e424b3
Filed Pursuant to Rule 424(b)(3)
Registration
No. 333-168130
Dear Fellow Shareholder:
You are cordially invited to attend a special meeting of the
shareholders of PMA Capital Corporation (PMA) to be
held on Tuesday, September 21, 2010, at 10:00 a.m.,
local time, at Philadelphia Marriott West, 111 Crawford Avenue,
West Conshohocken, Pennsylvania.
At the special meeting, you will be asked to approve the
Agreement and Plan of Merger, dated as of June 9, 2010 (the
merger agreement), by and among Old Republic
International Corporation (Old Republic), OR New
Corp., a wholly owned subsidiary of Old Republic (Merger
Sub), and PMA, pursuant to which Merger Sub will be merged
with and into PMA and PMA will continue as the surviving entity
and as a wholly owned subsidiary of Old Republic.
In the merger, each of your shares of PMA class A common
stock will be converted into the right to receive
0.55 shares of Old Republic common stock (the
exchange ratio), provided that the volume weighted
average price per share of Old Republic common stock on the
NYSE, as reported by Bloomberg LP, for the twenty consecutive
trading days ending on and including the fifth trading day prior
to, but not including, the effective date of the merger, is at
least $12.50 but not greater than $17.00 (the Old Republic
measurement price). If the Old Republic measurement price
is less than $12.50, the exchange ratio will be determined by
dividing $6.875 by the Old Republic measurement price, subject
to a maximum exchange ratio of 0.60 shares. If the Old
Republic measurement price is greater than $17.00, the exchange
ratio will be determined by dividing $9.350 by the Old Republic
measurement price, subject to a minimum exchange ratio of
0.50 shares.
This proxy statement/prospectus provides a detailed description
of the merger agreement and the proposed merger. In addition, it
contains important information regarding the special meeting.
We urge you to read this proxy statement/prospectus (and any
documents incorporated into this proxy statement/prospectus by
reference) carefully. Please pay particular attention to the
section titled Risk Factors beginning on
page 11.
The Board of Directors of PMA recommends that you vote
FOR the proposal to adopt the merger agreement.
The merger cannot be completed unless it is adopted by the
affirmative vote of a majority of the votes cast by all
shareholders entitled to vote on the merger, assuming a quorum
is present.
Your vote is very important. If you are a registered
shareholder, please vote your shares as soon as possible using
one of the following methods to ensure that your vote is
counted, regardless of whether you expect to attend the special
meeting in person: (1) call the toll-free number specified
on the enclosed proxy card and follow the instructions when
prompted, (2) access the Internet website specified on the
enclosed proxy card and follow the instructions provided to you,
or (3) complete, sign, date and return the enclosed proxy
card in the postage-paid envelope provided. If you hold your
shares in street name through a bank, broker or
other nominee, you will need to follow the instructions provided
to you by your bank, broker or other nominee to ensure that your
shares are represented and voted at the special meeting.
If you have any questions about the proposed merger or about how
to vote your shares, please call MacKenzie Partners, Inc., the
firm assisting PMA in its solicitation of proxies, toll-free at
(800)322-2885, or call PMA Investor Relations at
(610) 397-5298.
We look forward to the successful completion of the merger.
Sincerely,
Neal C. Schneider
Chairman of the Board
PMA Capital Corporation
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of the
securities to be issued under this proxy statement/prospectus or
determined if this proxy statement/prospectus is accurate or
complete. Any representation to the contrary is a criminal
offense.
This proxy statement/prospectus is dated August 4, 2010,
and is first being mailed to the shareholders of PMA on or about
August 6, 2010.
ADDITIONAL
INFORMATION
This proxy statement/prospectus incorporates important business
and financial information about PMA from other documents that
are not included in or delivered with this proxy
statement/prospectus. In addition, this proxy
statement/prospectus refers to certain additional information
about Old Republic that is not included in or delivered with
this proxy statement/prospectus. This information is available
for you to review at the public reference room of the Securities
and Exchange Commission (the SEC) located at
100 F Street, N.E., Washington, D.C. 20549, and
through the SECs website at www.sec.gov. You can also
obtain the documents incorporated by reference into and referred
to in this proxy statement/prospectus free of charge by
requesting them in writing or by telephone from the appropriate
company at the following addresses and telephone numbers:
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Old Republic
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PMA
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Old Republic International Corporation
307 North Michigan Avenue
Chicago, Illinois 60601
Attention: Investor Relations
Telephone:
(312) 346-8100
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PMA Capital Corporation
380 Sentry Parkway
Blue Bell, Pennsylvania 19422
Attention: Investor Relations
Telephone: (610) 397-5298
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If you would like to request any documents, please do so by
September 13, 2010 in order to receive them before the
special meeting.
For more information, please see the section titled Where
You Can Find More Information beginning on page 187.
ABOUT
THIS DOCUMENT
This document, which forms part of a registration statement on
Form S-4
filed with the SEC by Old Republic (File
No. 333-168130),
constitutes a prospectus of Old Republic under Section 5 of
the Securities Act of 1933, as amended (the Securities
Act), with respect to the shares of Old Republic common
stock to be issued to PMA shareholders under the merger
agreement. This document also constitutes a proxy statement
under Section 14(a) of the Securities Exchange Act of 1934,
as amended (the Exchange Act). It also constitutes a
notice of meeting with respect to the special meeting of PMA
shareholders, at which meeting PMA shareholders will be asked to
vote upon a proposal to adopt the merger agreement.
You should rely only on the information contained or
incorporated by reference into this proxy statement/prospectus.
No one has been authorized to provide you with information that
is different from that contained in, or incorporated by
reference into, this proxy statement/prospectus. This proxy
statement/prospectus is dated as of August 4, 2010. You
should not assume that the information contained in this proxy
statement/prospectus is accurate as of any date other than that
date. You should not assume that the information incorporated by
reference into this proxy statement/prospectus is accurate as of
any date other than the date of such incorporated document.
Neither our mailing of this proxy statement/prospectus to PMA
shareholders nor the issuance by Old Republic of its common
stock in connection with the merger will create any implication
to the contrary.
This proxy statement/prospectus does not constitute an offer
to sell or a solicitation of an offer to buy any securities, or
the solicitation of a proxy, in any jurisdiction to or from any
person to whom it is unlawful to make any such offer or
solicitation in such jurisdiction. Information contained in this
proxy statement/prospectus regarding PMA has been provided by
PMA and information contained in this proxy statement/prospectus
regarding Old Republic has been provided by Old Republic.
NOTICE OF
SPECIAL MEETING OF SHAREHOLDERS OF
PMA CAPITAL CORPORATION
A special meeting of shareholders of PMA Capital Corporation
(PMA) will be held on Tuesday, September 21,
2010, at 10:00 a.m., local time, at Philadelphia Marriott
West, 111 Crawford Avenue, West Conshohocken, Pennsylvania, for
the following purposes:
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to adopt the Agreement and Plan of Merger, dated as of
June 9, 2010, by and among Old Republic International
Corporation (Old Republic), OR New Corp., a wholly
owned subsidiary of Old Republic (Merger Sub), and
PMA, pursuant to which Merger Sub will be merged with and into
PMA and PMA will continue as the surviving entity, as further
described in the accompanying proxy
statement/prospectus; and
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to transact any other business that may properly be brought
before the special meeting, or any adjournments or postponements
thereof, including, without limitation, a motion to adjourn or
postpone the special meeting to another time
and/or place
for the purpose of soliciting additional proxies in favor of the
proposal to adopt the merger agreement, if necessary.
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The Board of Directors of PMA recommends that you vote
FOR the proposal to adopt the merger agreement.
Adoption of the merger agreement requires the affirmative vote
of a majority of the votes cast by all shareholders entitled to
vote on the merger, assuming a quorum is present.
Only shareholders of record at the close of business on
July 30, 2010 are entitled to notice of, and to vote at,
the special meeting and any adjournment or postponement thereof.
A complete list of shareholders entitled to vote at the special
meeting will be available and kept open at the time and place of
the special meeting and shall be subject to the inspection of
any shareholder during, and for purposes germane to, the special
meeting.
Only shareholders or their proxy holders may attend the special
meeting. If you hold shares in your name, please be prepared to
provide proper identification, such as a drivers license.
If you hold your shares in street name through a
bank, broker or other nominee, you will need to provide proof of
ownership, such as a recent account statement or letter from
your bank, broker or other nominee, along with proper
identification.
Your vote is very important. If you are a registered
shareholder, please vote your shares as soon as possible using
one of the following methods to ensure that your vote is
counted, regardless of whether you expect to attend the special
meeting in person: (1) call the toll-free number specified
on the enclosed proxy card and follow the instructions when
prompted, (2) access the Internet website specified on the
enclosed proxy card and follow the instructions provided to you,
or (3) complete, sign, date and return the enclosed proxy
card in the postage-paid envelope provided. If you hold your
shares in street name through a bank, broker or
other nominee, you will need to follow the instructions provided
to you by your bank, broker or other nominee to ensure that your
shares are represented and voted at the special meeting.
Your proxy may be revoked at any time before the vote at the
special meeting by following the procedures outlined in the
accompanying proxy statement/prospectus.
In connection with our solicitation of proxies for the special
meeting, we are mailing this proxy statement/prospectus and
proxy card on or about August 6, 2010.
By order of the Board of Directors of
PMA Capital Corporation
Neal C. Schneider
Chairman of the Board
August 4, 2010
Table of
Contents
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35
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47
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50
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58
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ii
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F-1
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Annexes
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A-1
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B-1
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iii
QUESTIONS
AND ANSWERS ABOUT THE MERGER AND THE SPECIAL MEETING
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When and where is the PMA special meeting? |
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The PMA special meeting will take place on Tuesday,
September 21, 2010 at 10:00 a.m. local time, at
Philadelphia Marriott West, 111 Crawford Avenue, West
Conshohocken, Pennsylvania. |
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Why am I receiving this document? |
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Old Republic has agreed to acquire PMA pursuant to the terms of
a merger agreement that is described in this proxy
statement/prospectus. A copy of the merger agreement is attached
to this proxy statement/prospectus as Annex A. |
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In order to complete the merger, PMA shareholders must vote to
adopt the merger agreement. PMA is holding a special meeting of
shareholders to obtain this shareholder approval. |
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This proxy statement/prospectus contains important information
about the merger and the special meeting of the shareholders of
PMA, and you should read it carefully. The enclosed voting
materials allow you to vote your shares without attending the
special meeting in person. |
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Your vote is extremely important. We encourage you to vote as
soon as possible. For more information on how to vote your
shares, please see the section titled PMA Special
Meeting beginning on page 183. |
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What shareholder vote is required to adopt the merger
agreement and approve the other items to be voted on at the PMA
special meeting? |
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Merger Agreement. Under Pennsylvania law,
which governs PMA, the merger agreement must be adopted by the
affirmative vote of a majority of the votes cast by all
shareholders entitled to vote on the merger, assuming a quorum
is present. Each share of PMA class A common stock is
entitled to one vote on the adoption of the merger agreement. |
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If these votes are not obtained, the merger will not be
completed. Your vote is very important. You are encouraged to
submit a proxy as soon as possible. |
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Adjournment of meeting. The affirmative vote
of a majority of the shares of PMA class A common stock
entitled to vote and present, in person or represented by proxy,
at the special meeting is required to adjourn or postpone the
special meeting for solicitation of additional proxies in the
event there are not sufficient votes present, in person or
represented by proxy, at the time of the special meeting to
adopt the merger agreement. |
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What will happen in the merger? |
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In the merger, OR New Corp. (Merger Sub), a wholly
owned subsidiary of Old Republic, will merge with and into PMA.
Following the merger, PMA will continue as the surviving entity
and as a wholly owned subsidiary of Old Republic. |
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What will PMA shareholders receive in the merger? How does
the collar work? |
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Upon the completion of the merger, each outstanding share of PMA
class A common stock, excluding any shares owned by PMA or
Old Republic or any subsidiary of PMA or Old Republic (other
than PMA class A common stock held in trust accounts and
the like for the benefit of a third party or in respect of an
outstanding debt), will be converted into the right to receive
0.55 shares of Old Republic common stock (the
exchange ratio), provided that the volume weighted
average price per share of Old Republic common stock on the
NYSE, as reported by Bloomberg LP, for the twenty consecutive
trading days ending on and including the fifth trading day prior
to, but not including, the effective date of the merger, is at
least $12.50 but not greater than $17.00 (the Old Republic
measurement price). The range from $12.50 to $17.00 is
referred to as the collar. |
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The exchange ratio will change if the Old Republic measurement
price is outside of the collar. If the Old Republic measurement
price is less than $12.50, the exchange ratio will be determined
by dividing $6.875 by the Old Republic measurement price,
subject to a maximum exchange ratio of 0.60 shares. If the
Old Republic measurement price is greater than $17.00, the
exchange ratio will be determined by dividing $9.350 by the Old |
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Republic measurement price, subject to a minimum exchange ratio
of 0.50 shares. See The Merger Agreement
Terms of the Merger below for additional information. |
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Are PMA shareholders able to exercise appraisal rights? |
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No. PMA shareholders are not entitled to appraisal rights
under the Pennsylvania Business Corporation Law
(PBCL) in connection with the merger. |
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When do the parties expect to complete the merger? |
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Old Republic and PMA are working to complete the merger as
quickly as practicable. We currently expect the merger to be
completed near the end of the third quarter of 2010. However,
neither Old Republic nor PMA can predict the effective time of
the merger because it is subject to conditions both within and
beyond each companys control. |
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How will the combined company be managed? |
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The current senior management team of Old Republic, including
Aldo C. Zucaro, who is currently serving as the chairman of the
board of directors and chief executive officer of Old Republic,
will continue in their respective positions and manage the
combined company. |
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What will be the composition of the board of directors of Old
Republic following the merger? |
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The Old Republic board will remain the same following the
merger, except that one of the independent directors of PMA will
join Old Republics board of directors as a
Class 2 director. |
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Why is my vote important? |
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If you do not submit a proxy or vote in person at the special
meeting, it will be more difficult for PMA to obtain the
necessary quorum to hold the meeting. If you hold your shares in
street name through a bank, broker or other nominee,
you will need to follow the instructions provided to you by your
bank, broker or other nominee to ensure that your shares are
represented and voted at the special meeting. |
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What constitutes a quorum for the meeting? |
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A majority of the outstanding shares of PMA class A common
stock having voting power being present, in person or
represented by proxy constitutes a quorum for the meeting. |
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Does PMAs board of directors recommend adoption of the
merger agreement and approval of the other matters to be voted
on at the PMA special meeting? |
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Yes. The PMA board of directors has determined that the terms of
the merger agreement and the transactions contemplated thereby
are advisable, fair to, and in the best interests of, PMA and
PMAs shareholders, and recommends that shareholders vote
FOR the proposal to adopt the merger agreement. In
addition, the PMA board of directors recommends that
shareholders vote FOR the approval of a proposal to
adjourn or postpone the special meeting for solicitation of
additional proxies in the event there are not sufficient votes
present, in person or represented by proxy, at the time of the
special meeting to adopt the merger agreement. |
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Please see The Merger PMAs Reasons for
the Merger and The Merger Old
Republics Reasons for the Merger below for
additional information. |
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What is the record date for the special meeting? |
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The record date for the PMA special meeting is July 30,
2010 (the PMA record date). Holders of PMA
class A common stock on the PMA record date are entitled to
notice of the PMA special meeting and to vote at the PMA special
meeting or any adjournment or postponement thereof. |
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Who can vote at the special meeting? |
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All PMA shareholders of record as of the close of business on
July 30, 2010, the record date for the special meeting, are
entitled to receive notice of and to vote at the special meeting. |
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What do I need to do now? |
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The parties urge you to read carefully this proxy
statement/prospectus, including its annexes and the documents
incorporated by reference herein. You also may want to review
the documents referenced under the section Where You Can
Find More Information below and consult with your
accounting, legal and tax advisors. |
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Once you have reviewed this information, please respond by
completing, signing and dating your proxy card and returning it
in the enclosed postage-paid envelope or, if available, by
submitting your proxy by telephone or through the Internet as
soon as possible so that your shares of PMA class A common
stock will be represented and voted at the special meeting, as
applicable. |
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Please refer to your proxy card or the information forwarded by
your broker or other nominee to see which voting options are
available to you. |
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The Internet and telephone proxy submission procedures are
designed to verify your stock holdings and to allow you to
confirm that your instructions have been properly recorded. |
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The method by which you submit a proxy will in no way limit your
right to vote at the special meeting if you later decide to
attend the meeting in person. If you hold your shares in
street name through a bank, broker or other nominee,
you will need to follow the instructions provided to you by your
bank, broker or other nominee to ensure that your shares are
represented and voted at the special meeting. |
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Who may attend the meeting? |
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PMA shareholders (or their authorized representatives) and
PMAs invited guests may attend the meeting. Verification
of stock ownership will be required at the meeting. If you own
your shares in your own name or hold them through a broker (and
can provide documentation showing ownership such as a letter
from your broker or a recent account statement) at the close of
business on the record date (July 30, 2010), you will be
permitted to attend the meeting. |
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How do I obtain directions to attend the special meeting in
person? |
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A: |
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You may contact PMA Investor Relations at
(610) 397-5298
to obtain directions to the special meeting. |
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What if I abstain from voting or do not vote? |
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Abstentions of shares of PMA class A common stock will be
counted as shares that are present and entitled to vote for
purposes of determining whether a quorum exists for a vote on
any particular proposal, but will not be counted as votes cast
in regard to a particular proposal. If a holder of shares of PMA
class A common stock fails to return its proxy card, such
shares will not be counted for purposes of such vote. |
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If my PMA class A common stock is held in a brokerage
account or in street name, will my broker vote my
shares for me? |
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If you are a PMA shareholder and if you do not provide your bank
or broker with instructions on how to vote your street name
shares, your bank or broker will not be permitted to vote them
unless your bank or broker already has discretionary authority
to vote such street name shares. Also, if your bank or broker
has indicated on the proxy that it does not have discretionary
authority to vote such street name shares, your bank or broker
will not be permitted to vote them. Either of these situations
results in a broker non-vote. |
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How are broker non-votes treated? |
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Broker non-votes will have no effect on the proposals to adopt
the merger agreement and approve the adjournment or postponement
of the PMA special meeting once a quorum for the meeting has
been established. Therefore, you should provide your bank or
broker with instructions on how to vote your shares, or arrange
to attend the PMA special meeting and vote your shares in person
to avoid a broker non-vote. |
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What should I do if I receive more than one set of voting
materials for the special meeting? |
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A: |
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You may receive more than one set of voting materials for the
special meeting, including multiple copies of this proxy
statement/prospectus and multiple proxy cards or voting
instruction cards. For example, if you hold your |
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shares of PMA class A common stock in more than one
brokerage account, you will receive a separate voting
instruction card for each brokerage account in which you hold
shares of PMA class A common stock. If you are a holder of
record and your shares of PMA class A common stock are
registered in more than one name, you will receive more than one
proxy card. Please complete, sign, date and return each proxy
card and voting instruction card that you receive. |
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What do I do if I want to change my vote or revoke my
proxy? |
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If you are a registered shareholder, you may change your vote at
any time before the vote takes place at the PMA special meeting.
To do so, you may either complete and submit a new proxy card
with a later date or send a written notice to the corporate
secretary of PMA stating that you would like to revoke your
proxy. In addition, you may elect to attend the PMA special
meeting and vote in person, as described above. However, if you
are not a registered shareholder, but instead hold your shares
of PMA class A common stock through a bank, broker or other
nominee, you may revoke your instructions only by informing the
bank, broker or nominee in accordance with any procedures
established by such nominee. |
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How will my shares be represented at the meeting? |
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At the meeting, the officers named in your proxy card will vote
your shares in the manner you requested if you correctly
submitted your proxy. If you sign your proxy card and return it
without indicating how you would like to vote your shares, your
proxy will be voted as the PMA board of directors recommends,
which is: |
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FOR the adoption of the merger
agreement; and
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FOR the approval of a proposal to
adjourn or postpone the special meeting for solicitation of
additional proxies in the event there are not sufficient votes
present, in person or represented by proxy, at the time of the
special meeting to adopt the merger agreement.
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What effect will the merger have on options to purchase PMA
class A common stock and other stock-based awards that have
been granted to employees and directors of PMA? |
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The terms of outstanding restricted share award agreements
between PMA and its non-employee directors provide that the
vesting of all unvested restricted shares will accelerate upon a
change in control transaction. The merger will constitute a
change in control transaction. |
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Restricted shares and options to purchase PMA class A
common stock will be converted into restricted shares and
options to purchase Old Republic common stock based on the
exchange ratio. Stock appreciation rights based on the value of
PMA class A common stock will be converted into stock
appreciation rights with respect to Old Republic common stock
based on the exchange ratio. The conversion price for the
options and the stock appreciation rights of Old Republic will
be established by dividing the current exercise price by the
exchange ratio. The converted stock options, stock appreciation
rights and restricted shares, other than restricted shares held
by non-employee directors, which will vest upon the closing of
the merger, will otherwise have the same terms and conditions as
were in effect before the merger was effective. |
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At the effective time of the merger, the performance goals
designated under each of PMAs 2009 and 2010 Officer Long
Term Incentive Plans will be deemed to have been met at 100% of
target and the performance goals designated under PMAs
2010 Officer Annual Incentive Compensation Plan will be deemed
to have been met at a payout factor of 100%. As such, the
payment of such awards will be based on the satisfaction by
participants of only the service-based and time-based vesting
requirements designated under such plans. Restricted share units
are outstanding under PMAs 2009 and 2010 Officer Long Term
Incentive Plans. At the effective time of the merger, each
outstanding restricted share unit awarded under a long-term
incentive plan will be automatically converted into a number of
restricted share units of Old Republic based on the exchange
ratio and the proportion of the performance period under the
applicable long term incentive plan that has passed at the time
of the closing of the merger. At the effective time of the
merger, PMAs 2008 Officer Long Term Incentive Plan will be
terminated. |
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See The Merger Agreement Treatment of PMA
Equity Compensation Awards and Performance-Based Compensation
Awards. |
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Should I send in my PMA stock certificates now? |
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No. If the merger is completed, written instructions will
be sent to shareholders of PMA with respect to the exchange of
their share certificates for the merger consideration described
in the merger agreement. |
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Do I have to take any action now to exchange my shares held
in book-entry form? |
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No. PMA shareholders who hold their shares in book-entry
form will receive instructions for the exchange of their shares
for the merger consideration following the completion of the
merger. |
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Are there risks associated with the merger, and what will
happen to PMA if the merger is not completed, that I should
consider in deciding how to vote? |
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Yes. There are a number of risks related to the merger and the
other transactions contemplated by the merger agreement that are
discussed in this proxy statement/prospectus and in other
documents incorporated by reference or referred to in this proxy
statement/prospectus. Please read with particular care the
detailed description of the risks described in Risk
Factors Risks Relating to the Pending Merger
below. Additional risks relating to Old Republics and
PMAs business are described under the heading Risk
Factors below and in the Old Republic SEC filings and the
PMA SEC filings referred to in Where You Can Find More
Information below. |
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If the merger is not completed, PMAs shareholders will not
receive the merger consideration and PMA will remain a stand
alone public company with its class A common stock traded
on the Nasdaq Stock Market. Under certain circumstances, PMA may
be required to reimburse Old Republic for its expenses or pay
Old Republic a fee in connection with the termination of the
merger agreement. |
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In addition, if the merger is not completed, PMAs ability
to reach a resolution with the Pennsylvania Insurance Department
with respect to the Departments examination of PMAs
insurance subsidiaries as of December 31, 2007 will be
adversely impacted. See The Merger PMAs
Reasons for the Merger Resolution of Pennsylvania
Insurance Department Examination. Based on recent
discussions with representatives of the Department, in order to
resolve the outstanding issues as a stand alone organization,
PMA will need to engage in administrative and legal review
processes which, irrespective of their ultimate outcome, will
likely hinder the long-term and
day-to-day
continuity of PMAs business operations and, in the
interim, potentially have a negative impact on the financial
ratings of its insurance subsidiaries. PMA cannot predict how
long the processes would take or whether it would ultimately be
successful. In the event that PMA is unsuccessful in its
administrative and legal appeals, PMA could be required to take
actions, such as increasing its loss and loss adjustment expense
reserves, that would materially and adversely affect its
business, financial condition and results of operations. |
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Will a proxy solicitor be used? |
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Yes. PMA has engaged MacKenzie Partners, Inc. to assist in the
solicitation of proxies for the special meeting and PMA expects
it will pay MacKenzie Partners, Inc. a fee of approximately
$10,000. PMA has also agreed to reimburse MacKenzie Partners,
Inc. for reasonable
out-of-pocket
expenses incurred in connection with the proxy solicitation and
to indemnify MacKenzie Partners, Inc. against certain losses,
costs and expenses. In addition, our officers and employees may
solicit proxies by telephone or in person, but no additional
compensation will be paid to them. |
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Who can I contact with any additional questions? |
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A: |
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If you have additional questions about the merger, you should
contact Old Republic or PMA at: |
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Old Republic International Corporation
307 North Michigan Avenue
Chicago, Illinois 60601
Attention: Investor Relations
Telephone:
(312) 346-8100
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PMA Capital Corporation
380 Sentry Parkway
Blue Bell, PA 19422
Attention: Investor Relations
Telephone: (610) 397-5298
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If you would like additional copies of this proxy
statement/prospectus, or if you need assistance voting your
shares, you should contact: |
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MacKenzie Partners, Inc.
105 Madison Avenue
New York, NY 10016
(800) 322-2885
(toll free) or
(212) 929-5500
(call collect)
PMA@mackenziepartners.com |
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Where can I find more information about the companies? |
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A: |
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You can find more information about Old Republic and PMA in the
documents described under the section entitled Where You
Can Find More Information below. |
ix
SUMMARY
This summary highlights selected information from this
statement and may not contain all the information that is
important to you. To fully understand the merger proposal and
for a more complete description of the legal terms of the
merger, you should read carefully this entire document,
including the annexes hereto and documents incorporated by
reference herein, and the other documents to which the parties
have referred you. For information on how to obtain the
documents that the parties have filed with the SEC, see the
section entitled Where You Can Find More Information
below.
Information
About the Companies
PMA Capital Corporation (PMA) is a holding company
whose operating subsidiaries provide insurance and related
fee-based services. PMAs insurance products include
workers compensation and other commercial property and
casualty lines of insurance. Fee-based services include third
party administrator (TPA), managing general agent
and program administrator services.
PMA is a Pennsylvania corporation. PMAs common stock
trades on the NASDAQ Stock
Market®
under the symbol PMACA. PMA has an A.M. Best
Company financial strength rating of A−
(Excellent), which is the 4th highest of 16 rating levels.
PMAs principal executive offices are located at 380 Sentry
Parkway, Blue Bell, Pennsylvania 19422, and its telephone number
is
(610) 397-5298.
Old Republic International Corporation (Old
Republic), a Delaware corporation, is a Chicago based
holding company engaged in the single business of insurance
underwriting. Old Republic conducts its operations through a
number of regulated insurance company subsidiaries organized
into three major segments, namely, its General (property and
liability insurance), Mortgage Guaranty, and
Title Insurance Groups.
The principal companies in Old Republics General Insurance
segment are rated either A+ (Superior) or A
(Excellent) by A.M. Best. Republic Mortgage Insurance
Company, Old Republics principal mortgage insurance
subsidiary, is rated BBB− by Fitch, Ba1 by Moodys
and BBB− by Standard & Poors.
Old Republics Title Insurance group is rated A or
higher by each of A.M. Best, Fitch, Moodys and
Standard & Poors. Old Republic common stock
trades on the NYSE under the symbol ORI. Old
Republics principal executive offices are located at 307
North Michigan Avenue, Chicago, Illinois 60601 and its telephone
number is
(312) 346-8100.
OR New Corp. (Merger Sub), a Pennsylvania
corporation, is a wholly owned subsidiary of Old Republic that
was formed solely for the purpose of effecting the merger.
Merger Sub has not conducted and will not conduct any business
prior to the merger. Merger Subs principal executive
offices are located at 307 North Michigan Avenue, Chicago,
Illinois 60601 and its telephone number is
(312) 346-8100.
Further details relating to Old Republic, Merger Sub and PMA are
described in Information About the Companies below.
The
Merger
Old Republic and PMA have entered into the merger agreement
pursuant to which Merger Sub will merge with and into PMA. As a
result of the merger, PMA will become a wholly owned subsidiary
of Old Republic and each share of PMA class A common stock
will be converted into 0.55 shares of Old Republic common
stock, subject to a collar.
Under the collar, if the volume weighted average price per share
of Old Republic common stock on the NYSE, as reported by
Bloomberg LP, for the twenty consecutive trading days ending on
and including the fifth trading day prior to, but not including,
the effective date of the merger (the Old Republic
measurement price), is less than $12.50, the exchange
ratio could be as high as 0.60 shares of Old Republic
common stock for each share of PMA class A common stock. If
the Old Republic measurement price is greater than $17.00, the
exchange ratio could be as low as 0.50 shares of Old
Republic common stock for each share of PMA class A common
stock. See The Merger Agreement Terms of the
Merger for a more complete description of the exchange
ratio and the collar.
1
The merger agreement is attached as Annex A to this proxy
statement/prospectus and is incorporated by reference. Old
Republic and PMA encourage you to read the merger agreement in
its entirety because it is the legal document that governs the
merger.
Treatment
of PMA Equity Compensation Awards and Performance-Based
Compensation Awards
PMA periodically has granted stock options, stock appreciation
rights, restricted shares and restricted share units to
employees and non-employee directors pursuant to PMAs 2002
Equity Incentive Plan, 2007 Omnibus Incentive Compensation Plan
and 2004 Director Stock Compensation Plan. As of the record
date for the PMA special meeting, there were approximately
856,871 shares of PMA class A common stock issuable
pursuant to outstanding stock options and 41,250 outstanding
restricted shares. As of the record date, there were 56,000
stock appreciation rights outstanding and 956,452 restricted
share units awarded under PMAs 2009 and 2010 Officer Long
Term Incentive Compensation Plans.
The terms of outstanding restricted share award agreements
between PMA and its non-employee directors provide that the
vesting of all unvested restricted shares will accelerate upon a
change in control transaction. The merger will constitute a
change in control transaction.
At the effective time of the merger, each outstanding stock
option and stock appreciation right that remains unexercised as
of the completion of the merger, whether or not vested or
unvested, will automatically be converted into an equivalent
stock option or stock appreciation right with respect to a
number of shares of Old Republic common stock based on the
exchange ratio. At the effective time of the merger, each
outstanding restricted share will automatically be converted
into an equivalent share of Old Republic common stock based on
the exchange ratio. The converted stock options, stock
appreciation rights and restricted shares, other than the
restricted shares held by non-employee directors, which will
vest upon the closing of the merger, will otherwise have the
same terms and conditions as were in effect before the merger
was effective.
At the effective time of the merger, the performance goals
designated under each of PMAs 2009 and 2010 Officer Long
Term Incentive Plans will be deemed to have been met at 100% of
target and the performance goals designated under PMAs
2010 Officer Annual Incentive Compensation Plan will be deemed
to have been met at a payout factor of 100%. As such, the
payment of such awards shall be based on the satisfaction by
participants of only the service-based and time-based vesting
requirements designated under such plans, if any. Restricted
share units are outstanding under PMAs 2009 and 2010
Officer Long Term Incentive Plans. At the effective time of the
merger, each outstanding restricted share unit awarded under a
long-term incentive plan will be automatically converted into a
number of restricted share units of Old Republic based on the
exchange ratio and the proportion of the performance period
under the applicable long term incentive plan that has passed at
the time of the closing of the merger. See The Merger
Agreement Treatment of PMA Equity Compensation
Awards and Performance-Based Compensation Awards.
At the effective time of the merger, PMAs 2008 Officer
Long Term Incentive Plan will be terminated.
PMAs
Reasons for the Merger
PMAs board of directors, at its meeting held on
June 9, 2010, considered the terms of the merger agreement
and the transactions contemplated thereby and determined them to
be advisable, fair to, and in the best interests of, PMA and
PMAs shareholders. PMA believes that a merger with Old
Republic, and the additional financial strength and stability it
can provide, will be of benefit to its shareholders, clients,
employees and other stakeholders. In evaluating the merger,
PMAs board of directors consulted with management, as well
as its legal and financial advisors, and considered a number of
factors, including the following:
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the challenges PMA would face continuing as an independent
company,
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the opportunity to resolve issues relating to the Pennsylvania
Insurance Departments examination of PMAs loss and
loss adjustment expense reserves through a merger with Old
Republic rather than engaging in administrative and legal review
processes which, irrespective of their ultimate outcome, would
likely hinder the long-term and
day-to-day
continuity of PMAs business operations and, in the
interim, potentially have a negative impact on its financial
ratings,
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the fact that the merger consideration represented a premium of
approximately 15% to the closing price of PMAs
class A common stock on June 8, 2010, the last trading
day prior to execution of the merger agreement,
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the opinion of BofA Merrill Lynch, dated June 9, 2010, to
PMAs board of directors to the effect that, as of the date
of the opinion and based on and subject to various assumptions
and limitations described in its opinion, the exchange ratio
provided for in the merger was fair, from a financial point of
view, to holders of PMA class A common stock (see the
section entitled The Merger Opinion of
PMAs Financial Advisor for a more complete
description),
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given the lengthy and thorough sale process undertaken by PMA
and its financial advisor, the probability of receiving an offer
better than the offer made by Old Republic was low,
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the benefits of the merger to PMAs shareholders, clients,
employees and other stakeholders compared to alternative
strategies where PMA continued to operate independently,
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the terms of the merger agreement,
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the decentralized nature of Old Republics operations,
which is expected to provide PMA with the ability to maintain
its operations in substantially the manner they existed prior to
the merger,
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based on the size of the transaction, the terms of the merger
agreement and discussions with the Pennsylvania Insurance
Department, PMA believes there is a high likelihood that the
transaction will be completed,
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Old Republic has higher financial strength ratings than PMA,
with Old Republics principal property and casualty
insurance subsidiaries having A.M. Best ratings of
A+ compared to PMAs A.M. Best rating of
A−, and
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that the merger is expected to qualify as a tax-free
reorganization within the meaning of
Section 368(a) of the Internal Revenue Code, which will
permit PMA shareholders to defer recognition of taxes associated
with their shares of PMA class A common stock (other than
cash paid in lieu of fractional shares) until they decide to
sell the shares of Old Republic common stock received in the
merger.
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For further details relating to PMAs reasons for approving
and recommending the merger, see The Merger
PMAs Reasons for the Merger, which is not intended
to be exhaustive.
Recommendations
of the PMA Board of Directors with Respect to the
Merger
On June 9, 2010, the PMA board of directors convened a
meeting to review and consider the proposed merger with Old
Republic. The entire board except for one director was present
at the meeting. At that meeting, PMAs board, by unanimous
vote of the directors present, determined that the terms of the
merger agreement and the transactions contemplated thereby are
advisable, fair to, and in the best interests of, PMA and
PMAs shareholders, and such directors unanimously approved
the merger agreement and the transactions contemplated by the
merger agreement. The PMA board of directors recommends that PMA
shareholders vote FOR the proposal to adopt the
merger agreement and FOR the approval of the
adjournment or postponement of the special meeting for the
solicitation of additional proxies if there are not sufficient
votes present, in person or represented by proxy, at the time of
the special meeting to adopt the merger agreement.
For further discussion of PMAs reasons for the merger and
the recommendation of the PMA board of directors, see The
Merger Background of the Merger, The
Merger PMAs Reasons for the Merger and
The Merger Recommendations of the PMA Board of
Directors with Respect to the Merger below.
Shareholders
Entitled to Vote; Vote Required
Shareholders who owned shares of PMA class A common stock
at the close of business on July 30, 2010, which is
referred to as the record date, are entitled to vote at the
special meeting. On the record date, there were
32,280,474 shares of PMA class A common stock
outstanding and entitled to vote at the special meeting, held by
approximately 134 holders of record. Shareholders may cast one
vote for each share of PMA class A common stock owned on
the record date.
3
Assuming a quorum is present, the affirmative vote of a majority
of the votes cast by all shareholders entitled to vote on the
merger is necessary for the adoption of the merger agreement.
The holders of a majority of the total number of outstanding
shares of PMA class A common stock entitled to vote as of
the record date, represented either in person or by proxy, will
constitute a quorum at the special meeting for the conduct of
business.
The affirmative vote of a majority of the shares of PMA
class A common stock entitled to vote and present, in
person or represented by proxy, at the special meeting is
required to adjourn or postpone the special meeting for
solicitation of additional proxies in the event there are not
sufficient shares present, in person or represented by proxy, at
the time of the special meeting to adopt the merger agreement.
An abstention occurs when a shareholder abstains from voting
(either in person or by proxy) on one or more of the proposals.
A broker non-vote occurs when a bank, broker or other nominee
returns a proxy but does not have authority to vote on a
particular proposal. Abstentions of shares of PMA class A
common stock will be counted as shares that are present and
entitled to vote for purposes of determining whether a quorum
exists for a vote on any particular proposal, but will not be
counted as votes cast in regard to a particular proposal. Broker
non-votes will have no effect on the proposals to adopt the
merger agreement and approve the adjournment or postponement of
the PMA special meeting once a quorum for the meeting has been
established. Therefore, you should provide your bank or broker
with instructions on how to vote your shares, or arrange to
attend the PMA special meeting and vote your shares in person to
avoid a broker non-vote. If you fail to return your proxy card,
your shares will not be counted for purposes of establishing a
quorum and will not be voted at the special meeting.
Your vote is very important. You are encouraged to vote as soon
as possible. If you do not indicate how your shares of PMA
class A common stock should be voted on a matter, the
shares of PMA class A common stock represented by your
properly completed proxy will be voted as the PMA board of
directors recommends and therefore FOR the adoption
of the merger agreement and FOR the approval of a
proposal to adjourn or postpone the special meeting for
solicitation of additional proxies in the event there are not
sufficient votes present, in person or represented by proxy, at
the time of the special meeting to adopt the merger agreement.
Opinion
of PMAs Financial Advisor
In connection with the merger, Merrill Lynch, Pierce,
Fenner & Smith Incorporated (BofA Merrill
Lynch), PMAs financial advisor, delivered to
PMAs board of directors a written opinion, dated
June 9, 2010, to the effect that, as of the date of the
opinion and based on and subject to various assumptions and
limitations described in its opinion, the exchange ratio
provided for in the merger was fair, from a financial point of
view, to holders of PMA class A common stock. The full text
of the written opinion, dated June 9, 2010, of BofA Merrill
Lynch, which describes, among other things, the assumptions
made, procedures followed, factors considered and limitations on
the review undertaken, is attached as Annex B to this
document and is incorporated by reference herein in its
entirety. BofA Merrill Lynch provided its opinion to
PMAs board of directors for the benefit and use of
PMAs board of directors in connection with and for
purposes of its evaluation of the exchange ratio from a
financial point of view. BofA Merrill Lynchs opinion does
not address any other aspect of the merger and does not
constitute a recommendation to any shareholder as to how to vote
or act in connection with the proposed merger.
Old
Republics Reasons for the Merger
It is the opinion of Old Republics management and board of
directors that the merger will enhance Old Republics
growth prospects. Old Republics management and board
believe that long-term growth can be achieved through the
greater geographic spread and certain industry specialization
offered by PMAs current business model. Furthermore, Old
Republic believes that it will acquire the continuing services
of a dedicated operating management and the well regarded
insurance services delivery of PMAs subsidiaries.
Interests
of PMA Officers and Directors in the Merger
In considering the recommendation of the PMA board of directors
with respect to the adoption of the merger agreement, PMA
shareholders should be aware that the merger agreement includes
a provision that one independent
4
member of the PMA board of directors be added to the Old
Republic board of directors following completion of the merger.
The other directors of PMA will resign effective upon closing of
the merger.
In addition, the terms of outstanding restricted stock award
agreements between PMA and its non-employee directors provide
that the vesting of all unvested restricted stock will
accelerate upon a change in control transaction. The merger will
constitute a change in control transaction.
Nine PMA officers are parties to employment and severance
agreements with PMA. The merger agreement provides as a
condition to the obligation of Old Republic to consummate the
merger that Vincent T. Donnelly, President and Chief Executive
Officer, shall have executed and delivered to PMA a voluntary
written termination of his employment agreement and PMA shall
have obtained a voluntary written termination from six of the
eight other officers that are parties to severance agreements
with PMA. The employment and severance agreements provide for
payments to the officers in the event their employment is
terminated following a change of control of PMA.
The nine officers of PMA referred to above, including the Chief
Executive Officer who is a member of PMAs board of
directors, have been advised by Old Republic that, following the
merger, they will be employed by Old Republic on terms
comparable to their employment with PMA.
PMAs board of directors was aware of these interests and
considered them, among other matters, in approving the merger
agreement and making its recommendation that the PMA
shareholders adopt the merger agreement. See The
Merger Interests of PMA Officers and Directors in
the Merger.
Material
U.S. Federal Income Tax Consequences
Old Republic and PMA each expect the merger to qualify as a
reorganization pursuant to Section 368(a) of
the Internal Revenue Code. Provided that the merger qualifies as
a reorganization under U.S. federal income tax
laws, PMA shareholders generally will not recognize any gain or
loss (except with respect to cash received in lieu of a
fractional share of Old Republic common stock) by reason of the
merger.
Please review carefully the information under the caption
Material U.S. Federal Income Tax Consequences of the
Merger for a description of the material U.S. federal
income tax consequences of the merger. PMA shareholders are
strongly urged to consult their own tax advisors as to the
specific tax consequences to them of the merger in light of
their particular circumstances, including the applicability and
effect of U.S. federal, state, local,
non-U.S. income
and other tax laws.
Accounting
Treatment
Old Republic will account for the merger under the purchase
method of accounting for business combinations. Old Republic
will be considered the acquirer of PMA for accounting purposes.
Further details relating to the accounting treatment of the
merger are described in The Merger Accounting
Treatment below.
Regulatory
Approvals Required for the Merger
PMA has three insurance company subsidiaries domiciled in the
Commonwealth of Pennsylvania. Insurance laws in Pennsylvania
require an acquiring person to obtain approval from the
Insurance Commissioner of Pennsylvania before acquiring control
of an insurance company domiciled in Pennsylvania. The Insurance
Commissioner of Pennsylvania approved the proposed merger on
August 3, 2010.
PMA has insurance subsidiaries domiciled in Bermuda and the
Cayman Islands. The laws of those jurisdictions require a notice
filing and, in the case of Bermuda, the approval of the Bermuda
Monetary Authority, before any change in the control of PMA can
occur. Old Republic has provided notice of the proposed merger
to the Bermuda Monetary Authority and the Cayman Island Monetary
Authority. The Bermuda Monetary Authority granted its approval
on June 30, 2010.
The merger is subject to review by the Antitrust Division of the
U.S. Department of Justice (the Antitrust
Division) and the Federal Trade Commission (the
FTC) under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the rules
and regulations promulgated thereunder (the HSR
Act). Old Republic and
5
PMA have filed the requisite Pre-Merger Notification and Report
Forms under the HSR Act with the Antitrust Division and the FTC
and have been notified that the waiting period has been
terminated.
For further discussion of regulatory matters relating to the
merger, see the section entitled The Merger
Regulatory Approvals Required for the Merger below.
No
Appraisal Rights in the Merger
Holders of PMAs class A common stock are not entitled
to dissenters rights of appraisal under Pennsylvania law
in connection with the merger. See The Merger
No Appraisal Rights.
Conditions
to Completion of the Merger
The parties expect to complete the merger after all of the
conditions to the merger in the merger agreement are satisfied
or waived, including after PMA receives shareholder approval of
the adoption of the merger agreement at its special meeting and
the parties receive all required regulatory approvals. The
parties currently expect to complete the merger near the end of
the third quarter of 2010. It is possible, however, that factors
outside of each partys control could require them to
complete the merger at a later time or not to complete it at all.
A number of conditions must be satisfied or waived, where
legally permissible, before the proposed merger can be
consummated. These include, among others:
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adoption by PMA shareholders of the merger agreement;
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shares of Old Republic common stock issuable to the shareholders
of PMA pursuant to the merger will have been approved for
listing on the NYSE, subject to official notice of issuance;
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absence of any order, decree or injunction issued, and of any
action taken by any court or agency or other law preventing or
making illegal the consummation of the merger;
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receipt of all required regulatory approvals; and
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receipt of voluntary written terminations of employment or
severance agreements with the Chief Executive Officer of PMA and
six of the eight other PMA officers party to such agreements
effective prior to the merger.
|
Neither Old Republic nor PMA can give any assurance when or if
all of the conditions to the merger will be either satisfied or
waived or that the merger will occur. Neither Old Republic nor
PMA currently intends to waive any material condition to the
completion of the merger. For further discussion of the
conditions to the merger, see The Merger
Agreement Conditions to Completion of the
Merger below.
No
Solicitation of Other Offers by PMA
The merger agreement contains provisions prohibiting PMA and its
subsidiaries, directors, officers, employees, agents or
representatives from taking actions to solicit, discuss or
negotiate any competing transaction proposal, with certain
exceptions, including with respect to an unsolicited bona fide
written superior proposal, as described in The
Merger Agreement No Solicitation of Other Offers by
PMA below.
Termination
of the Merger Agreement
Old Republic and PMA may jointly agree to terminate the merger
agreement at any time, even after adoption by the PMA
shareholders of the merger agreement, In addition, either Old
Republic or PMA may terminate the merger agreement if:
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the merger shall not have been consummated on or before
December 31, 2010, unless the party seeking to terminate
the merger agreement failed to perform or observe the applicable
covenants and agreements under the merger agreement;
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6
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a required regulatory approval has been denied or any
governmental entity has taken action permanently enjoining or
otherwise prohibiting or making illegal the merger, including
with respect to antitrust matters, if HSR approval has not been
obtained within 120 days of the filing of the HSR
application (such 120 day period to be extended for another
120 days if HSR approval is a reasonable possibility);
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the other party has breached a representation, warranty,
covenant or agreement that would preclude the satisfaction of
certain conditions to the consummation of the merger and such
breach is not remedied within the applicable cure period;
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the PMA board of directors shall have (i) failed to
recommend the approval and adoption of the merger agreement to
the PMA shareholders, (ii) made any PMA change of
recommendation, (iii) approved or recommended, or publicly
proposed to approve or recommend, any alternative proposal or
(iv) failed to recommend to PMAs shareholders that
they reject any tender offer or exchange offer that constitutes
an alternative transaction within the ten business day period
specified in
Rule 14e-2(a)
of the Exchange Act; or
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the PMA shareholders have not adopted the merger agreement at
the PMA special meeting. See The Merger
Agreement Termination of the Merger Agreement.
|
Termination
Fees and Expenses
Each of Old Republic and PMA has agreed that, if the merger
agreement is terminated in certain circumstances described in
the merger agreement, PMA must pay Old Republic a termination
fee of $8 million. In addition, if the merger agreement is
terminated in certain circumstances, PMA shall pay Old Republic
for its documented
out-of-pocket
expenses in connection with the merger agreement, up to
$2 million. In certain circumstances, the termination fee
is subject to offset based on any Old Republic expenses
reimbursed by PMA. The maximum amount payable by PMA to Old
Republic in the event of termination of the merger agreement is
$8 million. See The Merger Agreement
Termination of the Merger Agreement and The Merger
Agreement Termination Fees and Expenses.
Purpose
of the PMA Special Meeting
Holders of PMA class A common stock will be asked to vote
on the following proposals:
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to adopt the merger agreement; and
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to approve the adjournment or postponement of the PMA special
meeting for the solicitation of additional proxies in the event
there are not sufficient votes present, in person or represented
by proxy, at the time of the special meeting to adopt the merger
agreement.
|
PMAs board of directors recommends that PMAs
shareholders vote FOR the proposals set forth in the
two bullets above.
Voting by
PMA Directors and Executive Officers
As of July 30, 2010, directors and executive officers of
PMA held and were entitled to vote 482,103 shares of PMA
class A common stock, or approximately 1.5% of the voting
power of the issued and outstanding shares of PMA class A
common stock. Please see the section of this proxy
statement/prospectus entitled PMA Special
Meeting Voting by PMA Directors and Executive
Officers for additional information. It is currently
expected that PMAs directors and executive officers will
vote their shares in favor of adopting the merger agreement,
although none of them have entered into any agreements
obligating them to do so.
Directors
and Executive Officers of Old Republic After the
Merger
The directors and executive officers of Old Republic prior to
the merger will continue as the directors and executive officers
of Old Republic after the merger, except that following the
merger one of the independent directors of PMA will join Old
Republics board of directors as a
Class 2 director.
7
Ownership
of Old Republic After the Merger
Old Republic will issue a maximum of approximately
19,884,057 shares of Old Republic common stock pursuant to
the merger based on the number of outstanding shares of PMA
class A common stock on July 30, 2010 and assuming
conversion of all of PMAs 4.25% Convertible Debt and
the exercise of all outstanding options to purchase shares of
PMA class A common stock (which options, if unexercised,
will be converted pursuant to the merger into options to acquire
shares of Old Republic common stock). In addition, a maximum of
approximately 573,871 shares of Old Republic common stock
will be issuable in connection with outstanding PMA restricted
share units that will be converted pursuant to the merger into
restricted share units of Old Republic (the As-Converted
Award Shares). After the effective time of the merger, PMA
shareholders will own approximately 7.8% of Old Republic on a
fully diluted basis based on the outstanding shares of Old
Republic common stock and PMA class A common stock on
July 30, 2010 and assuming the issuance of the maximum
number of As-Converted Award Shares. Consequently, PMA
shareholders will have significantly less influence over the
management and policies of Old Republic than they currently
exercise over the management and policies of PMA.
Rights of
PMA Shareholders
PMA shareholders receiving merger consideration will have
different rights once they become Old Republic shareholders, due
to differences between the governing documents of Old Republic
and PMA. These differences are described in detail under
Comparison of Rights of Old Republic Shareholders and PMA
Shareholders below.
Recent
Developments
Old
Republic Second Quarter 2010 Results
On July 22, 2010 Old Republic issued a news release
covering its earnings for this years second quarter and
first half. The highlights of the release are set forth below
and should be read in conjunction with all other information
pertaining to Old Republics historical financial
statements and Old Republic Managements Discussion and
Analysis of Financial Condition and Results of Operations
appearing in this proxy statement/prospectus.
Financial
Highlights
(unaudited;
amounts in millions except per share data and
percentages)
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Quarters Ended June 30,
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Six Months Ended June 30,
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2010
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2009
|
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|
Change
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2010
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2009
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Change
|
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Operating Revenues
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$
|
935.3
|
|
|
$
|
912.2
|
|
|
|
2.5
|
%
|
|
$
|
1,864.9
|
|
|
$
|
1,790.7
|
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|
4.1
|
%
|
Net Operating Income (Loss)
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|
10.0
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(49.6
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)
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120.3
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33.2
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(103.5
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)
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132.1
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|
Net Income (Loss)
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$
|
57.4
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|
$
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(15.8
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)
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|
461.4
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%
|
|
$
|
82.5
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|
|
$
|
(69.8
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)
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|
218.2
|
%
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Diluted Earnings Per Share:
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Net Operating Income (Loss)
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$
|
0.05
|
|
|
$
|
(0.21
|
)
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|
123.8
|
%
|
|
$
|
0.16
|
|
|
$
|
(0.44
|
)
|
|
|
136.4
|
%
|
Net Income (Loss)
|
|
$
|
0.23
|
|
|
$
|
(0.07
|
)
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|
|
428.6
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%
|
|
$
|
0.35
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|
|
$
|
(0.30
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)
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|
|
216.7
|
%
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|
|
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|
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Cash Dividends Per Share:
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$
|
0.1725
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|
$
|
0.1700
|
|
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|
1.5
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%
|
|
$
|
0.3450
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|
$
|
0.3400
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|
1.5
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%
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Ending Book Value Per Share:
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$
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16.84
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|
$
|
15.93
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|
|
5.7
|
%
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Old Republics second quarter and first half operating
results, which exclude net realized investment gains or losses,
reflected significant improvement when compared to the same
periods of 2009. As noted below, substantially all of the
improvement stemmed from more positive results in Old
Republics Mortgage Guaranty line. The latter benefited
from a combination of lower provisions for outstanding claims,
and from the positive effects of largely non-recurring captive
reinsurance commutations and terminations of insured mortgage
pools. Second quarter and first half 2010 General Insurance
pretax operating earnings were reduced by relatively higher
claim costs; earnings were consequently off by 5.8 percent
for this years first half. Old Republic Title Group
results
8
turned to the profit column in both 2010s and 2009s
second quarterly periods, but remained in moderately negative
territory for the first half of both years as claim and
operating expenses outpaced revenue growth.
Consolidated Results The major components of
Old Republics consolidated results and other data for the
periods reported upon are shown below:
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Quarters Ended June 30,
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Six Months Ended June 30,
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2010
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2009
|
|
|
Change
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2010
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2009
|
|
|
Change
|
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Operating revenues:
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General insurance
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$
|
468.3
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$
|
507.0
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(7.6
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)%
|
|
$
|
947.5
|
|
|
$
|
1,030.8
|
|
|
|
(8.1
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)%
|
Mortgage guaranty
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|
152.1
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|
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|
166.5
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(8.7
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)
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|
312.6
|
|
|
|
337.8
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|
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|
(7.5
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)
|
Title insurance
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|
293.5
|
|
|
|
219.0
|
|
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|
34.0
|
|
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|
555.6
|
|
|
|
379.3
|
|
|
|
46.5
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|
Corporate and other
|
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|
21.3
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|
|
|
19.5
|
|
|
|
9.1
|
|
|
|
49.1
|
|
|
|
42.7
|
|
|
|
14.9
|
|
|
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|
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Total
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$
|
935.3
|
|
|
$
|
912.2
|
|
|
|
2.5
|
%
|
|
$
|
1,864.9
|
|
|
$
|
1,790.7
|
|
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|
4.1
|
%
|
|
|
|
|
|
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|
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|
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|
|
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Pretax operating income (loss):
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General insurance
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|
$
|
29.3
|
|
|
$
|
46.4
|
|
|
|
(36.8
|
)%
|
|
$
|
98.6
|
|
|
$
|
104.6
|
|
|
|
(5.8
|
)%
|
Mortgage guaranty
|
|
|
(22.1
|
)
|
|
|
(137.9
|
)
|
|
|
83.9
|
|
|
|
(56.3
|
)
|
|
|
(282.5
|
)
|
|
|
80.1
|
|
Title insurance
|
|
|
4.0
|
|
|
|
5.6
|
|
|
|
(28.2
|
)
|
|
|
(4.6
|
)
|
|
|
(3.4
|
)
|
|
|
(34.5
|
)
|
Corporate and other
|
|
|
(3.2
|
)
|
|
|
(0.1
|
)
|
|
|
N/M
|
|
|
|
(1.4
|
)
|
|
|
2.4
|
|
|
|
(157.0
|
)
|
|
|
|
|
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|
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|
|
|
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|
|
|
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|
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|
|
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|
|
Sub-total
|
|
|
7.9
|
|
|
|
(86.0
|
)
|
|
|
109.2
|
|
|
|
36.2
|
|
|
|
(178.8
|
)
|
|
|
120.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains (losses):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From sales
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|
|
72.8
|
|
|
|
0.3
|
|
|
|
|
|
|
|
75.8
|
|
|
|
0.3
|
|
|
|
|
|
From impairments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses)
|
|
|
72.8
|
|
|
|
0.3
|
|
|
|
N/M
|
|
|
|
75.8
|
|
|
|
0.3
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated pretax income (loss)
|
|
|
80.8
|
|
|
|
(85.6
|
)
|
|
|
194.3
|
|
|
|
112.1
|
|
|
|
(178.4
|
)
|
|
|
162.8
|
|
Income taxes (credits)
|
|
|
23.3
|
|
|
|
(69.8
|
)
|
|
|
133.5
|
|
|
|
29.5
|
|
|
|
(108.6
|
)
|
|
|
127.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
57.4
|
|
|
$
|
(15.8
|
)
|
|
|
461.4
|
%
|
|
$
|
82.5
|
|
|
$
|
(69.8
|
)
|
|
|
218.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated underwriting ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and claim ratio
|
|
|
60.4
|
%
|
|
|
78.8
|
%
|
|
|
|
|
|
|
60.0
|
%
|
|
|
81.3
|
%
|
|
|
|
|
Expense ratio
|
|
|
48.8
|
|
|
|
42.3
|
|
|
|
|
|
|
|
48.1
|
|
|
|
41.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composite ratio
|
|
|
109.2
|
%
|
|
|
121.1
|
%
|
|
|
|
|
|
|
108.1
|
%
|
|
|
122.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income (loss)
|
|
$
|
0.05
|
|
|
$
|
(0.21
|
)
|
|
|
123.8
|
%
|
|
$
|
0.16
|
|
|
$
|
(0.44
|
)
|
|
|
136.4
|
%
|
Net realized investment gains (losses)
|
|
|
0.18
|
|
|
|
0.14
|
|
|
|
|
|
|
|
0.19
|
|
|
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.23
|
|
|
$
|
(0.07
|
)
|
|
|
428.6
|
%
|
|
$
|
0.35
|
|
|
$
|
(0.30
|
)
|
|
|
216.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid per share
|
|
$
|
0.1725
|
|
|
$
|
0.1700
|
|
|
|
1.5
|
%
|
|
$
|
0.3450
|
|
|
$
|
0.3400
|
|
|
|
1.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/M: Not meaningful
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 for 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 Old Republics results from
period to period. Accordingly, Old Republics management
uses net operating income, a non-GAAP financial measure, to
9
evaluate and better explain operating performance, and believes
its use enhances an understanding of Old Republics basic
business results. Operating income, however, does not replace
net income determined in accordance with GAAP as a measure of
total profitability.
The above table shows both operating and net income (loss) to
highlight the effects of realized investment gain or loss
recognition on
period-to-period
comparisons. Realized gains in this years second quarter
and first half resulted from sales of securities, some of which
had been impaired in prior years. The following summary shows
the composition of realized gains shown in the above table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Realized gains (losses) from sales applicable to previously
impaired securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual tax basis (loss) on sales
|
|
$
|
(44.0
|
)
|
|
$
|
|
|
|
$
|
(44.0
|
)
|
|
$
|
|
|
GAAP valuation impact of the original impairment charge on
securities sold
|
|
|
71.9
|
|
|
|
|
|
|
|
71.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net total
|
|
|
27.9
|
|
|
|
|
|
|
|
27.9
|
|
|
|
|
|
Net realized gains from sales of all other securities
|
|
|
44.9
|
|
|
|
0.3
|
|
|
|
47.9
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains from all securities sales
|
|
$
|
72.8
|
|
|
$
|
0.3
|
|
|
$
|
75.8
|
|
|
$
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Litigation
Related to the Merger
On June 15, 2010 and as amended on July 30, 2010, a
purported derivative and class action lawsuit was filed by an
alleged shareholder of PMA naming PMA, its Board of Directors,
Old Republic and Merger Sub as defendants. The action was filed
in the Court of Common Pleas of Montgomery County, Pennsylvania.
The action is Alan R. Kahn and Wister S. Baisch v. Peter S.
Burgess, et al., Case
No. 2010-15690.
The complaint claims to be a class action on behalf of all of
PMAs shareholders, except the defendants and any of their
affiliates. The complaint alleges that the merger consideration
is inadequate, the proxy statement/prospectus fails to disclose
all material information about the merger, the directors of PMA
breached their fiduciary duties and failed to manage prudently
the business of PMA and Old Republic and Merger Sub aided and
abetted the alleged breaches by PMAs directors. The
complaint seeks several forms of relief, including monetary
damages and injunctive relief that would, if granted, prevent
the merger from closing on the terms set forth in the merger
agreement.
The defendants believe that the complaint has no merit and
intend to vigorously defend against the action.
On June 29, 2010, a second complaint was filed by an
alleged shareholder of PMA naming PMA and its Board of Directors
as defendants. The complaint was filed in the Court of Common
Pleas of Philadelphia, Pennsylvania. The action was Wister S.
Baisch v. Peter S. Burgess, et al., Case ID 100603098. The
matter was discontinued without prejudice by the plaintiff on
July 29, 2010 and the plaintiff joined the above described
matter.
10
RISK
FACTORS
In addition to the other information included in this proxy
statement/prospectus, including the matters addressed in
Cautionary Statement Regarding Forward-Looking
Statements below, you should carefully consider the
following risk factors before deciding whether to vote to adopt
the merger agreement. If any of the risks described below
actually materialize, the businesses, financial conditions,
results of operations, prospects or stock prices of PMA, Old
Republic or the combined company could be materially adversely
affected. See Where You Can Find More Information
below.
Risks
Relating to Old Republics Business
Risk factors are uncertainties and events over which Old
Republic has limited or no control, and which can have a
materially adverse effect on its business, results of operations
or financial condition. Old Republic and its business segments
are subject to a variety of risk factors and, within individual
segments, each type of insurance coverage may be exposed to
varying risk factors. The following sections set forth Old
Republics evaluation of the most prevalent material risk
factors for Old Republic as a whole and for each business
segment, which risks will also affect the combined company after
the merger. There may be risks which Old Republic management
does not presently consider to be material that may later prove
to be material risk factors as well.
Parent
Company
Dividend
Dependence and Liquidity
Old Republic is an insurance holding company with no operations
of its own. Its principal assets consist of the business
conducted by its insurance subsidiaries. It relies upon
dividends from such subsidiaries in order to pay the interest
and principal on its debt obligations, dividends to its
shareholders, and corporate expenses. The ability of the
insurance subsidiaries to declare and pay dividends is subject
to regulations under state laws that limit dividends based on
the amount of their statutory adjusted unassigned surplus or
statutory earnings, and require them to maintain minimum amounts
of capital, surplus and reserves. Dividends in excess of the
ordinary limitations can only be declared and paid with prior
regulatory approval, of which there can be no assurance. The
inability of the insurance subsidiaries to pay dividends in an
amount sufficient to meet Old Republics debt service and
cash dividends on stock, as well as other cash requirements
could result in liquidity issues.
Capitalization
Old Republic has access to various capital and liquidity
resources including dividends from its subsidiaries, holding
company investments, undrawn capacity under its commercial paper
program, and access to debt and equity capital markets. At
December 31, 2009 Old Republics consolidated debt to
equity ratio was 8.9%. This relatively low level of financial
leverage is assumed to provide Old Republic with additional
borrowing capacity to meet some possible future capital needs.
Risk
Factors Common to Old Republic and its Insurance
Subsidiaries
Investment
Risks
Old Republics invested assets and those of its
subsidiaries are centrally managed through a wholly owned asset
management subsidiary. Most of the investments consist of fixed
maturity securities. Changes in interest rates directly affect
the income from, and the fair value of fixed maturity
investments. Such changes could reduce the value of Old
Republics investment portfolio and adversely affect Old
Republics and its subsidiaries results of operations
and financial condition. A smaller percentage of total
investments are in indexed funds and actively managed equities.
A change in general economic conditions, the stock market, or in
many other external factors could adversely affect the value of
those investments and, in turn, Old Republics, or its
subsidiaries results and financial condition. Further, Old
Republic manages its fixed maturity investments by taking into
account the maturities of such securities and the anticipated
liquidity needs of Old Republic and its subsidiaries. Should Old
Republic suddenly experience greater than anticipated liquidity
needs for any reason, it could face a liquidity risk that could
affect adversely its financial condition or operating results.
11
Excessive
Losses and Loss Expenses
Although Old Republics business segments encompass
different types of insurance, the greatest risk factor common to
all insurance coverages is excessive losses due to unanticipated
claims frequency, severity or a combination of both. Many of the
factors affecting the frequency and severity of claims depend
upon the type of insurance coverage, but others are shared in
common. Severity and frequency can be affected by changes in
national economic conditions, unexpectedly adverse outcomes in
claims litigation, often as a result of unanticipated jury
verdicts, changes in court made law, adverse court
interpretations of insurance policy provisions resulting in
increased liability or new judicial theories of liability,
together with unexpectedly high costs of defending claims.
Inadequate
Reserves
Reserves are the amounts that an insurance company sets aside
for its anticipated policy liabilities. Claim reserves are an
estimate of liability for unpaid claims and claims defense and
adjustment expenses, and cover both reported as well as IBNR
claims. It is not possible to calculate precisely what these
liabilities will amount to in advance and, therefore, the
reserves represent a best estimate at any point in time. Such
estimates are based upon known historical loss data and
expectations of future trends in claim frequency and severity,
interest rates and other economic considerations. The latter are
affected by a variety of factors over which insurers have little
or no control and which can be quite volatile.
Reserve estimates are periodically reviewed in light of known
developments and, where necessary, they are adjusted and refined
as circumstances may warrant. Nevertheless, the reserve setting
process is inherently uncertain. If for any of these reasons
reserve estimates prove to be inadequate, Old Republics
subsidiaries can be forced to increase their reported
liabilities; such an occurrence could result in a materially
adverse impact on their results of operations and financial
condition.
Inadequate
Pricing
Premium rates are generally determined on the basis of
historical data for claim frequency and severity as well as
related production and other expense patterns. In the event
ultimate claims and expenses exceed historically projected
levels, premium rates are likely to prove insufficient. Premium
rate inadequacy may not become evident quickly, may require time
to correct, and, much like excessive losses can affect adversely
Old Republics business, operating results and financial
condition.
Liquidity
Risk
As indicated above, Old Republic manages its fixed-maturity
investments with a view toward matching the maturities of those
investments with the anticipated liquidity needs of its
subsidiaries for the payment of claims and expenses. If a
subsidiary suddenly experienced
greater-than-anticipated
liquidity needs for any reason, it could require an injection of
funds that might not necessarily be available to meet its
obligations at a point in time.
Regulatory
Environment
Old Republics insurance businesses are subject to
extensive governmental regulation in all of the state and
similar jurisdictions in which they operate. These regulations
relate to such matters as licensing requirements, types of
insurance products that may be sold, premium rates, marketing
practices, capital and surplus requirements, investment
limitations, underwriting limitations, dividend payment
limitations, transactions with affiliates, accounting practices,
taxation and other matters. While most of the regulation is at
the state level, the federal government has increasingly
expressed an interest in regulating the insurance business and
has injected itself through the Graham-Leach-Bliley Act, the
Patriot Act, financial services regulation, changes in the
Internal Revenue Code and other legislation. All of these
regulations raise the costs of conducting an insurance business
through increased compliance expenses. Furthermore, as existing
regulations evolve through administrative and court
interpretations, and as new regulations are adopted, there can
be no way of predicting what impact these changes will have on
Old Republics businesses in the future, and the impact
could adversely affect Old Republics profitability and
limit its growth.
12
Competition
Each of Old Republics lines of insurance business is
highly competitive and is likely to remain so for the
foreseeable future. Moreover, existing competitors and the
capital markets have from time to time brought an influx of
capital and newly-organized entrants into the industry, and
changes in laws have allowed financial institutions, like banks
and savings and loans, to sell insurance products. Increases in
competition threaten to reduce demand for Old Republics
insurance products, reduce its market share, reduce its growth,
reduce its profitability and generally adversely affect its
results of operations and financial condition.
Rating
Downgrades
The competitive positions of insurance companies, in general,
have come to depend increasingly on independent ratings of their
financial strength and claims-paying ability. The rating
agencies base their ratings on criteria they establish regarding
an insurers financial strength, operating performance,
strategic position and ability to meet its obligations to
policyholders. A significant downgrade in the ratings of any of
Old Republics major policy-issuing subsidiaries could
negatively impact their ability to compete for new business and
retain existing business and, as a result, adversely affect
their operations and financial condition.
Financial
Institutions Risk
Old Republics subsidiaries have significant business
relationships with financial institutions, particularly national
banks. The subsidiaries are the beneficiaries of a considerable
amount of security in the form of letters of credit which they
hold as collateral securing the obligations of insureds and
certain reinsurers. Some of the banks themselves have
subsidiaries that reinsure Old Republics business. Other
banks are depositories holding large sums of money in escrow
accounts established by Old Republics title subsidiaries.
There is thus a risk of concentrated financial exposures in one
or more such banking institutions. If any of these institutions
fail or are unable to honor their credit obligations, or if
escrowed funds become lost or tied up due to the failure of a
bank, the result could be adverse to Old Republics
business, results of operations and financial condition.
In addition to the foregoing, the following are risk factors
that are particular to each of Old Republics three major
business segments.
General
Insurance Group
Catastrophic
Losses
While Old Republic limits the property exposures it assumes, the
casualty or liability insurance it underwrites creates an
exposure to claims arising out of catastrophes. The two
principal catastrophe exposures are earthquakes and acts of
terrorism in areas where there are large concentrations of
employees of an insured employer or other individuals who could
potentially be injured and assert claims against an insured
under workers compensation policies. Collateral damage to
property or persons from acts of terrorism and other calamities
could also expose general liability policies.
Following the September 11, 2001 terrorist attack, the
reinsurance industry eliminated coverage from substantially all
reinsurance contracts for claims arising from acts of terrorism.
As discussed elsewhere in this report, the U.S. Congress
subsequently passed TRIA, TRIREA, and TRIPRA legislation that
required primary insurers to offer coverage for certified acts
of terrorism under most commercial property and casualty
insurance policies. Although these programs established a
temporary federal reinsurance program through December 31,
2014, primary insurers like Old Republics general
insurance subsidiaries retain significant exposure for terrorist
act-related losses.
Long-Tailed
Losses
Coverage for general liability is considered long-tailed
coverage. Written in most cases on an occurrence
basis, it often takes longer for covered claims to be reported
and become known, adjusted and settled than it does for property
claims, for example, which are generally considered
short-tailed. The extremely long-tailed aspect of such claims as
pollution, asbestos, silicosis, manganism (welding rod fume
exposure), black lung, lead paint and other
13
toxic tort claims, coupled with uncertain and sometimes variable
judicial rulings on coverage and policy allocation issues and
the possibility of legislative actions, makes reserving for
these exposures highly uncertain. While Old Republic believes
that it has reasonably estimated its liabilities for such
exposures to date, and that its exposures are relatively modest,
there is a risk of materially adverse developments in both known
and as-yet-unknown claims.
Workers
Compensation Coverage
Workers compensation coverage is the second largest line
of insurance written within Old Republic. The frequency and
severity of claims under, and the adequacy of reserves for
workers compensation claims and expenses can all be
significantly influenced by such risk factors as future wage
inflation in states that index benefits, the speed with which
injured employees are able to return to work in some capacity,
the cost and rate of inflation in medical treatments, the types
of medical procedures and treatments, the cost of prescription
medications, the frequency with which closed claims reopen for
additional or related medical issues, the mortality of injured
workers with lifetime benefits and medical treatments, the use
of health insurance to cover some of the expenses, the
assumption of some of the expenses by states second injury
funds, the use of cost containment practices like preferred
provider networks, and the opportunities to recover against
third parties through subrogation. Adverse developments in any
of these factors, if significant, could have a materially
adverse effect on Old Republics operating results and
financial condition.
Reinsurance
Reinsurance is a contractual arrangement whereby one insurer
(the reinsurer) assumes some or all of the risk exposure written
by another insurer (the reinsured). Old Republic uses
reinsurance to manage its risks both in terms of the amount of
coverage it is able to write, the amount it is able to retain
for its own account, and the price at which it is able to write
it. The availability of reinsurance and its price, however, are
determined in the reinsurance market by conditions beyond Old
Republics control.
Reinsurance does not relieve the reinsured company of its
primary liability to its insureds in the event of a loss. It
merely reimburses the reinsured company. The ability and
willingness of reinsurers to honor their obligations represent
credit risks inherent in reinsurance transactions. Old Republic
addresses these risks by limiting its reinsurance to those
reinsurers it considers the best credit risks. In recent years,
however, there has been an ever decreasing number of reinsurers
considered to be acceptable risks by Old Republic.
There can be no assurance that Old Republic will be able to find
the desired or even adequate amounts of reinsurance at favorable
rates from acceptable reinsurers in the future. If unable to do
so, Old Republic would be forced to reduce the volume of
business it writes or retain increased amounts of liability
exposure. Because of the declining number of reinsurers Old
Republic finds acceptable, there is a risk that too much
reinsurance risk may become concentrated in too few reinsurers.
Each of these results could adversely affect Old Republics
business, results of operations, and financial condition.
Insureds
as Credit Risks
A significant amount of Old Republics liability and
workers compensation business, particularly for large
commercial insureds, is written on the basis of risk sharing
underwriting methods utilizing large deductibles, captive
insurance risk retentions, or other arrangements whereby the
insureds effectively retain and fund varying and at times
significant amounts of their losses. Their financial strength
and ability to pay are carefully evaluated as part of the
underwriting process and monitored periodically thereafter, and
their retained exposures are estimated and collateralized based
on pertinent credit analysis and evaluation. Because Old
Republic is primarily liable for losses incurred under its
policies, the possible failure or inability of insureds to honor
their retained liability represents a credit risk. Any
subsequently developing shortage in the amount of collateral
held would also be a risk, as would the failure or inability of
a bank to honor a letter of credit issued as collateral. These
risk factors could have a material adverse impact on Old
Republics results of operations and financial condition.
14
Guaranty
Funds and Residual Markets
In nearly all states, licensed property and casualty insurers
are required to participate in guaranty funds through
assessments covering a portion of insurance claims against
impaired or insolvent property and casualty insurers. Any
increase in the number or size of impaired companies would
likely result in an increase in Old Republics share of
such assessments.
Many states have established second injury funds that compensate
injured employees for aggravation of prior injuries or
conditions. These second injury funds are funded by assessments
or premium surcharges.
Residual market or pooling arrangements exist in many states to
provide various types of insurance coverage to those that are
otherwise unable to find private insurers willing to insure
them. All licensed property and casualty insurers writing such
coverage voluntarily are required to participate in these
residual market or pooling mechanisms.
A material increase in any of these assessments or charges could
adversely affect Old Republics results of operations and
financial condition.
Prior
Approval of Rates
Most of the lines of insurance underwritten by Old Republic are
subject to prior regulatory approval of premium rates in a
majority of the states. The process of securing regulatory
approval can be time consuming and can impair Old
Republics ability to effect necessary rate increases in an
expeditious manner. Furthermore, there is a risk that the
regulators will not approve a requested increase, particularly
in regard to workers compensation insurance with respect
to which rate increases often confront strong opposition from
local business, organized labor, and political interests.
Mortgage
Guaranty Group
Continued
Material Losses
It is likely that Old Republics mortgage insurance segment
will continue to incur material losses, particularly in its 2005
to early 2008 books of business due to the effect of the
recession that began in 2007. Any decline in the rate and
severity of losses will depend in part on improvements in
general economic conditions, unemployment rates, and the
housing, mortgage and credit markets. The timing of any such
improvements cannot be accurately forecasted and there is no
assurance that improvements will be uniform across all sectors.
Housing values and unemployment may be the last to recover. The
loan modification programs of the FDIC, Fannie Mae and Freddie
Mac and some of the lenders are still in their early stages and
it is unclear to what extent, if at all, such programs will
reduce the rate of loan defaults and, in turn, mortgage
insurance claims and losses.
Premium
Income and Long-Term Claim Exposures
Mortgage insurers such as Old Republic issue long duration,
guaranteed renewable policies covering multi-year periods during
which exposure to loss exists. Loss exposures typically manifest
themselves as recurring (normal) losses usually
concentrated between the second and fifth year following
issuance of anyone years new policies. Additionally, the
policies cover catastrophic aggregations of claims such as are
occurring during the current recession engendered by substantial
market dislocations in the housing and mortgage lending
industries.
Old Republics mortgage guaranty premiums stem principally
from monthly installment policies. Substantially all such
premiums are generally written and earned in the month coverage
is effective. Recognition of normal or catastrophic claim costs,
however, occurs only upon an instance of default, defined as an
insured mortgage loan that has missed two or more consecutive
monthly payments. Accordingly, there is a risk that the GAAP
revenue recognition for insured loans is not appropriately
matched to the risk exposure and the consequent recognition of
both normal and most significantly, future catastrophic loss
occurrences which are not permitted to be currently reserved
for. As a result, mortgage guaranty GAAP earnings for any
individual year or series of years may be materially adversely
affected, particularly by cyclical catastrophic loss events such
as the mortgage insurance industry has experienced since mid
year 2007. Reported GAAP earnings and financial condition form,
in part, the
15
basis for significant judgments and strategic evaluations made
by management, analysts, investors, and other users of the
financial statements issued by mortgage guaranty companies. The
risk exists that such judgments and evaluations are at least
partially based on GAAP financial information that does not
match revenues and expenses and is not reflective of the
long-term normal and catastrophic risk exposures assumed by
mortgage guaranty insurers at any point in time.
Inadequate
Loss Reserves
Old Republics mortgage insurance subsidiaries establish
reserves for losses and loss adjustment expenses based upon
mortgage loans reported to be in default as well as estimates of
those in default but not yet reported. Of necessity, the
reserves are at best estimates by management, taking into
consideration its judgments and assumptions regarding the
housing and mortgage markets, unemployment rates and economic
trends in general. During the current widespread, sustained
economic downturn, loss reserve estimates become subject to
greater uncertainty and volatility. The rate and severity of
actual losses could prove to be greater than expected and
require Old Republic to effect substantial increases in its loss
reserves. Depending upon the magnitude, such increases could
have a materially adverse impact on Old Republics mortgage
insurance segment and Old Republics consolidated results
of operations and financial condition. There can be no assurance
that the actual losses paid by the mortgage insurance
subsidiaries will not be materially greater than previously
established loss reserves.
Fewer
Coverage Rescissions
Old Republics mortgage insurance subsidiaries policy
provisions permit them to rescind coverage where they find
evidence that a mortgage loan did not qualify for insurance
coverage or evidence of a material misrepresentation in the loan
application by the borrower, the lender or the lenders
agent. During the past several years, the rate of rescissions
has risen dramatically. As a result, rescissions have materially
reduced loss payments, and Old Republics loss reserving
estimates reflect assumptions as to the levels of rescission
activity.
Some policyholders have increasingly challenged coverage
rescissions, and mortgage insurers, including one of Old
Republics subsidiaries, are currently involved in
litigation with policyholders regarding rescissions. It is
likely that the current rates of rescission will continue or
even increase and that there will be further litigation or
arbitral challenges to the mortgage insurance industrys
rescissions of coverage. If any of such challenges are
successful with respect to Old Republics subsidiaries, it
could have a materially adverse effect on the subsidiaries
loss reserves, loss payments and their financial condition and
results of operations, and potentially on the consolidated
financial condition and results of Old Republics
operations. Even if such challenges are unsuccessful, the costs
of addressing them would likely be substantial.
Capital
Adequacy
The past several years material increases in claims and
loss payments have eroded the mortgage insurance
subsidiaries statutory capital base. Total statutory
capital for mortgage guaranty insurers is defined as the sum of
policyholders surplus and the statutory contingency
reserves. Sixteen states have insurance laws or regulations
which require a mortgage insurer to maintain a minimum amount of
statutory capital relative to the level of risk in force. While
formulations of minimum capital may vary in certain states, the
most common measure applied allows for a maximum permitted risk
to capital ratio of 25 to 1. The failure to maintain the
prescribed minimum capital level in a particular state would
generally require a mortgage insurer to immediately stop writing
new business until it reestablishes the required level of
capital or receives a waiver of the requirement from a
states insurance regulatory authorities. Legislation
permitting the issuance of such waivers has recently been
enacted in North Carolina, where Old Republics two
principal mortgage insurance subsidiaries are domiciled, and
eight of the other states.
It is likely that Old Republics principal mortgage
insurance subsidiary, Republic Mortgage Insurance Company
(RMIC) will breach the minimum capital requirement
during 2010. In anticipation of its doing so, RMIC has requested
and received waivers of the minimum policyholder position
requirements from insurance regulatory authorities in Arizona,
Florida, Illinois, North Carolina, Oregon and Wisconsin, and has
made similar requests to the insurance regulators in some of the
other ten states that have similar minimum capital or maximum
risk-to-capital
requirements. Most of the waivers extend until July 1,
2011, but the waiver in Florida extends only
16
until February 16, 2011. Most of the other states have
indicated a willingness to waive their requirements as well,
while some have not yet committed. For those that are willing to
waive their requirements, there can be no certainty as to how
long their waivers will be in place, or that they will not
exercise their discretion to terminate their waivers earlier
than expected, or that RMIC will again meet their capital
requirements by the end of the waiver period. For those states
that have not yet committed, there can be no assurance that they
will waive their requirements. Absent a waiver, RMIC could be
barred from writing any new business in one of these states
unless and until its capital base has recovered, and there can
be no certainty when or if it will recover. New insurance
written in the states that have not issued a waiver to RMIC
represented approximately 32% of the total for through the first
quarter of 2010.
In response to the possibility that a waiver may not be granted
in all cases, Old Republic has positioned another mortgage
insurance subsidiary, Republic Mortgage Insurance Company of
North Carolina (RMIC NC), to be able to possibly
write business in place of RMIC if the latter is required to
cease. On October 7, 2009, RMIC and RMIC NC entered into an
agreement with Fannie Mae under which Fannie Mae conditionally
approved RMIC NC as an eligible, Fannie Mae approved
mortgage insurer in those states where RMIC becomes prohibited
from writing business due to a breach of the minimum capital
requirements noted above. The conditions limit the amount of
business that RMIC NC would be permitted to write, and the
approval is limited in duration and may be revoked by Fannie Mae
at any time. On March 11, 2010, a substantially similar
conditional approval was received from Freddie Mac. Accordingly,
while the Fannie Mae and Freddie Mac agreements may help the
mortgage insurance subsidiaries avoid a complete shutdown in
certain states if RMICs capital requirements are breached,
they would not permit RMIC NC to fully replace RMIC as the
segments principal mortgage insurer.
Diminished
Role for Fannie Mae Freddie Mac
The market for private mortgage insurance exists primarily as a
result of restrictions within the federal charters of the GSEs
which require an acceptable form of credit enhancement on loans
purchased by the GSEs that have
loan-to-value
(LTV) ratios in excess of 80%. These institutions
establish the levels of required coverage, the underwriting
standards for the loans they will purchase and the loss
mitigation efforts that must be followed on insured loans.
Changes in any of these respects could result in a reduction of
the Mortgage Guaranty Groups business or an increase in
its claim costs.
In response to their deteriorating financial conditions, the
GSEs were taken over and placed in conservatorship under the
Federal Housing Finance Agency (FHFA) in September
2008. As their conservator, the FHFA could change the GSEs
business practices with respect to mortgage credit enhancement,
or new federal legislation prompted by the increasing role of
the federal government in the residential mortgage market could
alter their charters or restructure the GSEs in ways that may
reduce or eliminate the purchase of private mortgage insurance.
Any such changes could have a material adverse effect on Old
Republics subsidiaries and the entire mortgage insurance
industry.
Competition
Competition is always a risk factor and comes not only from the
five other mortgage insurers which comprise the industry, but
also from the Federal Housing Administration (FHA)
as well as the GSEs and the insured mortgage lenders themselves.
Beginning in 2008, the volume of business underwritten by
private mortgage insurers began to decrease generally as a
result of more restrictive underwriting guidelines, increased
premium rates, and changes to the pricing policies of the
GSEs. These changes, coupled with certain changes to the
FHAs guidelines, resulted in a significant increase in the
FHAs insured volume and its share of the market for
mortgage default protection.
Other competitive risk factors faced by Old Republics
mortgage insurance subsidiaries stem from certain credit
enhancement alternatives to private mortgage insurance. These
include:
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the retention of mortgage loans on an uninsured basis in the
lenders portfolio of assets;
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capital markets utilizing alternative credit enhancements.
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17
Regulation
and Litigation
The possibly adverse effect of litigation and regulation are
ever present risk factors. Captive reinsurance and other risk
participating structures with mortgage lenders have been
challenged in recent years as potential violations of the Real
Estate Settlement Procedures Act (RESPA). From time
to time, the U.S. Department of Housing and Urban
Development has considered adopting RESPA regulations which
would have adversely impacted mortgage insurance by requiring
that the premiums be combined with all other settlement service
charges in a single package fee. The recently proposed Consumer
Financial Protection Agency would include new regulations for
mortgage insurance. The industry is already subject to detailed
regulation by the states insurance regulatory authorities,
compliance with which is costly. The recent losses suffered by
the industry have resulted in greater regulatory scrutiny and
burdens for Old Republics subsidiaries and the industry as
a whole. Any regulatory changes affecting capital requirements
or reserving requirements could potentially have a material
adverse effect on Old Republics mortgage insurance
subsidiaries.
Title Insurance
Group
Housing
and Mortgage Lending Markets
The principal risk factor for the title insurance segment has
been the sharp decline in residential real estate activity that
began in 2006. The tightening and collapse of credit markets,
the collapse of the housing market, the general decline in the
value of real property, rising unemployment and the uncertainty
and negative trends in general economic conditions have created
a difficult operating environment for Old Republics title
insurance subsidiaries. Depending upon their ultimate severity
and duration, these conditions could have a materially adverse
effect on the subsidiaries financial conditions and
results of operation over the near term and longer. The impact
of these conditions has been somewhat mitigated both by lower
mortgage interest rates, leading to an increase in mortgage
refinancings and by an increase in the number of agents
producing business for Old Republics title insurance
subsidiaries.
Competition
Business comes to title insurers primarily by referral from real
estate agents, lenders, developers and other settlement
providers. The sources of business lead to a great deal of
competition among title insurers. Although the top four title
insurance companies during 2009 accounted for about 92% of
industry-wide premium volume, there are numerous smaller
companies representing the remainder at the regional and local
levels. The smaller companies are an ever-present competitive
risk in the regional and local markets where their business
connections can give them a competitive edge. Moreover, there is
almost always competition among the major companies for key
employees, especially those who are engaged in the production
side of the business.
Regulation
and Litigation
Regulation is also a risk factor for title insurers. The title
insurance industry has recently been, and continues to be, under
regulatory scrutiny in a number of states with respect to
pricing practices, and alleged RESPA violations and unlawful
rebating practices. The regulatory investigations could lead to
industry-wide reductions in premium rates and escrow fees, the
inability to get rate increases when necessary, as well as to
changes that could adversely affect Old Republics ability
to compete for or retain business or raise the costs of
additional regulatory compliance.
As with Old Republics other business segments, litigation
poses a risk factor. Litigation is currently pending in a number
of states in actions against the title industry alleging
violations of rate applications in those states with respect to
title insurance issued in certain mortgage refinancing
transactions and violations of federal anti-trust laws in
settling and filing premium rates.
18
Other
Risks
Inadequate title searches are among the risk factors faced by
the entire industry. If a title search is conducted thoroughly
and accurately, there should theoretically never be a claim.
When the search is less than thorough or complete, title defects
can go undetected and claims result.
To a lesser extent, fraud is also a risk factor for all title
companies sometimes in the form of an agents
or an employees defalcation of escrowed funds, sometimes
in the form of fraudulently issued title insurance policies.
Risks
Relating to PMAs Business
The existing business of PMA is subject to significant risks.
The risks affecting PMAs business are described in
Item 1A of its
Form 10-K
for the year ended December 31, 2009, which is incorporated
herein by reference. We anticipate that these risks will
continue to apply to PMAs businesses following the merger.
Risks
Relating to the Pending Merger
The
announcement and pendency of the merger could have an adverse
effect on Old Republics or PMAs stock prices,
businesses, financial conditions, results of operations or
business prospects.
The announcement and pendency of the merger could disrupt
PMAs
and/or Old
Republics businesses in the following ways, among others:
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employees may experience uncertainty regarding their future
roles with the combined company, which might adversely affect
PMAs
and/or Old
Republics ability to retain, recruit and motivate key
personnel;
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the attention of PMA
and/or Old
Republic management may be directed toward the completion of the
merger and transaction-related considerations and may be
diverted from the
day-to-day
business operations of their respective companies, and matters
related to the merger may require commitments of time and
resources that could otherwise have been devoted to other
opportunities that might have been beneficial to Old Republic or
PMA; and
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third parties with business relationships with Old Republic or
PMA may seek to terminate
and/or
renegotiate their relationships with Old Republic or PMA as a
result of the merger, whether pursuant to the terms of their
existing agreements with PMA
and/or Old
Republic or otherwise.
|
The merger agreement also restricts PMA from engaging in certain
actions and taking certain actions without Old Republics
approval, which could prevent PMA from pursuing opportunities
that may arise prior to the closing of the merger or termination
of the merger agreement.
