Old Republic Reports Fourth Quarter and Full Year 2010 Financial Results

CHICAGO, Jan. 27, 2011 /PRNewswire/ -- Old Republic International Corporation (NYSE: ORI), today reported the following results for the fourth quarter and full year 2010:

Old Republic's consolidated operating results, which exclude net realized investment gains or losses, produced a net operating loss in the quarter and year ended December 31, 2010. The losses for these periods, however, were much lower than those sustained in the same periods of 2009. Throughout 2010 general insurance operations remained solidly profitable, and title insurance earnings improved steadily as the year progressed. Old Republic's Mortgage Guaranty segment experienced relatively lower claim costs in each quarterly period of 2010, and its net operating loss for the year was approximately 46 percent less severe than the comparative amount in 2009.

Old Republic's acquisition of PMA Capital Corporation took effect on October 1, 2010. Accordingly, operating results, acquired assets, and assumed liabilities associated with PMA's business are included in Old Republic's financial statements for, and as of the end of the fourth quarter, 2010. The inclusion of PMA's overall accounts resulted in approximate increases in this period's consolidated operating revenues and pretax operating loss of $129 and $10, respectively, while consolidated year-end assets and shareholders' equity were enhanced by $2.3 billion and $231, respectively. PMA's pretax operating loss of $10 is stated after deduction of its interest costs, general corporate expenses, and merger-related costs aggregating $9.7.

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

The recognition of realized investment gains or losses can be highly discretionary and arbitrary due to such factors as the timing of individual securities sales, recognition of estimated losses from write-downs of impaired securities, tax-planning considerations, and changes in investment management judgments relative to the direction of securities markets or the future prospects of individual investees or industry sectors. Likewise, non-recurring items which may emerge from time to time can distort the comparability of the Company's results from period to period. Accordingly, management uses net operating income, a non-GAAP financial measure, to evaluate and better explain operating performance, and believes its use enhances an understanding of Old Republic's basic business results. Operating income, however, does not replace net income determined in accordance with GAAP as a measure of total profitability.

The preceding table shows both operating and net income or loss to highlight the effects of realized investment gain or loss recognition on period-to-period comparisons. Realized gains over the course of 2010 resulted mostly from second quarter sales of securities, some of which had been impaired in prior years. The composition of realized gains shown in the preceding table is summarized below:

General Insurance Results – Operating earnings for 2010's fourth quarter and full year were affected by lower underwriting performance when compared to the same periods of 2009. Key indicators of year-over-year performance are shown in the following table:

The inclusion of PMA's accounts beginning in 2010's fourth quarter resulted in an increase in the General Insurance Group's net premiums earned of approximately $104, net investment income of $3, and a decrease in pretax operating income of nearly $10. This last amount is stated after deduction of PMA's interest costs, general corporate expenses, and merger-related costs aggregating $9.7.

The continuation of a soft pricing environment and recessionary conditions have constrained general insurance 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.

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 have been driven by both higher loss 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 6.2 and 8.6 percentage points in the fourth quarter and all of 2010, respectively. By contrast CCI claim costs impacted the overall general insurance claim ratio by 7.9 and 7.3 percentage points for the fourth quarter and all of 2009, respectively. The general insurance expense ratio increased slightly in 2010's reporting periods as the earned premium base remained under pressure. Year-over-year net investment income was comparatively flat for the quarter and year-to-date periods.

Mortgage Guaranty Results – Operating performance for both the fourth quarter and full year 2010 improved when compared with 2009. Apart from the impact of captive commutations and pool terminations whose effects are summarized below, the year-over-year improvement was driven by lower claim costs and firm management of operating expenses. Key indicators of this segment's evolving performance are shown in the following tables:

During 2010 and 2009, 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 the related claim costs are expected to arise. While terminations of pool insurance contracts cause a reduction of incurred claims due to the positive effect of reserves released, greater cash outflows ensue. 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-wide penetration of the nation's current 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, lower premium volume, the afore-noted termination of insured mortgage pools, and a low yield environment for quality securities to which the investment portfolio is directed.

Fourth quarter and full year 2010 recurring claim costs were significantly lower in comparison with 2009. This outcome was mostly the result of downward trends in newly reported and outstanding traditional primary loan delinquencies, as well as a continuation of historically high, though gradually declining levels of claim rescissions and denials. By contrast, claim payments rose sharply during 2010 as foreclosure activity and 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. This 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 the second quarter of 2009. Fourth quarter 2010 operating results, however, were penalized by a charge of approximately $4.0 related to an insurance counterparty balance currently deemed uncollectible. Key performance indicators are shown in the following table:

Growth in 2010 premiums and fees benefited from market share gains emanating from title industry dislocations and consolidation. The inclusion of accounts from a Florida joint underwriting venture formed in mid-2009 also added to the year's revenue stream.

2010 claim ratios were relatively stable even though moderate additions to reserve levels continued to be made in consideration of evolving claim emergence trends. Production and general operating expenses reflected the greater costs associated with much higher premium and fee levels, the above-noted counterparty balance charge-off, and the inclusion of expenses contributed by the Florida venture.

A greater invested asset base generated moderate investment income growth in 2010 as a whole even though market yields have been lower for the high quality securities to which the investment portfolio is oriented.

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 slight gain for the fourth quarter and a loss for all of 2010. 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. 2010's corporate and other costs were accentuated by certain expenses covering executive transition and transaction outlays related to the PMA merger. 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 $282.2 for the year ended 2010. This compares to positive operating cash flow of $532.9 for 2009.

The consolidated investment portfolio reflects a current allocation of approximately 83 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. These are intended to assure solid funding of its insurance subsidiaries' long-term obligations to policyholders and other beneficiaries, and the long-term stability of capital accounts. The portfolio contains no significant 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.

Old Republic's equity investments include 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 the systemic dysfunctionality of the banking and mortgage-lending industries. As shown in the following table, the December 31, 2010 aggregate fair value of the two securities was still significantly below their original cost but approximately 122 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. EST (2:00 p.m. CST) today, to discuss its fourth quarter and full year 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 2143334, which will be available through February 3, 2011. The replay will also be available on Old Republic International's website through February 27, 2011.

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 $15.88 billion and shareholders' equity of $4.12 billion or $16.16 per share. Its current stock market valuation is approximately $3.3 billion, or $12.81 per share.

The nature of Old Republic's business requires that it be managed for the long run. For the 25 years ended in 2010, the Company's total market return, with dividends reinvested, has grown at a compounded annual rate of 9.4 percent per share. For the same period, the total market return, with dividends reinvested, for the S&P 500 Index has grown at a 9.9 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 11.4 percent per share, and the regular cash dividend has grown at a 10.2 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 U.S. 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