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.
Commercial automobile, general liability and workers' compensation insurance
policy coverages are typically produced in tandem for many assureds. For 2015,
production of workers' compensation direct insurance premiums accounted for
approximately 36.4% of consolidated General Insurance Group direct premiums
written, while commercial automobile and general liability direct premium production
amounted to approximately 28.3% and 11.3%, respectively, of such consolidated
totals.
Approximately 91% of general insurance premiums are produced through independent
agency or brokerage channels, while the remaining 9% 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, 2015, approximately 27% 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 and service subsidiaries
of the Company), while the remaining 73% 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.
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 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.
As reported in earlier periods, the Company's flagship mortgage guaranty insurance
carrier, Republic Mortgage Insurance Company ("RMIC"), had been operating
pursuant to a waiver of minimum state regulatory capital requirements since
late 2009. This waiver expired on August 31, 2011 and, as a consequence, RMIC
and its sister company Republic Insurance Company of North Carolina ("RMICNC"),
discontinued writing new business in all states and limited themselves to servicing
the run-off of their existing business. They were placed under the North Carolina
Department of Insurance's ("NCDOI") administrative supervision the
following year and ultimately ordered to defer the payment of 40% of all settled
claims as a deferred payment obligation ("DPO").
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, in the aggregate, be positive over the extended ten year run-off period
assumed to end on or about December 31, 2022.