Any of these matters could adversely affect either or both
companies respective businesses, financial conditions,
results of operations, prospects and stock prices.
Because
the market price of Old Republic common stock will fluctuate,
PMA shareholders cannot be sure of the exchange ratio or the
precise value of the merger consideration.
Under the terms of the merger agreement, Old Republic will issue
to PMAs shareholders 0.55 shares of Old Republic
common stock for each share of PMA class A common stock,
subject to a collar. Under the collar, the exchange ratio could
be as low as 0.50 shares of Old Republic common stock for
each share of PMA class A common stock or as high as
0.60 shares of Old Republic common stock for each share of
PMA class A common stock. In addition, the price of Old
Republic common stock issuable in the merger may vary from the
price on the date that the parties entered into the merger
agreement, on the date that the parties announced the merger, at
the effective time of the merger, and on the date that you
receive the merger consideration. Changes in the Old Republic
stock price and stock prices of Old Republic and PMA generally
may result from a variety of factors, including general market,
economic and political conditions, changes in the parties
respective businesses, operations and prospects, regulatory
considerations, legal proceedings and developments, market
assessments of the benefits of the merger and the likelihood
that the merger will be consummated and the timing of such
consummation, the prospects of post-merger operations and other
factors. Many of these factors are beyond Old Republics
control. Accordingly,
19
at the time of the PMA special meeting, PMA shareholders will
not be able to calculate the precise value of the merger
consideration that they would receive upon completion of the
merger.
Many
of the anticipated benefits of combining Old Republic and PMA
may not be realized.
Old Republic and PMA entered into the merger agreement with the
expectation that the merger would result in various benefits
including, among other things, synergies, cost savings and
operating efficiencies. The success of the merger will depend,
in part, on Old Republics ability to realize these
anticipated benefits and cost savings from combining the
businesses of Old Republic and PMA. However, to realize these
anticipated benefits and cost savings, Old Republic must
successfully combine the businesses of Old Republic and PMA. If
Old Republic is not able to achieve these objectives, the
anticipated benefits and cost savings of the merger may not be
realized fully or at all or may take longer to realize than
expected.
Old Republic and PMA have operated and, until the completion of
the merger, will continue to operate independently. It is
possible that the integration process could take longer than
anticipated and could result in the loss of key employees or the
disruption of each companys ongoing businesses, which
could adversely affect Old Republics ability to achieve
the anticipated benefits of the merger. Old Republic may have
difficulty coordinating the operations and personnel of two
geographically separated companies and addressing possible
differences in corporate cultures and management philosophies.
Integration efforts between the two companies will also divert
management attention and resources. These integration activities
could have an adverse effect on the businesses of both Old
Republic and PMA during the transition period. The integration
process is subject to a number of uncertainties. Although Old
Republics plans for integration are focused on minimizing
those uncertainties to help achieve the anticipated benefits, no
assurance can be given that these benefits will be realized or,
if realized, the timing of their realization. Failure to achieve
these anticipated benefits could result in increased costs or
decreases in the amount of expected revenues and could adversely
affect Old Republics future business, financial condition,
operating results and prospects. In addition, Old Republic may
not be able to eliminate duplicative costs or realize other
efficiencies from integrating the businesses to offset part or
all of the transaction and merger-related costs incurred by Old
Republic and PMA.
Any
delay in completing the merger may substantially reduce the
benefits expected to be obtained from the merger.
The merger is subject to a number of conditions beyond the
control of PMA and Old Republic that may prevent, delay or
otherwise materially adversely affect its completion. See
The Merger Agreement Conditions to Completion
of the Merger. Old Republic and PMA cannot predict whether
or when the conditions required to complete the merger will be
satisfied. The requirements for obtaining the required
clearances and approvals could delay the effective time of the
merger for a significant period of time or prevent it from
occurring. Any delay in completing the merger may materially
adversely affect the synergies and other benefits that Old
Republic and PMA expect to achieve if the merger and the
integration of their respective businesses are completed within
the expected timeframe.
Failure
to complete the merger could negatively affect the stock prices
and the future business and financial results of Old Republic
and PMA.
If the merger is not completed, the ongoing businesses of Old
Republic or PMA may be adversely affected and Old Republic and
PMA will be subject to several risks, including the following:
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having to pay certain significant costs relating to the merger
without receiving the benefits of the merger;
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the attention of management of Old Republic and PMA will have
been diverted to the merger instead of on each companys
own operations and pursuit of other opportunities that could
have been beneficial to that company; and
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resulting negative customer perception could adversely affect
the ability of Old Republic and PMA to compete for, or to win,
new and renewal business in the marketplace.
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20
If the merger is not completed, PMAs ability to reach a
resolution with the Pennsylvania Insurance Department with
respect to the Departments examination of PMAs
insurance subsidiaries as of December 31, 2007 will be
adversely impacted. See The Merger PMAs
Reasons for the Merger Resolution of Pennsylvania
Insurance Department Examination. Based on recent
discussions with representatives of the Department, in order to
resolve the outstanding issues as a stand alone organization,
PMA will need to engage in administrative and legal review
processes which, irrespective of their ultimate outcome, will
likely hinder the long-term and
day-to-day
continuity of PMAs business operations and, in the
interim, potentially have a negative impact on the financial
ratings of its insurance subsidiaries. PMA cannot predict how
long the processes would take or whether it would ultimately be
successful. In the event that PMA is unsuccessful in its
administrative and legal appeals, PMA could be required to take
actions, such as increasing its loss and loss adjustment expense
reserves, that would materially and adversely affect its
business, financial condition and results of operations.
Old
Republic and PMA will incur substantial transaction and
merger-related costs in connection with the
merger.
Old Republic and PMA expect to incur a number of substantial
non-recurring transaction fees and other costs associated with
completing the merger, combining the operations of the two
companies and achieving desired synergies. Additional
unanticipated costs may be incurred in the integration of the
businesses of Old Republic and PMA.
Directors
and officers of PMA have certain interests that are different
from those of PMA shareholders generally.
Executive officers of PMA negotiated the terms of the merger
agreement and the PMA board of directors approved the merger
agreement and recommends that PMA shareholders vote in favor of
the proposal to adopt the merger agreement. Nine officers of PMA
have management agreements with PMA that provide for severance
payments and the acceleration of existing equity awards if the
executive officers employment with PMA is terminated
following a change in control transaction. The merger will
constitute a change in control transaction. While it is a
condition to the completion of the merger that Vincent Donnelly
and six of these officers shall have delivered written voluntary
terminations of these agreements, there can be no assurance that
they will do so, in which event Old Republic would not be
obligated to complete the merger.
Following completion of the merger, one of the independent
directors of PMA will join Old Republics board of
directors as a Class 2 director. In addition,
restricted shares held by non-employee directors of PMA will
vest upon completion of the merger. These severance
arrangements, directorship positions and equity awards are
different from or in addition to the interests of PMA
shareholders in the company. PMA shareholders should take into
account such interests when they consider the PMA board of
directors recommendation that the PMA shareholders vote
for adoption of the merger agreement. For a discussion of the
interests of directors and executive officers in the merger, see
The Merger Interests of PMA Officers and
Directors in the Merger.
In
certain circumstances, the merger agreement requires payment of
a termination fee of $8 million by PMA to Old Republic and,
under certain circumstances, PMA must allow Old Republic 3
business days to match any alternative acquisition proposal
prior to any change in the PMA boards recommendation.
These terms could discourage a third party from proposing an
alternative transaction to the merger.
Under the merger agreement, PMA may be required to pay to Old
Republic a termination fee of $8 million if the merger
agreement is terminated under certain circumstances. Should the
merger agreement be terminated in circumstances under which such
a termination fee is payable, the payment of this fee could have
material and adverse consequences to the financial condition and
operations of PMA. Additionally, under the merger agreement, in
the event of a potential change by the PMA board of directors of
its recommendation with respect to the merger, PMA must allow
Old Republic 3 business days to make a revised proposal, prior
to which the PMA board of directors may not change its
recommendation with respect to the merger agreement. These terms
could affect the structure, pricing and terms proposed by other
parties seeking to acquire or merge with PMA, and could make it
more difficult for another party to make a superior acquisition
proposal for PMA. For a description of the termination rights of
each party and the termination fee payable by PMA under the
merger agreement, see The Merger Agreement
Termination of the Merger Agreement and
The Merger Agreement Termination Fees and
Expenses.
21
Old
Republics and PMAs shareholders will be diluted by
the merger.
The merger will dilute the ownership position of the current
shareholders of Old Republic. Old Republic will issue a maximum
of approximately 19,884,057 shares of Old Republic common
stock pursuant to the merger based on the number of outstanding
shares of PMA class A common stock on July 30, 2010
and assuming conversion of all of PMAs
4.25% Convertible Debt and the exercise of all outstanding
options to purchase shares of PMA class A common stock
(which options, if unexercised, will be converted pursuant to
the merger into options to acquire shares of Old Republic common
stock). In addition, a maximum of approximately
573,871 shares of Old Republic common stock will be
issuable in connection with outstanding PMA restricted share
units that will be converted pursuant to the merger into
restricted share units of Old Republic (the As-Converted
Award Shares). After the effective time of the merger, Old
Republic shareholders and PMA shareholders will own
approximately 92.2% and 7.8%, respectively, of Old Republic on a
fully diluted basis based on the outstanding shares of Old
Republic common stock and PMA class A common stock on
July 30, 2010 and assuming the issuance of the maximum
number of As-Converted Award Shares.
The
date that PMA shareholders will receive their merger
consideration is uncertain.
The completion of the merger is subject to adoption by PMA
shareholders and the satisfaction or waiver of certain other
conditions. While PMA and Old Republic currently expect to
complete the merger near the end of the third quarter of 2010,
such completion date could be later than expected due to delays
in receiving such adoption or satisfying the conditions to
closing. Accordingly, neither PMA nor Old Republic can provide
PMA shareholders with a definitive date on which they will
receive the merger consideration.
The
market price of Old Republic common stock after the merger may
be affected by factors different from those affecting PMA
class A common stock currently.
If the merger is completed, holders of PMA class A common
stock will become holders of Old Republic common stock. The
results of operations and market price of Old Republic common
stock may be affected by factors different from those currently
affecting the results of operations and market prices of PMA
class A common stock. These factors include:
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a greater number of shares outstanding;
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different shareholders;
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different businesses, including with respect to the types of
business written, geographical areas of operation and
underwriting guidelines; and
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different assets, including investment portfolios, and
capitalizations.
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Accordingly, the historical market prices and financial results
of PMA, which PMA shareholders considered when investing in PMA,
may not be indicative of the market prices and financial results
for the combined company after the merger.
The
market price of Old Republic common stock and Old
Republics earnings per share may decline as a result of
the merger.
The market price of Old Republic common stock may decline as a
result of, among other things, the merger if Old Republic does
not achieve the perceived benefits of the merger as rapidly or
to the extent anticipated by financial or industry analysts or
if the effect of the merger on Old Republics financial
results is not consistent with the expectations of financial or
industry analysts. In addition, the failure to achieve expected
benefits and unanticipated costs relating to the merger could
reduce Old Republics future earnings per share.
In addition, following the merger, shareholders of Old Republic
and former shareholders PMA will own interests in a company
operating an expanded business with more assets and a different
mix of liabilities. Current shareholders of Old Republic and
shareholders of PMA may not wish to continue to invest in Old
Republic, or for other reasons may wish to dispose of some or
all of their interests in Old Republic. If, following the
merger, large amounts of Old Republics common stock are
sold, the price of its common stock could decline.
22
Certain
provisions of Old Republics corporate documents could make
a future acquisition of Old Republic more
difficult.
The existence of some provisions in Old Republics
certificate of incorporation and by-laws, as currently in
effect, as well as its shareholders rights plan described
below, could discourage potential proposals to acquire Old
Republic, delay or prevent a change in control of Old Republic
or limit the price that investors may be willing to pay in the
future for shares of Old Republic common stock. As Old Republic
shareholders, former PMA shareholders will be subject to the
provisions of Old Republics corporate governing documents
which could make it more difficult to effect a change of control
of Old Republic, including:
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the ability of Old Republics board of directors to issue
and set the terms of preferred stock without the approval of Old
Republics shareholders;
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the ability of Old Republics board of directors to adopt,
amend or repeal Old Republics by-laws;
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the staggered nature of Old Republics board of directors;
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the potential restrictions on the ability of a 10% holder of Old
Republic common stock to complete a business combination with
Old Republic;
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the application of Section 203 of the General Corporation
Law of the State of Delaware (DGCL) to Old Republic,
which may limit the ability of an interested shareholder to
engage in a business combination with Old Republic; and
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restrictions on the rights of shareholders to submit proposals
to be considered at shareholders meetings.
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23
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL DATA OF PMA
Set forth below is certain selected historical consolidated
financial data relating to PMA. The financial data has been
derived from the unaudited financial statements filed as part of
PMAs Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2010 and the audited
financial statements filed as part of PMAs Annual Report
on
Form 10-K
for the year ended December 31, 2009. This financial data
should be read in conjunction with the financial statements and
the related notes and other financial information contained in
that
Form 10-Q
and
Form 10-K,
each of which is incorporated by reference into this proxy
statement/prospectus. More comprehensive financial information,
including managements discussion and analysis of
PMAs financial condition and results of operations, is
contained in other documents filed by PMA with the SEC, and the
following summary is qualified in its entirety by reference to
such other documents and all of the financial information and
notes contained in those documents. See Where You Can Find
More Information below.
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Q1 2010
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Q1 2009
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FY 2009
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FY 2008
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FY 2007
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FY 2006
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FY 2005
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(Dollar amounts in thousands, except per share data)(1)
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Gross Premiums Written
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$
|
171,905
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$
|
164,070
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$
|
561,266
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|
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$
|
528,915
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|
|
$
|
524,172
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|
|
$
|
455,756
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|
$
|
420,787
|
|
|
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|
|
|
|
|
|
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Net Premiums Written
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$
|
128,245
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$
|
117,978
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$
|
401,905
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|
$
|
414,237
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|
|
$
|
394,698
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|
|
$
|
373,001
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|
|
$
|
374,975
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Consolidated Revenues:
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Net premiums earned
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$
|
103,496
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|
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$
|
104,930
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$
|
414,771
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$
|
390,217
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|
|
$
|
378,243
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|
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$
|
367,403
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|
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$
|
357,824
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Claims service revenues and commission income
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20,975
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|
|
|
19,147
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|
|
|
78,471
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|
|
|
69,754
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|
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|
37,039
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|
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27,853
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|
|
|
23,591
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Net investment income
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9,120
|
|
|
|
8,457
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|
|
|
36,876
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|
|
|
36,069
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|
|
|
39,592
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|
|
|
35,851
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|
|
|
32,235
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Net realized investment gains (losses)
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|
426
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|
|
|
749
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|
|
|
514
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(4,724
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)
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|
563
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1,239
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|
|
|
372
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Other revenues
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|
|
392
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|
|
|
176
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|
|
|
1,083
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|
2,841
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|
|
340
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|
|
244
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|
|
406
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Total consolidated revenues
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$
|
134,409
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$
|
133,459
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$
|
531,715
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$
|
494,157
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|
|
$
|
455,777
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$
|
432,590
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|
|
$
|
414,428
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Components of net income (loss)(2):
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Pre-tax operating income (loss):
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|
|
|
|
|
|
|
|
|
|
|
The PMA Insurance Group(3)
|
|
$
|
14,267
|
|
|
$
|
15,187
|
|
|
$
|
43,050
|
|
|
$
|
46,713
|
|
|
$
|
38,045
|
|
|
$
|
26,082
|
|
|
$
|
19,511
|
|
Fee-based Business(3)
|
|
|
2,305
|
|
|
|
2,013
|
|
|
|
7,208
|
|
|
|
7,205
|
|
|
|
3,724
|
|
|
|
2,802
|
|
|
|
2,509
|
|
Corporate and Other
|
|
|
(4,366
|
)
|
|
|
(5,000
|
)
|
|
|
(19,127
|
)
|
|
|
(20,651
|
)
|
|
|
(19,564
|
)
|
|
|
(21,580
|
)
|
|
|
(24,598
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax operating income (loss)
|
|
|
12,206
|
|
|
|
12,200
|
|
|
|
31,131
|
|
|
|
33,267
|
|
|
|
22,205
|
|
|
|
7,304
|
|
|
|
(2,578
|
)
|
Income tax expense (benefit)
|
|
|
4,389
|
|
|
|
4,384
|
|
|
|
(9,357
|
)(4)
|
|
|
11,730
|
|
|
|
7,822
|
|
|
|
2,783
|
|
|
|
2,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
7,817
|
|
|
|
7,816
|
|
|
|
40,488
|
|
|
|
21,537
|
|
|
|
14,383
|
|
|
|
4,521
|
|
|
|
(5,137
|
)
|
Net realized investment gains (losses) after tax
|
|
|
277
|
|
|
|
487
|
|
|
|
334
|
|
|
|
(3,071
|
)
|
|
|
366
|
|
|
|
805
|
|
|
|
242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
8,094
|
|
|
|
8,303
|
|
|
|
40,822
|
|
|
|
18,466
|
|
|
|
14,749
|
|
|
|
5,326
|
|
|
|
(4,895
|
)
|
Loss from discontinued operations, net of tax
|
|
|
|
|
|
|
(86
|
)
|
|
|
(19,609
|
)
|
|
|
(12,777
|
)
|
|
|
(57,277
|
)
|
|
|
(1,275
|
)
|
|
|
(16,125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
8,094
|
|
|
$
|
8,217
|
|
|
$
|
21,213
|
|
|
$
|
5,689
|
|
|
$
|
(42,528
|
)
|
|
$
|
4,051
|
|
|
$
|
(21,020
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
32,199,378
|
|
|
|
31,956,183
|
|
|
|
32,133,970
|
|
|
|
31,820,173
|
|
|
|
32,169,287
|
|
|
|
32,238,278
|
|
|
|
31,682,648
|
|
Diluted
|
|
|
32,260,938
|
|
|
|
32,020,346
|
|
|
|
32,186,402
|
|
|
|
32,038,781
|
|
|
|
32,578,025
|
|
|
|
32,731,360
|
|
|
|
31,682,648
|
|
Income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
$
|
0.25
|
|
|
$
|
0.26
|
|
|
$
|
1.27
|
|
|
$
|
0.58
|
|
|
$
|
0.46
|
|
|
$
|
0.17
|
|
|
$
|
(0.15
|
)
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
(0.61
|
)
|
|
|
(0.40
|
)
|
|
|
(1.78
|
)
|
|
|
(0.04
|
)
|
|
|
(0.51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.25
|
|
|
$
|
0.26
|
|
|
$
|
0.66
|
|
|
$
|
0.18
|
|
|
$
|
(1.32
|
)
|
|
$
|
0.13
|
|
|
$
|
(0.66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
$
|
0.25
|
|
|
$
|
0.26
|
|
|
$
|
1.27
|
|
|
$
|
0.58
|
|
|
$
|
0.45
|
|
|
$
|
0.16
|
|
|
$
|
(0.15
|
)
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
(0.61
|
)
|
|
|
(0.40
|
)
|
|
|
(1.76
|
)
|
|
|
(0.04
|
)
|
|
|
(0.51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.25
|
|
|
$
|
0.26
|
|
|
$
|
0.66
|
|
|
$
|
0.18
|
|
|
$
|
(1.31
|
)
|
|
$
|
0.12
|
|
|
$
|
(0.66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity per share
|
|
$
|
12.96
|
|
|
$
|
10.91
|
|
|
$
|
12.46
|
|
|
$
|
10.78
|
|
|
$
|
11.92
|
|
|
$
|
12.83
|
|
|
$
|
12.70
|
|
Consolidated Financial Position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
857,738
|
|
|
$
|
786,307
|
|
|
$
|
862,653
|
|
|
$
|
772,241
|
|
|
$
|
815,331
|
|
|
$
|
786,344
|
|
|
$
|
763,197
|
|
Total assets from continuing operations
|
|
|
2,409,711
|
|
|
|
2,317,778
|
|
|
|
2,362,739
|
|
|
|
2,259,053
|
|
|
|
2,205,985
|
|
|
|
1,991,709
|
|
|
|
1,955,085
|
|
Total assets
|
|
|
2,409,711
|
|
|
|
2,553,043
|
|
|
|
2,362,739
|
|
|
|
2,502,716
|
|
|
|
2,581,641
|
|
|
|
2,666,407
|
|
|
|
2,888,045
|
|
Unpaid losses and LAE
|
|
|
1,274,006
|
|
|
|
1,256,435
|
|
|
|
1,269,685
|
|
|
|
1,242,258
|
|
|
|
1,212,956
|
|
|
|
1,152,704
|
|
|
|
1,169,338
|
|
Debt
|
|
|
137,445
|
|
|
|
129,380
|
|
|
|
143,380
|
|
|
|
129,380
|
|
|
|
131,262
|
|
|
|
131,211
|
|
|
|
196,181
|
|
Shareholders equity
|
|
|
418,130
|
|
|
|
351,270
|
|
|
|
401,797
|
|
|
|
344,656
|
|
|
|
378,584
|
|
|
|
419,093
|
|
|
|
406,223
|
|
24
|
|
|
(1) |
|
Unless specifically identified, amounts exclude discontinued
operations. |
|
(2) |
|
Operating income (loss), which PMA defines as GAAP net income
(loss) excluding net realized investment gains (losses) and
results from discontinued operations, is the financial
performance measure used by PMAs management and Board of
Directors to evaluate and assess the results of PMAs
businesses. Net realized investment activity is excluded because
(i) net realized investment gains and losses are
unpredictable and not necessarily indicative of current
operating fundamentals or future performance of the business
segments and (ii) in many instances, decisions to buy and
sell securities are made at the holding company level, and such
decisions result in net realized gains and losses that do not
relate to the operations of the individual segments.
Accordingly, PMA reports pre-tax operating income (loss) by
segment in Note 16 of PMAs Consolidated Financial
Statements included in PMAs annual report on
Form 10-K
incorporated into this proxy statement/prospectus by reference.
Operating income (loss) does not replace net income (loss) as
the GAAP measure of PMAs consolidated results of
operations. |
|
(3) |
|
As a result of PMAs acquisition of Midlands Management
Corporation (Midlands) in 2007, the combined
operating results of PMA Management Corp. and Midlands have been
reported in a new reporting segment, Fee-based Business. The
results of PMA Management Corp. were previously included with
the results of The PMA Insurance Group. For comparative
purposes, the financial results of The PMA Insurance Group and
PMA Management Corp. have been reclassified in all prior periods
to reflect this change. The combined operating results for
Fee-based Business also include those of PMA Management Corp. of
New England, Inc., which PMA acquired in June 2008. |
|
(4) |
|
In 2009, PMA reduced the valuation allowance on PMAs
deferred tax assets by $20.0 million, which resulted in an
income tax benefit. |
25
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION OF OLD REPUBLIC
The unaudited pro forma condensed combined financial statements
(pro forma financial statements) that follow combine
the historical accounts of Old Republic and PMA. The pro forma
balance sheet as of March 31, 2010 therefore shows the
combined financial position of Old Republic and PMA as if the
merger of the two companies had occurred on that date.
Similarly, the pro forma statements of income for the year ended
December 31, 2009 and for the three months ended
March 31, 2010 reflect the companies combined results
of operations as if their merger had occurred as of
January 1, 2009. These pro forma financial statements
should be read in conjunction with:
|
|
|
|
|
The accompanying notes to the pro forma financial statements;
|
|
|
|
Old Republics and PMAs separate unaudited historical
consolidated financial statements as of and for the three months
ended March 31, 2010 included in their respective
March 31, 2010 Reports on
Form 10-Q; and
|
|
|
|
Old Republics and PMAs separate audited historical
consolidated financial statements as of and for the year ended
December 31, 2009 included in their respective 2009 Reports
on
Form 10-K.
|
The pro forma financial statements have been prepared for
informational purposes only. The financial position and results
shown therein are not necessarily indicative of what the past
financial position and results of operations of the two combined
companies would have been, or those of their post merger periods.
26
Unaudited
Pro Forma Condensed Combined Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2010
|
|
|
|
Historical
|
|
|
Historical
|
|
|
Pro Forma
|
|
|
|
|
Pro Forma
|
|
|
|
Old Republic
|
|
|
PMA
|
|
|
Adjustments
|
|
|
Notes
|
|
Old Republic
|
|
|
|
($ in millions)
|
|
|
ASSETS
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities, at fair value
|
|
$
|
8,352.2
|
|
|
$
|
800.6
|
|
|
$
|
|
|
|
|
|
$
|
9,152.8
|
|
Equity securities, at fair value
|
|
|
631.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
631.4
|
|
Short-term investments, at fair value
|
|
|
783.5
|
|
|
|
25.9
|
|
|
|
|
|
|
|
|
|
809.4
|
|
Other investments
|
|
|
31.2
|
|
|
|
31.2
|
|
|
|
|
|
|
|
|
|
64.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
9,798.5
|
|
|
|
857.7
|
|
|
|
|
|
|
|
|
|
10,656.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
74.9
|
|
|
|
13.6
|
|
|
|
(6.0
|
)
|
|
2(k)
|
|
|
82.5
|
|
Accrued investment income
|
|
|
112.5
|
|
|
|
7.7
|
|
|
|
|
|
|
|
|
|
120.2
|
|
Accounts and notes receivable
|
|
|
794.4
|
|
|
|
275.1
|
|
|
|
|
|
|
|
|
|
1,069.5
|
|
Federal income tax recoverable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.4
|
|
Deferred
|
|
|
|
|
|
|
131.0
|
|
|
|
(121.8
|
)
|
|
2(d)
|
|
|
9.2
|
|
Prepaid federal income taxes
|
|
|
136.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
136.0
|
|
Reinsurance balances and funds held
|
|
|
130.7
|
|
|
|
61.6
|
|
|
|
|
|
|
|
|
|
192.3
|
|
Reinsurance recoverable
|
|
|
2,595.8
|
|
|
|
880.1
|
|
|
|
|
|
|
|
|
|
3,475.9
|
|
Deferred policy acquisition costs
|
|
|
202.0
|
|
|
|
44.8
|
|
|
|
(44.8
|
)
|
|
2(b)(i),2(e)
|
|
|
202.0
|
|
Goodwill and intangible assets
|
|
|
169.0
|
|
|
|
29.6
|
|
|
|
(29.6
|
)
|
|
2(c)
|
|
|
169.0
|
|
Sundry assets
|
|
|
226.2
|
|
|
|
108.5
|
|
|
|
|
|
|
|
|
|
334.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
14,240.9
|
|
|
$
|
2,409.7
|
|
|
$
|
(202.2
|
)
|
|
|
|
$
|
16,448.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, AND COMMON SHAREHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses, claims, and settlement expenses
|
|
$
|
7,774.8
|
|
|
$
|
1,274.0
|
|
|
$
|
|
|
|
|
|
$
|
9,048.8
|
|
Unearned premiums
|
|
|
1,041.7
|
|
|
|
270.1
|
|
|
|
(44.8
|
)
|
|
2(e)
|
|
|
1,267.0
|
|
Other policyholders benefits and funds
|
|
|
185.8
|
|
|
|
5.9
|
|
|
|
|
|
|
|
|
|
191.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total policy liabilities and accruals
|
|
|
9,002.3
|
|
|
|
1,550.0
|
|
|
|
(44.8
|
)
|
|
|
|
|
10,507.5
|
|
Commissions, expenses, fees, taxes, and other
|
|
|
456.6
|
|
|
|
238.5
|
|
|
|
|
|
|
|
|
|
695.1
|
|
Reinsurance balances and funds
|
|
|
335.8
|
|
|
|
65.7
|
|
|
|
|
|
|
|
|
|
401.5
|
|
Federal income tax payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
102.8
|
|
|
|
|
|
|
|
(102.8
|
)
|
|
2(d)
|
|
|
|
|
Debt
|
|
|
347.2
|
|
|
|
137.4
|
|
|
|
|
|
|
|
|
|
484.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
10,245.0
|
|
|
|
1,991.6
|
|
|
|
(147.6
|
)
|
|
|
|
|
12,089.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shareholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
241.0
|
|
|
|
171.1
|
|
|
|
(153.3
|
)
|
|
2(j),2(l)
|
|
|
258.8
|
|
Additional paid-in capital
|
|
|
416.2
|
|
|
|
111.9
|
|
|
|
99.5
|
|
|
2(j),2(l)
|
|
|
627.6
|
|
Retained earnings
|
|
|
2,911.8
|
|
|
|
163.8
|
|
|
|
(29.5
|
)
|
|
2(i),2(k),2(l)
|
|
|
3,046.1
|
|
Accumulated other comprehensive income (loss)
|
|
|
468.3
|
|
|
|
(5.9
|
)
|
|
|
5.9
|
|
|
2(l)
|
|
|
468.3
|
|
Unallocated ESSOP shares (at cost)
|
|
|
(41.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(41.5
|
)
|
Treasury stock (at cost)
|
|
|
|
|
|
|
(22.8
|
)
|
|
|
22.8
|
|
|
2(l)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Common Shareholders Equity
|
|
|
3,995.8
|
|
|
|
418.1
|
|
|
|
(54.6
|
)
|
|
|
|
|
4,359.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities, and Common Shareholders Equity
|
|
$
|
14,240.9
|
|
|
$
|
2,409.7
|
|
|
$
|
(202.2
|
)
|
|
|
|
$
|
16,448.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to the Unaudited Pro Forma Condensed
Combined Financial Statements
27
Unaudited
Pro Forma Condensed Combined Statement of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2010
|
|
|
|
Historical
|
|
|
Historical
|
|
|
Pro Forma
|
|
|
|
|
|
Pro Forma
|
|
|
|
Old Republic
|
|
|
PMA
|
|
|
Adjustments
|
|
|
Notes
|
|
|
Old Republic
|
|
|
|
($ in millions, except share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
752.3
|
|
|
$
|
103.5
|
|
|
$
|
|
|
|
|
|
|
|
$
|
855.8
|
|
Title, escrow, and other fees
|
|
|
76.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums and fees
|
|
|
828.5
|
|
|
|
103.5
|
|
|
|
|
|
|
|
|
|
|
|
932.0
|
|
Net investment income
|
|
|
96.2
|
|
|
|
9.1
|
|
|
|
|
|
|
|
|
|
|
|
105.3
|
|
Other income
|
|
|
4.8
|
|
|
|
21.4
|
|
|
|
|
|
|
|
|
|
|
|
26.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
929.6
|
|
|
|
134.0
|
|
|
|
|
|
|
|
|
|
|
|
1,063.6
|
|
Realized investment gains
|
|
|
2.9
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
932.6
|
|
|
|
134.4
|
|
|
|
|
|
|
|
|
|
|
|
1,067.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, Claims and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, claims and settlement expenses
|
|
|
491.6
|
|
|
|
75.1
|
|
|
|
|
|
|
|
|
|
|
|
566.7
|
|
Dividends to policyholders
|
|
|
2.5
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
3.0
|
|
Underwriting, acquisition, and other expenses
|
|
|
400.6
|
|
|
|
43.7
|
|
|
|
|
|
|
|
|
|
|
|
444.3
|
|
Interest and other charges
|
|
|
6.5
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
9.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
901.3
|
|
|
|
121.8
|
|
|
|
|
|
|
|
|
|
|
|
1,023.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes (credits)
|
|
|
31.2
|
|
|
|
12.6
|
|
|
|
|
|
|
|
|
|
|
|
43.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes (Credits):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
11.4
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
11.6
|
|
Deferred
|
|
|
(5.2
|
)
|
|
|
4.3
|
|
|
|
|
|
|
|
|
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6.2
|
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
10.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income from Continuing Operations
|
|
$
|
25.0
|
|
|
$
|
8.1
|
|
|
$
|
|
|
|
|
|
|
|
$
|
33.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Per Share from Continuing Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.11
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.11
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
236,387,779
|
|
|
|
32,199,378
|
|
|
|
17,709,658
|
|
|
|
|
|
|
|
254,097,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
236,462,231
|
|
|
|
32,260,938
|
|
|
|
17,743,516
|
|
|
|
|
|
|
|
254,205,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to the Unaudited Pro Forma Condensed
Combined Financial Statements
28
Unaudited
Pro Forma Condensed Combined Statement of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2009
|
|
|
|
Historical
|
|
|
Historical
|
|
|
Pro Forma
|
|
|
|
|
|
Pro Forma
|
|
|
|
Old Republic
|
|
|
PMA
|
|
|
Adjustments
|
|
|
Notes
|
|
|
Old Republic
|
|
|
|
($ in millions, except share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
3,111.5
|
|
|
$
|
414.8
|
|
|
$
|
|
|
|
|
|
|
|
$
|
3,526.3
|
|
Title, escrow, and other fees
|
|
|
277.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
277.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums and fees
|
|
|
3,388.9
|
|
|
|
414.8
|
|
|
|
|
|
|
|
|
|
|
|
3,803.7
|
|
Net investment income
|
|
|
383.5
|
|
|
|
36.9
|
|
|
|
|
|
|
|
|
|
|
|
420.4
|
|
Other income
|
|
|
24.8
|
|
|
|
79.5
|
|
|
|
|
|
|
|
|
|
|
|
104.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
3,797.2
|
|
|
|
531.2
|
|
|
|
|
|
|
|
|
|
|
|
4,328.4
|
|
Realized investment gains
|
|
|
6.3
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
6.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
3,803.6
|
|
|
|
531.7
|
|
|
|
|
|
|
|
|
|
|
|
4,335.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, Claims and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, claims and settlement expenses
|
|
|
2,591.0
|
|
|
|
291.2
|
|
|
|
|
|
|
|
|
|
|
|
2,882.2
|
|
Dividends to policyholders
|
|
|
7.8
|
|
|
|
8.7
|
|
|
|
|
|
|
|
|
|
|
|
16.5
|
|
Underwriting, acquisition, and other expenses
|
|
|
1,454.0
|
|
|
|
190.4
|
|
|
|
|
|
|
|
|
|
|
|
1,644.4
|
|
Interest and other charges
|
|
|
24.2
|
|
|
|
9.8
|
|
|
|
|
|
|
|
|
|
|
|
34.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
4,077.2
|
|
|
|
500.1
|
|
|
|
|
|
|
|
|
|
|
|
4,577.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes (credits)
|
|
|
(273.6
|
)
|
|
|
31.6
|
|
|
|
|
|
|
|
|
|
|
|
(242.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes (Credits):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
56.5
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
56.8
|
|
Deferred
|
|
|
(230.9
|
)
|
|
|
(9.5
|
)
|
|
|
|
|
|
|
|
|
|
|
(240.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(174.4
|
)
|
|
|
(9.2
|
)
|
|
|
|
|
|
|
|
|
|
|
(183.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) from Continuing Operations
|
|
$
|
(99.1
|
)
|
|
$
|
40.8
|
|
|
$
|
|
|
|
|
|
|
|
$
|
(58.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Per Share from Continuing Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.42
|
)
|
|
$
|
1.27
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.42
|
)
|
|
$
|
1.27
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
235,657,425
|
|
|
|
32,133,970
|
|
|
|
17,673,684
|
|
|
|
|
|
|
|
253,331,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
235,657,425
|
|
|
|
32,186,402
|
|
|
|
17,673,684
|
|
|
|
|
|
|
|
253,331,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to the Unaudited Pro Forma Condensed
Combined Financial Statements
29
NOTES TO
THE UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
($ in millions, except share data)
|
|
Note 1
|
Basis of
Presentation
|
On June 9, 2010, Old Republic International Corporation
(Old Republic) entered into an agreement and plan of merger with
PMA Capital Corporation (PMA). The unaudited pro forma condensed
combined balance sheet reflects the merger as if it had occurred
on March 31, 2010. The unaudited pro forma condensed
combined statements of income for the year ended
December 31, 2009 and for the three months ended
March 31, 2010 reflect the merger as if it had occurred as
of January 1, 2009. These pro forma financial statements
have been prepared by Old Republic management, after discussion
with PMAs management and are based on historical
consolidated financial statements for Old Republic and PMA.
Certain amounts from PMAs historical consolidated
financial statements have been reclassified to conform to the
Old Republic presentation.
The unaudited pro forma condensed combined statements of income
do not include any financial benefits, asset dispositions,
revenue enhancements or operating expense efficiencies which
could arise from the merger.
Note 2 Pro
forma Adjustments
Pursuant to the merger agreement, Old Republic will issue
0.55 shares of Old Republic common stock in exchange for
each outstanding common share of PMA Capital. Depending on the
Old Republic measurement price, the exchange ratio may be
adjusted upwards or downwards, but will not exceed 0.60 or be
less than 0.50. For purposes of the pro forma financial
statements, an exchange ratio of 0.55 is assumed. For financial
accounting purposes, the merger will be recorded as a purchase
of PMA by Old Republic. The purchase method of accounting
requires that the acquired companys identifiable assets
and liabilities be recorded at their estimated fair value as of
the date of acquisition. Old Republic will therefore make
necessary fair value adjustments to PMAs asset and
liability accounts as of the acquisition date in consideration
of the following factors:
(a) The use of then current market values to establish the
fair value of investment securities, and of independently
appraised values attributable to certain fixed assets such as
office buildings;
(b) The conformance of PMAs accounting policies to
Old Republics in the valuation of various assets and
liabilities. The adjustments most likely to be made in these
regards will apply to:
(i) Estimated deferred acquisition costs;
(ii) Loss and loss adjustment expense reserve estimates and
related amounts recoverable from reinsurers to reflect
variations in discount rates and the amount and timing of future
payments on such reserves; and
(iii) Pension liabilities and stock based compensation;
(c) The elimination of PMA carried goodwill and intangible
assets, substituting therefor any goodwill amount resulting from
allocation of the purchase price to individual assets, including
identifiable intangible assets, and liabilities;
(d) The adjustment of deferred income tax asset balances to
reflect limitations on the amount of PMAs net operating
loss carry forward that can inure to the merged businesses. (The
adjustment shown in the accompanying pro forma balance sheet
reflects a reclassification of Old Republics net deferred
tax liability); and
(e) The reduction of deferred acquisition costs to their
estimated fair value and the adjustment of the unearned premium
liability to fair value, determined as the undiscounted
liability less unamortized deferred acquisition costs.
30
NOTES TO
THE UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL
STATEMENTS (Continued)
Following the merger, Old Republic also anticipates that it will
make the following more significant changes to PMAs
operating and financial management model:
(f) Reconfigure a substantial portion of PMAs
investment portfolio to align it with Old Republics
investment management practices in regard to such factors as
type, quality, and maturity distribution of fixed maturity
securities holdings;
(g) Change PMAs external reinsurance ceded practices
to adhere more closely to Old Republics in regard to such
matters as amount of exposures retained, type and financial
standing of approved assuming reinsurers, and type of risk
transfer reinsurance programs; and
(h) Reduce the PMA insurance companies operating and
balance sheet leverage through internal reinsurance arrangements
with several Old Republic General Insurance Group subsidiaries
acting as companion risk carriers.
The changes contemplated at (f), (g), and (h) could also
have an effect on several purchase date adjustments noted above,
and on PMAs financial position and operating results
subsequent to the acquisition date.
In the accompanying pro forma balance sheet, the preliminary
estimated purchase price has been calculated by using the quoted
market value per share of Old Republic on July 9, 2010.
This purchase price will be adjusted subsequently to reflect the
quoted market value of the Old Republic common shares as of the
acquisitions effective date.
Calculation
of Preliminary Estimated Purchase Price
|
|
|
|
|
PMA shares outstanding as of July 9, 2010
|
|
|
32,280,474
|
|
Estimated exchange ratio
|
|
|
0.55
|
|
|
|
|
|
|
Total Old Republic shares to be issued
|
|
|
17,754,260
|
|
Old Republic closing share price on July 9, 2010
|
|
$
|
12.85
|
|
|
|
|
|
|
Estimated purchase price before adjustments for stock based
compensation
|
|
$
|
228.1
|
|
Estimated fair value of PMA options outstanding as of
July 9, 2010
|
|
$
|
1.1
|
|
|
|
|
|
|
Estimated purchase price
|
|
$
|
229.2
|
|
|
|
|
|
|
(i) The July 9, 2010 valuation of the Old Republic
shares exchangeable for PMAs stock, when compared to the
latters reported shareholders equity account as of
March 31, 2010, as adjusted for certain preliminary
purchase adjustments, largely accounts for the preliminary
negative goodwill balance ($140.3) which would be recorded as a
gain on bargain purchase upon closing of the merger.
Accordingly, such amount is reflected as an increase in retained
earnings in the pro forma balance sheet. Preliminary negative
goodwill will be adjusted based upon the final purchase price
allocation as of the closing date of the merger.
(j) In connection with the merger, 17,754,260 Old Republic
shares are expected to be issued in exchange for all of
PMAs common shares and common shares issued following
vesting of PMA restricted shares.
(k) Total transaction costs currently estimated at $6.0
will be incurred and expensed by the consolidated entity.
Consequently an adjustment of $6.0 was recorded to cash and to
retained earnings as of March 31, 2010 to reflect the
estimated transaction costs.
(l) Elimination of PMAs common stock of $171.1,
additional paid-in capital of $111.9, retained earnings of
$163.8, other comprehensive loss of $5.9, and treasury stock of
$22.8.
As noted above, the accompanying pro forma financial statements
were prepared using the quoted market price of $12.85 per share
of Old Republic, the closing price on July 9, 2010, and an
exchange ratio of 0.55 shares of Old Republic common stock
for each share of PMA class A common stock. The exchange
ratio may be adjusted to a
31
NOTES TO
THE UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL
STATEMENTS (Continued)
minimum of 0.50 or maximum of 0.60 depending on the Old Republic
measurement price (see The Merger Agreement
Terms of the Merger below). The effect of an increase in
Old Republics stock price to $18.70 per share, or an
decrease to $11.46 per share, assuming the minimum and maximum
exchange ratios, on the estimated purchase price and pro forma
common shareholders equity is as follows:
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
|
Maximum
|
|
|
Exchange ratio
|
|
|
0.50
|
|
|
|
0.60
|
|
Old Republics assumed share price at closing
|
|
$
|
18.70
|
|
|
$
|
11.46
|
|
Estimated purchase price
|
|
$
|
302.9
|
|
|
$
|
223.1
|
|
Increase (decrease) to pro forma shareholders equity:
|
|
|
|
|
|
|
|
|
Common stock
|
|
$
|
(1.7
|
)
|
|
$
|
1.6
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
$
|
75.4
|
|
|
$
|
(7.7
|
)
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
$
|
(73.7
|
)
|
|
$
|
6.1
|
|
|
|
|
|
|
|
|
|
|
As discussed above, pro forma purchase adjustments are based on
certain estimates and assumptions made as of the date of the pro
forma financial information. The actual adjustments will depend
on a number of factors, including changes in the estimated fair
value of net balance sheet assets and operating results of PMA
between March 31, 2010 and the effective date of the
merger. Old Republic expects to make such adjustments at the
effective date of the merger. These adjustments are likely to be
different from the adjustments made to prepare the pro forma
financial statements and such differences may be material.
The historical and pro forma debt of Old Republic and PMA is
summarized as follows:.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010
|
|
|
|
Historical
|
|
|
Historical
|
|
|
Pro forma
|
|
|
|
Old Republic
|
|
|
PMA
|
|
|
Old Republic
|
|
|
8.00% Convertible Senior Notes due 2012
|
|
$
|
316.2
|
|
|
$
|
|
|
|
$
|
316.2
|
|
ESSOP debt with an average yield of 3.73%
|
|
|
25.8
|
|
|
|
|
|
|
|
25.8
|
|
Trust preferred debt
|
|
|
|
|
|
|
62.5
|
|
|
|
62.5
|
|
8.50% Senior Notes due 2018
|
|
|
|
|
|
|
54.9
|
|
|
|
54.9
|
|
Surplus notes
|
|
|
|
|
|
|
10.0
|
|
|
|
10.0
|
|
Notes payable
|
|
|
|
|
|
|
10.0
|
|
|
|
10.0
|
|
4.25% Convertible debt due 2022
|
|
|
|
|
|
|
|
|
|
|
|
|
Other miscellaneous debt
|
|
|
5.1
|
|
|
|
|
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
347.2
|
|
|
$
|
137.4
|
|
|
$
|
484.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 4
|
Earnings
per Common Share
|
Pro forma earnings per common share for the three months ended
March 31, 2010 and the year ended December 31, 2009
have been calculated based on the estimated weighted average
number of common shares outstanding on a pro forma basis. The
pro forma weighted average number of common shares outstanding
was derived using Old Republics historical weighted
average common shares outstanding and PMAs historical
weighted average common shares outstanding multiplied by the
exchange ratio.
32
NOTES TO
THE UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the calculation of basic and
diluted earnings per share for the three months ended
March 31, 2010:
|
|
|
|
|
Historical PMA basic weighted average common shares outstanding
|
|
|
32,199,378
|
|
Exchange Ratio
|
|
|
0.55
|
|
|
|
|
|
|
Pro forma PMA basic weighted average common shares outstanding
|
|
|
17,709,658
|
|
Historical Old Republic basic weighted average common shares
outstanding
|
|
|
236,387,779
|
|
|
|
|
|
|
Pro forma Old Republic basic weighted average common shares
outstanding
|
|
|
254,097,437
|
|
|
|
|
|
|
Historical PMA diluted weighted average common shares outstanding
|
|
|
32,260,938
|
|
Exchange Ratio
|
|
|
0.55
|
|
|
|
|
|
|
Pro forma PMA diluted weighted average common shares outstanding
|
|
|
17,743,516
|
|
Historical Old Republic diluted weighted average common shares
outstanding
|
|
|
236,462,231
|
|
|
|
|
|
|
Pro forma Old Republic diluted weighted average common shares
outstanding
|
|
|
254,205,747
|
|
|
|
|
|
|
Pro forma Old Republic net income from continuing operations
|
|
$
|
33.1
|
|
|
|
|
|
|
Pro forma Old Republic net income per share from continuing
operations:
|
|
|
|
|
Basic
|
|
$
|
0.13
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.13
|
|
|
|
|
|
|
The following table sets forth the calculation of basic and
diluted earnings per share for the year ended December 31,
2009:
|
|
|
|
|
Historical PMA basic weighted average common shares outstanding
|
|
|
32,133,970
|
|
Exchange Ratio
|
|
|
0.55
|
|
|
|
|
|
|
Pro forma PMA basic weighted average common shares outstanding
|
|
|
17,673,684
|
|
Historical Old Republic basic weighted average common shares
outstanding
|
|
|
235,657,425
|
|
|
|
|
|
|
Pro forma Old Republic basic weighted average common shares
outstanding
|
|
|
253,331,109
|
|
|
|
|
|
|
Pro forma Old Republic diluted weighted average common shares
outstanding
|
|
|
253,331,109
|
*
|
|
|
|
|
|
Pro forma Old Republic net loss from continuing operations
|
|
$
|
(58.3
|
)
|
|
|
|
|
|
Pro forma Old Republic net loss per share from continuing
operations:
|
|
|
|
|
Basic
|
|
$
|
(0.23
|
)
|
|
|
|
|
|
Diluted
|
|
$
|
(0.23
|
)*
|
|
|
|
|
|
|
|
|
* |
|
Common share equivalents have been excluded from diluted
earnings per share calculations because their effect would be
antidilutive. |
33
NOTES TO
THE UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
Note 5
|
Book
Value per Share
|
The following table sets forth the calculation of book value per
share as of March 31, 2010. The pro forma number of common
shares outstanding was determined as if the shares issued,
pursuant to the merger, had been issued and outstanding as of
March 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
Pro Forma
|
|
|
|
Old Republic
|
|
|
Old Republic
|
|
|
Book value per common share calculation
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
$
|
3,995.8
|
|
|
$
|
4,359.3
|
|
Shares
|
|
|
236,466,473
|
|
|
|
254,204,589
|
|
|
|
|
|
|
|
|
|
|
Book value per common share
|
|
$
|
16.90
|
|
|
$
|
17.15
|
|
|
|
|
|
|
|
|
|
|
34
COMPARATIVE
PER SHARE DATA
The historical per share earnings, dividends, and book value of
Old Republic and PMA shown in the table below are derived from
their respective audited consolidated financial statements as of
and for the year ended December 31, 2009 and their
respective unaudited financial statements for the three months
ended March 31, 2010. The pro forma comparative basic and
diluted earnings per share and dividends per share data give
effect to the merger using the purchase method of accounting as
if the merger had been completed on January 1, 2009 for the
year ended December 31, 2009 and for the three months ended
March 31, 2010. The pro forma book value per share
information was computed as if the merger had been completed on
March 31, 2010. You should read this information in
conjunction with the historical financial information of Old
Republic and of PMA included or incorporated elsewhere in this
proxy statement/prospectus, including Old Republics and
PMAs financial statements and related notes. The per share
pro forma information assumes that all shares of PMA
class A common stock are converted into shares of Old
Republic common stock at the exchange ratio. The pro forma
information presented below is for illustrative purposes only
and is not necessarily indicative of the operating results or
financial position that would have been achieved if the merger
had been completed as of the beginning of the period presented,
nor is it necessarily indicative of the future operating results
or financial position of Old Republic after the merger.
The PMA pro forma equivalent per share amounts are calculated by
multiplying the applicable Old Republic pro forma combined
amount by the exchange ratio of 0.55 shares of Old Republic
common stock for each share of PMA class A common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2010
|
|
For the Year Ended December 31, 2009
|
|
|
Old Republic
|
|
PMA
|
|
Old Republic
|
|
PMA
|
|
|
|
|
Pro
|
|
|
|
Pro
|
|
|
|
Pro
|
|
|
|
Pro
|
|
|
|
|
Forma
|
|
|
|
Forma
|
|
|
|
Forma
|
|
|
|
Forma
|
|
|
Historical
|
|
Combined
|
|
Historical
|
|
Equivalent
|
|
Historical
|
|
Combined
|
|
Historical
|
|
Equivalent
|
|
Basic earnings per share from continuing operations
|
|
$
|
0.11
|
|
|
$
|
0.13
|
|
|
$
|
0.25
|
|
|
$
|
0.07
|
|
|
$
|
(0.42
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
1.27
|
|
|
$
|
(0.13
|
)
|
Diluted earnings per share from continuing operations
|
|
$
|
0.11
|
|
|
$
|
0.13
|
|
|
$
|
0.25
|
|
|
$
|
0.07
|
|
|
$
|
(0.42
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
1.27
|
|
|
$
|
(0.13
|
)
|
Dividends declared
|
|
$
|
0.1725
|
|
|
$
|
0.1725
|
|
|
|
|
|
|
$
|
0.09
|
|
|
$
|
0.68
|
|
|
$
|
0.68
|
|
|
|
|
|
|
$
|
0.37
|
|
Book value per share
|
|
$
|
16.90
|
|
|
$
|
17.15
|
|
|
$
|
12.96
|
|
|
$
|
9.43
|
|
|
$
|
16.49
|
|
|
|
N/A
|
|
|
$
|
12.46
|
|
|
|
N/A
|
|
COMPARATIVE
MARKET PRICE AND DIVIDEND INFORMATION
Old Republics common stock is listed on the NYSE under the
symbol ORI. PMAs class A common stock is
listed on the Nasdaq Global Select Market under the symbol
PMACA. The following table presents closing prices
for shares of Old Republic common stock and PMA class A
common stock on June 9, 2010, the last trading day before
the public announcement of the execution of the merger agreement
by Old Republic and PMA, and July 30, 2010, the latest
practicable trading day before the date of this proxy
statement/prospectus.
|
|
|
|
|
|
|
|
|
|
|
Old Republic
|
|
PMA Class A
|
|
|
Common Stock
|
|
Common Stock
|
|
June 9, 2010
|
|
$
|
12.91
|
|
|
$
|
6.11
|
|
July 30, 2010
|
|
$
|
12.51
|
|
|
$
|
6.71
|
|
35
The table below sets forth, for the calendar quarters indicated,
the high and low sale prices per share of Old Republic common
stock on the NYSE and per share of PMA class A common stock
on the Nasdaq Global Select Market, and cash dividends declared
for each quarterly period presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Old Republic
|
|
|
PMA
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Dividends
|
|
|
High
|
|
|
Low
|
|
|
Dividends
|
|
|
1st quarter
|
|
|
2007
|
|
|
$
|
23.74
|
|
|
$
|
21.38
|
|
|
$
|
.15
|
|
|
$
|
9.77
|
|
|
$
|
8.40
|
|
|
$
|
|
|
2nd quarter
|
|
|
2007
|
|
|
|
22.69
|
|
|
|
20.95
|
|
|
|
.16
|
|
|
|
11.40
|
|
|
|
9.12
|
|
|
|
|
|
3rd quarter
|
|
|
2007
|
|
|
|
21.91
|
|
|
|
16.56
|
|
|
|
.16
|
|
|
|
11.17
|
|
|
|
8.63
|
|
|
|
|
|
4th quarter
|
|
|
2007
|
|
|
$
|
19.57
|
|
|
$
|
13.57
|
|
|
$
|
.16
|
|
|
$
|
10.69
|
|
|
$
|
8.05
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st quarter
|
|
|
2008
|
|
|
$
|
15.96
|
|
|
$
|
11.85
|
|
|
$
|
.16
|
|
|
$
|
9.14
|
|
|
$
|
7.45
|
|
|
$
|
|
|
2nd quarter
|
|
|
2008
|
|
|
|
15.55
|
|
|
|
11.84
|
|
|
|
.17
|
|
|
|
10.23
|
|
|
|
8.24
|
|
|
|
|
|
3rd quarter
|
|
|
2008
|
|
|
|
17.25
|
|
|
|
9.19
|
|
|
|
.17
|
|
|
|
12.00
|
|
|
|
8.00
|
|
|
|
|
|
4th quarter
|
|
|
2008
|
|
|
$
|
12.99
|
|
|
$
|
6.77
|
|
|
$
|
.17
|
|
|
$
|
9.47
|
|
|
$
|
3.46
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st quarter
|
|
|
2009
|
|
|
$
|
12.80
|
|
|
$
|
7.24
|
|
|
$
|
.17
|
|
|
$
|
7.20
|
|
|
$
|
3.50
|
|
|
$
|
|
|
2nd quarter
|
|
|
2009
|
|
|
|
12.18
|
|
|
|
8.75
|
|
|
|
.17
|
|
|
|
5.35
|
|
|
|
3.70
|
|
|
|
|
|
3rd quarter
|
|
|
2009
|
|
|
|
12.85
|
|
|
|
8.98
|
|
|
|
.17
|
|
|
|
6.33
|
|
|
|
4.27
|
|
|
|
|
|
4th quarter
|
|
|
2009
|
|
|
$
|
12.49
|
|
|
$
|
10.03
|
|
|
$
|
.17
|
|
|
$
|
7.44
|
|
|
$
|
4.64
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st quarter
|
|
|
2010
|
|
|
$
|
12.75
|
|
|
$
|
10.02
|
|
|
$
|
.1725
|
|
|
$
|
6.89
|
|
|
$
|
5.60
|
|
|
$
|
|
|
Old Republic and PMA urge PMA shareholders to obtain current
market quotations for shares of Old Republic common stock and
PMA class A common stock before making any decision
regarding the adoption of the merger agreement. No assurance can
be given concerning the market price for Old Republic common
stock before or after the date on which the merger is
consummated. The market price for Old Republic common stock will
fluctuate between the date of this proxy statement/prospectus
and the date on which the merger is consummated and thereafter.
See The Merger Agreement Terms of the
Merger.
As of July 29, 2010, there were 2,609 registered holders of
Old Republics common stock. See Note 3(c) of the
Notes to Consolidated Financial Statements for the year ended
December 31, 2009 for a description of certain regulatory
restrictions on the payment of dividends by Old Republics
insurance subsidiaries.
36
COMPARATIVE
FIVE YEAR PERFORMANCE GRAPHS FOR COMMON STOCK
Old
Republic
The following table, prepared on the basis of market and related
data furnished by Standard & Poors Total Return
Service, reflects total market return data for the most recent
five calendar years ended December 31, 2009. For purposes
of the presentation, the information is shown in terms of $100
invested at the close of trading on the last trading day
preceding the first day of the fifth preceding year. The $100
investment is deemed to have been made either in Old Republic
common stock, in the S&P 500 Index of common stocks, or in
an aggregate of the common shares of the Peer Group of publicly
held insurance businesses selected by Old Republic. The
cumulative total return assumes reinvestment of cash dividends
on a pretax basis.
The information utilized to prepare the following table has been
obtained from sources believed to be reliable, but no
representation is made that it is accurate or complete in all
respects.
Comparison
of Five Year Total Market Return
OLD REPUBLIC INTERNATIONAL CORPORATION vs. S&P 500 vs. Peer
Group
(For the five years ended December 31, 2009)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec 04
|
|
|
Dec 05
|
|
|
Dec 06
|
|
|
Dec 07
|
|
|
Dec 08
|
|
|
Dec 09
|
ORI
|
|
|
$
|
100.00
|
|
|
|
$
|
110.52
|
|
|
|
$
|
125.81
|
|
|
|
$
|
86.11
|
|
|
|
$
|
70.30
|
|
|
|
$
|
63.08
|
|
S&P 500
|
|
|
|
100.00
|
|
|
|
|
104.91
|
|
|
|
|
121.48
|
|
|
|
|
128.16
|
|
|
|
|
80.74
|
|
|
|
|
102.11
|
|
Peer Group
|
|
|
|
100.00
|
|
|
|
|
115.44
|
|
|
|
|
132.48
|
|
|
|
|
122.50
|
|
|
|
|
95.42
|
|
|
|
|
106.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Peer Group consists of the following publicly held
corporations selected by the Company for its 2004 to 2009
comparison: Ace Limited, American Financial Group, Inc., The
Chubb Corporation, Cincinnati Financial Corporation, First
American Corporation, Stewart Information Services Corporation,
MGIC Investment Corporation, Markel Corporation, PMI Group Inc.,
Travelers Companies, Inc., and XL Capital Ltd.
The composition of the Peer Group companies has been approved by
Old Republics compensation committee.
37
PMA
The following graph provides an indicator of cumulative total
shareholder return on PMAs class A common stock for
the last five fiscal years compared with the cumulative total
return of the Standard & Poors 500 Stock Index
(the S&P 500), the Standard &
Poors Supercomposite Property/Casualty Insurance Index
(the S&P Super P/C) and the
Standard & Poors 600 Insurance Property/Casualty
Index (the S&P 600 P/C) for the same periods.
The graph assumes that with respect to PMAs class A
common stock, the S&P 500, the S&P Super P/C and the
S&P 600 P/C, $100 was invested on December 31, 2004,
and all dividends were reinvested.
Cumulative
Total Return
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2004
|
|
|
12/31/2005
|
|
|
12/31/2006
|
|
|
12/31/2007
|
|
|
12/31/2008
|
|
|
12/31/2009
|
PMA Capital
|
|
|
$
|
100.00
|
|
|
|
$
|
88.21
|
|
|
|
$
|
89.08
|
|
|
|
$
|
79.42
|
|
|
|
$
|
68.41
|
|
|
|
$
|
60.87
|
|
S&P 500
|
|
|
|
100.00
|
|
|
|
|
104.83
|
|
|
|
|
121.20
|
|
|
|
|
127.85
|
|
|
|
|
81.12
|
|
|
|
|
102.15
|
|
S&P Super P/C
|
|
|
|
100.00
|
|
|
|
|
116.61
|
|
|
|
|
130.75
|
|
|
|
|
113.56
|
|
|
|
|
88.06
|
|
|
|
|
93.15
|
|
S&P 600 P/C
|
|
|
|
100.00
|
|
|
|
|
126.59
|
|
|
|
|
139.64
|
|
|
|
|
122.88
|
|
|
|
|
113.63
|
|
|
|
|
97.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This document contains certain forward-looking information about
Old Republic and PMA and the combined company that is intended
to be covered by the safe harbor for forward-looking
statements provided by the Private Securities Litigation
Reform Act of 1995. These statements may be made directly in
this proxy statement/prospectus or may be incorporated into this
proxy statement/prospectus by reference to other documents and
may include statements for the period after the completion of
the merger. Representatives of Old Republic and PMA may also
make forward-looking statements. Forward-looking statements are
statements that are not historical facts. Words such as
expect, believe, will,
may, anticipate, plan,
estimate, intend, should,
can, likely, could and
similar expressions are intended to identify forward-looking
statements. These statements include statements about the
expected benefits of the merger, information about the combined
companys objectives, plans and expectations, the
likelihood of satisfaction of certain conditions to the
completion of the merger and whether and when the merger will be
completed. Forward-looking statements are not guarantees of
performance. These statements are based upon the current beliefs
and expectations of the management of each of Old Republic and
PMA and are subject to a number of risks, uncertainties and
assumptions, most of which are difficult to predict and many of
which are beyond Old Republics and PMAs control.
These include, but are not limited to, quarterly variations in
operating results, adverse changes in economic conditions in the
markets served by Old Republic or PMA or by their customers,
estimates and assumptions in determining financial results, and
the other risks described under the caption Risk
Factors in this proxy statement/prospectus, in Old
Republics Annual Report on
Form 10-K
for the year ended December 31, 2009 and Quarterly Report
on
Form 10-Q
for the three months ended March 31, 2010 and in PMAs
Annual Report on
Form 10-K
for the year ended December 31, 2009 and Quarterly Report
on
Form 10-Q
for the three months ended March 31, 2010.
Factors that could cause actual results to differ materially
from those contemplated by the forward-looking statements
include, among others, the following factors:
|
|
|
|
|
the ability to consummate the merger;
|
|
|
|
|
|
the ability to integrate the operations of Old Republic and PMA;
|
|
|
|
the amount and timing of any cost savings synergies or other
efficiencies expected to result from the merger;
|
|
|
|
the effects of competition in our markets;
|
|
|
|
the current economic condition and expected trends in the
industries we serve;
|
|
|
|
the various risks and other factors considered by the respective
boards of Old Republic and PMA as described under The
Merger PMAs Reasons for the Merger,
The Merger Recommendations of the PMA Board of
Directors with Respect to the Merger and The
Merger Old Republics Reasons for the
Merger;
|
|
|
|
the impact of political, regulatory and rating agency
developments;
|
|
|
|
future and pro forma financial condition or results of
operations and future revenues and expenses; and
|
|
|
|
business strategy and other plans and objectives for future
operations.
|
Should one or more of the risks or uncertainties described above
or elsewhere in this proxy statement/prospectus, in Old
Republics Annual Report on
Form 10-K
for the year ended December 31, 2009 or Quarterly Report on
Form 10-Q
for the three months ended March 31, 2010 or in PMAs
Annual Report on
Form 10-K
for the year ended December 31, 2009 or Quarterly Report on
Form 10-Q
for the three months ended March 31, 2010 occur, or should
underlying assumptions prove incorrect, actual results and plans
could differ materially from those expressed in any
forward-looking statements.
All forward-looking statements, expressed or implied, included
in this proxy statement/prospectus are expressly qualified in
their entirety by this cautionary statement. This cautionary
statement should also be considered in connection with any
subsequent written or oral forward-looking statements that Old
Republic, PMA or persons acting on their behalf may issue.
In light of these risks and uncertainties, the results
anticipated by the forward-looking statements discussed in this
proxy statement/prospectus or made by representatives of Old
Republic or PMA may not occur. Readers are cautioned not to
place undue reliance on these forward-looking statements, which
speak only as of the date hereof
39
or, in the case of statements incorporated by reference, on the
date of the document incorporated by reference, or, in the case
of statements made by representatives of Old Republic or PMA, on
the date those statements are made. All subsequent written and
oral forward-looking statements concerning the merger or the
combined company or other matters addressed in this proxy
statement/prospectus and attributable to Old Republic or PMA or
any person acting on their behalf are expressly qualified in
their entirety by the cautionary statements contained or
referred to in this section. Except to the extent required by
applicable law or regulation, neither Old Republic nor PMA
undertakes any obligation to update or publish revised
forward-looking statements to reflect events or circumstances
after the date hereof or the date of the forward-looking
statements or to reflect the occurrence of unanticipated events.
THE
MERGER
The following is a description of the material aspects of the
background and history behind the merger. This description may
not contain all of the information that is important to you. You
are encouraged to carefully read this entire proxy
statement/prospectus, including the merger agreement attached
hereto as Annex A, for a more complete understanding of the
merger.
Background
of the Merger
PMAs board of directors and senior management regularly
review and consider business alternatives that would enhance
shareholder value, including strategic alternatives and
opportunities for organic growth. From time to time, PMA has
evaluated strategic options in light of the business trends and
regulatory conditions impacting it or expected to impact it and
the insurance industry.
In the fall of 2008, PMAs Chief Executive Officer, Chief
Financial Officer and board had discussions about various
strategic alternatives and capital markets initiatives that
would enhance PMAs ability to implement its strategic
plan. Recognizing the challenges facing PMA including general
uncertainty with respect to the sale of PMAs run-off
operations, challenges inherent in being a smaller
publicly-traded insurance company, extreme negative economic
conditions and rating agency pressures, PMAs senior
management and board held periodic telephonic and in-person
meetings with Merrill Lynch, Pierce, Fenner & Smith
Incorporated (BofA Merrill Lynch), its financial
advisor, to discuss generally PMAs competitive position
and capital raising opportunities and strategic alternatives
that might be available to PMA. On March 28, 2008, PMA
entered a stock purchase agreement in which it agreed to sell
several subsidiaries with reinsurance run-off operations. The
sale of the run-off operations was subject to the approval of
the Pennsylvania Insurance Department. During 2008, the
Pennsylvania Insurance Department commenced its review of the
loss and loss adjustment expense reserves in connection with the
periodic financial examination of PMAs insurance and
reinsurance subsidiaries for the five years ended
December 31, 2007.
On September 17, 2008, BofA Merrill Lynch made a
presentation to the board which included an overview of the
current market environment, PMAs position in the insurance
industry and an overview of capital raising and strategic
alternatives available to PMA. Following the presentation,
PMAs Chief Executive Officer and the board requested that
BofA Merrill Lynch undertake a formal evaluation of strategic
alternatives. Among other things, the board asked BofA Merrill
Lynch to develop a timeline and list of potential merger
candidates to be approached if a sale transaction became a
viable alternative.
From October through December 2008, BofA Merrill Lynch provided
the board, in-person and telephonically, market updates and
additional information on potential merger candidates. BofA
Merrill Lynch also discussed the ability of PMA to access the
private and public equity and debt markets.
On December 12, 2008, PMAs board held a telephonic
meeting. At this meeting, which was also attended by PMAs
Chief Financial Officer and General Counsel and representatives
from BofA Merrill Lynch, the board discussed possible
divestitures, a sale of PMA and capital raising strategies for
PMA, including the potential processes and timelines. During the
meeting, the board considered PMAs ongoing discussions
with A.M. Best and the Pennsylvania Department of Insurance
regarding PMAs sale of its run-off operations. BofA
Merrill Lynch made a presentation to the board that included an
overview of the then current market conditions, a detailed
timeline and a list of potential merger candidates if the board
decided to pursue a sale transaction.
40
Throughout January and February 2009, PMAs board and
senior management continued exploring capital raising and
strategic alternatives with BofA Merrill Lynch, including the
possible sale of PMA.
On February 19, 2009, PMAs board held a meeting,
which was also attended by PMAs Chief Financial Officer
and General Counsel. Management reviewed the status of its
discussions with A.M. Best regarding PMAs sale of the
run-off operations and explained the possible impact on
PMAs financial strength ratings if the sale was not
completed. Management and the board also discussed the
Pennsylvania Insurance Departments review of the sale of
the run-off operations and potential outcomes that could result
from the review. At this meeting, management and the board also
discussed the status of PMAs capital markets and strategic
initiatives. Given the continued uncertainty surrounding the
sale of the run-off operations, the discussion focused on
alternatives in the event that the sale of the run-off
operations was not completed.
On March 20, 2009, PMAs board held a telephonic
meeting, which meeting was attended by PMAs Chief
Financial Officer and General Counsel. Management reviewed the
status of the sale of the run-off operations and advised the
board of their communications with the Pennsylvania Insurance
Department regarding the sale. Management then reported to the
board that the Pennsylvania Insurance Department had hired an
actuarial firm to review the reserves of PMAs insurance
subsidiaries. According to the Department, the results of that
preliminary analysis questioned the reasonableness of the
insurance subsidiaries loss reserves. Management explained
that it was in the process of reviewing the draft analysis and
that numerous errors and questionable assumptions were apparent
based on the review to date. At the meeting, PMAs Chief
Executive Officer noted that, given the circumstances,
PMAs capital markets and strategic initiatives were being
suspended.
On May 6, 2009, PMAs board held a meeting that was
also attended by PMAs Chief Financial Officer and General
Counsel. Management reported on the status of the sale of the
run-off operations and a potential framework that was discussed
between management and the Pennsylvania Insurance Department for
finalizing the sale of the run-off operations. The board and
management discussed the proposed framework, alternatives to
selling the run-off operations and potential ramifications if
the sale was not completed. The board authorized management to
proceed with the sale of the run-off operations based on the
terms described in the framework proposed by the Department.
In early June 2009, A.M. Best placed the ratings of PMA and
its subsidiaries under review with negative implications as a
result of the delay in the sale of PMAs run-off operations
and the potential impact to PMAs capital position when the
transaction closed. PMA and the buyer of the run-off operations
held discussions and communicated that each remained committed
to the sale and PMA believed that the sale would close based on
the revised framework discussed between PMA and the Department
in May. As a result, management, in consultation with the board,
determined that the time was appropriate to resume its
exploration of alternatives with respect to capital raising and
other strategic initiatives.
During June 2009, PMAs board instructed BofA Merrill Lynch
to have preliminary discussions with a select list of potential
partners to determine their level of interest in pursuing a
transaction with PMA. After receiving confirmation of interest
from five of the six parties contacted, the board authorized
BofA Merrill Lynch to share additional information and schedule
conversations and meetings between the potential partners and
PMAs senior management team.
On June 5, 2009, PMAs board held a telephonic
meeting, which meeting was also attended by PMAs Chief
Financial Officer and General Counsel, to discuss a recent
ratings press release by A.M. Best and communications with
the Pennsylvania Insurance Department regarding the sale of
PMAs run-off operations.
On June 29, 2009, BofA Merrill Lynch had a call with
members of Old Republics senior management and discussed
the current merger and acquisition environment which included an
overview of PMA.
Beginning in July 2009 and continuing through March 2010, BofA
Merrill Lynch spoke with 17 potential partners with PMAs
approval. A total of seven parties indicated that they were
interested in exploring a potential transaction with PMA, and
six of those parties executed confidentiality agreements with
PMA and received confidential information.
41
On July 14, 2009, PMAs Chief Executive Officer and
Chief Financial Officer met with senior management of Party 1.
Party 1 submitted a preliminary indication of interest on
July 22, 2009 based on public information. Party 1 executed
a confidentiality agreement and, over the course of the
following five months, management shared information with Party
1 and conducted multiple in-person meetings. Party 1 ultimately
withdrew from the process.
On August 6, 2009, PMAs board held a meeting, which
meeting was also attended by PMAs Chief Financial Officer
and General Counsel and representatives of BofA Merrill Lynch.
The BofA Merrill Lynch representatives reviewed the then current
market environment and their recent discussions with potential
partners.
On August 21, 2009, BofA Merrill Lynch spoke with Party
2s financial advisors. Party 2 executed a confidentiality
agreement on August 31, 2009 and received a confidential
information memorandum. During the fall of 2009, BofA Merrill
Lynch and PMAs Chief Executive Officer and Chief Financial
Officer had multiple phone calls and in-person meetings with
Party 2s senior management and their financial advisors.
Party 2 submitted an oral indication of interest in December
2009, but subsequently informed BofA Merrill Lynch it would no
longer participate in the process.
On August 28, 2009, PMA met with the senior management of
Party 3. Infrequent conversations continued between PMA
management and BofA Merrill Lynch and Party 3 through September
and October at which point Party 3 withdrew from the process.
In August 2009, BofA Merrill Lynch had conversations with Old
Republic regarding PMA. On September 3, 2009, PMAs
Chief Executive Officer and Chief Financial Officer, Old
Republics Chief Executive Officer and the President and
representatives of BofA Merrill Lynch met to discuss a potential
transaction at BofA Merrill Lynchs offices in New York
City. A confidentiality agreement was executed on
September 18, 2009 between PMA and Old Republic.
Thereafter, Old Republic commenced a preliminary due diligence
review of PMA.
On September 16, 2009, PMAs board held a meeting
which was also attended by PMAs Chief Financial Officer
and General Counsel, outside counsel and BofA Merrill Lynch to
discuss the status of the strategic alternatives review. At the
meeting, BofA Merrill Lynch presented an update to the board on
the current process, in addition to an overview of the
competitive environment following second quarter results. BofA
Merrill Lynch also provided the board additional information on
potential partners.
On September 21, 2009, PMAs board held a telephonic
meeting, which meeting was also attended by PMAs Chief
Financial Officer and General Counsel and outside counsel, to
review recent discussions with the Pennsylvania Insurance
Department regarding the sale of the run-off operations and the
review by the actuary engaged by the Department of PMAs
insurance subsidiaries loss reserves. Management explained
that PMA had objected to the results of the actuarys
reserve review and was engaging additional independent
consultants to review the loss reserves. The board decided,
given the current regulatory and rating agency issues, to engage
a second outside law firm to advise the board with respect to
strategic alternatives. PMAs Chief Financial Officer and
General Counsel consulted with that law firm over the next
several weeks.
On October 7, 2009, PMAs board held a telephonic
meeting, which meeting was also attended by PMAs Chief
Financial Officer and General Counsel and outside counsel. At
the meeting, the board discussed with management the progress of
the studies commissioned by PMA with respect to its insurance
subsidiaries loss reserves, the status of discussions with
A.M. Best and the status of PMAs strategic partner
review.
On October 12, 2009, PMAs board held a telephonic
meeting, which meeting was attended by PMAs Chief
Financial Officer and General Counsel and outside counsel. The
board received a report on communications with the Pennsylvania
Insurance Department, and the board and management discussed
options available to PMA with respect to its discussions with
the Department, and the status of PMAs strategic partner
review.
PMAs Chief Executive Officer and Chief Financial Officer
met with the chief executive officer of Party 4 on
October 15, 2009. Party 4 continued to show interest into
December 2009, at which time it decided not to proceed with a
transaction.
On October 19, 2009 and October 26, 2009, PMAs
board held telephonic meetings, which were attended by
PMAs Chief Financial Officer and General Counsel and
outside counsel. At the meetings, management reviewed PMAs
meetings with the Pennsylvania Insurance Department. Management
had met with the Department and the
42
prospective buyer in connection with the sale of PMAs
run-off operations and separately with the Department on the
status of the Departments examination of the insurance
subsidiaries. Through discussions with the Department, PMA had
reached a resolution that would allow for the closing of the
sale of the run-off operations. PMA also presented its position
to the Department with respect to the examination, including the
information and analyses that supported the reasonableness of
PMAs loss reserve estimates. The Department agreed to take
the supporting information into consideration as it continued
its review of PMAs reserves. The board decided to move
forward with the sale of the run-off operations based on the
revised terms that had been negotiated.
During November 2009, Party 5 engaged in conversations with BofA
Merrill Lynch regarding PMA. On December 11, 2009, Party 5
executed a confidentiality agreement and received confidential
information. Party 5 participated in a management presentation
by PMA management on January 5, 2010. At the end of January
2010, Party 5 decided not to proceed with a transaction.
On November 5, 2009, BofA Merrill Lynch had a conference
call with senior management of PMA to discuss process and timing.
On November 5, 2009, Old Republic advised BofA Merrill
Lynch that it was not interested in continuing discussions
regarding PMA until the sale of PMAs run-off operations
had been completed.
During November 2009, PMAs Chief Executive Officer had an
initial conversation with the Chief Executive Officer of Party
6. A confidentiality agreement was sent and executed by Party 6
on November 23, 2009. Party 6 received confidential
information and, on January 7, 2010, senior management of
Party 6 attended a management presentation by PMAs
management team. On January 21, 2010, Party 6 submitted an
initial indication of interest. The board of PMA and senior
management, after reviewing the matter with BofA Merrill Lynch,
deemed the indication sufficient to continue discussions. Both
PMA management and BofA Merrill Lynch had multiple discussions
with Party 6 management and their financial advisors over the
ensuing two months, including several due diligence meetings
between March 8 and 11, 2010. On March 11, 2010, Party 6
informed BofA Merrill Lynch they were withdrawing from the
process.
On November 11, 2009, PMAs board held a meeting,
which meeting was also attended by PMAs Chief Financial
Officer and General Counsel. At the meeting, among other items,
the board received a presentation by representatives of BofA
Merrill Lynch regarding the then current capital markets
environment, potential alternatives relating to PMAs
fee-based businesses and recent discussions with potential
partners.
On December 24, 2009, PMA completed the sale of its run-off
operations.
On January 10, 2010, a confidentiality agreement was sent
to Party 7 following conversations between the chief executives
of PMA and Party 7. The confidentiality agreement was executed
on January 12, 2010 and Party 7 subsequently received
confidential information. BofA Merrill Lynch conducted a number
of calls with the financial advisors of Party 7 prior to a PMA
management presentation to Party 7 senior management on
February 16, 2010. In late February 2010, Party 7 informed
BofA Merrill Lynch it would not continue with the process.
On January 14, 2010, PMAs board held a telephonic
meeting, which meeting was also attended by PMAs Interim
Chief Financial Officer and General Counsel. At the meeting, the
board and management discussed its recent meeting with
A.M. Best and discussions with the Pennsylvania Insurance
Department.
By letter dated January 14, 2010, Old Republic submitted an
indication of interest to BofA Merrill Lynch.
On January 15, 2010, BofA Merrill Lynch shared with Old
Republic a summary and preliminary financial analysis of the
sale of PMAs run-off operations.
On January 26, 2010, PMAs board held a telephonic
meeting, which meeting was also attended by PMAs Interim
Chief Financial Officer and General Counsel and representatives
of BofA Merrill Lynch and outside counsel. At the meeting, among
other things, a representative of BofA Merrill Lynch reported on
the status of the capital markets initiative, and reviewed
initial indications of interest received to date. BofA Merrill
Lynch also shared with the board detailed information on each of
the parties engaged in discussions, including examples of what
the combined company would look like if PMA were to partner with
each company. Outside counsel advised the board with respect to
the different types of transactions that may be pursued. The
board requested that
43
management and BofA Merrill Lynch meet and return to the board
with a proposed plan for contacting, in addition to those
entities already contacted, certain of the larger insurance
companies with an interest in workers compensation
insurance, so that the board could perform a comprehensive
evaluation.
On January 29, 2010, BofA Merrill Lynch received approval
from the board to contact six larger insurance companies with an
interest in workers compensation insurance, to discuss
their interest in considering a strategic transaction with PMA.
After contacting the identified parties, BofA Merrill Lynch
informed PMA management and the board none of the parties were
interested in engaging in discussions.
On January 29, 2010, A.M. Best affirmed the
A− rating of PMAs insurance subsidiaries
with a stable outlook.
On February 2, 2010, PMAs board held a telephonic
meeting, which meeting was also attended by PMAs Interim
Chief Financial Officer and General Counsel and outside counsel.
At the meeting, management updated the board on its discussions
with the Pennsylvania Insurance Department. The board and
management discussed the difference between loss reserve
estimates of PMA and the actuary engaged by the Department with
respect to the insurance subsidiaries reserves. Management
outlined its approach with the Department going forward and
reviewed with the board the process for appealing any
examination report that might be issued by the Department.
Management said that it would bring its independent actuarial
analysis to a prompt conclusion and respond to the analysis of
the Departments actuaries using PMAs actuarial
analysis and the independent actuarial analysis, as well as the
independent claim studies. Management reviewed the status of
discussions with potential partners for the board.
On March 3, 2010, PMA received the Pennsylvania Insurance
Department Bureau of Financial Examinations report on the
financial examination of PMAs insurance subsidiaries. The
report questioned the reasonableness of those companies
reserves.
On March 4, 2010, PMAs board held a meeting, which
meeting was also attended by PMAs Interim Chief Financial
Officer and General Counsel. The Examination Report was reviewed
during the meeting and management maintained that its reserves
were reasonable. It disagreed with the report and continued to
work with the Department to determine whether a solution to the
disagreement was possible. At the meeting, representatives of
BofA Merrill Lynch provided an update on the status of the
proposed transaction, noting that there were meetings scheduled
with Party 6 and Old Republic in the next week. BofA Merrill
Lynch also reported that one party was interested in a possible
merger of equals. The board decided to continue with the
scheduled meetings.
On March 5, 2010, PMA met with the Pennsylvania Insurance
Department in an attempt to resolve the difference of opinion
between the independent actuaries engaged by PMA and the
Department with respect to the reserve position of PMAs
insurance subsidiaries.
On March 12, 2010, PMAs board held a telephonic
meeting, which meeting was attended by PMAs Interim Chief
Financial Officer and General Counsel and outside counsel. At
the meeting, management reviewed the meetings that it had with
Party 6 earlier in the week and noted that members of management
were meeting with Old Republic that same day.
On March 12, 2010, management of PMA and Old Republic and
representatives of BofA Merrill Lynch met at BofA Merrill
Lynchs offices in New York City to discuss the proposed
transaction and their respective due diligence. One of the
discussions included a review of the disagreement over reserves
between PMA and the Pennsylvania Insurance Department.
On March 13, 2010, PMAs management team had a meeting
with outside counsel and BofA Merrill Lynch to discuss the
status of conversations with the Pennsylvania Insurance
Department and the sale process that was ongoing. PMAs
Chairman, along with PMAs executive management team,
discussed all alternatives available with outside counsel and
BofA Merrill Lynch.
On March 14, 2010, PMAs board held a telephonic
meeting, which meeting was attended by PMAs Interim Chief
Financial Officer and General Counsel, outside counsel and
representatives of BofA Merrill Lynch. Management reported that
Party 6 had terminated discussions regarding a possible
transaction until the disagreement over reserves with the
Pennsylvania Insurance Department was resolved. Management also
reported that Old
44
Republic remained interested in a transaction with PMA. Old
Republic requested, as a condition for proceeding, a
30-day
exclusivity period to complete its due diligence and enter into
a definitive agreement. The board continued to discuss a
possible transaction with Old Republic, and BofA Merrill Lynch
provided additional information on Old Republic to the board.
After this discussion, the board approved entering into an
exclusivity agreement with Old Republic.
PMA communicated the status of the discussions with Old Republic
to the Pennsylvania Insurance Department on March 13 and 14,
2010 and requested the Department to reject the Bureau of
Examinations report of financial examination.
On March 14, 2010, PMA and Old Republic executed a
30-day
exclusivity agreement.
On March 15, 2010, the Pennsylvania Insurance Department
rejected the Bureau of Examinations report and ordered the
examiner to reopen the examination, obtain additional
information with respect to the insurance companies loss
and LAE reserves and monitor PMAs discussions with Old
Republic regarding a potential transaction.
On March 16, 2010, PMAs board held a telephonic
meeting, which meeting was also attended by PMAs Interim
Chief Financial Officer and General Counsel and outside counsel.
Management and the board reviewed the Annual Report on
Form 10-K
and management reported that it would be updating A.M. Best
on PMAs signed exclusivity agreement with Old Republic.
On March 19, 2010, PMAs General Counsel had a
telephone call with Old Republics General Counsel to
discuss the process for moving forward with the proposed
transaction.
During late March 2010 and early April 2010, Old Republic
continued to conduct its due diligence examination of PMA and
PMA conducted its due diligence examination of Old Republic.
Between April 5 and 9, 2010, management of PMA and Old Republic,
along with representatives of BofA Merrill Lynch, MAKO Credit
Risk Consulting LLC, a mortgage insurance business consultant
engaged by PMA, and Macquarie, Old Republics financial
advisor, met at the offices of Old Republic to conduct due
diligence for the proposed transaction.
On April 12, 2010, PMA received a draft merger agreement
from Old Republic.
On April 14, 2010, PMAs board held a meeting, which
meeting was also attended by PMAs Interim Chief Financial
Officer and General Counsel, outside counsel and representatives
of BofA Merrill Lynch and MAKO Credit Risk Consulting LLC. At
the meeting, among other items, the board received an update on
discussions with Old Republic and a report on the due diligence
being performed by Old Republic. BofA Merrill Lynch noted that
Old Republic was finalizing its due diligence on PMA and its
review of PMAs loss reserves and reinsurance. BofA Merrill
Lynch also reported on the exchange ratio that Old Republic was
considering, including potential adjustments and collar
features. The board also discussed certain terms of the draft
merger agreement received from Old Republic. The board approved
the extension of the exclusivity agreement to May 14, 2010.
Also at the meeting, management reviewed the status of its due
diligence examination of Old Republic, including its review of
the mortgage insurance business and the operating philosophy of
Old Republic. The board also discussed the operating risks of
Old Republic, including potential negative business trends and
litigation relating to Old Republics mortgage insurance
business.
On April 14, 2010, PMA and Old Republic executed a
30-day
extension to the exclusivity agreement to May 14, 2010 to
provide the parties additional time to conduct due diligence and
negotiate the merger agreement.
Also on April 14, 2010, PMA met with the Pennsylvania
Insurance Department in a further attempt to resolve the
difference of opinion between PMA and the Department with
respect to the reserve position of PMAs insurance
subsidiaries.
On April 19, 2010, PMAs board held a telephonic
meeting, which meeting was attended by PMAs Interim Chief
Financial Officer and General Counsel, outside counsel and
representatives of BofA Merrill Lynch. The board received a
status report on discussions with Old Republic, noting that Old
Republic was continuing its due diligence and advised that it
had met with the Pennsylvania Insurance Department
representatives in conjunction with Old
45
Republics due diligence. Management noted that PMA and
counsel were reviewing the draft merger agreement. BofA Merrill
Lynch updated the board on the status of discussions regarding
the exchange ratio.
Between April 26, 2010 and April 29, 2010, PMA and Old
Republic negotiated terms of the merger agreement and exchanged
drafts of the agreement. The significant terms that were
addressed included the exchange ratio, collar, termination
rights, termination fee, PMAs right to receive and respond
to other proposals, the employment and severance agreements of
senior officers and continuation of employee benefit plans.
On May 5, 2010, PMAs board of directors held a
meeting, which meeting was attended by PMAs Interim Chief
Financial Officer and General Counsel, representatives of BofA
Merrill Lynch and outside counsel. At the meeting, management
updated the board on recent discussions with the Pennsylvania
Insurance Department. In addition, representatives of BofA
Merrill Lynch reported to the board on the terms of the proposed
transaction with Old Republic and the status of negotiations
with Old Republic, including discussions regarding the possible
exchange ratio and the status of due diligence. BofA Merrill
Lynch also reviewed the process that was undertaken to contact
other interested parties, noting that a total of 17 parties were
contacted or have contacted PMA, with six parties executing a
confidentiality agreement and completing a preliminary review of
PMA. BofA Merrill Lynch continued with a presentation
summarizing the key economic terms of the possible transaction
with Old Republic then being discussed, including the proposed
exchange ratio, collar and termination fee, as well as a
preliminary valuation analysis involving PMA and Old Republic
and a review of Old Republic and its business. Outside counsel
reviewed some of the legal considerations associated with
proceeding and not proceeding with the proposed transaction. The
board also received a presentation from PMAs General
Counsel on the terms of the proposed merger agreement, including
representations and warranties, covenants, conditions to closing
and termination provisions. Counsel also discussed required
regulatory and shareholder approval requirements, as well as
employment and severance agreements. The board also discussed
potential outcomes if it decided not to move forward with the
transaction, including the possible responses by the
Pennsylvania Insurance Department and rating agencies. Following
the discussion, the board decided to continue to move forward
with the transaction.
