(a) General Description of Business. Old Republic International Corporation is a Chicago based holding company engaged in the single business of insurance underwriting. It conducts its operations through a number of regulated insurance company subsidiaries organized into three major segments, namely, it’s General (property and liability insurance), Mortgage Guaranty, and Title Insurance Groups. 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 health 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 its subsidiaries’ long-term obligations to insurance beneficiaries. To achieve these objectives, adherence to certain basic 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;
Augmenting 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
Effectively managing 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 shareholders’ capital. Investment management aims for stability of income from interest and dividends, protection of capital, and sufficient 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 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 ap
propriate matching of assets and liabilities.
In light of the above factors, the Company’s 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 Republic’s view, such short reporting time frames do not comport well with the long-term nature of much of its business. Management 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 to ten year intervals. Such extended periods can encompass one or two economic and/or underwriting cycles, and can thereby provide appropriate time frames for such cycles to run their course and for reserved claim costs to be quantified with greater finality and effect.
Effective October 1, 2010, Old Republic acquired PMA Capital Corporation ("PMA"), an insurance holding company with interests in the commercial property and liability insurance field. The consideration transferred of $247.2 million included the issuance of 17,754,047 Old Republic common shares and the replacement value of PMA stock options. The financial statements and other data in this report include PMA's results of operations for the final quarter of 2010 and its assets and liabilities as of December 31, 2010.
The contributions to consolidated net revenues and income before taxes, and the assets and shareholders’ equity of each Old Republic segment are set forth in the following table. This information should be read in conjunction with the consolidated financial statements, the notes thereto, and the "Management Analysis of Financial Position and Results of Operations" appearing elsewhere in this report.
2
Financial Information Relating to Segments of Business (a)
Net Revenues (b)
($ in Millions)
Years Ended December 31:
2010
2009
2008
General
$
2,074.9
2,052.7
2,255.9
Mortgage Guaranty
588.4
746.1
690.0
Title
1,238.8
914.1
681.3
Corporate & Other – net (c)
145.8
138.1
132.1
Consolidated realized investment gains (losses)
109.1
6.3
(486.4)
Consolidation elimination adjustments
(54.5)
(53.8)
(35.3)
Consolidated
$
4,102.7
3,803.6
3,237.7
Income (Loss) Before Taxes
172.7
200.1
294.3
(260.8)
(594.3)
9.4
2.1
(46.3)
(2.8)
4.0
13.5
27.6
(273.6)
(819.2)
Assets
As of December 31:
12,189.8
9,920.8
9,482.9
2,537.9
3,233.4
2,973.1
915.0
852.8
762.4
576.7
503.5
509.5
(336.8)
(320.5)
(462.0)
15,882.7
14,190.0
13,266.0
Shareholders’ Equity
General (d)
2,846.8
2,548.2
2,258.7
Mortgage Guaranty (d)
441.1
581.7
828.0
Title (d)
300.6
288.6
260.0
578.6
516.9
433.7
Consolidated elimination adjustments
(45.8)
(44.1)
(40.2)
4,121.4
3,891.4
3,740.3
(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 net revenues and income or loss before income taxes of Old Republic's insurance industry segments.
(b)
Revenues consist of net premiums, fees, net investment and other income earned; realized investment gains (losses) are shown in total for all groups combined since the investment portfolio is managed as a whole.
(c)
Represents amounts for Old Republic’s holding company parent, minor corporate services subsidiaries, and a small life and health insurance operation.
(d)
Total capitalization allocated to each operating segment includes shareholders' equity as shown in this schedule plus intercompany financing arrangements for the following segments: General - $334.6, $334.0, and $207.5 as of December 31, 2010, 2009, and 2008, respectively; Mortgage - $150.0 as of December 31, 2010, 2009, and 2008; and Title - $150.4, $139.9, and $117.8 as of December 31, 2010, 2009, and 2008, respectively.