Old Republic Reports Third Quarter 2010 Financial Results

CHICAGO, Oct. 28 /PRNewswire-FirstCall/ -- Old Republic International Corporation (NYSE: ORI), today reported the following results for the third quarter and first nine months of 2010:

Consolidated operating results, which exclude net realized investment gains or losses, drifted into negative territory in this year's third quarter and first nine months. These results came on the heels of positive earnings posted in the first two quarters of 2010. By comparison, performance for the latest quarterly period was affected most negatively by higher claim costs in the Company's General Insurance and Mortgage Guaranty segments. Old Republic's Title Insurance business was profitable in this year's third quarter and year-to-date periods. These mixed segmented results not withstanding, 2010 year-to-date consolidated performance was much improved in comparison with that of 2009.

Consolidated Results – The major components of Old Republic's consolidated results and other data for the periods reported upon are shown below:

General Insurance Results – Operating earnings for the year's third quarter and first nine months were affected by lower underwriting performance when compared to the same periods of 2009. Key indicators of this outcome are shown in the following table.

The continuation of a soft pricing environment and recessionary conditions have constrained premium growth during the past several years. Lessened economic activity affects such factors as sales and employment levels, both of which are important elements upon which Old Republic's insurance premiums are based. While the General Insurance Group's year-over-year invested asset base has grown by approximately 2.5 percent, net investment income decreased negligibly in this year's latest quarter and increased slightly for it's 2010 year-to-date period. To a large extent this resulted from the low yield environment for quality securities to which investments are directed.

As the above table shows, overall claim ratios rose during the third quarter and first nine months of 2010. Most general insurance coverages reflected relatively stable underwriting performance except for consumer credit indemnity ("CCI"). The CCI coverage continued to produce significantly adverse claim experience even though consumer loan delinquency rates have subsided fairly steadily since mid-year 2009. The greater CCI claim costs were driven both by higher payment trends and by increased levels of claim verification and resolution activity. As a consequence, the overall general insurance claim ratio was affected adversely by 13.8 and 9.6 percentage points in this year's third quarter and first nine months, respectively. These effects incorporate 2.9 and 1.0 percentage points, respectively, from additional claim costs pertaining to a non-recurring contract termination in this year's third quarter. CCI claim costs impacted equally the overall general insurance claim ratio by 7.2 percentage points for the third quarter and first nine months of 2009.

Expense-wise, the ratio increased slightly in 2010's reporting periods as a small reduction in total operating expenses lagged a larger decline in the earned premium base.

Mortgage Guaranty Results – Third quarter operating results deteriorated moderately in 2010, whereas comparative performance for this year's first nine months reflected substantial improvement. In both instances, year-over-year comparisons were affected mostly by varying claim payment trends and reserve provisions as well as the captive and pool transactions discussed below. Key indicators of this segment's changing performance are shown in the following tables:

During each of the periods reported upon, Old Republic's mortgage guaranty subsidiaries negotiated the terminations of various captive reinsurance and pool insurance contracts. From a financial accounting standpoint premiums obtained upon terminations of captive reinsurance agreements are recognized as income when they are received rather than being deferred to future periods when related claim costs are expected to arise. Terminations of pool insurance contracts cause a reduction in incurred claims due to the positive effect of reserves released, but greater cash outflows occur. Taken together, these terminations had the following effects on key elements of reported results and operating cash flows.

Apart from the incremental premium income generated by captive reinsurance terminations, mortgage guaranty group earned premiums continued to decline during 2010. The reduction stemmed from lower volumes of new insurance, higher premium refunds related to claim rescissions, and the above noted termination of pool insurance contracts. Moreover, new business volume reflected continued weakness from the downturn in overall mortgage originations, lower industry penetration of the mortgage market, and the continuing effects of more selective underwriting guidelines in place since late 2007.

Year-to-date net investment income declined as the result of a lower invested asset base brought about by higher claim disbursements, the afore-noted termination of insured mortgage pools, and a low yield environment for quality investment securities.

Third quarter and year-to-date recurring claim costs for 2010 were significantly lower in comparison to the same periods of 2009. This outcome was largely the consequence of downward trends in newly reported and outstanding traditional primary loan delinquencies, as well as the continuation of historically high, though gradually declining levels of claim rescissions and denials. By contrast, claim payments rose sharply during these periods as previously pending documentation required to resolve claim filings progressed at a faster pace. The following table shows the major components of incurred claim ratios including the above noted effects of captive reinsurance and pool insurance contract terminations.

Production and operating expense ratios for all periods reported upon reflect moderate benefits from expense management. Their positive effect, however, was largely negated by continued declines in net premiums earned.

Title Insurance Results – Old Republic's title business continued to reflect the more positive operating momentum that first emerged in last year's second quarter. Key performance indicators are shown in the following table.

Growth in 2010 premiums and fees benefited from market share gains emanating from industry dislocations and consolidation. Inclusion of accounts from a Florida joint underwriting venture formed in mid-2009 also added to this year's revenue stream. A greater invested asset base generated moderate investment income growth even though market yields remain at relatively low levels for high quality investments.

