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, its 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 Companys 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 or be incurred, 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 insurance
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 Republics basic underwriting and related
services functions, significant investment income is earned from invested funds
generated by those functions and from shareholders capital. 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 objectives. The investment philosophy is therefore
best characterized as emphasizing value, credit quality, and relatively long-term
holding periods. The Companys 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 equity securities with necessary
market liquidity.
In light of the above factors, the Companys affairs are necessarily 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 Republics view, such short reporting time frames do not comport well
with the long-term nature of much of its business. Management believes that
the Companys 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 underw
Old Republics 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.
Old Republics flagship title insurance company was founded in 1907. The Title
Insurance Groups 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.
Old Republics 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 homes purchase price. The mortgage
guaranty operation insures only first mortgage loans, primarily on residential
properties incorporating one-to-four family dwelling units. Old Republics mortgage
guaranty business was started in 1973.
The Companys 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 Companys 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 Companys
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 managements 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.
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