On May 5, 2010, PMAs General Counsel had a telephonic
meeting with Old Republics General Counsel to discuss
terms of the proposed transaction.
On May 7, 2010, Old Republics Chief Executive
Officer, Chief Financial Officer and General Counsel met with
the Pennsylvania Insurance Department to discuss matters
relating to the proposed transaction with PMA.
On May 10, 2010, PMAs board held a telephonic
meeting, which meeting was also attended by PMAs Interim
Chief Financial Officer and General Counsel, outside counsel and
representatives of BofA Merrill Lynch. At the meeting, the board
received a report on the status of the proposed transaction with
Old Republic, including a review of the discussions between Old
Republics management and the Pennsylvania Insurance
Department. BofA Merrill Lynch updated the board on discussions
with Old Republics advisors regarding the proposed
exchange ratio. After discussion, the board authorized the
execution of a
30-day
extension to the exclusivity period.
On May 14, 2010, PMA and Old Republic executed an extension
to the exclusivity agreement to June 14, 2010.
On May 17, 2010, PMAs board held a telephonic
meeting, which meeting was also attended by PMAs Interim
Chief Financial Officer and General Counsel, outside counsel,
and representatives of BofA Merrill Lynch. At the meeting, the
board received a report on the status of the proposed
transaction with Old Republic, including a discussion of the
Form A approval process required by Pennsylvania insurance
law. Management also noted that an extension to the exclusivity
period had been executed and that discussions regarding the
proposed exchange ratio were ongoing. It was also reported that
PMA and Old Republic and their advisors were continuing to work
on the merger agreement, Old Republics registration
statement, PMAs proxy statement and regulatory filings.
BofA Merrill Lynch updated the board regarding discussion on the
proposed merger consideration.
Between May 19, 2010 and May 24, 2010, PMA and Old
Republic continued to negotiate terms of the merger agreement
and exchanged drafts of the agreement. The significant terms
being addressed included the exchange ratio, collar, termination
rights, termination fee, employment and severance agreements of
senior officers and continuation of employee benefit plans.
46
On May 24, 2010, PMAs board held a telephonic
meeting, which meeting was also attended by PMAs Interim
Chief Financial Officer and General Counsel, outside counsel and
representatives of BofA Merrill Lynch. Management reviewed the
status of merger agreement negotiations with Old Republic,
including proposed changes to the agreement. The board was also
updated on discussions regarding the proposed exchange ratio,
collar and termination fee.
On June 9, 2010, the board of PMA convened a meeting to
review and consider the proposed merger with Old Republic.
Present at the meeting were PMAs Interim Chief Financial
Officer and General Counsel and representatives from BofA
Merrill Lynch and outside counsel. The entire board except for
one director was present at the meeting. Management updated the
board on the final negotiations of the proposed merger.
PMAs General Counsel reviewed the terms of the merger
agreement that had been negotiated with Old Republic. Outside
counsel reviewed with the board its fiduciary duties as members
of the board. Also at this meeting, BofA Merrill Lynch reviewed
with PMAs board of directors the status of prior efforts
to solicit interest from third parties and certain key terms of
the proposed transaction. In addition, BofA Merrill Lynch
reviewed with PMAs board of directors its financial
analysis of the exchange ratio and delivered to PMAs board
of directors an oral opinion, which was confirmed by delivery of
a written opinion dated June 9, 2010, to the effect that,
as of that date and based on and subject to various assumptions
and limitations described in its opinion, the exchange ratio
provided for in the merger was fair, from a financial point of
view, to holders of PMA class A common stock. Following the
presentation, the board reviewed and discussed other strategic
alternatives and the positive and negative factors for entering
into the proposed merger. Following the discussion, PMAs
board, by unanimous vote of the directors present, determined
that the terms of the merger agreement and the transactions
contemplated thereby are advisable, fair to, and in the best
interests of, PMA and PMAs shareholders.
On the afternoon of June 9, 2010, PMA, Old Republic and
Merger Sub executed the merger agreement.
PMAs
Reasons for the Merger
PMAs board of directors, at its meeting held on
June 9, 2010, considered the terms of the merger agreement
and the transactions contemplated thereby and determined them to
be advisable, fair to, and in the best interests of, PMA and
PMAs shareholders. PMA believes that a merger with Old
Republic, and the additional financial strength and stability it
can provide, will be of benefit to its shareholders, clients,
employees and other stakeholders. In evaluating the merger,
PMAs board of directors consulted with management, as well
as its legal and financial advisors, and considered a number of
factors, including the material factors set forth below.
PMAs Challenges as an Independent
Company. Operating as a relatively small,
stand-alone public company, PMA faces continuing, and sometimes
conflicting, pressures from customers, brokers, competitors,
regulatory agencies, financial analysts and independent rating
agencies. The type of business that PMA writes and services is
particularly sensitive to PMAs financial strength rating.
The run-off operations recently sold by PMA had jeopardized
PMAs rating and required funding that could otherwise have
been used in PMAs other businesses. Following the
disposition of the run-off operations, PMA needed access to
additional capital in order to safely maintain its financial
rating, address the regulatory issues described below and grow
its business profitably. Given the current economic climate and
the fact that PMAs shares trade at a considerable discount
to their book value, PMA has had limited access to additional
capital. PMA believes that Old Republics financial
strength and its greater access to capital will provide PMA
increased stability and presents the best available alternative
for the continued growth of PMA and its businesses. Following
the merger, PMA will be part of a strong and larger diversified
company that is well capitalized. The merger will provide PMA
the opportunity for continued, potentially accelerated,
profitable growth. PMA expects that this merger will enable its
shareholders to realize a short-term premium and greater
long-term value than if PMA continued to operate as a
stand-alone entity.
Resolution of Pennsylvania Insurance Department
Examination. In connection with its examination
of PMAs insurance subsidiaries for the five years ended
December 31, 2007, the Examination Bureau of the
Pennsylvania Insurance Department issued a report in March 2010.
This report raised certain issues relative to the reasonableness
of those companies loss and loss adjustment expense
reserves as of year-end 2007. The Department subsequently
rejected that report and directed the examiner to reopen the
examination and obtain additional data, documentation and
information from PMA relative to the December 31, 2007
reserves.
47
PMA believes its original estimates of loss and loss adjustment
expense reserves were reasonable and has provided the Department
with several independent studies performed subsequent to
December 31, 2007, as well as industry and other
information in support of its position. Notwithstanding this
additional support and information, PMA has not been able to
achieve a resolution of these matters. After recent discussions
with the Department, PMA concluded that it could only resolve
these matters as a stand alone organization by engaging in
administrative and legal review processes which, irrespective of
their ultimate outcome, would likely hinder the long-term and
day-to-day
continuity of PMAs business operations, and, in the
interim, potentially have a negative impact on its financial
ratings. These discussions have also led PMAs board to
conclude that the merger with Old Republic, a company with
greater capitalization, resources and financial flexibility,
would likely provide PMA with the necessary financial
wherewithal to at once enhance PMAs own financial
resources and lead to a resolution of the outstanding regulatory
matters related to the Departments year-end 2007
examination. As indicated in the notes to the pro forma
financial data on pages 26 to 34 of Old Republics
registration statement of which this PMA proxy statement is a
part, Old Republic expects to provide reinsurance support to
PMAs insurance subsidiaries to reduce their balance sheet
leverage after the merger.
Favorable Consideration Received in
Merger. The merger consideration represented a
premium of approximately 15% to the closing price of PMAs
class A common stock on June 8, 2010, the last trading
day prior to the execution of the merger agreement. The exchange
ratio, combined with the collar, provides reasonable certainty
as to the relative value that PMA shareholders will receive in
the merger in the form of shares of Old Republic common stock.
PMAs class A common stock has historically traded at
a discount to book value that is significantly greater than the
discount at which other workers compensation specialty
insurers and diversified specialty insurers have traded. Old
Republic has historically traded at a higher book value multiple
than PMA. Old Republic is a respected organization, well
positioned to continue creating value for its shareholders. It
has a strong stock currency, and is well capitalized and
appropriately positioned to take advantage of opportunities
which will be available to it. According to its 2009 Annual
Review, Old Republic has outperformed the Standard and
Poors 500 Index over the last 50 years with an annual
book return that averaged 16.6% compared to an average annual
return of 10.9% for the S&P Index. Old Republic has paid
regular cash dividends on common shares without interruption
since 1942 and paid $0.68 per share in dividends during 2009.
Financial Presentation and Opinion of BofA Merrill
Lynch. The opinion of BofA Merrill Lynch, dated
June 9, 2010, to PMAs board of directors to the
effect that, as of the date of the opinion and based on and
subject to various assumptions and limitations described in its
opinion, the exchange ratio provided for in the merger was fair,
from a financial point of view, to holders of PMA class A
common stock as more fully described below in the section
entitled The Merger Opinion of PMAs
Financial Advisor.
Low Probability of a Superior Offer. The
results of the thorough and lengthy process undertaken by PMA
and its financial advisor in connection with its proposed sale
indicated that the probability of receiving an offer better than
the offer made by Old Republic was low. Overall, 17 potential
partners were contacted over a period of nine months and none of
those companies indicated that it was willing to make an offer
on terms better than those offered by Old Republic.
Alternative Strategies. Alternative strategies
and scenarios in which PMA would continue to operate
independently were examined by the board in consultation with
management and PMAs financial and legal advisors. After
the review of the alternative strategies, the board concluded
that none of those strategies were preferable from a financial
point of view and that a merger with Old Republic would provide
the greatest benefit to PMAs shareholders, clients,
employees and other stakeholders.
Terms of the Merger Agreement. All of the
terms of the merger agreement were considered. In particular,
the board of directors considered the risks posed to PMA and its
shareholders by the terms of the merger agreement. While the
merger agreement prohibits PMA from soliciting alternative
proposals, PMA has the right to furnish information to, and
engage in discussions with, a person who makes an unsolicited
offer that PMAs board of directors determines in good
faith is, or is reasonably likely to result in, a superior
proposal. PMA has the right to terminate the merger agreement in
order to accept a superior offer, subject to the terms and
conditions of the merger agreement, including the payment to Old
Republic of an $8 million termination fee. PMA believes
that the termination fee is reasonable and comparable to
termination fees in similar transactions. The merger agreement
48
contains limited conditions to Old Republics obligation to
complete the merger and permits PMA to specifically enforce its
provisions, providing reasonable certainty that the merger can
be completed. The merger agreement must be adopted by PMAs
shareholders before the merger can be completed.
Decentralized Operations; Continuation of PMA Companies,
Inc. PMA will continue to operate as PMA
Companies, Inc. and once the merger is consummated, PMA will be
identified as a subsidiary of Old Republic. Old Republic
operates in a decentralized manner that emphasizes
specialization by type of insurance coverage, industries and
economic sectors, and client bases. This approach is expected to
allow PMA to continue to maintain its headquarters, locations,
management team and employees in substantially the manner they
existed prior to the merger, which is expected to enable PMA to
continue to execute its strategic plan by building on its strong
relationships with its customers, clients and other partners and
with the substantial resources of its merger partner.
Likelihood of Completion of Transaction. Based
on the size of the transaction, the terms of the merger
agreement and discussions with the Pennsylvania Insurance
Department, PMA believes that there is a high likelihood that
the regulatory and other approvals required in connection with
the merger will be received.
Financial Strength Rating of Old Republic Insurance
Subsidiaries. Old Republic has a disciplined
underwriting, risk management and claims performance culture
that focuses on successful long-term growth and profitability.
Old Republics core property and casualty insurance
businesses have a strong profitability record. Old
Republics principal property and casualty insurance
subsidiaries have A.M. Best ratings of A+
compared to PMAs A.M. Best rating of
A−.
Tax-Free Nature of the Merger. The merger is
expected to qualify as a tax-free reorganization
within the meaning of Section 368(a) of the Internal
Revenue Code. This structure will permit shareholders of PMA to
defer the recognition of taxes associated with their shares of
PMA class A common stock (other than cash paid in lieu of
fractional shares) until they decide to sell the shares of Old
Republic common stock received in the merger.
Other Factors. In addition to the foregoing,
PMAs board considered the following reasons for the merger:
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PMA and Old Republic have similar cultures, core values and
business principles that will foster growth and expansion. Both
companies have similar business and operational philosophies of
disciplined underwriting, risk management and claims
performance. Likewise, both companies manage their businesses
for long-term profitability and success.
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Old Republics stated business strategy is to increase
penetration in the property and casualty business marketplace.
PMAs business has little to no overlap with Old
Republics business operations and distribution channel
partners.
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Old Republic pursues a well diversified business approach, and
Old Republic values that approach in PMA as well. PMAs
fee-based businesses now represent 16% of PMAs total
revenues, and are anticipated to continue to grow. Old Republic
is very interested and supportive of PMAs insurance and
fee-based operations, and PMA plans to continue to grow these
business segments.
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Potential Negative Factors Relating to the
Merger. During its deliberations, PMAs
board of directors considered potential risks and negative
factors, including the following:
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the risk that the merger does not close and its effect on
PMAs business and the impact of the resolution of the
financial examination being conducted by the Pennsylvania
Insurance Department;
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the risk that the merger may be delayed;
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the merger consideration represents a discount to PMAs
current book value and the highest price at which PMAs
stock has traded during recent years;
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the potential negative impact that the announcement of the
merger may have on PMAs employees, customers, clients and
other partners;
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the significant costs involved and the diversion of management
resources in negotiating the merger agreement, closing the
merger and integrating PMA with Old Republics operations;
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49
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the inherent risks and financial condition of Old
Republics mortgage guaranty and title insurance businesses
and the effect those businesses can have on the value of Old
Republics common stock;
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the merger agreement prohibits PMA from soliciting alternative
acquisition proposals; and
|
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the potential that the termination fee may discourage an
alternative proposal or result in a lower price in an
alternative transaction.
|
The foregoing discussion of the factors considered by PMAs
board of directors is not intended to be exhaustive, but,
rather, includes the material factors considered by PMAs
board of directors. In reaching its decision to approve the
merger agreement, the merger and the other transactions
contemplated by the merger agreement, PMAs board of
directors did not quantify or assign any relative weights to the
factors considered, and individual directors may have given
different weights to different factors. PMAs board of
directors considered all these factors as a whole, and overall
considered the factors to be favorable to, and supportive of,
its determination.
For the reasons set forth above, PMAs board of directors
determined that the merger agreement and the transactions
contemplated thereby are advisable, fair to and in the best
interests of PMA and PMAs shareholders, and approved the
merger agreement. PMAs board of directors recommends that
you vote FOR the approval of the merger.
Recommendations
of the PMA Board of Directors with Respect to the
Merger
By unanimous vote of the directors present, the PMA board of
directors, at a meeting held on June 9, 2010, determined
that the terms of the merger agreement and the transactions
contemplated thereby are advisable, fair to, and in the best
interests of, PMA and PMAs shareholders, and approved the
merger agreement and the transactions contemplated thereby,
including the merger. The PMA board of directors recommends that
the PMA shareholders vote FOR the proposal to adopt
the merger agreement at the special meeting. The PMA board of
directors also recommends that the PMA shareholders vote
FOR the proposal to approve the adjournment or
postponement of the special meeting for the solicitation of
additional proxies if there are not sufficient votes present, in
person or represented by proxy, at the time of the special
meeting to adopt the merger agreement.
Opinion
of PMAs Financial Advisor
PMA retained BofA Merrill Lynch to act as PMAs financial
advisor in connection with PMAs exploration of strategic
alternatives, including the merger. PMA selected BofA Merrill
Lynch to act as PMAs financial advisor in connection with
the merger on the basis of BofA Merrill Lynchs experience
in transactions similar to the merger, its reputation in the
investment community and its familiarity with PMA and its
business.
On June 9, 2010, at a meeting of PMAs board of
directors held to evaluate the merger, BofA Merrill Lynch
delivered to PMAs board of directors an oral opinion,
which was confirmed by delivery of a written opinion dated
June 9, 2010, to the effect that, as of the date of the
opinion and based on and subject to various assumptions and
limitations described in its opinion, the exchange ratio
provided for in the merger was fair, from a financial point of
view, to holders of PMA class A common stock.
The full text of BofA Merrill Lynchs written opinion to
PMAs board of directors, which describes, among other
things, the assumptions made, procedures followed, factors
considered and limitations on the review undertaken, is attached
as Annex B to this document and is incorporated by
reference herein in its entirety. The following summary of BofA
Merrill Lynchs opinion is qualified in its entirety by
reference to the full text of the opinion. BofA Merrill Lynch
delivered its opinion to PMAs board of directors for the
benefit and use of PMAs board of directors in connection
with and for purposes of its evaluation of the exchange ratio
from a financial point of view. BofA Merrill Lynchs
opinion does not address any other aspect of the merger and does
not constitute a recommendation to any shareholder as to how to
vote or act in connection with the proposed merger. In addition,
the opinion does not in any manner address the prices at which
shares of PMA class A common stock and Old Republic common
stock would trade at any time, including following announcement
or following the consummation of the transaction. The following
is a summary of BofA Merrill Lynchs opinion, including the
procedures followed, the assumptions made, the matters
considered and the limitations on review undertaken by BofA
Merrill Lynch in rendering its opinion.
50
In connection with rendering its opinion, BofA Merrill Lynch,
among other things:
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reviewed certain publicly available business and financial
information relating to PMA and Old Republic;
|
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|
reviewed certain internal financial and operating information
with respect to the business, operations and prospects of PMA
furnished to or discussed with BofA Merrill Lynch by the
management of PMA, including certain financial forecasts
relating to PMA prepared by or at the direction of and approved
by the management of PMA under certain scenarios (such
forecasts, PMA Forecasts);
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|
reviewed certain internal financial and operating information
with respect to the business, operations and prospects of Old
Republic furnished to or discussed with BofA Merrill Lynch by
the management of Old Republic, including certain financial
forecasts relating to Old Republic prepared by the management of
Old Republic for the year ended December 31, 2010 (such
forecasts, Old Republic 2010 Forecasts);
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reviewed certain financial forecasts relating to Old Republic
prepared by or at the direction of and approved by the
management of PMA for the years ended December 31, 2011
through December 31, 2014 under certain scenarios (such
forecasts, Old Republic Extended Forecasts);
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reviewed certain reports regarding reserves for loss and loss
adjustment expense of PMA prepared by an independent actuarial
firm engaged by PMA which were made available to BofA Merrill
Lynch by PMA;
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discussed the past and current business, operations, financial
condition and prospects of PMA with members of senior
managements of PMA and Old Republic, and discussed the past and
current business, operations, financial condition and prospects
of Old Republic with members of senior managements of PMA and
Old Republic;
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discussed with the management of PMA its assessment of the
financial examination of PMAs insurance subsidiaries
currently being conducted by the Pennsylvania Insurance
Department, including the status of such examination and the
potential impact on PMA of any action that may be required to be
taken as a result thereof;
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reviewed the potential pro forma financial impact of the merger
on the future financial performance of Old Republic;
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participated in certain discussions and negotiations among
representatives of PMA and Old Republic and their financial and
legal advisors;
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reviewed the trading histories for PMA class A common stock
and Old Republic common stock and the valuation multiples
implied by the merger for PMA class A common stock and a
comparison of such trading histories and such valuation
multiples with each other and with the trading histories and
valuation multiples of other companies BofA Merrill Lynch deemed
relevant;
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compared certain financial and stock market information of PMA
and Old Republic with similar information of other companies
BofA Merrill Lynch deemed relevant;
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considered the results of BofA Merrill Lynchs efforts on
behalf of PMA to solicit, at the direction of PMA, indications
of interest from third parties with respect to a possible
acquisition of PMA;
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reviewed a draft, dated June 4, 2010, of the merger
agreement; and
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performed such other analyses and studies and considered such
other information and factors as BofA Merrill Lynch deemed
appropriate.
|
In arriving at its opinion, BofA Merrill Lynch assumed and
relied upon, without independent verification, the accuracy and
completeness of the financial and other information and data
publicly available or provided to or otherwise reviewed by or
discussed with BofA Merrill Lynch and relied upon the assurances
of the managements of PMA and Old Republic that they are not
aware of any facts or circumstances that would make such
information or data inaccurate or misleading in any material
respect. With respect to the PMA Forecasts and the Old Republic
Extended Forecasts, BofA Merrill Lynch was advised by PMA, and
assumed, that they were reasonably prepared on bases reflecting
the best currently available estimates and good faith judgments
of the management of PMA as to the future financial performance
of PMA and Old Republic, as applicable, under the scenarios
reflected therein, in each case for the periods set forth
therein. With respect to the Old Republic 2010 Forecasts, BofA
Merrill Lynch was advised by Old
51
Republic, and assumed, with the consent of PMA, that they were
reasonably prepared on bases reflecting the best currently
available estimates and good faith judgments of the management
of Old Republic as to the future financial performance of Old
Republic for the year ended December 31, 2010. As PMA was
aware, although BofA Merrill Lynch requested financial forecasts
with respect to Old Republic prepared by the management of Old
Republic for the years ended December 31, 2011 through
December 31, 2014, BofA Merrill Lynch was advised by the
management of Old Republic that it had not prepared current and
reliable financial forecasts for the periods beyond
December 31, 2010. Accordingly, based upon discussions with
the management of Old Republic and at the direction of PMA, BofA
Merrill Lynch assumed that the Old Republic Extended Forecasts
were a reasonable basis upon which to evaluate the future
financial performance of Old Republic for the years ended
December 31, 2011 through December 31, 2014 and, at
the direction of PMA, used such forecasts for such periods in
performing the analyses.
BofA Merrill Lynch did not make any physical inspection of the
properties or assets of PMA or Old Republic, nor did BofA
Merrill Lynch make or was it provided with any independent
evaluation or appraisal of the assets or liabilities (contingent
or otherwise) of PMA or Old Republic, other than the PMA
actuarial reports referenced above that BofA Merrill Lynch
reviewed and relied upon without independent verification for
purposes of its opinion. BofA Merrill Lynch is not an expert in
the evaluation of reserves for losses and loss adjustment
expenses and BofA Merrill Lynch did not make an independent
evaluation of the adequacy of the reserves of PMA or Old
Republic. In that regard, BofA Merrill Lynch made no analysis
of, and expressed no opinion as to, the adequacy of reserves for
losses and loss adjustment expenses of PMA or Old Republic. BofA
Merrill Lynch further relied, at the direction of PMA, upon the
assessment of management of PMA as to the potential impact on
PMA of any action that may be required to be taken as a result
of the Pennsylvania Insurance Department examination.
BofA Merrill Lynch did not evaluate the solvency or fair value
of PMA or Old Republic under any state, federal or other laws
relating to bankruptcy, insolvency or similar matters. BofA
Merrill Lynch assumed, at the direction of PMA, that the merger
would be consummated in accordance with its terms, without
waiver, modification or amendment of any material term,
condition or agreement and that, in the course of obtaining the
necessary governmental, regulatory and other approvals,
consents, releases and waivers for the merger, no delay,
limitation, restriction or condition, including any divestiture
requirements or amendments or modifications, will be imposed
that would have an adverse effect on PMA, Old Republic or the
contemplated benefits of the merger. BofA Merrill Lynch also
assumed, at the direction of PMA, that the merger will qualify
for federal income tax purposes as a reorganization under the
provisions of Section 368(a) of the Internal Revenue Code
of 1986, as amended. BofA Merrill Lynch also assumed, at the
direction of PMA, that the final executed Agreement would not
differ in any material respect from the draft, dated
June 4, 2010, of the merger agreement reviewed by BofA
Merrill Lynch.
BofA Merrill Lynch expressed no view or opinion as to any terms
or other aspects of the merger (other than the exchange ratio to
the extent expressly specified in its opinion), including,
without limitation, the form or structure of the merger. BofA
Merrill Lynchs opinion was limited to the fairness, from a
financial point of view, of the exchange ratio to holders of PMA
class A common stock and no opinion or view was expressed
with respect to any consideration received in connection with
the merger by the holders of any other class of securities,
creditors or other constituencies of any party. In addition, no
opinion or view was expressed with respect to the fairness
(financial or otherwise) of the amount, nature or any other
aspect of any compensation to any of the officers, directors or
employees of any party to the merger, or class of such persons,
relative to the exchange ratio. Furthermore, no opinion or view
was expressed as to the relative merits of the merger in
comparison to other strategies or transactions that might be
available to PMA or in which PMA might engage or as to the
underlying business decision of PMA to proceed with or effect
the merger. BofA Merrill Lynch did not express any opinion as to
what the value of Old Republic common stock actually would be
when issued or the prices at which PMA class A common stock
or Old Republic common stock would trade at any time, including
following announcement or consummation of the merger. In
addition, BofA Merrill Lynch expressed no opinion or
recommendation as to how any shareholder should vote or act in
connection with the merger or any related matter.
BofA Merrill Lynchs opinion was necessarily based on
financial, economic, monetary, market and other conditions and
circumstances as in effect on, and the information made
available to BofA Merrill Lynch as of, the date of its opinion.
As noted in the opinion, the credit, financial and stock markets
have been experiencing unusual volatility and BofA Merrill Lynch
expressed no opinion or view as to any potential effects of such
volatility on PMA, Old Republic or the merger. It should be
understood that subsequent developments may affect its opinion,
and
52
BofA Merrill Lynch does not have any obligation to update,
revise or reaffirm its opinion. The issuance of BofA Merrill
Lynchs opinion was approved by BofA Merrill Lynchs
Americas Fairness Opinion Review Committee.
The following represents a brief summary of the material
financial analyses presented by BofA Merrill Lynch to PMAs
board of directors in connection with its opinion. The financial
analyses summarized below include information presented in
tabular format. In order to fully understand the financial
analyses performed by BofA Merrill Lynch, the tables must be
read together with the text of each summary. The tables alone do
not constitute a complete description of the financial analyses
performed by BofA Merrill Lynch. Considering the data set forth
in the tables below without considering the full narrative
description of the financial analyses, including the
methodologies and assumptions underlying the analyses, could
create a misleading or incomplete view of the financial analyses
performed by BofA Merrill Lynch.
PMA
and Old Republic Financial Analyses
Except as otherwise noted, the following information, to the
extent it is based on market data, is based on market data as it
existed on or before June 7, 2010 and is not necessarily
indicative of current market conditions.
As described more fully below, BofA Merrill Lynch assessed the
fairness of the exchange ratio by assessing the stand-alone
value of each of PMA and Old Republic using several
methodologies, including an analysis of comparable publicly
traded companies using valuation multiples from selected
publicly traded companies and a discounted cash flow analysis.
Each of these methodologies was used to generate implied per
share valuation ranges for each of PMA and Old Republic on a
fully diluted basis, which gives effect to the impact of
restricted stock, options and convertible debt. The implied per
share valuation ranges were then used to assess the exchange
ratio implied by each methodology.
Based on Old Republics share price of $12.72 as of
June 7, 2010, BofA Merrill Lynch noted that the implied
offer price per share of PMA was $7.00, an implied premium of
14.3% to PMAs share price of $6.12 as of June 7,
2010. Such implied offer price represented a multiple of 0.54x
PMAs fully diluted book value per share as of
March 31, 2010, a multiple of 11.3x PMAs actual
earnings per share for the year 2009, a multiple of 10.1x
PMAs estimated research analysts consensus earnings per
share for the year 2010 and a multiple of 8.4x PMAs
estimated research analysts consensus earnings per share for the
year 2011. By way of background, BofA Merrill Lynch noted that,
based on the equity interests outstanding in each of PMA and Old
Republic as of June 7, 2010, the exchange ratio would
result in pro forma ownership of the combined company being
approximately 6.9% for holders of PMA class A common stock,
on a fully diluted basis, after giving effect to the net impact
of options and convertible debt. The determination of fully
diluted figures (including ownership) includes the net impact of
options under the treasury stock method using values implied by
the exchange ratio proposed in the merger agreement.
Selected Publicly Traded Companies
Analyses. BofA Merrill Lynch reviewed and
analyzed certain publicly available financial information and
market trading data of selected publicly traded companies and
compared such information to PMA and Old Republic. BofA Merrill
Lynch reviewed the following 19 companies:
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W.R. Berkley Corporation;
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Markel Corporation;
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American Financial Group, Inc.;
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HCC Insurance Holdings, Inc.;
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ProAssurance Corporation;
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RLI Corp.;
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Tower Group, Inc.;
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Argo Group International Holdings, Ltd.;
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Harleysville Group Inc.;
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Selective Insurance Group, Inc.;
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53
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AmTrust Financial Services, Inc.;
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The Navigators Group, Inc.;
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National Interstate Corporation;
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United America Indemnity, Ltd.;
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NYMAGIC, Inc.;
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Employers Holdings, Inc.;
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Amerisafe, Inc.;
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SeaBright Holdings, Inc.; and
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Eastern Insurance Holdings, Inc.
|
No company used in this analysis is identical or directly
comparable to PMA or Old Republic. BofA Merrill Lynch selected
these companies on the basis that each was a publicly traded
company with operations in the specialty insurance or
workers compensation industries. A complete analysis of
the results of the following calculations cannot be limited to a
quantitative review of such results, however, and involves
complex considerations and judgments concerning the differences
in the financial and operating characteristics of the comparable
companies and other factors that could affect the public share
prices of the comparable companies, as well as the price of
shares of common stock of PMA and Old Republic.
A summary of multiples of the stock price to book value per
share as of March 31, 2010 and stock price to earnings per
share, including the implied expected return on equity for 2011,
for each of the selected publicly traded companies is as follows:
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Price/3/31/10
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Book Value
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Price/2011E
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2011E
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per Share(1)
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Operating EPS
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Return on Equity
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Diversified Specialty
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W.R. Berkley Corporation
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1.12
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x
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10.0
|
x
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10.3
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%
|
Markel Corporation
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1.14
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x
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17.6
|
x
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6.0
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%
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American Financial Group, Inc.
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0.71
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x
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7.1
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x
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9.2
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%
|
HCC Insurance Holdings, Inc.
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0.92
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x
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8.2
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x
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10.0
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%
|
ProAssurance Corporation
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1.05
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x
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11.0
|
x
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8.6
|
%
|
RLI Corp.
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1.32
|
x
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14.0
|
x
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8.8
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%
|
Tower Group, Inc.
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0.87
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x
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6.1
|
x
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12.7
|
%
|
Argo Group International Holdings, Ltd.
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0.54
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x
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7.3
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x
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7.1
|
%
|
Harleysville Group Inc.
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1.11
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x
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9.7
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x
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10.8
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%
|
Selective Insurance Group, Inc.
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0.76
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x
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9.6
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x
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7.7
|
%
|
AmTrust Financial Services, Inc.
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1.26
|
x
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5.5
|
x
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18.7
|
%
|
The Navigators Group, Inc.
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0.79
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x
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10.7
|
x
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7.1
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%
|
National Interstate Corporation
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1.32
|
x
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|
9.3
|
x
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|
|
12.5
|
%
|
United America Indemnity, Ltd.
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|
|
0.53
|
x
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|
8.3
|
x
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|
6.0
|
%
|
NYMAGIC, Inc.
|
|
|
0.74
|
x
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|
|
NA
|
x
|
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|
NA
|
%
|
Mean
|
|
|
0.95
|
x
|
|
|
9.6
|
x
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9.7
|
%
|
Workers Compensation Focused
|
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Employers Holdings, Inc.
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|
0.70
|
x
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|
12.2
|
x
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|
5.4
|
%
|
Amerisafe, Inc.
|
|
|
1.03
|
x
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|
|
8.2
|
x
|
|
|
11.1
|
%
|
SeaBright Holdings, Inc.
|
|
|
0.58
|
x
|
|
|
11.0
|
x
|
|
|
5.0
|
%
|
Eastern Insurance Holdings, Inc.
|
|
|
0.64
|
x
|
|
|
11.5
|
x
|
|
|
5.0
|
%
|
Mean
|
|
|
0.74
|
x
|
|
|
10.7
|
x
|
|
|
6.6
|
%
|
Overall Mean
|
|
|
0.90
|
x
|
|
|
9.9
|
x
|
|
|
9.0
|
%
|
|
|
|
(1) |
|
Based on primary book value per share, which excludes the
dilutive impact of options, warrants and restricted stock. |
54
Mathematical analysis, such as determining the average, is not
in itself a meaningful method of using comparable company data.
BofA Merrill Lynch performed this analysis to understand the
range of book value multiples and estimated earnings multiples
of these comparable publicly traded companies based upon market
prices. In addition, BofA Merrill Lynch reviewed certain
operating data for these companies, such as combined ratios,
return on equity and growth in book value per share to assess
the relative valuation of these companies, based on the most
recent publicly available information. The projections and
estimates for the selected publicly traded companies used by
BofA Merrill Lynch in its analysis were based on consensus
research analysts estimates as reported in the database known as
Factset as well as historical information reported by such
companies in their SEC filings. The 2011 earnings projections
and estimates for PMA were based both on estimates of research
analysts and estimates provided to BofA Merrill Lynch by or at
the direction of and approved by the management of PMA. The 2011
earnings projections and estimates for Old Republic were based
on estimates of research analysts.
Based in part on the multiples described above, BofA Merrill
Lynch derived illustrative implied valuations per fully diluted
share of PMA and Old Republic, which gives effect to the impact
of options and convertible debt. For PMA, BofA Merrill Lynch
applied book value multiples ranging from 0.50x to 0.70x
PMAs March 31, 2010 adjusted book value per share and
applied earnings multiples of 7.0x to 9.0x 2011 earnings per
share based on research analysts estimates and PMA management
estimates. For these purposes, PMAs adjusted book value
per share reflects the potential impact of $50 million
reserve strengthening pre-tax, offset by the financial impact of
$50 million pre-tax of retroactive reinsurance protection
purchased. For Old Republic, BofA Merrill Lynch applied book
value multiples ranging from 0.70x to 0.90x Old Republics
March 31, 2010 book value per share and applied earnings
multiples of 10.0x to 12.0x 2011 earnings per share based on
research analysts estimates. BofA Merrill Lynch utilized these
selected multiples after considering the current market
conditions, current and historical trading multiples and the
size and diversification of the selected publicly traded
companies, among other things.
The resulting implied exchange ratio range was 0.3958x to
0.7124x based on the book value multiple methodology and 0.4052x
to 0.6251x based on the earnings multiple methodology using
PMAs 2011 estimate based on research analysts estimates
and Old Republics 2011 estimate based on research analysts
estimates. The following table shows the ranges of implied
valuation per fully diluted common share for each of PMA and Old
Republic and the implied exchange ratio ranges derived using the
book value multiple and earnings multiple methodologies. The
table should be read together with the more detailed summary of
the analyses set forth above.
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Implied Old Republic
|
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Implied PMA Valuation
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|
Valuation
|
|
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Selected Publicly Traded Companies
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|
per Share
|
|
per Share
|
|
Implied Exchange Ratio
|
Analysis
|
|
Minimum
|
|
Maximum
|
|
Minimum
|
|
Maximum
|
|
Minimum
|
|
Maximum
|
|
Book value multiple
|
|
$
|
6.02
|
|
|
$
|
8.43
|
|
|
$
|
11.83
|
|
|
$
|
15.21
|
|
|
0.3958x
|
|
0.7124x
|
Earnings multiple analysts estimates (2011)
|
|
$
|
5.81
|
|
|
$
|
7.47
|
|
|
$
|
11.95
|
|
|
$
|
14.34
|
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0.4052x
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0.6251x
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Discounted Cash Flow Analyses. BofA Merrill
Lynch performed discounted cash flow analyses of PMA and Old
Republic based on the PMA Forecasts, the Old Republic 2010
Forecasts and the Old Republic Extended Forecasts.
As described below, (x) the PMA scenarios reflect PMA
managements various assumptions regarding possible reserve
charges of differing amounts and, in several cases, an adverse
rating action, and (y) the Old Republic scenarios reflect
assumptions made by or at the direction of and approved by PMA
management with regards to adjusting the combined ratio of the
Mortgage Guaranty Group segment as described below. As discussed
in the The Merger Background of the
Merger, PMA management believes that PMAs loss
reserves are reasonably stated and provided independent support
to the Pennsylvania Insurance Department for this position. The
loss reserve assumptions reflected in the scenarios below are
hypothetical estimates by PMA management of possible increases
in net loss reserves that may be required to reach a resolution
of the matters with the Pennsylvania Insurance Department as an
alternative to the appeal process. The various scenarios
prepared by or at the direction of and approved by the
management of PMA are as follows:
PMA Case 1. This case reflects an assumed
$50 million pre-tax increase in reserves, which is
approximately 11% of net loss reserves at December 31, 2009
as a possible resolution of differences relating
55
to the Pennsylvania Insurance Department examination. This
scenario reflects the impact of an A.M. Best financial
strength ratings downgrade to B++.
PMA Case 2. This case reflects an assumed
$100 million pre-tax increase in reserves as a possible
resolution of differences relating to the Pennsylvania Insurance
Department examination. This scenario reflects the impact of an
A.M. Best financial strength ratings downgrade to B++.
PMA Case 3. This case reflects an assumed
$50 million pre-tax increase in reserves as a possible
resolution of differences relating to the Pennsylvania Insurance
Department examination. This scenario assumes there is no change
in PMAs A.M. Best financial strength ratings.
PMA Case 4. This case assumes that PMA no
longer writes new business and, starting in 2011, places all
operations in runoff. It is also assumes that reserves are
increased by $100 million on a pre-tax basis and the
fee-based business is sold.
Old Republic Base Case. This case assumes that
the combined ratio of the Mortgage Guaranty segment of Old
Republic is adjusted to achieve a combined ratio of 75.0% in
2014. A downside and an upside case were also run which, on
average, would have decreased or increased, as applicable, the
potential value of Old Republic common stock by approximately 3%.
The discounted cash flow analyses were performed in order to
evaluate the fully diluted equity value per share, based on what
could be achieved by each PMA and Old Republic as stand-alone
entities. BofA Merrill Lynch calculated the fully diluted equity
values per share for PMA and Old Republic as the sum of
(1) the present values of the estimated future free cash
flows per fully diluted share for each of PMA and Old Republic
for the years 2010 through 2014 using discount rates ranging
from 11.5% to 13.5% for PMAs Cases 1, 2 and 3, 12.5% to
14.5% for PMA Case 4 and 9.5% to 11.5% for the Old Republic Base
Case, and (2) the present values of the illustrative
terminal values per fully diluted share using estimated
2014 shareholders equity based on terminal book value
multiples ranging from 0.55x to 0.75x for PMA Cases 1 and 2,
0.60x to 0.80x for PMA Case 3, 0.80x to 0.90x statutory surplus
for PMA Case 4 and 0.75x to 0.95x for the Old Republic Base
Case. All selected discount rates considered risks inherent in
the insurance industry, specific risks associated with the
continuing operations of each of PMA and Old Republic on a
stand-alone basis and other considerations. BofA Merrill Lynch
selected terminal book value multiples based upon the current
and historical trading values of PMA, Old Republic and selected
publicly traded insurance companies. The per share amounts were
based on the total outstanding diluted shares, which includes
the impact of restricted stock, options and convertible debt.
The resulting implied exchange ratio range was (1) 0.2813x
to 0.5330x based on the PMA projections for PMA Case 1 and the
Old Republic Base Case projections, (2) 0.2565x to 0.4869x
based on the PMA projections for PMA Case 2 and the Old Republic
Base Case projections, (3) 0.4055x to 0.7365x based on the
PMA projections for PMA Case 3 and the Old Republic Base Case
projections and (4) 0.1916x to 0.3268x based on the PMA
projections for PMA Case 4 and the Old Republic Base Case
projections.
The following table shows the ranges of implied valuation per
fully diluted common share for each of PMA and Old Republic and
the implied exchange ratio ranges derived using the discounted
cash flow analysis. The table should be read together with the
more detailed summary of the analyses set forth above.
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Implied Old Republic
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Implied PMA Valuation
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Valuation
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per Share
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per Share
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Implied Exchange Ratio
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Discounted Cash Flow Analysis
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Minimum
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Maximum
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Minimum
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Maximum
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Minimum
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Maximum
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PMA Case 1/Old Republic Base Case
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$
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3.74
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$
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5.53
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$
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10.37
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$
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13.31
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0.2813x
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0.5330x
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PMA Case 2/Old Republic Base Case
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$
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3.41
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$
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5.05
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$
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10.37
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$
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13.31
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0.2565x
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0.4869x
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PMA Case 3/Old Republic Base Case
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$
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5.40
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$
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7.64
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$
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10.37
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$
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13.31
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0.4055x
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0.7365x
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PMA Case 4/Old Republic Base Case
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$
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2.55
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$
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3.39
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$
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10.37
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$
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13.31
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0.1916x
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0.3268x
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While a discounted cash flow analysis is a widely accepted and
practiced valuation methodology, it relies on a number of
assumptions, including growth rates, terminal values and
discount rates. The implied exchange ratio range derived from
the discounted cash flow analysis is not necessarily indicative
of PMA or Old Republics present or future value or results.
56
Other Factors. In rendering its opinion, BofA
Merrill Lynch also reviewed and considered other factors,
including:
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high and low trading prices of PMA class A common stock and
Old Republic common stock during the
52-week
period ended June 7, 2010, which implied an exchange ratio
of between 0.2755x and 0.8519x; and
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the future public market share price targets of PMA class A
common stock and Old Republic common stock as reported by
various analysts following the PMA and Old Republic common
stocks, which implied an exchange ratio of between 0.4211x and
0.6875x.
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BofA Merrill Lynch also observed that, under various financial
measures, PMA could be viewed as contributing to the combined
company a percentage higher than the percentage of the
outstanding shares to be received by PMAs shareholders in
the transaction. BofA Merrill Lynch, however, did not believe
that this analysis was meaningful since it did not, in BofA
Merrill Lynchs judgment, adequately reflect the potential
need, as described in the scenarios above, to increase reserves
as a possible resolution to the Pennsylvania Insurance
Department examination or the potential risk to the business of
a possible ratings downgrade that could result from a need to
increase reserves. Similarly, BofA Merrill Lynch did not present
an analysis based on selected precedent transactions, in light
of BofA Merrill Lynchs belief that, given PMAs
relatively unique circumstances, there were no comparable
transactions.
Miscellaneous. As noted above, the discussion
set forth above is a summary of the material financial analyses
presented by BofA Merrill Lynch to PMAs board of directors
in connection with its opinion and is not a comprehensive
description of all analyses undertaken by BofA Merrill Lynch in
connection with its opinion. The preparation of a financial
opinion is a complex analytical process involving various
determinations as to the most appropriate and relevant methods
of financial analysis and the application of those methods to
the particular circumstances and, therefore, a financial opinion
is not readily susceptible to partial analysis or summary
description. BofA Merrill Lynch believes that its analyses
summarized above must be considered as a whole. BofA Merrill
Lynch further believes that selecting portions of its analyses
and the factors considered or focusing on information presented
in tabular format, without considering all analyses and factors
or the narrative description of the analyses, could create a
misleading or incomplete view of the processes underlying BofA
Merrill Lynchs analyses and opinion. The fact that any
specific analysis has been referred to in the summary above is
not meant to indicate that such analysis was given greater
weight than any other analysis referred to in the summary.
In performing its analyses, BofA Merrill Lynch considered
industry performance, general business and economic conditions
and other matters, many of which are beyond the control of PMA
and Old Republic. The estimates of the future performance of PMA
and Old Republic in or underlying BofA Merrill Lynchs
analyses are not necessarily indicative of actual values or
actual future results, which may be significantly more or less
favorable than those estimates or those suggested by BofA
Merrill Lynchs analyses. These analyses were prepared
solely as part of BofA Merrill Lynchs analysis of the
fairness, from a financial point of view, of the exchange ratio
and were provided to PMAs board of directors in connection
with the delivery of BofA Merrill Lynchs opinion. The
analyses do not purport to be appraisals or to reflect the
prices at which a company might actually be sold or the prices
at which any securities have traded or may trade at any time in
the future. Accordingly, the estimates used in, and the ranges
of valuations resulting from, any particular analysis described
above are inherently subject to substantial uncertainty and
should not be taken to be BofA Merrill Lynchs view of the
actual values of PMA or Old Republic.
Although BofA Merrill Lynch participated in the negotiations
between the parties, the type and amount of consideration
payable in the merger was determined by PMA and Old Republic and
was approved by PMAs board of directors. The decision to
enter into the merger agreement was solely that of PMAs
board of directors. As described above, BofA Merrill
Lynchs opinion and analyses were only one of many factors
considered by PMAs board of directors in its evaluation of
the proposed merger and should not be viewed as determinative of
the views of PMAs board of directors or management with
respect to the merger or the exchange ratio.
PMA has agreed to pay BofA Merrill Lynch for its services in
connection with the merger an aggregate fee of
$3.8 million, a portion of which was payable in connection
with its opinion and a significant portion of which is
contingent upon the completion of the merger. PMA also has
agreed to reimburse BofA Merrill Lynch for its expenses incurred
in connection with BofA Merrill Lynchs engagement and to
indemnify BofA Merrill Lynch, any
57
controlling person of BofA Merrill Lynch and each of their
respective directors, officers, employees, agents and affiliates
against specified liabilities, including liabilities under the
federal securities laws.
BofA Merrill Lynch and its affiliates comprise a full service
securities firm and commercial bank engaged in securities,
commodities and derivatives trading, foreign exchange and other
brokerage activities, and principal investing as well as
providing investment, corporate and private banking, asset and
investment management, financing and financial advisory services
and other commercial services and products to a wide range of
companies, governments and individuals. In the ordinary course
of their businesses, BofA Merrill Lynch and its affiliates
invest on a principal basis or on behalf of customers or manage
funds that invest, make or hold long or short positions, finance
positions or trade or otherwise effect transactions in the
equity, debt or other securities or financial instruments
(including derivatives, bank loans or other obligations) of PMA,
Old Republic and certain of their respective affiliates.
In addition, BofA Merrill Lynch and its affiliates in the past
have provided, currently are providing, and in the future may
provide investment banking, commercial banking and other
financial services to Old Republic and have received or in the
future may receive compensation for the rendering of these
services, including (i) having acted or are acting as
lender under, or otherwise having extended credit under, certain
credit facilities and other arrangements with Old Republic,
(ii) having acted as book runner on a convertible debt
offering for Old Republic and (iii) having provided or
providing certain treasury management and trade products and
services to Old Republic.
Old
Republics Reasons for the Merger
It is the opinion of Old Republics management and board of
directors that the merger will enhance Old Republics
growth prospects. Old Republics management and board
believe that long-term growth can be achieved through the
greater geographic spread and certain industry specialization
offered by PMAs current business model. Furthermore, Old
Republic believes that it will acquire the continuing services
of a dedicated operating management and the well regarded
insurance services delivery of PMAs subsidiaries.
Interests
of PMA Officers and Directors in the Merger
In considering the recommendation of the PMA board of directors
with respect to the adoption of the merger agreement, PMA
shareholders should be aware that the merger agreement includes
an agreement that one independent member of the PMA board of
directors be added to the Old Republic board of directors
following completion of the merger. At the time the PMA board of
directors approved the merger agreement, the PMA board of
directors was aware that one member of PMAs board of
directors would become a member of Old Republics board of
directors.
In addition, the terms of restricted stock award agreements
between PMA and its non-employee directors provide that the
vesting of all unvested restricted stock will accelerate upon a
change in control transaction. The merger will constitute a
change in control transaction.
Nine PMA officers are parties to employment and severance
agreements with PMA. The merger agreement provides as a
condition to the obligation of Old Republic to consummate the
merger that Vincent T. Donnelly, President and Chief Executive
Officer, shall have executed and delivered to PMA a voluntary
written termination of his employment agreement and PMA shall
have obtained a voluntary written termination from six of the
eight other officers that are party to a severance agreement
with PMA. The employment and severance agreements provide for
payments to the officers in the event their employment is
terminated following a change of control of PMA.
The nine officers of PMA referred to above, including the Chief
Executive Officer who is a member of PMAs board of
directors, have been advised by Old Republic that, following the
merger, they will be employed by Old Republic on terms
comparable to their employment with PMA.
PMAs board of directors was aware of these interests and
considered them, among other matters, in approving the merger
agreement and making its recommendation that the PMA
shareholders adopt the merger agreement. See The
Merger PMAs Reasons for the Merger.
58
Accounting
Treatment
Accounting Standards Codification (ASC) Topic 805
requires the use of the purchase method of accounting for
business combinations. In applying the acquisition method, it is
necessary to identify the acquiree and the acquirer for
accounting purposes. Old Republic will be considered the
acquirer of PMA for accounting purposes. The purchase price will
be allocated to the identifiable assets acquired and liabilities
assumed from PMA based on their fair values as of the date of
the completion of the transaction, with any excess being
allocated to goodwill. Reported financial condition and results
of operations of Old Republic issued after completion of the
merger will reflect PMAs balances and results after
completion of the merger, but will not be restated retroactively
to reflect the historical financial position or results of
operations of PMA. Following the completion of the merger, the
earnings of the combined company will reflect purchase
accounting adjustments; for example, additional depreciation of
property, plant and equipment, amortization of identified
intangible assets or other impacts from the purchase price
allocation.
Regulatory
Approvals Required for the Merger
Insurance
Regulatory Approvals
PMA has three insurance company subsidiaries domiciled in the
Commonwealth of Pennsylvania. Insurance laws in Pennsylvania
require an acquiring person to obtain approval from the
Insurance Commissioner of Pennsylvania before acquiring control
of an insurance company domiciled in Pennsylvania. The Insurance
Commissioner of Pennsylvania approved the proposed merger on
August 3, 2010.
PMA has insurance subsidiaries domiciled in Bermuda and the
Cayman Islands. The laws of those jurisdictions require a notice
filing and, in the case of Bermuda, the consent of the Bermuda
Monetary Authority, before any change in the control of PMA can
occur. Old Republic has provided notice of the proposed merger
to the Bermuda Monetary Authority and the Cayman Island Monetary
Authority. The Bermuda Monetary Authority granted its approval
on June 30, 2010.
Antitrust
Approvals
The merger is subject to the expiration or termination of the
applicable waiting period under the HSR Act. Under the HSR Act,
the merger may not be consummated until notifications have been
given and certain information has been furnished to the
Antitrust Division and the FTC and the applicable waiting period
has expired or been terminated.
Old Republic and PMA have filed the requisite Pre-Merger
Notification and Report Forms under the HSR Act with the
Antitrust Division and the FTC and have been notified that the
waiting period has been terminated.
There can be no assurance that the merger will not be challenged
on antitrust or competition grounds or, if a challenge is made,
what the outcome would be. The Antitrust Division, the FTC, any
U.S. state and other applicable regulatory bodies may
challenge the merger on antitrust or competition grounds at any
time, including after the termination of the waiting period
under the HSR Act or other applicable process, as they may deem
necessary or desirable or in the public interest. Accordingly,
at any time before or after the completion of the merger, any
such party could take action under the antitrust laws,
including, without limitation, by seeking to enjoin the
effective time of the merger or permitting completion subject to
regulatory concessions or conditions. Private parties may also
seek to take legal action under antitrust laws under certain
circumstances.
Other
Regulatory Procedures
The merger may be subject to certain regulatory requirements of
other municipal, state, federal and foreign governmental
agencies and authorities, including those relating to the
insurance business and the offer and sale of securities. Old
Republic and PMA are currently working to evaluate and comply in
all material respects with these requirements, as appropriate,
and do not currently anticipate that they will hinder, delay or
restrict completion of the merger.
59
It is possible that one or more of the regulatory approvals
required to complete the merger will not be obtained on a timely
basis or at all. In addition, it is possible that any of the
governmental entities with which filings are made may seek
regulatory concessions as conditions for granting approval of
the merger. Under the merger agreement, Old Republic and PMA
have each agreed to use reasonable best efforts to complete the
merger, including to gain clearance from antitrust authorities
and obtain other required approvals. See The Merger
Agreement Reasonable Best Efforts to Obtain Required
Approvals.
Although Old Republic and PMA do not expect regulatory
authorities to raise any significant objections to the merger,
Old Republic and PMA cannot be certain that all required
regulatory approvals will be obtained or that these approvals
will not contain terms, conditions or restrictions that would be
detrimental to Old Republic after the effective time of the
merger.
No
Appraisal Rights
Holders of PMAs common stock are not entitled to
dissenters rights of appraisal under Pennsylvania law in
connection with the merger.
Listing
of Old Republic Common Stock
Old Republic will cause the shares of Old Republic common stock
to be issued in connection with the merger to be approved for
listing on the NYSE, subject to official notice of issuance,
before the closing of the merger. Approval of the listing on the
NYSE of the shares of Old Republic common stock to be issued
pursuant to the merger is a condition to each partys
obligation to complete the merger.
Delisting
and Deregistration of PMA Class A Common Stock
If the merger is completed, PMA common stock will be delisted
from the Nasdaq Global Select Market and deregistered under the
Exchange Act.
MATERIAL
U.S. FEDERAL INCOME TAX CONSEQUENCES
The following discussion sets forth the material
U.S. federal income tax consequences of the merger to
U.S. Holders (as defined below) of PMA class A common
stock. This discussion addresses only those U.S. Holders
that hold PMA class A common stock as a capital asset. It
does not address all of the U.S. federal income tax
consequences that may be relevant to a particular holder of PMA
class A common stock in light of that shareholders
particular circumstances or to a holder of PMA class A
common stock that is subject to special rules, including,
without limitation:
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a financial institution or insurance company;
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a tax-exempt organization;
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certain U.S. expatriates;
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a person that is not a U.S. Holder;
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a regulated investment company;
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a pass-through entity or an investor in such an entity;
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a trader in securities that elects
mark-to-market
accounting;
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a dealer or broker in securities or currencies;
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a person that holds PMA class A common stock as part of a
hedge, straddle, constructive sale or conversion transaction;
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a person that acquired its shares of PMA class A common
stock pursuant to the exercise of employee stock options or
otherwise in connection with the performance of services;
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60
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a person who holds shares of PMA class A common stock in an
individual retirement or other tax-deferred account;
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a person that has a functional currency other than the
U.S. dollar; and
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a person subject to the alternative minimum tax.
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For purposes of this discussion U.S. Holder
refers to a beneficial holder of PMA class A common stock
that, for U.S. federal income tax purposes, is (i) an
individual citizen or resident of the United States, (ii) a
corporation, or other entity taxable as a corporation, created
or organized in or under the laws of the United States, any
state thereof or the District of Columbia, (iii) an estate
the income of which is subject to U.S. federal income
taxation regardless of its source or (iv) a trust
(x) that is subject to the supervision of a court within
the United States and to the control of one or more
U.S. persons as described in section 7701(a)(30) of
the Internal Revenue Code (Code) or (y) that
has a valid election in effect under applicable
U.S. Treasury Regulations to be treated as a
U.S. person.
If an entity or arrangement treated as a partnership for
U.S. federal income tax purposes holds PMA class A
common stock, the tax treatment of a partner in such entity will
generally depend upon the status and activities of both the
partner and the partnership. A partner in a partnership holding
PMA class A common stock is urged to consult its tax
advisor regarding the tax consequences of the merger.
This discussion is based upon the Code, the Treasury Regulations
issued thereunder, judicial interpretations thereof, and
published positions of the Internal Revenue Service
(IRS), all as in effect on the date of the
Registration Statement of which this proxy statement/prospectus
forms a part. The discussion and the opinions to be rendered by
Locke Lord Bissell & Liddell LLP and Ballard Spahr LLP
that are described below assume that there will be no change
through the effective time of the merger in any of these
authorities or interpretations. No assurance can be given that
any of the foregoing authorities or interpretations will not be
modified, revoked, supplemented or overruled, possibly with
retroactive effect, in a manner that could adversely affect the
current and continuing validity of this discussion or such
opinions, or that the IRS will agree with the discussion or the
opinions or that, if the IRS were to take a contrary position,
such positions will not be ultimately sustained by the courts.
In addition, neither this discussion nor any of the opinions
described below addresses any state, local or non-US tax
consequences of the merger.
Holders of shares of PMA class A common stock and
persons holding options on PMA class A common stock are
strongly urged to consult their own tax advisors as to the
specific tax consequences to them of the merger in light of
their particular circumstances, including the applicability and
effect of U.S. federal, state, local,
non-U.S. income
and other tax laws.
Subject to the limitations, assumptions and qualifications set
forth in this section entitled Material U.S. Federal
Income Tax Consequences, each of Locke Lord
Bissell & Liddell LLP, counsel to Old Republic, and
Ballard Spahr LLP, counsel to PMA, will render an opinion at the
time of closing of the merger that the merger will qualify as a
reorganization within the meaning of Section 368(a) of the
Code and that Old Republic and PMA will each be a party to the
reorganization. These opinions will be subject to customary
qualifications and assumptions, including that the merger will
be completed according to the terms of the merger agreement. In
rendering the tax opinions, each counsel may require and rely on
representations of Old Republic, PMA and their affiliates, to be
delivered at the time of closing. If any of the representations
or assumptions upon which these opinions are based is or becomes
inconsistent with the actual facts, or there is a change in
applicable law, the U.S. federal income tax consequences of
the merger could be materially and adversely affected. Neither
of these tax opinions will be binding on the IRS. Neither Old
Republic nor PMA intends to request any ruling from the IRS as
to the U.S. Federal income tax consequences of the merger.
Consequently, no assurance can be given that the IRS will not
assert, or that a court will not sustain, a position contrary to
any of the tax consequences set forth below or to any of the tax
consequences described in the tax opinions.
If the merger does not qualify as a reorganization within the
meaning of Section 368(a) of the Code, then a
U.S. Holder generally would recognize gain or loss on the
exchange of PMA class A common stock for Old Republic
common stock measured by the difference between the fair market
value of the Old Republic common stock (together with any cash
received in lieu of a fractional share of Old Republic common
stock) received by such U.S. Holder and such
U.S. Holders adjusted tax basis in the PMA
class A common stock surrendered.
61
The following discussion assumes that the merger qualifies as a
reorganization within the meaning of Section 368 of the
Code and that each of Old Republic and PMA is a party to the
reorganization within the meaning of Section 368(b) of the
Code.
Material U.S. Federal Income Tax Consequences to
U.S. Holders of PMA class A common stock Who
Participate in the Merger
As a result of the merger qualifying as a reorganization within
the meaning of Section 368(a) of the Code and Old Republic
and PMA being parties to such reorganization, the material
U.S. federal income tax consequences of the merger to
U.S. Holders will be as follows:
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a U.S. Holder whose shares of PMA class A common stock
are exchanged in the merger for shares of Old Republic common
stock will not recognize gain or loss with respect to such PMA
class A common stock, except as to cash, if any, received
in lieu of a fractional share of Old Republic common stock (as
discussed below);
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a U.S. Holders aggregate tax basis in shares of Old
Republic common stock received in the merger in exchange for PMA
class A common stock (including any fractional shares
deemed received and exchanged for cash as described below) will
be the same as the aggregate tax basis of the PMA class A
common stock surrendered in the merger;
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a U.S. Holders holding period for shares of Old
Republic common stock received in the merger (including any
fractional shares deemed received and exchanged for cash, as
described below) will generally include the holding period for
the shares of PMA class A common stock surrendered in exchange
therefor in the merger;
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if a U.S. Holder acquired different blocks of PMA
class A common stock at different times or at different
prices, such shareholders tax basis and holding periods in
its Old Republic common stock will be determined with reference
to each block of PMA class A common stock; and
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to the extent that a U.S. Holder receives cash in lieu of a
fractional share of Old Republic common stock, the
U.S. Holder will be deemed to have received that fractional
share in the merger and then to have sold such fractional share
for cash in redemption of that fractional share. The shareholder
will generally recognize capital gain or loss equal to the
difference between the cash received and the tax basis allocable
to that fractional share of Old Republic common stock. This
capital gain or loss will generally be long-term capital gain or
loss if the U.S. Holders holding period for its
shares of PMA class A common stock exchanged exceeds one
year at the closing date.
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Certain
Conditions to Completing the Merger
It is a condition to Old Republics obligation to complete
the merger that Old Republic receive, on the closing date of the
merger, a written opinion of its counsel, Locke Lord
Bissell & Liddell LLP, to the effect that the merger
will be treated as a reorganization within the meaning of
Section 368(a) of the Code and that Old Republic and PMA
will each be a party to the reorganization. Similarly, it is a
condition to PMAs obligation to complete the merger that,
on the closing date of the merger, PMA receive an opinion of its
counsel, Ballard Spahr LLP, to the effect that the merger will
be treated as a reorganization within the meaning of
Section 368(a) of the Code and that Old Republic and PMA
will each be a party to the reorganization.
The opinions will be subject to limitations, assumptions and
qualifications as described under Material
U.S. Federal Income Tax Consequences above (including
an assumption as to the accuracy of tax representation
certificates to be provided by Old Republic and PMA). If events
occur between the date of this document and the closing of the
merger that render Old Republic
and/or PMA
unable to make the representations required by Locke Lord
Bissell & Liddell LLP and Ballard Spahr LLP or there
is a change in applicable law, either or both of Locke Lord
Bissell & Liddell LLP and Ballard Spahr LLP may be
unable to deliver an opinion on the closing date that the merger
will be treated as a reorganization within the meaning of
Section 368(a) of the Code. If either or both of Old
Republic and PMA waives this condition to the completion of the
merger, Old Republic and PMA intend to
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recirculate this proxy statement/prospectus and to resolicit the
adoption of the merger agreement by the holders of PMA
class A common stock. Neither Old Republic nor PMA
currently intends to waive this condition.
Backup
Withholding and Information Reporting
Non-corporate U.S. Holders may be subject to information
reporting and backup withholding on any cash payments received
in lieu of a fractional share interest in Old Republic. These
U.S. Holders will not be subject to backup withholding,
however, if they furnish a correct taxpayer identification
number and certify that they are not subject to backup
withholding on the
Form W-9
or successor form included in the letter of transmittal to be
delivered to the holders following the completion of the merger
or are otherwise exempt from backup withholding. Any amounts
withheld under the backup withholding rules will be allowed as a
refund or credit against that holders U.S. federal
income tax liability, provided the required information or
appropriate claim for refund is furnished to the IRS.
U.S. Holders receiving Old Republic common stock as a
result of the merger generally will be required to retain
records pertaining to the merger and certain U.S. Holders
will be required to file with their U.S. federal income tax
return for the year in which the merger takes place a statement
setting forth certain facts relating to the merger.
THE
MERGER AGREEMENT
The following summary describes the material provisions of
the merger agreement but does not purport to describe all of the
terms of the merger agreement. The following summary is
qualified in its entirety by reference to the complete text of
the merger agreement, which is attached as Annex A to this
proxy statement/prospectus and is incorporated by reference
herein. This summary may not contain all of the information
about the merger agreement that is important to you. You are
encouraged to carefully read the merger agreement in its
entirety.
The representations and warranties described below and included
in the merger agreement were made by each of Old Republic and
PMA to the other. These representations and warranties were made
as of specific dates and are subject to important exceptions and
limitations, including a contractual standard of materiality
different from that generally applicable under federal
securities laws. In addition, the representations and warranties
may have been included in the merger agreement for the purpose
of allocating risk between Old Republic and PMA, rather than to
establish matters as facts. The merger agreement is described in
this proxy statement/prospectus and attached as Annex A
hereto only to provide you with information regarding its terms
and conditions, and not to provide any other factual information
regarding Old Republic, PMA or their respective businesses.
Accordingly, you should not rely on the representations and
warranties in the merger agreement as characterizations of the
actual state of facts about Old Republic or PMA, and you should
read the information provided elsewhere in this proxy
statement/prospectus and in the documents incorporated by
reference into this proxy statement/prospectus for information
regarding Old Republic and PMA and their respective businesses.
See Where You Can Find More Information.
Terms of
the Merger
The merger agreement provides that, subject to the terms and
conditions of the merger agreement, and in accordance with the
PBCL, upon the completion of the merger, Merger Sub will merge
with and into PMA, with PMA continuing as the surviving
corporation and succeeding to and assuming all of the rights and
obligations of Merger Sub.
Upon the completion of the merger, each outstanding share of PMA
class A common stock, excluding any shares owned by PMA or
Old Republic or any subsidiary of PMA or Old Republic (other
than PMA class A common stock held in trust accounts and
the like for the benefit of a third party or in respect of an
outstanding debt) will be converted into the right to receive
0.55 shares of Old Republic common stock (the
exchange ratio), provided that the volume weighted
average price per share of Old Republic common stock on the
NYSE, as reported by Bloomberg LP, for the twenty consecutive
trading days ending on and including the fifth trading day prior
to, but not including, the effective date of the merger, is at
least $12.50 but not greater than $17.00 (the Old Republic
measurement price). If the Old Republic measurement price
is less than $12.50, the exchange ratio will be determined by
dividing $6.875 by the Old Republic measurement price, subject
to a maximum exchange ratio of 0.60 shares. If the Old
Republic measurement price is greater than $17.00, the exchange
ratio will be determined by
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dividing $9.350 by the Old Republic measurement price, subject
to a minimum exchange ratio of 0.50 shares. The range from
$12.50 to $17.00 is referred to as the collar.
Based on the number of shares of PMA class A common stock
outstanding on July 30, 2010, and assuming conversion of
all of PMAs 4.25% Convertible Debt and the exercise
of all outstanding options to purchase shares of PMA
class A common stock (which options, if unexercised, will
be converted pursuant to the merger into options to acquire
shares of Old Republic common stock), Old Republic would issue a
maximum of approximately 19,884,057 shares of Old Republic
common stock pursuant to the merger. In addition, following the
merger, a maximum of approximately 573,871 shares of Old
Republic common stock will be issuable in connection with
outstanding PMA restricted share units that will be converted
pursuant to the merger into restricted share units of Old
Republic.
If the number of shares of Old Republic common stock outstanding
changes before the merger is completed because of a
reorganization, recapitalization, reclassification, stock
dividend, stock split, reverse stock split, or other similar
change in capitalization, then an appropriate and proportionate
adjustment will be made to the number of shares of Old Republic
common stock into which each share of PMA class A common
stock will be converted.
Fractional
Shares
Old Republic will not issue any fractional shares of Old
Republic common stock in connection with the merger. Instead,
any PMA shareholder who would otherwise have received a fraction
of a share of Old Republic common stock will receive an amount
in cash rounded to the nearest cent (without interest). This
cash amount will be equal to such shareholders
proportionate interest in the net proceeds from the sale in the
open market by the exchange agent, on behalf of all such
holders, of the aggregate fractional shares of Old Republic
common stock that would otherwise have been issued. The sale
described in the previous sentence will occur as soon as
practicable following the merger. The exchange agent is entitled
to deduct its commissions and other
out-of-pocket
transaction costs from the proceeds of the sale, which will
reduce the amounts payable to PMA shareholders that would have
received a fractional share, but not below zero. The exchange
agent will be entitled to deduct and withhold from the cash in
lieu of fractional shares payable to any PMA shareholder the
amounts it is required to deduct and withhold under any federal,
state, local or foreign tax law. If the exchange agent withholds
any amounts, these amounts will be treated for all purposes of
the merger as having been paid to the shareholders from whom
they were withheld.
Exchange
of PMA Stock Certificates; Book-Entry Shares
Prior to the effective time, Old Republic will designate an
exchange agent for the purpose of paying the merger
consideration to PMA shareholders. At or prior to the effective
time, Old Republic will authorize the exchange agent to issue an
aggregate number of shares of Old Republic common stock equal to
the merger consideration to be paid to holders of PMA
class A common stock.
As soon as reasonably practicable following the completion of
the merger, Old Republics exchange agent will mail you a
letter of transmittal and instructions for use in surrendering
your PMA class A common stock (including any stock
certificates if you hold shares in certificated form) for common
stock of Old Republic and a fractional share payment in lieu of
any fractional shares of Old Republic common stock. When you
deliver your PMA stock certificates to the exchange agent along
with a properly executed letter of transmittal and any other
required documents, your PMA stock certificates will be
cancelled.
PLEASE DO NOT SUBMIT YOUR PMA STOCK CERTIFICATES FOR EXCHANGE
UNTIL YOU RECEIVE THE TRANSMITTAL INSTRUCTIONS AND LETTER
OF TRANSMITTAL FROM THE EXCHANGE AGENT.
If you own PMA class A common stock in book-entry form or
through a broker, bank or other holder of record, you will not
need to obtain stock certificates to submit for exchange to the
exchange agent. However, you or your broker or other nominee
will need to follow the instructions provided by the exchange
agent in order to properly surrender your shares of PMA
class A common stock.
Holders of PMA class A common stock will not be entitled to
receive any dividends or other distributions on Old Republic
common stock until the merger is completed and you have
surrendered your PMA class A common
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stock in exchange for Old Republic common stock. If Old Republic
effects any dividend or other distribution on the Old Republic
common stock with a record date occurring after the time the
merger is completed and a payment date before the date you
surrender your PMA class A common stock, you will receive
the dividend or distribution, without interest, with respect to
the whole shares of Old Republic common stock issued to you
after you surrender your PMA class A common stock and the
shares of Old Republic common stock are issued in exchange. If
Old Republic effects any dividend or other distribution on the
Old Republic common stock with a record date after the date on
which the merger is completed and a payment date after the date
you surrender your PMA class A common stock, you will
receive the dividend or distribution, without interest, on that
payment date with respect to the whole shares of Old Republic
common stock issued to you. After the effective time of the
merger, each certificate and book-entry formerly representing
shares of PMA class A common stock that has not been
surrendered will represent only the right to receive the merger
consideration.
If your PMA stock certificate has been lost, stolen or
destroyed, you may receive shares of Old Republic common stock
upon the making of an affidavit to that fact, and if reasonably
required by Old Republic or the exchange agent, the posting of a
bond as indemnity against any claim that may be made against the
surviving corporation, Old Republic, or the exchange agent with
respect to the lost, stolen or destroyed PMA stock certificate.
Old Republic will issue stock (or make a fractional share
payment) in a name other than the name in which a surrendered
PMA stock certificate is registered only if you present the
exchange agent with all documents required to show and effect
the unrecorded transfer of ownership and show that you paid any
applicable stock transfer taxes.
Upon the first anniversary of the merger, the exchange agent
will return to Old Republic the portion of the merger
consideration that remains unclaimed by holders of PMA
class A common stock. Thereafter, a holder of PMA
class A common stock must look only to Old Republic for
payment of the merger consideration to which the holder is
entitled under the terms of the merger agreement. Any portion of
the merger consideration remaining unclaimed by holders of PMA
class A common stock as of the date that is immediately
prior to such time as such amount would otherwise escheat to or
become property of any governmental entity will, to the extent
permitted by law, become the property of Old Republic, free and
clear of any claims or interest of any person previously
entitled to such merger consideration.
Treatment
of PMA Equity Compensation Awards and Performance-Based
Compensation Awards
Treatment of Stock Options. Immediately prior
to the effective time of the merger, each outstanding PMA stock
option shall become fully vested and exercisable to the extent
the applicable award agreement or PMA equity compensation plan
provides that such stock option shall vest upon an event that
includes the merger. At the effective time of the merger, each
outstanding PMA stock option that remains unexercised as of the
completion of the merger will be converted into an option to
purchase the number of whole shares of Old Republic common stock
that is equal to the number of shares of PMA class A common
stock subject to the option multiplied by the exchange ratio
(rounded down to the nearest whole share), at an exercise price
equal to the original exercise price for the stock option
divided by the exchange ratio (rounded up to the nearest whole
penny). With respect to options that are designed to qualify as
incentive stock options under Section 422 of the Internal
Revenue Code and options that are designed to satisfy an
exemption from Section 409A of the Internal Revenue Code,
the number of shares of Old Republic common stock subject to the
converted option and the exercise price for such converted
options shall be adjusted in accordance with the applicable tax
regulations to the extent necessary to preserve the applicable
tax status. The converted options will otherwise have the same
terms and conditions as were in effect before the merger was
effective.
Treatment of Stock Appreciation
Rights. Immediately prior to the effective time
of the merger, each outstanding PMA stock appreciation right
shall become fully vested and exercisable to the extent the
applicable award agreement or PMA equity compensation plan
provides that such stock appreciation right shall vest upon an
event that includes the merger. At the effective time of the
merger, each outstanding PMA stock appreciation right that
remains unexercised as of the completion of the merger will be
converted into a stock appreciation right with respect to the
number of whole shares of Old Republic common stock that is
equal to the number of shares of PMA class A common stock
subject to the stock appreciation right multiplied by the
exchange ratio (rounded down to the nearest whole share), at an
exercise price equal to the original exercise price for the
stock appreciation right divided by the exchange ratio (rounded
up to the nearest whole penny). With respect to stock
appreciation rights that are
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designed to satisfy an exemption from Section 409A of the
Internal Revenue Code, the number of shares of Old Republic
common stock underlying the converted stock appreciation right
and the exercise price for such converted stock appreciation
right shall be adjusted in accordance with the applicable tax
regulations to the extent necessary to preserve the
Section 409A exemption. The converted stock appreciation
rights will otherwise have the same terms and conditions as were
in effect before the merger was effective.
Treatment of Restricted Shares. Immediately
prior to the effective time of the merger, each outstanding PMA
restricted share shall become fully vested and exercisable to
the extent the applicable restricted share award agreement or
PMA equity compensation plan provides that such restricted share
shall vest upon an event that includes the merger and, upon the
merger, be converted into the right to receive the merger
consideration. If the applicable restricted share award
agreement or PMA equity compensation plan does not provide that
such restricted share shall vest upon an event that includes the
merger, at the effective time of the merger, such restricted
shares will be converted into the number of whole shares
(rounded to the nearest whole share) of Old Republic common
stock equal to the exchange ratio times the number of restricted
shares. The converted restricted shares will otherwise have the
same terms and conditions as were in effect before the merger
was effective, including applicable vesting requirements.
The terms of the award agreements for restricted shares issued
to the non-employee directors of PMA in May 2010 provide that
the restricted shares will vest upon a change of control. The
merger will constitute a change of control.
Treatment of Restricted Share Units. At the
effective time of the merger, all restricted share units awarded
under a long-term incentive plan shall be converted into
restricted share units with respect to the number of shares of
Old Republic common stock that is equal to the number of shares
of PMA class A common stock in which such restricted share
units are denominated multiplied by each of the exchange ratio
and the proportion of the performance period under the
applicable long-term incentive plan that has passed at the time
of the closing of the merger (rounded to the nearest number of
whole shares).
All outstanding restricted share units were granted under
PMAs 2009 and 2010 Officer Long Term Incentive Plans. At
the effective time of the merger, the performance goals
designated under each of PMAs 2009 and 2010 Officer Long
Term Incentive Plans will be deemed to have been met at 100% of
target. The payment of the awards will be based on the
satisfaction by participants of only the service-based or
time-based vesting requirements under the plans, if any. Each
plan has a term of three years.
2008 Officer Long Term Incentive Plan. At the
effective time of the merger, PMAs 2008 Officer Long Term
Incentive Plan will be terminated.
2010 Officer Annual Incentive Compensation
Plan. At the effective time of the merger, the
performance goals designated under PMAs 2010 Officer
Annual Incentive Compensation Plan will be deemed to have been
met at a payout factor of 100%. The payment of the awards shall
be based on the satisfaction by participants of only the
service-based and time-based vesting requirements designated
under the plan, if any.
Articles
of Incorporation and By-laws of the Surviving
Corporation
At the effective time, the articles of incorporation and bylaws
of PMA shall by virtue of the merger be amended and restated to
be identical to the articles of incorporation and by-laws of
Merger Sub (other than references to Merger Subs name,
which will be replaced by references to PMA Companies, Inc.).
Directors
and Officers
At the effective time, all of the directors of PMA (other than
Vincent T. Donnelly, a director and officer of PMA) will resign,
and the directors and officers of Merger Sub, together with
Mr. Donnelly, will become the directors and officers of the
surviving corporation until their successors have been elected
or until their earlier death, resignation or removal in
accordance with the organizational documents of the surviving
corporation. Following the merger, Old Republic will add one of
PMAs independent directors to its board to serve as a
Class 2 director. The officers of Old Republic are not
expected to change as a result of the merger.
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Completion
of the Merger
Unless Old Republic and PMA agree otherwise, the parties are
required to complete the merger on the fifth business day after
satisfaction or, to the extent permitted by law, waiver of all
of the conditions described under The Merger
Agreement Conditions to Completion of the
Merger below. The merger will be effective at the time the
certificate of merger is filed with the Secretary of State of
the Commonwealth of Pennsylvania or such later time as is agreed
upon by the parties and specified in the certificate of merger.
Conditions
to Completion of the Merger
The respective obligations of PMA, Old Republic and Merger Sub
to complete the merger are subject to the satisfaction of
certain conditions.
Conditions to each partys obligation to effect the
merger. The obligations of Old Republic, Merger
Sub and PMA to complete the merger are each subject to the
satisfaction of the following conditions:
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adoption by holders of PMA class A common stock of the
merger agreement;
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the approval of the listing of the Old Republic common stock to
be issued in the merger on the NYSE, subject to official notice
of issuance;
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effectiveness of the registration statement of which this proxy
statement/prospectus is a part and the absence of a stop order
or proceedings threatened or initiated by the SEC for that
purpose;
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absence of any order, decree or injunction issued, and of any
action taken by any court or agency or other law preventing or
making illegal the consummation of the merger; and
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the waiting period (and any extension thereof) applicable to the
consummation of the merger under the HSR Act will have expired
or been terminated and all regulatory approvals required to
complete the merger will have been obtained.
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Conditions to the obligations of Old Republic and Merger Sub
to effect the merger. The obligations of Old
Republic and Merger Sub to complete the merger are subject to
the satisfaction or waiver of the following conditions:
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the truth and correctness of PMAs representations and
warranties in the merger agreement (in certain circumstances,
subject to materiality or material adverse effect
qualifications) as of the date of the merger agreement and as of
the closing date as though made on and as of the closing date
(except to the extent expressly made as of an earlier date, in
which case as of such date);
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the performance by PMA, in all material respects, of all of its
obligations under the merger agreement;
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receipt of a certificate executed by the Chief Executive Officer
or the Chief Financial Officer of PMA as to the satisfaction of
the conditions described in the preceding two bullets;
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receipt of a legal opinion from Old Republics counsel to
the effect that the merger should qualify as a
reorganization within the meaning of
Section 368(a) of the Internal Revenue Code;
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since December 31, 2009, the absence of any event or
condition that has had or is reasonably likely to have,
individually or in the aggregate, a material adverse effect on
PMA; and
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receipt of voluntary written terminations of employment or
severance agreements with the Chief Executive Officer of PMA and
six of the eight other PMA officers party to such agreements
effective prior to the merger.
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Conditions to the obligations of PMA to effect the
merger. The obligations of PMA to complete the
merger are subject to the satisfaction or waiver of the
following conditions:
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the truth and correctness of Old Republics representations
and warranties in the merger agreement (in certain
circumstances, subject to materiality or material adverse effect
qualifications) as of the date of the
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merger agreement and as of the closing date as though made on
and as of the closing date (except to the extent expressly made
as of an earlier date, in which case as of such date);
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the performance by Old Republic, in all material respects, of
all of its obligations under the merger agreement;
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receipt of a certificate executed by the Chief Executive Officer
or the Chief Financial Officer of Old Republic as to the
satisfaction of the conditions described in the preceding two
bullets;
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receipt of a legal opinion from Ballard Spahr LLP to the effect
that (i) the merger should qualify as a
reorganization within the meaning of
Section 368(a) of the Code, (ii) PMA, Merger Sub and
Old Republic each will be a party to the
reorganization within the meaning of Section 368(a)
of the Internal Revenue Code and (iii) no gain or loss will
be recognized by the PMA shareholders upon the receipt of the
merger consideration (except cash received in lieu of fractional
shares); and
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since December 31, 2009, the absence of any event or
condition that has had or is reasonably likely to have,
individually or in the aggregate, a material adverse effect on
Old Republic.
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The merger agreement provides that any or all of the respective
conditions of Old Republic and Merger Sub or PMA may be waived,
in whole or in part, by Old Republic and Merger Sub or PMA, as
applicable, to the extent legally allowed. In the event that
either Old Republic or PMA were to waive a condition to the
completion of the merger set forth above that would require
material changes to the disclosure set forth in this proxy
statement/prospectus, Old Republic and PMA will recirculate this
proxy statement/prospectus and resolicit the adoption of the
merger agreement by the holders of PMA class A common
stock. Accordingly, if either or both of Old Republic and PMA
waives the condition to completion of the merger that opinions
are received from Old Republics and PMAs respective
counsel to the effect that the merger will be treated as a
reorganization within the meaning of
Section 368(a) of the Code and that Old Republic and PMA
will each be a party to the reorganization, Old Republic and PMA
intend to recirculate this proxy statement/prospectus and
resolicit the adoption of the merger agreement by the holders of
PMA class A common stock. Neither Old Republic nor PMA
currently intends to waive any material condition to the
completion of the merger, including the condition that the above
referenced opinions are received.
Representations
and Warranties
The merger agreement contains representations and warranties
made by PMA relating to, among other things, the following:
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due incorporation, good standing, qualification and corporate
power, organizational documents, corporate records and
governmental licenses, authorizations, permits and approvals to
conduct its business;
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corporate power and authority to enter into, and perform its
obligations under, the merger agreement, enforceability of the
merger agreement, approval of the merger agreement by the PMA
board of directors, and the determination of the PMA board of
directors that the merger agreement is in the best interests of
PMA and its shareholders and that the merger agreement will be
submitted to the PMA shareholders for adoption;
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required governmental filings and approvals;
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the absence of conflicts between the execution, delivery or
performance of the merger agreement and PMAs or its
subsidiaries organizational documents, any applicable law
or order, certain of PMAs contracts, or any governmental
licenses, authorizations, permits or approvals, and the absence
of any liens resulting from the execution, delivery or
performance of the merger agreement;
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capitalization and outstanding stock options and restricted
stock awards;
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PMAs subsidiaries;
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filings with the SEC and internal controls and procedures;
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financial statements;
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statutory statements of PMAs insurance subsidiaries filed
with state insurance departments;
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the accuracy of information provided by PMA for inclusion in
this proxy statement/prospectus and compliance with SEC rules
and regulations;
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the absence of a material adverse effect on PMA since
December 31, 2009;
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the absence of undisclosed liabilities;
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compliance with applicable laws, including insurance laws;
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the absence of material litigation;
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conduct of, and matters related to, PMAs insurance
subsidiaries, reinsurance matters, actuarial analyses, and
policy forms and marketing materials;
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the determination of reserves;
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PMAs owned and leased real property;
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confirming receipt of the opinion from PMAs financial
advisor described herein;
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tax matters;
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employee benefit plan matters, post-employment compensation and
deferred compensation matters;
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employee and labor matters;
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environmental matters;
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intellectual property rights;
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material contracts of PMA and its subsidiaries;
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finders fees due in connection with the merger; and
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the absence of certain affiliate transactions between PMA and
its directors, officers or shareholders.
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The merger agreement also contains representations and
warranties made by each of Old Republic and Merger Sub relating
to, among other things, the following:
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due incorporation, good standing, qualification and corporate
power, governmental licenses, authorizations, permits and
approvals to conduct its business;
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corporate power and authority to enter into, and perform its
obligations under, the merger agreement, enforceability of the
merger agreement and approval of the merger agreement by the
board of directors of Old Republic and Merger Sub;
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required governmental filings and approvals;
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the absence of conflicts between the execution, delivery or
performance of the merger agreement and Old Republics or
Merger Subs organizational documents, any applicable law
or order, or certain agreements of Old Republic or Merger Sub
and the absence of any liens resulting from the execution,
delivery or performance of the merger agreement;
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capitalization of Old Republic;
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filings with the SEC by Old Republic and internal controls and
procedures of Old Republic;
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financial statements of Old Republic;
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accuracy of information supplied by Old Republic or Merger Sub
for inclusion in this proxy statement/prospectus;
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the absence of a material adverse effect on Old Republic since
December 31, 2009;
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the absence of undisclosed liabilities;
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compliance with applicable laws, including insurance laws;
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the absence of certain material litigation or governmental
orders;
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tax matters; and
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the absence of finders fees due in connection with the
merger.
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Certain of the representations and warranties of PMA and Old
Republic are qualified in whole or in part as to
materiality or material adverse effect.
For purposes of the merger agreement, material adverse
effect means, with respect to Old Republic or PMA, as the
case may be, a material adverse effect on the financial
condition, results of operations or business of such party and
its subsidiaries taken as a whole or the ability of such party
to timely consummate the transactions contemplated by the merger
agreement.
In determining whether a material adverse effect on PMA and its
subsidiaries, on the one hand, or Old Republic and Merger Sub
and their subsidiaries, on the other hand, has occurred, none of
the following shall be considered:
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changes in global, national or regional political conditions
(including acts of terrorism or war) or changes in general
business, economic or market conditions, including changes
generally in prevailing interest rates, credit markets or
securities markets;
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changes in generally accepted accounting practices,
(GAAP) or regulatory accounting requirements
generally applicable to the relevant industries after the date
of the merger agreement;
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changes in laws, rules or regulations of general applicability
to companies in the industries in which the parties operate
after the date of the merger agreement;
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the execution of the merger agreement or the public disclosure
of the merger agreement; or
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any actions or omissions taken with the prior written consent of
the other party or expressly required by the terms of the merger
agreement.
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However, the exceptions in the first, second and third bullet
points in the preceding list do not apply only to the extent
that the effects are disproportionately adverse to the financial
condition, results of operations or business of such party and
its subsidiaries, taken as a whole, as compared to other
companies in its industry.
The representations and warranties of each of PMA, on the one
hand, and Old Republic and Merger Sub, on the other hand, are
subject to information disclosed in the confidential disclosure
schedules delivered by PMA to Old Republic and Merger Sub, on
the one hand, and by Old Republic and Merger Sub to PMA, on the
other hand, and to the information in PMAs SEC filings or
Old Republics SEC filings, as the case may be, filed or
furnished with the SEC prior to the date of the merger
agreement, excluding information contained in the Risk
Factors sections or any forward-looking
disclaimers included in such SEC filings.
The representations and warranties in the merger agreement do
not survive the completion of the merger.
Conduct
of Business Prior to Closing
PMA has agreed to covenants in the merger agreement that affect
the conduct of its business between the date the merger
agreement was signed and the closing date. Prior to the closing
date, subject to specified exceptions, PMA and each of its
subsidiaries are required to (i) conduct business in the
ordinary and usual course consistent with past practices and in
material compliance with all laws, (ii) use commercially
reasonable efforts to maintain and preserve their business
organization, management and advantageous business relationships
with customers, suppliers and others with which it has material
business dealings and retain the services of its key employees
and (iii) refrain from taking any action that is intended
to or would reasonably be expected to adversely affect or
materially delay the ability of the parties to obtain the
regulatory approvals necessary to complete the merger or to
perform its obligations under the merger agreement.