2010 year-to-date claim costs were somewhat higher as the Company continued to add moderately to reserve levels in consideration of recent claim emergence trends. Production and general operating expenses reflected the greater costs associated with much higher premium and fee levels, including those contributed by the Florida venture.

Corporate and Other Operations – The Company's small life and health business and the net costs associated with the parent holding company and its internal services subsidiaries produced a loss in this year's third quarter and first nine months. Period-to-period variations in the results posted by these relatively minor elements of Old Republic's operations usually stem from volatility inherent to the small scale of its life and health business, fluctuations in the costs of external debt, and net interest costs on intra-system financing arrangements. Volatility was particularly accentuated in this year's first nine months due to much higher net life insurance death claim provisions, and by certain operating expenses covering executive transition and the PMA merger transaction costs at the holding company level. A summary of corporate and other operations' results follows:

Cash, Invested Assets, and Shareholders' Equity – The following table reflects Old Republic's consolidated cash and invested assets as well as shareholders' equity accounts at the dates shown:

Consolidated cash flow from operating activities produced a deficit of $172.9 million for the first nine months of 2010. This compares to positive operating cash flow of $438.0 million for the same period of 2009. This year's significant reduction was mostly due to the negative cash flow impact of varying claim payment trends and the above noted mortgage guaranty pool terminations.

The consolidated investment portfolio reflects a current allocation of approximately 84 percent to fixed-maturity securities and 6 percent to equities. As has been the case for many years, Old Republic's invested assets are managed in consideration of enterprise-wide risk management objectives intended to assure solid funding of its insurance subsidiaries' long-term obligations to policyholders and other beneficiaries, and of their long-term effect on the stability of capital accounts. The portfolio contains little or no direct insurance risk-correlated asset exposures to real estate, mortgage-backed securities, collateralized debt obligations ("CDO's"), derivatives, junk bonds, hybrid securities, or illiquid private equity investments. In a similar vein, 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.

Total equity investments include Old Republic's common stock holdings in two leading publicly held mortgage guaranty ("MI") businesses (MGIC Investment Corp. and The PMI Group). These stocks were acquired in 2007 and 2008 as passive long-term investment additions for a core segment of Old Republic's business in anticipation of a cyclical recovery of the MI industry in 2010. In management's judgment, the past three years' depressed market valuations of companies operating in the housing and mortgage-lending sectors of the American economy have been impacted significantly by cyclical and macroeconomic conditions affecting these sectors, and by systemic dysfunctionality of the banking and mortgage-lending industries. As shown in the following table, the September 30, 2010 aggregate fair value of the two securities was still significantly below their original cost but approximately 109 percent above the other-than-temporarily-impaired level to which they were written down in 2008.

Substantially all changes in the shareholders' equity account reflect the Company's net income or loss, dividend payments to shareholders, and impairments or changes in market valuations of invested assets during the periods shown below:

Conference Call Information

Old Republic has scheduled a conference call at 3:00 p.m. EDT (2:00 p.m. CDT) today, to discuss its third quarter 2010 performance and to review major operating trends and business developments. To access this call, please log on to the Company's website at www.oldrepublic.com 15 minutes before the call to download the necessary software.

Investors may access a replay of the call by dialing 877-870-5176, passcode 2042769, which will be available through November 4, 2010. The replay will also be available on Old Republic International's website through November 28, 2010.

Financial Supplement

A financial supplement to this news release is available on the Company's website.

About Old Republic

Chicago-based Old Republic International Corporation is an insurance holding company whose subsidiaries market, underwrite and provide risk management services for a wide variety of coverages primarily in the property & liability, mortgage guaranty, and title insurance fields. One of the nation's 50 largest publicly owned insurance organizations, Old Republic has assets of approximately $13.99 billion and shareholders' equity of $4.03 billion or $17.05 per share. Its current stock market valuation is approximately $3.6 billion, or $13.87 per share.

The nature of Old Republic's business requires that it be managed for the long run. For the 25 years ended in 2009, the Company's total market return, with dividends reinvested, has grown at a compounded annual rate of 9.7 percent per share. For the same period, the total market return, with dividends reinvested, for the S&P 500 Index has grown at a 10.5 percent annual compound rate. During those years, Old Republic's shareholders' equity account, inclusive of cash dividends, has risen at an average annual rate of 11.6 percent per share, and the regular cash dividend has grown at a 10.3 percent annual compound rate. According to the most recent edition of Mergent's Dividend Achievers, Old Republic is one of just 96 companies, out of 10,000-plus publicly held corporations, that have posted at least 25 consecutive years of annual dividend growth.

Accompanying Financial Data:

• Summary Financial Statements and Common Stock Statistics
• Segmented Operating Summary
• Safe Harbor Statement

Safe Harbor Statement

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. Mortgage Guaranty and Title Insurance 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. Mortgage Guaranty results, in particular, 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 health 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.

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 the Company's 2009 Form 10-K 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.

SOURCE Old Republic International Corporation