, up from $365.6 million in the year-ago period. Life Insurance Group premiums declined 6.0% to $38.4 million during the same 2001 period. The above-cited factors for the third quarter of 2001 had similar effects on premium and fee revenue trends for the first nine months of 2001.
11 Consolidated net investment income was $205.1 million in the first nine months of 2001 and $68.0 million in the third quarter of 2001 compared to $203.0 million and $68.0 million, respectively, in the same quarter and nine month period of 2000. The average annualized yield on investments was approximately 5.2% and 5.6% at the end of September 30, 2001 and 2000, respectively. Yield trends reflect at once the relatively short maturity of Old Republic's fixed maturity securities portfolio, declining interest rates during most of the first nine months of 2001, and an increase in equity investments. Realized investment gains or losses, a largely discretionary source of revenues and income affected by market timing and periodic changes in investment values, registered a pre-tax realized loss of $2.4 million in this year's third quarter versus a pre-tax realized gain of $7.1 million in the same quarter of 2000. Year-to-date, however, realized investment gains were nearly 2.5 times greater at $20.6 million pre-tax when compared to a pre-tax gain of $8.0 million posted in the nine months ended September 30, 2000. Substantially all net realized gains or losses emanate from the disposition of equity securities. Dispositions of fixed maturity securities arise mostly from scheduled maturities and early calls; for the first nine months of 2001 and 2000, 91.1% and 80.2%, respectively, of all such dispositions resulted from these factors. Expenses: Consolidated benefit, claim and settlement costs, as a percentage of net premiums and fees earned, were approximately 43% and 44% in the first nine months of 2001and 2000, respectively. For the third quarter of each year, these ratios were approximately 42% in 2001 and 41% in 2000. For both the third quarter and year-to-date periods of the current year, the General Insurance claims ratio was affected positively by the previously noted increase in premiums earned. The Mortgage Guaranty claims ratio was higher during the third quarter and first nine months of 2001 largely due to moderately higher loan default rates. Title claims costs were up slightly in 2001, while Life Group claim costs rose during the same periods by virtue of higher life and disability claims provisions. The ratio of consolidated underwriting, acquisition and insurance expenses to net premiums and fees earned was approximately 49% and 50% in the first nine months of 2001 and 2000, respectively. These ratios were approximately 48% and 50% for the third quarter of 2001 and 2000, respectively. Variations in these ratios reflect a continually changing mix of coverages sold and attendant costs of producing business. The property and liability segment's expense ratio declined due to a greater increase in premium revenues than operating expenses for the quarter and nine months ended September 30, 2001 when compared to the same periods in 2000. The Mortgage Guaranty segment's expense ratio declined moderately for this year's most recent quarterly and year to date periods as premium and fee revenues grew by larger dollar amounts. The insurance expense ratio for the title segment was lower in the third quarter and first nine months of 2001 compared to the same period in 2000 due mostly to the increase in premium and fees volume without a proportional increase in expenses. Consolidated interest and other charges decreased slightly in the third quarter and first nine months of 2001 principally due to lower interest costs on a decreased debt level. The Company's mix of coverages, industries served, and long-standing objective of assuring wide dispersion of risks in selected geographical areas, have likely minimized claim exposures related to the September 11, 2001 terrorist attack on America. The income statements for the quarter and nine months ended September 30, 2001 nonetheless include precautionary charges aggregating $4.0 million to cover the possibility of isolated property, workers' compensation, trip delay, and life insurance claims. Of this total, pre-tax claim provisions of $3.0 million and $1.0 million have been charged to the General and Life insurance segments, respectively. The resulting aggregate post tax charge of $2.6 million reduced consolidated net income 2 cents per share for the third quarter and first nine months of 2001. Pre-Tax and Net Income: Consolidated income before taxes increased by 3.5% in the third quarter and 26.8% in the first nine months of 2001 when compared to the same periods one year ago. The continuation of more positive trends in General Insurance underwriting performance, further growth of Mortgage Guaranty income from underwriting and investments, and accelerated growth in premiums and fees from greater refinancing activity which benefitted the Title Insurance Group in particular, led to greater contributions to pre-tax operating earnings in both the third quarter and year-to-date periods. The effective consolidated income tax rate was 32.0% and 30.8% in the third quarter and nine month period of 2001, respectively, and 31.3% and 30.3% for the third quarter and nine month period of 2000, respectively. The consolidated income tax rate was enhanced by previously unrecognized tax settlement recoveries of $2.9 million recorded in the second quarter of 2001. The rates for each period reflect primarily the varying proportions of pre-tax operating income derived from tax-sheltered investment income (principally tax-exempt interest) on the one hand, and fully taxable investment and underwriting/service income on the other hand.
12 OTHER INFORMATION Reference is here made to "Financial Information Relating to Segments of Business" appearing elsewhere herein. Historical data pertaining to the operating performance, liquidity, and other financial matters 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 claims can have a bearing on period-to-period comparisons and future operating results. Any forward-looking commentary or inferences contained in this report involve, of necessity, 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, as well as periodic changes in claim frequency and severity patterns caused by natural disasters, weather conditions, accidents, illnesses, work-related injuries, and unanticipated external events. Mortgage Guaranty and Title insurance results can be affected by such factors as changes in national and regional housing demand and values, the availability and cost of mortgage loans, employment trends, and default rates on mortgage loans; mortgage guaranty results may also be affected by various risk-sharing arrangements with business producers as well as the risk management and pricing policies of government sponsored enterprises. Life and disability insurance results can be impacted by the levels of employment and consumer spending, as well as mortality and health trends. At the holding company level, operating earnings or losses are generally affected by the amount of debt outstanding and its cost, as well as interest income on temporary holdings of short-term investments. Any forward-looking commentaries speak only as of their dates. Old Republic undertakes no obligation to publicly update or revise such comments, whether as a result of new information, future events or otherwise, and accordingly they may not be unduly relied upon.
13 OLD REPUBLIC INTERNATIONAL CORPORATION FORM 10 - Q PART II - OTHER INFORMATION - -------------------------------------------------------------------------------- Item 6 - Reports on Form 8-K (a) Reports on Form 8-K 1. The registrant has not filed any reports on Form 8-K during the quarter for which this report is filed. Items other than those listed are omitted because they are not required.
14 SIGNATURE Pursuant to the requirements 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. Old Republic International Corporation -------------------------------------- (Registrant) Date: November 9, 2001 --------------------- /s/ John S. Adams ------------------------------- John S. Adams Senior Vice President & Chief Financial Officer