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In addition, without the prior written consent of Old Republic
and subject to specified exceptions which are set forth in
detail in the merger agreement, PMA will not, and will not
permit any of its subsidiaries to take numerous actions,
including the following:
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amend its charter or by-laws or similar governing documents;
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take any action to exempt any entity (other than Old Republic)
from any state takeover statute or similar provisions of
PMAs governing documents or terminate or amend any
provisions of any confidentiality or standstill agreements;
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declare, make or pay any dividend or other distribution (whether
in cash, stock, securities or property) in respect of any of its
capital stock, except for dividends or distributions by any
wholly owned subsidiary of PMA to PMA or to any other wholly
owned subsidiary of PMA;
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adjust, split, combine, subdivide or reclassify any of its
capital stock or issue or authorize the issuance of any other
securities in respect of, in lieu of, or in substitution for,
shares of its capital stock;
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repurchase, redeem or otherwise acquire any PMA securities or
securities of a PMA subsidiary, except for in payment of the
exercise price or withholding taxes in connection with the
exercise of stock options or the vesting of restricted stock;
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grant any stock options, stock appreciation rights, restricted
shares, deferred equity units or other equity-based award with
respect to PMA class A common stock or grant any third
party the right to acquire any capital stock of PMA;
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issue any additional shares of PMA class A common stock or
other capital stock of PMA except pursuant to the settlement of
outstanding equity awards;
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acquire any corporation or other business organization or, other
than in the ordinary course of business and consistent with past
practices, make a material investment in (whether through the
acquisition of stock, assets or otherwise) any other person;
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sell, transfer, pledge, lease, grant, license, mortgage,
encumber, subject to a lien or otherwise dispose of any of its
properties or assets or cancel, release or assign any
indebtedness or claim, except in the ordinary course of business
consistent with past practice or pursuant to existing contracts;
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incur, guarantee, assume or otherwise become responsible for any
indebtedness;
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increase the compensation or other benefits payable or provided
to PMAs current or former directors, officers or employees
except as required by law or pursuant to existing contracts;
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pay any pension, severance or retirement benefits to any
employee;
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enter into any employment, change of control, severance or
retention agreement with any employee of PMA;
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establish, adopt, enter into or amend any company benefit plan
for the benefit of any current or former directors, officers or
employees or any of their beneficiaries;
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accelerate the vesting of stock-based compensation or other
long-term compensation under any company benefit plan;
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enter into any collective bargaining agreement;
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commence or settle any material claim, action or proceeding;
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modify or amend, except in the ordinary course of business and
consistent with past practice, or knowingly violate or terminate
certain contracts material to PMA;
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enter into certain new agreements that would materially restrict
the business of PMA;
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materially change any of its accounting policies (whether for
financial accounting or tax purposes), except as required by
applicable law, GAAP or regulatory guidelines;
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file or amend any material tax return, make or change any
material tax election or settle or compromise any material tax
liability other than in the ordinary course of business as
required by law;
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take any action or knowingly fail to take any action that is
reasonably likely to prevent the merger from qualifying as a
reorganization within the meaning of Section 368(a) of the Code;
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enter into any new line of business or change in any material
respect its investment, underwriting, risk and asset liability
management and other operating policies, except as required by
law or regulations;
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transfer ownership, or grant any license or other rights to any
person regarding any material company intellectual property;
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take any action or willfully fail to take any action that would
reasonably be expected to result in any condition to the merger
not being satisfied; or
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agree to or adopt any board resolution in support of any of the
prohibited actions set forth above.
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Old Republic also has agreed to covenants in the merger
agreement that affect the conduct of its business between the
date the merger agreement was signed and the closing date. Prior
to the closing date, subject to specified exceptions which are
set forth in detail in the merger agreement, without the prior
written consent of PMA, Old Republic will not, and will not
permit any of its subsidiaries to take the following actions:
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amend, repeal or otherwise modify any provision of its
certificate of incorporation or by-laws in a manner that would
adversely affect PMA, its shareholders or the merger;
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take any action or knowingly fail to take any action that is
reasonably likely to prevent the merger from qualifying as a
reorganization within the meaning of Section 368(a) of the Code;
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take any action or willfully fail to take any action that would
reasonably be expected to result in any condition to the merger
not being satisfied;
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take any action that would prevent, materially impede or
materially delay the merger; or
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agree to take, commit to take or adopt any board resolution in
support of any of the prohibited actions set forth above.
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No
Solicitation of Other Offers by PMA
The merger agreement provides that PMA and its subsidiaries will
immediately cease and terminate all existing discussions or
negotiations with any third party conducted prior to the date of
the merger agreement with respect to any alternative proposal.
Under the terms of the merger agreement, subject to certain
exceptions described below, PMA has also agreed that neither it
nor any of its subsidiaries, directors, officers, employees
agents or representatives will directly or indirectly:
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solicit, initiate, encourage or facilitate or take any other
action designed to facilitate any inquiries or proposals
regarding any alternative proposals relating to any alternative
transactions;
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participate in any discussions or negotiations regarding any
alternative transaction; or
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enter into any agreement regarding any alternative transaction.
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Under the merger agreement, an alternative proposal
is any inquiry or proposal relating to an alternative
transaction. Under the merger agreement, an
alternative transaction includes the following
transactions:
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any direct or indirect acquisition by any third party (other
than Old Republic and its subsidiaries) of more than 20% of the
outstanding shares of PMA or any of its subsidiaries or more
than 20% of the outstanding voting power of any new series or
new class of preferred stock that would be entitled to vote with
respect to the proposed merger, including pursuant to a tender
offer or exchange offer;
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any merger, share exchange, consolidation or other business
combination involving PMA or any of its subsidiaries (other than
the proposed merger);
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any transaction pursuant to which any third party (other than
Old Republic and its subsidiaries) would acquire or would
acquire control of assets (including equity securities of any
subsidiary of PMA) of PMA or its subsidiaries that represent
more than 20% of the fair market value of all of the assets, net
revenues or net income of PMA and its subsidiaries, taken as a
whole, immediately prior to such transaction; or
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any other consolidation, business combination, recapitalization
or similar transaction involving PMA or any of its subsidiaries
other than the transactions contemplated by the merger agreement.
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PMA has agreed that promptly (and in any event within
48 hours) after the receipt of any alternative proposal,
PMA will provide oral and written notice to Old Republic of such
proposal setting forth the identity of the third party and the
material terms of such proposal. Similarly, PMA has agreed that
promptly (and in any event within 48 hours) after the
receipt of any request for non-public information relating to
PMA or any of its subsidiaries or requests for access to the
properties, books or records of PMA or any of its subsidiaries
(other than requests not reasonably expected to be related to a
takeover proposal), PMA will provide oral and written notice to
Old Republic of such request. Additionally, PMA is required to
use its best efforts to keep Old Republic fully informed on a
current basis of any material changes in the status of any such
alternative proposal or request, including any material changes
to the terms of the takeover proposal or request. Neither PMA
nor its board of directors shall approve or take any action to
render the Pennsylvania takeover disclosure law inapplicable to
any alternative proposal or alternative transaction.
If, following the execution of the merger agreement and prior to
the adoption of the merger agreement by PMA shareholders, PMA
receives a bona fide alternative proposal which did not arise as
a result of a breach of PMAs no solicitation obligations
under the merger agreement, and the Board of Directors of PMA
determines in good faith that such alternative proposal
constitutes or is reasonably likely to lead to a superior
proposal, then, following execution of an appropriate
confidentiality agreement with the person submitting the
alternative proposal, the Board of Directors of PMA may consider
and participate in discussions and negotiations with respect to
such bona fide alternative proposal and may furnish information
regarding PMA and its subsidiaries to the third party making the
alternative proposal (provided PMA shall simultaneously provide
to Old Republic any such information that was not previously
provided). PMA shall provide Old Republic with 48 hours
written notice before it enters into any such discussions or
negotiations concerning any alternative proposal.
Under the merger agreement, a superior proposal is
any proposal made by a third party to acquire, directly or
indirectly, upon payment of cash
and/or
securities, 100% of the outstanding shares of PMA class A
common stock or 100% of the assets, net revenues or net income
of PMA and its subsidiaries, taken as a whole, and which the
board of directors of PMA determines in its reasonable good
faith judgment (after consultation with its financial advisor
and outside legal counsel), that the proposal, (i) if
consummated, would result in a transaction that is more
favorable, from a financial point of view, to PMAs
shareholders than the proposed merger and (ii) is
reasonably capable of being completed, including, in the good
faith judgment of the Board of Directors of PMA, the third party
being reasonably capable of obtaining any required financing.
PMA
Special Meeting
Except as provided in the merger agreement, PMA agreed to call a
special meeting of the shareholders of PMA as soon as reasonably
practicable for the purpose of obtaining shareholder adoption of
the merger agreement and will use commercially reasonable
efforts to cause such meeting to occur as soon as reasonably
practicable. Subject to certain exceptions, PMAs board of
directors has agreed to recommend that the holders of PMA
class A common stock vote to adopt the merger agreement and
to use commercially reasonable efforts to obtain adoption by
PMAs shareholders.
Recommendation
of the PMA Board of Directors
Under the merger agreement, PMAs board of directors has
agreed to recommend that the holders of PMA class A common
stock vote to adopt the merger agreement, which is set forth in
The Merger Recommendations
73
of the PMA Board of Directors with Respect to the Merger
above. Subject to the provisions described below, the merger
agreement provides that none of the PMA board of directors or
any committee thereof will:
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withdraw, modify or qualify or propose publicly to withdraw,
modify or qualify the PMA board of directors recommendation
regarding the merger proposal;
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take any public action or make any public statement in
connection with the PMA special shareholders meeting
substantively inconsistent with the PMA board of directors
recommendation regarding the merger proposal; or
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approve or recommend, or publicly propose to approve or
recommend or fail to recommend against any alternative proposal
(each of the actions set forth in this bullet point or in the
two preceding bullet points is referred to in this proxy
statement/prospectus as a PMA change of
recommendation).
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However, at any time prior to the adoption of the merger
agreement by the PMA shareholders, the PMA board of directors
may effect a PMA change of recommendation if each of the
following conditions is satisfied:
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PMA receives a superior proposal and such superior proposal has
not been withdrawn;
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the board of directors of PMA determines in good faith (after
consultation with outside legal counsel), that in light of a
superior proposal, the failure to effect a PMA change of
recommendation would be inconsistent with its fiduciary duties
under Pennsylvania law;
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Old Republic has received written notice from PMA at least three
business days prior to the date the PMA change of recommendation
occurs and such notice states that PMA has received an
alternative proposal which the board of directors has determined
is a superior proposal and that PMA intends to effect a PMA
change of recommendation and how such change will be made and
also includes the identity of the third party making the
proposal and a summary of the material terms of such proposal
(and in the event the alternative proposal is materially
amended, PMA must provide a new notice at least two business
days before effecting any PMA change of recommendation); and
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during such notice period, PMA and its advisors have negotiated
in good faith with Old Republic (if Old Republic desires to
negotiate) to make adjustments in the terms and conditions of
the merger agreement such that the alternative proposal would no
longer constitute a superior proposal.
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Reasonable
Best Efforts to Obtain Required Approvals
Subject to the terms and conditions of the merger agreement,
PMA, Old Republic and Merger Sub have agreed to use their
reasonable best efforts to take, or cause to be taken, all
actions, to file, or cause to be filed, all documents and to do,
or cause to be done, all things necessary, proper and advisable
to consummate the transactions contemplated by the merger
agreement, including preparing and filing as promptly as
practicable all documents to effect all necessary filings,
consents, waivers, approvals, authorizations, permits or orders
from all third parties and governmental entities. PMA, Old
Republic and Merger Sub have agreed to make, or cause to be
made, the filings and authorizations required under any
regulatory law as promptly as reasonably practicable and to take
or cause to be taken all other actions necessary, proper or
advisable to cause the expiration or termination of the
applicable waiting periods or receipt of required authorizations
under any regulatory law as soon as practicable.
PMA and Old Republic will also use their reasonable best efforts
to (i) cooperate in all respects with each other in
connection with any filing or submission and in connection with
any investigation or inquiry, (ii) subject to applicable
legal limitations and the instructions of any governmental
entity, keep the other party reasonably informed of any
communication received from or given to any governmental entity
and of any communication received or given in connection with
any proceeding by a private party, in each case regarding the
transactions contemplated in the merger agreement,
(iii) subject to applicable legal limitations and the
instructions of any governmental entity, permit the other party
to review in advance any communication to be given by it to, and
consult with each other in advance of any meeting with, any
governmental entity or, in connection with any proceeding by a
private party, with any other person, and (iv) to the
extent permitted by the governmental entity or other person,
give the other party the opportunity to attend and participate
in any such meetings.
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PMA and Old Republic will use their reasonable best efforts to
resolve any objections or challenges to the merger brought by a
governmental entity or a private party so as to permit
consummation of merger on the terms set forth in the merger
agreement as soon as reasonably practicable. Notwithstanding the
foregoing, under the merger agreement, Old Republic shall not be
required to and none of PMA or its subsidiaries may, without the
prior written consent of Old Republic, take any action if doing
so would prohibit or limit the business of Old Republic or PMA,
limit the ability of Old Republic to own PMA or its
subsidiaries, prohibit Old Republic from controlling in any
material respect the business or operations of Old Republic, PMA
or their affiliates or would reasonably be expected to
materially and adversely affect the benefits, taken as a whole,
that Old Republic expects to derive from the merger or have a
material adverse effect on the business, financial condition or
results of operations of PMA and its subsidiaries taken as a
whole.
Employee
Benefits Matters
Old Republic and PMA have agreed that, except as otherwise
provided in the merger agreement, until December 31, 2011,
Old Republic will provide continuing employees with employee
benefits and compensation that are, in the aggregate, no less
favorable than the employee benefits and compensation that were
provided to such employees immediately prior to the merger,
subject to pay or benefit cuts generally applicable to similarly
situated Old Republic employees.
To the extent applicable, Old Republic has agreed to
(i) use its reasonable best efforts to cause any
pre-existing condition limitations or eligibility waiting
periods under an Old Republic benefit plan to be waived (to the
extent such a waiver would have been available under the PMA
plan), (ii) recognize any health, dental or vision expenses
incurred by such employees in the plan year that includes the
merger for purposes of any applicable deductible and annual
out-of-pocket
expense requirements, and (iii) recognize service prior to
the merger with PMA and any of its subsidiaries for purposes of
eligibility to participate and vesting and level of benefits to
the same extent such service was recognized by PMA or any of its
subsidiaries under their analogous benefit plans.
Except as otherwise provided in the merger agreement, after the
merger, Old Republic will cause the surviving corporation and
its subsidiaries to honor, in accordance with its terms or as
may be amended after the merger, each PMA benefit plan.
Expenses
Except as otherwise provided below in the event the merger
agreement is terminated under certain circumstances, and with
respect to the costs and expenses of printing and mailing this
proxy statement/prospectus and all filing and other fees paid to
the SEC in connection with the merger, which will be split
equally between Old Republic and PMA, each of Old Republic and
PMA will pay their own expenses incurred in connection with the
merger.
Tax
Treatment of the Merger
Following the merger, neither PMA nor Old Republic will
knowingly take (or fail to take) any action that could cause the
merger to fail to qualify as a reorganization within
the meaning of Section 368(a) of the United States Internal
Revenue Code and the regulations promulgated thereunder.
Directors
and Officers Insurance and Indemnification
After the closing, the surviving corporation will, and Old
Republic will cause the surviving corporation to, to the fullest
extent permitted by law, indemnify, defend and hold harmless
(and advance expenses to) the present and former directors and
officers of PMA and its subsidiaries against all losses, claims,
damages, costs, expenses, liabilities or judgments or amounts
that are paid in settlement of or in connection with any claim
based in whole or in part on or arising in whole or in part out
of the fact that such person is or was a director or officer of
PMA or any of its subsidiaries, and pertaining to any matter
existing or occurring, or any acts or omissions occurring, at or
prior to the merger, whether asserted or claimed prior to, or at
or after, the merger, or taken at the request of Old Republic.
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In addition, prior to the merger, PMA shall purchase
directors and officers liability insurance and
fiduciary liability insurance policies covering for a tail
period of six years from the merger any acts or omissions
occurring prior to the merger and covering each person covered
by PMAs directors and officers liability
insurance in effect as of the date of the merger agreement.
In the event of any claim, action, suit, proceeding or
investigation, whether civil, criminal or administrative,
including any claim in which any individual who is now, or has
been prior to the date of merger agreement, or who becomes prior
to the merger, a director or officer of PMA or any of its
subsidiaries, is or is threatened to be, made a party based in
whole or in part on, or arising in whole or in part out of, or
pertaining to (i) the fact that he or she is or was a
director or officer of PMA or any of its subsidiaries (or any
such other person) prior to merger or (ii) the merger
agreement or any of the transactions contemplated by merger
agreement, whether asserted or arising before or after the
merger, Old Republic and PMA shall cooperate and use their
reasonable best efforts to defend against and respond to such
claim. PMA has agreed that it will not settle or offer to settle
any litigation or other legal proceeding against PMA or any of
its directors or executive officers relating to the merger
agreement or the merger without the prior written consent of Old
Republic, which consent shall not be unreasonably withheld or
delayed. All rights to indemnification for acts or omissions
occurring prior to the merger existing as of the date of the
merger agreement in favor of any party as provided in their
respective certificates or articles of incorporation or bylaws
(or comparable organizational documents), and any
indemnification agreements in effect as of the date of the
merger agreement, will survive the merger and continue in full
force and effect in accordance with their terms.
Notification
of Certain Events
PMA and Old Republic shall promptly advise the other of any
change or event (i) having or reasonably likely to have a
material adverse effect on it or (ii) that it believes
would or would be reasonably likely to cause a material breach
of any of its representations, warranties or covenants contained
in the merger agreement.
Exemption
from Liability under Section 16(b)
Old Republic and PMA will take all steps necessary or
appropriate to cause any deemed disposition of shares of PMA
class A common stock or conversion of any derivative
securities in respect of such shares of PMA class A common
stock or any deemed acquisition of shares of Old Republic common
stock by an individual who after the merger is expected to be
subject to Section 16(b) of the Exchange Act with respect
to Old Republic, in each case in connection with the
consummation of the transactions contemplated by the merger
agreement, to be exempt under
Rule 16b-3
promulgated under the Exchange Act.
Listing
of Old Republics Common Stock
Old Republic will cause the shares of Old Republic common stock
to be issued in the merger to be approved for listing on the New
York Stock Exchange, subject to official notice of issuance,
prior to the merger.
Termination
of the Merger Agreement
The merger agreement may be terminated, at any time prior to the
consummation of the merger:
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by mutual written consent of Old Republic and PMA;
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subject to certain limitations described in the merger
agreement, by either Old Republic or PMA, if:
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the merger shall not have been consummated on or before
December 31, 2010, unless the party seeking to terminate
the merger agreement failed to perform or observe the applicable
covenants and agreements under the merger agreement;
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a required regulatory approval has been denied or any
governmental entity has taken action permanently enjoining or
otherwise prohibiting or making illegal the merger, including
with respect to antitrust matters, if HSR approval has not been
obtained within 120 days of the filing of the HSR
application (such 120 day period to be extended for another
120 days if HSR approval is a reasonable possibility);
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the other party has breached a representation, warranty,
covenant or agreement that would preclude the satisfaction of
certain conditions to the consummation of the merger and such
breach is not remedied within the applicable cure period;
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the PMA board of directors shall have (i) failed to
recommend the approval and adoption of the merger agreement to
the PMA shareholders, (ii) made any PMA change of
recommendation, (iii) approved or recommended, or publicly
proposed to approve or recommend, any alternative proposal or
(iv) failed to recommend to PMAs shareholders that
they reject any tender offer or exchange offer that constitutes
an alternative transaction within the ten business day period
specified in Rule
14e-2(a) of
the Exchange Act; or
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the PMA shareholders have not adopted the merger agreement at
the PMA special meeting.
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Termination
Fees and Expenses
If the merger agreement is terminated as described in The
Merger Agreement Termination of the Merger
Agreement above, the merger agreement will become void,
and there will be no liability or obligation of any party or its
officers and directors under the merger agreement except as to
certain limited provisions set forth in the merger agreement,
including the payment of termination fees and the reimbursement
of reasonable
out-of-pocket
transaction expenses of Old Republic in connection with a
termination of the merger agreement, as described below, which
will survive the termination, and except that no party will be
relieved or released from any liabilities or damages arising out
of its knowing breach of the merger agreement.
If either Old Republic or PMA terminates the merger agreement as
a result of the actions of the PMA board of directors (failed to
recommend the merger to the PMA shareholders, made a PMA change
of recommendation, approved or recommended any alternative
proposal or failed to recommend to PMAs shareholders that
they reject any tender offer or exchange offer that constitutes
an alternative transaction), PMA will pay to Old Republic a
termination fee of $8 million.
If a pre-termination company takeover proposal event (as defined
below) occurred and (i) Old Republic or PMA terminates the
merger agreement as a result of the failure of the merger to be
consummated by December 31, 2010 (provided PMA is not in
material breach of the merger agreement and the PMA shareholders
have adopted the merger agreement), (ii) Old Republic or
PMA terminates the merger agreement as a result of the PMA
shareholders failure to adopt the merger agreement, or
(ii) Old Republic terminates the merger agreement as a
result of PMAs breach of a representation, warranty,
covenant or agreement that would preclude the satisfaction of
certain conditions to the consummation of the merger and such
breach is not remedied within the applicable cure period, then
PMA shall pay Old Republic for its documented
out-of-pocket
expenses paid or payable to any third party in connection with
the merger agreement (including all actuaries,
attorneys, accountants and investment bankers
fees and expenses), not to exceed $2 million. If within six
months of termination of the merger agreement under those
circumstances, PMA consummates any alternative transaction, PMA
shall pay Old Republic a termination fee of $8 million less
any expenses paid pursuant to the merger agreement.
Under the merger agreement, a pre-termination company
takeover proposal event will occur if, prior to the event
giving rise to the right to terminate the merger agreement, a
bona fide alternative proposal shall have been made to PMA or
has been made directly to its shareholders or any person shall
have publicly announced an intention to make an alternative
proposal involving PMA. For purposes of the right to terminate
and the right to any expense reimbursement or any termination
fees under the merger agreement, an alternative
proposal is any inquiry or proposal relating to an
alternative transaction. In this case, an
alternative transaction includes the following
transactions:
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any direct or indirect acquisition by any third party (other
than Old Republic and its subsidiaries) 50% or more of the
outstanding shares of PMA class A common stock of 50% or
more of the voting power of any new series or new class of
preferred stock that would be entitled to vote with respect to
the proposed merger, including pursuant to a tender offer or
exchange offer;
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77
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any merger, share exchange, consolidation or other business
combination involving PMA or any of its subsidiaries (other than
the proposed Old Republic merger) to which PMA is a party and in
which the PMA shareholders will not hold at least
662/3%
of the total voting power of the surviving company;
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any transaction pursuant to which any third party (other than
Old Republic and its subsidiaries) would acquire or would
acquire control of assets (including equity securities of any
subsidiary of PMA) of PMA or its subsidiaries that represent
more than 50% of the fair market value of all of the assets, net
revenues or net income of PMA and its subsidiaries, taken as a
whole, immediately prior to such transaction; or
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any other consolidation, business combination, recapitalization
or similar transaction involving PMA or any of its subsidiaries
other then the transactions contemplated by the merger agreement
to which PMA is a party and in which the PMA shareholders will
not hold at least
662/3%
of the total voting power of the surviving company.
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Amendment,
Extension and Waiver
Old Republic and PMA have agreed that the merger agreement may
be amended by the parties, as authorized by their respective
boards of directors, in writing. After the adoption of the
merger agreement by the PMA shareholders, no amendment may be
made to the merger agreement without the approval of PMA
shareholders, if such approval is required by law.
The parties have also agreed that, prior to the consummation of
the merger, with the authorization of their respective boards of
directors, the parties will be allowed, in writing, to the
extent permitted by law, to extend the time for the performance
of any of the obligations or other acts of the other parties,
waive any inaccuracies in the representations and warranties
contained in the merger agreement or waive compliance with any
of the agreements or conditions contained in the merger
agreement.
Governing
Law
The merger agreement is governed by and will be construed in
accordance with the laws of the Commonwealth of Pennsylvania.
INFORMATION
ABOUT THE COMPANIES
PMA
PMA is a holding company whose operating subsidiaries provide
insurance and related fee-based services. PMAs insurance
products include workers compensation and other commercial
property and casualty lines of insurance. Fee-based services
include third party administrator (TPA), managing
general agent and program administrator services. The operating
subsidiaries are marketed under PMA Companies and include The
PMA Insurance Group, PMA Management Corp., PMA Management Corp.
of New England, Inc., and Midlands Management Corporation
(Midlands). PMAs insurance products are
marketed primarily in the eastern part of the United States.
These products are written through The PMA Insurance Group,
PMAs property and casualty insurance segment. The PMA
Insurance Group primarily includes the operations of PMAs
principal insurance subsidiaries, Pennsylvania
Manufacturers Association Insurance Company, Manufacturers
Alliance Insurance Company and Pennsylvania Manufacturers
Indemnity Company. PMAs Fee-based Business includes the
operations of PMA Management Corp., PMA Management Corp. of New
England, Inc., and Midlands. PMA Management Corp. is a TPA that
provides various claims administration, risk management, loss
prevention and related services, primarily to self-insured
clients under fee for service arrangements. PMA Management Corp.
of New England, Inc. is a provider of risk management and TPA
services. Midlands is a managing general agent, program
administrator and provider of TPA services. PMA also has a
Corporate and Other segment, which primarily includes corporate
expenses and debt service.
PMA is a Pennsylvania corporation. PMAs common stock
trades on the NASDAQ Stock
Market®
under the symbol PMACA. PMA has an A.M. Best
Company rating of A− (Excellent), which is the
4th highest of 16 rating levels. PMAs principal
executive offices are located at 380 Sentry Parkway, Blue Bell,
Pennsylvania 19422, and its telephone number is
(610) 397-5298.
78
Old
Republic
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, its General (property and liability insurance),
Mortgage Guaranty, and Title Insurance Groups. References
herein to such groups apply to Old Republics 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 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 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:
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Disciplined risk selection, evaluation, and pricing to reduce
uncertainty and adverse selection;
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Augmenting the predictability of expected outcomes through
insurance of the largest number of homogeneous risks as to each
type of coverage;
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Reducing the insurance portfolio risk profile through:
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diversification and spread of insured risks; and
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assimilation of uncorrelated asset and liability exposures
across economic sectors that tend to offset or counterbalance
one another; and
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Effectively managing gross and net limits of liability through
appropriate use of reinsurance.
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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 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. Old
Republics 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.
In light of the above factors, Old Republics affairs are
managed without 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 Old Republics
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 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.
79
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 Old
Republics consolidated financial statements, the notes
thereto, and the section entitled Old Republic
Managements Discussion and Analysis of Financial Condition
and Results of Operations appearing elsewhere in this
proxy statement/prospectus.
Financial
Information Relating to Segments of Business(a)
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Net Revenues(b)
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2009
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2008
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2007
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($ in Millions)
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Years Ended December 31:
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General
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$
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2,052.7
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$
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2,255.9
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$
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2,438.0
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Mortgage Guaranty
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746.1
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690.0
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608.3
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Title
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914.1
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681.3
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878.5
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Corporate & Other net(c)
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138.1
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132.1
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131.4
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Consolidated realized investment gains (losses)
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6.3
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(486.4
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)
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70.3
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Consolidation elimination adjustments
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(53.8
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)
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(35.3
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)
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(35.8
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Consolidated
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$
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3,803.6
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$
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3,237.7
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$
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4,091.0
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Income (Loss) Before Taxes
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2009
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2008
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2007
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Years Ended December 31:
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General
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$
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200.1
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$
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294.3
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$
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418.0
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Mortgage Guaranty
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(486.4
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(594.3
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(110.4
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Title
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2.1
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(46.3
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(14.7
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)
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Corporate & Other net(c)
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4.0
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13.5
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15.1
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Consolidated realized investment gains (losses)
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6.3
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(486.4
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)
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70.3
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Consolidated
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$
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(273.6
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$
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(819.2
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$
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378.4
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Assets
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2009
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2008
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2007
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As of December 31:
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General
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$
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9,920.8
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$
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9,482.9
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$
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9,769.9
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Mortgage Guaranty
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3,233.4
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2,973.1
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2,523.8
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Title
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852.8
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762.4
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770.4
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Corporate & Other net(c)
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503.5
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509.5
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437.9
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Consolidation elimination adjustments
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(320.5
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)
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(462.0
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)
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(211.5
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Consolidated
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$
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14,190.0
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$
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13,266.0
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$
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13,290.6
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Shareholders Equity
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2009
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2008
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2007
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As of December 31:
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General
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$
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2,548.2
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$
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2,258.7
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$
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2,536.7
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Mortgage Guaranty
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581.7
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828.0
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1,237.7
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Title
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288.6
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260.0
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334.9
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Corporate & Other net(c)
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516.9
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433.7
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475.4
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Consolidated elimination adjustments
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(44.1
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)
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(40.2
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)
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(43.2
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Consolidated
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$
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3,891.4
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$
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3,740.3
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$
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4,541.6
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80
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(a) |
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Reference is made to the table in Note 6 of the Notes to
Consolidated Financial Statements for the year ended
December 31, 2009, 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
Republics insurance industry segments. |
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(b) |
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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. |
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(c) |
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Represents amounts for Old Republics holding company
parent, minor corporate services subsidiaries, and a small life
and health insurance operation. |
General
Insurance Group
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. Old Republic 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, forest products, energy, general manufacturing,
and financial services industries. In managing the insurance
risks it undertakes, Old Republic 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 pertaining to
individual or groups of assureds.
Over the years, the General Insurance Groups 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 manufacturers 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. Old
Republics aviation business does not extend to commercial
airlines.
Commercial Automobile Insurance
(1930s): 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)(1920s): Policies afford
liability coverage for claims arising from the acts of owners or
employees, and protection for the physical assets of large
businesses.
Financial Indemnity: Multiple types of
specialty coverages, including most prominently the following
five, are underwritten by Old Republic within this financial
indemnity products classification.
Consumer Credit Indemnity
(CCI)(1955): Policies provide limited
indemnity to lenders and other financial intermediaries against
the risk of non-payment of consumer loan balances by individual
buyers and borrowers arising from unemployment, bankruptcy, and
other failures to pay.
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
provides 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.
81
Guaranteed Asset Protection
(GAP)(2003): This insurance covers an
automobile loan borrower for the dollar value difference between
an insurance companys 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 (1920s): 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 (1920s): 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 Old
Republics Canadian life insurance affiliate, cover
monetary losses arising from trip delay and cancellation for
individual insureds.
Workers Compensation (1920s): 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.
(Parenthetical dates refer to the year(s) when Old
Republics Companies began underwriting the coverages)
Commercial automobile, general liability and workers
compensation insurance are typically produced in tandem for many
assureds. For 2009, production of commercial automobile direct
insurance premiums accounted for approximately 29.8% of
consolidated General Insurance Group direct premiums written,
while workers compensation and general liability direct
premium production amounted to approximately 19.2% and 13.6%,
respectively, of such consolidated totals.
Approximately 85% of general insurance premiums are produced
through independent agency or brokerage channels, while the
remaining 15% is obtained through direct production facilities.
Mortgage
Guaranty Group
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 Group insures only first mortgage loans, primarily on
residential properties incorporating
one-to-four
family dwelling units.
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, Old Republic 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 is 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
are individually reviewed (except for loans insured under
delegated approval programs) and priced according to filed
premium rates. In underwriting traditional primary business, Old
Republic generally adheres to the underwriting guidelines
published by the Federal Home Loan Mortgage Corporation
(FHLMC or Freddie Mac) or the Federal
National Mortgage Association (FNMA or Fannie
Mae), purchasers of many of the loans Old Republic
insures. Delegated underwriting programs allow approved lenders
to commit Old Republic to insure loans provided they adhere to
predetermined underwriting guidelines. In 2009, delegated
underwriting approvals accounted for approximately 67% of Old
Republics new traditional primary risk written.
82
Bulk and other insurance is issued on groups of loans to
mortgage banking customers through a centralized risk assessment
and underwriting department. These groups of loans are priced in
the aggregate, on a bid or negotiated basis. Coverage for
insurance issued in this manner can be provided through primary
insurance policies (loan level coverage) or pool insurance
policies (aggregate coverage). Old Republic considers
transactions designated as bulk insurance to be exposed to
higher risk (as determined by characteristics such as
origination channel, loan amount, credit quality, and loan
documentation) than those designated as other insurance.
Before insuring any loans, Old Republic issues to each approved
customer a master policy outlining the terms and conditions
under which coverage will be provided. Primary business is then
executed 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 is issued covering the particular loans applicable to
each transaction.
As to all types of mortgage insurance products, the amount of
premium charge depends on various underwriting criteria such as
loan-to-value
ratios, the level of coverage being provided, the
borrowers 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 Old Republic
(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 Old Republics direct premiums are written under monthly
premium plans. Premiums may be paid by borrowers as part of
their monthly mortgage payment and passed through to Old
Republic by the servicer of the loan or they may be paid
directly by the originator of, or investor in the mortgage loan.
Title Insurance
Group
The title insurance 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 policy insures
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,
2009, approximately 39% of Old Republics consolidated
title premium and related fee income stemmed from direct
operations (which include branch offices of its title insurers
and wholly owned subsidiaries of Old Republic), while the
remaining 61% 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.
The 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
owners policy of title insurance protects an owners
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 service 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 services pertaining to real
estate transfers and loan transactions.
83
Corporate
and Other Operations
Corporate and other operations include the accounts of a small
life and health insurance business as well as those of the
parent holding company and several minor corporate services
subsidiaries that perform investment management, payroll,
administrative and minor marketing services.
Old Republics small life and health business registered
2009 and 2008 net premium revenues of $73.3 million
and $80.1 million, respectively. This business is conducted
in both the United States and Canada and consists mostly of
limited product offerings sold through financial intermediaries
such as automobile dealers, travel agents, and marketing
channels that are also utilized in some of Old Republics
general insurance operations. Production of term life insurance,
accounting for net premiums earned of $15.1 million in 2009
and $16.8 million in 2008, was terminated and placed in run
off as of year end 2004.
Consolidated
Underwriting Statistics
The following table reflects underwriting statistics covering
premiums and related loss, expense, and policyholders
dividend ratios for the major coverages underwritten in Old
Republics insurance segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in Millions)
|
|
|
General Insurance Group:
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall Experience:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Premiums Earned
|
|
$
|
1,782.5
|
|
|
$
|
1,989.3
|
|
|
$
|
2,155.1
|
|
Claim Ratio
|
|
|
75.9
|
%
|
|
|
72.2
|
%
|
|
|
67.4
|
%
|
Policyholders Dividend Benefit
|
|
|
.4
|
|
|
|
.8
|
|
|
|
.4
|
|
Expense Ratio
|
|
|
25.8
|
|
|
|
24.2
|
|
|
|
24.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composite Ratio
|
|
|
102.1
|
%
|
|
|
97.2
|
%
|
|
|
91.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Experience by Major Coverages:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Automobile (Principally Trucking):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Premiums Earned
|
|
$
|
652.8
|
|
|
$
|
694.5
|
|
|
$
|
752.4
|
|
Claim Ratio
|
|
|
71.3
|
%
|
|
|
75.8
|
%
|
|
|
73.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workers Compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Premiums Earned
|
|
$
|
387.3
|
|
|
$
|
418.4
|
|
|
$
|
505.6
|
|
Claim Ratio
|
|
|
73.9
|
%
|
|
|
67.2
|
%
|
|
|
69.7
|
%
|
Policyholders Dividend Benefit
|
|
|
1.0
|
%
|
|
|
2.2
|
%
|
|
|
1.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Premiums Earned
|
|
$
|
143.2
|
|
|
$
|
150.2
|
|
|
$
|
168.1
|
|
Claim Ratio
|
|
|
65.3
|
%
|
|
|
63.9
|
%
|
|
|
59.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Above Coverages Combined:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Premiums Earned
|
|
$
|
1,183.5
|
|
|
$
|
1,263.2
|
|
|
$
|
1,426.2
|
|
Claim Ratio
|
|
|
71.4
|
%
|
|
|
71.5
|
%
|
|
|
70.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Indemnity:(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Premiums Earned
|
|
$
|
241.5
|
|
|
$
|
319.7
|
|
|
$
|
298.0
|
|
Claim Ratio
|
|
|
117.8
|
%
|
|
|
95.0
|
%
|
|
|
69.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inland Marine and Commercial Multi-Peril:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Premiums Earned
|
|
$
|
168.8
|
|
|
$
|
192.9
|
|
|
$
|
199.3
|
|
Claim Ratio
|
|
|
61.4
|
%
|
|
|
58.8
|
%
|
|
|
54.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in Millions)
|
|
|
Home and Automobile Warranty:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Premiums Earned
|
|
$
|
141.6
|
|
|
$
|
126.2
|
|
|
$
|
129.8
|
|
Claim Ratio
|
|
|
65.2
|
%
|
|
|
61.2
|
%
|
|
|
62.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Coverages:(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Premiums Earned
|
|
$
|
50.7
|
|
|
$
|
89.5
|
|
|
$
|
98.9
|
|
Claim Ratio
|
|
|
45.8
|
%
|
|
|
43.6
|
%
|
|
|
46.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Guaranty Group:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Premiums Earned
|
|
$
|
644.5
|
|
|
$
|
592.5
|
|
|
$
|
518.2
|
|
Claim Ratio
|
|
|
176.0
|
%
|
|
|
199.3
|
%
|
|
|
118.8
|
%
|
Expense Ratio
|
|
|
12.6
|
|
|
|
15.7
|
|
|
|
17.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composite Ratio
|
|
|
188.6
|
%
|
|
|
215.0
|
%
|
|
|
136.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Title Insurance Group:(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Premiums Earned
|
|
$
|
611.0
|
|
|
$
|
463.1
|
|
|
$
|
638.5
|
|
Combined Net Premiums & Fees Earned
|
|
$
|
888.4
|
|
|
$
|
656.1
|
|
|
$
|
850.7
|
|
Claim Ratio
|
|
|
7.9
|
%
|
|
|
7.0
|
%
|
|
|
6.6
|
%
|
Expense Ratio
|
|
|
93.8
|
|
|
|
103.6
|
|
|
|
98.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composite Ratio
|
|
|
101.7
|
%
|
|
|
110.6
|
%
|
|
|
104.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Coverages Consolidated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Premiums & Fees Earned
|
|
$
|
3,388.9
|
|
|
$
|
3,318.1
|
|
|
$
|
3,601.2
|
|
Claim and Benefit Ratio
|
|
|
76.7
|
%
|
|
|
81.8
|
%
|
|
|
60.2
|
%
|
Expense Ratio
|
|
|
41.8
|
|
|
|
39.1
|
|
|
|
41.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composite Ratio
|
|
|
118.5
|
%
|
|
|
120.9
|
%
|
|
|
101.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Any necessary reclassifications of prior year data are reflected
in the above table to conform to our current presentation.
|
|
|
(a) |
|
Consists principally of fidelity, surety, consumer credit
indemnity, executive indemnity (directors & officers
and errors & omissions), and guaranteed asset
protection (GAP) coverages. |
|
(b) |
|
Consists principally of aviation and travel accident coverages. |
|
(c) |
|
Title claim, expense, and composite ratios are calculated on the
basis of combined net premiums and fees earned. |
General insurance premiums have trended down
during the three years ended December 31, 2009. Old
Republic estimates that most of the downtrend has been caused by
the combination of a softer pricing environment and the
recessionary economic conditions affecting its customers
operations. These conditions affect such factors as sales and
employment levels, both of which are important elements upon
which premiums are based. Mortgage guaranty
premium levels have been pressured by lower
industry-wide market penetration offset by reduced cessions to
captive insurers. The significant increase in 2009 earned
premiums was due to largely non-recurring captive reinsurance
commutations which contributed $82.5 million of additional
premiums covering future losses. Title insurance
premiums and fees had been in a downtrend between 2005
and late 2008. The combination of stronger refinance activity
that began late in 2008 and continued into early 2009 and
greater market share gains in the second half of last year
produced a turn around for 2009 as a whole.
Variations in claim ratios are typically caused by changes in
the frequency and severity of claims incurred, changes in
premium rates and the level of premium refunds, and periodic
changes in claim and claim expense
85
reserve estimates resulting from ongoing reevaluations of
reported and incurred but not reported claims and claim
expenses. As demonstrated in the above table, Old Republic can
therefore experience
period-to-period
volatility in the underwriting results posted for individual
coverages. In light of Old Republics basic underwriting
focus in managing its business, a long-term objective has been
to dampen this volatility by diversifying the coverages it
offers and the industries it serves.
The claim ratios include loss adjustment expenses where
appropriate. Policyholders dividends, which apply
principally to workers compensation insurance, are a
reflection of changes in loss experience for individual or
groups of policies, rather than overall results, and should be
viewed in conjunction with loss ratio trends.
Excluding the impact of Old Republics consumer credit
indemnity (CCI) business discussed below, the
overall general insurance claim ratio reflects
reasonably consistent trends for all periods reported upon. To a
large extent this major cost factor reflects pricing and risk
selection improvements that have been applied since 2001,
followed by a general price softening in the past three years or
so. Changes in commercial automobile coverages claim ratios are
primarily due to greater claim frequencies. Loss ratios for
workers compensation and liability insurance coverages may
reflect greater variability due to chance events in any one
year, changes in loss costs emanating from participation in
involuntary markets (i.e. insurance assigned risk pools and
associations in which participation is basically mandatory), and
added provisions for loss costs not recoverable from assuming
reinsurers which may experience financial difficulties from time
to time. Additionally, workers compensation claim costs in
particular are affected by a variety of underwriting techniques
such as the use of captive reinsurance retentions, retrospective
premium plans, and self-insured or deductible insurance programs
that are intended to mitigate claim costs over time. Claim
ratios for a relatively small book of general liability
coverages tend to be highly volatile year to year due to the
impact of changes in claim emergence and severity of legacy
asbestos and environmental claims exposures.
Old Republic generally underwrites concurrently workers
compensation, commercial automobile (liability and physical
damage), and general liability insurance coverages for a large
number of customers. Given this concurrent underwriting
approach, an evaluation of trends in premiums, claim and
dividend ratios for these individual coverages is more
appropriately considered in the aggregate.
The higher claim ratio for financial indemnity coverages in the
periods shown was driven principally by greater claim
frequencies experienced in Old Republics CCI coverage.
These higher claim ratios added 7.3 and 6.1 percentage
points, respectively, to the 2009 and 2008 general insurance
overall claim ratio versus an insignificant effect for 2007.
Mortgage guaranty claim ratios, absent the effect
of the third quarter 2009 reinsurance commutation transactions
which had the impact of lowering the 2009 ratio from 199.6% to
176.0%, have continued to rise in recent periods. These ratios
have risen principally as a result of higher reserve provisions
and paid losses. Greater reserve provisions have resulted from
higher levels of reported delinquencies emanating from the
downturn in the national economy, widespread stress in housing
and mortgage finance markets, and increasing unemployment.
Trends in expected and actual claim frequency and severity have
been impacted to varying degrees by several factors including,
but not limited to, significant declines in home prices which
limit a troubled borrowers ability to sell the mortgaged
property in an amount sufficient to satisfy the remaining debt
obligation; more restrictive mortgage lending standards which
limit a borrowers ability to refinance the loan; increases
in housing supply relative to recent demand; historically high
levels of coverage rescissions and claim denials as a result of
material misrepresentation in key underwriting information or
non-compliance with prescribed underwriting guidelines, and
changes in claim settlement costs. The latter costs are
influenced by the amount of unpaid principal outstanding on
delinquent loans as well as the rising expenses of settling
claims due to higher investigation costs, legal fees, and
accumulated interest expenses.
Title insurance loss ratios have remained in the
single digits for a number of years due to a continuation of
favorable trends in claims frequency and severity for business
underwritten since 1992 in particular. Though still reasonably
contained, claim ratios have risen in the three most recent
years due to the continuing downturn and economic stresses in
the housing and related mortgage lending industries.
86
The consolidated claim, expense, and composite ratios reflect
all the above factors and the changing
period-to-period
contributions of each segment to consolidated results.
General
Insurance Claim Reserves
Old Republics 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, are reported
for financial and regulatory reporting purposes at amounts that
are substantially the same.
The establishment of claim reserves by Old Republics
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 Old
Republics 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,
Old Republic is exposed to 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.
In establishing claim reserves, the possible increase in future
loss settlement costs caused by inflation is considered
implicitly, along with the many other factors cited above.
Reserves are generally set to provide for the ultimate cost of
all claims. With regard to workers compensation reserves,
however, the ultimate cost of long-term disability or pension
type claims is discounted to present value based on interest
rates ranging from 3.5% to 4.0%. Old Republic, where applicable,
uses only such discounted reserves in evaluating the results of
its operations, in pricing its products and settling
retrospective and reinsured accounts, in evaluating policy terms
and experience, and for other general business purposes. Solely
to comply with reporting rules mandated by the Securities and
Exchange Commission, however, Old Republic has made statistical
studies of applicable workers compensation reserves to
obtain estimates of the amounts by which claim and claim
adjustment expense reserves, net of reinsurance, have been
discounted. These studies have resulted in estimates of such
amounts at $143.9 million, $156.8 million and
$148.5 million, as of December 31, 2009, 2008 and
2007, respectively. It should be noted, however, that these
differences between discounted and non-discounted (terminal)
reserves are, fundamentally, of an informational nature, and are
not indicative of an effect on operating results for any one or
series of years for the above noted reasons.
Early in 2001, the Federal Department of Labor revised the
Federal Black Lung Program regulations. The revisions basically
require a reevaluation of previously settled, denied, or new
occupational disease claims in the context of newly devised,
more lenient standards when such claims are resubmitted.
Following a number of challenges and appeals by the insurance
and coal mining industries, the revised regulations were, for
the most part, upheld in June, 2002 and are to be applied
prospectively. Since the final quarter of 2001, black lung
claims filed or refiled pursuant to these anticipated and now
final regulations have increased, though the volume of new claim
reports has abated in recent years. The vast majority of claims
filed to date against Old Republic pertain to business
underwritten through loss sensitive programs that permit the
charge of additional or refund of return premiums to wholly or
partially offset changes in estimated claim costs, or to
business underwritten as a service carrier on behalf of various
industry-wide involuntary market (i.e. assigned risk) pools. A
much smaller portion pertains to business produced on a
traditional risk transfer basis. Old Republic has established
applicable reserves for claims as they have been reported and
for claims not as yet reported on the basis of its historical
experience as well as assumptions relative to the effect of the
revised regulations. Inasmuch as a variety of challenges are
likely as the revised regulations are implemented through the
actual claim settlement process, the potential impact on
reserves, gross and
87
net of reinsurance or retrospective premium adjustments,
resulting from such regulations cannot be estimated with
reasonable certainty.
Old Republics reserve estimates also include provisions
for indemnity and settlement costs for various asbestosis and
environmental impairment (A&E) claims that have
been filed in the normal course of business against a number of
its insurance subsidiaries. Many such claims relate to policies
issued prior to 1985, including many issued during a short
period between 1981 and 1982 pursuant to an agency agreement
canceled in 1982. Over the years, Old Republics property
and liability insurance subsidiaries have typically issued
general liability insurance policies with face amounts ranging
between $1.0 million and $2.0 million and rarely
exceeding $10.0 million. Such policies have, in turn, been
subject to reinsurance cessions which have typically reduced the
subsidiaries net retentions to $.5 million or less as
to each claim. Old Republics exposure to A&E claims
cannot, however, be calculated by conventional insurance
reserving methods for a variety of reasons, including:
a) the absence of statistically valid data inasmuch as such
claims typically involve long reporting delays and very often
uncertainty as to the number and identity of insureds against
whom such claims have arisen or will arise; and b) the
litigation history of such or similar claims for insurance
industry members which has produced inconsistent court decisions
with regard to such questions as to when an alleged loss
occurred, which policies provide coverage, how a loss is to be
allocated among potentially responsible insureds
and/or their
insurance carriers, how policy coverage exclusions are to be
interpreted, what types of environmental impairment or toxic
tort claims are covered, when the insurers duty to defend
is triggered, how policy limits are to be calculated, and
whether
clean-up
costs constitute property damage. In recent times, the Executive
Branch
and/or the
Congress of the United States have proposed or considered
changes in the legislation and rules affecting the determination
of liability for environmental and asbestosis claims. As of
December 31, 2009, however, there is no solid evidence to
suggest that possible future changes might mitigate or reduce
some or all of these claim exposures. Because of the above
issues and uncertainties, estimation of reserves for losses and
allocated loss adjustment expenses for A&E claims in
particular is much more difficult or impossible to quantify with
a high degree of precision. Accordingly, no representation can
be made that Old Republics reserves for such claims and
related costs will not prove to be overstated or understated in
the future. At December 31, 2009, Old Republics
aggregate indemnity and loss adjustment expense reserves
specifically identified with A&E exposures amounted to
approximately $172.8 million gross, and $136.9 million
net of reinsurance. Based on average annual claims payments
during the five most recent calendar years, such reserves
represented 8.4 years (gross) and 11.5 years (net of
reinsurance) of average annual claims payments. Fluctuations in
this ratio between years can be caused by the inconsistent pay
out patterns associated with these types of claims. For the five
years ended December 31, 2009, incurred A&E claim and
related loss settlement costs have averaged 1.4% of average
annual General Insurance Group claims and related settlement
costs.
Over the years, the subject of property and liability insurance
claim reserves has been written about and analyzed extensively
by a large number of professionals and regulators. Accordingly,
the above discussion summary should, of necessity, be regarded
as a basic outline of the subject and not as a definitive
presentation. Old Republic believes that its overall reserving
practices have been consistently applied over many years, and
that its aggregate reserves have generally resulted in
reasonable approximations of the ultimate net costs of claims
incurred. However, no representation is made nor is any guaranty
given that ultimate net claim and related costs will not develop
in future years to be greater or lower than currently
established reserve estimates.
88
The following table shows the evolving redundancies or
deficiencies for reserves established as of December 31, of
each of the years 1999 through 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
2000
|
|
|
1999
|
|
|
|
($ in Millions)
|
|
|
(a) As of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b) Liability(1) for unpaid claims and claim adjustment
expenses(2):
|
|
$
|
3,229
|
|
|
$
|
3,222
|
|
|
$
|
3,175
|
|
|
$
|
2,924
|
|
|
$
|
2,414
|
|
|
$
|
2,182
|
|
|
$
|
1,964
|
|
|
$
|
1,802
|
|
|
$
|
1,678
|
|
|
$
|
1,661
|
|
|
$
|
1,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) Paid (cumulative) as of(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
|
%
|
|
|
25.8
|
%
|
|
|
27.2
|
%
|
|
|
24.1
|
%
|
|
|
15.3
|
%
|
|
|
25.2
|
%
|
|
|
24.7
|
%
|
|
|
23.5
|
%
|
|
|
23.3
|
%
|
|
|
23.2
|
%
|
|
|
22.1
|
%
|
Two years later
|
|
|
|
|
|
|
|
|
|
|
41.0
|
|
|
|
39.2
|
|
|
|
31.3
|
|
|
|
33.7
|
|
|
|
39.2
|
|
|
|
38.6
|
|
|
|
37.3
|
|
|
|
37.0
|
|
|
|
36.6
|
|
Three years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48.7
|
|
|
|
42.7
|
|
|
|
44.3
|
|
|
|
44.4
|
|
|
|
48.4
|
|
|
|
47.7
|
|
|
|
46.0
|
|
|
|
45.8
|
|
Four years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50.1
|
|
|
|
51.3
|
|
|
|
50.9
|
|
|
|
51.2
|
|
|
|
54.0
|
|
|
|
52.7
|
|
|
|
51.9
|
|
Five years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56.7
|
|
|
|
55.9
|
|
|
|
55.5
|
|
|
|
55.2
|
|
|
|
57.5
|
|
|
|
56.8
|
|
Six years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60.2
|
|
|
|
59.5
|
|
|
|
58.6
|
|
|
|
57.7
|
|
|
|
60.7
|
|
Seven years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63.0
|
|
|
|
61.9
|
|
|
|
60.5
|
|
|
|
60.3
|
|
Eight years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65.0
|
|
|
|
63.6
|
|
|
|
62.8
|
|
Nine years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66.4
|
|
|
|
65.6
|
|
Ten years later
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
68.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) Liability reestimated (i.e., cumulative payments plus
reestimated ending liability) As of(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
|
%
|
|
|
98.2
|
%
|
|
|
97.4
|
%
|
|
|
96.2
|
%
|
|
|
95.2
|
%
|
|
|
97.6
|
%
|
|
|
97.2
|
%
|
|
|
98.6
|
%
|
|
|
99.6
|
%
|
|
|
97.3
|
%
|
|
|
96.1
|
%
|
Two years later
|
|
|
|
|
|
|
|
|
|
|
94.9
|
|
|
|
94.3
|
|
|
|
92.3
|
|
|
|
94.8
|
|
|
|
97.0
|
|
|
|
98.2
|
|
|
|
101.3
|
|
|
|
98.1
|
|
|
|
94.9
|
|
Three years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92.4
|
|
|
|
90.4
|
|
|
|
93.3
|
|
|
|
95.6
|
|
|
|
99.7
|
|
|
|
102.7
|
|
|
|
100.1
|
|
|
|
96.5
|
|
Four years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88.4
|
|
|
|
92.2
|
|
|
|
95.7
|
|
|
|
100.4
|
|
|
|
105.8
|
|
|
|
102.2
|
|
|
|
98.0
|
|
Five years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91.6
|
|
|
|
95.6
|
|
|
|
100.6
|
|
|
|
106.7
|
|
|
|
105.6
|
|
|
|
100.7
|
|
Six years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95.5
|
|
|
|
101.0
|
|
|
|
107.3
|
|
|
|
106.9
|
|
|
|
104.2
|
|
Seven years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101.0
|
|
|
|
107.8
|
|
|
|
107.5
|
|
|
|
105.4
|
|
Eight years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108.0
|
|
|
|
108.3
|
|
|
|
106.1
|
|
Nine years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108.5
|
|
|
|
106.7
|
|
Ten years later
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
107.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(e) Redundancy (deficiency)(5) for each year-end
|
|
|
|
%
|
|
|
1.8
|
%
|
|
|
5.1
|
%
|
|
|
7.6
|
%
|
|
|
11.6
|
%
|
|
|
8.4
|
%
|
|
|
4.5
|
%
|
|
|
(1.0
|
)%
|
|
|
(8.0
|
)%
|
|
|
(8.5
|
)%
|
|
|
(7.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average redundancy (deficiency) for all year-ends
|
|
|
2.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts are reported net of reinsurance. |
|
(2) |
|
Excluding unallocated loss adjustment expense reserves. |
|
(3) |
|
Percent of most recent reestimated liability (line d). Decreases
in paid loss percentages may at times reflect the reassumption
by the Company of certain previously ceded loss reserves from
assuming reinsurers through commutations of then existing
reserves. |
|
(4) |
|
Percent of beginning liability (line b) for unpaid claims
and claim adjustment expenses. |
|
(5) |
|
Beginning liability less the most current liability reestimated
(line d) as a percent of beginning liability (line b). |
In reviewing the preceding tabular data, it should be noted that
prior periods loss payment and development trends may not
be repeated in the future due to the large variety of factors
influencing the reserving and settlement processes outlined
herein above. The reserve redundancies or deficiencies shown for
all years are not necessarily indicative of the effect on
reported results of any one or series of years since cumulative
retrospective premium and commission adjustments employed in
various parts of Old Republics business may partially
offset such effects. The moderately deficient development of
reserves at year-ends 1999 to 2002 pertain mostly to claims
incurred in prior accident years, generally for business written
in the 1980s. (See Consolidated Underwriting
Statistics above, and Reserves, Reinsurance, and
Retrospective Adjustments elsewhere herein).
89
The following table shows an analysis of changes in aggregate
reserves for Old Republics property and liability
insurance claims and allocated claim adjustment expenses for
each of the years shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
2000
|
|
|
1999
|
|
|
|
($ in Millions)
|
|
|
(a) Beginning net reserves
|
|
$
|
3,222
|
|
|
$
|
3,175
|
|
|
$
|
2,924
|
|
|
$
|
2,414
|
|
|
$
|
2,182
|
|
|
$
|
1,964
|
|
|
$
|
1,802
|
|
|
$
|
1,678
|
|
|
$
|
1,661
|
|
|
$
|
1,699
|
|
|
$
|
1,742
|
|
Incurred claims and claim expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b) Current year provision
|
|
|
1,343
|
|
|
|
1,452
|
|
|
|
1,490
|
|
|
|
1,295
|
|
|
|
1,191
|
|
|
|
1,070
|
|
|
|
893
|
|
|
|
814
|
|
|
|
749
|
|
|
|
690
|
|
|
|
734
|
|
(c) Change in prior years provision
|
|
|
(56
|
)
|
|
|
(83
|
)
|
|
|
(110
|
)
|
|
|
(116
|
)
|
|
|
(52
|
)
|
|
|
(55
|
)
|
|
|
(25
|
)
|
|
|
(7
|
)
|
|
|
(44
|
)
|
|
|
(66
|
)
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) Total incurred
|
|
|
1,287
|
|
|
|
1,369
|
|
|
|
1,379
|
|
|
|
1,179
|
|
|
|
1,138
|
|
|
|
1,014
|
|
|
|
868
|
|
|
|
807
|
|
|
|
704
|
|
|
|
623
|
|
|
|
668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claim payments on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(e) Current years events
|
|
|
460
|
|
|
|
502
|
|
|
|
476
|
|
|
|
342
|
|
|
|
402
|
|
|
|
332
|
|
|
|
277
|
|
|
|
260
|
|
|
|
269
|
|
|
|
258
|
|
|
|
298
|
|
(f) Prior years events
|
|
|
818
|
|
|
|
820
|
|
|
|
652
|
|
|
|
326
|
|
|
|
504
|
|
|
|
463
|
|
|
|
428
|
|
|
|
423
|
|
|
|
418
|
|
|
|
402
|
|
|
|
412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(g) Total payments
|
|
|
1,279
|
|
|
|
1,323
|
|
|
|
1,128
|
|
|
|
668
|
|
|
|
907
|
|
|
|
796
|
|
|
|
706
|
|
|
|
683
|
|
|
|
687
|
|
|
|
661
|
|
|
|
710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(h) Ending net reserves (a + d − g)
|
|
|
3,229
|
|
|
|
3,222
|
|
|
|
3,175
|
|
|
|
2,924
|
|
|
|
2,414
|
|
|
|
2,182
|
|
|
|
1,964
|
|
|
|
1,802
|
|
|
|
1,678
|
|
|
|
1,661
|
|
|
|
1,699
|
|
(i) Unallocated loss adjustment expense reserves
|
|
|
104
|
|
|
|
104
|
|
|
|
103
|
|
|
|
97
|
|
|
|
92
|
|
|
|
87
|
|
|
|
83
|
|
|
|
78
|
|
|
|
76
|
|
|
|
73
|
|
|
|
71
|
|
(j) Reinsurance recoverable on claims reserves
|
|
|
2,046
|
|
|
|
2,020
|
|
|
|
1,976
|
|
|
|
1,929
|
|
|
|
1,894
|
|
|
|
1,632
|
|
|
|
1,515
|
|
|
|
1,363
|
|
|
|
1,261
|
|
|
|
1,235
|
|
|
|
1,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(k) Gross claims reserves (h + i + j)
|
|
$
|
5,380
|
|
|
$
|
5,346
|
|
|
$
|
5,256
|
|
|
$
|
4,951
|
|
|
$
|
4,401
|
|
|
$
|
3,902
|
|
|
$
|
3,562
|
|
|
$
|
3,244
|
|
|
$
|
3,016
|
|
|
$
|
2,969
|
|
|
$
|
3,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments. In common with other insurance
organizations, Old Republic invests most capital and operating
funds in income producing securities. Investments must comply
with applicable insurance laws and regulations which prescribe
the nature, form, quality, and relative amounts of investments
which may be made by insurance companies. Generally, these laws
and regulations permit insurance companies to invest within
varying limitations in state, municipal and federal government
obligations, corporate debt, preferred and common stocks,
certain types of real estate, and first mortgage loans. For many
years, Old Republics investment policy has therefore been
to acquire and retain primarily investment grade, publicly
traded, fixed maturity securities. The investment policy is also
influenced by the terms of the insurance coverages written, by
its expectations as to the timing of claim and benefit payments,
and by income tax considerations. As a consequence of all these
factors, Old Republics invested assets are managed in
consideration of enterprise-wide risk management objectives
intended to assure solid funding of its subsidiaries
long-term obligations to insurance policyholders and other
beneficiaries, as well as evaluations of their long-term effect
on stability of capital accounts. Accordingly, the investment
portfolio contains little or no direct insurance risk-correlated
asset exposures to real estate, mortgage-backed securities,
collateralized debt obligations (CDOs),
derivatives, junk bonds, hybrid securities, or illiquid private
equity investments. In a similar vein, Old Republic does not
engage in hedging transactions or securities lending operations,
nor does it invest in securities whose values are predicated on
non-regulated financial instruments exhibiting amorphous or
unfunded counter-party risk attributes.
Management considers investment grade securities to be those
rated by Standard & Poors Corporation
(Standard & Poors) or Moodys
Investors Service, Inc. (Moodys) that fall
within the top four rating categories, or securities which are
not rated but have characteristics similar to securities so
rated. Old Republic had no bond or note investments in default
as to principal
and/or
interest at December 31, 2009 and 2008. The status and fair
value changes of each investment is reviewed on at least a
quarterly basis, and estimates of
other-than-temporary
impairments in the portfolios value are evaluated and
established at each balance sheet date. Substantially all of Old
Republics invested assets as of December 31, 2009
have been classified as available for sale pursuant
to the existing investment policy.
Old Republics investment policies are not designed to
maximize or emphasize the realization of investment gains. The
combination of gains and losses from sales or impairments of
securities are reflected as realized gains and losses in the
income statement. Dispositions of securities result principally
from scheduled maturities of bonds and notes and sales of fixed
income and equity securities available for sale. Dispositions of
securities at a realized gain or loss reflect such factors as
ongoing assessments of issuers business prospects,
rotation among industry sectors, changes in credit quality, and
tax planning considerations.
90
The following tables show invested assets at the end of the last
two years, together with investment income for each of the last
three years:
Consolidated
Investments
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
($ in Millions)
|
|
|
Available for Sale
|
|
|
|
|
|
|
|
|
Fixed Maturity Securities:
|
|
|
|
|
|
|
|
|
U.S. & Canadian Governments
|
|
$
|
974.0
|
|
|
$
|
694.4
|
|
Tax-Exempt
|
|
|
2,344.0
|
|
|
|
2,365.7
|
|
Corporate
|
|
|
5,008.7
|
|
|
|
4,346.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,326.8
|
|
|
|
7,406.9
|
|
Equity Securities
|
|
|
502.9
|
|
|
|
350.3
|
|
Short-term Investments
|
|
|
826.7
|
|
|
|
888.0
|
|
Miscellaneous Investments
|
|
|
24.0
|
|
|
|
29.7
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
|
9,680.5
|
|
|
|
8,675.0
|
|
Other Investments
|
|
|
7.8
|
|
|
|
7.8
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
9,688.4
|
|
|
$
|
8,682.9
|
|
|
|
|
|
|
|
|
|
|
Sources
of Consolidated Investment Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in Millions)
|
|
|
Fixed Maturity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable Interest
|
|
$
|
285.5
|
|
|
$
|
259.1
|
|
|
$
|
247.7
|
|
Tax-Exempt Interest
|
|
|
83.0
|
|
|
|
86.1
|
|
|
|
85.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
368.6
|
|
|
|
345.2
|
|
|
|
332.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities Dividends
|
|
|
7.4
|
|
|
|
13.3
|
|
|
|
16.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Investment Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on Short-term Investments
|
|
|
5.4
|
|
|
|
16.5
|
|
|
|
28.2
|
|
Sundry
|
|
|
4.9
|
|
|
|
5.6
|
|
|
|
6.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.4
|
|
|
|
22.1
|
|
|
|
34.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Investment Income
|
|
|
386.5
|
|
|
|
380.8
|
|
|
|
383.8
|
|
Less: Investment Expenses(a)
|
|
|
3.0
|
|
|
|
3.4
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Income
|
|
$
|
383.5
|
|
|
$
|
377.3
|
|
|
$
|
379.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Investment expenses consist primarily of personnel costs,
investment management and custody service fees, and interest
incurred on funds held of $.1 million, $.6 million,
and $1.1 million for the years ended December 31,
2009, 2008, and 2007 respectively. |
The independent credit quality ratings and maturity distribution
for Old Republics consolidated fixed maturity investments,
excluding short-term investments, at the end of the last two
years are shown in the following tables. These investments,
$8.3 billion and $7.4 billion at December 31,
2009 and 2008, respectively, represented approximately 59% and
56%, respectively, of consolidated assets, and 81% and 78%,
respectively, of consolidated liabilities as of such dates.
91
Credit
Quality Ratings of Fixed Maturity Securities(b)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(% of total portfolio)
|
|
|
Aaa
|
|
|
22.3
|
%
|
|
|
20.4
|
%
|
Aa
|
|
|
20.3
|
|
|
|
24.5
|
|
A
|
|
|
30.3
|
|
|
|
31.4
|
|
Baa
|
|
|
25.7
|
|
|
|
22.0
|
|
|
|
|
|
|
|
|
|
|
Total investment grade
|
|
|
98.6
|
|
|
|
98.3
|
|
All other(c)
|
|
|
1.4
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(b) |
|
Credit quality ratings used are those assigned primarily by
Moodys for U.S. Governments, Agencies and Corporate
issuers and by Standard & Poors
(S&P) for U.S. and Canadian Municipal issuers,
which are converted to equivalent Moodys ratings
classifications. In the second quarter of 2009, Old Republic
changed its source of credit quality ratings from Moodys
to S&P for U.S. Municipal issuers due to their wider credit
coverage. The December 31, 2008 disclosures have been
restated to be comparable to the current period classifications.
The effect of such change moderately improved the previously
reported credit quality ratings. |
|
(c) |
|
All other includes non investment grade or non rated
issuers. |
Age Distribution
of Fixed Maturity Securities
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(% of total portfolio)
|
|
|
Maturity Ranges:
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
|
9.3
|
%
|
|
|
14.0
|
%
|
Due after one year through five years
|
|
|
55.0
|
|
|
|
51.0
|
|
Due after five years through ten years
|
|
|
34.9
|
|
|
|
34.7
|
|
Due after ten years through fifteen years
|
|
|
.8
|
|
|
|
.3
|
|
Due after fifteen years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Average Maturity in Years
|
|
|
4.4
|
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
Marketing. Commercial automobile (trucking),
workers compensation and general liability insurance
underwritten for business enterprises and public entities is
marketed primarily through independent insurance agents and
brokers with the assistance of Old Republics trained
sales, underwriting, actuarial, and loss control personnel. The
remaining property and liability commercial insurance written by
Old Republic is obtained through insurance agents or brokers who
are independent contractors and generally represent other
insurance companies, and by direct sales. No single source
accounted for over 10% of Old Republics premium volume in
2009.
Traditional primary mortgage insurance is marketed primarily
through a direct sales force which calls on mortgage bankers,
brokers, commercial banks, savings institutions and other
mortgage originators. No sales commissions or other forms of
remuneration are paid to the lending institutions or others for
the procurement or development of business. The Mortgage
Guaranty segments ten largest customers were responsible
for 47.6%, 50.4%, and 49.5% of traditional primary new insurance
written in 2009, 2008, and 2007, respectively. The largest
single customer accounted for 12.8% of traditional primary new
insurance written in 2009 compared to 15.6% and 9.8% in 2008 and
2007, respectively.
92
A substantial portion of Old Republics title insurance
business is referred to it by title insurance agents, builders,
lending institutions, real estate developers, realtors, and
lawyers. Title insurance and related real estate settlement
products are sold through 242 Company offices and through
agencies and underwritten title companies in Puerto Rico, the
District of Columbia and all 50 states. The issuing agents
are authorized to issue commitments and title insurance policies
based on their own search and examination, or on the basis of
abstracts and opinions of approved attorneys. Policies are also
issued through independent title companies (not themselves title
insurers) pursuant to underwriting agreements. These agreements
generally provide that the agency or underwritten company may
cause title policies of Old Republic to be issued, and the
latter is responsible under such policies for any payments to
the insured. Typically, the agency or underwritten title company
deducts the major portion of the title insurance charge to the
customer as its commission for services. During 2009,
approximately 61% of title insurance premiums and fees were
accounted for by policies issued by agents and underwritten
title companies.
Title insurance premium and fee revenue is closely related to
the level of activity in the real estate market. The volume of
real estate activity is affected by the availability and cost of
financing, population growth, family movements and other
factors. Also, the title insurance business is seasonal. During
the winter months, new building activity is reduced and,
accordingly, Old Republic produces less title insurance business
relative to new construction during such months than during the
rest of the year. The most important factors, insofar as Old
Republics title business is concerned, however, are the
rates of activity in the resale and refinance markets for
residential properties.
The personal contacts, relationships, reputations, and
intellectual capital of Old Republics key executives are a
vital element in obtaining and retaining much of its business.
Many of Old Republics customers produce large amounts of
premiums and therefore warrant substantial levels of top
executive attention and involvement. In this respect, Old
Republics mode of operation is similar to that of
professional reinsurers and commercial insurance brokers, and
relies on the marketing, underwriting, and management skills of
relatively few key people for large parts of its business.
Several types of insurance coverages underwritten by Old
Republic, such as consumer credit indemnity, title, and mortgage
guaranty insurance, are affected in varying degrees by changes
in national economic conditions. During periods when housing
activity or mortgage lending are constrained by any combination
of rising interest rates, tighter mortgage underwriting
guidelines, falling home prices, excess housing supply
and/or
economic recession operating
and/or claim
costs pertaining to such coverages tend to rise
disproportionately to revenues and can result in underwriting
losses and reduced levels of profitability.
At least one Old Republic general insurance subsidiary is
licensed to do business in each of the 50 states, the
District of Columbia, Puerto Rico, Virgin Islands, Guam, and
each of the Canadian provinces; mortgage insurance subsidiaries
are licensed in 50 states and the District of Columbia;
title insurance operations are licensed to do business in
50 states, the District of Columbia, Puerto Rico and Guam.
Consolidated direct premium volume distributed among the various
geographical regions shown was as follows for the past three
years:
Geographical
Distribution of Consolidated Direct Premiums Written
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
United States:
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast
|
|
|
9.0
|
%
|
|
|
9.4
|
%
|
|
|
10.1
|
%
|
Mid-Atlantic
|
|
|
7.7
|
|
|
|
7.3
|
|
|
|
8.6
|
|
Southeast
|
|
|
19.6
|
|
|
|
20.0
|
|
|
|
20.6
|
|
Southwest
|
|
|
12.6
|
|
|
|
12.7
|
|
|
|
12.2
|
|
East North Central
|
|
|
12.9
|
|
|
|
12.9
|
|
|
|
12.3
|
|
West North Central
|
|
|
12.9
|
|
|
|
13.5
|
|
|
|
12.4
|
|
Mountain
|
|
|
8.8
|
|
|
|
8.3
|
|
|
|
8.2
|
|
Western
|
|
|
13.8
|
|
|
|
13.4
|
|
|
|
13.0
|
|
Foreign (Principally Canada)
|
|
|
2.7
|
|
|
|
2.5
|
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93
Reserves, Reinsurance, and Retrospective
Adjustments. Old Republics insurance
subsidiaries establish reserves for unearned premiums, reported
claims, claims incurred but not reported, and claim adjustment
expenses, as required in the circumstances. Such reserves are
based on regulatory accounting requirements and generally
accepted accounting principles. In accordance with insurance
industry practices, claim reserves are based on estimates of the
amounts that will be paid over a period of time and changes in
such estimates are reflected in the financial statements of the
periods during which they occur. See General Insurance
Claim Reserves herein.
To maintain premium production within its capacity and limit
maximum losses and risks for which it might become liable under
its policies, Old Republic, as is the practice in the insurance
industry, may cede a portion or all of its premiums and
liabilities on certain classes of insurance, individual
policies, or blocks of business to other insurers and
reinsurers. Although the ceding of insurance does not generally
discharge an insurer from its direct liability to a
policyholder, it is industry practice to establish the reinsured
part of risks as the liability of the reinsurer. Old Republic
also employs retrospective premium adjustments and risk sharing
arrangements for parts of its business in order to minimize
losses for which it might become liable under its insurance
policies, and to afford its customers or producers a degree of
participation in the risks and rewards associated with such
business. Under retrospective arrangements, Old Republic
collects additional premiums if losses are greater than
originally anticipated and refunds a portion of original
premiums if loss costs are lower. Pursuant to risk sharing
arrangements, Old Republic adjusts production costs or premiums
retroactively to likewise reflect deviations from originally
expected loss costs. The amount of premium, production costs and
other retrospective adjustments which may be made is either
limited or unlimited depending on Old Republics evaluation
of risks and related contractual arrangements. To the extent
that any reinsurance companies, retrospectively rated risks, or
producers might be unable to meet their obligations under
existing reinsurance, retrospective insurance and production
agreements, Old Republic would be liable for the defaulted
amounts. In these regards, however, Old Republic generally
protects itself by withholding funds, by securing indemnity
agreements, by obtaining surety bonds, or by otherwise
collateralizing such obligations through irrevocable letters of
credit, cash, or securities.
The following table displays Old Republics General
Insurance liabilities reinsured by its ten largest reinsurers as
of December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance
|
|
|
|
|
|
% of Total
|
|
|
|
A.M.
|
|
Recoverable
|
|
|
Total
|
|
|
Consolidated
|
|
|
|
Best
|
|
On Paid
|
|
|
On Claims
|
|
|
Exposure to
|
|
|
Reinsured
|
|
Reinsurer
|
|
Rating
|
|
Claims
|
|
|
Reserves
|
|
|
Reinsurer
|
|
|
Liabilities
|
|
|
|
($ in Millions)
|
|
|
Munich Reinsurance America, Inc.
|
|
A+
|
|
$
|
10.1
|
|
|
$
|
664.5
|
|
|
$
|
674.7
|
|
|
|
28.3
|
%
|
Swiss Reinsurance America Corporation
|
|
A
|
|
|
3.4
|
|
|
|
179.1
|
|
|
|
182.5
|
|
|
|
7.7
|
|
National WC Reinsurance Pool
|
|
unrated
|
|
|
3.2
|
|
|
|
102.5
|
|
|
|
105.8
|
|
|
|
4.4
|
|
General Reinsurance Corporation
|
|
A++
|
|
|
1.8
|
|
|
|
83.7
|
|
|
|
85.5
|
|
|
|
3.6
|
|
Muenchener Ruckversicherungs
|
|
A+
|
|
|
3.9
|
|
|
|
79.0
|
|
|
|
83.0
|
|
|
|
3.5
|
|
School Boards Insurance Co of PA, Inc.
|
|
A−
|
|
|
1.0
|
|
|
|
63.9
|
|
|
|
65.0
|
|
|
|
2.7
|
|
Westport Insurance Corporation
|
|
A
|
|
|
.5
|
|
|
|
59.5
|
|
|
|
60.0
|
|
|
|
2.5
|
|
Kentucky Workers Compensation Reins Pool for Coal Miners
Risks
|
|
unrated
|
|
|
2.0
|
|
|
|
53.3
|
|
|
|
55.3
|
|
|
|
2.3
|
|
Transatlantic Reinsurance Company
|
|
A
|
|
|
(.1
|
)
|
|
|
46.5
|
|
|
|
46.3
|
|
|
|
1.9
|
|
Hannover Ruckversicherungs
|
|
A
|
|
|
.3
|
|
|
|
44.5
|
|
|
|
44.8
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
26.4
|
|
|
$
|
1,376.9
|
|
|
$
|
1,403.3
|
|
|
|
58.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Mortgage Guaranty Groups total claims exposure to its
largest reinsurer, Balboa Reinsurance Company, was
$133.2 million, which represented 5.6% of total
consolidated reinsured liabilities as of December 31, 2009.
Reinsured liabilities of the Title Insurance Group and
small life and health insurance operations are not material.
Reinsurance recoverable asset balances represent amounts due
from or credited by assuming reinsurers for paid and unpaid
claims and policy reserves. Such reinsurance balances that are
recoverable from non-admitted foreign and certain other
reinsurers such as captive insurance companies owned by assureds
or business producers,
94
as well as similar balances or credits arising from policies
that are retrospectively rated or subject to assureds high
deductible retentions are substantially collateralized by
letters of credit, securities, and other financial instruments.
Old Republic evaluates on a regular basis the financial
condition of its assuming reinsurers and assureds who purchase
its retrospectively rated or high deductible policies. Estimates
of unrecoverable amounts are included in Old Republics net
claim and claim expense reserves since reinsurance,
retrospectively rated and self-insured deductible policies and
contracts do not relieve Old Republic from its direct
obligations to assureds or their beneficiaries.
Old Republics reinsurance practices with respect to
portions of its business also result from its desire to bring
its sponsoring organizations and customers into some degree of
joint venture or risk sharing relationship. Old Republic may, in
exchange for a ceding commission, reinsure up to 100% of the
underwriting risk, and the premium applicable to such risk, to
insurers owned by or affiliated with lending institutions,
financial and other intermediaries whose customers are insured
by Old Republic, or individual customers who have formed captive
insurance companies. The ceding commissions received compensate
Old Republic for performing the direct insurers functions
of underwriting, actuarial, claim settlement, loss control,
legal, reinsurance, and administrative services to comply with
local and federal regulations, and for providing appropriate
risk management services.
Remaining portions of Old Republics business are reinsured
in most instances with independent insurance or reinsurance
companies pursuant to excess of loss agreements. Except as noted
in the following paragraph, reinsurance protection on property
and liability coverages generally limits the net loss on most
individual claims to a maximum of: $4.1 million for
workers compensation; $2.6 million for commercial
auto liability; $2.6 million for general liability;
$8.0 million for executive protection
(directors & officers and errors &
omissions); $2.0 million for aviation; and
$2.6 million for property coverages. Roughly 34% of the
mortgage guaranty traditional primary insurance in force is
subject to lender sponsored captive reinsurance arrangements
structured primarily on an excess of loss basis. All bulk and
other mortgage guaranty insurance risk in force is retained.
Exclusive of reinsurance, the average direct primary mortgage
guaranty exposure is approximately (in whole dollars) $38,500
per insured loan. Title insurance risk assumptions are currently
limited to a maximum of $500.0 million as to any one
policy. The vast majority of title policies issued, however,
carry exposures of less than $1.0 million.
Since January 1, 2005, Old Republic has had maximum
reinsurance coverage of up to $200.0 million for its
workers compensation exposures. Pursuant to regulatory
requirements, however, all workers compensation primary
insurers such as Old Republic remain liable for unlimited
amounts in excess of reinsured limits. Other than the
substantial concentration of workers compensation losses
caused by the September 11, 2001 terrorist attack on
America, to the best of Old Republics knowledge there had
not been a similar accumulation of claims in a single location
from a single occurrence prior to that event. Nevertheless, the
possibility continues to exist that non-reinsured losses could,
depending on a wide range of severity and frequency assumptions,
aggregate several hundred million dollars to an insurer such as
Old Republic. Such aggregation of losses could occur in the
event of a catastrophe such as an earthquake that could lead to
the death or injury of a large number of employees concentrated
in a single facility such as a high rise building.
As a result of the September 11, 2001 terrorist attack on
America, the reinsurance industry eliminated coverage from
substantially all contracts for claims arising from acts of
terrorism. Primary insurers like Old Republic thus became fully
exposed to such claims. Late in 2002, the Terrorism Risk
Insurance Act of 2002 (the TRIA) was signed into
law, immediately establishing a temporary federal reinsurance
program administered by the Secretary of the Treasury. The
program applied to insured commercial property and casualty
losses resulting from an act of terrorism, as defined in the
TRIA. Congress extended and modified the program in late 2005
through the Terrorism Risk Insurance Revision and Extension Act
of 2005 (the TRIREA). TRIREA expired on
December 31, 2007. Congress enacted a revised program in
December 2007 through the Terrorism Risk Insurance Program
Reauthorization Act of 2007 (the TRIPRA), a seven
year extension through December 31, 2014. The TRIA
automatically voided all policy exclusions which were in effect
for terrorism related losses and obligated insurers to offer
terrorism coverage with most commercial property and casualty
insurance lines. The TRIREA revised the definition of
property and casualty insurance to exclude
commercial automobile, burglary and theft, surety, professional
liability and farm owners multi-peril insurance. TRIPRA
did not make any further changes to the definition of property
and casualty insurance, however, it does include domestic acts
of terrorism within the scope of the program. Although insurers
are permitted to charge an additional premium for terrorism
coverage, insureds may
95
reject the coverage. Under TRIPRA, the programs protection
is not triggered for losses arising from an act of terrorism
until the industry first suffers losses of $100 billion in
the aggregate during any one year. Once the program trigger is
met, the program will pay 85% of an insurers terrorism
losses that exceed that individual insurers deductible.
The insurers deductible is 20% of direct earned premium on
property and casualty insurance. Insurers may reinsure that
portion of the risk they retain under the program. Effective
January 1, 2008, Old Republic reinsured limits of
$198.0 million excess of $2.0 million for claims
arising from certain acts of terrorism for casualty clash
coverage and catastrophe workers compensation liability
insurance coverage.
Competition. The insurance business is highly
competitive and Old Republic competes with many stock and mutual
insurance companies. Many of these competitors offer more
insurance coverages and have substantially greater financial
resources than Old Republic. The rates charged for many of the
insurance coverages in which Old Republic specializes, such as
workers compensation insurance, other property and
liability insurance and title insurance, are primarily regulated
by the states and are also subject to extensive competition
among major insurance organizations. The basic methods of
competition available to Old Republic, aside from rates, are
service to customers, expertise in tailoring insurance programs
to the specific needs of its clients, efficiency and flexibility
of operations, personal involvement by its key executives, and,
as to title insurance, accuracy and timely delivery of evidences
of title issued. Mortgage insurance companies also compete by
providing contract underwriting services to lenders, enabling
the latter to improve the efficiency of their operations by
outsourcing all or part of their mortgage loan underwriting
processes. For certain types of coverages, including loan credit
indemnity and mortgage guaranty insurance, Old Republic also
competes in varying degrees with the Federal Housing
Administration (FHA) and the Veterans Administration
(VA). In recent years, the FHAs market share
of insured mortgages has increased significantly, mostly due to
the more restrictive underwriting guidelines and premium rate
increases imposed by private mortgage insurers. Nevertheless,
Old Republics insurance subsidiaries continue to compete
with the FHA and VA by offering greater flexibility in regards
to offered coverage levels, premium rate structures, and
underwriting processes. Old Republic believes its experience and
expertise have enabled it to develop a variety of specialized
insurance programs and related services for its customers, and
to secure state insurance departments approval of these
programs.
Government Regulation. In common with all
insurance companies, Old Republics insurance subsidiaries
are subject to the regulation and supervision of the
jurisdictions in which they do business. The method of such
regulation varies, but, generally, regulation has been delegated
to state insurance commissioners who are granted broad
administrative powers relating to: the licensing of insurers and
their agents; the nature of and limitations on investments;
approval of policy forms; reserve requirements; and trade
practices. In addition to these types of regulation, many
classes of insurance, including most of Old Republics
insurance coverages, are subject to rate regulations which
require that rates be reasonable, adequate, and not unfairly
discriminatory.
The FNMA and the FHLMC sometimes also referred to as Government
Sponsored Enterprises (GSEs) have various qualifying
requirements for private mortgage guaranty insurers which write
mortgage insurance on loans acquired by the FNMA and FHLMC from
mortgage lenders. These requirements call for compliance with
the applicable laws and regulations of the insurers
domiciliary state and those states in which it conducts business
and maintenance of contingency reserves in accordance with
applicable state laws. The requirements also contain guidelines
pertaining to captive reinsurance transactions. The GSEs also
place additional restrictions on qualified insurers who fail to
maintain the equivalent of a AA financial strength rating from
at least two nationally recognized statistical rating agencies.
Since 2008, substantially all national mortgage guaranty
insurance companies, including Old Republics insurance
subsidiaries, have experienced ratings downgrades below AA. As a
result, all of these companies have been required to submit
capital remediation plans to FNMA and FHLMC, and continue as
approved mortgage guaranty insurers for loans purchased by the
GSEs.
The majority of states have also enacted insurance holding
company laws which require registration and periodic reporting
by insurance companies controlled by other corporations licensed
to transact business within their respective jurisdictions. Old
Republics insurance subsidiaries are subject to such
legislation and are registered as controlled insurers in those
jurisdictions in which such registration is required. Such
legislation varies from state to state but typically requires
periodic disclosure concerning the corporation which controls
the registered insurers, or ultimate holding company, and all
subsidiaries of the ultimate holding company, and prior approval
of certain intercorporate transfers of assets (including
payments of dividends in excess of specified amounts by the
insurance
96
subsidiary) within the holding company system. Each state has
established minimum capital and surplus requirements to conduct
an insurance business. All of Old Republics subsidiaries
meet or exceed these requirements, which vary from state to
state.
Employees. As of December 31, 2009, Old
Republic and its subsidiaries employed approximately
5,900 persons on a full time basis. A majority of eligible
full time employees participate in various pension or similar
plans which provide benefits payable upon retirement. Eligible
employees are also covered by hospitalization and major medical
insurance, group life insurance, and various savings, profit
sharing, and deferred compensation plans. Old Republic considers
its employee relations to be good.
Website access. Old Republic files various
reports with the U.S. Securities and Exchange Commission
(SEC), including its annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
proxy statements, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act. Old Republics filings are available for
viewing
and/or
copying at the SECs Public Reference Room located at
450 Fifth Street, NW., Washington, DC 20549. Information
regarding the operation of the Public Reference Room can be
obtained by calling
1-800-SEC-0330.
Old Republics reports are also available by visiting the
SECs internet website
(http://www.sec.gov)
and accessing its EDGAR database to view or print copies of the
electronic versions of Old Republics reports.
Additionally, Old Republics reports can be obtained, free
of charge, by visiting its internet website
(http://www.oldrepublic.com),
selecting Investors then SEC Filings to view or
print copies of the electronic versions of Old Republics
reports. The contents of Old Republics internet website
are not intended to be, nor should they be considered
incorporated by reference in any of the reports Old Republic
files with the SEC.
Properties
The principal executive offices of Old Republic are located in
the Old Republic Building in Chicago, Illinois. This
Company-owned building contains 151,000 square feet of
floor space of which approximately 54% is occupied by Old
Republic, and the remainder is leased to others. In addition to
its Chicago building, a subsidiary of the Title Insurance
Group partially occupies its owned headquarters building in
Minneapolis, Minnesota. This building contains
110,000 square feet of floor space of which approximately
68% is occupied by the Old Republic National
Title Insurance Company. The remainder of the building is
leased to others. Eight smaller buildings are owned by Old
Republic and its subsidiaries in various parts of the nation and
are primarily used for its business. The carrying value of all
owned buildings and related land at December 31, 2009 was
$36.1 million.
Certain other operations of Old Republic and its subsidiaries
are directed from leased premises. See Note 4(b) of the
Notes to Consolidated Financial Statements for a summary of all
material lease obligations.
Legal
Proceedings
Legal proceedings against Old Republic and its subsidiaries
routinely arise in the normal course of business and usually
pertain to claim matters related to insurance policies and
contracts issued by its insurance subsidiaries. Other,
non-routine legal proceedings which may prove to be material to
Old Republic or a subsidiary are discussed below.
Purported class action lawsuits are pending against Old
Republics principal title insurance subsidiary, Old
Republic National Title Insurance Company
(ORNTIC), in state or federal courts in five
states Connecticut (Castro et al. v.
ORNTIC, U.S. District Court of Connecticut, filed
May 19, 2006), New Jersey (Barandas et al. v.
ORNTIC, U.S. District Court, District Court of New
Jersey, filed April 13, 2006), Ohio (Chura et al. v.
ORNTIC, Court of Common Pleas of Cuyahoga County, Ohio,
filed December 1, 2002), Pennsylvania (Allen et al.
v. ORNTIC, U.S. District Court, Eastern District,
Pennsylvania, filed June 8, 2006; Markocki et al. v.
ORNTIC, U.S. District Court, Eastern District,
Pennsylvania, filed June 8, 2006), and Texas (Ahmad et
al. v. ORNTIC, U.S. District Court, Northern
District, Texas, Dallas Division, filed February 8, 2008).
The plaintiffs allege that ORNTIC failed to give consumers
reissue
and/or
refinance credits on the premiums charged for title insurance
covering mortgage refinancing transactions, as required by rate
schedules filed by ORNTIC or by state rating bureaus with the
state insurance regulatory authorities. The suits in
Pennsylvania and Texas also allege violations of the federal
Real Estate Settlement Procedures Act (RESPA).
Substantially similar lawsuits are also pending
97
against other unaffiliated title insurance companies in these
and other states as well, and additional lawsuits based upon
similar allegations could be filed against ORNTIC in the future.
Classes have been certified in the New Jersey and Pennsylvania
actions. Settlement agreements have been reached in the
Connecticut and New Jersey actions and are not expected to cost
ORNTIC more than $2.9 million and $2.2 million,
respectively, including attorneys fees and administrative
costs.
Since early February 2008, some 80 purported consumer class
action lawsuits have been filed against the title
industrys principal title insurance companies, their
subsidiaries and affiliates, and title insurance rating bureaus
or associations in at least 10 states. The suits are
substantially identical in alleging that the defendant title
insurers engaged in illegal price-fixing agreements to set
artificially high premium rates and conspired to create premium
rates which the state insurance regulatory authorities could not
evaluate and therefore, could not adequately regulate. A number
of them have been dismissed and others consolidated.
Approximately 57 remain nationwide. ORNTIC is currently among
the named defendants in 35 of these actions in 5 states;
its affiliate, American Guaranty Title Insurance Company is
a named defendant in 10 of the consolidated actions in
1 state; and the Company is a named defendant in 8 of the
actions in 1 state. No class has yet been certified in any
of these suits against Old Republic and ORNTIC, and none of the
actions against them allege RESPA violations.
National class action suits have been filed against Old
Republics subsidiary, Old Republic Home Protection Company
(ORHP) in the California Superior Court,
San Diego, and the U.S. District Court in Birmingham,
Alabama. The California suit has been filed on behalf of all
persons who made a claim under an ORHP home warranty contract
from March 6, 2003 to the present. The suit alleges breach
of contract, breach of the implicit covenant of good faith and
fair dealing, violations of certain California consumer
protection laws and misrepresentation arising out of ORHPs
alleged failure to adopt and implement reasonable standards for
the prompt investigation and processing of claims under its home
warranty contracts. The suit seeks unspecified damages
consisting of the rescission of the class members
contracts, restitution of all sums paid by the class members,
punitive damages, declaratory and injunctive relief. No class
has been certified in either action. ORHP has removed the action
to the U.S. District Court for the Southern District of
California. The Alabama suit alleges that ORHP pays fees to the
real estate brokers who market its home warranty contracts and
that the payment of such fees is in violation of
Section 8(a) of RESPA. The suit seeks unspecified damages,
including treble damages under RESPA.
On December 19, 2008, Old Republic Insurance Company and
Old Republic Insured Credit Services, Inc. (Old
Republic) filed suit against Countrywide Bank FSB,
Countrywide Home Loans, Inc. (Countrywide) and Bank
of New York Mellon, BNY Mellon Trust of Delaware in the Circuit
Court, Cook County, Illinois seeking a declaratory judgment to
rescind or terminate various credit indemnity policies issued to
insure home equity loans and home equity lines of credit which
Countrywide had securitized or held for its own account. In
February of 2009 Countrywide filed a counterclaim alleging a
breach of contract, bad faith and seeking a declaratory judgment
challenging the factual and procedural bases that Old Republic
has relied upon to deny or rescind coverage for individual
defaulted loans under those policies. To date, Old Republic has
rescinded or denied coverage on more than 11,500 defaulted
loans, based upon material misrepresentations either by
Countrywide as to the credit characteristics of the loans or by
the borrowers in their loan applications.
On December 31, 2009, two of Old Republics mortgage
insurance subsidiaries, Republic Mortgage Insurance Company and
Republic Mortgage Insurance Company of North Carolina (together
RMIC) filed a Complaint for Declaratory Judgment in
the Supreme Court of the State of New York, County of New York,
against Countrywide Financial Corporation, Countrywide Home
Loans, Inc., The Bank of New York Mellon Trust Company,
N.A., BAC Home Loans Servicing, LP, and Bank of America,
N.A. as successor in interest to Countrywide Bank, N.A.
(together, Countrywide). The suit relates to five
mortgage insurance master policies (the Policies)
issued by RMIC to Countrywide or to The Bank of New York Mellon
Trust Company as co-trustee for trusts containing
securitized mortgage loans that were originated or purchased by
Countrywide. RMIC has rescinded its mortgage insurance coverage
on over 1,500 of the loans originally covered under the Policies
based upon material misrepresentations of the borrowers in their
loan applications or the negligence of Countrywide in its loan
underwriting practices or procedures. Each of the coverage
rescissions occurred after a borrower had defaulted and RMIC
reviewed the claim and loan file submitted by Countrywide. The
suit seeks the Courts review and interpretation of the
Policies incontestability provisions and its validation of
RMICs investigation procedures with respect to the claims
and underlying loan files.
98
On January 29, 2010, in response to RMICs suit,
Countrywide served RMIC with a demand for arbitration under the
arbitration clauses of the same Policies. The demand proposes
arbitration in Los Angeles, California, and raises largely the
same issues as those raised in RMICs suit against
Countrywide, as well as Countrywides and RMICs
compliance with the terms, provisions and conditions of the
Policies. The demand includes a prayer for punitive,
compensatory and consequential damages.
Except in the Connecticut and New Jersey actions against the
title companies, where settlement agreements have been approved,
the ultimate impact of these lawsuits and the arbitration, all
of which seek unquantified damages, attorneys fees and
expenses, is uncertain and not reasonably estimable. Old
Republic and its subsidiaries intend to defend vigorously
against each of the aforementioned actions. Although Old
Republic does not believe that these lawsuits will have a
material adverse effect on its consolidated financial condition,
results of operations or cash flows, there can be no assurance
in those regards.
Merger
Sub
Merger Sub, a Pennsylvania corporation, is a wholly owned
subsidiary of Old Republic that was formed solely for the
purpose of effecting the merger. Merger Sub has not conducted
and will not conduct any business prior to the merger. Aldo C.
Zucaro is the president, chief executive officer and a director
of Merger Sub. Mr. Zucaro also serves as the chairman of
the board of directors, president and chief executive officer of
Old Republic. Karl W. Mueller is the senior vice president and
chief financial officer, treasurer and a director of Merger Sub.
Mr. Mueller also serves as senior vice president and chief
financial officer of Old Republic. Spencer LeRoy is the senior
vice president, general counsel, secretary and a director of
Merger Sub. Mr. LeRoy is also the senior vice president,
general counsel and secretary of Old Republic. R. Scott Rager is
the senior vice president and strategic planning officer of
Merger Sub. Mr. Rager also serves as the senior vice
president and strategic planning officer of Old Republic.
Merger Subs principal executive offices are located at 307
North Michigan Avenue, Chicago, Illinois 60601 and its telephone
number is
(312) 346-8100.
Important business and financial information about Old Republic
is incorporated by reference into this proxy
statement/prospectus. See Where You Can Find More
Information below.
99
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL DATA OF OLD REPUBLIC
Set forth below is certain selected historical consolidated
financial data relating to Old Republic. The financial data has
been derived from the unaudited financial statements filed as
part of Old Republics Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2010 and the audited
financial statements filed as part of Old Republics Annual
Report on
Form 10-K
for the year ended December 31, 2009. This financial data
should be read in conjunction with the financial statements and
the related notes and other financial information contained in
such financial statements, which are attached to this proxy
statement/prospectus, see Index to Financial Statements of
Old Republic International Corporation. More comprehensive
financial information, including managements discussion
and analysis of Old Republics financial condition and
results of operations, is contained later in this proxy
statement/prospectus under the heading Old Republic
Managements Discussion and Analysis of Financial Condition
and Results of Operations. The following summary is
qualified in its entirety by reference to such other disclosure
and all of the financial information and notes contained therein.
Selected
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in millions, except share data)
|
|
|
FINANCIAL POSITION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Invested Assets(a)
|
|
$
|
9,985.9
|
|
|
$
|
9,052.4
|
|
|
$
|
9,879.0
|
|
|
$
|
8,855.1
|
|
|
$
|
8,924.0
|
|
|
$
|
8,230.8
|
|
|
$
|
7,394.1
|
|
Other Assets
|
|
|
4,254.9
|
|
|
|
4,241.1
|
|
|
|
4,310.9
|
|
|
|
4,410.9
|
|
|
|
4,366.5
|
|
|
|
4,381.4
|
|
|
|
4,149.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
14,240.9
|
|
|
$
|
13,293.5
|
|
|
$
|
14,190.0
|
|
|
$
|
13,266.0
|
|
|
$
|
13,290.6
|
|
|
$
|
12,612.2
|
|
|
$
|
11,543.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities, Other than Debt
|
|
$
|
9,897.8
|
|
|
$
|
9,429.0
|
|
|
$
|
9,951.8
|
|
|
$
|
9,292.6
|
|
|
$
|
8,684.9
|
|
|
$
|
8,098.6
|
|
|
$
|
7,376.4
|
|
Debt
|
|
|
347.2
|
|
|
|
221.1
|
|
|
|
346.7
|
|
|
|
233.0
|
|
|
|
64.1
|
|
|
|
144.3
|
|
|
|
142.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
10,245.0
|
|
|
|
9,650.2
|
|
|
|
10,298.6
|
|
|
|
9,525.7
|
|
|
|
8,749.0
|
|
|
|
8,243.0
|
|
|
|
7,519.1
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shareholders Equity
|
|
|
3,995.8
|
|
|
|
3,643.2
|
|
|
|
3,891.4
|
|
|
|
3,740.3
|
|
|
|
4,541.6
|
|
|
|
4,369.2
|
|
|
|
4,024.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
14,240.9
|
|
|
$
|
13,293.5
|
|
|
$
|
14,190.0
|
|
|
$
|
13,266.0
|
|
|
$
|
13,290.6
|
|
|
$
|
12,612.2
|
|
|
$
|
11,543.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capitalization(b)
|
|
$
|
4,343.1
|
|
|
$
|
3,864.4
|
|
|
$
|
4,238.2
|
|
|
$
|
3,973.4
|
|
|
$
|
4,605.7
|
|
|
$
|
4,513.5
|
|
|
$
|
4,166.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended March 31,
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
RESULTS OF OPERATIONS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Premiums and Fees Earned
|
|
$
|
828.5
|
|
|
$
|
777.4
|
|
|
$
|
3,388.9
|
|
|
$
|
3,318.1
|
|
|
$
|
3,601.2
|
|
|
$
|
3,400.5
|
|
|
$
|
3,386.9
|
|
Net Investment and Other Income
|
|
|
101.0
|
|
|
|
101.0
|
|
|
|
408.3
|
|
|
|
406.0
|
|
|
|
419.3
|
|
|
|
374.6
|
|
|
|
354.0
|
|
Realized Investment Gains (Losses)
|
|
|
2.9
|
|
|
|
|
|
|
|
6.3
|
|
|
|
(486.4
|
)
|
|
|
70.3
|
|
|
|
19.0
|
|
|
|
64.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
|
932.6
|
|
|
|
878.5
|
|
|
|
3,803.6
|
|
|
|
3,237.7
|
|
|
|
4,091.0
|
|
|
|
3,794.2
|
|
|
|
3,805.9
|
|
Benefits, Claims, and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement Expenses
|
|
|
494.1
|
|
|
|
652.0
|
|
|
|
2,598.9
|
|
|
|
2,715.7
|
|
|
|
2,166.2
|
|
|
|
1,539.6
|
|
|
|
1,465.4
|
|
Underwriting and Other Expenses
|
|
|
407.1
|
|
|
|
319.3
|
|
|
|
1,478.3
|
|
|
|
1,341.2
|
|
|
|
1,546.3
|
|
|
|
1,574.3
|
|
|
|
1,593.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax Income (Loss)
|
|
|
31.2
|
|
|
|
(92.7
|
)
|
|
|
(273.6
|
)
|
|
|
(819.2
|
)
|
|
|
378.4
|
|
|
|
680.1
|
|
|
|
747.3
|
|
Income Taxes (Credits)
|
|
|
6.2
|
|
|
|
(38.8
|
)
|
|
|
(174.4
|
)
|
|
|
(260.8
|
)
|
|
|
105.9
|
|
|
|
215.2
|
|
|
|
195.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
25.0
|
|
|
$
|
(53.9
|
)
|
|
$
|
(99.1
|
)
|
|
$
|
(558.3
|
)
|
|
$
|
272.4
|
|
|
$
|
464.8
|
|
|
$
|
551.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMON SHARE DATA:(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.11
|
|
|
$
|
(0.23
|
)
|
|
$
|
(.42
|
)
|
|
$
|
(2.41
|
)
|
|
$
|
1.18
|
|
|
$
|
2.01
|
|
|
$
|
2.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
.11
|
|
|
$
|
(0.23
|
)
|
|
$
|
(.42
|
)
|
|
$
|
(2.41
|
)
|
|
$
|
1.17
|
|
|
$
|
1.99
|
|
|
$
|
2.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Regular
|
|
$
|
.1725
|
|
|
$
|
$.1700
|
|
|
$
|
.6800
|
|
|
$
|
.6700
|
|
|
$
|
.6300
|
|
|
$
|
.5900
|
|
|
$
|
.5120
|
|
Special
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.8000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
.1725
|
|
|
$
|
.1700
|
|
|
$
|
.6800
|
|
|
$
|
.6700
|
|
|
$
|
.6300
|
|
|
$
|
.5900
|
|
|
$
|
1.3120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book Value
|
|
$
|
16.90
|
|
|
$
|
15.47
|
|
|
$
|
16.49
|
|
|
$
|
15.91
|
|
|
$
|
19.71
|
|
|
$
|
18.91
|
|
|
$
|
17.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares (thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
236,466
|
|
|
|
235,485
|
|
|
|
235,995
|
|
|
|
235,031
|
|
|
|
230,472
|
|
|
|
231,047
|
|
|
|
229,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
236,387
|
|
|
|
235,259
|
|
|
|
235,657
|
|
|
|
231,484
|
|
|
|
231,370
|
|
|
|
231,017
|
|
|
|
229,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
236,462
|
|
|
|
235,259
|
|
|
|
235,657
|
|
|
|
231,484
|
|
|
|
232,912
|
|
|
|
233,034
|
|
|
|
232,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Consists of cash, investments and accrued investment income. |
|
(b) |
|
Total capitalization consists of debt, preferred stock, and
common shareholders equity. |
|
(c) |
|
All per share statistics herein have been restated to reflect
all stock dividends or splits declared through March 31,
2010. |
101
OLD
REPUBLIC MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
($ in Millions, Except Share Data)
OVERVIEW
This managements discussion and analysis of financial
condition and results of operation pertains to the consolidated
accounts of Old Republic. Old Republic conducts its operations
through three major regulatory segments, namely, its General
(property and liability), Mortgage Guaranty, and Title insurance
segments. A small life and health insurance business, accounting
for 2.9% of consolidated operating revenues for the quarter
ended March 31, 2010 and 1.8% of consolidated assets as of
March 31, 2010, is included within the corporate and other
caption of this report.
The consolidated accounts are presented in conformity with the
Financial Accounting Standards Boards (FASB)
Accounting Standards Codification (ASC) of
accounting principles generally accepted in the
United States of America (GAAP).
This management analysis should be read in conjunction with the
consolidated financial statements and the footnotes included
elsewhere in this proxy statement/prospectus.
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. 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 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. Old Republics
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.
In light of the above factors, Old Republics affairs are
managed without 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 Old Republics
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 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.
EXECUTIVE
SUMMARY
|
|
A.
|
Quarters
Ended March 31, 2010 and 2009
|
Old Republics first quarter 2010 consolidated operating
results, which exclude net realized investment gains or losses,
reflected a substantial turn for the better when compared to the
same quarter of 2009. As noted below, most of the gain stemmed
from improved underwriting results in Old Republics
mortgage guaranty line. The latter arose from the combination of
lower claim provisions and the positive effects of largely
non-recurring captive reinsurance contract terminations
(commutations) and terminations of certain pool
insurance contracts. General insurance earnings were higher
mostly as a result of lower claim costs. Title insurance
operating earnings were basically flat
quarter-over-quarter.
102
Consolidated Results The major components of
Old Republics consolidated results and other data for the
periods reported upon are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
General insurance
|
|
$
|
479.1
|
|
|
$
|
523.7
|
|
|
|
(8.5
|
)%
|
Mortgage guaranty
|
|
|
160.5
|
|
|
|
171.2
|
|
|
|
(6.3
|
)
|
Title insurance
|
|
|
262.0
|
|
|
|
160.2
|
|
|
|
63.5
|
|
Corporate and other
|
|
|
27.8
|
|
|
|
23.2
|
|
|
|
19.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
929.6
|
|
|
$
|
878.5
|
|
|
|
5.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
General insurance
|
|
$
|
69.2
|
|
|
$
|
58.2
|
|
|
|
19.0
|
%
|
Mortgage guaranty
|
|
|
(34.1
|
)
|
|
|
(144.6
|
)
|
|
|
76.4
|
|
Title insurance
|
|
|
(8.6
|
)
|
|
|
(9.0
|
)
|
|
|
4.3
|
|
Corporate and other
|
|
|
1.8
|
|
|
|
2.6
|
|
|
|
(31.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
28.3
|
|
|
|
(92.8
|
)
|
|
|
130.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
From sales
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
From impairments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses)
|
|
|
2.9
|
|
|
|
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated pretax income (loss)
|
|
|
31.2
|
|
|
|
(92.7
|
)
|
|
|
133.7
|
|
Income taxes (credits)
|
|
|
6.2
|
|
|
|
(38.8
|
)
|
|
|
116.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
25.0
|
|
|
$
|
(53.9
|
)
|
|
|
146.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated underwriting ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and claim ratio
|
|
|
59.6
|
%
|
|
|
83.9
|
%
|
|
|
|
|
Expense ratio
|
|
|
47.4
|
|
|
|
39.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composite ratio
|
|
|
107.0
|
%
|
|
|
123.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income (loss)
|
|
$
|
0.10
|
|
|
$
|
(0.23
|
)
|
|
|
143.5
|
%
|
Net realized investment gains (losses)
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.11
|
|
|
$
|
(0.23
|
)
|
|
|
147.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid per share
|
|
$
|
0.1725
|
|
|
$
|
0.1700
|
|
|
|
1.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/M: Not meaningful
The above table shows both operating and net income (loss) to
highlight the effects of realized investment gain or loss
recognition on
period-to-period
comparisons. Operating income, however, does not replace net
income determined in accordance with GAAP as a measure of total
profitability.
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 for 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 Old Republics results from
period to period. Accordingly, management uses net operating
income, a non-GAAP financial measure, to evaluate and better
103
explain operating performance, and believes its use enhances an
understanding of Old Republics basic business results.
General Insurance Results First quarter 2010
general insurance earnings were mainly affected by lower earned
premiums and the changes in claim costs and expenses reflected
in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Insurance Group
|
|
|
|
Quarters Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Net premiums earned
|
|
$
|
411.8
|
|
|
$
|
457.3
|
|
|
|
(10.0
|
)%
|
Net investment income
|
|
|
64.6
|
|
|
|
63.4
|
|
|
|
1.8
|
|
Pretax operating income (loss)
|
|
$
|
69.2
|
|
|
$
|
58.2
|
|
|
|
19.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claim ratio
|
|
|
70.6
|
%
|
|
|
74.8
|
%
|
|
|
|
|
Expense ratio
|
|
|
26.7
|
|
|
|
25.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composite ratio
|
|
|
97.3
|
%
|
|
|
100.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The continuation of a moderate decline in premium rates and
recessionary conditions constrained premium growth in the latest
quarter and each of the prior two years. Lessened economic
activity affects such factors as sales and employment levels,
both of which are important elements upon which Old
Republics commercial insurance premiums are based.
While the Groups invested asset base grew by approximately
10%
year-over-year,
net investment income was up negligibly by 1.8%
quarter-over-quarter.
The disparate growth rates reflect primarily a low yield market
environment and the relatively short-term nature of the bond
portfolio.
As the above table shows, the overall claim ratio declined by
4.2 percentage points
quarter-over-quarter
as experience for most insurance coverages reflected relatively
stable trends in claim payments and reserve provisions.
Moreover, the consumer credit indemnity (CCI)
coverage impacted adversely the overall claim ratio by
3.9 percentage points compared to a 7.7 percentage
point effect in last years first quarter. Most of the
reduced impact stemmed from lower CCI premium volume, and
declining loan delinquency and claim payment trends.
The expense ratio edged up slightly as a small reduction in
total expenses lagged the larger drop in earned premiums.
Mortgage Guaranty Results Operating results
for Old Republics mortgage guaranty segment improved
significantly as downward trends in newly reported and
outstanding traditional primary delinquencies resulted in lower
claim reserve provisions. First quarter pretax operating results
also benefited from gains emanating from additional commutations
of two captive reinsurance agreements, and the termination of
certain pool insurance contracts. Key indicators of this
segments performance are shown in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Guaranty Group
|
|
|
|
Quarters Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Net premiums earned
|
|
$
|
136.2
|
|
|
$
|
145.3
|
|
|
|
(6.2
|
)%
|
Net investment income
|
|
|
23.1
|
|
|
|
22.4
|
|
|
|
3.1
|
|
Pretax operating income (loss)
|
|
$
|
(34.1
|
)
|
|
$
|
(144.6
|
)
|
|
|
76.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claim ratio
|
|
|
127.2
|
%
|
|
|
199.9
|
%
|
|
|
|
|
Expense ratio
|
|
|
13.5
|
|
|
|
13.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composite ratio
|
|
|
140.7
|
%
|
|
|
213.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As above noted, during this years first quarter the
Mortgage Guaranty Group negotiated the termination of two
captive reinsurance agreements and certain pool insurance
contracts. The reinsurance commutations resulted in additional
net premiums earned of $5.3 that are intended to cover Old
Republics assumption of future losses related to the
agreements. Pursuant to GAAP accounting methodology these
premiums must be recognized as income upon
104
receipt rather than being deferred to future periods when the
related claim costs are expected to arise. The cancellation of
pool insurance contracts resulted in a reduction of first
quarter 2010 incurred losses of approximately $30.3. Taken
together these transactions reduced the incurred claim ratio for
the quarter by approximately 27.4 percentage points,
increased the paid claim ratio by 128.8 percentage points,
and decreased the pretax operating loss by approximately $35.6.
As a further consequence, these non-recurring transactions
resulted in a reduction of operating cash flow of $167.1.
Leaving aside the additional captive reinsurance premium income
of $5.3, mortgage guaranty earned premiums continued to decline
in this years first quarter. Lower volumes of new
insurance and premium refunds related to claim rescissions
accounted for most of the decline. New business volume reflected
further weakness due to the downturn in overall mortgage
originations, lower industry market penetration, and the
continuation of more selective underwriting guidelines in place
since late 2007.
Net investment income grew moderately due to a temporarily
higher invested asset base in this years first quarter.
First quarter 2010 claim costs were lower as a result of the
first sequential decline in outstanding traditional primary loan
delinquencies since the first quarter of 2007. The continuation
of historically high levels of claim rescissions and denials
also affected paid claim and reserve provision trends. The
following table shows the major components of incurred claims
inclusive of the above noted effect of captive reinsurance and
pool insurance terminations.
|
|
|
|
|
|
|
|
|
|
|
Mortgage Guaranty Group
|
|
|
|
Quarters Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Components of incurred claim ratio as a percent of earned
premiums:
|
|
|
|
|
|
|
|
|
Paid claims:
|
|
|
|
|
|
|
|
|
Payments, excluding pool terminations
|
|
|
107.6
|
%
|
|
|
107.1
|
%
|
Pool terminations reserve payments
|
|
|
128.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total paid claim ratio
|
|
|
236.5
|
|
|
|
107.1
|
|
|
|
|
|
|
|
|
|
|
Claim reserve provisions:
|
|
|
|
|
|
|
|
|
Excluding pool terminations
|
|
|
47.0
|
|
|
|
92.8
|
|
Pool termination reserves released
|
|
|
(151.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net claim reserve provisions (release)
|
|
|
(104.2
|
)
|
|
|
92.8
|
|
|
|
|
|
|
|
|
|
|
Effect of captive commutations
|
|
|
(5.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred claim ratio
|
|
|
127.2
|
%
|
|
|
199.9
|
%
|
|
|
|
|
|
|
|
|
|
Production and operating expense ratios for all periods reported
upon reflect continued success in expense management.
105
Title Insurance Results Old
Republics title business continued to generate the more
positive operating momentum that emerged in last years
second half. Key performance indicators are shown in the
following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Title Insurance Group
|
|
|
|
Quarters Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Net premiums and fees earned
|
|
$
|
255.2
|
|
|
$
|
154.3
|
|
|
|
65.4
|
%
|
Net investment income
|
|
|
6.6
|
|
|
|
5.8
|
|
|
|
12.8
|
|
Pretax operating income (loss)
|
|
$
|
(8.6
|
)
|
|
$
|
(9.0
|
)
|
|
|
4.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claim ratio
|
|
|
7.4
|
%
|
|
|
6.6
|
%
|
|
|
|
|
Expense ratio
|
|
|
98.5
|
|
|
|
102.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composite ratio
|
|
|
105.9
|
%
|
|
|
109.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter 2010 net premiums and fees reflected
accelerating growth as the Title Group gained market share
from industry dislocations and consolidation. The consolidation
of accounts from the Florida joint underwriting venture formed
in mid-year 2009 also added to this years revenue stream.
A greater invested asset base generated meaningful investment
income growth even though market yields remain relatively low.
Claim costs, however, rose at a quicker pace than premiums and
fees revenues as Old Republic added moderately to reserve
provisions in consideration of recent claim emergence trends.
Growth in production and general operating expenses also
reflected the greater costs associated with the much higher
level of premiums and fees.
Corporate and Other Operations Old
Republics small life and health business and the net costs
associated with the parent company and its internal services
subsidiaries produced a lower net gain in this years first
quarter.
Period-to-period
variations in the results posted by these relatively small
elements of Old Republics 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.
Cash, Invested Assets, and Shareholders
Equity The following table reflects Old
Republics consolidated cash and invested assets as well as
shareholders equity at the dates shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
March 10/
|
|
|
March 10/
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
Dec 09
|
|
|
March 09
|
|
|
Cash and invested assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value basis
|
|
$
|
9,985.9
|
|
|
$
|
9,879.0
|
|
|
$
|
9,052.4
|
|
|
|
1.1
|
%
|
|
|
10.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original cost basis
|
|
$
|
9,561.2
|
|
|
$
|
9,625.9
|
|
|
$
|
9,407.1
|
|
|
|
(.7
|
)%
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,995.8
|
|
|
$
|
3,891.4
|
|
|
$
|
3,643.2
|
|
|
|
2.7
|
%
|
|
|
9.7
|
%
|
Per common share
|
|
$
|
16.90
|
|
|
$
|
16.49
|
|
|
$
|
15.47
|
|
|
|
2.5
|
%
|
|
|
9.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composition of shareholders equity per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity before items below
|
|
$
|
14.92
|
|
|
$
|
14.99
|
|
|
$
|
15.69
|
|
|
|
(0.5
|
)%
|
|
|
(4.9
|
)%
|
Unrealized investment gains (losses) and other accumulated
comprehensive income (loss)
|
|
|
1.98
|
|
|
|
1.50
|
|
|
|
(0.22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16.90
|
|
|
$
|
16.49
|
|
|
$
|
15.47
|
|
|
|
2.5
|
%
|
|
|
9.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated cash flow from operating activities produced a
deficit of $19.3 for the first three months of 2010. This
compares to positive operating cash flow of $263.3 for the same
period in 2009. This years significant reduction was
largely due to the net operating cash flow impact of the
previously discussed mortgage guaranty pool terminations.
106
The investment portfolio reflects a current allocation of
approximately 85% to fixed-maturity securities and 6% to
equities. As has been the case for many years, Old
Republics 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 (CDOs),
derivatives, junk bonds, hybrid securities, or illiquid private
equity investments. In a similar vein, Old Republic 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 Republics 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
Republics business in anticipation of a recovery of the MI
industry in 2010. In managements 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 the cyclical and
macroeconomic conditions affecting these sectors, and by the
recent dysfunctionality of the banking and mortgage-lending
industries. As shown in the following table, the March 31,
2010 fair value of the two securities had risen to 61.0% of
their original cost compared to the 25.6%
other-than-temporarily-impaired
level to which they were written down in 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for Periods Ended:
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Total value of the two MI investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Original cost
|
|
$
|
416.4
|
|
|
$
|
416.4
|
|
|
$
|
416.4
|
|
Impaired cost
|
|
|
106.8
|
|
|
|
106.8
|
|
|
|
106.8
|
|
Fair value
|
|
|
254.0
|
|
|
|
130.7
|
|
|
|
82.7
|
|
Underlying equity(*)
|
|
$
|
235.6
|
|
|
$
|
274.6
|
|
|
$
|
515.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax
other-than-temporary
impairments recorded in income statement of the period
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(375.5
|
)
|
Pretax unrealized investment gains (losses) recorded directly in
shareholders equity account:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period
|
|
$
|
123.3
|
|
|
$
|
48.0
|
|
|
$
|
(24.1
|
)
|
Cumulatively
|
|
$
|
147.2
|
|
|
$
|
23.9
|
|
|
$
|
(24.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
Underlying equity based on latest reports (which may lag by one
quarter) issued by investees. |
107
Substantially all changes in the shareholders equity
account reflect Old Republics net income or loss, dividend
payments to shareholders, and impairments or changes in market
valuations of invested assets during the periods shown below:
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity per Share
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Beginning balance
|
|
$
|
16.49
|
|
|
$
|
15.91
|
|
|
|
|
|
|
|
|
|
|
Changes in shareholders equity:
|
|
|
|
|
|
|
|
|
Net operating income (loss)
|
|
|
0.10
|
|
|
|
(0.23
|
)
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses):
|
|
|
|
|
|
|
|
|
From sales
|
|
|
0.01
|
|
|
|
|
|
From impairments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
0.01
|
|
|
|
|
|
Net unrealized investment gains (losses)
|
|
|
0.47
|
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
Total realized and unrealized investment gains (losses)
|
|
|
0.48
|
|
|
|
(0.04
|
)
|
Cash dividends
|
|
|
(0.17
|
)
|
|
|
(0.17
|
)
|
Stock issuance, foreign exchange, and other transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change
|
|
|
0.41
|
|
|
|
(0.44
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
16.90
|
|
|
$
|
15.47
|
|
|
|
|
|
|
|
|
|
|
|
|
B.
|
Years
Ended December 31, 2009, 2008 and 2007
|
Old Republic experienced further operating difficulties in 2009.
Since mid-year 2007, operating income has declined mostly due to
Old Republics mortgage guaranty and other insurance
coverages linked to the housing and consumer credit fields.
Full year 2009 mortgage guaranty and consolidated operating
results benefited from a GAAP accounting requirement that
premiums received for largely non-recurring reinsurance
commutations, be recognized immediately as income. As a
consequence, 2009 pretax operating earnings benefited by $76.3
($49.6 after tax or $0.21 per share) from such premiums.
Substantially all of these premiums will likely be absorbed by
loss costs related to the future years risk exposures they
are designed to cover. General insurance performance has
declined during the last three years due to a reduction of
underwriting profitability among several coverages. Title
operations returned to profitability in 2009 for the first time
since 2006 as a result of greater real estate transactions,
growth in market share, and expense control management.
2009 pre-tax investment gains of $6.3 were enhanced by the
reversal of a deferred tax valuation allowance to produce net
post-tax realized investment gains of $58.1 ($0.25 per share).
The valuation allowance pertained to losses from
other-than-temporary
investment impairments, most of which originated in the second
quarter of 2008. Realized losses in 2008 were mostly due to
write downs of equity investments for
other-than-temporary
impairments.
108
Consolidated Results The major components of
Old Republics consolidated results and other data for the
periods reported upon are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
Years Ended December 31,
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
vs. 2008
|
|
|
vs. 2007
|
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General insurance
|
|
$
|
2,052.7
|
|
|
$
|
2,255.9
|
|
|
$
|
2,438.0
|
|
|
|
(9.0
|
)%
|
|
|
(7.5
|
)%
|
Mortgage guaranty
|
|
|
746.1
|
|
|
|
690.0
|
|
|
|
608.3
|
|
|
|
8.1
|
|
|
|
13.4
|
|
Title insurance
|
|
|
914.1
|
|
|
|
681.3
|
|
|
|
878.5
|
|
|
|
34.2
|
|
|
|
(22.4
|
)
|
Corporate and other
|
|
|
84.3
|
|
|
|
96.8
|
|
|
|
95.6
|
|
|
|
(12.9
|
)
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,797.2
|
|
|
$
|
3,724.2
|
|
|
$
|
4,020.6
|
|
|
|
2.0
|
%
|
|
|
(7.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General insurance
|
|
$
|
200.1
|
|
|
$
|
294.3
|
|
|
$
|
418.0
|
|
|
|
(32.0
|
)%
|
|
|
(29.6
|
)%
|
Mortgage guaranty
|
|
|
(486.4
|
)
|
|
|
(594.3
|
)
|
|
|
(110.4
|
)
|
|
|
18.2
|
|
|
|
(438.1
|
)
|
Title insurance
|
|
|
2.1
|
|
|
|
(46.3
|
)
|
|
|
(14.7
|
)
|
|
|
104.7
|
|
|
|
(214.7
|
)
|
Corporate and other
|
|
|
4.0
|
|
|
|
13.5
|
|
|
|
15.1
|
|
|
|
(70.1
|
)
|
|
|
(10.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
(279.9
|
)
|
|
|
(332.7
|
)
|
|
|
308.0
|
|
|
|
15.9
|
|
|
|
(208.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From sales
|
|
|
15.9
|
|
|
|
(4.1
|
)
|
|
|
70.3
|
|
|
|
|
|
|
|
|
|
From impairments
|
|
|
(9.5
|
)
|
|
|
(482.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses)
|
|
|
6.3
|
|
|
|
(486.4
|
)
|
|
|
70.3
|
|
|
|
101.3
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated pretax income (loss)
|
|
|
(273.6
|
)
|
|
|
(819.2
|
)
|
|
|
378.4
|
|
|
|
66.6
|
|
|
|
(316.5
|
)
|
Income taxes (credits)
|
|
|
(174.4
|
)
|
|
|
(260.8
|
)
|
|
|
105.9
|
|
|
|
33.1
|
|
|
|
(346.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(99.1
|
)
|
|
$
|
(558.3
|
)
|
|
$
|
272.4
|
|
|
|
82.2
|
%
|
|
|
(304.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated underwriting ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and claim ratio
|
|
|
76.7
|
%
|
|
|
81.8
|
%
|
|
|
60.2
|
%
|
|
|
(6.2
|
)%
|
|
|
35.9
|
%
|
Expense ratio
|
|
|
41.8
|
|
|
|
39.1
|
|
|
|
41.3
|
|
|
|
6.9
|
|
|
|
(5.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composite ratio
|
|
|
118.5
|
%
|
|
|
120.9
|
%
|
|
|
101.5
|
%
|
|
|
(2.0
|
)%
|
|
|
19.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income (loss)
|
|
$
|
(0.67
|
)
|
|
$
|
(0.81
|
)
|
|
$
|
0.97
|
|
|
|
17.3
|
%
|
|
|
(183.5
|
)%
|
Net realized investment gains (losses)
|
|
|
0.25
|
|
|
|
(1.60
|
)
|
|
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(0.42
|
)
|
|
$
|
(2.41
|
)
|
|
$
|
1.17
|
|
|
|
82.6
|
%
|
|
|
(306.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid per share
|
|
$
|
0.68
|
|
|
$
|
0.67
|
|
|
$
|
0.63
|
|
|
|
1.5
|
%
|
|
|
6.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/M: Not meaningful
The above table shows both operating and net income (loss) to
highlight the effects of realized investment gain or loss
recognition and any non-recurring items on
period-to-period
comparisons. Operating income, however, does not replace net
income computed in accordance with GAAP as a measure of total
profitability.
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 for 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 Old Republics results from
period to period. Accordingly, management uses net operating
income, a non-GAAP financial measure, to evaluate and better
109
explain operating performance, and believes its use enhances an
understanding of Old Republics basic business results.
General Insurance Results Pretax operating
earnings for the periods reported upon were affected mostly by
reduced premium volume and moderately higher claim and expense
ratios. The following table shows these effects:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Insurance Group
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
Years Ended December 31,
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
vs. 2008
|
|
|
vs. 2007
|
|
|
Net premiums earned
|
|
$
|
1,782.5
|
|
|
$
|
1,989.3
|
|
|
$
|
2,155.1
|
|
|
|
(10.4
|
)%
|
|
|
(7.7
|
)%
|
Net investment income
|
|
|
258.9
|
|
|
|
253.6
|
|
|
|
260.8
|
|
|
|
2.1
|
|
|
|
(2.8
|
)
|
Pretax operating income (loss)
|
|
$
|
200.1
|
|
|
$
|
294.3
|
|
|
$
|
418.0
|
|
|
|
(32.0
|
)%
|
|
|
(29.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claim ratio
|
|
|
76.3
|
%
|
|
|
73.0
|
%
|
|
|
67.8
|
%
|
|
|
4.5
|
%
|
|
|
7.7
|
%
|
Expense ratio
|
|
|
25.8
|
|
|
|
24.2
|
|
|
|
24.1
|
|
|
|
6.6
|
|
|
|
.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composite ratio
|
|
|
102.1
|
%
|
|
|
97.2
|
%
|
|
|
91.9
|
%
|
|
|
5.0
|
%
|
|
|
5.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums for the large majority of insurance coverages
trended down in the past three years. In recent years, premium
growth has been constrained by the combination of a moderately
declining rate environment and by recessionary economic
conditions. These conditions affect such factors as sales and
employment levels, both of which are important elements upon
which premiums are based.
General insurance investment income trends have benefited from
greater invested asset balances.
Overall claim ratios trended moderately higher during 2009 and
2008. 2009 and 2008 claim experience for the CCI coverage in
particular has trended much higher adding approximately 7.3 and
6.1 percentage points to the above claim ratios for years
ended December 31, 2009 and 2008, respectively versus an
insignificant effect for 2007. Aggregate claim experience for
other coverages, however, remained relatively consistent.
Production and general operating expenses edged up slightly in
2009 as expense reduction lagged a larger drop in earned
premiums.
Mortgage Guaranty Results 2009 mortgage
guaranty operating results benefited from the captive
reinsurance premiums receipts previously noted. Key indicators
of this segments evolving performance are shown in the
following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Guaranty Group
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
Years Ended December 31,
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
vs. 2008
|
|
|
vs. 2007
|
|
|
Net premiums earned
|
|
$
|
644.5
|
|
|
$
|
592.5
|
|
|
$
|
518.2
|
|
|
|
8.8
|
%
|
|
|
14.3
|
%
|
Net investment income
|
|
|
92.0
|
|
|
|
86.8
|
|
|
|
79.0
|
|
|
|
5.9
|
|
|
|
10.0
|
|
Pretax operating income (loss)
|
|
$
|
(486.4
|
)
|
|
$
|
(594.3
|
)
|
|
$
|
(110.4
|
)
|
|
|
18.2
|
%
|
|
|
(438.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claim ratio
|
|
|
176.0
|
%
|
|
|
199.3
|
%
|
|
|
118.8
|
%
|
|
|
(11.7
|
)%
|
|
|
67.8
|
%
|
Expense ratio
|
|
|
12.6
|
|
|
|
15.7
|
|
|
|
17.7
|
|
|
|
(19.7
|
)
|
|
|
(11.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composite ratio
|
|
|
188.6
|
%
|
|
|
215.0
|
%
|
|
|
136.5
|
%
|
|
|
(12.3
|
)%
|
|
|
57.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Absent the aforementioned effect of the reinsurance commutations
further discussed below, mortgage guaranty earned premiums
declined in 2009. Premium levels for the three years ended
December 31, 2009 were impacted by the more selective
underwriting criteria applied since late 2007, by an overall
decline in the industrys business penetration, and by
higher premium refunds related to coverage rescissions. These
factors were attenuated somewhat by relatively high persistency
levels for business produced in prior years, and by a continuing
decline in premiums ceded to lender-owned (captive) reinsurance
companies.
During 2009s third quarter, Old Republics Mortgage
Guaranty Group entered into commutations with four lender-owned
captive reinsurers. As part of the transactions, Old Republic
received reinsurance premiums of $82.5
110
to cover losses expected to occur after the contract termination
date. Under GAAP, these reinsurance commutations have been
treated as the termination of risk transfer reinsurance
arrangements rather than transactions in which Old Republic
takes on new or additional insurance risk. As a result of this
GAAP characterization, the premiums received have been booked as
current income rather than being deferred and subsequently
recognized in the future periods during which the related risk
will exist and expected claims will occur. Old Republic
estimates that substantially all of these premiums will likely
be absorbed by related claim costs thus negating the current
appearance of a gain from the transactions. In the above table,
the up front recognition of the $82.5 of premiums also has the
effect of portraying an increase in 2009s net premiums
earned of 8.8%, whereas their exclusion through deferral to
future at risk periods would have shown an actual 4.1% decline.
As a further consequence of this GAAP premium recognition
methodology the 2009 loss ratio dropped from 199.6% to 176.0%,
and the 2009 pretax operating loss was reduced from $562.7 to
$486.4. Excluding these premium recognition effects, quarterly
claim ratios throughout 2009 averaged 199.7% versus a comparable
average of 199.3% for 2008 and 115.2% for 2007. Greater numbers
of coverage rescissions and a moderate decline in expected claim
severity during 2009 offset to some degree the impact on claim
reserve provisions of a continued uptrend in reported delinquent
loans. The components of incurred mortgage guaranty claim ratios
are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Incurred claim ratio from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid claims
|
|
|
97.0
|
%
|
|
|
74.8
|
%
|
|
|
42.5
|
%
|
Claim reserve provisions
|
|
|
102.6
|
|
|
|
124.5
|
|
|
|
76.3
|
|
Effect of commutations
|
|
|
(23.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
176.0
|
%
|
|
|
199.3
|
%
|
|
|
118.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production and operating expense ratios for all periods reported
upon reflect continued success in expense management. Net
investment income has trended up on the strength of an invested
asset base enhanced by positive operating cash flow, funds
generated by income tax related asset recoveries, and in 2009,
capital additions and funds received in the above noted
reinsurance commutations.
Title Insurance Results In 2009 Old
Republics title insurance business turned slightly
profitable for the first time since 2006. Key operating
performance indicators are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Title Insurance Group
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
Years Ended December 31,
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
vs. 2008
|
|
|
vs. 2007
|
|
|
Net premiums and fees earned
|
|
$
|
888.4
|
|
|
$
|
656.1
|
|
|
$
|
850.7
|
|
|
|
35.4
|
%
|
|
|
(22.9
|
)%
|
Net investment income
|
|
|
25.2
|
|
|
|
25.1
|
|
|
|
27.3
|
|
|
|
0.2
|
|
|
|
(7.9
|
)
|
Pretax operating income (loss)
|
|
$
|
2.1
|
|
|
$
|
(46.3
|
)
|
|
$
|
(14.7
|
)
|
|
|
104.7
|
%
|
|
|
(214.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claim ratio
|
|
|
7.9
|
%
|
|
|
7.0
|
%
|
|
|
6.6
|
%
|
|
|
12.9
|
%
|
|
|
6.1
|
%
|
Expense ratio
|
|
|
93.8
|
|
|
|
103.6
|
|
|
|
98.1
|
|
|
|
(9.5
|
)
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composite ratio
|
|
|
101.7
|
%
|
|
|
110.6
|
%
|
|
|
104.7
|
%
|
|
|
(8.0
|
)%
|
|
|
5.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth in title premiums and fees for 2009 resulted mostly from
greater refinance transactions earlier in the year and from
market share gains taken from title industry dislocations and
consolidations. Claim costs rose at a quicker pace, however, as
Old Republic added moderately to reserve provisions in
consideration of recent claim emergence trends. Production and
general operating expenses, while relatively lower as a
percentage of premium and fees revenues, rose dollar-wise in
reflection of greater personnel and other production costs
related to the higher revenues attained and anticipated.
Results for 2008 and 2007 also reflect the impact of the
cyclical downturn in the housing and related mortgage lending
sectors of the U.S. economy.
111
Corporate and Other Operations Old
Republics small life and health insurance business and the
net costs associated with the parent holding company and
internal services subsidiaries produced a much lower operating
gain in 2009.
Period-to-period
variations in the results of these relatively minor elements of
Old Republics operations usually stem from the volatility
inherent to the small scale of its life and health business,
fluctuations in the costs of external debt, and net interest on
intra-system financing arrangements.
Cash, Invested Assets, and Shareholders
Equity The following table reflects Old
Republics consolidated cash and invested assets as well as
shareholders equity at the dates shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
As of December 31:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
vs. 2008
|
|
|
vs. 2007
|
|
|
Cash and invested assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value basis
|
|
$
|
9,879.0
|
|
|
$
|
8,855.1
|
|
|
$
|
8,924.0
|
|
|
|
11.6
|
%
|
|
|
(.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original cost basis
|
|
$
|
9,625.9
|
|
|
$
|
9,210.0
|
|
|
$
|
8,802.5
|
|
|
|
4.5
|
%
|
|
|
4.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,891.4
|
|
|
$
|
3,740.3
|
|
|
$
|
4,541.6
|
|
|
|
4.0
|
%
|
|
|
(17.6
|
)%
|
Per common share
|
|
$
|
16.49
|
|
|
$
|
15.91
|
|
|
$
|
19.71
|
|
|
|
3.6
|
%
|
|
|
(19.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composition of shareholders equity per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity before items below
|
|
$
|
14.99
|
|
|
$
|
16.10
|
|
|
$
|
19.31
|
|
|
|
(6.9
|
)%
|
|
|
(16.6
|
)%
|
Unrealized investment gains (losses) and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accumulated comprehensive income (loss)
|
|
|
1.50
|
|
|
|
(0.19
|
)
|
|
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16.49
|
|
|
$
|
15.91
|
|
|
$
|
19.71
|
|
|
|
3.6
|
%
|
|
|
(19.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated cash flow from operating activities amounted to
$532.9, $565.6 and $862.5 for the years ended 2009, 2008 and
2007, respectively.
The investment portfolio reflects a current allocation of
approximately 86 percent to fixed-maturity securities and
5 percent to equities. As has been the case for many years,
Old Republics invested assets are managed in consideration
of enterprise-wide risk management objectives intended to assure
solid funding of its subsidiaries long-term obligations to
insurance policyholders and other beneficiaries, and evaluations
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, CDOs, derivatives, junk bonds, hybrid
securities, or illiquid private equity investments. In a similar
vein, Old Republic 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.
112
Substantially all changes in the shareholders equity
account reflect Old Republics net income or loss, dividend
payments to shareholders, and impairments or changes in market
valuations of invested assets during the periods shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity per Share
|
|
Years Ended December 31,
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Beginning book value per share
|
|
$
|
15.91
|
|
|
$
|
19.71
|
|
|
$
|
18.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in shareholders equity for the periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income (loss)
|
|
|
(.67
|
)
|
|
|
(.81
|
)
|
|
|
.98
|
|
Net realized investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
From sales
|
|
|
.04
|
|
|
|
(.01
|
)
|
|
|
.20
|
|
From impairments
|
|
|
.21
|
|
|
|
(1.59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
.25
|
|
|
|
(1.60
|
)
|
|
|
.20
|
|
Net unrealized investment gains (losses)
|
|
|
1.59
|
|
|
|
(.33
|
)
|
|
|
.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total realized and unrealized investment gains (losses)
|
|
|
1.84
|
|
|
|
(1.93
|
)
|
|
|
.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends
|
|
|
(.68
|
)
|
|
|
(.67
|
)
|
|
|
(.63
|
)
|
Stock issuance, foreign exchange, and other transactions
|
|
|
.09
|
|
|
|
(.39
|
)
|
|
|
.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change
|
|
|
.58
|
|
|
|
(3.80
|
)
|
|
|
.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending book value per share
|
|
$
|
16.49
|
|
|
$
|
15.91
|
|
|
$
|
19.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Old Republics significant investments in the stocks of two
leading publicly held MI businesses (MGIC Investment Corp. and
The PMI Group) account for a substantial portion of the 2008
realized and unrealized investment losses shown in the above and
following tables. Unrealized losses, including losses on
securities categorized as
other-than-temporarily
impaired (OTTI), represent the net difference
between the most recently established cost and the fair values
of the investments at each point in time. The aggregate original
and impaired costs, fair value, and latest reported underlying
equity values of the aforementioned two mortgage guaranty
investments are shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Total value of the two MI investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Original cost
|
|
$
|
416.4
|
|
|
$
|
416.4
|
|
|
$
|
429.7
|
|
Impaired cost
|
|
|
106.8
|
|
|
|
106.8
|
|
|
|
N/A
|
|
Fair value
|
|
|
130.7
|
|
|
|
82.7
|
|
|
|
375.1
|
|
Underlying equity(*)
|
|
$
|
274.6
|
|
|
$
|
515.9
|
|
|
$
|
679.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
Underlying equity based on latest reports (which may lag by one
quarter) issued by investees. |
The above-noted mortgage guaranty holdings were acquired as
passive long-term investment additions for a core segment of Old
Republics business in anticipation of a recovery of the MI
industry in 2010. In managements judgment, the currently
depressed market valuations of companies operating in the
housing and mortgage-lending sectors of the American economy
have been impacted significantly by the cyclical and
macroeconomic conditions affecting these sectors, and by the
recent dysfunctionality of the banking and mortgage lending
industries. For external financial reporting purposes, however,
Old Republic uses relatively short time frames in recognizing
OTTI adjustments in its income statement. In this context,
absent issuer-specific circumstances that would result in a
contrary conclusion, all unrealized investment losses pertaining
to any equity security reflecting a 20 percent or greater
decline for a six month period is considered OTTI. Unrealized
losses that are deemed temporary and all unrealized gains are
recorded directly as a separate component of the
shareholders equity account and in the consolidated
statement of comprehensive income. As a result of accounting
idiosyncrasies, however, OTTI losses recorded in the income
statement of one period can not be offset in the income
statement of a subsequent period by
113
fair value gains on the previously impaired securities unless
the gains are realized through actual sales. Such unrealized
fair value gains can only be recognized through direct credits
in the shareholders equity account and in the consolidated
statement of comprehensive income.
2009 Capital Raise Early in 2009s
second quarter, Old Republic obtained gross proceeds of $316.25
through a public offering of 8% convertible Senior Notes due in
2012. The funds were used mostly to enhance the capital base of
the general and title insurance segments, and to repay a portion
of commercial paper debt previously incurred to strengthen the
capital of the mortgage guaranty segment as of year end 2008.
Along with the growth oriented capital additions to businesses
with good prospects for the long term, the new funds enhance the
stability and resiliency of Old Republics consolidated
capitalization.
DETAILED
MANAGEMENT ANALYSIS
CRITICAL
ACCOUNTING ESTIMATES
Old Republics annual and interim financial statements
incorporate a large number and types of estimates relative to
matters which are highly uncertain at the time the estimates are
made. The estimation process required of an insurance enterprise
is by its very nature highly dynamic inasmuch as it necessitates
a continuous evaluation, analysis, and quantification of factual
data as it becomes known to Old Republic. As a result, actual
experienced outcomes can differ from the estimates made at any
point in time, and thus affect future periods reported
revenues, expenses, net income, and financial condition.
Old Republic believes that its most critical accounting
estimates relate to: a) the determination of OTTI in the
value of fixed maturity and equity investments; b) the
establishment of deferred acquisition costs which vary directly
with the production of insurance premiums; c) the
recoverability of reinsured paid
and/or
outstanding losses; and d) the establishment of reserves
for losses and loss adjustment expenses. The major assumptions
and methods used in setting these estimates are discussed in the
pertinent sections of this Management Analysis and are
summarized as follows:
|
|
(a)
|
Other-than-temporary
impairments in the value of investments:
|
Old Republic completes a detailed analysis each quarter to
assess whether the decline in the value of any investment below
its cost basis is deemed
other-than-temporary.
All securities in an unrealized loss position are reviewed.
Absent issuer-specific circumstances that would result in a
contrary conclusion, any equity security with any unrealized
investment loss amounting to 20% or greater decline for a six
month period is considered OTTI. The decline in value of a
security deemed OTTI is included in the determination of net
income and a new cost basis is established for financial
reporting purposes.
For the three years ended December 31, 2009, pretax charges
due to
other-than-temporary
impairments in the value of securities affected pretax income or
loss within a range of -143.2% and 0% and averaged -48.9%.
|
|
(b)
|
Establishment
of deferred acquisition costs (DAC)
|
The eligibility for deferral and the recoverability of DAC is
based on the current terms and estimated profitability of the
insurance contracts to which they relate. As of the three most
recent year ends, consolidated DAC balances ranged between 1.5%
and 1.9% and averaged 1.7% of consolidated assets. The annual
change in DAC balances for the three-year period affected
underwriting, acquisition and other expenses within a range of
1.1% and 1.8%, and averaged 1.4% of such expenses.
|
|
(c)
|
The
recoverability of reinsured paid and/or outstanding
losses
|
Assets consisting of gross paid losses recoverable from assuming
reinsurers, and balance sheet date reserves similarly
recoverable in future periods as gross losses are settled and
paid, are established at the same time as the gross losses are
paid or recorded as reserves. Accordingly, these assets are
subject to the same estimation processes and valuations as the
related gross amounts that are discussed below. As of the three
most recent year ends, paid and
114
outstanding reinsurance recoverable balances ranged between
30.1% and 32.9% and averaged 31.5% of the related gross reserves.
|
|
(d)
|
The
reserves for losses and loss adjustment expenses
|
As discussed in pertinent sections of this Management Analysis,
the reserves for losses and related loss adjustment expenses are
based on a wide variety of factors and calculations. Among these
Old Republic believes the most critical are:
|
|
|
|
|
The establishment of expected loss ratios for the three latest
accident years, particularly for so-called long-tail coverages
as to which information about covered losses emerges and becomes
more accurately quantified over long periods of time. Long-tail
lines of business generally include workers compensation,
auto liability, general liability, errors and omissions and
directors and officers liability, and title insurance.
Gross loss reserves related to such long-tail coverages ranged
between 66.0% and 79.1%, and averaged 72.0% of gross
consolidated claim reserves as of the three most recent year
ends. Net of reinsurance recoverables, such reserves ranged
between 60.1% and 75.4% and averaged 67.3% as of the same dates.
|
|
|
|
Loss trend factors that are used to establish the above noted
expected loss ratios. These factors take into account such
variables as judgments and estimates relative to premium rate
trends and adequacy, current and expected interest rates,
current and expected social and economic inflation trends, and
insurance industry statistical claim trends.
|
|
|
|
Loss development factors, expected claim rates and average claim
costs all of which are based on Company
and/or
industry statistics used to project reported and unreported
losses for each accounting period.
|
For each of the three most recent calendar years, prior accident
years consolidated claim costs have developed favorably
and have had the consequent effect of reducing consolidated
annual loss costs between 3.0% and 7.2%, or by an average of
approximately 4.7% per annum. As a percentage of each of these
years consolidated earned premiums and fees the favorable
developments have ranged between 1.8% and 5.9%, and have
averaged 3.7%.
In all the above regards Old Republic anticipates that future
periods financial statements will continue to reflect
changes in estimates. As in the past such changes will result
from altered circumstances, the continuum of newly emerging
information and its effect on past assumptions and judgments,
the effects of securities markets valuations, and changes in
inflation rates and future economic conditions beyond Old
Republics control. As a result, Old Republic cannot
predict, quantify, or guaranty the likely impact that probable
changes in estimates will have on its future financial condition
or results of operations.
ACCOUNTING
POLICIES
The consolidated accounts are presented in accordance with the
Financial Accounting Standards Boards (FASB)
Accounting Standards Codification (ASC) of
accounting principles generally accepted in the United States of
America (GAAP). In managing Old Republics
insurance subsidiaries and providing for their current tax
liabilities, however, management adheres to state insurance
regulatory and accounting practices. In comparison with GAAP,
such practices reflect greater conservatism and comparability
among insurers, and are intended to address the primary
financial security interests of policyholders and their
beneficiaries. This management analysis should be read in
conjunction with Old Republics annual and quarterly
consolidated financial statements and the footnotes appended to
them.
In recent years, the FASB has issued various releases requiring
additional financial statement disclosures, and to provide
guidance relative to the application of such releases. Of
particular pertinence to Old Republics financial
statements are certain disclosures relating to uncertainties
affecting income tax provisions, methodologies for establishing
the fair value and recording of
other-than-temporary
impairments of securities, and the composition of plan assets
held by Old Republics defined benefit pension plans. The
requisite disclosures and explanations for these matters have
been included in the footnotes to Old Republics financial
statements.
115
FINANCIAL
POSITION
|
|
A.
|
Quarters
Ended March 31, 2010 and 2009
|
Old Republics financial position at March 31, 2010
reflected increases in assets, and common shareholders
equity of .4% and 2.7%, respectively, and a decrease in
liabilities of .5% when compared to the immediately preceding
year-end. Cash and invested assets represented 70.1% and 69.6%
of consolidated assets as of March 31, 2010 and
December 31, 2009, respectively. As of March 31, 2010,
cash and invested assets increased 1.1% to $9,985.9 as a result
of an increase in the fair value of investments.
Investments During the first quarter of 2010
and 2009, Old Republic committed substantially all investable
funds to short to intermediate-term fixed maturity securities.
At both March 31, 2010 and 2009, approximately 99% of Old
Republics investments consisted of marketable securities.
Old Republic continues to adhere to its long-term policy of
investing primarily in investment grade, marketable securities.
The portfolio contains little or no insurance risk-correlated
asset exposures to real estate, mortgage-backed securities,
CDOs, derivatives, junk bonds, hybrid securities, or
illiquid private equity investments. In a similar vein, Old
Republic 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. At
March 31, 2010, Old Republic had no fixed maturity
investments in default as to principal
and/or
interest.
Relatively high short-term maturity investment positions
continued to be maintained as of March 31, 2010. Such
positions reflect a large variety of seasonal and
intermediate-term factors including current operating needs,
expected operating cash flows, quarter-end cash flow
seasonality, and investment strategy considerations.
Accordingly, the future level of short-term investments will
vary and respond to the interplay of these factors and may, as a
result, increase or decrease from current levels.
Old Republic does not own or utilize derivative financial
instruments for the purpose of hedging, enhancing the overall
return of its investment portfolio, or reducing the cost of its
debt obligations. With regard to its equity portfolio, Old
Republic does not own any options nor does it engage in any type
of option writing. Traditional investment management tools and
techniques are employed to address the yield and valuation
exposures of the invested assets base. The long-term fixed
maturity investment portfolio is managed so as to limit various
risks inherent in the bond market. Credit risk is addressed
through asset diversification and the purchase of investment
grade securities. Reinvestment rate risk is reduced by
concentrating on non-callable issues, and by taking
asset-liability matching considerations into account. Purchases
of mortgage and asset backed securities, which have variable
principal prepayment options, are generally avoided. Market
value risk is limited through the purchase of bonds of
intermediate maturity. The combination of these investment
management practices is expected to produce a more stable
long-term fixed maturity investment portfolio that is not
subject to extreme interest rate sensitivity and principal
deterioration.
The fair value of Old Republics long-term fixed maturity
investment portfolio is sensitive, however, to fluctuations in
the level of interest rates, but not materially affected by
changes in anticipated cash flows caused by any prepayments. The
impact of interest rate movements on the long-term fixed
maturity investment portfolio generally affects net unrealized
gains or losses. As a general rule, rising interest rates
enhance currently available yields but typically lead to a
reduction in the fair value of existing fixed maturity
investments. By contrast, a decline in such rates reduces
currently available yields but usually serves to increase the
fair value of the existing fixed maturity investment portfolio.
All such changes in fair value are reflected, net of deferred
income taxes, directly in the shareholders equity account,
and as a separate component of the statement of comprehensive
income. Given Old Republics inability to forecast or
control the movement of interest rates, Old Republic sets the
maturity spectrum of its fixed maturity securities portfolio
within parameters of estimated liability payouts, and focuses
the overall portfolio on high quality investments. By so doing,
Old Republic believes it is reasonably assured of its ability to
hold securities to maturity as it may deem necessary in changing
environments, and of ultimately recovering their aggregate cost.
Possible future declines in fair values for Old Republics
bond and stock portfolios would negatively affect the common
shareholders equity account at any point in time, but
would not necessarily result in the recognition of realized
investment losses. Old Republic reviews the status and fair
value changes of each of its investments on at
116
least a quarterly basis during the year, and estimates of
other-than-temporary
impairments in the portfolios value are evaluated and
established at each quarterly balance sheet date. In reviewing
investments for
other-than-temporary
impairment, Old Republic, in addition to a securitys
market price history, considers the totality of such factors as
the issuers operating results, financial condition and
liquidity, its ability to access capital markets, credit rating
trends, most current audit opinion, industry and securities
markets conditions, and analyst expectations to reach its
conclusions. Sudden fair value declines caused by such adverse
developments as newly emerged or imminent bankruptcy filings,
issuer default on significant obligations, or reports of
financial accounting developments that bring into question the
validity of previously reported earnings or financial condition,
are recognized as realized losses as soon as credible publicly
available information emerges to confirm such developments.
Absent issuer-specific circumstances that would result in a
contrary conclusion, any equity security with an unrealized
investment loss amounting to a 20% or greater decline for a six
month period is considered
other-than-temporarily-impaired.
In the event Old Republics estimate of
other-than-temporary
impairments is insufficient at any point in time, future
periods net income (loss) would be affected adversely by
the recognition of additional realized or impairment losses, but
its financial condition would not necessarily be affected
adversely inasmuch as such losses, or a portion of them, could
have been recognized previously as unrealized losses.
The following tables show certain information relating to Old
Republics fixed maturity and equity portfolios as of the
dates shown:
Credit
Quality Ratings of Fixed Maturity Securities(a)
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Aaa
|
|
|
21.8
|
%
|
|
|
22.3
|
%
|
Aa
|
|
|
20.2
|
|
|
|
20.3
|
|
A
|
|
|
30.6
|
|
|
|
30.3
|
|
Baa
|
|
|
26.2
|
|
|
|
25.7
|
|
|
|
|
|
|
|
|
|
|
Total investment grade
|
|
|
98.8
|
|
|
|
98.6
|
|
All other(b)
|
|
|
1.2
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Credit quality ratings used are those assigned primarily by
Moodys for U.S. Governments, Agencies and Corporate
issuers and by Standard & Poors
(S&P) for U.S. and Canadian Municipal issuers,
which are converted to equivalent Moodys ratings
classifications. |
|
(b) |
|
All other includes non-investment grade or non-rated
issuers. |
Gross
Unrealized Losses Stratified by Industry Concentration for
Non-Investment Grade Fixed Maturity Securities
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
|
|
Gross
|
|
|
Amortized
|
|
Unrealized
|
|
|
Cost
|
|
Losses
|
|
Fixed Maturity Securities by Industry Concentration:
|
|
|
|
|
|
|
|
|
Banking
|
|
$
|
23.0
|
|
|
$
|
1.4
|
|
Industrial
|
|
|
6.5
|
|
|
|
.5
|
|
Retail
|
|
|
4.1
|
|
|
|
.2
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
33.7
|
(c)
|
|
$
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) |
|
Represents .4% of the total fixed maturity securities portfolio. |
117
Gross
Unrealized Losses Stratified by Industry Concentration for
Investment Grade Fixed Maturity Securities
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
|
|
Gross
|
|
|
Amortized
|
|
Unrealized
|
|
|
Cost
|
|
Losses
|
|
Fixed Maturity Securities by Industry Concentration:
|
|
|
|
|
|
|
|
|
Energy
|
|
$
|
33.5
|
|
|
$
|
1.1
|
|
Industrial
|
|
|
69.8
|
|
|
|
1.0
|
|
Utilities
|
|
|
56.5
|
|
|
|
.7
|
|
Banking
|
|
|
15.9
|
|
|
|
.6
|
|
Other (includes 13 industry groups)
|
|
|
282.8
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
458.7
|
(d)
|
|
$
|
5.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) |
|
Represents 5.8% of the total fixed maturity securities portfolio. |
Gross
Unrealized Losses Stratified by Industry Concentration for
Equity Securities
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
|
|
Gross
|
|
|
|
|
Unrealized
|
|
|
Cost
|
|
Losses
|
|
Equity Securities by Industry Concentration:
|
|
|
|
|
|
|
|
|
Index Funds
|
|
$
|
112.8
|
|
|
$
|
7.9
|
|
Health Care
|
|
|
15.1
|
|
|
|
.2
|
|
Natural Gas
|
|
|
.3
|
|
|
|
|
|
Insurance
|
|
|
.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
128.5
|
(e)
|
|
$
|
8.2
|
(f)
|
|
|
|
|
|
|
|
|
|
|
|
|
(e) |
|
Represents 35.8% of the total equity securities portfolio. |
|
|
|
(f) |
|
Represents 2.3% of the adjusted cost of the total equity
securities portfolio, while gross unrealized gains represent
78.4% of the portfolio. |
Gross
Unrealized Losses Stratified by Maturity Ranges for All Fixed
Maturity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
Amortized Cost
|
|
Gross
|
|
|
of Fixed Maturity Securities
|
|
Unrealized Losses
|
|
|
|
|
Non-
|
|
|
|
Non-
|
|
|
|
|
Investment
|
|
|
|
Investment
|
|
|
All
|
|
Grade Only
|
|
All
|
|
Grade Only
|
|
Maturity Ranges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Due after one year through five years
|
|
|
94.4
|
|
|
|
13.4
|
|
|
|
1.3
|
|
|
|
1.0
|
|
Due after five years through ten years
|
|
|
355.3
|
|
|
|
20.3
|
|
|
|
4.8
|
|
|
|
1.1
|
|
Due after ten years
|
|
|
42.7
|
|
|
|
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
492.5
|
|
|
$
|
33.7
|
|
|
$
|
7.7
|
|
|
$
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118
Gross
Unrealized Losses Stratified by Duration and Amount of
Unrealized Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
|
Amount of Gross Unrealized Losses
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
Total Gross
|
|
|
|
20% of
|
|
|
20% to 50%
|
|
|
More Than
|
|
|
Unrealized
|
|
|
|
Cost
|
|
|
of Cost
|
|
|
50% of Cost
|
|
|
Loss
|
|
|
Number of Months in Loss Position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to six months
|
|
$
|
4.6
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4.6
|
|
Seven to twelve months
|
|
|
.1
|
|
|
|
|
|
|
|
|
|
|
|
.1
|
|
More than twelve months
|
|
|
2.5
|
|
|
|
.3
|
|
|
|
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7.3
|
|
|
$
|
.3
|
|
|
$
|
|
|
|
$
|
7.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to six months
|
|
$
|
.3
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
.3
|
|
Seven to twelve months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More than twelve months
|
|
|
7.8
|
|
|
|
|
|
|
|
|
|
|
|
7.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8.1
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
8.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Issues in Loss Position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to six months
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
92
|
|
Seven to twelve months
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
More than twelve months
|
|
|
11
|
|
|
|
1
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
107
|
|
|
|
1
|
|
|
|
|
|
|
|
108
|
(g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to six months
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Seven to twelve months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More than twelve months
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4
|
|
|
|
1
|
|
|
|
|
|
|
|
5
|
(g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(g) |
|
At March 31, 2010 the number of issues in an unrealized
loss position represent 5.3% as to fixed maturities, and 31.3%
as to equity securities of the total number of such issues held
by the Company. |
The aging of issues with unrealized losses employs closing
market price comparisons with an issues original cost net
of
other-than-temporary
impairment adjustments. The percentage reduction from such
adjusted cost reflects the decline as of a specific point in
time (March 31, 2010 in the above table) and, accordingly,
is not indicative of a securitys value having been
consistently below its cost at the percentages and throughout
the periods shown.
119
Age Distribution
of Fixed Maturity Securities
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Maturity Ranges:
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
|
10.9
|
%
|
|
|
9.3
|
%
|
Due after one year through five years
|
|
|
53.2
|
|
|
|
55.0
|
|
Due after five years through ten years
|
|
|
35.1
|
|
|
|
34.9
|
|
Due after ten years through fifteen years
|
|
|
.8
|
|
|
|
.8
|
|
Due after fifteen years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Average Maturity in Years
|
|
|
4.3
|
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
Duration(h)
|
|
|
3.7
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(h) |
|
Duration is used as a measure of bond price sensitivity to
interest rate changes. A duration of 3.7 as of March 31,
2010 implies that a 100 basis point parallel increase in
interest rates from current levels would result in a possible
decline in the fair value of the long-term fixed maturity
investment portfolio of approximately 3.7%. |
Composition
of Unrealized Gains (Losses)
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Fixed Maturity Securities:
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
$
|
7,877.1
|
|
|
$
|
7,896.2
|
|
Estimated fair value
|
|
|
8,352.2
|
|
|
|
8,326.8
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized gains
|
|
|
482.8
|
|
|
|
448.0
|
|
Gross unrealized losses
|
|
|
(7.7
|
)
|
|
|
(17.4
|
)
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses)
|
|
$
|
475.0
|
|
|
$
|
430.5
|
|
|
|
|
|
|
|
|
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
Original cost
|
|
$
|
675.9
|
|
|
$
|
674.9
|
|
Adjusted cost(*)
|
|
|
358.6
|
|
|
|
357.5
|
|
Estimated fair value
|
|
|
631.4
|
|
|
|
502.9
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized gains
|
|
|
281.0
|
|
|
|
159.0
|
|
Gross unrealized losses
|
|
|
(8.2
|
)
|
|
|
(13.7
|
)
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses)
|
|
$
|
272.7
|
|
|
$
|
145.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
net of OTTI adjustments |
Other Assets Among other major assets,
substantially all of Old Republics receivables are not
past due. Reinsurance recoverable balances on paid or estimated
unpaid losses are deemed recoverable from solvent reinsurers or
have otherwise been reduced by allowances for estimated amounts
unrecoverable. Deferred policy acquisition costs are estimated
by taking into account the variable costs of producing specific
types of insurance policies, and evaluating their recoverability
on the basis of recent trends in claims costs. Old
Republics deferred policy acquisition cost balances have
not fluctuated substantially from
period-to-period
and do not represent significant percentages of assets or
shareholders equity.
Liquidity The parent holding company meets
its liquidity and capital needs principally through dividends
paid by its subsidiaries. From time to time additional cash
needs are also met by accessing Old Republics commercial
paper program
and/or the
debt and equity capital markets. The insurance
subsidiaries ability to pay
120
cash dividends to the parent company is generally restricted by
law or subject to approval of the insurance regulatory
authorities of the states in which they are domiciled. Old
Republic can receive up to $295.6 in dividends from its
subsidiaries in 2010 without the prior approval of regulatory
authorities. The liquidity achievable through such permitted
dividend payments is considered adequate to cover the parent
holding companys currently expected cash outflows
represented mostly by interest and scheduled repayments on
outstanding debt, quarterly cash dividend payments to
shareholders, modest operating expenses, and the near-term
capital needs of its operating company subsidiaries. Old
Republic can currently access the commercial paper market for up
to $150.0.
Capitalization Old Republics total
capitalization of $4,343.1 at March 31, 2010 consisted of
debt of $347.2 and common shareholders equity of $3,995.8.
Changes in the common shareholders equity account reflect
primarily operating results for the period then ended, dividend
payments, and changes in market valuations of invested assets.
Old Republic has paid cash dividends to its shareholders without
interruption since 1942, and has increased the annual rate in
each of the past 29 calendar years. The dividend rate is
reviewed and approved by the Board of Directors on a quarterly
basis each year. In establishing each years cash dividend
rate, Old Republic does not follow a strict formulaic approach.
Rather, it favors a gradual rise in the annual dividend rate
that is largely reflective of long-term consolidated operating
earnings trends. Accordingly, each years dividend rate is
set judgmentally in consideration of such key factors as the
dividend paying capacity of Old Republics insurance
subsidiaries, the trends in average annual statutory and GAAP
earnings for the five most recent calendar years, and
managements long-term expectations for Old Republics
consolidated business.
Under state insurance regulations, Old Republics three
mortgage guaranty insurance subsidiaries are required to operate
at a maximum risk to capital ratio of 25:1 or otherwise hold
minimum amounts of capital based on specified formulas. If a
companys risk to capital ratio exceeds the limit or its
capital falls below the minimum prescribed levels, absent
expressed regulatory approval, it may be prohibited from writing
new business until its risk to capital ratio falls below the
limit or it reestablishes the required minimum levels of
capital. At March 31, 2010, the statutory risk to capital
ratio was 23.2:1 for the three companies combined. A
continuation of operating losses could further reduce statutory
surplus thus increasing the risk to capital ratio which Old
Republic evaluates on a quarterly basis.
In anticipation that Old Republics principal mortgage
insurance subsidiary, Republic Mortgage Insurance Company
(RMIC), will breach the minimum capital requirement
during 2010, RMIC has requested and received waivers of the
minimum policyholder position requirements from the North
Carolina Department of Insurance, the Wisconsin Commissioner of
Insurance, the Illinois Department of Insurance, the Florida
Office of Insurance Regulation, and the Arizona Department of
Insurance. RMIC has made similar requests to the insurance
regulators in other states that have similar minimum capital or
maximum
risk-to-capital
requirements. New insurance written in the states that have not
issued a waiver to RMIC represented 34.6% of the total for the
quarter ended March 31, 2010.
Old Republic has access to various capital resources including
dividends from its subsidiaries, holding company investments,
undrawn capacity under its commercial paper program, and access
to debt and equity capital markets. At March 31, 2010, Old
Republics consolidated debt to equity ratio was 8.7%. This
relatively low level of financial leverage should provide Old
Republic with additional borrowing capacity to meet its capital
commitments.
|
|
B.
|
Years
Ended December 31, 2009, 2008 and 2007
|
Old Republics financial position at December 31, 2009
reflected increases in assets, liabilities, and common
shareholders equity of 7.0%, 8.1%, and 4.0%, respectively,
when compared to the immediately preceding year-end. Cash and
invested assets represented 69.6% and 66.8% of consolidated
assets as of December 31, 2009 and December 31, 2008,
respectively. Consolidated operating cash flow was positive at
$532.9 in 2009 compared to $565.6 in 2008 and $862.5 in 2007. As
of December 31, 2009, the invested asset base increased
11.6% to $9,688.4 as a result of positive operating cash flows,
new funds from an April 2009 securities offering, and an
increase in the fair value of investments.
Investments During 2009 and 2008, Old
Republic committed substantially all investable funds to short
to intermediate-term fixed maturity securities. At both
December 31, 2009 and 2008, approximately 99% of Old
121
Republics investments consisted of marketable securities.
Old Republic continues to adhere to its long-term policy of
investing primarily in investment grade, marketable securities.
The portfolio contains little or no insurance risk-correlated
asset exposures real estate, mortgage-backed securities,
CDOs, derivatives, junk bonds, hybrid securities, or
illiquid private equity investments. In a similar vein, Old
Republic does not engage in hedging transactions or securities
lending operations, nor does it invest in securities whose
values are predicated on non-regulated financial instruments
exhibiting amorphous or unfunded counter-party risk attributes.
At December 31, 2009, Old Republic had no fixed maturity
investments in default as to principal
and/or
interest.
Relatively high short-term maturity investment positions
continued to be maintained as of December 31, 2009. Such
positions reflect a large variety of seasonal and
intermediate-term factors including current operating needs,
expected operating cash flows, quarter-end cash flow
seasonality, and investment strategy considerations.
Accordingly, the future level of short-term investments will
vary and respond to the interplay of these factors and may, as a
result, increase or decrease from current levels.
Old Republic does not own or utilize derivative financial
instruments for the purpose of hedging, enhancing the overall
return of its investment portfolio, or reducing the cost of its
debt obligations. With regard to its equity portfolio, Old
Republic does not own any options nor does it engage in any type
of option writing. Traditional investment management tools and
techniques are employed to address the yield and valuation
exposures of the invested assets base. The long-term fixed
maturity investment portfolio is managed so as to limit various
risks inherent in the bond market. Credit risk is addressed
through asset diversification and the purchase of investment
grade securities. Reinvestment rate risk is reduced by
concentrating on non-callable issues, and by taking
asset-liability matching considerations into account. Purchases
of mortgage and asset backed securities, which have variable
principal prepayment options, are generally avoided. Market
value risk is limited through the purchase of bonds of
intermediate maturity. The combination of these investment
management practices is expected to produce a more stable
long-term fixed maturity investment portfolio that is not
subject to extreme interest rate sensitivity and principal
deterioration.
The fair value of Old Republics long-term fixed maturity
investment portfolio is sensitive, however, to fluctuations in
the level of interest rates, but not materially affected by
changes in anticipated cash flows caused by any prepayments. The
impact of interest rate movements on the long-term fixed
maturity investment portfolio generally affects net unrealized
gains or losses. As a general rule, rising interest rates
enhance currently available yields but typically lead to a
reduction in the fair value of existing fixed maturity
investments. By contrast, a decline in such rates reduces
currently available yields but usually serves to increase the
fair value of the existing fixed maturity investment portfolio.
All such changes in fair value are reflected, net of deferred
income taxes, directly in the shareholders equity account,
and as a separate component of the statement of comprehensive
income. Given Old Republics inability to forecast or
control the movement of interest rates, Old Republic sets the
maturity spectrum of its fixed maturity securities portfolio
within parameters of estimated liability payouts, and focuses
the overall portfolio on high quality investments. By so doing,
Old Republic believes it is reasonably assured of its ability to
hold securities to maturity as it may deem necessary in changing
environments, and of ultimately recovering their aggregate cost.
Possible future declines in fair values for Old Republics
bond and stock portfolios would negatively affect the common
shareholders equity account at any point in time, but
would not necessarily result in the recognition of realized
investment losses. Old Republic reviews the status and fair
value changes of each of its investments on at least a quarterly
basis during the year, and estimates of
other-than-temporary
impairments in the portfolios value are evaluated and
established at each quarterly balance sheet date. In reviewing
investments for
other-than-temporary
impairment, Old Republic, in addition to a securitys
market price history, considers the totality of such factors as
the issuers operating results, financial condition and
liquidity, its ability to access capital markets, credit rating
trends, most current audit opinion, industry and securities
markets conditions, and analyst expectations to reach its
conclusions. Sudden fair value declines caused by such adverse
developments as newly emerged or imminent bankruptcy filings,
issuer default on significant obligations, or reports of
financial accounting developments that bring into question the
validity of previously reported earnings or financial condition,
are recognized as realized losses as soon as credible publicly
available information emerges to confirm such developments.
Absent issuer-specific circumstances that would result in a
contrary conclusion, any equity security with an unrealized
investment loss amounting to a 20% or greater decline for a six
month period is considered
other-than-temporarily-impaired.
In
122
the event Old Republics estimate of
other-than-temporary
impairments is insufficient at any point in time, future
periods net income would be affected adversely by the
recognition of additional realized or impairment losses, but its
financial condition would not necessarily be affected adversely
inasmuch as such losses, or a portion of them, could have been
recognized previously as unrealized losses.
The following tables show certain information relating to Old
Republics fixed maturity and equity portfolios as of the
dates shown:
Credit
Quality Ratings of Fixed Maturity Securities(a)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Aaa
|
|
|
22.3
|
%
|
|
|
20.4
|
%
|
Aa
|
|
|
20.3
|
|
|
|
24.5
|
|
A
|
|
|
30.3
|
|
|
|
31.4
|
|
Baa
|
|
|
25.7
|
|
|
|
22.0
|
|
|
|
|
|
|
|
|
|
|
Total investment grade
|
|
|
98.6
|
|
|
|
98.3
|
|
All other(b)
|
|
|
1.4
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Credit quality ratings used are those assigned primarily by
Moodys for U.S. Governments, Agencies and Corporate
issuers and by Standard & Poors
(S&P) for U.S. and Canadian Municipal issuers,
which are converted to equivalent Moodys ratings
classifications. In the second quarter of 2009, Old Republic
changed its source of credit quality ratings from Moodys
to S&P for U.S. Municipal issuers due to their wider credit
coverage. The December 31, 2008 disclosures have been
restated to be comparable to the current period classifications.
The effect of such change moderately improved the previously
reported credit quality ratings. |
|
(b) |
|
All other includes non-investment grade or non-rated
issuers. |
Gross
Unrealized Losses Stratified by Industry Concentration for
Non-Investment Grade Fixed Maturity Securities
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
Gross
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
|
Cost
|
|
|
Losses
|
|
|
Fixed Maturity Securities by Industry Concentration:
|
|
|
|
|
|
|
|
|
Banking
|
|
$
|
23.0
|
|
|
$
|
5.1
|
|
Retail
|
|
|
11.5
|
|
|
|
.7
|
|
Industrial
|
|
|
17.4
|
|
|
|
.5
|
|
Consumer non-durables
|
|
|
9.9
|
|
|
|
.1
|
|
Other (includes 2 industry groups)
|
|
|
7.5
|
|
|
|
.1
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
69.6
|
(c)
|
|
$
|
6.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) |
|
Represents .9% of the total fixed maturity securities portfolio. |
123
Gross
Unrealized Losses Stratified by Industry Concentration for
Investment Grade Fixed Maturity Securities
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
Gross
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
|
Cost
|
|
|
Losses
|
|
|
Fixed Maturity Securities by Industry Concentration:
|
|
|
|
|
|
|
|
|
U.S. Government & Agencies
|
|
$
|
302.7
|
|
|
$
|
2.9
|
|
Banking
|
|
|
36.3
|
|
|
|
1.5
|
|
Energy
|
|
|
45.6
|
|
|
|
1.2
|
|
Industrial
|
|
|
51.7
|
|
|
|
1.0
|
|
Other (includes 15 industry groups)
|
|
|
277.2
|
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
713.9
|
(d)
|
|
$
|
10.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) |
|
Represents 9.0% of the total fixed maturity securities portfolio. |
Gross
Unrealized Losses Stratified by Industry Concentration for
Equity Securities
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
|
Cost
|
|
|
Losses
|
|
|
Equity Securities by Industry Concentration:
|
|
|
|
|
|
|
|
|
Index Funds
|
|
$
|
112.8
|
|
|
$
|
13.3
|
|
Finance
|
|
|
1.2
|
|
|
|
.2
|
|
Natural Gas
|
|
|
.3
|
|
|
|
|
|
Insurance
|
|
|
.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
114.6
|
(e)
|
|
$
|
13.7
|
(f)
|
|
|
|
|
|
|
|
|
|
|
|
|
(e) |
|
Represents 32.1% of the total equity securities portfolio. |
|
|
|
(f) |
|
Represents 3.8% of the cost of the total equity securities
portfolio, while gross unrealized gains represent 44.5% of the
portfolio. |
Gross
Unrealized Losses Stratified by Maturity Ranges for All Fixed
Maturity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Amortized Cost of Fixed Maturity Securities
|
|
|
Gross Unrealized Losses
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
Investment
|
|
|
|
|
|
Investment
|
|
|
|
All
|
|
|
Grade Only
|
|
|
All
|
|
|
Grade Only
|
|
|
Maturity Ranges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
.9
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Due after one year through five years
|
|
|
339.1
|
|
|
|
43.1
|
|
|
|
5.4
|
|
|
|
3.2
|
|
Due after five years through ten years
|
|
|
399.8
|
|
|
|
26.5
|
|
|
|
10.2
|
|
|
|
3.3
|
|
Due after ten years
|
|
|
43.7
|
|
|
|
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
783.5
|
|
|
$
|
69.6
|
|
|
$
|
17.4
|
|
|
$
|
6.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124
Gross
Unrealized Losses Stratified by Duration and Amount of
Unrealized Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Amount of Gross Unrealized Losses
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
Total Gross
|
|
|
|
20% of
|
|
|
20% to 50%
|
|
|
More Than
|
|
|
Unrealized
|
|
|
|
Cost
|
|
|
of Cost
|
|
|
50% of Cost
|
|
|
Loss
|
|
|
Number of Months in Loss Position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to six months
|
|
$
|
8.4
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
8.4
|
|
Seven to twelve months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More than twelve months
|
|
|
3.6
|
|
|
|
5.3
|
|
|
|
|
|
|
|
8.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12.0
|
|
|
$
|
5.3
|
|
|
$
|
|
|
|
$
|
17.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to six months
|
|
$
|
|
|
|
$
|
.2
|
|
|
$
|
|
|
|
$
|
.2
|
|
Seven to twelve months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More than twelve months
|
|
|
13.3
|
|
|
|
|
|
|
|
|
|
|
|
13.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13.4
|
|
|
$
|
.3
|
|
|
$
|
|
|
|
$
|
13.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Issues in Loss Position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to six months
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
|
119
|
|
Seven to twelve months
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
More than twelve months
|
|
|
32
|
|
|
|
3
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
152
|
|
|
|
3
|
|
|
|
|
|
|
|
155
|
(g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to six months
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
2
|
|
Seven to twelve months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More than twelve months
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3
|
|
|
|
2
|
|
|
|
|
|
|
|
5
|
(g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(g) |
|
At December 31, 2009 the number of issues in an unrealized
loss position represent 7.5% as to fixed maturities, and 31.3%
as to equity securities of the total number of such issues held
by Old Republic. |
The aging of issues with unrealized losses employs closing
market price comparisons with an issues original cost net
of
other-than-temporary
impairment adjustments. The percentage reduction from such
adjusted cost reflects the decline as of a specific point in
time (December 31, 2009 in the above table) and,
accordingly, is not indicative of a securitys value having
been consistently below its cost at the percentages and
throughout the periods shown.
125
Age Distribution
of Fixed Maturity Securities
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Maturity Ranges:
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
|
9.3
|
%
|
|
|
14.0
|
%
|
Due after one year through five years
|
|
|
55.0
|
|
|
|
51.0
|
|
Due after five years through ten years
|
|
|
34.9
|
|
|
|
34.7
|
|
Due after ten years through fifteen years
|
|
|
.8
|
|
|
|
.3
|
|
Due after fifteen years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Average Maturity in Years
|
|
|
4.4
|
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
Duration(h)
|
|
|
3.8
|
|
|
|
3.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(h) |
|
Duration is used as a measure of bond price sensitivity to
interest rate changes. A duration of 3.8 as of December 31,
2009 implies that a 100 basis point parallel increase in
interest rates from current levels would result in a possible
decline in the fair value of the long-term fixed maturity
investment portfolio of approximately 3.8%. |
Composition
of Unrealized Gains (Losses)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Fixed Maturity Securities:
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
$
|
7,896.2
|
|
|
$
|
7,385.2
|
|
Estimated fair value
|
|
|
8,326.8
|
|
|
|
7,406.9
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized gains
|
|
|
448.0
|
|
|
|
196.8
|
|
Gross unrealized losses
|
|
|
(17.4
|
)
|
|
|
(175.0
|
)
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses)
|
|
$
|
430.5
|
|
|
$
|
21.7
|
|
|
|
|
|
|
|
|
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
Original cost
|
|
$
|
674.9
|
|
|
$
|
729.2
|
|
Adjusted cost(*)
|
|
|
357.5
|
|
|
|
373.3
|
|
Estimated fair value
|
|
|
502.9
|
|
|
|
350.3
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized gains
|
|
|
159.0
|
|
|
|
49.6
|
|
Gross unrealized losses
|
|
|
(13.7
|
)
|
|
|
(72.7
|
)
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses)
|
|
$
|
145.3
|
|
|
$
|
(23.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
net of OTTI adjustments |
Other Assets Among other major assets,
substantially all of Old Republics receivables are not
past due. Reinsurance recoverable balances on paid or estimated
unpaid losses are deemed recoverable from solvent reinsurers or
have otherwise been reduced by allowances for estimated amounts
unrecoverable. Deferred policy acquisition costs are estimated
by taking into account the variable costs of producing specific
types of insurance policies, and evaluating their recoverability
on the basis of recent trends in claims costs. Old
Republics deferred policy acquisition cost balances have
not fluctuated substantially from
period-to-period
and do not represent significant percentages of assets or
shareholders equity.
126
Liquidity The parent holding company meets
its liquidity and capital needs principally through dividends
paid by its subsidiaries. From time to time additional cash
needs are also met by accessing Old Republics commercial
paper program
and/or debt
and equity capital markets. The insurance subsidiaries
ability to pay cash dividends to the parent company is generally
restricted by law or subject to approval of the insurance
regulatory authorities of the states in which they are
domiciled. Old Republic can receive up to $295.6 in dividends
from its subsidiaries in 2010 without the prior approval of
regulatory authorities. The liquidity achievable through such
permitted dividend payments is considered adequate to cover the
parent holding companys currently expected cash outflows
represented mostly by interest and scheduled repayments on
outstanding debt, quarterly cash dividend payments to
shareholders, modest operating expenses at the holding company,
and the near-term capital needs of its operating company
subsidiaries. Old Republic can currently access the commercial
paper market for up to $150.0.
Capitalization Old Republics total
capitalization of $4,238.2 at December 31, 2009 consisted
of debt of $346.7 and common shareholders equity of
$3,891.4. Changes in the common shareholders equity
account for the three most recent years reflect primarily
operating results for the period then ended, dividend payments,
and changes in market valuations of invested assets. Old
Republic has paid cash dividends to its shareholders without
interruption since 1942, and has increased the annual rate in
each of the past 28 years. The dividend rate is reviewed
and approved by the Board of Directors on a quarterly basis each
year. In establishing each years cash dividend rate Old
Republic does not follow a strict formulaic approach. Rather, it
favors a gradual rise in the annual dividend rate that is
largely reflective of long-term consolidated operating earnings
trends. Accordingly, each years dividend rate is set
judgmentally in consideration of such key factors as the
dividend paying capacity of Old Republics insurance
subsidiaries, the trends in average annual statutory and GAAP
earnings for the five most recent calendar years, and
managements long-term expectations for Old Republics
consolidated business.
Under state insurance regulations, Old Republics three
mortgage guaranty insurance subsidiaries are required to operate
at a maximum risk to capital ratio of 25:1 or otherwise hold
minimum amounts of capital based on specified formulas. If a
companys risk to capital ratio exceeds the limit or its
capital falls below the minimum prescribed levels, absent
expressed regulatory approval, it may be prohibited from writing
new business until its risk to capital ratio falls below the
limit or it reestablishes the required minimum levels of
capital. At December 31, 2009, the statutory risk to
capital ratio was 23.1:1 for the three companies combined. A
continuation of operating losses could further reduce statutory
surplus thus increasing the risk to capital ratio which Old
Republic evaluates on a quarterly basis. During the fourth
quarter of 2008, capital funds of $150.0 were added to Old
Republics mortgage guaranty group.
Old Republic has access to various capital resources including
dividends from its subsidiaries, holding company investments,
undrawn capacity under its commercial paper program, and access
to debt and equity capital markets. At December 31, 2009,
Old Republics consolidated debt to equity ratio was 8.9%.
This relatively low level of financial leverage provides Old
Republic with additional borrowing capacity to meet its capital
commitments. During the second quarter of 2009, additional
capital funds of $30.0 and $132.0 were directed to the title and
general insurance segments, respectively, to enhance insurance
capacity.
Contractual Obligations The following table
shows certain information relating to Old Republics
contractual obligations as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due in the Following Years
|
|
|
|
|
|
|
|
|
|
2011 and
|
|
|
2013 and
|
|
|
2015 and
|
|
|
|
Total
|
|
|
2010
|
|
|
2012
|
|
|
2014
|
|
|
After
|
|
|
Contractual Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
$
|
346.7
|
|
|
$
|
3.6
|
|
|
$
|
322.2
|
|
|
$
|
5.9
|
|
|
$
|
15.0
|
|
Interest on Debt
|
|
|
68.4
|
|
|
|
26.4
|
|
|
|
39.7
|
|
|
|
1.2
|
|
|
|
1.0
|
|
Operating Leases
|
|
|
168.2
|
|
|
|
38.7
|
|
|
|
55.0
|
|
|
|
32.5
|
|
|
|
41.8
|
|
Pension Benefits Contributions(a)
|
|
|
86.0
|
|
|
|
1.8
|
|
|
|
35.9
|
|
|
|
26.3
|
|
|
|
22.0
|
|
Claim & Claim Expense Reserves(b)
|
|
|
7,915.0
|
|
|
|
2,562.8
|
|
|
|
2,067.3
|
|
|
|
716.7
|
|
|
|
2,568.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,584.5
|
|
|
$
|
2,633.4
|
|
|
$
|
2,520.2
|
|
|
$
|
782.7
|
|
|
$
|
2,648.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127
|
|
|
(a) |
|
Represents estimated minimum funding of contributions for the
Old Republic International Salaried Employees Restated
Retirement Plan (the Old Republic Plan), the Bituminous Casualty
Corporation Retirement Income Plan (the Bitco Plan), and the Old
Republic National Title Group Pension Plan (the
Title Plan). Funding of the plans is dependent on a number
of factors including actual performance versus actuarial
assumptions made at the time of the actuarial valuations, as
well as, maintaining certain funding levels relative to
regulatory requirements. |
|
(b) |
|
Amounts are reported gross of reinsurance. As discussed herein
with respect to the nature of loss reserves and the estimating
process utilized in their establishment, Old Republics
loss reserves do not have a contractual maturity date. Estimated
gross loss payments are based primarily on historical claim
payment patterns, are subject to change due to a wide variety of
factors, do not reflect anticipated recoveries under the terms
of reinsurance contracts, and cannot be predicted with
certainty. Actual future loss payments may differ materially
from the current estimates shown in the table above. |
RESULTS
OF OPERATIONS
Revenues:
Premiums & Fees
Pursuant to GAAP applicable to the insurance industry, revenues
are recognized as follows:
Substantially all general insurance premiums pertain to annual
policies and are reflected in income on a pro-rata basis in
association with the related benefits, claims and expenses.
Earned but unbilled premiums are generally taken into income on
the billing date, while adjustments for retrospective premiums,
commissions and similar charges or credits are accrued on the
basis of periodic evaluations of current underwriting experience
and contractual obligations.
Old Republics mortgage guaranty premiums primarily stem
from monthly installments paid on long-duration, guaranteed
renewable insurance policies. Substantially all such premiums
are written and earned in the month coverage is effective. With
respect to relatively few annual or single premium policies,
earned premiums are largely recognized on a pro-rata basis over
the terms of the policies. As described more fully in the
Mortgage Guaranty Groups Risk Factors for premium income
and long-term claim exposures, there is a risk that the revenue
recognition for insured loans is not appropriately matched to
the risk exposure and the consequent recognition of both normal
and catastrophic loss occurrences.
Title premium and fee revenues stemming from Old Republics
direct operations (which include branch offices of its title
insurers and wholly owned agency subsidiaries) represent 36.6%
of consolidated title business revenues for the three months
ended March 31, 2010, and approximately 39% of such
revenues for the year ended December 31, 2009. Such
premiums are generally recognized as income at the escrow
closing date which approximates the policy effective date. Fee
income related to escrow and other closing services is
recognized when the related services have been performed and
completed. The remaining consolidated title premium and fee
revenues are produced by independent title agents and
underwritten title companies. Rather than making estimates that
could be subject to significant variance from actual premium and
fee production, Old Republic recognizes revenues from those
sources upon receipt. Such receipts can reflect a three to four
month lag relative to the effective date of the underlying title
policy, and are offset concurrently by production expenses and
claim reserve provisions.
128
The major sources of Old Republics earned premiums and
fees for the periods shown were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned Premiums and Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from Prior
|
|
|
|
General
|
|
|
Mortgage
|
|
|
Title
|
|
|
Other
|
|
|
Total
|
|
|
Period
|
|
|
Years Ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
2,155.1
|
|
|
$
|
518.2
|
|
|
$
|
850.7
|
|
|
$
|
77.0
|
|
|
$
|
3,601.2
|
|
|
|
5.9
|
%
|
2008
|
|
|
1,989.3
|
|
|
|
592.5
|
|
|
|
656.1
|
|
|
|
80.1
|
|
|
|
3,318.1
|
|
|
|
(7.9
|
)
|
2009
|
|
|
1,782.5
|
|
|
|
644.5
|
|
|
|
888.4
|
|
|
|
73.3
|
|
|
|
3,388.9
|
|
|
|
2.1
|
|
Quarters Ended March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
457.3
|
|
|
|
145.3
|
|
|
|
154.3
|
|
|
|
20.4
|
|
|
|
777.4
|
|
|
|
(8.2
|
)
|
2010
|
|
$
|
411.8
|
|
|
$
|
136.2
|
|
|
$
|
255.2
|
|
|
$
|
25.1
|
|
|
$
|
828.5
|
|
|
|
6.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 and 2008 General Insurance Group earned premiums
trended lower as a moderately declining rate environment for
most commercial insurance prices has hindered retention of some
business and precluded meaningful additions to the premium base.
Earned premium growth of 13.3% in 2007 reflects additional
business produced in a reasonably stable underwriting
environment and the year-end 2006 acquisition of a liability
insurance book of business.
2009 mortgage guaranty premium revenue increased 8.8% by
comparison to 2008 primarily due to the commutation of certain
reinsurance agreements during the third quarter of 2009. GAAP
requires that commutation reinsurance premiums of
$82.5 million received from lenders captive insurers
to cover future periods losses be recognized immediately
as income as of the effective date of the reinsurance
commutation agreements. Excluding the effect of immediate
premium revenue recognition for these reinsurance commutation
agreements, mortgage guaranty premium revenue would have
reflected a
year-over-year
decline of 4.1% in 2009. Mortgage guaranty premium revenues for
the three years ended December 31, 2009 were impacted by
more selective underwriting criteria applied since late 2007, an
overall decline in the industrys business penetration, and
by higher premium refunds related to coverage rescissions. These
lower premium revenue trends have been mitigated somewhat by
greater business persistency levels for business produced in
prior years, and by a continuing decline in premiums ceded to
lender-owned (captive) reinsurance companies.
Title Group premium and fee revenues grew by 35.4% in 2009
as a result of greater refinance transactions in late 2008 and
early 2009 and from market share gains taken from title industry
dislocations and consolidations. Title premium and fee revenues
decreased by 22.9% and 13.2% in 2008 and 2007, respectively. The
decline was particularly accentuated in the segments
direct operations, most of which are concentrated in the Western
United States, and all of which reflected a downturn in home
sales and resales.
The percentage allocation of net premiums earned for major
insurance coverages in the General Insurance Group was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Insurance Earned Premiums by Type of Coverage
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
Inland
|
|
|
|
|
|
|
|
|
|
Automobile
|
|
|
|
|
|
|
|
|
Marine
|
|
|
|
|
|
|
|
|
|
(Mostly
|
|
|
Workers
|
|
|
Financial
|
|
|
and
|
|
|
General
|
|
|
|
|
|
|
Trucking)
|
|
|
Compensation
|
|
|
Indemnity
|
|
|
Property
|
|
|
Liability
|
|
|
Other
|
|
|
Years Ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
35.0
|
%
|
|
|
23.5
|
%
|
|
|
13.8
|
%
|
|
|
9.3
|
%
|
|
|
7.8
|
%
|
|
|
10.6
|
%
|
2008
|
|
|
34.9
|
|
|
|
21.0
|
|
|
|
16.1
|
|
|
|
9.7
|
|
|
|
7.5
|
|
|
|
10.8
|
|
2009
|
|
|
36.6
|
|
|
|
21.7
|
|
|
|
13.5
|
|
|
|
9.5
|
|
|
|
8.0
|
|
|
|
10.7
|
|
Quarters Ended March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
35.2
|
|
|
|
22.5
|
|
|
|
14.5
|
|
|
|
9.7
|
|
|
|
8.5
|
|
|
|
9.6
|
|
2010
|
|
|
39.3
|
%
|
|
|
22.9
|
%
|
|
|
11.5
|
%
|
|
|
9.5
|
%
|
|
|
7.1
|
%
|
|
|
9.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129
The following tables provide information on production and
related risk exposure trends for Old Republics Mortgage
Guaranty Group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Guaranty Production by Type
|
|
|
|
Traditional
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary
|
|
|
Bulk
|
|
|
Other
|
|
|
Total
|
|
|
New Insurance Written:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
31,841.7
|
|
|
$
|
10,800.3
|
|
|
$
|
901.6
|
|
|
$
|
43,543.7
|
|
2008
|
|
|
20,861.9
|
|
|
|
3.5
|
|
|
|
1,123.5
|
|
|
|
21,989.0
|
|
2009
|
|
|
7,899.2
|
|
|
|
|
|
|
|
.5
|
|
|
|
7,899.8
|
|
Quarters Ended March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2,212.0
|
|
|
|
|
|
|
|
.5
|
|
|
|
2,212.6
|
|
2010
|
|
$
|
748.3
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
748.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary
|
|
|
Bulk
|
|
|
Other
|
|
|
Total
|
|
|
New Risk Written by Type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
7,844.5
|
|
|
$
|
724.5
|
|
|
$
|
15.2
|
|
|
$
|
8,584.4
|
|
2008
|
|
|
4,815.0
|
|
|
|
.6
|
|
|
|
11.8
|
|
|
|
4,827.5
|
|
2009
|
|
|
1,681.7
|
|
|
|
|
|
|
|
|
|
|
|
1,681.7
|
|
Quarters Ended March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
468.4
|
|
|
|
|
|
|
|
|
|
|
|
468.4
|
|
2010
|
|
$
|
168.2
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
168.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned Premiums
|
|
|
Persistency
|
|
|
|
|
|
|
|
|
|
Traditional
|
|
|
|
|
|
|
Direct
|
|
|
Net
|
|
|
Primary
|
|
|
Bulk
|
|
|
Premium and Persistency Trends by Type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
612.7
|
|
|
$
|
518.2
|
|
|
|
77.6
|
%
|
|
|
73.7
|
%
|
2008
|
|
|
698.4
|
|
|
|
592.5
|
|
|
|
83.9
|
|
|
|
88.4
|
|
2009
|
|
|
648.6
|
|
|
|
644.5
|
|
|
|
82.8
|
|
|
|
88.3
|
|
Quarters Ended March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
170.3
|
|
|
|
145.3
|
|
|
|
83.3
|
|
|
|
89.7
|
|
2010
|
|
$
|
145.8
|
|
|
$
|
136.2
|
|
|
|
83.6
|
%
|
|
|
88.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
While there is no consensus in the marketplace as to the precise
definition of
sub-prime,
Old Republic generally views loans with credit (FICO) scores
less than 620, loans underwritten with reduced levels of
documentation and loans with loan to value ratios in excess of
95% as having a higher risk of default. Risk in force
concentrations by these attributes are disclosed in the
following tables for both traditional primary and bulk
production. Premium rates for loans exhibiting greater risk
attributes are typically higher in anticipation of potentially
greater defaults and claim costs. Additionally, bulk insurance
policies, which represent 7.5% of total net risk in force as of
March 31, 2010, are frequently subject to deductibles and
aggregate stop losses which serve to limit the overall risk on a
pool of insured loans. As the decline in the housing markets has
accelerated and mortgage
130
lending standards have tightened, rising defaults and the
attendant increases in reserves and paid claims on higher risk
loans have become more significant drivers of increased claim
costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Risk in Force
|
|
|
|
Traditional
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary
|
|
|
Bulk
|
|
|
Other
|
|
|
Total
|
|
|
Net Risk in Force By Type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
18,808.5
|
|
|
$
|
2,539.9
|
|
|
$
|
511.1
|
|
|
$
|
21,859.5
|
|
2008
|
|
|
20,463.0
|
|
|
|
2,055.0
|
|
|
|
457.0
|
|
|
|
22,975.1
|
|
2009
|
|
|
18,727.9
|
|
|
|
1,776.7
|
|
|
|
297.2
|
|
|
|
20,801.9
|
|
As of March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
19,809.1
|
|
|
|
2,006.8
|
|
|
|
386.7
|
|
|
|
22,202.7
|
|
2010
|
|
$
|
18,209.6
|
|
|
$
|
1,507.4
|
|
|
$
|
274.8
|
|
|
$
|
19,991.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Analysis of Risk in Force
|
|
|
|
|
|
|
|
|
|
FICO
|
|
|
|
|
|
|
FICO Less
|
|
|
FICO 620
|
|
|
Greater
|
|
|
Unscored/
|
|
|
|
Than 620
|
|
|
to 680
|
|
|
Than 680
|
|
|
Unavailable
|
|
|
Risk in Force Distribution By FICO Scores:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Primary:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
8.5
|
%
|
|
|
33.6
|
%
|
|
|
55.1
|
%
|
|
|
2.8
|
%
|
2008
|
|
|
7.0
|
|
|
|
30.5
|
|
|
|
60.5
|
|
|
|
2.0
|
|
2009
|
|
|
6.5
|
|
|
|
28.8
|
|
|
|
63.1
|
|
|
|
1.6
|
|
As of March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
6.8
|
|
|
|
30.2
|
|
|
|
61.2
|
|
|
|
1.8
|
|
2010
|
|
|
6.5
|
%
|
|
|
28.5
|
%
|
|
|
63.4
|
%
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bulk(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
19.4
|
%
|
|
|
34.9
|
%
|
|
|
45.4
|
%
|
|
|
.3
|
%
|
2008
|
|
|
18.2
|
|
|
|
33.7
|
|
|
|
47.9
|
|
|
|
.2
|
|
2009
|
|
|
17.6
|
|
|
|
33.1
|
|
|
|
49.2
|
|
|
|
.1
|
|
As of March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
18.0
|
|
|
|
33.7
|
|
|
|
48.1
|
|
|
|
.2
|
|
2010
|
|
|
20.2
|
%
|
|
|
33.4
|
%
|
|
|
46.3
|
%
|
|
|
.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LTV
|
|
|
LTV
|
|
|
LTV
|
|
|
LTV
|
|
|
|
85.0
|
|
|
85.01
|
|
|
90.01
|
|
|
Greater
|
|
|
|
and Below
|
|
|
to 90.0
|
|
|
to 95.0
|
|
|
Than 95.0
|
|
|
Risk in Force Distribution By Loan to Value (LTV)
Ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Primary:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
4.7
|
%
|
|
|
34.4
|
%
|
|
|
32.0
|
%
|
|
|
28.9
|
%
|
2008
|
|
|
5.1
|
|
|
|
35.5
|
|
|
|
31.6
|
|
|
|
27.8
|
|
2009
|
|
|
5.3
|
|
|
|
36.4
|
|
|
|
31.6
|
|
|
|
26.7
|
|
As of March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
5.2
|
|
|
|
35.8
|
|
|
|
31.4
|
|
|
|
27.6
|
|
2010
|
|
|
5.3
|
%
|
|
|
36.5
|
%
|
|
|
31.6
|
%
|
|
|
26.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bulk(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
62.0
|
%
|
|
|
20.9
|
%
|
|
|
9.3
|
%
|
|
|
7.8
|
%
|
2008
|
|
|
63.5
|
|
|
|
20.1
|
|
|
|
8.6
|
|
|
|
7.8
|
|
2009
|
|
|
65.9
|
|
|
|
18.4
|
|
|
|
7.8
|
|
|
|
7.9
|
|
As of March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
64.0
|
|
|
|
19.8
|
|
|
|
8.4
|
|
|
|
7.8
|
|
2010
|
|
|
61.8
|
%
|
|
|
20.6
|
%
|
|
|
8.7
|
%
|
|
|
8.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk in
Force Distribution By Top Ten States:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Primary
|
|
|
|
FL
|
|
|
TX
|
|
|
GA
|
|
|
IL
|
|
|
OH
|
|
|
CA
|
|
|
NJ
|
|
|
VA
|
|
|
NC
|
|
|
PA
|
|
|
As of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
8.9
|
%
|
|
|
7.7
|
%
|
|
|
5.3
|
%
|
|
|
5.2
|
%
|
|
|
3.4
|
%
|
|
|
4.5
|
%
|
|
|
3.1
|
%
|
|
|
2.8
|
%
|
|
|
4.5
|
%
|
|
|
3.8
|
%
|
2008
|
|
|
8.3
|
|
|
|
8.1
|
|
|
|
5.2
|
|
|
|
5.2
|
|
|
|
3.2
|
|
|
|
5.5
|
|
|
|
3.1
|
|
|
|
2.9
|
|
|
|
4.4
|
|
|
|
3.8
|
|
2009
|
|
|
8.1
|
|
|
|
8.5
|
|
|
|
5.2
|
|
|
|
5.1
|
|
|
|
3.2
|
|
|
|
5.5
|
|
|
|
3.1
|
|
|
|
2.9
|
|
|
|
4.5
|
|
|
|
4.0
|
|
As of March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
8.3
|
|
|
|
8.1
|
|
|
|
5.2
|
|
|
|
5.1
|
|
|
|
3.1
|
|
|
|
5.7
|
|
|
|
3.1
|
|
|
|
2.9
|
|
|
|
4.3
|
|
|
|
3.9
|
|
2010
|
|
|
8.0
|
%
|
|
|
8.5
|
%
|
|
|
5.2
|
%
|
|
|
5.1
|
%
|
|
|
3.2
|
%
|
|
|
5.4
|
%
|
|
|
3.1
|
%
|
|
|
2.9
|
%
|
|
|
4.5
|
%
|
|
|
4.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bulk(a)
|
|
|
|
FL
|
|
|
TX
|
|
|
GA
|
|
|
IL
|
|
|
OH
|
|
|
CA
|
|
|
NJ
|
|
|
AZ
|
|
|
CO
|
|
|
NY
|
|
|
As of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
9.3
|
%
|
|
|
4.8
|
%
|
|
|
4.2
|
%
|
|
|
4.1
|
%
|
|
|
3.1
|
%
|
|
|
17.5
|
%
|
|
|
3.4
|
%
|
|
|
4.2
|
%
|
|
|
3.0
|
%
|
|
|
5.5
|
%
|
2008
|
|
|
10.0
|
|
|
|
4.6
|
|
|
|
4.0
|
|
|
|
3.9
|
|
|
|
3.1
|
|
|
|
18.2
|
|
|
|
3.4
|
|
|
|
4.3
|
|
|
|
2.9
|
|
|
|
5.4
|
|
2009
|
|
|
10.4
|
|
|
|
4.6
|
|
|
|
4.0
|
|
|
|
4.0
|
|
|
|
3.2
|
|
|
|
17.8
|
|
|
|
3.5
|
|
|
|
4.1
|
|
|
|
3.0
|
|
|
|
5.4
|
|
As of March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
10.1
|
|
|
|
4.6
|
|
|
|
4.0
|
|
|
|
3.9
|
|
|
|
3.1
|
|
|
|
18.2
|
|
|
|
3.5
|
|
|
|
4.3
|
|
|
|
3.0
|
|
|
|
5.4
|
|
2010
|
|
|
9.9
|
%
|
|
|
5.1
|
%
|
|
|
4.1
|
%
|
|
|
4.0
|
%
|
|
|
3.5
|
%
|
|
|
16.2
|
%
|
|
|
3.5
|
%
|
|
|
3.9
|
%
|
|
|
3.0
|
%
|
|
|
5.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Bulk pool risk in-force, which represented 39.8% and 46.8% of
total bulk risk in-force at March 31, 2010 and
December 31, 2009, respectively, has been allocated
pro-rata based on insurance in-force. |
132
|
|
|
|
|
|
|
|
|
|
|
Full
|
|
|
Reduced
|
|
|
|
Documentation
|
|
|
Documentation
|
|
|
Risk in Force Distribution By Level of Documentation:
|
|
|
|
|
|
|
|
|
Traditional Primary:
|
|
|
|
|
|
|
|
|
As of December 31:
|
|
|
|
|
|
|
|
|
2007
|
|
|
88.0
|
%
|
|
|
12.0
|
%
|
2008
|
|
|
90.0
|
|
|
|
10.0
|
|
2009
|
|
|
91.1
|
|
|
|
8.9
|
|
As of March 31:
|
|
|
|
|
|
|
|
|
2009
|
|
|
90.1
|
|
|
|
9.9
|
|
2010
|
|
|
91.4
|
%
|
|
|
8.6
|
%
|
|
|
|
|
|
|
|
|
|
Bulk(a):
|
|
|
|
|
|
|
|
|
As of December 31:
|
|
|
|
|
|
|
|
|
2007
|
|
|
49.6
|
%
|
|
|
50.4
|
%
|
2008
|
|
|
49.1
|
|
|
|
50.9
|
|
2009
|
|
|
49.4
|
|
|
|
50.6
|
|
As of March 31:
|
|
|
|
|
|
|
|
|
2009
|
|
|
49.0
|
|
|
|
51.0
|
|
2010
|
|
|
53.1
|
%
|
|
|
46.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate
|
|
|
|
|
|
|
& ARMS
|
|
|
ARMS
|
|
|
|
with Resets
|
|
|
with Resets
|
|
|
|
>= 5 years
|
|
|
< 5 years
|
|
|
Risk in Force Distribution By Loan Type:
|
|
|
|
|
|
|
|
|
Traditional Primary:
|
|
|
|
|
|
|
|
|
As of December 31:
|
|
|
|
|
|
|
|
|
2007
|
|
|
94.4
|
%
|
|
|
5.6
|
%
|
2008
|
|
|
95.8
|
|
|
|
4.2
|
|
2009
|
|
|
96.3
|
|
|
|
3.7
|
|
As of March 31:
|
|
|
|
|
|
|
|
|
2009
|
|
|
95.8
|
|
|
|
4.2
|
|
2010
|
|
|
96.4
|
%
|
|
|
3.6
|
%
|
|
|
|
|
|
|
|
|
|
Bulk(a):
|
|
|
|
|
|
|
|
|
As of December 31:
|
|
|
|
|
|
|
|
|
2007
|
|
|
70.9
|
%
|
|
|
29.1
|
%
|
2008
|
|
|
74.4
|
|
|
|
25.6
|
|
2009
|
|
|
75.4
|
|
|
|
24.6
|
|
As of March 31:
|
|
|
|
|
|
|
|
|
2009
|
|
|
74.8
|
|
|
|
25.2
|
|
2010
|
|
|
72.6
|
%
|
|
|
27.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Bulk pool risk in-force, which represented 39.8% and 46.8% of
total bulk risk in-force at March 31, 2010 and
December 31,2009, respectively, has been allocated pro-rata
based on insurance in-force. |
133
The following table shows the percentage distribution of
Title Group premium and fee revenues by production sources:
|
|
|
|
|
|
|
|
|
Title Premium and Fee Production by Source
|
|
|
|
|
|
|
Independent
|
|
|
|
|
|
|
Title
|
|
|
|
Direct
|
|
|
Agents &
|
|
|
|
Operations
|
|
|
Other
|
|
|
Years Ended December 31:
|
|
|
|
|
|
|
|
|
2007
|
|
|
32.1
|
%
|
|
|
67.9
|
%
|
2008
|
|
|
36.8
|
|
|
|
63.2
|
|
2009
|
|
|
38.5
|
|
|
|
61.5
|
|
Quarters Ended March 31:
|
|
|
|
|
|
|
|
|
2009
|
|
|
43.5
|
|
|
|
56.5
|
|
2010
|
|
|
36.6
|
%
|
|
|
63.4
|
%
|
|
|
|
|
|
|
|
|
|
Revenues:
Net Investment Income
Net investment income is affected by trends in interest and
dividend yields for the types of securities in which Old
Republics funds are invested during each reporting period.
The following tables reflect the segmented and consolidated
invested asset bases as of the indicated dates, and the
investment income earned and resulting yields on such assets.
Since Old Republic can exercise little control over fair values,
yields are evaluated on the basis of investment income earned in
relation to the cost of the underlying invested assets, though
yields based on the fair values of such assets are also shown in
the statistics below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
Invested
|
|
|
|
Invested Assets at Adjusted Cost
|
|
|
Value
|
|
|
Assets at
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
Adjust-
|
|
|
Fair
|
|
|
|
General
|
|
|
Mortgage
|
|
|
Title
|
|
|
and Other
|
|
|
Total
|
|
|
ment
|
|
|
Value
|
|
|
As of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
5,618.7
|
|
|
$
|
2,099.7
|
|
|
$
|
545.8
|
|
|
$
|
417.5
|
|
|
$
|
8,681.8
|
|
|
$
|
1.0
|
|
|
$
|
8,682.9
|
|
2009
|
|
|
5,670.9
|
|
|
|
2,466.3
|
|
|
|
615.2
|
|
|
|
355.2
|
|
|
|
9,107.8
|
|
|
|
580.6
|
|
|
|
9,688.4
|
|
As of March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
5,625.9
|
|
|
|
2,354.9
|
|
|
|
564.0
|
|
|
|
338.9
|
|
|
|
8,883.9
|
|
|
|
1.2
|
|
|
|
8,885.2
|
|
2010
|
|
$
|
5,700.4
|
|
|
$
|
2,379.2
|
|
|
$
|
598.1
|
|
|
$
|
368.2
|
|
|
$
|
9,046.1
|
|
|
$
|
752.3
|
|
|
$
|
9,798.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Income
|
|
|
Yield at
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
Original
|
|
|
Fair
|
|
|
|
General
|
|
|
Mortgage
|
|
|
Title
|
|
|
and Other
|
|
|
Total
|
|
|
Cost
|
|
|
Value
|
|
|
Years Ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
260.8
|
|
|
$
|
79.0
|
|
|
$
|
27.3
|
|
|
$
|
12.7
|
|
|
$
|
379.9
|
|
|
|
4.58
|
%
|
|
|
4.52
|
%
|
2008
|
|
|
253.6
|
|
|
|
86.8
|
|
|
|
25.1
|
|
|
|
11.6
|
|
|
|
377.3
|
|
|
|
4.27
|
|
|
|
4.33
|
|
2009
|
|
|
258.9
|
|
|
|
92.0
|
|
|
|
25.2
|
|
|
|
7.2
|
|
|
|
383.5
|
|
|
|
4.15
|
|
|
|
4.17
|
|
Quarters Ended March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
63.4
|
|
|
|
22.4
|
|
|
|
5.8
|
|
|
|
1.6
|
|
|
|
93.4
|
|
|
|
4.09
|
|
|
|
4.25
|
|
2010
|
|
$
|
64.6
|
|
|
$
|
23.1
|
|
|
$
|
6.6
|
|
|
$
|
1.8
|
|
|
$
|
96.2
|
|
|
|
4.09
|
%
|
|
|
3.95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net investment income grew by 1.6% and 11.2% in
2009 and 2007, respectively, and declined by .7% in 2008. This
revenue source was affected by a rising invested asset base
caused by positive consolidated operating cash flows, by a
concentration of investable assets in interest-bearing
securities, and by changes in market rates of return. Yield
trends reflect the relatively short maturity of Old
Republics fixed maturity securities portfolio as well as
continuation of a relatively lower yield environment during the
past several years.
134
Revenues:
Net Realized Gains (Losses)
Old Republics investment policies have not been designed
to maximize or emphasize the realization of investment gains.
Rather, these policies aim for a stable source of income from
interest and dividends, protection of capital, and the providing
of sufficient liquidity to meet insurance underwriting and other
obligations as they become payable in the future. Dispositions
of fixed maturity securities arise mostly from scheduled
maturities and early calls; for the first quarters of 2010 and
2009, 71.0% and 96.8%, respectively, and for the years ended
December 31, 2009, 2008 and 2007, 87.2%, 90.1% and 85.1%,
respectively, of all such dispositions resulted from these
occurrences. Dispositions of securities at a realized gain or
loss reflect such factors as ongoing assessments of
issuers business prospects, rotation among industry
sectors, changes in credit quality, and tax planning
considerations. Additionally, the amount of net realized gains
and losses registered in any one accounting period are affected
by the aforementioned assessments of securities values for
other-than-temporary
impairment. As a result of the interaction of all these factors
and considerations, net realized investment gains or losses can
vary significantly from
period-to-period,
and in Old Republics view are not indicative of any
particular trend or result in the basics of its insurance
business.
The following table reflects the composition of net realized
gains or losses for the periods shown. A significant portion of
Old Republics indexed stock portfolio was sold at a gain
during 2007, with proceeds redirected to a more concentrated,
select list of common stocks expected to provide greater
long-term total returns.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized Gains (Losses) on
|
|
|
|
|
|
|
|
|
|
Disposition of Securities
|
|
|
Impairment Losses on Securities
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
Net
|
|
|
|
Fixed
|
|
|
Securities and
|
|
|
|
|
|
Fixed
|
|
|
Securities and
|
|
|
|
|
|
Realized
|
|
|
|
Maturity
|
|
|
Miscellaneous
|
|
|
|
|
|
Maturity
|
|
|
Miscellaneous
|
|
|
|
|
|
Gains
|
|
|
|
Securities
|
|
|
Investments
|
|
|
Total
|
|
|
Securities
|
|
|
Investments
|
|
|
Total
|
|
|
(Losses)
|
|
|
Years Ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
2.2
|
|
|
$
|
68.1
|
|
|
$
|
70.3
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
70.3
|
|
2008
|
|
|
(25.0
|
)
|
|
|
20.9
|
|
|
|
(4.1
|
)
|
|
|
(11.5
|
)
|
|
|
(470.7
|
)
|
|
|
(482.3
|
)
|
|
|
(486.4
|
)
|
2009
|
|
|
4.2
|
|
|
|
11.7
|
|
|
|
15.9
|
|
|
|
(1.5
|
)
|
|
|
(8.0
|
)
|
|
|
(9.5
|
)
|
|
|
6.3
|
|
Quarters Ended March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
$
|
2.9
|
|
|
$
|
|
|
|
$
|
2.9
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
Benefits and Claims
Old Republic records the benefits, claims and related settlement
costs that have been incurred during each accounting period.
Total claim costs are affected by the amount of paid claims and
the adequacy of reserve estimates established for current and
prior years claim occurrences at each balance sheet date.
135
The following table shows a breakdown of gross and net of
reinsurance claim reserve estimates for major types of insurance
coverages as of March 31, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claim and Loss Adjustment Expense Reserves
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Gross
|
|
|
Net
|
|
|
Gross
|
|
|
Net
|
|
|
Commercial automobile (mostly trucking)
|
|
$
|
1,067.2
|
|
|
$
|
881.0
|
|
|
$
|
1,049.4
|
|
|
$
|
860.5
|
|
Workers compensation
|
|
|
2,253.9
|
|
|
|
1,284.4
|
|
|
|
2,258.1
|
|
|
|
1,285.6
|
|
General liability
|
|
|
1,278.5
|
|
|
|
637.2
|
|
|
|
1,281.8
|
|
|
|
638.7
|
|
Other coverages
|
|
|
633.8
|
|
|
|
429.8
|
|
|
|
649.1
|
|
|
|
444.7
|
|
Unallocated loss adjustment expense reserves
|
|
|
147.8
|
|
|
|
104.7
|
|
|
|
141.9
|
|
|
|
104.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general insurance reserves
|
|
|
5,381.4
|
|
|
|
3,337.3
|
|
|
|
5,380.4
|
|
|
|
3,334.3
|
|
Mortgage guaranty
|
|
|
2,083.5
|
|
|
|
1,813.3
|
|
|
|
2,225.6
|
|
|
|
1,962.6
|
|
Title
|
|
|
260.1
|
|
|
|
260.1
|
|
|
|
260.8
|
|
|
|
260.8
|
|
Life and health
|
|
|
29.9
|
|
|
|
23.5
|
|
|
|
29.0
|
|
|
|
21.5
|
|
Unallocated loss adjustment expense reserves other
coverages
|
|
|
19.7
|
|
|
|
19.7
|
|
|
|
19.1
|
|
|
|
19.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total claim and loss adjustment expense reserves
|
|
$
|
7,774.8
|
|
|
$
|
5,454.1
|
|
|
$
|
7,915.0
|
|
|
$
|
5,598.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asbestosis and environmental claim reserves included
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in the above general insurance reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
$
|
170.2
|
|
|
$
|
135.6
|
|
|
$
|
172.8
|
|
|
$
|
136.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of total general insurance reserves
|
|
|
3.2
|
%
|
|
|
4.1
|
%
|
|
|
3.2
|
%
|
|
|
4.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in aggregate case, IBNR, and loss adjustment expense
reserves are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Reserve increase(decrease):
|
|
|
|
|
|
|
|
|
General Insurance
|
|
$
|
3.0
|
|
|
$
|
(13.5
|
)
|
Mortgage Guaranty
|
|
|
(148.9
|
)
|
|
|
134.8
|
|
Title Insurance
|
|
|
(.4
|
)
|
|
|
(5.8
|
)
|
Other
|
|
|
2.0
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(144.3
|
)
|
|
$
|
117.7
|
|
|
|
|
|
|
|
|
|
|
IBNR reserves carried in each segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
General Insurance
|
|
$
|
1,653.9
|
|
|
$
|
1,621.6
|
|
Mortgage Guaranty
|
|
|
37.7
|
|
|
|
39.7
|
|
Title Insurance
|
|
|
187.7
|
|
|
|
191.3
|
|
Other
|
|
|
8.5
|
|
|
|
9.4
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,887.9
|
|
|
$
|
1,862.0
|
|
|
|
|
|
|
|
|
|
|
136
The following table shows a breakdown of gross and net of
reinsurance claim reserve estimates for major types of insurance
coverages as of December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claim and Loss Adjustment Expense Reserves
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Gross
|
|
|
Net
|
|
|
Gross
|
|
|
Net
|
|
|
Commercial automobile (mostly trucking)
|
|
$
|
1,049.4
|
|
|
$
|
860.5
|
|
|
$
|
1,035.7
|
|
|
$
|
849.8
|
|
Workers compensation
|
|
|
2,258.1
|
|
|
|
1,285.6
|
|
|
|
2,241.6
|
|
|
|
1,271.8
|
|
General liability
|
|
|
1,281.8
|
|
|
|
638.7
|
|
|
|
1,209.2
|
|
|
|
612.3
|
|
Other coverages
|
|
|
649.1
|
|
|
|
444.7
|
|
|
|
709.7
|
|
|
|
487.9
|
|
Unallocated loss adjustment expense reserves
|
|
|
141.9
|
|
|
|
104.7
|
|
|
|
150.6
|
|
|
|
104.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general insurance reserves
|
|
|
5,380.4
|
|
|
|
3,334.3
|
|
|
|
5,346.9
|
|
|
|
3,326.9
|
|
Mortgage guaranty
|
|
|
2,225.6
|
|
|
|
1,962.6
|
|
|
|
1,581.7
|
|
|
|
1,380.6
|
|
Title
|
|
|
260.8
|
|
|
|
260.8
|
|
|
|
261.2
|
|
|
|
261.2
|
|
Life and health
|
|
|
29.0
|
|
|
|
21.5
|
|
|
|
28.1
|
|
|
|
22.2
|
|
Unallocated loss adjustment expense reserves other
coverages
|
|
|
19.1
|
|
|
|
19.1
|
|
|
|
23.2
|
|
|
|
23.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total claim and loss adjustment expense reserves
|
|
$
|
7,915.0
|
|
|
$
|
5,598.5
|
|
|
$
|
7,241.3
|
|
|
$
|
5,014.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asbestosis and environmental claim reserves included in the
above general insurance reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
$
|
172.8
|
|
|
$
|
136.9
|
|
|
$
|
172.4
|
|
|
$
|
145.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of total general insurance reserves
|
|
|
3.2
|
%
|
|
|
4.1
|
%
|
|
|
3.2
|
%
|
|
|
4.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Old Republics reserve for loss and loss adjustment
expenses represents the accumulation of estimates of ultimate
losses, including incurred but not reported losses and loss
adjustment expenses. The establishment of claim reserves by Old
Republics insurance subsidiaries is a reasonably complex
and dynamic process influenced by a large variety of factors as
further discussed below. Consequently, 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, Old Republic is exposed to possibly higher or
lower than anticipated claim costs and the resulting changes in
estimates are recorded in operations of the periods during which
they are made. Increases to prior reserve estimates are often
referred to as unfavorable development whereas any changes that
decrease previous estimates of Old Republics ultimate
liability are referred to as favorable development. Most of the
decline in mortgage guaranty reserves at March 31, 2010
resulted from the previously discussed cancellation of certain
pool insurance policies.
Overview
of Loss Reserving Process
Most of Old Republics consolidated claim and related
expense reserves stem from its general insurance
business. At December 31, 2009, such reserves
accounted for 68.0% and 59.6% of consolidated gross and net of
reinsurance reserves, respectively, while similar reserves at
December 31, 2008 represented 73.8% and 66.3% of the
respective consolidated amounts.
Old Republics reserve setting process reflects the nature
of its insurance business and the decentralized basis upon which
it is conducted. Old Republics general insurance
operations encompass a large variety of lines or classes
of commercial insurance; it has negligible exposure to personal
lines such as homeowners or private passenger automobile
insurance that exhibit wide diversification of risks,
significant frequency of claim occurrences, and high degrees of
statistical credibility. Additionally, Old Republics
insurance subsidiaries do not provide significant amounts of
insurance protection for premises; most of its property
insurance exposures relate to cargo, incidental property, and
insureds inland marine assets. Consequently, the wide
variety of policies issued and commercial insurance customers
served require that loss reserves be analyzed and established in
the context of the
137
unique or different attributes of each block or class of
business produced by Old Republic. For example, accident
liability claims emanating from insured trucking companies or
from general aviation customers become known relatively quickly,
whereas claims of a general liability nature arising from the
building activities of a construction company may emerge over
extended periods of time. Similarly, claims filed pursuant to
errors and omissions or directors and officers
(E&O/D&O) liability coverages are usually
not prone to immediate evaluation or quantification inasmuch as
many such claims may be litigated over several years and their
ultimate costs may be affected by the vagaries of judged or jury
verdicts. Approximately 87% of the general insurance
groups claim reserves stem from liability insurance
coverages for commercial customers which typically require more
extended periods of investigation and at times protracted
litigation before they are finally settled. As a consequence of
these and other factors, Old Republic does not utilize a single,
overarching loss reserving approach.
Old Republic prepares periodic analyses of its loss reserve
estimates for its significant insurance coverages. It
establishes point estimates for most losses on an insurance
coverage
line-by-line
basis for individual subsidiaries,
sub-classes,
individual accounts, blocks of business or other unique
concentrations of insurance risks such as directors and
officers liability, that have similar attributes.
Actuarially or otherwise derived ranges of reserve levels are
not utilized as such in setting these reserves. Instead the
reported reserves encompass Old Republics best point
estimates at each reporting date and the overall reserve level
at any point in time therefore represents the compilation of a
very large number of reported reserve estimates and the results
of a variety of formula calculations largely driven by
statistical analysis of historical data. Reserve releases or
additions are implicitly covered by the point estimates
incorporated in total reserves at each balance sheet date. Old
Republic does not project future variability or make an explicit
provision for uncertainty when determining its best estimate of
loss reserves, although, as discussed below, over the most
recent ten-year period managements estimates have
developed slightly favorably on an overall basis.
Aggregate loss reserves consist of liability estimates for
claims that have been reported (case) to Old
Republics insurance subsidiaries and reserves for claims
that have been incurred but not yet reported (IBNR)
or whose ultimate costs may not become fully apparent until a
future time. Additionally, Old Republic establishes unallocated
loss adjustment expense reserves for loss settlement costs that
are not directly related to individual claims. Such reserves are
based on prior years cost experience and trends, and are
intended to cover the unallocated costs of claim
departments administration of case and IBNR claims over
time. Long-term, disability-type workers compensation
reserves are discounted to present value based on interest rates
that range from 3.5% to 4.0%. The amount of discount reflected
in the year end net reserves totaled $143.9, $156.8 and $148.5
as of December 31, 2009, 2008, and 2007, respectively.
A large variety of statistical analyses and formula calculations
are utilized to provide for IBNR claim costs as well as
additional costs that can arise from such factors as monetary
and social inflation, changes in claims administration
processes, changes in reinsurance ceded and recoverability
levels, and expected trends in claim costs are related ratios.
Typically, such formulas take into account so-called link ratios
that represent prior years patterns of incurred or paid
loss trends between succeeding years, or past experience
relative to progressions of the number of claims reported over
time and ultimate average costs per claim.
Overall, reserves pertaining to several hundred large individual
commercial insurance accounts that exhibit sufficient
statistical credibility, and at times may be subject to
retrospective premium rating plans or the utilization of varying
levels or types of self-insured retentions through captive
insurers and similar risk management mechanisms are established
on an account by account basis using case reserves and
applicable formula-driven methods. Large account reserves are
usually set and analyzed for groups of coverages such as
workers compensation, commercial auto and general
liability that are typically underwritten jointly for many
customers. For certain so-called long-tail categories of
insurance such as retained or assumed excess liability or excess
workers compensation, officers and directors
liability, and commercial umbrella liability relative to which
claim development patterns are particularly long, more volatile,
and immature in their early stages of development, Old Republic
judgmentally establishes the most current accident years
loss reserves on the basis of expected loss ratios. Such
expected loss ratios typically reflect currently estimated loss
ratios from prior accident years, adjusted for the effect of
actual and anticipated rate changes, actual and anticipated
changes in coverage, reinsurance, mix of business, and other
anticipated changes in external factors such as trends in loss
costs or the legal and claims environment. Expected loss ratios
are generally used for the two to three most recent accident
years depending on
138
the individual class or category of business. As actual claims
data emerges in succeeding interim and annual periods, the
original accident year loss ratio assumptions are validated or
otherwise adjusted sequentially through the application of
statistical projection techniques such as the
Bornhuetter/Ferguson method which utilizes data from the more
mature experience of prior years to arrive at a likely
indication of more recent years loss trends and costs.
Mortgage guaranty insurance reserves for unpaid claims
and claim adjustment expenses are recognized only upon an
instance of default. The latter is defined as an insured
mortgage loan that has missed two or more consecutive monthly
payments. Loss reserves are therefore based on statistical
calculations that take into account the number of reported
insured mortgage loan defaults as of each balance sheet date, as
well as experience-based estimates of loan defaults that have
occurred but have not as yet been reported (IBNR).
Further, the loss reserve estimating process takes into account
a large number of variables including trends in claim severity,
potential salvage recoveries, expected cure rates for reported
loan delinquencies at various stages of default, the level of
coverage rescissions and claims denials due to material
misrepresentation in key underwriting information or
non-compliance with prescribed underwriting guidelines, and
management judgments relative to future employment levels,
housing market activity, and mortgage loan interest costs,
demand, and extensions. Historically, coverage rescissions and
claims denials as a result of material misrepresentation in key
underwriting information or non-compliance with terms of the
master policy have not been material; however, they have
increased significantly since early 2008.
Title insurance and related escrow services loss and loss
adjustment expense reserves are established as point estimates
to cover the projected settlement costs of known as well as IBNR
losses related to premium and escrow service revenues of each
reporting period. Reserves for known claims are based on an
assessment of the facts available to Old Republic during the
settlement process. The point estimates covering all claim
reserves take into account IBNR claims based on past experience
and evaluations of such variables as changing trends in the
types of policies issued, changes in real estate markets and
interest rate environments, and changing levels of loan
refinancing, all of which can have a bearing on the emergence,
number, and ultimate costs of claims.
Incurred
Loss Experience
Management believes that Old Republics overall reserving
practices have been consistently applied over many years. For at
least the past ten years, previously established aggregate
reserves have produced reasonable estimates of the cumulative
ultimate net costs of claims incurred. However, there are no
guarantees that such outcomes will continue, and accordingly, no
representation is made that ultimate net claim and related costs
will not develop in future years to be greater or lower than
currently established reserve estimates. In managements
opinion, however, such potential development is not likely to
have a material effect on Old Republics consolidated
financial position, although it could affect materially its
consolidated results of operations for any one annual or interim
reporting period. See Risk Factors Risks
Relating to Old Republics Business.
139
The following table shows an analysis of changes in aggregate
reserves for Old Republics losses, claims, and settlement
expenses for each of the years shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Gross reserves at beginning of year
|
|
$
|
7,241.3
|
|
|
$
|
6,231.1
|
|
|
$
|
5,534.7
|
|
Less: reinsurance losses recoverable
|
|
|
2,227.0
|
|
|
|
1,984.7
|
|
|
|
1,936.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserves at beginning of year:
|
|
|
|
|
|
|
|
|
|
|
|
|
General Insurance
|
|
|
3,326.9
|
|
|
|
3,279.7
|
|
|
|
3,022.8
|
|
Mortgage Guaranty
|
|
|
1,382.6
|
|
|
|
644.9
|
|
|
|
249.6
|
|
Title Insurance
|
|
|
282.4
|
|
|
|
296.9
|
|
|
|
304.1
|
|
Other
|
|
|
22.2
|
|
|
|
24.7
|
|
|
|
21.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
5,014.2
|
|
|
|
4,246.3
|
|
|
|
3,598.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred claims and claim adjustment expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provisions for insured events of the current year:
|
|
|
|
|
|
|
|
|
|
|
|
|
General Insurance
|
|
|
1,409.2
|
|
|
|
1,520.1
|
|
|
|
1,562.8
|
|
Mortgage Guaranty
|
|
|
1,284.0
|
|
|
|
1,199.5
|
|
|
|
551.3
|
|
Title Insurance
|
|
|
63.6
|
|
|
|
46.3
|
|
|
|
72.3
|
|
Other
|
|
|
36.4
|
|
|
|
41.9
|
|
|
|
37.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
2,793.3
|
|
|
|
2,807.8
|
|
|
|
2,224.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in provision for insured events of prior years:
|
|
|
|
|
|
|
|
|
|
|
|
|
General Insurance
|
|
|
(56.8
|
)
|
|
|
(83.0
|
)
|
|
|
(110.6
|
)
|
Mortgage Guaranty(a)
|
|
|
(149.9
|
)
|
|
|
(18.7
|
)
|
|
|
64.4
|
|
Title Insurance
|
|
|
6.7
|
|
|
|
(0.6
|
)
|
|
|
(16.3
|
)
|
Other
|
|
|
(1.3
|
)
|
|
|
(3.8
|
)
|
|
|
(3.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
(201.3
|
)
|
|
|
(106.1
|
)
|
|
|
(66.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred claims and claim adjustment expenses(a)
|
|
|
2,592.0
|
|
|
|
2,701.6
|
|
|
|
2,158.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims and claim adjustment expenses attributable to insured
events of the current year:
|
|
|
|
|
|
|
|
|
|
|
|
|
General Insurance
|
|
|
498.6
|
|
|
|
549.0
|
|
|
|
518.7
|
|
Mortgage Guaranty(a)
|
|
|
7.8
|
|
|
|
59.8
|
|
|
|
29.6
|
|
Title Insurance
|
|
|
7.1
|
|
|
|
5.4
|
|
|
|
7.5
|
|
Other
|
|
|
25.8
|
|
|
|
30.3
|
|
|
|
23.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
539.3
|
|
|
|
644.5
|
|
|
|
579.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims and claim adjustment expenses attributable to insured
events of prior years:
|
|
|
|
|
|
|
|
|
|
|
|
|
General Insurance
|
|
|
846.4
|
|
|
|
840.8
|
|
|
|
676.3
|
|
Mortgage Guaranty(a)
|
|
|
543.5
|
|
|
|
383.2
|
|
|
|
190.8
|
|
Title Insurance
|
|
|
68.5
|
|
|
|
54.8
|
|
|
|
55.8
|
|
Other
|
|
|
9.9
|
|
|
|
10.2
|
|
|
|
7.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
1,468.3
|
|
|
|
1,289.0
|
|
|
|
930.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total payments
|
|
|
2,007.7
|
|
|
|
1,933.5
|
|
|
|
1,509.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of reserves for unpaid claims and claim adjustment
expenses at the end of each year, net of reinsurance losses
recoverable:(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
General Insurance
|
|
|
3,334.3
|
|
|
|
3,326.9
|
|
|
|
3,279.7
|
|
Mortgage Guaranty
|
|
|
1,965.4
|
|
|
|
1,382.6
|
|
|
|
644.9
|
|
Title Insurance
|
|
|
277.1
|
|
|
|
282.4
|
|
|
|
296.9
|
|
Other
|
|
|
21.5
|
|
|
|
22.2
|
|
|
|
24.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
5,598.5
|
|
|
|
5,014.2
|
|
|
|
4,246.3
|
|
Reinsurance losses recoverable
|
|
|
2,316.5
|
|
|
|
2,227.0
|
|
|
|
1,984.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross reserves at end of year
|
|
$
|
7,915.0
|
|
|
$
|
7,241.3
|
|
|
$
|
6,231.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140
|
|
|
(a) |
|
In common with all other insurance lines, mortgage guaranty paid
and incurred claim and claim adjustment expenses include only
those costs actually or expected to be paid by Old Republic.
Claims not paid by virtue of coverage rescissions and claims
denials amounted to $719.5, $211.0, and $36.4 for 2009, 2008,
and 2007, respectively. In a similar vein, changes in mortgage
guaranty aggregate case, IBNR, and loss adjustment expense
reserves shown in the following table and entering into the
determination of incurred claim costs, take into account, among
a large number of variables, claim cost reductions for
anticipated coverage rescissions and claims denials of $881.9 in
2009, $830.5 in 2008, and none in 2007. The significant decline
of $149.9 in 2009 for prior years mortgage guaranty
incurred claim provisions resulted mostly from greater than
anticipated coverage rescissions and claim denials. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Reserve increase(decrease):
|
|
|
|
|
|
|
|
|
|
|
|
|
General Insurance
|
|
$
|
7.4
|
|
|
$
|
47.2
|
|
|
$
|
256.9
|
|
Mortgage Guaranty
|
|
|
582.8
|
|
|
|
737.7
|
|
|
|
395.3
|
|
Title Insurance
|
|
|
(5.3
|
)
|
|
|
(14.5
|
)
|
|
|
(7.2
|
)
|
Other
|
|
|
(.7
|
)
|
|
|
(2.5
|
)
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
584.3
|
|
|
$
|
768.0
|
|
|
$
|
648.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b) |
|
Year end IBNR reserves carried in each segment were as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
General Insurance
|
|
$
|
1,621.6
|
|
|
$
|
1,583.8
|
|
|
$
|
1,539.0
|
|
Mortgage Guaranty
|
|
|
39.7
|
|
|
|
33.0
|
|
|
|
20.8
|
|
Title Insurance
|
|
|
191.3
|
|
|
|
200.7
|
|
|
|
223.4
|
|
Other
|
|
|
9.4
|
|
|
|
9.0
|
|
|
|
11.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,862.0
|
|
|
$
|
1,826.5
|
|
|
$
|
1,795.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The percentage of net claims, benefits and related settlement
expenses incurred as a percentage of premiums and related fee
revenues of Old Republics three major operating segments
and for its consolidated results were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
|
|
|
Mortgage
|
|
|
Title
|
|
|
Consolidated
|
|
|
Years Ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
67.8
|
%
|
|
|
118.8
|
%
|
|
|
6.6
|
%
|
|
|
60.2
|
%
|
2008
|
|
|
73.0
|
|
|
|
199.3
|
|
|
|
7.0
|
|
|
|
81.8
|
|
2009
|
|
|
76.3
|
|
|
|
176.0
|
|
|
|
7.9
|
|
|
|
76.7
|
|
Quarters Ended March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
74.8
|
|
|
|
199.9
|
|
|
|
6.6
|
|
|
|
83.9
|
|
2010
|
|
|
70.6
|
%
|
|
|
127.2
|
%
|
|
|
7.4
|
%
|
|
|
59.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Reconciliation of consolidated ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for insured events of the current year
|
|
|
82.6
|
%
|
|
|
85.0
|
%
|
|
|
62.0
|
%
|
Change in provision for insured events of prior years:
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to asbestos and environmental
|
|
|
|
|
|
|
|
|
|
|
.1
|
|
Due to all other coverages
|
|
|
(5.9
|
)
|
|
|
(3.2
|
)
|
|
|
(1.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (favorable) unfavorable development
|
|
|
(5.9
|
)
|
|
|
(3.2
|
)
|
|
|
(1.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated benefits and claim ratio
|
|
|
76.7
|
%
|
|
|
81.8
|
%
|
|
|
60.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141
The consolidated benefits and claim ratio reflects the changing
effects of
period-to-period
contributions of each segment to consolidated results, and this
ratios variances within each segment. For the three most
recent calendar years, the above table indicates that the
one-year development of consolidated reserves at the beginning
of each year produced average favorable developments that
reduced the consolidated loss ratio by 3.7%.
The percentage of net claims, benefits and related settlement
expenses measured against premiums earned by major types of
general insurance coverage were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Insurance Claims Ratios by Type of Coverage
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
Inland
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile
|
|
|
|
|
|
|
|
|
Marine
|
|
|
|
|
|
|
|
|
|
All
|
|
|
(Mostly
|
|
|
Workers
|
|
|
Financial
|
|
|
and
|
|
|
General
|
|
|
|
|
|
|
Coverages
|
|
|
Trucking)
|
|
|
Compensation
|
|
|
Indemnity
|
|
|
Property
|
|
|
Liability
|
|
|
Other
|
|
|
Years Ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
67.8
|
%
|
|
|
74.0
|
%
|
|
|
70.9
|
%
|
|
|
69.6
|
%
|
|
|
54.9
|
%
|
|
|
59.9
|
%
|
|
|
55.9
|
%
|
2008
|
|
|
73.0
|
|
|
|
76.1
|
|
|
|
69.4
|
|
|
|
95.0
|
|
|
|
60.5
|
|
|
|
64.4
|
|
|
|
53.9
|
|
2009
|
|
|
76.3
|
|
|
|
71.5
|
|
|
|
74.9
|
|
|
|
117.8
|
|
|
|
63.0
|
|
|
|
65.6
|
|
|
|
60.1
|
|
Quarters Ended March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
74.8
|
|
|
|
74.9
|
|
|
|
69.6
|
|
|
|
120.0
|
|
|
|
57.8
|
|
|
|
59.2
|
|
|
|
58.2
|
|
2010
|
|
|
70.6
|
%
|
|
|
76.5
|
%
|
|
|
72.2
|
%
|
|
|
85.4
|
%
|
|
|
49.7
|
%
|
|
|
52.4
|
%
|
|
|
71.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The overall general insurance claims ratio reflects reasonably
consistent trends, excluding the impact of Old Republics
CCI business, for the past three years. To a large extent this
major cost factor reflects pricing and risk selection
improvements that have been applied since 2001, together with
elements of reduced loss severity and frequency. The higher
claim ratio for financial indemnity coverages in the periods
shown was driven principally by greater claim frequencies
experienced in Old Republics CCI coverage. During the
three most recent calendar years, the general insurance
group experienced favorable development of prior year
loss reserves primarily due to the commercial automobile,
general aviation, and the E&O/D&O (financial
indemnity) lines of business; these were partially offset by
unfavorable development in excess workers compensation
coverages, by ongoing development of asbestos and environmental
(A&E) claim reserves, and by unfavorable
development of the CCI reserves. Unfavorable developments
attributable to A&E claim reserves are due to periodic
re-evaluations of such reserves as well as subsequent
reclassifications of other coverages reserves, typically
workers compensation, deemed assignable to A&E
category of losses.
Except for a small portion that emanates from ongoing primary
insurance operations, a large majority of the A&E claim
reserves posted by Old Republic stem mainly from its
participations in assumed reinsurance treaties and insurance
pools which were discontinued fifteen or more years ago and have
since been in run-off status. With respect to the primary
portion of gross A&E reserves, Old Republic administers the
related claims through its claims personnel as well as outside
attorneys, and posted reserves reflect its best estimates of
ultimate claim costs. Claims administration for the assumed
portion of Old Republics A&E exposures is handled by
the claims departments of unrelated primary or ceding
reinsurance companies. While Old Republic performs periodic
reviews of certain claim files managed by third parties, the
overall A&E reserves it establishes respond to the paid
claim and case reserve activity reported to Old Republic as well
as available industry statistical data such as so-called
survival ratios. Such ratios represent the number of years
average paid losses for the three or five most recent calendar
years that are encompassed by an insurers A&E reserve
level at any point in time. According to this simplistic
appraisal of an insurers A&E loss reserve level, Old
Republics average five year survival ratios stood at
9.8 years (gross) and 13.9 years (net of reinsurance)
as of March 31, 2010 and 8.4 years (gross) and
11.5 years (net of reinsurance) as of December 31,
2009 and 7.3 years (gross) and 9.9 years (net of
reinsurance) as of December 31, 2008. Fluctuations in this
ratio between years can be caused by the inconsistent pay out
patterns associated with these types of claims. Incurred net
losses for A&E claims have averaged 1.4% of general
insurance group net incurred losses for the five years
ended December 31, 2009.
142
A summary of reserve activity, including estimates for IBNR,
relating to A&E claims at December 31, 2009 and 2008
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Gross
|
|
|
Net
|
|
|
Gross
|
|
|
Net
|
|
|
Asbestos:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves at beginning of year
|
|
$
|
133.1
|
|
|
$
|
108.6
|
|
|
$
|
149.4
|
|
|
$
|
121.9
|
|
Loss and loss expenses incurred
|
|
|
(2.1
|
)
|
|
|
|
|
|
|
(4.9
|
)
|
|
|
(7.4
|
)
|
Claims and claim adjustment expenses paid
|
|
|
(8.9
|
)
|
|
|
(5.0
|
)
|
|
|
(11.4
|
)
|
|
|
(5.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves at end of year
|
|
|
122.0
|
|
|
|
103.5
|
|
|
|
133.1
|
|
|
|
108.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves at beginning of year
|
|
|
39.3
|
|
|
|
36.4
|
|
|
|
41.1
|
|
|
|
36.1
|
|
Loss and loss expenses incurred
|
|
|
21.2
|
|
|
|
2.1
|
|
|
|
6.0
|
|
|
|
6.2
|
|
Claims and claim adjustment expenses paid
|
|
|
(9.8
|
)
|
|
|
(5.1
|
)
|
|
|
(7.8
|
)
|
|
|
(5.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves at end of year
|
|
|
50.7
|
|
|
|
33.4
|
|
|
|
39.3
|
|
|
|
36.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total asbestos and environmental reserves
|
|
$
|
172.8
|
|
|
$
|
136.9
|
|
|
$
|
172.4
|
|
|
$
|
145.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage guaranty claims ratios were lower in the first
quarter of 2010 primarily as a result of the first sequential
decline in outstanding traditional primary loan delinquencies
since the first quarter of 2007. As more fully discussed above,
the Mortgage Guaranty Group negotiated the termination of two
captive reinsurance agreements and certain pool insurance
contracts in the first quarter. Taken together these
transactions reduced the incurred claims ratio by
27.4 percentage points for the first quarter of 2010.
Reinsurance commutation transactions in the third quarter of
2009 had the impact of lowering the 2009 ratio from 199.6% to
176.0%, or 23.6 percentage points. These claims ratios have
risen through year-end 2009 principally as a result of higher
reserve provisions and paid losses. Reserve provisions have been
impacted by the levels of reported delinquencies emanating from
the downturn in the national economy, widespread stress in
housing and mortgage finance markets, and increasing
unemployment. Trends in expected and actual claim frequency and
severity have been impacted to varying degrees by several
factors including, but not limited to, significant declines in
home prices which limit a troubled borrowers ability to
sell the mortgaged property in an amount sufficient to satisfy
the remaining debt obligation, more restrictive mortgage lending
standards which limit a borrowers ability to refinance the
loan, increases in housing supply relative to recent demand,
historically high levels of coverage rescissions and claims
denials as a result of material misrepresentation in key
underwriting information or non-compliance with prescribed
underwriting guidelines, and changes in claim settlement costs.
The latter costs are influenced by the amount of unpaid
principal outstanding on delinquent loans as well as the rising
expenses of settling claims due to higher investigations costs,
legal fees, and accumulated interest expenses.
In common with all other insurance lines, mortgage guaranty paid
and incurred claim and claim adjustment expenses include only
those costs actually or expected to be paid by Old Republic.
Claims not paid by virtue of coverage rescissions and claims
denials amounted to $198.0 and $127.0 for the quarters ended
March 31, 2010 and 2009, respectively. In a similar vein,
changes in mortgage guaranty aggregate case, IBNR, and loss
adjustment expense reserves entering into the determination of
incurred claim costs take into account a large number of
variables including changes in claim cost estimates for
anticipated coverage rescissions and claims denials of $(268.1)
and $31.1 for the quarters ended March 31, 2010 and 2009,
respectively.
143
Average mortgage guaranty paid claims, and certain
delinquency ratio data as of the end of the periods shown are
listed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Paid Claim
|
|
|
|
|
|
|
Amount(a)
|
|
|
Delinquency Ratio
|
|
|
|
Traditional
|
|
|
|
|
|
Traditional
|
|
|
|
|
|
|
Primary
|
|
|
Bulk
|
|
|
Primary
|
|
|
Bulk
|
|
|
Years Ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
32,214
|
|
|
$
|
34,951
|
|
|
|
5.47
|
%
|
|
|
6.85
|
%
|
2008
|
|
|
43,532
|
|
|
|
56,481
|
|
|
|
10.34
|
|
|
|
17.17
|
|
2009
|
|
|
48,492
|
|
|
|
59,386
|
|
|
|
16.83
|
|
|
|
30.81
|
|
Quarters Ended March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
48,968
|
|
|
|
61,806
|
|
|
|
11.47
|
|
|
|
21.71
|
|
2010
|
|
$
|
47,874
|
|
|
$
|
61,878
|
|
|
|
16.89
|
%
|
|
|
28.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Amounts are in whole dollars. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Primary Delinquency Ratios for Top Ten
States(b):
|
|
|
|
FL
|
|
|
TX
|
|
|
GA
|
|
|
IL
|
|
|
OH
|
|
|
CA
|
|
|
NJ
|
|
|
VA
|
|
|
NC
|
|
|
PA
|
|
|
As of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
7.7
|
%
|
|
|
4.5
|
%
|
|
|
7.2
|
%
|
|
|
5.4
|
%
|
|
|
8.1
|
%
|
|
|
6.7
|
%
|
|
|
5.4
|
%
|
|
|
4.1
|
%
|
|
|
4.8
|
%
|
|
|
5.2
|
%
|
2008
|
|
|
21.9
|
|
|
|
7.1
|
|
|
|
11.1
|
|
|
|
10.8
|
|
|
|
11.0
|
|
|
|
19.8
|
|
|
|
11.4
|
|
|
|
8.1
|
|
|
|
7.6
|
|
|
|
7.7
|
|
2009
|
|
|
34.1
|
|
|
|
10.6
|
|
|
|
18.8
|
|
|
|
19.5
|
|
|
|
16.4
|
|
|
|
30.5
|
|
|
|
21.1
|
|
|
|
13.9
|
|
|
|
12.3
|
|
|
|
11.6
|
|
As of March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
25.4
|
|
|
|
6.9
|
|
|
|
12.1
|
|
|
|
12.2
|
|
|
|
11.4
|
|
|
|
23.7
|
|
|
|
13.9
|
|
|
|
9.3
|
|
|
|
8.0
|
|
|
|
8.2
|
|
2010
|
|
|
34.5
|
%
|
|
|
10.5
|
%
|
|
|
19.1
|
%
|
|
|
19.8
|
%
|
|
|
16.2
|
%
|
|
|
30.5
|
%
|
|
|
21.4
|
%
|
|
|
14.2
|
%
|
|
|
12.8
|
%
|
|
|
11.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bulk Delinquency Ratios for Top Ten States(b):
|
|
|
|
FL
|
|
|
TX
|
|
|
GA
|
|
|
IL
|
|
|
OH
|
|
|
CA
|
|
|
NJ
|
|
|
NY
|
|
|
CO
|
|
|
AZ
|
|
|
As of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
7.8
|
%
|
|
|
5.4
|
%
|
|
|
7.3
|
%
|
|
|
8.6
|
%
|
|
|
10.6
|
%
|
|
|
7.0
|
%
|
|
|
6.6
|
%
|
|
|
6.6
|
%
|
|
|
5.8
|
%
|
|
|
5.1
|
%
|
2008
|
|
|
27.0
|
|
|
|
10.2
|
|
|
|
16.3
|
|
|
|
19.1
|
|
|
|
17.1
|
|
|
|
22.4
|
|
|
|
16.0
|
|
|
|
13.8
|
|
|
|
9.8
|
|
|
|
18.2
|
|
2009
|
|
|
46.5
|
|
|
|
16.3
|
|
|
|
27.6
|
|
|
|
35.7
|
|
|
|
23.4
|
|
|
|
41.3
|
|
|
|
33.3
|
|
|
|
26.8
|
|
|
|
17.0
|
|
|
|
37.5
|
|
As of March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
34.3
|
|
|
|
12.2
|
|
|
|
19.5
|
|
|
|
22.8
|
|
|
|
19.1
|
|
|
|
30.0
|
|
|
|
22.0
|
|
|
|
18.0
|
|
|
|
11.6
|
|
|
|
25.1
|
|
2010
|
|
|
42.9
|
%
|
|
|
16.6
|
%
|
|
|
27.6
|
%
|
|
|
34.9
|
%
|
|
|
23.7
|
%
|
|
|
35.1
|
%
|
|
|
34.2
|
%
|
|
|
27.4
|
%
|
|
|
17.3
|
%
|
|
|
33.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Delinquency Ratios for Top Ten States (includes
other business)(b):
|
|
|
|
FL
|
|
|
TX
|
|
|
GA
|
|
|
IL
|
|
|
OH
|
|
|
CA
|
|
|
NJ
|
|
|
NY
|
|
|
NC
|
|
|
PA
|
|
|
As of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
6.9
|
%
|
|
|
4.5
|
%
|
|
|
6.7
|
%
|
|
|
5.0
|
%
|
|
|
8.0
|
%
|
|
|
5.5
|
%
|
|
|
5.5
|
%
|
|
|
5.4
|
%
|
|
|
4.1
|
%
|
|
|
5.1
|
%
|
2008
|
|
|
21.3
|
|
|
|
7.2
|
|
|
|
11.2
|
|
|
|
10.2
|
|
|
|
11.4
|
|
|
|
17.2
|
|
|
|
12.1
|
|
|
|
10.8
|
|
|
|
6.8
|
|
|
|
8.1
|
|
2009
|
|
|
36.4
|
|
|
|
11.2
|
|
|
|
19.4
|
|
|
|
20.5
|
|
|
|
17.2
|
|
|
|
33.9
|
|
|
|
24.1
|
|
|
|
20.1
|
|
|
|
11.5
|
|
|
|
12.9
|
|
As of March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
25.9
|
|
|
|
7.5
|
|
|
|
12.5
|
|
|
|
11.9
|
|
|
|
12.3
|
|
|
|
23.1
|
|
|
|
15.5
|
|
|
|
13.2
|
|
|
|
7.4
|
|
|
|
9.0
|
|
2010
|
|
|
35.1
|
%
|
|
|
11.1
|
%
|
|
|
19.4
|
%
|
|
|
20.8
|
%
|
|
|
17.1
|
%
|
|
|
31.1
|
%
|
|
|
24.1
|
%
|
|
|
20.4
|
%
|
|
|
12.0
|
%
|
|
|
12.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b) |
|
As determined by risk in force as of March 31, 2010, these
10 states represent approximately 49.9%, 59.1%, and 50.2%,
of traditional primary, bulk, and total risk in force,
respectively. |
144
Title insurance loss ratios have remained in the single
digits for a number of years due to a continuation of favorable
trends in claims frequency and severity for business
underwritten since 1992 in particular. Though still reasonably
contained, claim ratios have risen for the first quarter of 2010
and most recent three years due to the continuing downturn and
economic stresses in the housing and related mortgage lending
industries.
Volatility
of Reserve Estimates and Sensitivity
There is a great deal of uncertainty in the estimates of loss
and loss adjustment expense reserves, and unanticipated events
can have both a favorable or unfavorable impact on such
estimates. Old Republic believes that the factors most
responsible, in varying and continually changing degrees, for
such favorable or unfavorable development are as follows:
General insurance net claim reserves can be affected by
lower than expected frequencies of claims incurred but not
reported, the effect of reserve discounts applicable to
workers compensation claims, higher than expected severity
of litigated claims in particular, governmental or judicially
imposed retroactive conditions in the settlement of claims such
as noted elsewhere in this document in regard to black lung
disease claims, greater than anticipated inflation rates
applicable to repairs and the medical benefits portion of
claims, and higher than expected IBNR due to the slower and
highly volatile emergence patterns applicable to certain types
of claims such as those stemming from litigated, assumed
reinsurance, or the A&E types of claims noted above.
Mortgage guaranty net claim reserve levels can be
affected adversely by several factors. The latter include
changes in the mix of insured business toward loans that have a
higher probability of default, increases in the average risk per
insured loan, the deterioration of regional or national economic
conditions leading to a reduction in borrowers income and
thus their ability to make mortgage payments, and reductions in
housing values
and/or
increases in housing supply that can raise the rate at which
defaults evolve into claims and affect their overall severity.
Title insurance loss reserve levels can be impacted
adversely by such developments as reduced loan refinancing
activity, the effect of which can be to lengthen the period
during which title policies remain exposed to loss emergence.
Such reserve levels can also be impacted by reductions in either
property values or the volume of transactions which, by virtue
of the speculative nature of some real estate developments, can
lead to increased occurrences of fraud, defalcations or
mechanics liens.
With respect to Old Republics small life and health
insurance operations, reserve adequacy may be affected
adversely by greater than anticipated medical care cost
inflation as well as greater than expected frequency and
severity of claims. In life insurance, as in general insurance,
concentrations of insured lives coupled with a catastrophic
event would represent Old Republics largest exposure.
Loss reserve uncertainty is illustrated by the variability in
loss reserve development presented in the schedule which appears
under Item 1 of this Annual Report. That schedule shows the
cumulative loss reserve development for each of the past ten
years through December 31, 2009 for the general insurance
business which currently represents 59.6% of Old
Republics total loss and loss adjustment expense reserves,
net of reinsurance reserves. For each of these ten calendar
years, prior accident years general insurance
claim reserves have developed, as a percentage of the
original estimates, within a range of 8.5% unfavorable in 2000
to a 11.6% favorable development in 2005. For the ten year
period the net development has averaged 2.5% favorable.
On a consolidated basis, which includes all coverages provided
by Old Republic, the one year development on prior year loss
reserves over the same ten year period has ranged from -.2%
unfavorable to 10.1% favorable and averaged 4.3%. Although
management does not have a practical business reason for making
projections of likely outcomes of future loss developments, its
analysis and evaluation of Old Republics existing business
mix, current aggregate loss reserve levels, and loss development
patterns suggests the reasonable likelihood that
2009 year-end loss reserves could ultimately develop within
a range of +/- 5%. The most significant factors impacting the
potential reserve development for each of Old Republics
insurance segments is discussed above. While Old Republic has
generally experienced favorable loss developments for the latest
ten year period on an overall basis, the current analysis of
loss development factors and economic conditions influencing Old
Republics insurance coverages
145
indicates a gradual downward trend in favorable development
during the most recent three years, with respect to general
insurance. In managements opinion, the other
segments loss reserve development patterns show greater
variability due to changes in economic conditions which cannot
be reasonably anticipated. Consequently, management believes
that using a 5% potential range of reserve development provides
a reasonable benchmark for a sensitivity analysis of Old
Republics reserves as of December 31, 2009.
Reinsurance
Programs
To maintain premium production within its capacity and limit
maximum losses and risks for which it might become liable under
its policies, Old Republic may cede a portion or all of its
premiums and liabilities on certain classes of insurance,
individual policies, or blocks of business to other insurers and
reinsurers. For a further discussion of Old Republics
reinsurance programs, see Information About the
Companies Old Republic.
Subsidiaries within the general insurance segment
have generally obtained reinsurance coverage from independent
insurance or reinsurance companies pursuant to excess of loss
agreements. Under excess of loss reinsurance agreements Old
Republic is generally reimbursed for claim costs exceeding
contractually
agreed-upon
levels. During the three year period ended December 31,
2009, Old Republics net retentions have risen gradually
within the general insurance segment; however, such changes have
not had a material impact on Old Republics consolidated
financial statements.
Generally, mortgage guaranty insurance risk has
historically been reinsured through excess of loss contracts
through insurers owned by or affiliated with lending
institutions and financial and other intermediaries whose
customers are insured by Old Republic. Effective
December 31, 2008, Old Republic discontinued excess of loss
reinsurance cessions to lenders captive insurance
companies for all new production originated subsequent to the
effective date. Traditional pro-rata (quota share)
reinsurance arrangements will continue to be offered by Old
Republic. During the third quarter of 2009, the Mortgage
Guaranty Group recaptured business previously ceded to several
captives. In substance, the transactions are cut-off reinsurance
commutation arrangements whereby the captives have remitted to
Old Republic the reserves on existing claim obligations and a
risk premium for claims that will occur after the recapture
date. In accordance with GAAP, Old Republic recorded proceeds of
$148.9 million and established a combination of existing
claim reserves ($68.4 million) and premium income of
$82.5 million covering claims expected to occur after the
transaction date. Old Republic estimates that substantially all
of these premiums will likely be absorbed by those expected
claims in future periods thus negating the appearance of a
current period bottom line gain from these 2009 transactions.
Except for relatively few facultative reinsurance cessions
covering large risks, the title insurance segment
does not utilize reinsurance to manage its insurance risk.
Old Republic does not anticipate any significant changes to its
reinsurance programs during 2010.
Expenses:
Underwriting Acquisition and Other Expenses
The following table sets forth the expense ratios registered by
each major business segment and in consolidation for the periods
shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
|
|
|
Mortgage
|
|
|
Title
|
|
|
Consolidated
|
|
|
Years Ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
24.1
|
%
|
|
|
17.7
|
%
|
|
|
98.1
|
%
|
|
|
41.3
|
%
|
2008
|
|
|
24.2
|
|
|
|
15.7
|
|
|
|
103.6
|
|
|
|
39.1
|
|
2009
|
|
|
25.8
|
|
|
|
12.6
|
|
|
|
93.8
|
|
|
|
41.8
|
|
Quarters Ended March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
25.6
|
|
|
|
13.7
|
|
|
|
102.9
|
|
|
|
39.6
|
|
2010
|
|
|
26.7
|
%
|
|
|
13.5
|
%
|
|
|
98.5
|
%
|
|
|
47.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variations in Old Republics consolidated expense ratios
reflect a continually changing mix of coverages sold and
attendant costs of producing business in Old Republics
three largest business segments. To a significant degree,
expense ratios for both the general and title insurance segments
are mostly reflective of variable costs, such as commissions or
similar charges, that rise or decline along with corresponding
changes in premium and fee income.
146
Moreover, general operating expenses can contract or expand in
differing proportions due to varying levels of operating
efficiencies and expense management opportunities in the face of
changing market conditions.
The General Insurance expense has trended upward since 2007 due
primarily to the declining premium base in 2008 and 2009. The
decline in the Mortgage Guaranty segments expense ratios
for the periods shown is reflective of the continued emphasis on
operating efficiency. Furthermore as a consequence of the
previously mentioned GAAP accounting requirement for reinsurance
contract terminations, this segments 2009 expense ratio
dropped from 14.3% to 12.6%. Production expenses for the Title
segment were relatively lower as a percentage of premium and
fees revenue, but rose dollar-wise in reflection of greater
personnel and other production costs related to the higher
revenues attained and anticipated. The increase in the Title
segments 2008 and 2007 expense ratios result from a
decline in revenues from direct operations during these periods,
most of which are concentrated in the Western United States, to
a level lower than necessary to support the fixed portion of the
operating expense structure.
Expenses:
Total
The composite ratios of the above summarized net claims,
benefits and underwriting expenses that reflect the sum total of
all the factors enumerated above have been as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
|
|
|
Mortgage
|
|
|
Title
|
|
|
Consolidated
|
|
|
Years Ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
91.9
|
%
|
|
|
136.5
|
%
|
|
|
104.7
|
%
|
|
|
101.5
|
%
|
2008
|
|
|
97.2
|
|
|
|
215.0
|
|
|
|
110.6
|
|
|
|
120.9
|
|
2009
|
|
|
102.1
|
|
|
|
188.6
|
|
|
|
101.7
|
|
|
|
118.5
|
|
Quarters Ended March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
100.4
|
|
|
|
213.6
|
|
|
|
109.5
|
|
|
|
123.5
|
|
2010
|
|
|
97.3
|
%
|
|
|
140.7
|
%
|
|
|
105.9
|
%
|
|
|
107.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
Income Taxes
The effective consolidated income tax rates (credits) were 19.8%
in the first quarter of 2010, compared to (41.9%) in the first
quarter of 2009, and (63.8%) in 2009, (31.8%) in 2008 and 28.0%
in 2007. The rates for each year reflect primarily the varying
proportions of pretax operating income (loss) derived from
partially tax sheltered investment income (principally state and
municipal tax-exempt interest), the combination of fully taxable
investment income, realized investment gains or losses, and
underwriting and service income, and judgments about the
recoverability of deferred tax assets. A valuation allowance of
$54.0 (equivalent to a charge of $.23 per outstanding share) was
established against a deferred tax asset related to Old
Republics realized losses on investments at
December 31, 2008. As of December 31, 2009, this
valuation allowance was eliminated following an increase in the
fair value of Old Republics investment portfolio.
OTHER
INFORMATION
Reference is here made to Information About Segments of
Business appearing in the notes to Old Republics
financial statements for the year ended December 31, 2009
and the quarter ended March 31, 2010 attached hereto. See
Index to Financial Statements of Old Republic
International Corporation.
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.
147
Some of the oral or written statements made in Old
Republics reports, press releases, conference calls
following earnings releases and this proxy statement/prospectus,
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 Old
Republics future performance. With regard to Old
Republics 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 Old Republics
widespread operations.
A more detailed listing and discussion of the risks and other
factors which affect Old Republics risk-taking insurance
business, including risks related to the merger discussed
herein, are included under the heading Risk Factors,
which discussion 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.
OLD
REPUBLIC QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
($ in Millions)
Market risk represents the potential for loss due to adverse
changes in the fair value of financial instruments as a result
of changes in interest rates, equity prices, foreign exchange
rates and commodity prices. Old Republics primary market
risks consist of interest rate risk associated with investments
in fixed maturities and equity price risk associated with
investments in equity securities. Old Republic has no material
foreign exchange or commodity risk.
Old Republic does not own or utilize derivative financial
instruments for the purpose of hedging, enhancing the overall
return of its investment portfolio, or reducing the cost of its
debt obligations. With regard to its equity portfolio, Old
Republic does not own any options nor does it engage in any type
of option writing. Traditional investment management tools and
techniques are employed to address the yield and valuation
exposures of the invested assets base. The long-term fixed
maturity investment portfolio is managed so as to limit various
risks inherent in the bond market. Credit risk is addressed
through asset diversification and the purchase of investment
grade securities. Reinvestment rate risk is reduced by
concentrating on non-callable issues, and by taking
asset-liability matching considerations into account. Purchases
of mortgage and asset backed securities, which have variable
principal prepayment options, are generally avoided. Market
value risk is limited through the purchase of bonds of
intermediate maturity. The combination of these investment
management practices is expected to produce a more stable
long-term fixed maturity investment portfolio that is not
subject to extreme interest rate sensitivity and principal
deterioration.
The fair value of Old Republics long-term fixed maturity
investment portfolio is sensitive, however, to fluctuations in
the level of interest rates, but not materially affected by
changes in anticipated cash flows caused by any prepayments. The
impact of interest rate movements on the long-term fixed
maturity investment portfolio generally affects net unrealized
gains or losses. As a general rule, rising interest rates
enhance currently available yields but typically lead to a
reduction in the fair value of existing fixed maturity
investments. By contrast, a decline in such rates reduces
currently available yields but usually serves to increase the
fair value of the existing fixed
148
maturity investment portfolio. All such changes in fair value
are reflected, net of deferred income taxes, directly in the
shareholders equity account, and as a separate component
of the statement of comprehensive income. Given Old
Republics inability to forecast or control the movement of
interest rates, Old Republic sets the maturity spectrum of its
fixed maturity securities portfolio within parameters of
estimated liability payouts, and focuses the overall portfolio
on high quality investments. By so doing, Old Republic believes
it is reasonably assured of its ability to hold securities to
maturity as it may deem necessary in changing environments, and
of ultimately recovering their aggregate cost.
The following table illustrates the hypothetical effect on the
fixed income and equity investment portfolios resulting from
movements in interest rates and fluctuations in the equity
securities markets, using the S&P 500 index as a proxy, at
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value
|
|
|
Estimated
|
|
Hypothetical Change in
|
|
After Hypothetical Change in
|
|
|
Fair Value
|
|
Interest Rates or S&P 500
|
|
Interest Rates or S&P 500
|
|
Interest Rate Risk:
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities
|
|
$
|
8,326.8
|
|
|
100 basis point rate increase
|
|
$
|
8,013.7
|
|
|
|
|
|
|
|
200 basis point rate increase
|
|
|
7,700.6
|
|
|
|
|
|
|
|
100 basis point rate decrease
|
|
|
8,639.9
|
|
|
|
|
|
|
|
200 basis point rate decrease
|
|
$
|
8,953.0
|
|
Equity Price Risk:
|
|
|
|
|
|
|
|
|
|
|
Equity Securities
|
|
$
|
502.9
|
|
|
10% increase in the S&P 500
|
|
$
|
569.8
|
|
|
|
|
|
|
|
20% increase in the S&P 500
|
|
|
636.7
|
|
|
|
|
|
|
|
10% decline in the S&P 500
|
|
|
436.0
|
|
|
|
|
|
|
|
20% decline in the S&P 500
|
|
$
|
369.1
|
|
OLD
REPUBLIC MANAGEMENT
Directors
The following table lists all directors of Old Republic. Given
the reasons and background information next to each
Directors name below, the Old Republic Board of Directors
believes that each of its members is eminently qualified to
serve Old Republics shareholders and other stakeholders.
|
|
|
|
|
|
|
|
|
|
|
|
Positions with Old Republic, Business Experience and
|
Name
|
|
Age
|
|
|
Qualifications
|
|
|
|
|
|
|
|
|
CLASS 1 (Term expires in 2012)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harrington Bischof
|
|
|
75
|
|
|
Director since 1997. President of Pandora Capital Corporation
since 1996. Formerly Senior Advisor with Prudential Securities,
Inc. and prior to that a Senior investment banker with the firms
of Merrill, Lynch & Co. and White, Weld & Co. His long
business, investment banking, and international finance
experience are of significant value in Old Republics
governance.
|
|
|
|
|
|
|
|
Leo E. Knight, Jr.
|
|
|
65
|
|
|
Director of Old Republic since 2006, and of several Old Republic
subsidiaries since 1999. A CPA by training, he retired in 2006
as Chairman and Chief Executive Officer of National City
Mortgage Company, Dayton, Ohio, following a thirty-two year
career. Mr. Knight is also a director of Merscorp, Inc. He
brings significant business experience in mortgage lending and
the mortgage insurance industry and their risk factors to Old
Republics Board.
|
149
|
|
|
|
|
|
|
|
|
|
|
|
Positions with Old Republic, Business Experience and
|
Name
|
|
Age
|
|
|
Qualifications
|
|
|
|
|
|
|
|
|
Charles F. Titterton
|
|
|
68
|
|
|
Director since 2004. Formerly Director Insurance
Group with Standard & Poors Corp. until 2003. He
brings significant business experience and knowledge of the risk
factors connected with the insurance industry by virtue of a
long career as a lending officer with a major banking
institution and with the aforementioned rating agency.
|
|
|
|
|
|
|
|
Steven R. Walker
|
|
|
65
|
|
|
Director since 2006. Formerly Senior Counsel and Partner with
Leland, Parachini, Steinberg, Matzger & Melnick, LLP,
attorneys, San Francisco, California. He brings significant
experience to Old Republics Board as both an attorney and
a business manager during a long career focused on the title
insurance industry.
|
|
|
|
|
|
|
|
CLASS 2 (Term expires in 2013)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jimmy A. Dew
|
|
|
70
|
|
|
Director since 1980. Vice Chairman of Old Republics
subsidiary, Republic Mortgage Insurance Company
(RMIC), of which he was a co-founder in 1973. His
knowledge of RMIC gained in an executive capacity since its
founding and his long service on Old Republics board make
him fully conversant with the insurance industry and its risk
factors.
|
|
|
|
|
|
|
|
John M. Dixon
|
|
|
70
|
|
|
Director since 2003. Formerly Chief Executive Partner with the
law firm of Chapman and Cutler, Chicago, Illinois until his
retirement in 2002. His qualifications include his extensive
background as an attorney and his knowledge of corporate law and
the risk factors of corporations like Old Republic.
|
|
|
|
|
|
|
|
Dennis P. Van Mieghem
|
|
|
70
|
|
|
Director since 2004. A CPA by training, he was the Partner in
charge of the National Insurance Tax Practice of the accounting
firm of KPMG LLP until his retirement in 1998. With this
background he brings significant experience and knowledge of the
insurance industry and its risk factors to service on Old
Republics Board.
|
CLASS 3 (Term expires in 2011)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William A. Simpson
|
|
|
68
|
|
|
Director since 1980. Chairman of Old Republics subsidiary,
Republic Mortgage Insurance Company (RMIC) of which
he was a co-founder in 1973. His knowledge of RMICs
business gained in an executive capacity since its founding, and
his long service on Old Republics Board make him fully
conversant with the insurance industry and its risk factors.
|
|
|
|
|
|
|
|
Arnold L. Steiner
|
|
|
72
|
|
|
Director since 1974. Retired for more than the past five years
from Steiner Bank, Birmingham, Alabama of which he was President
and a substantial owner. He brings long and significant
experience in financial businesses and has extensive knowledge
of Old Republic and its risk factors.
|
150
|
|
|
|
|
|
|
|
|
|
|
|
Positions with Old Republic, Business Experience and
|
Name
|
|
Age
|
|
|
Qualifications
|
|
|
|
|
|
|
|
|
Fredricka Taubitz
|
|
|
66
|
|
|
Director since 2003. A CPA by training, she was until 2000,
Executive Vice President and Chief Financial Officer of Zenith
National Insurance Corp. Until 1985 she had been a Partner with
the accounting firm of Coopers & Lybrand (now
PricewaterhouseCoopers LLP). During her long professional career
she has gained significant experience in, and knowledge of, the
business and the risk factors associated with the insurance
industry.
|
|
|
|
|
|
|
|
Aldo C. Zucaro
|
|
|
71
|
|
|
Director since 1976. Chairman of the Board and Chief Executive
Officer of Old Republic and various subsidiaries for more than
the past five years. A CPA by training, he brings a significant
background as a former insurance specialist partner with Coopers
& Lybrand (now PricewaterhouseCoopers LLP), and long term
experience with the insurance industry in general, and Old
Republic in particular since 1970.
|
Executive
Officers
The following table sets forth certain information as of
July 30, 2010, regarding the senior officers of Old
Republic:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Charles S. Boone
|
|
|
57
|
|
|
Senior Vice President Investments and Treasurer
since August, 2001.
|
James A. Kellogg
|
|
|
59
|
|
|
Executive Vice Chairman since July 1, 2010. President and Chief
Operating Officer since July, 2006 and President of Old Republic
Insurance Company since October, 2002.
|
Spencer LeRoy, III
|
|
|
64
|
|
|
Senior Vice President, Secretary and General Counsel since 1992.
|
Karl W. Mueller
|
|
|
51
|
|
|
Senior Vice President and Chief Financial Officer since October,
2004.
|
Christopher S. Nard
|
|
|
47
|
|
|
President and Chief Operating Officer since July 1, 2010.
Senior Vice President Mortgage Guaranty since May,
2005. President and Chief Executive Officer of Republic Mortgage
Insurance Companies since May, 2005.
|
R. Scott Rager
|
|
|
61
|
|
|
Senior Vice President General Insurance and
President and Chief Operating Officer of Old Republic General
Insurance Companies since July, 2006.
|
Rande K. Yeager
|
|
|
61
|
|
|
Senior Vice President Title Insurance since March,
2003; President and Chief Executive Officer of Old Republic
Title Insurance Companies since March, 2002.
|
Aldo C. Zucaro
|
|
|
71
|
|
|
Chairman of the Board, Chief Executive Officer, and Director
since 1993, 1990 and 1976, respectively.
|
The term of office of each officer of Old Republic expires on
the date of the annual meeting of the board of directors, which
is generally held in May of each year. There is no family
relationship between any of the executive officers named above.
Each of these named officers has been employed in senior
capacities with Old Republic
and/or its
subsidiaries for the past five years. Mr. LeRoy has been
determined by Old Republic to not be an executive officer under
Rule 3-b7
of the Exchange Act.
151
Corporate
Governance
Overview
Old Republic is organized as an independent, for-profit
insurance enterprise managed for the long run. Old
Republics Mission is to provide quality insurance security
and related services to businesses, individuals, and public
institutions and be a dependable long-term steward of the trust
our policyholders and shareholders place in us. Old
Republics governance and operations are guided by this
Mission and the inherent public interest vested in the risk
taking nature of its business. Its governance is therefore
aligned with this substance of the business with due
appreciation and regard for its three most important assets:
|
|
|
|
|
The investors capital which enables and underpins the
insurance risk taking;
|
|
|
|
The intellectual capital, know-how, and business relationships
possessed by employees at various levels of the
enterprise; and
|
|
|
|
Old Republics good name and reputation, cultivated over
its 86-plus year history, and the even longer history of some of
its major insurance subsidiaries.
|
Information appearing on Old Republics website is not
incorporated by reference in this proxy statement/prospectus.
However its Corporate Governance Guidelines, Code of Ethics for
the Principal Executive Officer and Senior Financial Officers,
and its Code of Business Conduct and Ethics, are accessible on
the website at www.oldrepublic.com . Printed copies of these
documents are also available to shareholders upon request to the
Investors Relations Department at Old Republics Chicago
Home Office.
Leadership
Structure and Risk Management
Old Republics leadership structure and its risk management
processes are overseen and monitored by the Board of Directors.
The details of this leadership structure and the development of
management talent has been the primary responsibility of the
Boards Executive Committee for many decades. This five
member committee is currently composed of Old Republics
Chairman of the Board (Chairman) and Chief Executive Officer
(CEO), and four independent directors, including the Lead
Director. The Board of Directors and its Executive Committee
believe that Old Republics decades-long joining of the
Chairman and CEO positions is best suited to ensuring the long
term value, stability and management of the three most important
assets necessary for the accomplishment of its Mission. Old
Republics Board holds management singularly accountable
for protecting and enhancing the value of these and all other
assets. It therefore holds its CEO responsible for setting the
proper tone in shaping and nurturing the institutions
culture and values not solely in the shareholders
interests, but in those of its important stakeholders as well.
Most critically, these include the policyholders to whom
long-term promises of financial indemnity and stability are made
by Old Republics insurance subsidiaries, the employees who
possess the intellectual capital and business relationships
necessary for the conduct and success of Old Republic, the debt
holders who extend a portion of the capital at risk, and the
regulators who are charged with protecting the public interest
vested in the insurance enterprise. To meet these
responsibilities and objectives, the Board expects the CEO to be
a knowledgeable, and well rounded leader who, as chief
enterprise risk manager is fully dedicated to Old
Republics overall Mission and is best qualified to address
and balance the interests of all major stakeholders.
In the Boards sole discretion the Chairman and CEO
positions may be separated and assigned to two individuals with
extensive and complementary operating knowledge of Old Republic.
Under the Boards long standing corporate governance
philosophy, this separation is intended to be temporary and to
occur in unusual circumstances or during transitions of
management authority.
While the Board has determined that the advantages of a joint
Chairman and CEO position outweigh the theoretical benefits of a
separated leadership structure, it has in the past few years
formalized the establishment of a Lead Director position. In Old
Republics practice the Lead Director is appointed from
among the independent directors and serves as that groups
liaison to the Chairman and CEO in addition to the liaison also
provided by the Executive Committees four independent
directors. In his or her capacity, the Lead Director may preside
at board meetings in the Chairmans absence, provide input
to meeting agendas of the full Board or the independent
152
directors, and act as liaison among various committees
chairmen in the resolution of inter-committee governance
applications that may arise from time to time.
Old Republics multi-faceted business is managed through a
relatively flat, non-bureaucratic organizational structure. The
CEO has primary responsibility for managing enterprise-wide risk
exposures. Old Republic avoids management by committee and other
organizational impediments to the free flow of information and
to effective decision making. Long established control processes
are in place, and a variety of methods are utilized to
coordinate system-wide risk taking and risk management
objectives. These methods and processes are centered around
three major functions:
|
|
|
|
|
Lines of business responsibility,
|
|
|
|
Enterprise functions, and
|
|
|
|
Internal audit and peer reviews.
|
The lines of business operations are responsible for
identifying, monitoring, quantifying, and mitigating all
insurance underwriting risks falling within their areas of
responsibility. Lines of business managers use reports covering
annual, quarterly or monthly time frames to identify the status
and content of insured risk, including pricing or underwriting
changes. These reports ensure the continuity and timeliness of
appropriate risk management monitoring, and enterprise-wide
oversight of existing or emerging issues.
The enterprise functions incorporate system-wide risk
management, including asset/liability and underwriting exposure
correlation controls, regulatory and public interest compliance,
finance, actuarial, and legal functions. These functions are
both independent of the lines of business and are coordinated on
an enterprise-wide basis by the CEO.
The internal audit, as well as related underwriting and claims
management peer review functions and processes, provide
reasonably independent assessments of management and internal
control systems. Internal audit activities are intended to give
reasonable assurance that resources are adequately protected;
that significant financial, managerial and operating information
is materially complete, accurate and reliable; and that all
associates actions are in compliance with corporate
policies, standards, procedures, internal control guidelines,
and applicable laws and regulations.
Corporate culture, and the actions of all our associates and the
continuity of their employment are most critical to Old
Republics risk management processes. Old Republics
Code of Business Conduct and Ethics provides a framework for all
senior managers and employees to conduct themselves with the
highest integrity in the delivery of Old Republics
services to its customers and in connection with all Old
Republic relationships and activities.
The Compensation Committee, at the direction of the Board, has
reviewed Old Republics compensation policies and practices
and has concluded that they do not encourage Old Republics
senior executives or employees to take unnecessary or excessive
risks that could adversely effect Old Republic.
The
Board of Directors Responsibilities and
Independence
The Board of Directors main responsibilities are to
oversee Old Republics operations. Directly and through
several committees operating cohesively, the Board is charged
with the following oversight duties:
|
|
|
|
|
Ascertain that strategies and policies are in place to encourage
the growth of consolidated earnings and shareholders equity over
the long haul, while increasing Old Republics regular
dividend payout;
|
|
|
|
Ascertain that Old Republics business is managed in a
sound and conservative manner that takes into account the public
interest vested in its insurance subsidiaries;
|
|
|
|
Provide advice and counsel to management on business
opportunities and strategies;
|
|
|
|
Review and approve major corporate transactions;
|
|
|
|
Monitor the adequacy of Old Republics internal control and
financial reporting systems and practices to safeguard assets
and to comply with applicable laws and regulations;
|
153
|
|
|
|
|
Ascertain that appropriate policies and practices are in place
for managing the identified risks faced by the enterprise;
|
|
|
|
Evaluate periodically the performance of the Chairman and Chief
Executive Officer in the context of Old Republics Mission
and performance metrics;
|
|
|
|
Review and approve senior managements base and incentive
compensation taking into account the business performance
gauged by its return on equity and growth of operating earnings;
|
|
|
|
Review periodically senior management development and succession
plans both at corporate and operating subsidiary levels;
|
|
|
|
Select and recommend for election by the shareholders candidates
deemed qualified for Board service; and
|
|
|
|
Select and retain independent auditors for the principal purpose
of expressing their opinion on the annual financial statements
and internal controls over financial reporting of Old Republic
and its subsidiaries.
|
In considering the qualifications and independence of
board members and candidates, the Board of Directors,
through the Governance and Nominating Committee, seeks to
identify individuals who, at a minimum:
|
|
|
|
|
Satisfy the requirements for director independence;
|
|
|
|
Are, or have been, senior executives of businesses or
professional organizations;
|
|
|
|
Have significant business, financial, accounting
and/or legal
backgrounds useful to Old Republics operations, markets
and customer services.
|
Additionally, the Board seeks to retain and attract members
possessing certain critical personal characteristics, most
importantly, (i) respect within the candidates
social, business and professional community for his or her
integrity, ethics, principles and insights;
(ii) demonstrated analytic ability; and (iii) ability
and initiative to frame insightful questions, to challenge
questionable assumptions collegially, and to disagree in a
constructive fashion as appropriate.
Old Republics insurance business is conducted through four
insurance segments which, in the aggregate, are broadly
diversified as to type of coverages and services provided. Each
of the segments insurance subsidiaries is highly regulated
by state and federal governmental agencies as to their capital
requirements, financial leverage, business conduct, and
accounting and financial reporting practices. In part, as the
result of the specialized nature of its businesses and their
regulation, it is Old Republics view that at least two to
four years are normally required for a new director to develop
sufficient knowledge of the business to become a fully
productive and effective contributor to Old Republics
governance. Reflecting this, each director is expected to serve
two or more three-year terms on Old Republics classified
Board, that of one or more of its key insurance subsidiaries,
and on one or more Board committees.
The commitment of a substantial expenditure of time for
meetings, preparation therefor, and related travel is essential
to the performance of a directors responsibilities. Owing
to the risk taking nature of much of Old Republics
business, a demonstrated long-term orientation in a Board
members business dealings and thought process is
considered very important. Old Republics Board of
Directors has been classified into three classes for several
decades. Excepting the possibility of uneven distribution among
the classes, one-third of the Board is therefore elected
annually. This organizational structure is intended to promote
continuity and stability of strategy and business direction for
the best long term interests of investors in the
Corporations securities, the confidence of insurance
subsidiaries policyholders, and the long term expectations
of other stakeholders.
Nine of Old Republics directors have been affirmatively
determined to qualify as independent directors in
accordance with Section 303A.02 of the Listing Standards of
the New York Stock Exchange (NYSE) and item 407
(a) of
Regulation S-K
of the SEC. Neither they nor any members of their immediate
families had any of the types of disqualifying relationships
with Old Republic or any of its subsidiaries during 2009 or the
two years prior to that, as set forth in subsection (b) of
Section 303A.02 of the NYSEs Corporate Governance
Standards. The independent directors who are listed below
selected from among themselves a Lead Director; and met on a
regular basis during 2009 in executive sessions without
management present. The Lead Director is nominated by the
154
Governance and Nominating Committee and elected annually by the
independent directors. Arnold L. Steiner is the current Lead
Director.
Membership on Old Republics Audit, Compensation, and
Governance and Nominating Committees consists exclusively of
independent directors. The members, chairpersons and
vice-chairpersons of these committees are recommended each year
to the Board by the Governance and Nominating Committee in
consultation with the Executive Committee. Each of the three
committees has the authority to retain independent advisors or
counsel as necessary and appropriate in the fulfillment of their
duties. The chairpersons set the agenda of their respective
committees meetings consulting, as necessary and
appropriate, with the Chairman and CEO.
Shareholders
Communication with the Board
Shareholders of Old Republic and other interested parties may
communicate with the Lead Director, the independent directors,
the Board of Directors as a whole or with any individual
director. The communications must be in writing and sent to Old
Republic International Corporation,
c/o Secretary,
307 N. Michigan Ave, Chicago, IL 60601. The Secretary
will promptly forward the communications to the intended
recipient.
Procedures
for the Approval of Related Person Transactions
In addition to its Code of Business Conduct and Ethics and a
Code of Ethics for The Principal Executive Officer and Senior
Financial Officers, Old Republic also has a conflict of
interest policy which is circulated annually, and
acknowledged by all directors, officers and senior managers of
Old Republic and its subsidiaries. This policy states that no
director, officer, or employee of Old Republic or its
subsidiaries may acquire or retain any interest that conflicts
with the interest of Old Republic. This includes direct or
indirect interests in entities doing business with Old Republic
or its subsidiaries. If such a conflict occurs, the director,
officer or employee is required to make a written disclosure of
the conflict to Old Republic.
The directors, officers and affected employees are required to
notify Old Republic of the actual or potential existence of a
related party transaction , as defined by SEC
rules. Directors are required to notify the Chairman of the
Board, unless the Chairman is an affected director, in which
case he or she is required to notify the Lead Director.
Executive officers are required to notify the CEO, unless the
CEO is the affected executive, in which case he or she is
required to notify the Chairman or Lead Director as appropriate.
Under the procedures, the CEO, Chairman or Lead Director as
applicable, must conduct a preliminary inquiry into the facts
relating to any existing or potential related party transaction.
If, based upon the inquiry and the advice of legal counsel, the
CEO, Chairman or Lead Director, as applicable, believes that an
actual or potential related party transaction exists, then he or
she is required to notify the entire Board. In turn, the Board
is required to conduct a full inquiry into the facts and
circumstances concerning a conflicted transaction and to
determine the appropriate actions, if any, for Old Republic to
take. Any director who is the subject of an existing or
potential related party transaction will not participate in the
decision-making process of the Board relating to what actions,
if any, shall be taken by Old Republic with respect to such
transaction.
OLD
REPUBLIC DIRECTOR AND EXECUTIVE OFFICER COMPENSATION
Compensation
Committee Interlocks and Insider Participation
None of the members of the compensation Committee has served as
an officer or employee of Old Republic or any of its
subsidiaries, nor has any executive officer of Old Republic
served as a director or member of a compensation committee for
any company that employs any director of Old Republic or member
of the Compensation Committee.
Director
Compensation
Independent directors receive an annual retainer of $90,000 plus
an additional annual fee of $10,000 for each committee on which
they serve. The Lead Director, Mr. Steiner, and the
chairmen of the Governance and Nominating and Compensation
Committees, Messrs. Titterton and Dixon, respectively, each
receive an additional
155
annual retainer of $10,000. Mr. Taubitz as Chairman of the
Audit Committee is paid an additional annual retainer of
$15,000. Each of the Committees Vice-Chairmen receives an
additional retainer of $5,000. Independent directors also serve
as directors of regulated subsidiary companies and these fees
cover service on such subsidiary boards and related committees.
Directors compensation is reviewed annually, and any
changes are recommended by the Compensation Committee, in
consultation with the CEO and any independent consultant
retained by the Committee for that purpose. The Committees
recommendations are in turn voted upon by the full Board.
Non-employee directors are not currently eligible for stock
option awards. Incentive compensation awards, deferred
compensation awards and pensions are currently limited to
eligible full time employees. Mr. Zucaro as an employee and
executive officer of Old Republic has his compensation reported
in the Summary Compensation Table shown elsewhere in this proxy
statement/prospectus. Messrs. Dew and Simpson, who are
retired, have their compensation reported in the Director
Compensation table that follows. This table reports their
consulting compensation and the value of all other compensation
for 2009. Other than their participation in a 401(k) program
sponsored by Republic Mortgage Insurance Company,
(RMIC), a subsidiary company, neither
Messrs. Dew or Simpson participated in a pension plan
sponsored by Old Republic or any subsidiary.
The following table lists the compensation paid to each director
of Old Republic. Old Republic and its subsidiaries, also, either
directly pay, or reimburse directors for travel, lodging and
related expenses incurred in attending meetings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Directors Compensation
|
|
|
|
|
(c)
|
|
|
|
|
|
|
(b)
|
|
Non-Qualified
|
|
|
|
|
|
|
Fees Earned
|
|
Deferred
|
|
(d)
|
|
|
(a)
|
|
Or Paid in
|
|
Compensation
|
|
All Other
|
|
(e)
|
Name
|
|
Cash
|
|
Earnings
|
|
Compensation
|
|
Total
|
|
Harrington Bischof
|
|
$
|
126,250
|
|
|
|
|
|
|
|
|
|
|
$
|
126,250
|
|
Jimmy A. Dew
|
|
|
176,000
|
(1)
|
|
|
23,058
|
(2)
|
|
$
|
811,207
|
(4)
|
|
|
1,010,265
|
|
John M. Dixon
|
|
|
130,000
|
|
|
|
|
|
|
|
|
|
|
|
130,000
|
|
Leo E. Knight, Jr.
|
|
|
115,000
|
|
|
|
|
|
|
|
|
|
|
|
115,000
|
|
John W. Popp
|
|
|
135,000
|
|
|
|
7,336
|
(3)
|
|
|
|
|
|
|
142,336
|
|
William A. Simpson
|
|
|
264,000
|
(1)
|
|
|
32,773
|
(2)
|
|
|
465,307
|
(4)
|
|
|
762,080
|
|
Arnold L. Steiner
|
|
|
130,000
|
|
|
|
|
|
|
|
|
|
|
|
130,000
|
|
Fredricka Taubitz
|
|
|
115,000
|
|
|
|
|
|
|
|
|
|
|
|
115,000
|
|
Charles F. Titterton
|
|
|
118,750
|
|
|
|
|
|
|
|
|
|
|
|
118,750
|
|
Dennis Van Mieghem
|
|
|
115,000
|
|
|
|
|
|
|
|
|
|
|
|
115,000
|
|
Steven R. Walker
|
|
|
110,000
|
|
|
|
|
|
|
|
|
|
|
|
110,000
|
|
|
|
|
(1) |
|
Messrs. Dew and Simpson were not paid any director fees
during 2009 but were paid $176,000 and $264,000, respectively,
as consultants of RMIC as they continued as non executive Vice
Chairman and Chairman of RMIC. |
|
(2) |
|
During 2009, Messrs. Dew and Simpson were credited with
$23,058 and $32,773, respectively, for interest on deferred
balances held under the RMIC Key Employee Performance
Recognition Plan. |
|
(3) |
|
During 2009, Mr. Popp was credited with interest on the
deferred balance of compensation due him from a subsidiary of
Old Republic for work done for that subsidiary many years ago.
Mr. Popp retired from the Board on May 28, 2010. |
|
(4) |
|
Messrs. Dew and Simpson were paid $811,207 and $465,307,
respectively, as one time lump sum settlements of previously
deferred benefits under the RMIC Supplemental Retirement Plan
during 2009. These payments resulted from their retirement at
year end 2008. |
156
Executive
Compensation
Compensation
Philosophy and Objectives
Compensation levels are set to enable Old Republic to attract
and retain key executives and other associates critical to its
long-term success. Old Republic believes that compensation paid
to the executive officers with major policy setting
responsibilities should be closely aligned with the performance
of Old Republic on both a short-term and long-term basis. In
this regard, performance is evaluated principally on the basis
of achieved returns on equity and growth in operating earnings
over multi-year periods. For all other executive officers and
key employees, compensation is based in part on the foregoing
financial factors as well as on their individual performances in
supportive staff positions.
Neither the CEO, Chief Financial Officer (CFO), nor other
executive officers of Old Republic have employment contracts.
They and all other associates of Old Republic and its
subsidiaries are employees at will. Compensation for most senior
officers is set annually by the Compensation Committee of the
Board of Directors based either on its sole determination or in
consultation with the CEO and the President. Old Republic does
not set any salary, incentive award or stock option targets or
conditions for its executive officers which will automatically
result in salary increases or awards based solely on the
achievement of such targets or conditions. Rather, Old Republic
attempts to make the total compensation paid to executive
officers and its other employees, including non executive
officers, reflective of the financial performance actually
achieved by Old Republic and the divisions or units they work
for. In certain cases, employees individual performance is
subjectively evaluated and their incentive compensation is set
at a level reasonably competitive with other companies in the
insurance industry. In all of these regards, Old Republic does
not measure each individual element of compensation against
similar elements paid by other companies or its peer group. Nor
is any compensation element or the total compensation paid to
any executive based solely on comparisons with those of other
companies or their executives.
The companies Old Republic has selected as members of its peer
group for 2009 were: Ace Limited, American Financial Group,
Inc., The Chubb Corporation, Cincinnati Financial Corporation,
First American Corporation, MGIC Investment Corporation, Markel
Corporation, The PMI Group, Inc., Stewart Information Services
Corporation, Travelers Companies, Inc. and XL Capital Ltd. A
comparison of the aggregate stock performance of this peer group
and Old Republics appears in this proxy
statement/prospectus under the heading Comparative Five
Year Performance Graphs for Common Stock.
Executive
Performance Considered in Reaching Compensation
Decisions
Old Republic rewards performance which the Compensation
Committee believes will lead to both short-term and long-term
success. The Committee evaluates Old Republics CEO
performance and compensation in the context of the following
most significant factors:
|
|
|
|
|
Vision and planning for Old Republics future, principally
on a long-term basis;
|
|
|
|
Strategies established and implemented to realize these plans;
|
|
|
|
Leadership qualities;
|
|
|
|
Judgment in making decisions regarding plans and general
management of Old Republics affairs;
|
|
|
|
Commitment to achieving goals, especially when faced with
adversity;
|
|
|
|
Ability in setting objectives and promoting the best interests
of Old Republics shareholders, the beneficiaries of its
subsidiaries insurance policies, and those of other
stakeholders;
|
|
|
|
Adherence to high ethical standards that promote and protect Old
Republics good name and reputation.
|
No particular component is given any greater weight than
another. Rather, each Compensation Committee member subjectively
reviews these characteristics in the aggregate and exercises his
or her best business judgment in reaching conclusions. The
Committee evaluates the other policy-making executive
officers performance and compensation in consultation with
the CEO and the President and in the context of the above noted
factors. The performance of non-policy-making executive officers
is likewise reviewed by the Committee in consultation with the
CEO and the President.
157
Elements
of Compensation and the Factors and Rationale in Determining
Compensation Amounts
The compensation paid by Old Republic to its CEO and other
executive officers is usually composed of the following basic
elements:
|
|
|
|
|
Annual Salary
|
|
|
|
Incentive awards including both cash and deferred amounts, based
on earnings and return on equity achievements of Old Republic
and its subsidiaries over multi-year periods, and in certain
cases, bonuses based also upon their individual performances.
|
|
|
|
Stock option awards; and
|
|
|
|
Miscellaneous other benefits such as pensions and health
insurance programs.
|
The following table shows the segmented sources of Old
Republics pre-tax and post-tax operating income. The level
and trends in earnings of such segments and their past and most
recent contributions to Old Republics growth in the
shareholders equity account are important considerations
in the determination of cash and stock option incentive
compensation for policy-making executive officers in particular.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segmented Operating Results
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in Millions)
|
|
|
Pretax operating income (loss)(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General insurance
|
|
$
|
200.1
|
|
|
$
|
294.3
|
|
|
$
|
418.0
|
|
|
$
|
401.6
|
|
|
$
|
350.0
|
|
Mortgage guaranty
|
|
|
(486.4
|
)
|
|
|
(594.3
|
)
|
|
|
(110.4
|
)
|
|
|
228.4
|
|
|
|
243.7
|
|
Title insurance
|
|
|
2.1
|
|
|
|
(46.3
|
)
|
|
|
(14.7
|
)
|
|
|
31.0
|
|
|
|
88.7
|
|
Corporate and other(b)
|
|
|
4.0
|
|
|
|
13.5
|
|
|
|
15.1
|
|
|
|
|
|
|
|
(.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(279.9
|
)
|
|
|
(332.7
|
)
|
|
|
308.0
|
|
|
|
661.1
|
|
|
|
682.4
|
|
Income taxes (credits) on operating income (loss)
|
|
|
(122.7
|
)
|
|
|
(144.6
|
)
|
|
|
81.3
|
|
|
|
208.6
|
|
|
|
173.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income (loss)(a)
|
|
$
|
(157.2
|
)
|
|
$
|
(188.1
|
)
|
|
$
|
226.7
|
|
|
$
|
452.4
|
|
|
$
|
509.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Operating income is a non-GAAP reflection of Old Republics
business results in as much as it excludes investment gains or
losses from sales of securities or impairments in the value of
portfolio securities. |
|
(b) |
|
Represents amounts for Old Republics holding company
parent, minor corporate services subsidiaries, and a small life
and health insurance operation. |
158
The following table shows a compensation summary for the
Chairman and Chief Executive Officer, the Chief Financial
Officer and the four policy-making executive officers
responsible for operations of Old Republic and its major
segments. Bonus and stock option awards for Messrs. Zucaro
and Kellogg have been based to a significant degree on the
Corporations consolidated results, those of
Messrs. Rager, Nard, and Yeager on the results of the
General, Mortgage Guaranty, and Title Insurance segments,
respectively, and those of Mr. Mueller and other
non-policy-making executive officers and other associates on a
composite of Old Republics segmented and consolidated
results, as well as their individual performance evaluations by
senior executive officers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary Compensation Table
|
|
|
|
|
|
|
|
|
|
|
(f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
|
|
|
|
|
|
(e)
|
|
Pension Value
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of
|
|
and Nonqualified
|
|
|
|
|
(a)
|
|
|
|
|
|
|
|
Stock
|
|
Deferred
|
|
(g)
|
|
(h)
|
Name and
|
|
(b)
|
|
(c)
|
|
(d)
|
|
Option
|
|
Compensation
|
|
All Other(5)
|
|
Total
|
Principal Positions
|
|
Year
|
|
Salary(1)
|
|
Bonus(2)
|
|
Awards(3)
|
|
Earnings(4)
|
|
Compensation
|
|
($)
|
|
Aldo C. Zucaro
|
|
|
2009
|
|
|
$
|
776,146
|
|
|
$
|
40,748
|
|
|
$
|
|
|
|
$
|
183,129
|
|
|
$
|
22,577
|
|
|
$
|
1,022,600
|
|
Chairman & Chief
|
|
|
2008
|
|
|
|
776,146
|
|
|
|
37,513
|
|
|
|
|
|
|
|
50,547
|
|
|
|
16,320
|
|
|
|
880,526
|
|
Executive Officer
|
|
|
2007
|
|
|
|
767,813
|
|
|
|
38,090
|
|
|
|
936,000
|
|
|
|
343,737
|
|
|
|
17,719
|
|
|
|
2,103,359
|
|
|
|
|
2006
|
|
|
|
741,146
|
|
|
|
726,019
|
|
|
|
1,528,800
|
|
|
|
283,680
|
|
|
|
20,237
|
|
|
|
3,299,882
|
|
|
|
|
2005
|
|
|
|
711,279
|
|
|
|
1,096,929
|
|
|
|
486,990
|
|
|
|
|
|
|
|
25,313
|
|
|
|
2,320,511
|
|
Karl W. Mueller
|
|
|
2009
|
|
|
|
385,000
|
|
|
|
113,446
|
|
|
|
13,116
|
|
|
|
24,886
|
|
|
|
7,216
|
|
|
|
543,664
|
|
Senior Vice President &
|
|
|
2008
|
|
|
|
370,833
|
|
|
|
103,724
|
|
|
|
38,000
|
|
|
|
15,876
|
|
|
|
7,807
|
|
|
|
536,240
|
|
Chief Financial Officer
|
|
|
2007
|
|
|
|
358,333
|
|
|
|
190,927
|
|
|
|
177,840
|
|
|
|
11,232
|
|
|
|
7,527
|
|
|
|
745,859
|
|
|
|
|
2006
|
|
|
|
341,667
|
|
|
|
266,934
|
|
|
|
191,100
|
|
|
|
15,044
|
|
|
|
9,941
|
|
|
|
824,686
|
|
|
|
|
2005
|
|
|
|
325,000
|
|
|
|
253,275
|
|
|
|
162,330
|
|
|
|
|
|
|
|
9,018
|
|
|
|
749,623
|
|
James A. Kellogg
|
|
|
2009
|
|
|
|
476,034
|
|
|
|
18,821
|
|
|
|
|
|
|
|
156,585
|
|
|
|
23,031
|
|
|
|
674,471
|
|
President & Chief
|
|
|
2008
|
|
|
|
472,400
|
|
|
|
18,273
|
|
|
|
|
|
|
|
79,904
|
|
|
|
20,246
|
|
|
|
590,823
|
|
Operating Officer
|
|
|
2007
|
|
|
|
467,400
|
|
|
|
18,632
|
|
|
|
397,800
|
|
|
|
(5,968
|
)
|
|
|
13,402
|
|
|
|
891,266
|
|
|
|
|
2006
|
|
|
|
413,233
|
|
|
|
449,186
|
|
|
|
327,600
|
|
|
|
104,700
|
|
|
|
17,737
|
|
|
|
1,312,456
|
|
|
|
|
2005
|
|
|
|
357,400
|
|
|
|
421,948
|
|
|
|
162,330
|
|
|
|
|
|
|
|
15,766
|
|
|
|
957,444
|
|
Christopher S. Nard(6)
|
|
|
2009
|
|
|
|
395,000
|
|
|
|
31,916
|
|
|
|
52,464
|
|
|
|
|
|
|
|
13,365
|
(7)
|
|
|
492,745
|
|
Senior Vice President
|
|
|
2008
|
|
|
|
375,333
|
|
|
|
31,209
|
|
|
|
152,000
|
|
|
|
|
|
|
|
17,106
|
(7)
|
|
|
575,648
|
|
Mortgage Guaranty
|
|
|
2007
|
|
|
|
351,833
|
|
|
|
31,702
|
|
|
|
280,000
|
|
|
|
|
|
|
|
33,521
|
(7)
|
|
|
697,056
|
|
|
|
|
2006
|
|
|
|
343,500
|
|
|
|
784,135
|
|
|
|
409,500
|
|
|
|
|
|
|
|
36,138
|
(7)
|
|
|
1,573,273
|
|
|
|
|
2005
|
|
|
|
305,167
|
|
|
|
757,856
|
|
|
|
229,967
|
|
|
|
|
|
|
|
29,878
|
(7)
|
|
|
1,267,397
|
|
R. Scott Rager(6)
|
|
|
2009
|
|
|
|
433,667
|
|
|
|
386,152
|
|
|
|
8,744
|
|
|
|
|
|
|
|
5,364
|
|
|
|
833,927
|
|
Senior Vice President
|
|
|
2008
|
|
|
|
420,000
|
|
|
|
498,629
|
|
|
|
57,000
|
|
|
|
|
|
|
|
5,364
|
|
|
|
980,993
|
|
General Insurance
|
|
|
2007
|
|
|
|
374,500
|
|
|
|
486,440
|
|
|
|
257,400
|
|
|
|
|
|
|
|
487,109
|
(8)
|
|
|
1,605,449
|
|
|
|
|
2006
|
|
|
|
294,583
|
|
|
|
430,770
|
|
|
|
256,815
|
|
|
|
|
|
|
|
5,982
|
|
|
|
988,150
|
|
Rande K. Yeager
|
|
|
2009
|
|
|
|
357,167
|
|
|
|
|
|
|
|
17,488
|
|
|
|
107,229
|
|
|
|
10,951
|
|
|
|
492,835
|
|
Senior Vice President
|
|
|
2008
|
|
|
|
316,063
|
|
|
|
|
|
|
|
45,600
|
|
|
|
96,186
|
|
|
|
10,967
|
|
|
|
468,816
|
|
Title Insurance
|
|
|
2007
|
|
|
|
299,383
|
|
|
|
|
|
|
|
23,400
|
|
|
|
26,509
|
|
|
|
9,550
|
|
|
|
358,842
|
|
|
|
|
2006
|
|
|
|
284,450
|
|
|
|
500,000
|
|
|
|
81,900
|
|
|
|
74,460
|
|
|
|
10,260
|
|
|
|
951,070
|
|
|
|
|
2005
|
|
|
|
265,483
|
|
|
|
620,000
|
|
|
|
59,521
|
|
|
|
|
|
|
|
10,710
|
|
|
|
955,714
|
|
|
|
|
(1) |
|
Since January 1, 2007, no employee of Old Republic or any
of its subsidiaries have received any director fees for
attending Board meetings of Old Republic or any of its
subsidiaries. In the above table, each officers salary
includes the non material amount of director fees for 2006 and
2005. |
|
(2) |
|
Includes the combined cash and deferred incentive compensation
awards granted under Old Republics performance recognition
plans or similar plans maintained by subsidiaries of Old
Republic. In this table, both the cash and deferred portions are
attributed to the year on which the award was based, even though
the award was granted in the following calendar year. Prior to
2007, these awards were split 50% each into cash and deferred
amounts, except as to Mr. Yeager whose awards were and
continue to be 100% cash. Beginning in 2007, the first $25,000
was paid in cash and the balance was split 50% each into cash
and deferred amounts. The deferred amounts included in this
column are usually not payable before the person retires at
55 years of age or later. Beginning in 2007, the deferred
portions accrue interest for awards made in 2005 and subsequent.
For awards made prior to 2004 an interest equivalent multiplier
may apply. The deferred amounts included in this column are
shown without a present value discount but show the interest
accrual on the deferred balances for the |
159
|
|
|
|
|
year. No incentive compensation awards were granted in 2007,
2008 or 2009 under Old Republics and its subsidiaries Key
Employee Performance Recognition Plans. These plans have been
suspended. However, certain executive officers and other
employees have been granted bonus awards based on Old
Republics segmented results as well as on their individual
performance. The 2009 and 2008 bonus awards shown for
Messrs. Mueller and Rager represent such awards and
interest ($13,446 and $12,924 and $51,152 and $23,629,
respectively) on deferred incentive compensation plan balances
outstanding at December 31, 2009. The 2009, 2008 and 2007
amounts shown for Messrs. Zucaro, Kellogg and Nard
represent only interest on their deferred incentive compensation
plan balances. |
|
(3) |
|
The value of options is calculated pursuant to the Black-Scholes
model. The option values represent the estimated present value
as of the date options were granted. Accordingly, the option
awards included under this column were granted in the years
shown and reflect, among other factors previously noted, an
evaluation of earnings trends and returns on equity for prior
years. The values shown for Messrs Mueller, Kellogg and Nard
have been restated for 2008 and prior years to reflect changes
in SEC rules regarding the presentation of such values. |
|
|
|
The significant facts and assumptions incorporated in the
Black-Scholes model used to estimate the value of the options
include the following: |
|
|
|
a) Options are issued with an exercise price equal to 100%
of the per share value at the close of trading (the Fair
Market Value) of Common Stock on the business day
immediately preceding the date of grant (the Grant
Date).
|
|
|
|
b) The term of each option is 10 years (unless such
terms are otherwise shortened or forfeited due to termination of
employment) but it is assumed that these executives would hold
these options for 8 years. |
|
|
|
c) Specific interest rates are used for valuing the awards.
Such rates are predicated on the interest rate on
U.S. Treasury securities on the date of grant with a
maturity date corresponding to that of the expected option life. |
|
|
|
d) A stock price volatility factor is utilized in valuing
the option awards. This factor is calculated using daily stock
prices for the period prior to the grant date corresponding with
the expected option life. |
|
|
|
e) Expected annual dividend yields ranging between 6.5% and
3.5% are used in the calculation of the awards. |
|
|
|
The ultimate value of the options will depend on the future
market price of Old Republics Common Stock which cannot be
forecasted with reasonable accuracy. The actual value, if any,
that an optionee may realize upon exercise of an option will
depend on the excess of the market value over the exercise price
on the date the option is exercised. |
|
|
|
|
|
The values attributed to options granted in the years 2005 to
2008 have been negated based on the actual market value of Old
Republics stock through August 2, 2010. |
|
|
|
(4) |
|
Represents the aggregate change in the actuarial present value
of the accumulated benefits under all defined benefit and
actuarial pension plans, including supplemental plans. Old
Republic does not have any non-qualified deferred compensation
plans that credit above market or preferential earnings to
participants. No information is supplied for 2005 as that
information is unavailable. |
|
(5) |
|
Includes all minor amounts covering Old Republics matching
contribution to the officers ESSOP account; the value of
Old Republics group term life insurance plan treated as
income; the value of the personal use of a vehicle supplied for
company business; and the personal value of meals and club dues
incurred for company business. |
|
(6) |
|
Mr. Nard assumed additional responsibilities as an
executive officer of Old Republic effective June 1, 2005;
Mr. Rager assumed additional responsibilities as an
executive officer of Old Republic and its General Insurance
Companies effective June 1, 2006. |
|
(7) |
|
Includes the vested amounts accrued under the RMIC Profit
Sharing Plan, of which their was none in 2008 and 2009, and a
minor amount attributed to a health program available to all
RMIC employees. |
|
(8) |
|
Includes a $400,000 relocation bonus and $84,362 in relocation
expenses paid to Mr. Rager in connection with his move to
Old Republics Chicago executive offices in 2007. |
160
Annual
Salary
Old Republics objective in establishing annual salaries is
to set them at amounts which:
1) Are reasonably competitive in the context of prevailing
salary scales in the insurance industry; and
2) Provide a fixed, reasonable source of annual income.
The primary factors considered in varying degrees in
establishing annual salaries are:
|
|
|
|
|
Business size and complexity of the operations with which the
executive is associated;
|
|
|
|
The executives level of responsibility and experience;
|
|
|
|
The success of the executives business unit and evaluation
of his or her contribution to that success.
|
When making these evaluations prevailing salary scales in the
insurance industry, the annual consumer price index, trends in
salary levels in published or private compilations and reports,
and data contained in the proxy statements of publicly held
insurance organizations are taken into account. No formula, set
benchmark or matrix is used in determining annual salary
adjustments. The decision regarding each executive officer is
subjectively based upon all of the above factors, with the
Compensation Committee members exercising their business
judgment in consultation with the CEO, as to executive officers
other than the CEO himself. Old Republic believes its annual
salary compensation level for executive officers is below the
median for the insurance industry and its peer group.
The salaries of the executive officers are reviewed on an annual
basis during the first quarter of the year, and concurrently
with a promotion or other significant change in
responsibilities. Prior compensation, prior cash
and/or
deferred incentive awards, bonuses or prior gains from the
exercise of stock options are not taken into account when
setting current annual salaries for the CEO and other executive
officers of Old Republic.
Incentive
Awards and Bonuses
Old Republic uses incentive awards, comprised of both cash and
deferred amounts, as well as bonuses. Incentive awards and
bonuses are intended to afford eligible executive officers and
certain key associates, an opportunity and incentive to increase
their compensation based on managements and the
Compensation committees review of their performance.
Performance
Recognition Plans
Under Old Republics Key Employee Performance Recognition
Plan (KEPRP) a performance recognition pool is established each
year for allocation among eligible key employees of Old Republic
and its participating subsidiaries, including the CEO and other
executive officers. Employees eligible to share in this pool are
selected by the Compensation Committee in consultation with the
CEO and the President. The CEO recommends the allocation of the
pool to participants in the plan and the Compensation Committee
then makes the sole determination with regard to the CEOs
and Presidents performance, eligibility and award from any
remaining balance in the pool, and after deducting any pertinent
earnings multiplier therefrom. Up to 50% of any one years
pool amount may be carried forward for up to three years for
later allocation. In designating eligible employees and
determining amounts to be allocated, the Compensation Committee
consults with the CEO and the President and considers the
positions and responsibilities of the employees, the perceived
value of their accomplishments to Old Republic, their expected
future contributions to Old Republic and other relevant factors.
The Compensation Committees evaluation of all such factors
is subjective and based on the business judgment of its members.
Each years pool amount takes into account pre-established
objectives approved by the Compensation Committee for return on
equity and year over year growth in earnings. Calculation of the
pool is made in accordance with a detailed formula affected by
(a) the eligible participating employees annual
salaries, (b) the current years earnings in excess of
the prior years earnings (excluding income from realized
investment gains or losses), multiplied by a factor determined
by the increase in Old Republics earnings per share, and
(c) the latest years return on equity in excess of a
minimum target return on equity equal to two times the mean of
the five-year average post-tax yield on
10-year and
20-year
U.S. Treasury Securities. The pool is limited to a
percentage of plan participants aggregate annual base
salaries, ranging from 10% to 150%, depending upon the amount by
which the
161
current years actual return on equity exceeds the minimum
target return on equity for the year. There is no prescribed
guaranty or limit as to how much of the years available
pool may be awarded to each participant.
Prior to 2007, there was an immediate payment in cash of 50% of
any award, as well as 50% of the multiplier factor applied to
the deferred balances of prior years participants; the
balance of the award was deferred and vested at the rate of 10%
per year of participation. Beginning in 2007, the first $25,000
of any award, including any multiplier applied to a deferred
balance, is paid in cash. For awards in excess of that amount,
50% of the excess is paid in cash and 50% is deferred. The
deferred balance, if any, is credited with interest at a rate
approved annually by the Compensation Committee. Pursuant to the
terms of the plan, participants become vested in their deferred
account balances upon total and permanent disability, death,
upon the earlier of attaining age 55 or being employed for
10 years after first becoming eligible or upon a change of
control of Old Republic. Benefits are payable in a set number of
equal installments, beginning no earlier than age 55,
following termination of employment, death, disability,
retirement or a change in control of Old Republic. Distributions
for executive officers can begin no earlier than six months
following their termination from service.
In addition to the KEPRP, Old Republic also maintains a number
of separate plans for several individual subsidiaries, or
segments of business such as the Mortgage Guaranty and
Title Insurance segments. Such plans provide for the
achievement of certain financial results and objectives as to
each such entity. Each of these plans operates in the same basic
fashion as Old Republics Plan. The award pools for each
plan are also established according to detailed formulas that
take into account the increases in earnings, returns on equity
in excess of a minimum target percentage, and other factors
pertinent to each operating entity. Each separate
subsidiarys or operating centers plan has a similar
cash and deferred element, except for a few separate plans used
for transaction-driven businesses, such as Title Insurance,
which have historically been cash basis plans only.
Incentive awards are typically granted annually during the first
quarter of the year to eligible employees who are employed as of
the award date. This follows the receipt of independent
auditors reports on the financial statements of the
preceding year, and an evaluation of any pertinent and
significant post balance sheet events and business trends.
The awards shown in the Bonus column of the
preceding Summary Compensation Table for 2005 and 2006 were
approved by the Compensation Committee following a review of the
tangible factors cited at (a), (b), and (c) in the second
paragraph of this section. As a result of the substantial
decline in the earnings in 2007, 2008 and 2009 of Old
Republics consolidated business and of its Mortgage
Guaranty and Title Insurance segments in particular, no
incentive awards or bonus payments were made to any of the
policy-making executive officers responsible for the operations
of Old Republic as a whole or the Mortgage Guaranty or
Title Insurance units. In light of current business and
financial conditions, the Compensation Committee, in
consultation with the CEO and the President, has determined to
suspend Old Republics KEPRP and certain other plans. The
current policy of the Compensation Committee is to grant bonus
awards, if any, to executive officers and other employees based
upon a composite of Old Republics segmented results as
well as their individual performance evaluations by senior
executive officers.
162
The following table sets forth certain information regarding
non-qualified deferred compensation awards made to the persons
listed in the Summary Compensation Table and shows the proforma
balances of such accounts as of December 31, 2009. The
individuals listed had no discretion as to whether they wished
to defer any awards made to them by Old Republic and were not
permitted to voluntarily make contributions of their own to Old
Republics KEPRP. The amounts shown as contributed to the
named persons accounts were based upon their performance
for that year even though the award itself was made after year
end following the receipt of the independent auditors
reports on the financial statements of Old Republic, review of
any significant post balance sheet events, and their continued
employment. Similarly, the amount earned on prior year balances
and the aggregate balances for these persons are presented as of
the date coincident with the calculation and the making of
awards in mid-March 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonqualified Deferred Compensation
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
Old Republics
|
|
|
Aggregate
|
|
|
Balance as of
|
|
|
|
Contributions
|
|
|
Earnings
|
|
|
December 31,
|
|
Name
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
Aldo C. Zucaro
|
|
|
|
|
|
$
|
40,748
|
|
|
$
|
6,658,040
|
|
Karl W. Mueller
|
|
|
|
|
|
|
13,446
|
|
|
|
479,259
|
|
James A. Kellogg
|
|
|
|
|
|
|
18,821
|
|
|
|
1,487,647
|
|
Christopher S. Nard
|
|
|
|
|
|
|
31,916
|
|
|
|
2,233,336
|
|
R. Scott Rager
|
|
$
|
155,000
|
|
|
|
51,152
|
|
|
|
1,994,675
|
|
Rande K. Yeager
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Option Awards
Old Republic believes that its CEO, executive officers, and
other employees, who make a substantial contribution to
long-term performance, should have an equity interest in Old
Republic. Old Republic has maintained a non-qualified stock
option plan for key employees of Old Republic and its
participating subsidiaries for several decades. The current Plan
was approved by Old Republics shareholders in 2006 and
replaced a similar non-qualified stock option plans that had
been in place for more than twenty-five years. Pursuant to the
existing Plan, as amended, the maximum number of shares
available for grant is 14.5 million until the Incentive
Plan terminates in 2016. All awards made after March 12,
2010 will reduce the 14.5 million shares authorized for
future awards under the Plan.
The objective of the plan is to encourage:
1) an alignment of shareholder and employee interests,
2) employee efforts to grow shareholder value, and
3) a long-term commitment to Old Republic by participating
employees.
Accordingly, stock option grants have not been limited solely to
the CEO, and executive officers but have been available to a
number of Old Republic employees. The factors considered when
making stock option awards include:
|
|
|
|
|
the achievements of the individual,
|
|
|
|
the overall performance of Old Republic,
|
|
|
|
the anticipated contributions of awardees to Old Republics
future success.
|
No formula, set benchmark or matrix is used in determining stock
option awards. The relative significance of the above factors
with respect to awards granted to the CEO and other executive
officers is determined subjectively by the Committee using its
business judgment, and in consultation with the CEO and the
President. The aggregate number of option shares granted over
the past five years to all employees, including the CEO, the
other executive officers of Old Republic and all employees has
ranged from 0.4% to 1.1% of the then outstanding Common Stock of
Old Republic.
163
Option awards are made once a year, usually during the first
quarter following receipt of the independent auditors
report on the financial statement for the preceding year. The
Compensation Committee approves the total pool of option shares
and the options granted to the CEO, and a number of the most
senior executives of Old Republic and its subsidiaries. The
options exercise price is the Fair Market Value of Old
Republics Common Stock on the Grant Date. When making
these awards the other sources of compensation for the
participant, such as base salary and any other incentive awards,
are taken into account so as to achieve a reasonable balance of
cash and future income or value. The grant of options and their
strike price are not linked to any company action such as the
release of earnings and have typically occurred during March of
each year.
The following table sets forth certain information regarding
options to purchase shares of Common Stock granted in 2009 to
the executive officers listed in the Summary Compensation Table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Stock Option Grants
|
|
|
|
|
All Other
|
|
|
|
|
|
|
|
|
Option Awards:
|
|
Exercise or
|
|
Grant Date
|
|
|
Grant
|
|
Number of Securities
|
|
Base Price Of
|
|
Fair Value of
|
Name
|
|
Date
|
|
Underlying Options
|
|
Option Awards
|
|
Option Award
|
|
Aldo C. Zucaro
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Karl W. Mueller
|
|
|
3/25/09
|
|
|
|
15,000
|
|
|
$
|
10.48
|
|
|
$
|
13,116
|
|
James A. Kellogg
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher S. Nard
|
|
|
3/25/09
|
|
|
|
60,000
|
|
|
|
10.48
|
|
|
|
52,464
|
|
R. Scott Rager
|
|
|
3/25/09
|
|
|
|
10,000
|
|
|
|
10.48
|
|
|
|
8,744
|
|
Rande K. Yeager
|
|
|
3/25/09
|
|
|
|
20,000
|
|
|
|
10.48
|
|
|
|
17,488
|
|
The purchase price per share of Common Stock subject to an
option was fixed by the Compensation Committee. Such purchase
price was the fair market value of Common Stock on the Grant
Date.
The term of each option was 10 years from the date of
grant. Options are exercisable in accordance with the following
vesting schedule: 10% at the end of the year of grant, and
thereafter, annually at the rates of 15%, 20%, 25% and 30% so
that at the end of the 5th fiscal year after the grant they
are 100% vested. If the optionee dies, retires in good standing,
after age 57, or becomes disabled, vesting acceleration
occurs. In such cases and if a change in control of Old Republic
occurs, vesting accelerates to the extent of the higher of 10%
of the shares covered for each year of service by the optionee
or the actual vested percentage plus 50% of the unvested
remaining shares. All option shares granted prior to 2006 are
now fully vested.
Exercises
of Stock Options During 2009
No stock options were exercised during 2009 by any of the
executive officers named in the Summary Compensation Table.
164
Equity
Compensation Plan Information
The following table sets forth certain information regarding
securities authorized for issuance under equity compensation
plans as of year end 2009. Old Republic only has equity
compensation plans that have been approved by Old
Republics shareholders.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Compensation Plan Status as of Year End 2009
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
Number of
|
|
|
|
|
|
Available for
|
|
|
|
Securities to be
|
|
|
|
|
|
Future Issuance
|
|
|
|
Issued Upon Exercise
|
|
|
Weighted-Average
|
|
|
Under Equity
|
|
|
|
of Outstanding
|
|
|
Exercise Price of
|
|
|
Compensation Plans
|
|
|
|
Options, Warrants
|
|
|
Outstanding Options,
|
|
|
(Excluding Securities
|
|
Plan Category
|
|
and Rights
|
|
|
Warrants and Rights
|
|
|
Reflected in Column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved by security holders
|
|
|
15,781,176
|
|
|
$
|
17.49
|
|
|
|
5,880,514
|
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
15,781,176
|
|
|
$
|
17.49
|
|
|
|
5,880,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth information regarding the
unexercised options held by the persons listed in the Summary
Compensation Table. This table shows the option exercise price
for each exercisable and unexercisable option held by each
individual and the date upon which each option expires.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Equity Awards at Year End 2009
|
|
|
Number of Securities
|
|
|
|
|
Underlying
|
|
Underlying
|
|
|
|
|
|
|
Unexercised
|
|
Unexercised
|
|
Option
|
|
Option
|
|
|
Options
|
|
Options
|
|
Exercise
|
|
Expiration
|
Name
|
|
Exercisable
|
|
Unexercisable
|
|
Price
|
|
Date
|
|
Aldo C. Zucaro
|
|
|
300,000
|
|
|
|
|
|
|
$
|
14.36
|
|
|
|
03/21/11
|
|
|
|
|
318,750
|
|
|
|
|
|
|
|
16.86
|
|
|
|
03/20/12
|
|
|
|
|
346,875
|
|
|
|
|
|
|
|
14.37
|
|
|
|
03/19/13
|
|
|
|
|
346,875
|
|
|
|
|
|
|
|
19.32
|
|
|
|
03/09/14
|
|
|
|
|
112,500
|
|
|
|
|
|
|
|
18.41
|
|
|
|
04/11/15
|
|
|
|
|
196,000
|
|
|
|
84,000
|
|
|
|
21.48
|
|
|
|
05/26/16
|
|
|
|
|
90,000
|
|
|
|
110,000
|
|
|
|
21.77
|
|
|
|
03/13/17
|
|
|
|
|
|
|
|
|
|
|
|
|
12.95
|
|
|
|
03/18/18
|
|
|
|
|
|
|
|
|
|
|
|
|
10.48
|
|
|
|
03/25/19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Karl W. Mueller
|
|
|
37,500
|
|
|
|
|
|
|
|
20.02
|
|
|
|
03/09/14
|
|
|
|
|
12,500
|
|
|
|
|
|
|
|
18.41
|
|
|
|
04/11/15
|
|
|
|
|
24,500
|
|
|
|
10,500
|
|
|
|
21.48
|
|
|
|
05/26/16
|
|
|
|
|
17,100
|
|
|
|
20,900
|
|
|
|
21.77
|
|
|
|
03/13/17
|
|
|
|
|
6,250
|
|
|
|
18,750
|
|
|
|
12.95
|
|
|
|
03/18/18
|
|
|
|
|
1,500
|
|
|
|
13,500
|
|
|
|
10.48
|
|
|
|
03/25/19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James A. Kellogg
|
|
|
4,219
|
|
|
|
|
|
|
|
6.40
|
|
|
|
03/22/10
|
(*)
|
|
|
|
6,563
|
|
|
|
|
|
|
|
14.36
|
|
|
|
03/21/11
|
|
|
|
|
7,500
|
|
|
|
|
|
|
|
16.86
|
|
|
|
03/20/12
|
|
|
|
|
9,375
|
|
|
|
|
|
|
|
14.37
|
|
|
|
03/19/13
|
|
|
|
|
25,000
|
|
|
|
|
|
|
|
19.32
|
|
|
|
03/09/14
|
|
|
|
|
37,500
|
|
|
|
|
|
|
|
18.41
|
|
|
|
04/11/15
|
|
|
|
|
42,000
|
|
|
|
18,000
|
|
|
|
21.48
|
|
|
|
05/26/16
|
|
|
|
|
38,250
|
|
|
|
46,750
|
|
|
|
21.77
|
|
|
|
03/13/17
|
|
|
|
|
|
|
|
|
|
|
|
|
12.95
|
|
|
|
03/18/18
|
|
|
|
|
|
|
|
|
|
|
|
|
10.48
|
|
|
|
03/25/19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Equity Awards at Year End 2009
|
|
|
Number of Securities
|
|
|
|
|
Underlying
|
|
Underlying
|
|
|
|
|
|
|
Unexercised
|
|
Unexercised
|
|
Option
|
|
Option
|
|
|
Options
|
|
Options
|
|
Exercise
|
|
Expiration
|
Name
|
|
Exercisable
|
|
Unexercisable
|
|
Price
|
|
Date
|
|
Christopher S. Nard
|
|
|
28,125
|
|
|
|
|
|
|
|
6.40
|
|
|
|
03/22/10
|
(*)
|
|
|
|
65,625
|
|
|
|
|
|
|
|
14.36
|
|
|
|
03/21/11
|
|
|
|
|
56,250
|
|
|
|
|
|
|
|
16.86
|
|
|
|
03/20/12
|
|
|
|
|
75,000
|
|
|
|
|
|
|
|
14.37
|
|
|
|
03/19/13
|
|
|
|
|
75,000
|
|
|
|
|
|
|
|
19.32
|
|
|
|
03/09/14
|
|
|
|
|
53,125
|
|
|
|
|
|
|
|
18.41
|
|
|
|
04/11/15
|
|
|
|
|
52,500
|
|
|
|
22,500
|
|
|
|
21.48
|
|
|
|
05/26/16
|
|
|
|
|
27,000
|
|
|
|
33,000
|
|
|
|
21.77
|
|
|
|
03/13/17
|
|
|
|
|
25,000
|
|
|
|
75,000
|
|
|
|
12.95
|
|
|
|
03/18/18
|
|
|
|
|
6,000
|
|
|
|
54,000
|
|
|
|
10.48
|
|
|
|
03/25/19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R. Scott Rager
|
|
|
15,000
|
|
|
|
|
|
|
|
16.86
|
|
|
|
03/20/12
|
|
|
|
|
27,500
|
|
|
|
|
|
|
|
19.32
|
|
|
|
03/09/14
|
|
|
|
|
28,750
|
|
|
|
|
|
|
|
18.41
|
|
|
|
04/11/15
|
|
|
|
|
32,900
|
|
|
|
14,100
|
|
|
|
21.48
|
|
|
|
05/26/16
|
|
|
|
|
24,750
|
|
|
|
30,250
|
|
|
|
21.77
|
|
|
|
03/13/17
|
|
|
|
|
9,375
|
|
|
|
28,125
|
|
|
|
12.95
|
|
|
|
03/18/18
|
|
|
|
|
1,000
|
|
|
|
9,000
|
|
|
|
10.48
|
|
|
|
03/25/19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rande K. Yeager
|
|
|
14,063
|
|
|
|
|
|
|
|
16.86
|
|
|
|
03/20/12
|
|
|
|
|
18,750
|
|
|
|
|
|
|
|
19.32
|
|
|
|
03/09/14
|
|
|
|
|
13,750
|
|
|
|
|
|
|
|
18.41
|
|
|
|
04/11/15
|
|
|
|
|
10,500
|
|
|
|
4,500
|
|
|
|
21.48
|
|
|
|
05/26/16
|
|
|
|
|
2,250
|
|
|
|
2,750
|
|
|
|
21.77
|
|
|
|
03/13/17
|
|
|
|
|
7,500
|
|
|
|
22,500
|
|
|
|
12.95
|
|
|
|
03/18/18
|
|
|
|
|
2,000
|
|
|
|
18,000
|
|
|
|
10.48
|
|
|
|
03/25/19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
These options were exercised or lapsed during March 2010. |
Pension
Plans
Old Republic maintains the Old Republic International
Corporation Salaried Employees Restated Retirement Plan
(ORI Employees Retirement Plan or Company
Plan) for eligible employees and those of participating
subsidiaries who had been employed through year end, 2004.
Persons whose employment commenced on or after January 1,
2005 are not eligible to participate in the Company Plan but may
participate in Old Republics 401(k) ESSOP. The Company
Plan, which is noncontributory, provides for benefits based upon
1.5% of the participants Final Average Monthly
Earnings (1/60th of the aggregate earnings of the
employee during the period of the five consecutive years of
service out of the last ten consecutive years of service which
results in the highest Final Average Monthly
Earnings) multiplied by the participants years of
service. Earnings include base salary and commissions, but
exclude cash and deferred incentive compensation awards granted
under Old Republics current or former KEPRP.
Old Republic also maintains the Old Republic International
Corporation Executives Excess Benefit Plan (ORI
Excess Benefit Plan) to provide certain key executives
with pension benefits in excess of those provided by the Company
Plan because of legal limitations that cap benefit payments. The
ORI Excess Benefit Plan is administered by the Compensation
Committee of the Board of Directors, which selected the
employees to participate in this plan from those who are
participants in the Company Plan. Mr. Zucaro is the only
listed
166
executive officer who qualified for participation under the ORI
Excess Benefit Plan, as this plan was closed to any additional
participants as of December 31, 2004.
Employees of the Old Republic National Title Group
(ORNTG) who had been employed through year end 2003,
participate in the Old Republic National Title Group
Pension Plan (ORNTG Plan) instead of the Company
Plan. The ORNTG Plan operates in the same basic fashion as Old
Republics Plan except that benefits are calculated
differently. The monthly benefit is 1.20% of the participants
Final Average Monthly Earnings up to the Social Security
Integration Level, and 1.75% of the amount in excess of that
level, times the participants years of credited service
limited to a maximum of 30 years. Employees who joined
ORNTG on or after January 1, 2004 are ineligible to
participate in the ORNTGs Plan but may be eligible to
participate in Old Republics 401(k) ESSOP.
Mr. Nard did not participate in the Company Plan because
employees of Republic Mortgage Insurance Company
(RMIC) participate in the RMIC Profit-Sharing Plan
instead of the Company Plan. Likewise, Mr. Rager does not
participate in the Company Plan. He does, however, participate
in the Great West Casualty Profit Sharing Plan and Old
Republics ESSOP. These plans are described in the
following section.
The following table sets forth the present value of the
estimated benefits payable to an employee:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
|
|
|
Present Value of
|
|
|
|
|
|
|
Number of Years
|
|
Accumulated
|
|
Payments During
|
Name
|
|
Plan Name
|
|
Credited Service
|
|
Benefit(1)
|
|
Last Fiscal Year
|
|
Aldo C. Zucaro
|
|
ORI Employees Retirement Plan
|
|
|
32.4
|
|
|
$
|
1,306,188
|
|
|
|
|
|
|
|
ORI Excess Benefit Plan
|
|
|
32.4
|
|
|
|
2,863,938
|
|
|
|
|
|
Karl W. Mueller
|
|
ORI Employees Retirement Plan
|
|
|
4.3
|
|
|
|
70,286
|
|
|
|
|
|
James A. Kellogg
|
|
ORI Employees Retirement Plan
|
|
|
32.8
|
|
|
|
866,018
|
|
|
|
|
|
Christopher S. Nard
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
R. Scott Rager
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
Rande K. Yeager
|
|
ORNTG Pension Plan
|
|
|
22.6
|
|
|
|
711,605
|
|
|
|
|
|
|
|
|
(1) |
|
The present value of accumulated benefits payable following
assumed retirement is calculated using interest and mortality
assumptions consistent with those used for financial reporting
purposes with respect to the companies audited financial
statements. No discount is assumed for separation prior to
retirement due to death, disability or termination of
employment. The amount shown is based upon accrued service
through year end 2009. |
Employees
Savings and Stock Ownership Plan
Under Old Republics 401(k) qualified ESSOP,
employees savings, up to a maximum of 6%, are matched by
employer contributions ranging from 20% to 140% of such savings
in accordance with a formula based upon the percentages saved
and the increase in Old Republics average net operating
earnings per share for the five years ending with the calendar
year immediately prior to the year for which the contribution is
made. Old Republics matching contribution applies to
annual compensation up to a maximum of $150,000. For the year
2009, Old Republics match was set at 20% by this formula.
Employees contributions are invested, at the
employees direction, in a number of publicly traded mutual
funds and employees may elect to purchase Old Republics
Common Stock as an investment option. Employer contributions are
invested exclusively in the stock of Old Republic. Prior to
2007 employees over age 55 and with 10 years of
service credited under the Plan could diversify a portion of the
employers contributions out of Old Republics stock
and into alternative investments based on their age and years of
service with Old Republic. For the year 2007 and in each
subsequent year, employees with three or more years of service
as of the prior years end (three years of
service) may diversify the annual contribution of Old
Republics stock into alternative investments. Further,
employees with three years of service may also diversify all of
the prior contributions of Old Republics stock at any
time. The alternative investment choices include a number of
publicly traded stock and bond mutual funds. Employees may also
change their investments from the
167
alternate investments permitted into investments in Old
Republics stock. However, the number of times an employee
may change their investments into or out of Old Republics
stock is annually limited. A participant becomes vested in the
account balance allocated from employer contributions upon being
totally and permanently disabled, dying, or upon the earlier of
attaining age 65 or being employed for 6 years.
Vesting also occurs in increments of 20% a year, beginning after
one year of service. Benefits are payable upon termination of
service, death or disability, or following retirement and are
subject to minimum distribution requirements set out in Treasury
regulations under the Internal Revenue Code. At the election of
the participant, benefits derived from employer contributions
are payable either in cash or Old Republics Common Stock.
Mr. Nard participates in Old Republics ESSOP as well
as in the RMIC Profit Sharing Plan, a 401(k) qualified plan. The
RMIC Profit Sharing Plan covers substantially all employees of
RMIC and its affiliates. Contributions to the plan are
determined annually by RMICs Board of Directors, and
voluntary contributions of up to 10% of annual income are
permitted. There was no contribution made by RMIC in 2008 or
2009 based upon RMICs performance in 2008 and 2007.
Employees contributions are invested, at the
employees direction, in a number of publicly traded mutual
funds and employees may elect to purchase Old Republics
Common Stock as an investment option. RMIC Profit Sharing Plan
participants interests vest in increments of 10% of
contributed amounts beginning with 40% after one year and
extending to 100% after seven years. Account balances are
payable upon death or permanent disability. Normal retirement is
at age 65 and the plan provides for early retirement at
age 50 with ten years of service. Benefits upon retirement
may be received as a monthly annuity, periodic cash payments, or
in a lump-sum distribution, at the participants election.
Mr. Rager participates in Old Republics ESSOP as well
as in the GWC Profit Sharing Plan, The GWC Profit Sharing Plan
is a 401(k) qualified plan that covers substantially all
employees of GWC and its affiliates. Under the terms of the
Plan, employees may contribute up to 15% of their pay on a
pretax basis. Contributions are subject to an annual maximum
(set at $16,500 in 2009) which increases annually to
reflect changes in the cost of living. GWC matches 25% of the
employees first 6% of contributions and at the discretion of
GWCs Board of Directors may make additional contributions
as determined annually. Employees share in discretionary
contributions on a proportional basis according to their
earnings. Employees contributions are invested, at the
employees direction, in a number of publicly traded mutual
funds and employees may elect to purchase Old Republics
Common Stock as an investment option. GWC Profit Sharing Plan
participants interest vests in increments of 20% of Old
Republics contributions after two years of service and are
100% vested after six years of service. Benefits are payable
upon normal retirement at age 65 and earlier upon death or
permanent disability. Upon retirement a participant may elect a
lump sum distribution or a direct rollover into an Individual
Retirement Account.
Other
Benefits
Old Republics philosophy on compensation does not
encompass the disbursement of significant values by way of
perquisites or personal benefits to its executive officers and
other associates. Such benefits, as are in fact provided,
include the personal value attributed to the use of company
supplied automobiles, the personal value of club memberships,
and the value of personal meals. The value of these benefits to
the CEO, CFO and other listed executive officers are shown in
the All Other Compensation column of the Summary
Compensation Table shown elsewhere in this proxy
statement/prospectus. Old Republic and most of its subsidiaries
provide other employment benefits that are generally available
to most other employees and include: 401(k) and profit sharing
plans based on each subsidiarys or operating units
profitability; group life insurance plans; group health
insurance plans; paid holidays and vacations.
Change
of Control, Severance or Retirement
None of the executive officers have employment contracts, and
all are considered at-will employees of Old
Republic. Further, Old Republic has no change of control or
severance agreements such as golden parachutes in
place for any of its executive officers. However, the benefit
plans referred to above would be affected, in limited ways, by a
change of control of Old Republic. Such an event would not
result in additional compensation or benefits being paid to any
executive officer or employee for Old Republic. Rather, the
effect would be to accelerate the vesting of benefits under
these plans and require the immediate payment of all deferred
balances under Old Republics Performance Recognition Plans.
168
The above notwithstanding, Old Republic and its Board of
Directors retain the right to enter into employment contracts or
institute golden parachute and similar benefits for a number of
its executives and other key associates immediately, and at any
time circumstances may warrant, to protect Old Republics
business interests. There is no assurance, however, that any of
the selected executives would agree to such contracts.
Financial
Restatement
Old Republic has adopted a policy that it will, to the extent
permitted by law, attempt to recover bonuses, deferred
compensation and stock option awards made to executive officers
where such awards were predicated upon financial results that
were subsequently the subject of a restatement resulting from
any benefiting executives illegal or fraudulent actions.
Where applicable, Old Republic will seek to recover any amount
determined to have been inappropriately received by the
individual executive.
Tax
Deductibility of Compensation
Section 162(m) of the Internal Revenue Code of 1986, as
amended, places a limit of $1,000,000 on the amount of
compensation that Old Republic may deduct in any one year with
respect to each of its five most highly paid executive officers.
There is an exception to the $1,000,000 limitation for
performance-based compensation meeting certain requirements.
Annual cash incentive compensation and stock option awards
generally are performance-based compensation meeting those
requirements and, as such, are fully deductible. In light of the
above rule, Old Republic has not adopted any policy with respect
to compensation in excess of $1,000,000 being paid to executive
officers.
Stock
Ownership Guidelines
Old Republic encourages all its employees to own Old Republic
Common Stock directly or through employee benefit plans such as
its 401(k) ESSOP. All of its senior executive officers and
directors own shares of Old Republics stock. The table
under the heading Old Republic Principal Holders of
Securities shows the nature and amount of such holdings.
Old Republic has an equity ownership policy for its directors
and senior officers. Pursuant to this policy, directors are
required to acquire holdings in Old Republics Common Stock
with a value of at least $250,000. This policy allows new
directors three years during which to acquire such ownership
with the valuation of such stock based upon the greater of
current market value attained at any point in time or the
original acquisition cost. All of Old Republics directors
currently hold in excess of this requirement. For the most
senior officers of Old Republic, the recommended value of Common
Stock ownership is based upon the following multiples of the
officers base salary:
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CEO of Old Republic
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6 times
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President of Old Republic
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4 times
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Certain other senior officers of Old Republic and its
subsidiaries
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1.5 times
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The value of all shares of Old Republic Common Stock owned
directly or held in employee benefit accounts by such officers
together with the value of deferred compensation accounts are
considered in meeting these objectives. Newly elected senior
officers have five years to meet the pertinent requirement.
Senior officers who are promoted to a position that suggests
additional ownership of Old Republics Common Stock have
three years from such promotion to meet the applicable
requirement.
169
OLD
REPUBLIC PRINCIPAL HOLDERS OF SECURITIES
The following tabulation shows with respect to (i) each
person who is known to be the beneficial owner of more than 5%
of the common stock of Old Republic; (ii) each director and
named executive officer of Old Republic; and (iii) all
directors and executive officers, as a group: (a) the total
number of shares of Old Republic common stock beneficially owned
as of July 30, 2010 (b) the percent of the class of
stock so owned as of the same date and (c) the percent of
the class of stock so owned if the Merger is completed:
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Amount and
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Percent of
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Nature of
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Class
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Beneficial
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Percent of
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Following the
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Title of Class
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Name of Beneficial Owner
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Ownership
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Class(*)
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Merger(*)
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Common Stock
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Shareholders beneficial ownership of more than 5% of the
Common Stock
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Franklin Resources, Inc. One Franklin Parkway
San Mateo, California
94403-1906
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19,378,056
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(1)
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8.1
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7.4
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JP Morgan Chase & Co.
270 Park Avenue
New York, New York 10017
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18,974,881
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(1)
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7.9
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7.3
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FMR LLC
82 Devonshire Street
Boston, Massachusetts 02109
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17,303,458
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(1)
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7.1
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6.6
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Old Republic International Corporation
Employees Savings and Stock
Ownership Trust 307 N. Michigan Avenue Chicago,
Illinois 60601
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15,446,633
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(2)
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6.4
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5.9
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Black Rock, Inc.
40 East 52nd Street
New York, New York 10022
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13,548,415
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(1)
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5.6
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5.6
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(12)
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Franklin Mutual Advisors, LLC.
101 John F Kennedy Parkway
Short Hills, New Jersey 07078
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12,747,567
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(1)
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5.3
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4.9
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170
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Shares
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Other
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Shares
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Held by
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Shares
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Percent
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Subject
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Employee
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Beneficially
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of Class
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Name of
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to Stock
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Plans
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Owned
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Percent
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Following the
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Common Stock
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Beneficial Owner
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Options(*)
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(*)(2)(3)
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(*)(4)
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Total
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of Class(*)
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Merger(*)
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Directors and
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Harrington Bischof
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33,260
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33,260
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(5)
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**
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**
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executive officers
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Jimmy A. Dew
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497,500
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197,219
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661,337
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1,320,556
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(6)
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0.5
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0.5
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beneficial ownership
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John M. Dixon
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18,199
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18,199
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**
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**
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James A. Kellogg
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166,188
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43,239
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388,462
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597,889
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0.2
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0.2
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Leo E. Knight, Jr.
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23,181
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23,181
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**
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**
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Karl W. Mueller
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99,350
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3,209
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6,242
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108,801
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**
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**
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Christopher S. Nard
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435,500
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10,978
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24,170
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470,648
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0.2
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0.2
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R. Scott Rager
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139,275
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39,692
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2,670
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181,637
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**
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**
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William A. Simpson
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602,188
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548,040
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1,150,228
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(7)
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0.5
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0.4
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Arnold L. Steiner
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826,438
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826,438
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(8)
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0.3
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0.3
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Fredricka Taubitz
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22,681
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22,681
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**
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**
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Charles F. Titterton
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23,187
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23,187
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(9)
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**
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**
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Dennis Van Mieghem
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14,050
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14,050
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(10)
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**
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**
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Steven R. Walker
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34,340
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34,340
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(11)
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**
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**
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Rande K. Yeager
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68,813
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22,611
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9,688
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101,112
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**
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**
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Aldo C. Zucaro
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1,711,000
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408,574
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1,063,101
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3,182,675
|
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1.3
|
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1.2
|
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executive officers and directors, as a group(18)
|
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3,796,189
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764,078
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|
|
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3,714,664
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|
|
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8,274,931
|
|
|
|
3.3
|
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|
|
3.1
|
|
|
|
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* |
|
Calculated pursuant to
Rule 13d-3(d)
of the Securities Exchange Act of 1934. Unless otherwise stated
below, each such person has sole voting and investment power
with respect to all such shares. Under
Rule 13d-3(d),
shares not outstanding which are subject to options, warrants,
rights or conversion privileges exercisable within 60 days
are deemed outstanding for the purpose of calculating the number
and percentage owned by such person, but are not deemed
outstanding for the purpose of calculating the percentage owned
by each other person listed. |
|
** |
|
Less than one-tenth of one percent. |
|
(1) |
|
Reflects the number of shares shown in the most recent
Schedule 13G filings with the Securities and Exchange
Commission through February 15, 2010. Franklin Resources,
Inc. reports that Franklin Advisory Services, LLC and Franklin
Templeton Advisors, Inc. have sole voting power for 18,270,832
and 920,539 shares, respectively, and sole dispositive
power for 18,457,432 and 920,539 shares, respectively; JP
Morgan Chase & Co. reports that it has sole and shared
voting power for 16,290,855 and 1,657,173 shares,
respectively, and sole and shared dispositive power for
17,313,433 and 1,661,448 shares, respectively; FMR LLC
reports its subsidiary, Strategic Advisors, Inc., has sole
voting and dispositive power for 919,300 shares and its
subsidiary, Fidelity Management & Research Company,
has sole dispositive power for 16,384,158 shares; Black
Rock, Inc. reports that it has sole voting and dispositive power
for all share reported; Franklin Mutual Advisors, LLC reports it
has sole voting and dispositive power for all shares reported. |
|
(2) |
|
Reflects the number of shares held as of February 1, 2010.
Under the terms of the Old Republic International Corporation
Employees Savings and Stock Ownership Plan (ESSOP),
a participant is entitled to vote Old Republic stock held by the
ESSOP, the shares of which have been allocated to the
participants account. The Executive Committee of Old
Republic, pursuant to the ESSOP, is authorized to vote Old
Republic stock held by the ESSOP until such time as the shares
of such stock has been allocated to a participants account
or where a participant fails to exercise his or her voting
rights. Additionally, the Executive Committee may be deemed to
have sole investment power with respect to unallocated stock and
shared power for allocated stock held by the ESSOP. The
Executive Committee is composed of Messrs. Bischof, Dixon,
Steiner and Zucaro. The Trustees for the Trust established by
the ESSOP are Messrs. LeRoy, Mueller, Rager and Zucaro. In
addition to the ESSOP, the Old Republic International Employees
Retirement Plan and two other retirement plans of subsidiaries
hold an aggregate of 2,280,000 shares of Old
Republics stock, not included in this table, for |
171
|
|
|
|
|
which the voting of these shares are controlled, directly or
indirectly in a fiduciary capacity, by the Executive Committee.
Also, American Business & Personal Insurance Mutual,
Inc. (ABPIM) and its subsidiary Inter Capital Group, Inc. own
2,132,873 shares of Old Republics stock, not included
in this table. ABPIMs directors and senior officers are
also executive officers of Old Republic. |
|
(3) |
|
Includes only the shares that have been allocated to the
employer matching and employee savings accounts of the director
or executive officer as a participant in the ESSOP or other
Profit Sharing Plans sponsored by subsidiaries. Excludes those
shares for which the director or executive officer may be deemed
to have investment and voting power as a result of being a
member of the Executive Committee. Includes shares of Old
Republics stock held by the RMIC Profit Sharing Plan for
Mr. Dew and shares of Old Republics stock held by the
Great West Casualty Corporation Profit Sharing Plan for
Mr. Rager. |
|
(4) |
|
Includes the number of shares of Common Stock that the following
listed persons would receive upon converting their holdings of
Old Republics 8% Senior Notes.
Mr. Bischof 13,021; Mr. Dew
17,361; Mr. Dixon 2,170;
Mr. Kellogg 8,681; Mr. Knight
8,681; Mr. Mueller 2,064;
Mr. Nard 2,170; Mr. Rager
2,170; Mr. Simpson 26,042;
Ms. Taubitz 8,681;
Mr. Titterton 1,910;
Mr. Walker 4,340; Mr. Zucaro
13,021. |
|
(5) |
|
Includes 8,437 shares held in trust for
Mr. Bischofs benefit. |
|
(6) |
|
Includes 209,471 shares owned by Mr. Dews wife. |
|
(7) |
|
Includes 134,648 shares owned by Mr. Simpsons
wife and 41,010 held in an IRA trust for Mr. Simpsons
benefit. |
|
(8) |
|
Includes 270,237 shares owned by Mr. Steiner directly,
465,000 shares held in trust for Mr. Steiners
children, for which he is a co-trustee, and 91,201 shares
held by the Steiner Foundation for which Mr. Steiner
disclaims beneficial ownership. |
|
(9) |
|
Includes 5,239 shares held in IRA and SEP-IRA trusts for
Mr. Tittertons benefit. |
|
(10) |
|
Includes 1,250 shares owned by Mr. Van Mieghems
wife and 6,125 shares held in an IRA trust for Mr. Van
Mieghems benefit. |
|
(11) |
|
Includes 17,925 shares held in IRA and SEP-IRA trusts for
Mr. Walkers benefit and 9,000 shares held by his
wife. |
|
|
|
(12) |
|
Based on the conversion of 1,891,984 shares of PMA
class A common stock owned by Black Rock, Inc. as reflected
in a Schedule 13G on January 29, 2010 (over which
Black Rock, Inc. reported that it had sole voting and
dispositive power) into 1,040,591 shares of Old republic
common stock in the Merger assuming an exchange ratio of 0.55. |
DESCRIPTION
OF OLD REPUBLIC CAPITAL STOCK
When Old Republic and PMA complete the Merger, PMA shareholders
will become Old Republic shareholders. The following is a
description of Old Republics capital stock and the Old
Republic common stock to be issued in the Merger. The following
is only a summary of certain provisions of Old Republics
Restated Certificate of Incorporation (Old
Republics certificate of incorporation). Such
summary does not purport to be complete and is subject to, and
is qualified in its entirety by, all of the provisions of Old
Republics certificate of incorporation, which is
incorporated by reference as exhibit 3(A) to Old
Republics registration statement on
Form S-4
of which this proxy statement/prospectus is a part.
Authorized
Old Republic Stock
Under Old Republics certificate of incorporation, Old
Republic has authority to issue 675,000,000 shares of
capital stock divided into three classes. Old Republic has
authority to issue 500,000,000 shares of common stock, par
value $1.00 per share, 100,000,000 shares of class B
common stock, par value $1.00 per share, and
75,000,000 shares of preferred stock, par value $0.01 per
share. The class B common stock is identical to the common
stock, except that it carries only 1/10th of a vote.
172
Old
Republic Common Stock
As of July 29, 2010, 241,061,082 shares of Old
Republic common stock were issued and outstanding. Additional
shares of Old Republics existing authorized common stock
are expected to be issued by Old Republic and payable to PMA
shareholders in connection with the Merger. No shares of Old
Republic class B common stock are issued and outstanding.
The outstanding shares of Old Republic common stock are, and the
shares of Old Republic common stock to be issued pursuant to the
Merger will be, duly authorized, validly issued, fully paid and
nonassessable. Each holder of Old Republic common stock is
entitled to one vote for each share held of record on all
matters submitted to a vote of Old Republics shareholders
and is not entitled to preemptive rights. Old Republics
common stock is neither redeemable nor convertible into other
securities and there are no sinking fund provisions.
Subject to the preferences applicable to any shares of Old
Republic preferred stock outstanding at the time, holders of Old
Republic common stock are entitled to dividends when and as
declared by Old Republics board of directors from funds
legally available therefor and are entitled, in the event of
liquidation, to share ratably in all assets remaining after
payment of liabilities.
Old
Republic Preferred Stock
Old Republics board of directors, without further
shareholder authorization, may issue from time to time up to
75,000,000 shares of preferred stock, par value $0.01 per
share. Old Republics certificate of incorporation
designates 10,000,000 shares of preferred stock as
series A junior participating preferred stock and
1,500,000 shares of preferred stock as
series G-3
convertible preferred stock. As of July 29, 2010, no shares
of any series of Old Republic preferred stock were issued and
outstanding.
Generally. Preferred stock may be issued from
time to time in one or more series with or without voting
powers, and with such designations, preferences and relative,
participating, optional or other special rights, and
qualifications and limitations or restrictions thereof, as shall
be stated and expressed in Old Republics certificate of
incorporation or any amendment thereof or in any designation
approved by Old Republics board of directors for the
purpose of establishing any such series of Old Republic
preferred stock. Shareholders do not have any pre-emptive rights
with respect to any of the presently authorized but unissued
shares of Old Republic preferred stock. All shares of Old
Republic preferred stock will, if issued, be fully paid and
non-assessable.
Series A Junior Participating Preferred
Stock. A description of Old Republics
series A junior participating preferred stock is set forth
below under Certain Charter Provisions and Other
Agreements Rights Agreement.
Series G-3
Convertible Preferred Stock. If issued, each
share of
series G-3
convertible preferred stock will be entitled to one vote and
shall be voted along with any other shares of Old Republic
capital stock entitled to vote as one class. The shares of
series G-3
convertible preferred stock will rank senior to Old
Republics common stock, class B common stock and
series A convertible preferred stock.
The holders of
series G-3
convertible preferred stock will be entitled to receive
preferential cumulative cash dividends, when and as declared by
Old Republics board of directors out of funds legally
available therefore, at an annual rate, based upon $19.59 per
share (subject to adjustment). In the event of liquidation, the
holders of the
series G-3
convertible preferred stock will be entitled to a cash payment
in a per share amount equal to 95% of the book value per share
of the Old Republic common stock plus a sum equal to all
dividends on the shares of
series G-3
convertible preferred stock accrued and unpaid on the date of
the final distribution, but no further payments.
Each share of
series G-3
convertible preferred stock may be converted at any time after
six months following issuance at the holders option into
shares of Old Republic common stock at a rate of .95 shares
of Old Republic common stock for each share of
series G-3
convertible preferred stock. Old Republic may also elect to
convert the shares of
series G-3
convertible preferred stock in certain situations at a rate of
.95 shares of Old Republic common stock for each share of
series G-3
convertible preferred stock or redeem the shares of
series G-3
convertible preferred stock at a redemption price of $19.59 per
share (subject to certain adjustments). The shares of
series G-3
convertible preferred stock will not be transferable other than
by will or under the laws of descent and distribution, subject
to Old Republics right to redeem any shares of
series G-3
convertible preferred stock so transferred.
173
Certain
Charter Provisions and Other Agreements
Old Republics certificate of incorporation and by-laws and
certain other agreements to which Old Republic is a party
contain certain provisions, described below, that could delay,
defer or prevent a change in control of Old Republic if the
board of directors determines that such a change in control is
not in the best interests of Old Republic and its shareholders
and could have the effect of making it more difficult to acquire
Old Republic or remove incumbent management.
Charter and By-Law Provisions. The terms of
the authorized series of Old Republics preferred stock and
the power in the board of directors to issue additional shares
of preferred stock, common stock and class B common stock
without shareholder approval could render more difficult or
discourage a merger, tender offer or proxy contest for
assumption of control by a holder of Old Republics
securities.
Old Republics certificate of incorporation requires the
approval of holders of 80% of the outstanding shares of all
classes of stock entitled to vote in the election of directors
considered as one class for (i) a merger or consolidation
of Old Republic with, (ii) the sale, lease, exchange,
mortgage, pledge or other disposition of all, substantially all,
or any substantial part (as defined) of the assets of Old
Republic or a subsidiary to, or (iii) the transfer of a
substantial amount (as defined) of securities of Old Republic in
exchange for the securities or assets of, any other person,
firm, corporation or other entity, other than a subsidiary of
Old Republic. This requirement does not apply if Old
Republics board of directors approves the transaction
under certain circumstances. This provision of the Restated
Certificate of Incorporation cannot be amended or repealed
except by a vote of 80% of the outstanding shares of all classes
of Old Republic stock entitled to vote in the election of
directors, such shares to be considered as one class.
Old Republics certificate of incorporation prohibits any
merger or certain other business combinations to be effected
between Old Republic and any person or entity that owns more
than 10% of Old Republics outstanding stock entitled to
vote (an Acquiring Entity) unless it is
approved by the holders of not less than
662/3%
of the outstanding shares of all classes of stock entitled to
vote in the election of directors considered as one class (other
than shares beneficially owned by the Acquiring Entity) or is
approved unanimously by Old Republics board of directors
or is in compliance with certain other conditions. The
conditions specified include a requirement that the price to be
paid to the remaining shareholders of Old Republic in cash or
securities be not less than the greatest of: (i) the
highest price paid by the Acquiring Entity for its stock in Old
Republic, (ii) a price that reflects the same premium over
market price paid by the Acquiring Entity to other shareholders
of Old Republic, (iii) a price that is equal to the book
value of Old Republics common stock, and (iv) a price
that reflects the same earnings multiple at which the Acquiring
Entitys stock is selling. This provision of Old
Republics certificate of incorporation cannot be amended
except by a vote of
662/3%
of the outstanding shares of all classes of stock of Old
Republic entitled to vote in the election of directors, such
shares to be considered as one class, excluding stock of which
an Acquiring Entity, if any, is the beneficial owner.
Pursuant to Old Republics certificate of incorporation,
directors of Old Republic are divided into three classes and
elected to serve staggered three-year terms. Under Delaware law,
directors serving staggered terms can be removed from office
only for cause. Additionally, special meetings of Old
Republics shareholders, for any purpose may be called by
the president and must be called by the president or secretary
at the request in writing of a majority of Old Republics
board of directors, or at the request in writing of shareholders
owning a majority in amount of the entire capital stock of Old
Republic issued and outstanding and entitled to vote.
Rights Agreement. On November 19, 2007,
Old Republics board of directors amended and restated the
terms of its rights agreement. Each right, as amended, when it
becomes exercisable, entitles the registered holder to purchase
from Old Republic one one-hundredth of a share of series A
junior participating preferred stock of Old Republic at a price
of $100 per one-hundredth of a share of series A junior
participating preferred stock (the Purchase
Price), subject to adjustment.
The rights become exercisable upon the earlier to occur of
(i) the public announcement that a person has acquired
beneficial ownership of 20% or more of the outstanding shares of
Old Republic common stock (an Acquiring
Person); or (ii) 10 days following the
commencement of a tender offer or exchange offer the
174
consummation of which would result in a person becoming an
Acquiring Person. The rights will expire at the close of
business on June 26, 2017, unless earlier redeemed by Old
Republic.
In the event that any person becomes an Acquiring Person, each
holder of a right will thereafter have the right to receive,
upon exercise and payment of the purchase price, that number of
shares of Old Republic common stock or one-hundredths of a share
of series A junior participating preferred stock (or, in
certain circumstances, other securities of Old Republic) having
a value (immediately prior to such triggering event) equal to
two times the exercise price of the right until the earliest of
(i) June 26, 2017, (ii) the redemption of the
rights, or (iii) the exchange of the rights for Old
Republic common stock.
In the event that, (i) Old Republic merges with an
Acquiring Person or merges with any other person in which merger
all holders of Old Republic common stock are not treated alike,
or (ii) more than 50% of Old Republics assets or
earning power is sold or transferred, to an Acquiring Person,
or, to any other person if in such transaction all holders of
Old Republic common stock are not treated alike, then each
holder of a right shall have the right to receive, upon
exercise, common shares of the acquiring company having a value
equal to two times the exercise price of the right.
Shares of series A junior participating preferred stock
purchasable upon exercise of the rights will not be redeemable.
Each share of series A junior participating preferred stock
will be entitled to a minimum preferential quarterly dividend
payment of $1.00 per share but, if greater, will be entitled to
an aggregate dividend per share of 100 times the dividend
declared per share of Old Republic common stock. In the event of
liquidation, the holders of the series A junior
participating preferred stock will be entitled to a minimum
preferential liquidation payment of $100 per share; thereafter,
and after the holders of Old Republic common stock receive a
liquidation payment of $1.00 per share, the holders of the
series A junior participating preferred stock and the
holders of Old Republic common stock will share the remaining
assets in the ratio of 100 to 1 (as adjusted) for each share of
series A junior participating preferred stock and Old
Republic so held, respectively.
Each one-one hundredth share of the series A junior
participating preferred stock will be entitled to one vote and
shall be voted with the Old Republic common stock as one class.
In the event of any merger, consolidation or other transaction
in which the Old Republic common stock is exchanged, each share
of series A junior participating preferred stock will be
entitled to receive 100 times the amount received per share of
Old Republic common stock. In the event that the amount of
accrued and unpaid dividends on the series A junior
participating preferred stock is equivalent to six full
quarterly dividends or more, the holders of the series A
junior participating preferred stock shall have the right,
voting as a class, to elect two directors in addition to the
directors elected by the holders of Old Republic common stock
until all cumulative dividends on the series A junior
participating preferred stock have been paid through the last
quarterly dividend payment date or until non-cumulative
dividends have been paid regularly for at least one year.
8.00% Convertible
Senior Notes due 2012
In 2009, Old Republic obtained gross proceeds of
$316.25 million through a public offering of 8.00%
convertible Senior Notes due in 2012. The notes bear interest at
a rate of 8.00% per year, payable semiannually in arrears on May
15 and November 15 of each year, beginning on November 15,
2009. The notes will mature on May 15, 2012.
Holders may convert their notes at their option into shares of
Old Republic common stock at any time prior to the close of
business on the second scheduled trading day immediately
preceding the maturity date. The conversion rate will initially
be 86.8056 shares of Old Republic common stock per $1,000
principal amount of notes (equivalent to an initial conversion
price of approximately $11.52 per share of Old Republic common
stock). The conversion rate will be subject to adjustment in
some events but will not be adjusted for accrued interest.
Set forth below are certain additional terms of the notes:
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Following certain corporate transactions that occur prior to the
maturity date, Old Republic will increase the conversion rate
for a holder who elects to convert its notes in connection with
such a corporate transaction in certain circumstances.
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175
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Old Republic may not redeem the notes prior to the maturity date
of the notes.
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If Old Republic undergoes a fundamental change, holders may
require Old Republic to purchase the notes in whole or in part
for cash at a price equal to 100% of the principal amount of the
notes to be purchased plus any accrued and unpaid interest to,
but excluding, the fundamental change purchase date.
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The notes will be Old Republics senior unsecured
obligations and will rank:
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senior in right of payment to Old Republics existing and
future indebtedness that is expressly subordinated in right of
payment to the notes;
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equal in right of payment to Old Republics existing and
future unsecured indebtedness that is not so subordinated;
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junior in right of payment to any of Old Republics secured
indebtedness to the extent of the value of the assets securing
such indebtedness; and
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structurally junior to all existing and future indebtedness and
liabilities incurred by Old Republics subsidiaries.
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The notes are not listed on any securities exchange.
The foregoing summary does not purport to be complete and is
subject to and qualified in its entirety by all of the
provisions of the indenture between Old Republic and Wilmington
Trust Company, as trustee, dated as of August 15,
1992, as supplemented by a supplemental indenture between Old
Republic and Wilmington Trust Company, as trustee, dated as
of April 29, 2009.
PMA
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Beneficial
Ownership of PMA Class A Common Stock
Directors and Executive Officers. The
following table shows, as of July 30, 2010, the number of
shares and percentage of PMA class A common stock
beneficially owned by (i) each director; (ii) each
executive officer; and (iii) executive officers and
directors as a group. Unless otherwise indicated, each person
has sole voting and investment power with respect to shares
shown as beneficially owned by such person.
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Class A Common Stock
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Name of Beneficial Owner
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Beneficially Owned
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Percent of Class(1)
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Peter S. Burgess
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34,009
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*
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Patricia A. Drago
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21,533
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*
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J. Gregory Driscoll
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24,972
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*
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Charles T. Freeman
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32,244
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*
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James C. Hellauer
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29,010
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(2)
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*
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Richard Lutenski
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34,009
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*
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John D. Rollins
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24,705
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*
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Neal C. Schneider
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112,756
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(3)
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*
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Vincent T. Donnelly
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719,128
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(4)
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2.2
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%
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John Santulli, III
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38,148
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(5)
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*
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Anthony J. Ciofani
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30,297
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(6)
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*
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Stephen L. Kibblehouse
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4,236
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*
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John M. Cochrane
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18,849
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(7)
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*
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All executive officers and directors as a group (13 persons)
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1,123,896
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(8)
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3.5
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%
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* |
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Less than 1% |
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(1) |
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Based on 32,280,474 shares of PMA class A common stock
outstanding as of July 30, 2010. |
176
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(2) |
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Includes 2,000 shares of PMA class A common stock held
to an irrevocable trust for which Mr. Hellauers wife
serves as trustee. |
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(3) |
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Includes options to purchase 12,987 shares of PMA
class A common stock that are exercisable or will become
exercisable within 60 days of July 30, 2010 under
PMAs equity incentive plans. |
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(4) |
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Includes options to purchase 583,259 shares of PMA
class A common stock that are exercisable or will become
exercisable within 60 days of July 30, 2010 under
PMAs equity incentive plans and 2,740 shares held in
the Retirement Savings Plan as of July 30, 2010. |
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(5) |
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Includes options to purchase 20,511 shares of PMA
class A common stock that are exercisable or will become
exercisable within 60 days of July 30, 2010 under
PMAs equity incentive plans. |
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(6) |
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Includes options to purchase 18,023 shares of PMA
class A common stock that are exercisable or will become
exercisable within 60 days of July 30, 2010 under
PMAs equity incentive plans and 3,140 shares held in
the Retirement Savings Plan as of July 30, 2010. |
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(7) |
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Includes options to purchase 7,013 shares of PMA
class A common stock that are exercisable or will become
exercisable within 60 days of July 30, 2010 under
PMAs equity incentive plans. |
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(8) |
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Includes options to purchase 641,793 shares of PMA
class A common stock that are exercisable or will become
exercisable within 60 days of July 30, 2010 under
PMAs equity incentive plans and 5,880 shares of PMA
class A common stock held in the Retirement Savings Plan as
of July 30, 2010. |
Five Percent Shareholders. The following table
shows those shareholders known to us to beneficially own more
than 5% of the outstanding shares of PMA class A common
stock as of July 30, 2010.
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Class A Common Stock
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Name and Address of Beneficial Owner
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Beneficiary Owned
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Percent of Class(1)
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Donald Smith & Co., Inc.
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3,215,327
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(2)
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9.96
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%
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152 West 57th Street
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New York, New York 10019
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Dimensional Fund Advisors LP
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2,729,280
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(3)
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8.45
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%
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Palisades West, Building One
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6300 Bee Cave Road
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Austin, Texas 78746
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NWQ Investment Management Company, LLC
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2,413,442
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(4)
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7.48
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%
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2049 Century Park East, 16th Floor
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Los Angeles, California 90067
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BlackRock, Inc.
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1,891,984
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(5)
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5.86
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%
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40 East
52nd
Street
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New York, New York 10022
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MMCAP International, Inc. SPC
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1,616,129
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(6)
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5.01
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%
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P. O. Box 32021 SMB, Admiral Financial Centre
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90 Fort Street
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Grand Cayman, Cayman Islands, KY1-1208
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(1) |
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Based on 32,280,474 shares of PMA class A common stock
outstanding as of July 30, 2010. |
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(2) |
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Based solely on a Schedule 13G, filed on February 11,
2010. Donald Smith & Co., Inc. (DS&C)
reported that it has sole voting power over
2,847,313 shares of PMA class A common stock and sole
dispositive power over 3,215,327 shares of PMA class A
common stock. Due to the dispositive power over the shares of
PMA class A common stock, DS&C may be deemed to
beneficially own such shares, which DS&C reported are owned
by clients of DS&C. |
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(3) |
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Based solely on a Schedule 13G, filed on February 8,
2010. Dimensional Fund Advisors LP (DFA)
reported that it has sole voting power over
2,718,930 shares of PMA class A common stock and sole
dispositive power over 2,729,280 shares of PMA class A
common stock. Due to the dispositive power over the shares of
PMA class A common stock, DFA may be deemed to beneficiary
own such shares, which DFA reported are owned by certain
investment companies and certain commingled group trusts and
separate accounts for which DFA serves an investment advisor or
investment manager. DFA disclaims beneficial ownership of such
shares. |
177
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(4) |
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Based solely on a Schedule 13G, filed on February 12,
2010. NWQ Investment Management Company, LLC (NWQ)
reported that it has sole voting power over 2,046,907 share
of PMA class A common stock and sole dispositive power of
2,413,442 shares of PMA class A common stock. Due to
the dispositive power over the shares of PMA class A common
stock, NWQ may be deemed to beneficiary own such shares, which
NWQ reported are owned by clients of NWQ. |
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(5) |
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Based solely on a Schedule 13G, filed on January 29,
2010. BlackRock, Inc. reported that it has sole voting and
dispositive power over 1,891,984 shares of PMA class A
common stock. |
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(6) |
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Based solely on a Schedule 13G, filed on July 21,
2010. MMCAP International, Inc. SPC (MMCAP) reported
that it has shared voting and dispositive power over
1,616,129 shares of PMA class A common stock. MMCAP
shares voting and dispositive power over these shares with MM
Asset Management Inc. whose address is 120 Adelaide Street
West, Suite 2601, Toronto, Ontario, Canada M5H1T1. |
COMPARISON
OF RIGHTS OF OLD REPUBLIC SHAREHOLDERS AND PMA
SHAREHOLDERS
Old Republic is a Delaware corporation subject to the provisions
of the DGCL. PMA is a Pennsylvania corporation subject to the
provisions of the Pennsylvania Business Corporation Law
(PBCL). Upon the completion of the merger, all
outstanding shares of PMA class A common stock will be
converted into the right to receive the merger consideration,
which consists of Old Republic common stock. Therefore, upon the
completion of the merger, the rights of the former PMA
shareholders will be governed by Delaware law, Old
Republics certificate of incorporation, and Old
Republics bylaws.
The following discussion is a summary of the current rights of
PMA shareholders and the current rights of Old Republic
shareholders. While this summary includes the material
differences between the two, this summary may not contain all of
the information that is important to you. You should carefully
read this entire proxy statement/prospectus, the relevant
provisions of the DGCL and the PBCL and the other governing
documents which are referenced in this proxy
statement/prospectus for a more complete understanding of the
differences between being a shareholder of PMA and a shareholder
of Old Republic. Old Republic and PMA have filed with the SEC
their respective governing documents referenced in this summary
of shareholder rights and will send copies of these documents to
you, without charge, upon your request. See the section entitled
Where You Can Find More Information below.
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PMA Capital Corporation
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Old Republic International Corporation
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Authorized and Outstanding Capital Stock
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The total authorized number of shares of all classes of capital
stock of PMA is 62,000,000 shares. Of this,
60,000,000 shares are par value $5.00 class A common
stock and 2,000,000 shares are par value $0.01 preferred
stock, of which 60,000 shares are designated as
series A junior participating preferred stock.
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The total authorized number of shares of all classes of capital
stock of Old Republic is 675,000,000 shares. Of this,
500,000,000 shares are par value $1.00 common stock,
100,000,000 shares are par value $1.00 class B common stock
and 75,000,000 shares are par value $0.01 preferred stock,
of which 10,000,000 shares are designated as series A
junior participating preferred stock and 1,500,000 shares
are designated as series G-3 convertible preferred stock.
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At July 30, 2010, 32,280,474 shares of class A
common stock and no shares of series A junior participating
preferred stock were issued and outstanding.
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At July 29, 2010, 241,061,082 shares of common stock and no
shares of class B common stock, series A junior participating
preferred stock or series G-3 convertible preferred stock were
issued and outstanding.
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In addition, Old Republic has $316.25 million of 8.00%
convertible senior notes due 2012 outstanding.
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178
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PMA Capital Corporation
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Old Republic International Corporation
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Voting Rights of PMA Class A Common Stock
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General. Each holder of PMA class A
common stock is entitled to one vote for each share of such
stock held of record and may not cumulate votes for the election
of directors.
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General. Following the merger, former holders
of PMA class A common stock that receive Old Republic common
stock will be entitled to one vote per share of Old Republic
common stock.
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Merger or Consolidation. Under the PBCL, the
consummation of a merger requires the approval of a majority of
the board of directors of a corporation and, except where the
approval of shareholders is unnecessary, the approval of a
majority of the votes cast by all shareholders entitled to vote
thereon. Under the PBCL, a sale of all or substantially all of
PMAs assets would require the approval of the board of
directors and the affirmative vote of a majority of all of the
votes cast by shareholders entitled to vote thereon.
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Merger or Consolidation. Old Republics
certificate of incorporation requires a greater vote of
shareholders for authorization of a merger or consolidation than
that generally required by the DGCL. Under Old Republics
certificate of incorporation, the affirmative vote of holders of
80% of the outstanding shares of all classes of stock entitled
to vote in elections of directors taken together is required to
approve a merger or consolidation, the sale of all,
substantially all or any substantial part of Old Republics
assets or the issuance or transfer of any substantial amount of
Old Republic securities to 10% holders of Old Republic
securities.
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Business Combinations. Generally under the
PBCL there is a five year moratorium on business combinations
between a corporation and any interested shareholder (a
shareholder holding at least 20% of PMAs voting stock),
subject to certain exceptions involving board and/or shareholder
approval. PMAs articles of incorporation specifically
excludes portions of the PBCL pertaining to control
transactions, business combinations, control share acquisitions
and disgorgement of profits in certain corporate takeover
scenarios.
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Business Combinations. Old Republics
certificate of incorporation also imposes additional
restrictions upon business combinations with
interested shareholders on top of those imposed by
Section 203 of the DGCL, which generally prohibits a Delaware
corporation from engaging in a business combination with an
interested shareholder within three years after the shareholder
becomes an interested shareholder by acquiring 15% of Old
Republics voting stock. Under Old Republics
certificate of incorporation, if within ten years of becoming
10% holder, such holder seeks to complete a business combination
with Old Republic, the affirmative vote of holders of
662/3%
of the outstanding shares of all classes of stock entitled to
vote in elections of directors taken together is required to
approve such business combination, subject to certain conditions
and exceptions.
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Directors
|
General. PMAs bylaws provide that the
total number of PMA directors will be not less than nine nor
more than fifteen, divided into three classes as nearly equal as
possible and serving three-year terms. Currently, PMA has nine
directors.
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|
General. Old Republics by-laws provide
that the total number of Old Republic directors will be not less
than nine nor more than fifteen, divided into three classes as
nearly equal as possible and serving three-year terms.
Currently, Old Republic has eleven directors.
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Election and Vacancies. Each holder of PMA
class A common stock is entitled to one vote for each share
of such stock held of record and may not cumulate votes for the
election of directors. Directors are elected by a plurality of
the votes of the shares present in person or represented by
proxy at a shareholder meeting and entitled to vote. PMAs
bylaws provide that any vacancies in the board of directors will
be filled by a majority vote of those directors remaining.
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Election and Vacancies. Following the merger,
former holders of PMA class A common stock that receive Old
Republic common stock will be entitled to one vote per share of
Old Republic common stock. As provided by the DGCL, holders of
Old Republic common stock may not cumulate votes for the
election of directors. Directors are elected by a plurality of
the votes of the shares present in person or represented by
proxy at a shareholder meeting and entitled to vote. Old
Republics by-laws provide that any vacancies in the board
of directors will be filled by a majority vote of those
directors remaining.
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179
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PMA Capital Corporation
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Old Republic International Corporation
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Removal. PMAs shareholders may remove
directors only for cause, except that shareholders entitled to
vote on the removal of directors without cause may do so by
unanimous vote.
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Removal. As provided by the DGCL, Old
Republics directors may be removed only for cause.
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Amendments to Organizational Documents
|
Articles of Incorporation. Pursuant to the
PBCL, following a resolution by PMAs board of directors to
amend the articles of incorporation or a petition by at least
10% of those shareholders entitled to vote on an amendment,
PMAs articles of incorporation may be amended by the
affirmative vote of a majority of shareholders entitled to vote
thereon.
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Certificate of Incorporation. Under the DGCL,
Old Republics certificate of incorporation may be amended
by a majority vote of shareholders entitled to vote thereon
following adoption of a resolution by the board of directors
declaring the advisability of such amendment. In certain
circumstances, greater than a simple majority vote is required
to amend Old Republics certificate of incorporation. See
above under the subheading Voting Rights of PMA Class A
Common Stock.
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Bylaws. Subject to certain limitations with
regard to limitation of director liability and indemnification,
PMAs bylaws provide that they may be amended by either the
affirmative vote of a majority of the outstanding voting power
of PMAs stock or by a majority vote of PMAs board,
subject to a shareholder right to change such board action by
the affirmative vote of the holders of a majority of the
outstanding voting power of PMAs stock.
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By-laws. Old Republics by-laws may be
amended by the board of directors or by the affirmative vote of
662/3%
of the outstanding shares of all classes of stock entitled to
vote thereon.
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Shareholder Action by Written Consent
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PMAs bylaws provide that no shareholder action may be
taken by unanimous or partial consent in lieu of a meeting.
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Consistent with the DGCL, Old Republics by-laws provide
that any meeting and vote of shareholders may be dispensed with
upon the written consent of shareholders who would have been
entitled to cast the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted,
subject to the provision of notice of such corporate action to
those shareholders who did not consent if the consent was less
than unanimous.
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Special Meetings of Shareholders
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PMAs bylaws provide that special meetings of shareholders
may be called at any time only by PMAs chairman, president
or board of directors by providing notice to shareholders at
least ten days prior to the day named for a meeting.
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Old Republics by-laws provide that special meetings of
shareholders may be called by the president and must be called
by the president or secretary upon written request by a majority
of the board of directors or shareholders owning a majority in
amount of Old Republics stock issued, outstanding and
entitled to vote. Notice of such meeting must be given not less
than ten nor more than sixty days before the meeting.
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PMA Capital Corporation
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Old Republic International Corporation
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Notice of Shareholder Meetings and Actions
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The PBCL provides that written notice of the time, place and date of a meeting of shareholders must be given or sent to each shareholder of record entitled to vote at the meeting at least ten days prior to the day named for a meeting that will consider a fundamental change or five days prior to the day named for the meeting in any other case. The PMA bylaws require that notice of a meeting of shareholders be sent to each shareholder entitled to vote at the meeting at least ten days before the meeting. A notice of a special meeting must state the purpose or purposes of the meeting.
The PMA bylaws require a shareholder who intends to nominate a person to the board of directors or bring any matter before an annual meeting to provide advance notice of such intended action not less than ninety days prior to the date of the corporations proxy statement in connection with the previous years annual meeting.
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The DGCL and Old Republics by-laws provide that written
notice of the time, place and purpose or purposes of any annual
or special meeting of shareholders must be given not less than
10 days and not more than 60 days before the date of
the meeting to each shareholder entitled to vote at the meeting.
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Indemnification and Limitation of Liability of Directors and
Officers
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Indemnification of PMAs directors and officers is required
by PMAs bylaws. The bylaws also provide that PMA may
indemnify any other employee or agent. Indemnification extends
to those liabilities and expenses actually and reasonably
incurred by such individuals in connection with an action or
proceeding by reason of the fact that such individual served PMA
in a specified capacity, provided such individuals act or
failure to act is not determined to be willful misconduct or
reckless. PMA may also advance expenses to such individuals for
purposes of defending such a suit. The bylaws further provide
that a director shall not be personally liable for any action
taken or any failure to take any action, unless such act or
failure to act was a breach of the directors fiduciary
duties and the breach constitutes self-dealing, willful
misconduct or recklessness.
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Old Republics certificate of incorporation provides that
Old Republic shall provide indemnification to any person who was
or is a party to any action, civil or criminal, by reason of the
fact that the individual was a director, officer, employee or
agent of Old Republic provided that the individual acted in good
faith and in a manner reasonably believed to be in or not
opposed to the best interests of Old Republic, and, with respect
to criminal actions, if the individual had no reasonable cause
to believe the conduct was unlawful. Old Republic may also
advance expenses to an indemnitee. The certificate of
incorporation further provides that no director shall be
personally liable for any breach of fiduciary duty, except with
regard to breaches of the duty of loyalty, acts or omissions not
in good faith or which involve intentional misconduct or a
knowing violation of law, violation of the DGCL with regard to
payment of dividends or the repurchase or redemption of the
corporations stock or any transaction from which a
director derived an improper personal benefit.
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Dividends
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PMAs bylaws permit the payment of dividends to
shareholders, provided that the PBCL restricts a corporation
from paying dividends if, after payment,(a) the corporation
would be unable to pay its debts as they become due in the usual
course of its business, or(b) the total assets of the
corporation would be less than the sum of its total liabilities
plus the amount that would be needed, if the corporation were to
be dissolved, to satisfy the preferential rights upon
dissolution of shareholders whose preferential rights are
superior to those receiving the distribution.
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Old Republics certificate of incorporation provides for
the payment of dividends to shareholders to the extent permitted
by law and subject to the preferential rights of any preferred
shareholders. Under the DGCL, dividends may be declared by the
board of directors and paid out of surplus, and, if no surplus
is available, out of any net profits for the then current fiscal
year, or both, provided that such payment would not reduce the
corporations capital below the amount of capital
represented by all classes of outstanding stock having a
preference as to the distribution of assets upon liquidation of
a corporation.
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PMA Capital Corporation
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Old Republic International Corporation
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Other Corporate Constituencies
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Under the PBCL, PMAs board of directors may, in
discharging its duties, consider to the extent deemed
appropriate the effects of any action upon any or all groups
affected by such action, including shareholders, employees,
suppliers, customers and creditors of the corporation, and upon
communities in which officers or other establishments of the
corporation are located.
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The DGCL does not have an other constituency statute
similar to that contained in the PBCL.
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Appraisal Rights and Dissenters Rights
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Under the PBCL, unless the articles of incorporation or bylaws
provide otherwise, shareholders of a Pennsylvania corporation
generally are not entitled to dissenters rights if the
shares that would otherwise give rise to such rights are listed
on a national securities exchange, or held beneficially or of
record by more than 2,000 persons, on the record date fixed
to determine the shareholders entitled to notice of and vote at
the meeting at which a merger or consolidation will be voted
upon. Neither the PMA articles of incorporation nor the PMA
bylaws contain provisions with respect to dissenters
rights.
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Under the DGCL, shareholders have the right to dissent from any
plan of merger or consolidation to which the corporation is a
party, and to demand payment for the fair value of their shares
pursuant to, and in compliance with procedures set forth in, the
appraisal rights provisions of the DGCL. However,
unless the certificate of incorporation otherwise provides,
Delaware law states that shareholders do not have such appraisal
rights in connection with a merger or consolidation with respect
to shares:
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listed on a national securities exchange
or held of record by more than 2,000 holders; and
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for which, pursuant to the plan of
merger or consolidation, shareholders will receive only (i)
shares or depository receipts of another corporation which at
the effective date of the merger or consolidation will be either
listed on a national securities exchange or held of record by
more than 2,000 holders, (ii) shares of stock or depositary
receipts of the surviving corporation in the merger or
consolidation, (iii) cash in lieu of fractional shares or (iv)
any combination of the foregoing.
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In addition, Delaware law provides that, unless the certificate
of incorporation provides otherwise, shareholders of a surviving
corporation do not have appraisal rights in connection with a
plan of merger if the merger did not require for its approval
the vote of the surviving corporations shareholders. The
Old Republic certificate of incorporation does not contain any
provisions with respect to appraisal rights.
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PMA Capital Corporation
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Old Republic International Corporation
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Rights Plan
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In August 2009, PMAs Board of Directors adopted a
Section 382 shareholder rights plan designed to
protect the companys net operating loss carryforward from
limitation as a result of an ownership change. The plan was
approved by PMAs shareholders at PMAs 2010 annual
meeting of shareholders. Under the PMA shareholder rights plan,
each outstanding share of the companys common stock has an
associated preferred share purchase right. The rights are
exercisable upon the earlier of (i) 10 days after the
date of a public announcement that a person has acquired
beneficial ownership of 5% or more of the outstanding shares of
PMA class A common stock or (ii) 10 days after a
person begins or publicly announces an intent to begin a tender
or exchange offer that would result in that person acquiring
beneficial ownership of 5% or more of the outstanding shares of
PMA class A common stock. If the rights become exercisable,
the rights would allow PMA shareholders (other than the
acquiring person or group) to purchase one one-thousandth of a
share of series A junior participating preferred stock, no
par value per share, of PMA at a price of $35, subject to
adjustment. Holders of shares of the series A junior
participating preferred stock are entitled to a preferential
quarterly dividend, voting rights and a stipulated return in the
event of a merger or similar transaction prior to
exercise, the right does not give the holder any such dividend,
voting or other rights.
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Pursuant to the terms of Old Republics rights agreement,
each preferred share purchase right entitles the holder to
purchase from Old Republic one one-hundredth of a share of
series A junior participating preferred stock at a price of $100
per share, subject to adjustment. The rights become exercisable
upon the earlier to occur of (i) the public announcement that a
person has acquired beneficial ownership of 20% or more of the
outstanding shares of Old Republic common stock or (ii)
10 days following the commencement of a tender offer or
exchange offer for 20% or more of Old Republics common
stock. In such event, each holder of a right will have the
right to receive, upon exercise and payment of the purchase
price, that number of shares of Old Republic common stock or
one-hundredths of a share of series A junior participating
preferred stock (or, in certain circumstances, other securities
of Old Republic) having a value equal to two times the exercise
price of the right. In the event that Old Republic is a party
to certain types of mergers or more than 50% of Old
Republics assets or earning power is sold in certain
circumstances, then each holder of a right shall have the right
to receive, upon exercise, common shares of the acquiring
company having a value equal to two times the exercise price of
the right. The rights will expire on June 26, 2017.
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In the event a person acquires the beneficial ownership of 5% or
more of the outstanding shares of PMA class A common stock,
all holders of rights except such acquiring person may purchase
the number of shares of PMA class A common stock having a
market value equal to $70. If, at any time after a person
becomes the beneficial owner of 5% or more of the outstanding
shares of PMA class A common stock, PMA is acquired in a
merger or other business combination, or if 50% or more of
PMAs assets are sold, all holders of rights except such
acquiring person may purchase that number of shares of the
acquiring entity having a market value of $70.
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Upon issuance, each share of series A junior participating
preferred stock will be entitled to certain preferential
dividend payments, liquidation payments and voting rights. In
addition, in the event of any merger, consolidation or other
transaction in which Old Republic common stock is exchanged,
each share of series A junior participating preferred stock will
be entitled to receive 100 times the amount received per share
of Old Republic common stock.
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PMA
SPECIAL MEETING
Date,
Time and Place
This proxy statement/prospectus is being furnished to PMAs
shareholders as part of the solicitation of proxies by
PMAs board of directors for use at the special meeting to
be held on Tuesday, September 21, 2010, at 10:00 a.m.,
local time, at Philadelphia Marriott West, 111 Crawford Avenue,
West Conshohocken, Pennsylvania.
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Purpose
of the PMA Special Meeting
The purpose of the special meeting will be to consider and vote
upon the proposal to adopt the merger agreement. In addition,
PMA is also asking for you to approve the adjournment or
postponement of the PMA special meeting, for the solicitation of
additional proxies in the event there are not sufficient votes
present, in person or represented by proxy, at the time of the
PMA special meeting to adopt the merger agreement.
Recommendation
of the PMA Board of Directors
The members of PMAs board of directors present at its
meeting on June 9, 2010 unanimously determined that the
terms of the merger agreement and the transactions contemplated
thereby are advisable, fair to, and in the best interests of,
PMA and PMAs shareholders, and approved the merger
agreement and the transactions contemplated by the merger
agreement. The PMA board of directors recommends that PMA
shareholders vote FOR the proposal to adopt the
merger agreement. and FOR the approval of the
adjournment or postponement of the special meeting for the
solicitation of additional proxies if there are not sufficient
votes present, in person or represented by proxy, at the time of
the special meeting to adopt the merger agreement.
PMA
Record Date; Shares Entitled to Vote; Quorum
Only holders of record of PMA class A common stock at the
close of business on July 30, 2010, the record date, are
entitled to notice of, and to vote at, the PMA special meeting.
As of that date, there were 32,280,474 shares of PMA
class A common stock outstanding and entitled to vote at
the special meeting, held by approximately 134 shareholders
of record. Each share of PMA class A common stock is
entitled to one vote at the special meeting.
The PMA record date is earlier than the date of the PMA special
meeting and the date that the merger is expected to be
completed. If you transfer your PMA class A common stock
after the PMA record date but before the special meeting, you
will retain the right to vote at the PMA special meeting, but
you will have transferred the right to receive the merger
consideration. To receive the merger consideration, you must
beneficially own your PMA stock through the completion of the
merger.
A quorum of shareholders is necessary to take action at the PMA
special meeting. The presence, in person or by proxy, of
shareholders entitled to cast at least a majority of the votes
that all shareholders are entitled to cast on the particular
matter constitutes a quorum. Votes cast in person or by proxy at
the special meeting will be tabulated by the inspectors of
election appointed for the PMA special meeting. The inspectors
of election will determine whether a quorum is present at the
special meeting. In the event that a quorum is not present at
the PMA special meeting, PMA expects that the meeting will be
adjourned or postponed to solicit additional proxies.
Vote
Required for Adoption
Assuming a quorum is present, the affirmative vote of a majority
of the votes cast by all shareholders entitled to vote at the
special meeting is necessary for the adoption of the merger
agreement.
Voting by
PMA Directors and Executive Officers
As of July 30, 2010, directors and executive officers of
PMA held and were entitled to vote 482,103 shares of PMA
class A common stock, or approximately 1.5% of the voting
power of the issued and outstanding shares of PMA class A
common stock. It is currently expected that PMAs directors
and executive officers will vote their shares in favor of
adopting the merger agreement and other proposals described in
this proxy statement/prospectus, although none of them have
entered into any agreements obligating them to do so.
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Manner of
Voting
Shareholders may submit their votes for or against the proposal
submitted at the special meeting in person or by proxy.
Shareholders may be able to submit a proxy in the following ways:
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Internet. Shareholders may submit a proxy over
the Internet by going to the website listed on their proxy card.
Once at the website, follow the instructions to submit a proxy.
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Telephone. Shareholders may submit a proxy
using the toll-free number listed on their proxy card.
Easy-to-follow
voice prompts will help them and confirm that their submission
instructions have been followed.
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Mail. Shareholders may submit a proxy by
signing, dating and returning their proxy card in the
preaddressed postage-paid envelope provided.
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Shareholders should refer to their proxy card or the information
forwarded by their bank, broker or other nominee to see which
options are available to them.
The Internet and telephone proxy submission procedures are
designed to authenticate shareholders and to allow shareholders
to confirm that their vote has been properly recorded.
The method by which shareholders submit a proxy will in no way
limit their right to vote at the special meeting if they later
decide to attend the meeting in person. If you hold your shares
in street name through a bank, broker or other
nominee, you will need to follow the instructions provided to
you by your bank, broker or other nominee to ensure that your
shares are represented and voted at the special meeting.
All shares of PMA class A common stock entitled to vote and
represented by properly completed proxies received prior to the
special meeting, and not revoked, will be voted at the special
meeting as instructed on the proxies. If shareholders do not
indicate how their shares of PMA common stock should be voted on
a matter, the shares of PMA class A common stock
represented by their properly completed proxy will be voted as
the PMA board of directors recommends and therefore,
FOR the adoption of the merger agreement.
Voting of
Proxies by Registered Holders
Giving a proxy means that a PMA shareholder authorizes the
persons named in the enclosed proxy card to vote its shares at
the PMA special meeting in the manner it directs. A PMA
shareholder may vote by proxy or in person at the PMA special
meeting. To vote by proxy, a PMA shareholder may, if it is a
registered holder (that is, it holds its stock in its own name),
submit a proxy by mail by completing and returning the proxy
card in the enclosed envelope. The envelope requires no
additional postage if mailed in the United States.
Shares Held
in Street Name
If you are a PMA shareholder and your shares are held in
street name in a stock brokerage account or by a
bank or nominee, you must provide the record holder of your
shares with instructions on how to vote the shares. Please
follow the voting instructions provided by the bank or broker.
You may not vote shares held in street name by returning a proxy
card directly to PMA or by voting in person at the PMA special
meeting unless you provide a legal proxy, which you
must obtain from your bank or broker. Further, brokers who hold
shares of PMA class A common stock on behalf of their
customers may not give a proxy to PMA to vote those shares with
respect to the merger without specific instructions from their
customers, as brokers do not have discretionary voting power on
such proposals.
If you are a PMA shareholder and you do not provide your bank or
broker with instructions on how to vote your street name shares,
your bank or broker will not be permitted to vote them unless
your bank or broker already has discretionary authority to vote
such street name shares. Also, if your bank or broker has
indicated on the proxy that it does not have discretionary
authority to vote such street name shares, your bank or broker
will not be permitted to vote them. Either of these situations
results in a broker non-vote. Broker non-votes will
have no effect on the proposals to adopt the merger agreement
and approve the adjournment or postponement of the PMA special
meeting once a quorum for the meeting has been established.
Therefore, you should provide your bank or broker
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with instructions on how to vote your shares, or arrange to
attend the PMA special meeting and vote your shares in person to
avoid a broker non-vote.
Revocability
of Proxies and Changes to a PMA Shareholders
Vote
Shareholders may revoke their proxy at any time before it is
exercised by timely sending written notice to the Secretary that
they would like to revoke their proxy, by timely delivering a
properly executed, later-dated proxy (including over the
Internet or telephone) or by voting by ballot at the special
meeting. Simply attending the special meeting without voting
will not revoke their proxy.
Solicitation
of Proxies
PMA will pay the cost of soliciting proxies. Directors, officers
and employees of PMA may solicit proxies on behalf of PMA in
person or by telephone, facsimile or other means. PMA has
engaged MacKenzie Partners, Inc. to assist it in the
distribution and solicitation of proxies. PMA expects to pay
MacKenzie Partners, Inc. a fee of approximately $10,000 plus
payment of certain fees and expenses for its services to solicit
proxies. Brokerage houses and other custodians, nominees and
fiduciaries may be requested to forward soliciting material to
the beneficial owners of PMA class A common stock, and will
be reimbursed for their related expenses.
Delivery
of Proxy Materials to Households Where Two or More Shareholders
Reside
As permitted by applicable law, only one copy of the proxy
materials, which includes the proxy
statement/prospectus,
is being delivered to PMAs shareholders residing at the
same address, unless such shareholders have notified PMA of
their desire to receive multiple copies of the proxy materials.
PMA will promptly deliver, upon oral or written request, a
separate copy of the proxy materials to any shareholder residing
at an address to which only one copy was mailed. If you are a
shareholder at a shared address to which PMA delivered a single
copy of the proxy materials and you desire to receive a separate
copy of this proxy statement/prospectus, please submit your
request by mail to Investor Relations, 380 Sentry Parkway, Blue
Bell, Pennsylvania 19422 or by calling
(610) 397-5298.
If you desire to receive a separate proxy statement/prospectus
and/or
annual report in the future, or if you are a shareholder at a
shared address to which PMA delivered multiple copies of the
proxy materials and you desire to receive one copy in the
future, submit a request in writing to Investor Relations, 380
Sentry Parkway, Blue Bell, Pennsylvania 19422 or by calling
(610) 397-5298.
If you are the beneficial owner, but not the record holder, of
shares of PMA class A common stock, your broker, bank or
other nominee may only deliver one copy of this proxy
statement/prospectus to multiple shareholders who share an
address, unless that nominee has received contrary instructions
from one or more of the shareholders. PMA will deliver promptly,
upon written or oral request, a separate copy of this proxy
statement/prospectus to a beneficial holder at a shared address
to which a single copy of the documents was delivered. If you
are a beneficial owner at a shared address to which only one
copy of the proxy statement/prospectus was delivered and you
desire to receive a separate proxy statement/prospectus
and/or
annual report in the future, or if you are a beneficial owner at
a shared address to which PMA delivered multiple copies of this
proxy statement/prospectus and you desire to receive one copy in
the future you will need to contact your broker, bank or other
nominee to request such change.
Attending
the PMA Special Meeting
You are entitled to attend the PMA special meeting only if you
are a holder of record or a beneficial owner of PMA stock as of
the close of business on July 30, 2010, or you hold a valid
proxy for the PMA special meeting. If you are the shareholder of
record, your name will be verified against the list of
shareholders of record prior to your admittance to the PMA
special meeting. You should be prepared to present photo
identification for admission. If you hold your shares in street
name, you should provide proof of beneficial ownership on the
PMA record date, such as a brokerage account statement showing
that you owned PMAs class A common stock as of the
PMA record date, a copy of the voting instruction card provided
by your broker, bank or other nominee, or other similar evidence
of ownership as of the PMA record date, as well as your photo
identification, for admission. If you do not provide photo
identification or comply with the other procedures outlined
above upon request, you will not be admitted to the PMA special
meeting.
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Tabulation
of the Votes
PMA will appoint an inspector of election for the special
meeting to tabulate affirmative and negative votes and
abstentions.
Adjournments
and Postponements
If no quorum of shareholders is present in person or by proxy at
the special meeting, the special meeting may be adjourned from
time to time until a quorum is present or represented. In
addition, adjournments of the special meeting may be made for
the purpose of soliciting additional proxies in favor of the
proposal. However, no proxy that is voted against a proposal
described in this proxy statement/prospectus will be voted in
favor of adjournment of the special meeting for the purpose of
soliciting additional proxies.
SHAREHOLDER
PROPOSALS
PMA will hold an annual meeting in 2011 only if the merger has
not already been completed. In order to be included in the proxy
statement for the 2011 annual meeting of PMAs
shareholders, shareholder proposals must be received by PMA by
November 30, 2010. Any shareholder of PMA who wishes to
submit a proposal outside of the process described in
Rule 14a-8
of the Exchange Act must notify PMAs Secretary in writing
of the proposal not later than the close of business on
December 30, 2010. The notice must also include the other
information specified in PMAs bylaws. Any shareholder of
PMA who wishes to submit a proposal should consult PMAs
bylaws and the applicable proxy rules of the SEC.
LEGAL
MATTERS
The validity of the Old Republic common stock issued in
connection with the merger will be passed upon for Old Republic
by Spencer LeRoy, III, Senior Vice President, General
Counsel, and Secretary of Old Republic. Mr. LeRoy holds
stock and options to purchase stock granted under Old
Republics employee stock plans, which in the aggregate
represent less than 1% of Old Republics outstanding common
stock. Certain tax matters related to the merger will be passed
upon for Old Republic by Locke Lord Bissell & Liddell
LLP. Certain tax matters related to the merger will be passed
upon for PMA by Ballard Spahr LLP.
EXPERTS
The consolidated financial statements and managements
assessment of the effectiveness of internal control over
financial reporting (which is included in Managements
Report on Internal Control over Financial Reporting)
incorporated in this proxy statement/prospectus by reference to
the Annual Report on
Form 10-K
of PMA for the year ended December 31, 2009, have been so
incorporated in reliance on the report of ParenteBeard LLC, an
independent registered public accounting firm, given on the
authority of said firm as experts in auditing and accounting.
The consolidated financial statements and financial statement
schedules of Old Republic and its subsidiaries as of
December 31, 2009 and 2008 and for each of the three years
in the period ended December 31, 2009 and managements
assessment of the effectiveness of internal control over
financial reporting (which is included in Managements
Report on Internal Control over Financial Reporting) as of
December 31, 2009 included in this proxy
statement/prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, an independent registered
public accounting firm, given on the authority of said firm as
experts in auditing and accounting.
WHERE YOU
CAN FIND MORE INFORMATION
Old Republic has filed a registration statement on
Form S-4
to register with the SEC the Old Republic common stock to be
issued to PMA shareholders in the merger, if adopted. This proxy
statement/prospectus is a part of that registration statement
and constitutes a prospectus of Old Republic in addition to
being a proxy statement of PMA.
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As allowed by SEC rules, this proxy statement/prospectus does
not contain all the information you can find in the registration
statement on
Form S-4,
of which this proxy statement/prospectus forms a part, or the
annexes to the registration statement. Old Republic and PMA file
annual, quarterly and current reports, proxy statements and
other information with the SEC. You may read and copy any
reports, statements or other information that Old Republic and
PMA file with the SEC at the SECs public reference room at
100 F Street, N.E., Washington, D.C. 20549.
Please call the SEC at
1-800-SEC-0330
for further information on the operation of the public reference
room. These SEC filings are also available to the public from
the Internet worldwide web site maintained by the SEC at
http://www.sec.gov.
Reports, proxy statements and other information concerning Old
Republic may also be inspected at the offices of the New York
Stock Exchange 11 Wall Street, New York, NY 10005 and concerning
PMA may also be inspected at the office of The NASDAQ Stock
Market, One Liberty Plaza, 165 Broadway, New York, NY 10006.
If you are a PMA shareholder, some of the documents previously
filed with the SEC may have been sent to you, but you can also
obtain any of them through PMA, the SEC or the SECs
Internet web site as described above. Documents filed with the
SEC are available from Old Republic or PMA without charge,
excluding all exhibits, except that, if PMA has specifically
incorporated by reference an exhibit in this proxy
statement/prospectus, the exhibit will also be provided without
charge.
You may obtain documents filed with the SEC by requesting them
in writing or by telephone from the appropriate company at the
following addresses:
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Old Republic
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PMA
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Old Republic International Corporation
307 North Michigan Avenue
Chicago, Illinois 60601
Attention: Investor Relations
Telephone:
(312) 346-8100
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PMA Capital Corporation
380 Sentry Parkway
Blue Bell, Pennsylvania 19422
Attention: Investor Relations
Telephone: (610) 397-5298
|
If you would like to request documents, PMA shareholders must do
so no later than September 13, 2010 in order to receive
them before the PMA special meeting.
You can also get more information by visiting Old
Republics website at
http://www.oldrepublic.com/
and PMAs website at
http://www.pmacapital.com/.
Materials from these websites and other websites mentioned in
this proxy statement/prospectus are not incorporated by
reference in this proxy statement/prospectus. If you are viewing
this proxy statement/prospectus in electronic format, each of
the URLs mentioned in this proxy statement/prospectus is an
active textual reference only.
The SEC allows PMA to incorporate by reference
information in this proxy statement/prospectus, which means that
PMA can disclose important information to you by referring you
to another document filed separately with the SEC. The
information incorporated by reference is considered to be a part
of this proxy statement/prospectus, except for any information
that is superseded by information included directly in this
document.
The documents listed below that PMA has previously filed with
the SEC are considered to be a part of this proxy
statement/prospectus. They contain important business and
financial information about the companies:
|
|
|
PMA SEC Filings (File No. 001-31706)
|
|
Period or Date Filed
|
|
Annual Report on
Form 10-K
|
|
Fiscal year ended December 31, 2009
|
Quarterly Report on
Form 10-Q
|
|
March 31, 2010
|
Definitive Proxy Statement on Schedule 14A
|
|
Filed on March 29, 2010
|
Current Reports on
Form 8-K
|
|
Filed on April 27, 2010, May 6, 2010, June 10, 2010, June 10,
2010, July 15, 2010 and July 30, 2010
|
188
PMA also incorporates by reference into this proxy
statement/prospectus each document filed with the SEC pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act by
PMA after the date of this proxy
statement/prospectus,
but before the date of the PMA special meeting. To the extent,
however, required by the rules and regulations of the SEC, Old
Republic and PMA will amend this proxy statement/prospectus to
include information filed after the date of this proxy
statement/prospectus.
Old Republic has supplied all of the information contained in
this proxy statement/prospectus relating to Old Republic, as
well as all pro forma financial information, and PMA has
supplied all information contained or incorporated by reference
in this proxy statement/prospectus relating to PMA. This
document constitutes the prospectus of Old Republic and a proxy
statement of PMA.
189
Old
Republic International Corporation and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
($ in millions, except share data)
|
|
|
ASSETS
|
Investments:
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
Fixed maturity securities (at fair value) (amortized cost:
$7,896.2 and $7,385.2)
|
|
$
|
8,326.8
|
|
|
$
|
7,406.9
|
|
Equity securities (at fair value) (adjusted cost: $357.5 and
$373.3)
|
|
|
502.9
|
|
|
|
350.3
|
|
Short-term investments (at fair value which approximates cost)
|
|
|
826.7
|
|
|
|
888.0
|
|
Miscellaneous investments
|
|
|
24.0
|
|
|
|
29.7
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,680.5
|
|
|
|
8,675.0
|
|
Other investments
|
|
|
7.8
|
|
|
|
7.8
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
9,688.4
|
|
|
|
8,682.9
|
|
|
|
|
|
|
|
|
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
|
77.3
|
|
|
|
63.9
|
|
Securities and indebtedness of related parties
|
|
|
17.1
|
|
|
|
17.4
|
|
Accrued investment income
|
|
|
113.3
|
|
|
|
108.2
|
|
Accounts and notes receivable
|
|
|
788.6
|
|
|
|
806.7
|
|
Federal income tax recoverable:
|
|
|
|
|
|
|
|
|
Current
|
|
|
7.3
|
|
|
|
41.0
|
|
Prepaid federal income taxes
|
|
|
221.4
|
|
|
|
463.4
|
|
Reinsurance balances and funds held
|
|
|
141.9
|
|
|
|
67.6
|
|
Reinsurance recoverable:
|
|
|
|
|
|
|
|
|
Paid losses
|
|
|
66.7
|
|
|
|
52.2
|
|
Policy and claim reserves
|
|
|
2,491.2
|
|
|
|
2,395.7
|
|
Deferred policy acquisition costs
|
|
|
206.9
|
|
|
|
222.8
|
|
Sundry assets
|
|
|
369.3
|
|
|
|
343.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,501.6
|
|
|
|
4,583.1
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
14,190.0
|
|
|
$
|
13,266.0
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, PREFERRED STOCK, AND COMMON SHAREHOLDERS
EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
Losses, claims, and settlement expenses
|
|
$
|
7,915.0
|
|
|
$
|
7,241.3
|
|
Unearned premiums
|
|
|
1,038.1
|
|
|
|
1,112.3
|
|
Other policyholders benefits and funds
|
|
|
185.2
|
|
|
|
180.7
|
|
|
|
|
|
|
|
|
|
|
Total policy liabilities and accruals
|
|
|
9,138.4
|
|
|
|
8,534.3
|
|
Commissions, expenses, fees, and taxes
|
|
|
266.3
|
|
|
|
264.5
|
|
Reinsurance balances and funds
|
|
|
321.3
|
|
|
|
264.8
|
|
Federal income tax payable:
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
47.5
|
|
|
|
77.3
|
|
Debt
|
|
|
346.7
|
|
|
|
233.0
|
|
Sundry liabilities
|
|
|
178.0
|
|
|
|
151.5
|
|
Commitments and contingent liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
10,298.6
|
|
|
|
9,525.7
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shareholders Equity:
|
|
|
|
|
|
|
|
|
Common stock(1)
|
|
|
240.6
|
|
|
|
240.5
|
|
Additional paid-in capital
|
|
|
412.4
|
|
|
|
405.0
|
|
Retained earnings
|
|
|
2,927.3
|
|
|
|
3,186.5
|
|
Accumulated other comprehensive income (loss)
|
|
|
353.7
|
|
|
|
(41.7
|
)
|
Unallocated ESSOP shares (at cost)
|
|
|
(42.7
|
)
|
|
|
(50.0
|
)
|
Treasury stock (at cost)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Common Shareholders Equity
|
|
|
3,891.4
|
|
|
|
3,740.3
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities, Preferred Stock and Common Shareholders
Equity
|
|
$
|
14,190.0
|
|
|
$
|
13,266.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
At December 31, 2009 and 2008, there were
75,000,000 shares of $0.01 par value preferred stock
authorized, of which no shares were outstanding. As of the same
dates, there were 500,000,000 shares of common stock,
$1.00 par value, authorized, of which 240,685,448 and
240,520,251 were issued as of December 31, 2009 and 2008,
respectively. At December 31, 2009 and 2008, there were
100,000,000 shares of Class B Common Stock,
$1.00 par value, authorized, of which no shares were
issued. There were no common shares classified as treasury stock
as of December 31, 2009 and 2008. |
See accompanying Notes to Consolidated Financial Statements.
F-2
Old
Republic International Corporation and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in millions, except share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
3,111.5
|
|
|
$
|
3,125.1
|
|
|
$
|
3,389.0
|
|
Title, escrow, and other fees
|
|
|
277.4
|
|
|
|
192.9
|
|
|
|
212.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums and fees
|
|
|
3,388.9
|
|
|
|
3,318.1
|
|
|
|
3,601.2
|
|
Net investment income
|
|
|
383.5
|
|
|
|
377.3
|
|
|
|
379.9
|
|
Other income
|
|
|
24.8
|
|
|
|
28.7
|
|
|
|
39.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
3,797.2
|
|
|
|
3,724.2
|
|
|
|
4,020.6
|
|
Realized investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
From sales
|
|
|
15.9
|
|
|
|
(4.1
|
)
|
|
|
70.3
|
|
From impairments
|
|
|
(9.5
|
)
|
|
|
(482.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total realized investment gains (losses)
|
|
|
6.3
|
|
|
|
(486.4
|
)
|
|
|
70.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
3,803.6
|
|
|
|
3,237.7
|
|
|
|
4,091.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, Claims and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, claims and settlement expenses
|
|
|
2,591.0
|
|
|
|
2,700.4
|
|
|
|
2,156.9
|
|
Dividends to policyholders
|
|
|
7.8
|
|
|
|
15.2
|
|
|
|
9.3
|
|
Underwriting, acquisition, and other expenses
|
|
|
1,454.0
|
|
|
|
1,338.5
|
|
|
|
1,538.9
|
|
Interest and other charges
|
|
|
24.2
|
|
|
|
2.7
|
|
|
|
7.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
4,077.2
|
|
|
|
4,056.9
|
|
|
|
3,712.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes (credits)
|
|
|
(273.6
|
)
|
|
|
(819.2
|
)
|
|
|
378.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes (Credits):
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
56.5
|
|
|
|
19.4
|
|
|
|
172.5
|
|
Deferred
|
|
|
(230.9
|
)
|
|
|
(280.3
|
)
|
|
|
(66.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(174.4
|
)
|
|
|
(260.8
|
)
|
|
|
105.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(99.1
|
)
|
|
$
|
(558.3
|
)
|
|
$
|
272.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
$
|
(.42
|
)
|
|
$
|
(2.41
|
)
|
|
$
|
1.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
$
|
(.42
|
)
|
|
$
|
(2.41
|
)
|
|
$
|
1.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
235,657,425
|
|
|
|
231,484,083
|
|
|
|
231,370,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
235,657,425
|
|
|
|
231,484,083
|
|
|
|
232,912,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends Per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash:
|
|
$
|
.68
|
|
|
$
|
.67
|
|
|
$
|
.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-3
Old
Republic International Corporation and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in millions)
|
|
|
Net income (loss) as reported
|
|
$
|
(99.1
|
)
|
|
$
|
(558.3
|
)
|
|
$
|
272.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-tax net unrealized gains (losses) on securities
|
|
|
376.1
|
|
|
|
(78.1
|
)
|
|
|
12.4
|
|
Other adjustments
|
|
|
19.3
|
|
|
|
(56.9
|
)
|
|
|
35.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net adjustments
|
|
|
395.4
|
|
|
|
(135.1
|
)
|
|
|
48.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
296.3
|
|
|
$
|
(693.4
|
)
|
|
$
|
320.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-4
Old
Republic International Corporation and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in millions)
|
|
|
Convertible Preferred Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
240.5
|
|
|
$
|
232.0
|
|
|
$
|
231.0
|
|
Dividend reinvestment plan
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
.2
|
|
|
|
.9
|
|
Issuance of shares
|
|
|
|
|
|
|
9.7
|
|
|
|
|
|
Treasury stock restored to unissued status
|
|
|
|
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
240.6
|
|
|
$
|
240.5
|
|
|
$
|
232.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-in Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
405.0
|
|
|
$
|
344.4
|
|
|
$
|
319.5
|
|
Dividend reinvestment plan
|
|
|
.8
|
|
|
|
.9
|
|
|
|
1.0
|
|
Exercise of stock options
|
|
|
.4
|
|
|
|
2.0
|
|
|
|
13.0
|
|
Issuance of shares
|
|
|
|
|
|
|
73.1
|
|
|
|
|
|
Stock option compensation
|
|
|
4.9
|
|
|
|
11.2
|
|
|
|
10.8
|
|
ESSOP shares released
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
Treasury stock restored to unissued status
|
|
|
|
|
|
|
(26.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
412.4
|
|
|
$
|
405.0
|
|
|
$
|
344.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
3,186.5
|
|
|
$
|
3,900.1
|
|
|
$
|
3,773.9
|
|
Net income (loss)
|
|
|
(99.1
|
)
|
|
|
(558.3
|
)
|
|
|
272.4
|
|
Dividends on common stock: cash
|
|
|
(160.0
|
)
|
|
|
(155.2
|
)
|
|
|
(145.4
|
)
|
Effects of changing pension plan measurement date, net of tax
|
|
|
|
|
|
|
|
|
|
|
(.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
2,927.3
|
|
|
$
|
3,186.5
|
|
|
$
|
3,900.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
(41.7
|
)
|
|
$
|
93.3
|
|
|
$
|
44.6
|
|
Foreign currency translation adjustments
|
|
|
18.9
|
|
|
|
(27.1
|
)
|
|
|
20.7
|
|
Net unrealized gains (losses) on securities, net of tax
|
|
|
376.1
|
|
|
|
(78.1
|
)
|
|
|
12.4
|
|
Net adjustment related to defined benefit pension plans, net of
tax
|
|
|
.3
|
|
|
|
(29.8
|
)
|
|
|
15.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
353.7
|
|
|
$
|
(41.7
|
)
|
|
$
|
93.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated ESSOP Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
(50.0
|
)
|
|
$
|
|
|
|
$
|
|
|
Unallocated ESSOP shares issued
|
|
|
|
|
|
|
(50.0
|
)
|
|
|
|
|
ESSOP shares released
|
|
|
7.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
(42.7
|
)
|
|
$
|
(50.0
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
|
|
|
$
|
(28.3
|
)
|
|
$
|
|
|
Acquired during the year
|
|
|
|
|
|
|
|
|
|
|
(28.3
|
)
|
Restored to unissued status
|
|
|
|
|
|
|
28.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(28.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-5
Old
Republic International Corporation and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in millions)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(99.1
|
)
|
|
$
|
(558.3
|
)
|
|
$
|
272.4
|
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred policy acquisition costs
|
|
|
18.0
|
|
|
|
20.3
|
|
|
|
21.2
|
|
Premiums and other receivables
|
|
|
18.5
|
|
|
|
73.5
|
|
|
|
82.2
|
|
Unpaid claims and related items
|
|
|
583.0
|
|
|
|
769.5
|
|
|
|
646.4
|
|
Other policyholders benefits and funds
|
|
|
(77.0
|
)
|
|
|
(36.5
|
)
|
|
|
(1.3
|
)
|
Income taxes
|
|
|
(199.9
|
)
|
|
|
(315.1
|
)
|
|
|
(57.1
|
)
|
Prepaid federal income taxes
|
|
|
241.9
|
|
|
|
73.1
|
|
|
|
(68.1
|
)
|
Reinsurance balances and funds
|
|
|
(32.9
|
)
|
|
|
(7.0
|
)
|
|
|
(29.3
|
)
|
Realized investment (gains) losses
|
|
|
(6.3
|
)
|
|
|
486.4
|
|
|
|
(70.3
|
)
|
Accounts payable, accrued expenses and other
|
|
|
87.0
|
|
|
|
59.6
|
|
|
|
66.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
532.9
|
|
|
|
565.6
|
|
|
|
862.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities and early calls
|
|
|
1,047.6
|
|
|
|
853.3
|
|
|
|
692.0
|
|
Sales
|
|
|
153.9
|
|
|
|
94.2
|
|
|
|
120.9
|
|
Sales of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
24.9
|
|
|
|
90.0
|
|
|
|
393.3
|
|
Other net
|
|
|
5.6
|
|
|
|
44.2
|
|
|
|
15.5
|
|
Purchases of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
|
(1,727.4
|
)
|
|
|
(1,124.6
|
)
|
|
|
(1,257.8
|
)
|
Equity securities
|
|
|
|
|
|
|
(111.2
|
)
|
|
|
(604.6
|
)
|
Other net
|
|
|
(19.6
|
)
|
|
|
(30.9
|
)
|
|
|
(30.4
|
)
|
Purchase of a business
|
|
|
(3.5
|
)
|
|
|
(4.3
|
)
|
|
|
(4.4
|
)
|
Net decrease (increase) in short-term investments
|
|
|
62.3
|
|
|
|
(427.2
|
)
|
|
|
32.4
|
|
Other-net
|
|
|
(8.4
|
)
|
|
|
9.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(464.5
|
)
|
|
|
(607.3
|
)
|
|
|
(643.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of debentures and notes
|
|
|
576.2
|
|
|
|
280.0
|
|
|
|
121.3
|
|
Issuance of common shares
|
|
|
1.4
|
|
|
|
86.1
|
|
|
|
15.0
|
|
Redemption of debentures and notes
|
|
|
(472.8
|
)
|
|
|
(110.9
|
)
|
|
|
(201.6
|
)
|
Issuance of unallocated ESSOP shares
|
|
|
|
|
|
|
(50.0
|
)
|
|
|
|
|
Dividends on common shares
|
|
|
(160.0
|
)
|
|
|
(155.2
|
)
|
|
|
(145.4
|
)
|
Purchase of treasury shares
|
|
|
|
|
|
|
|
|
|
|
(28.3
|
)
|
Other-net
|
|
|
|
|
|
|
1.6
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(55.1
|
)
|
|
|
51.5
|
|
|
|
(237.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash:
|
|
|
13.3
|
|
|
|
9.9
|
|
|
|
(17.6
|
)
|
Cash, beginning of year
|
|
|
63.9
|
|
|
|
54.0
|
|
|
|
71.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of year
|
|
$
|
77.3
|
|
|
$
|
63.9
|
|
|
$
|
54.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
19.1
|
|
|
$
|
3.8
|
|
|
$
|
7.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
24.3
|
|
|
$
|
53.8
|
|
|
$
|
162.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-6
Old
Republic International Corporation and Subsidiaries
($ in Millions, Except as Otherwise Indicated)
Old Republic International Corporation is a Chicago-based
insurance holding company with subsidiaries engaged mainly in
the general (property and liability), mortgage guaranty and
title insurance businesses. In this report, Old
Republic, or the Company refers to Old
Republic International Corporation and its subsidiaries as the
context requires. The aforementioned insurance segments are
organized as the Old Republic General Insurance, Mortgage
Guaranty and Title Insurance Groups, and references herein
to such groups apply to the Companys subsidiaries engaged
in the respective segments of business. Results of a small life
and health insurance business are included in the corporate and
other caption of this report.
Note 1
Summary of Significant Accounting Policies
The significant accounting policies employed by Old Republic
International Corporation and its subsidiaries are set forth in
the following summary.
(a) Accounting Principles The
Companys insurance subsidiaries are managed pursuant to
the laws and regulations of the various states in which they
operate. As a result, the subsidiaries maintain their accounts
in conformity with accounting practices permitted by various
states insurance regulatory authorities. Federal income
taxes and dividends to shareholders are based on financial
statements and reports complying with such practices. The
statutory accounting requirements vary from the Financial
Accounting Standards Boards (FASB) Accounting
Standards Codification (ASC) of accounting
principles generally accepted in the United States of America
(GAAP) in the following major respects: (1) the
costs of selling insurance policies are charged to operations
immediately, while the related premiums are taken into income
over the terms of the policies; (2) investments in fixed
maturity securities designated as available for sale are
generally carried at amortized cost rather than their estimated
fair value; (3) certain assets classified as
non-admitted assets are excluded from the balance
sheet through a direct charge to earned surplus;
(4) changes in allowed deferred income tax assets or
liabilities are recorded directly in earned surplus and not
through the income statement; (5) mortgage guaranty
contingency reserves intended to provide for future catastrophic
losses are established as a liability through a charge to earned
surplus whereas, GAAP does not allow provisions for future
catastrophic losses; (6) title insurance premium reserves,
which are intended to cover losses that will be reported at a
future date are based on statutory formulas, and changes therein
are charged in the income statement against each years
premiums written; (7) certain required formula-derived
reserves for general insurance in particular are established for
claim reserves in excess of amounts considered adequate by the
Company as well as for credits taken relative to reinsurance
placed with other insurance companies not licensed in the
respective states, all of which are charged directly against
earned surplus; and (8) surplus notes are classified as
equity. In consolidating the statutory financial statements of
its insurance
F-7
Old
Republic International Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
subsidiaries, the Company has therefore made necessary
adjustments to conform their accounts with GAAP. The following
table reflects a summary of all such adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
Net Income (Loss)
|
|
|
|
December 31,
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Statutory totals of insurance company subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
|
|
$
|
2,383.2
|
|
|
$
|
2,112.4
|
|
|
$
|
203.9
|
|
|
$
|
(63.9
|
)
|
|
$
|
329.2
|
|
Mortgage Guaranty
|
|
|
332.0
|
|
|
|
194.3
|
|
|
|
(474.8
|
)
|
|
|
(595.6
|
)
|
|
|
(99.6
|
)
|
Title
|
|
|
183.7
|
|
|
|
156.4
|
|
|
|
(9.7
|
)
|
|
|
(9.4
|
)
|
|
|
21.5
|
|
Life & Health
|
|
|
68.8
|
|
|
|
58.3
|
|
|
|
5.9
|
|
|
|
3.0
|
|
|
|
7.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
2,967.7
|
|
|
|
2,521.4
|
|
|
|
(274.7
|
)
|
|
|
(665.9
|
)
|
|
|
258.3
|
|
GAAP totals of non-insurance company subsidiaries and
consolidation adjustments
|
|
|
269.8
|
|
|
|
215.0
|
|
|
|
(24.6
|
)
|
|
|
(148.1
|
)
|
|
|
(32.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unadjusted totals
|
|
|
3,237.7
|
|
|
|
2,736.4
|
|
|
|
(299.2
|
)
|
|
|
(814.2
|
)
|
|
|
226.1
|
|
Adjustments to conform to GAAP statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred policy acquisition costs
|
|
|
200.9
|
|
|
|
218.5
|
|
|
|
(19.5
|
)
|
|
|
(19.7
|
)
|
|
|
(21.4
|
)
|
Fair value of fixed maturity securities
|
|
|
424.3
|
|
|
|
34.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-admitted assets
|
|
|
56.5
|
|
|
|
47.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
(292.3
|
)
|
|
|
(273.9
|
)
|
|
|
216.3
|
|
|
|
256.4
|
|
|
|
63.7
|
|
Mortgage contingency reserves
|
|
|
392.9
|
|
|
|
867.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Title unearned premiums
|
|
|
339.0
|
|
|
|
336.1
|
|
|
|
2.9
|
|
|
|
(20.0
|
)
|
|
|
(6.8
|
)
|
Loss reserves
|
|
|
(242.6
|
)
|
|
|
(243.0
|
)
|
|
|
.5
|
|
|
|
11.1
|
|
|
|
10.6
|
|
Surplus notes
|
|
|
(315.0
|
)
|
|
|
(55.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Sundry adjustments
|
|
|
89.5
|
|
|
|
70.9
|
|
|
|
(.4
|
)
|
|
|
28.1
|
|
|
|
.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
653.6
|
|
|
|
1,003.7
|
|
|
|
200.0
|
|
|
|
256.1
|
|
|
|
46.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated GAAP totals
|
|
$
|
3,891.4
|
|
|
$
|
3,740.3
|
|
|
$
|
(99.1
|
)
|
|
$
|
(558.3
|
)
|
|
$
|
272.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The preparation of financial statements in conformity with
either statutory practices or generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Accordingly, actual
results could differ from those estimates.
(b) Consolidation Practices The
consolidated financial statements include the accounts of the
Company and those of its majority owned insurance underwriting
and service subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
(c) Statement Presentation Amounts shown
in the consolidated financial statements and applicable notes
are stated (except as otherwise indicated and as to share data)
in millions, which amounts may not add to totals shown due to
truncation. Necessary reclassifications are made in prior
periods financial statements whenever appropriate to
conform to the most current presentation.
(d) Investments The Company may classify
its invested assets in terms of those assets relative to which
it either (1) has the positive intent and ability to hold
until maturity, (2) has available for sale or (3) has
the intention of trading. As of December 31, 2009 and 2008,
substantially all the Companys invested assets were
classified as available for sale.
F-8
Old
Republic International Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Fixed maturity securities classified as available for
sale and other preferred and common stocks (equity
securities) are included at fair value with changes in such
values, net of deferred income taxes, reflected directly in
shareholders equity. Fair values for fixed maturity
securities and equity securities are based on quoted market
prices or estimates using values obtained from independent
pricing services as applicable.
The Company reviews the status and fair value changes of each of
its investments on at least a quarterly basis during the year,
and estimates of
other-than-temporary
impairments in the portfolios value are evaluated and
established at each quarterly balance sheet date. In reviewing
investments for
other-than-temporary
impairment, the Company, in addition to a securitys market
price history, considers the totality of such factors as the
issuers operating results, financial condition and
liquidity, its ability to access capital markets, credit rating
trends, most current audit opinion, industry and securities
markets conditions, and analyst expectations to reach its
conclusions. Sudden fair value declines caused by such adverse
developments as newly emerged or imminent bankruptcy filings,
issuer default on significant obligations, or reports of
financial accounting developments that bring into question the
validity of previously reported earnings or financial condition,
are recognized as realized losses as soon as credible publicly
available information emerges to confirm such developments.
Absent issuer-specific circumstances that would result in a
contrary conclusion, any equity security with an unrealized
investment loss amounting to a 20% or greater decline for a six
month period is considered
other-than-temporarily-impaired.
In the event the Companys estimate of other-than-temporary
impairments is insufficient at any point in time, future
periods net income would be adversely affected by the
recognition of additional realized or impairment losses, but its
financial position would not necessarily be affected adversely
inasmuch as such losses, or a portion of them, could have been
recognized previously as unrealized losses. The Company
recognized $9.5 and $482.3 of
other-than-temporary
impairments of investments for the years ended December 31,
2009 and 2008, respectively, while recognizing no
other-than-temporary
impairments for the year ended December 31, 2007.
During 2009, the Company adopted new accounting pronouncements
that provide additional technical guidance to the application of
fair value measurements, and modify the recognition and
presentation requirements of OTTI adjustments relating to debt
securities. The necessary effects of these pronouncements have
been reflected in this report.
The amortized cost and estimated fair values of fixed maturity
securities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Fixed Maturity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. & Canadian Governments
|
|
$
|
937.4
|
|
|
$
|
39.6
|
|
|
$
|
3.0
|
|
|
$
|
974.0
|
|
Tax-exempt
|
|
|
2,209.3
|
|
|
|
135.0
|
|
|
|
.3
|
|
|
|
2,344.0
|
|
Corporate
|
|
|
4,749.4
|
|
|
|
273.2
|
|
|
|
14.0
|
|
|
|
5,008.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,896.2
|
|
|
$
|
448.0
|
|
|
$
|
17.4
|
|
|
$
|
8,326.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. & Canadian Governments
|
|
$
|
631.6
|
|
|
$
|
62.8
|
|
|
$
|
|
|
|
$
|
694.4
|
|
Tax-exempt
|
|
|
2,290.0
|
|
|
|
77.2
|
|
|
|
1.5
|
|
|
|
2,365.7
|
|
Corporate
|
|
|
4,463.5
|
|
|
|
56.6
|
|
|
|
173.3
|
|
|
|
4,346.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,385.2
|
|
|
$
|
196.8
|
|
|
$
|
175.0
|
|
|
$
|
7,406.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-9
Old
Republic International Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
The amortized cost and estimated fair value of fixed maturity
securities at December 31, 2009, by contractual maturity,
are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment
penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Fixed Maturity Securities:
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
731.6
|
|
|
$
|
745.0
|
|
Due after one year through five years
|
|
|
4,345.2
|
|
|
|
4,570.9
|
|
Due after five years through ten years
|
|
|
2,758.6
|
|
|
|
2,951.1
|
|
Due after ten years
|
|
|
60.7
|
|
|
|
59.7
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,896.2
|
|
|
$
|
8,326.8
|
|
|
|
|
|
|
|
|
|
|
Bonds and other investments with a statutory carrying value of
$392.3 as of December 31, 2009 were on deposit with
governmental authorities by the Companys insurance
subsidiaries to comply with insurance laws.
A summary of the Companys equity securities reflecting
reported cost, net of
other-than-temporary
impairment adjustments of $317.3 and $355.8 at December 31,
2009 and 2008, respectively, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Adjusted
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
December 31, 2009
|
|
$
|
357.5
|
|
|
$
|
159.0
|
|
|
$
|
13.7
|
|
|
$
|
502.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
$
|
373.3
|
|
|
$
|
49.6
|
|
|
$
|
72.7
|
|
|
$
|
350.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table reflects the Companys gross unrealized
losses and fair value, aggregated by category and length of time
that individual securities have been in an unrealized loss
position employing closing market price comparisons with an
issuers adjusted cost at December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Months or Less
|
|
|
Greater Than 12 Months
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. & Canadian Governments
|
|
$
|
307.1
|
|
|
$
|
3.0
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
307.1
|
|
|
$
|
3.0
|
|
Tax-exempt
|
|
|
13.9
|
|
|
|
.2
|
|
|
|
3.1
|
|
|
|
|
|
|
|
17.1
|
|
|
|
.3
|
|
Corporates
|
|
|
302.5
|
|
|
|
5.1
|
|
|
|
139.3
|
|
|
|
8.9
|
|
|
|
441.8
|
|
|
|
14.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
623.6
|
|
|
|
8.4
|
|
|
|
142.5
|
|
|
|
8.9
|
|
|
|
766.1
|
|
|
|
17.4
|
|
Equity Securities
|
|
|
1.2
|
|
|
|
.2
|
|
|
|
99.5
|
|
|
|
13.4
|
|
|
|
100.8
|
|
|
|
13.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
624.9
|
|
|
$
|
8.6
|
|
|
$
|
242.1
|
|
|
$
|
22.4
|
|
|
$
|
867.0
|
|
|
$
|
31.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. & Canadian Governments
|
|
$
|
1.0
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1.0
|
|
|
$
|
|
|
Tax-exempt
|
|
|
60.8
|
|
|
|
1.4
|
|
|
|
7.7
|
|
|
|
|
|
|
|
68.5
|
|
|
|
1.5
|
|
Corporates
|
|
|
1,981.4
|
|
|
|
112.4
|
|
|
|
504.3
|
|
|
|
61.0
|
|
|
|
2,485.8
|
|
|
|
173.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
2,043.2
|
|
|
|
113.9
|
|
|
|
512.1
|
|
|
|
61.1
|
|
|
|
2,555.4
|
|
|
|
175.0
|
|
Equity Securities
|
|
|
247.8
|
|
|
|
72.7
|
|
|
|
|
|
|
|
|
|
|
|
247.9
|
|
|
|
72.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,291.1
|
|
|
$
|
186.5
|
|
|
$
|
512.1
|
|
|
$
|
61.2
|
|
|
$
|
2,803.3
|
|
|
$
|
247.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-10
Old
Republic International Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
At December 31, 2009, the Company held 155 fixed maturity
and 5 equity securities in an unrealized loss position,
representing 7.5% as to fixed maturities and 31.3% as to equity
securities of the total number of such issues held by the
Company. Of the 155 fixed maturity securities, 35 had been in a
continuous unrealized loss position for greater than
12 months. The unrealized losses on these securities are
primarily attributable to a post-purchase rising interest rate
environment
and/or a
decline in the credit quality of some issuers. As part of its
assessment of
other-than-temporary
impairment, the Company considers its intent to continue to hold
and the likelihood that it will not be required to sell
investment securities in an unrealized loss position until cost
recovery, principally on the basis of its asset and liability
maturity matching procedures. The Company has not sold nor does
it expect to sell investments for purposes of generating cash to
pay claim or expense obligations.
Beginning in 2008, the Company adopted an accounting
pronouncement which establishes a framework for measuring fair
value. The pronouncement defines fair value as the price that
would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants
(an exit price) at the measurement date. A fair value hierarchy
is established that prioritizes the sources (inputs)
used to measure fair value into three broad levels: inputs based
on quoted market prices in active markets (Level 1);
observable inputs based on corroboration with available market
data (Level 2); and unobservable inputs based on
uncorroborated market data or a reporting entitys own
assumptions (Level 3). In 2009, the Company also adopted a
related accounting pronouncement which provides guidance on fair
value measurements in the current economic environment and
results in more detailed disclosures relative to the
Companys fair value measurements. Following is a
description of the valuation methodologies and general
classification used for securities measured at fair value.
The Company uses quoted values and other data provided by a
nationally recognized independent pricing source as inputs into
its quarterly process for determining fair values of its fixed
maturity and equity securities. To validate the techniques or
models used by pricing sources, the Companys review
process includes, but is not limited to: (i) initial and
ongoing evaluation of methodologies used by outside parties to
calculate fair value; and (ii) comparing the fair value
estimates to its knowledge of the current market and to
independent fair value estimates provided by the investment
custodian. The independent pricing source obtains market
quotations and actual transaction prices for securities that
have quoted prices in active markets using its own proprietary
method for determining the fair value of securities that are not
actively traded. In general, these methods involve the use of
matrix pricing in which the independent pricing
source uses observable market inputs including, but not limited
to, investment yields, credit risks and spreads, benchmarking of
like securities, broker-dealer quotes, reported trades and
sector groupings to determine a reasonable fair value.
Level 1 securities include U.S. and Canadian Treasury
notes, publicly traded common stocks, the quoted net asset value
(NAV) mutual funds, and most short-term investments
in highly liquid money market instruments. Level 2
securities generally include corporate bonds, municipal bonds,
and certain U.S. and Canadian government agency securities.
Securities classified within Level 3 include non-publicly
traded bonds, short-term investments, and common stocks. During
2009, the Company transferred a security initially classified as
Level 3 as of December 31, 2008 to Level 1 due to
the completion of an initial public offering of the security
during 2009. There were no other significant changes in the fair
value of assets measured with the use of significant
unobservable inputs during the year ended December 31, 2009.
The following table shows a summary of assets measured at fair
value segregated among the various input levels described above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 2009:
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
$
|
341.4
|
|
|
$
|
7,964.8
|
|
|
$
|
20.5
|
|
|
$
|
8,326.8
|
|
Equity securities
|
|
|
502.5
|
|
|
|
.1
|
|
|
|
.2
|
|
|
|
502.9
|
|
Short-term investments
|
|
$
|
820.8
|
|
|
$
|
|
|
|
$
|
5.9
|
|
|
$
|
826.7
|
|
F-11
Old
Republic International Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Investment income is reported net of allocated expenses and
includes appropriate adjustments for amortization of premium and
accretion of discount on fixed maturity securities acquired at
other than par value. Dividends on equity securities are
credited to income on the ex-dividend date. Realized investment
gains and losses, which result from sales or write-downs of
securities, are reflected as revenues in the income statement
and are determined on the basis of amortized value at date of
sale for fixed maturity securities, and cost in regard to equity
securities; such bases apply to the specific securities sold.
Unrealized investment gains and losses, net of any deferred
income taxes, are recorded directly as a component of
accumulated other comprehensive income in shareholders
equity. At December 31, 2009, the Company and its
subsidiaries had no non-income producing fixed maturity
securities.
The following table reflects the composition of net investment
income, net realized gains or losses, and the net change in
unrealized investment gains or losses for each of the years
shown.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Investment income from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
$
|
368.6
|
|
|
$
|
345.2
|
|
|
$
|
332.9
|
|
Equity securities
|
|
|
7.4
|
|
|
|
13.3
|
|
|
|
16.1
|
|
Short-term investments
|
|
|
5.4
|
|
|
|
16.5
|
|
|
|
28.2
|
|
Other sources
|
|
|
4.9
|
|
|
|
5.6
|
|
|
|
6.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross investment income
|
|
|
386.5
|
|
|
|
380.8
|
|
|
|
383.8
|
|
Investment expenses(a)
|
|
|
3.0
|
|
|
|
3.4
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
383.5
|
|
|
$
|
377.3
|
|
|
$
|
379.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains (losses) on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains
|
|
$
|
4.4
|
|
|
$
|
4.6
|
|
|
$
|
2.4
|
|
Losses
|
|
|
(1.7
|
)
|
|
|
(41.2
|
)
|
|
|
(.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
2.6
|
|
|
|
(36.5
|
)
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities & other long-term investments
|
|
|
3.7
|
|
|
|
(449.8
|
)
|
|
|
68.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6.3
|
|
|
|
(486.4
|
)
|
|
|
70.3
|
|
Income taxes (credits)(b)
|
|
|
(51.7
|
)
|
|
|
(116.1
|
)
|
|
|
24.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses)
|
|
$
|
58.1
|
|
|
$
|
(370.2
|
)
|
|
$
|
45.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized investment gains (losses) on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
$
|
408.0
|
|
|
$
|
(49.7
|
)
|
|
$
|
112.1
|
|
Less: Deferred income taxes (credits)
|
|
|
142.7
|
|
|
|
(17.5
|
)
|
|
|
39.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net changes in unrealized investment gains (losses)
|
|
$
|
265.2
|
|
|
$
|
(32.1
|
)
|
|
$
|
72.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities & other long-term investments
|
|
$
|
170.6
|
|
|
$
|
(70.6
|
)
|
|
$
|
(93.0
|
)
|
Less: Deferred income taxes (credits)
|
|
|
59.6
|
|
|
|
(24.6
|
)
|
|
|
(32.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net changes in unrealized investment gains (losses)
|
|
$
|
110.9
|
|
|
$
|
(45.9
|
)
|
|
$
|
(60.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Investment expenses consist of personnel costs and investment
management and custody service fees, as well as interest
incurred on funds held of $.1, $.6 and $1.1 for the years ended
December 31, 2009, 2008 and 2007, respectively. |
F-12
Old
Republic International Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
(b) |
|
Reflects primarily the combination of fully taxable realized
investment gains or losses and judgments about the
recoverability of deferred tax assets. |
(e) Revenue Recognition Pursuant to GAAP
applicable to the insurance industry, revenues are recognized as
follows:
Substantially all general insurance premiums are reflected in
income on a pro-rata basis in association with the related
benefits, claims, and expenses. Earned but unbilled premiums are
generally taken into income on the billing date, while
adjustments for retrospective premiums, commissions and similar
charges or credits are accrued on the basis of periodic
evaluations of current underwriting experience and contractual
obligations.
The Companys mortgage guaranty premiums stem principally
from monthly installment policies. Substantially all such
premiums are generally written and earned in the month coverage
is effective. Recognition of normal or catastrophic claim costs,
however, occurs only upon an instance of default, defined as an
insured mortgage loan that has missed two or more consecutive
monthly payments. Accordingly, there is a risk that the GAAP
revenue recognition for insured loans is not appropriately
matched to the risk exposure and the consequent recognition of
both normal and most significantly, future catastrophic loss
occurrences which are not permitted to be currently reserved
for. As a result, mortgage guaranty GAAP earnings for any
individual year or series of years may be materially adversely
affected, particularly by cyclical catastrophic loss events such
as the mortgage insurance industry has experienced since mid
year 2007. Reported GAAP earnings and financial condition form,
in part, the basis for significant judgments and strategic
evaluations made by management, analysts, investors, and other
users of the financial statements issued by mortgage guaranty
companies. The risk exists that such judgments and evaluations
are at least partially based on GAAP financial information that
does not match revenues and expenses and is not reflective of
the long-term normal and catastrophic risk exposures assumed by
mortgage guaranty insurers at any point in time.
During 2009s third quarter, Old Republics Mortgage
Guaranty Group entered into reinsurance termination agreements
(commutations) with four lender-owned captive
reinsurers. As part of the transactions, the Company received
reinsurance premiums of $82.5 to cover losses expected to occur
after the contract termination date. Under GAAP, these
reinsurance commutations have been treated as the termination of
risk transfer reinsurance arrangements rather than transactions
in which the Company takes on new or additional insurance risk.
As a result of this GAAP characterization, the premiums received
have been booked as current income rather than being deferred
and subsequently recognized in the future periods during which
the related risk will exist and expected claims will occur. The
Company estimates that substantially all of these premiums will
likely be absorbed by related claim costs thus negating the
current appearance of a gain from the transactions. The up front
recognition of the $82.5 of premiums also has the effect of
portraying an increase in the Mortgage Guaranty Groups
2009 net premiums earned of 8.8%, whereas their exclusion
through deferral to future at risk periods would have shown an
actual 4.1% decline. As a further consequence of this GAAP
premium recognition methodology, the Mortgage Guaranty
Groups 2009 loss ratio dropped from 199.6% to 176.0%, and
their 2009 pretax operating loss was reduced from $562.7 to
$486.4. Excluding these premium recognition effects, quarterly
claim ratios throughout 2009 averaged 199.7% versus a comparable
average of 199.3% for 2008 and 115.2% for 2007.
Title premium and fee revenues stemming from the Companys
direct operations (which include branch offices of its title
insurers and wholly owned agency subsidiaries) represent 39% of
2009 consolidated title business revenues. Such premiums are
generally recognized as income at the escrow closing date which
approximates the policy effective date. Fee income related to
escrow and other closing services is recognized when the related
services have been performed and completed. The remaining 61% of
consolidated title premium and fee revenues is produced by
independent title agents and underwritten title companies.
Rather than making estimates that could be subject to
significant variance from actual premium and fee production, the
Company recognizes revenues from those sources upon receipt.
Such receipts can reflect a three to four month lag relative to
the effective date of the underlying title policy, and are
offset concurrently by production expenses and claim reserve
provisions.
F-13
Old
Republic International Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
(f) Deferred Policy Acquisition Costs
The Companys insurance subsidiaries, other than title
companies, defer certain costs which vary with and are primarily
related to the production of business. Deferred costs consist
principally of commissions, premium taxes, marketing, and policy
issuance expenses. With respect to most coverages, deferred
acquisition costs are amortized on the same basis as the related
premiums are earned or, alternatively, over the periods during
which premiums will be paid. To the extent that future revenues
on existing policies are not adequate to cover related costs and
expenses, deferred policy acquisition costs are charged to
earnings.
The following table summarizes deferred policy acquisition costs
and related data for the years shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Deferred, beginning of year
|
|
$
|
222.8
|
|
|
$
|
246.5
|
|
|
$
|
264.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition costs deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions net of reinsurance
|
|
|
153.4
|
|
|
|
165.0
|
|
|
|
210.6
|
|
Premium taxes
|
|
|
74.5
|
|
|
|
80.8
|
|
|
|
78.5
|
|
Salaries and other marketing expenses
|
|
|
91.8
|
|
|
|
88.3
|
|
|
|
94.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
319.8
|
|
|
|
334.2
|
|
|
|
384.1
|
|
Amortization charged to income
|
|
|
(335.7
|
)
|
|
|
(357.8
|
)
|
|
|
(402.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change for the year
|
|
|
(15.9
|
)
|
|
|
(23.6
|
)
|
|
|
(18.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred, end of year
|
|
$
|
206.9
|
|
|
$
|
222.8
|
|
|
$
|
246.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(g) Unearned Premiums Unearned premium
reserves are generally calculated by application of pro-rata
factors to premiums in force. At December 31, 2009 and
2008, unearned premiums consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
General Insurance Group
|
|
$
|
962.7
|
|
|
$
|
1,022.0
|
|
Mortgage Guaranty Group
|
|
|
75.4
|
|
|
|
90.2
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,038.1
|
|
|
$
|
1,112.3
|
|
|
|
|
|
|
|
|
|
|
(h) Losses, Claims and Settlement Expenses
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 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.
All reserves are necessarily based on estimates which are
periodically reviewed and evaluated in the light of emerging
claim experience and changing circumstances. The resulting
changes in estimates are recorded in
F-14
Old
Republic International Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
operations of the periods during which they are made. Return and
additional premiums and policyholders dividends, all of
which tend to be affected by development of claims in future
years, may offset, in whole or in part, developed claim
redundancies or deficiencies for certain coverages such as
workers compensation, portions of which are written under
loss sensitive programs that provide for such adjustments. The
Company believes that its overall reserving practices have been
consistently applied over many years, and that its aggregate net
reserves have produced reasonable estimates of the ultimate net
costs of claims incurred. However, no representation is made
that ultimate net claim and related costs will not be greater or
lower than previously established reserves.
General Insurance Group reserves are established to
provide for the ultimate expected cost of settling unpaid losses
and claims reported at each balance sheet date. Such reserves
are based on continually evolving assessments of the facts
available to the Company during the settlement process which may
stretch over long periods of time. Long-term disability-type
workers compensation reserves are discounted to present
value based on interest rates ranging from 3.5% to 4.0%. Losses
and claims incurred but not reported, as well as expenses
required to settle losses and claims are established on the
basis of a large number of formulas that take into account
various criteria, including historical cost experience and
anticipated costs of servicing reinsured and other risks.
Estimates of possible recoveries from salvage or subrogation
opportunities are considered in the establishment of such
reserves as applicable. As part of overall claim and claim
expense reserves, the point estimates incorporate amounts to
cover net estimates of unusual claims such as those emanating
from asbestosis and environmental (A&E)
exposures as discussed below. Such reserves can affect claim
costs and related loss ratios for such insurance coverages as
general liability, commercial automobile (truck), workers
compensation and property.
Early in 2001, the Federal Department of Labor revised the
Federal Black Lung Program regulations. The revisions basically
require a reevaluation of previously settled, denied, or new
occupational disease claims in the context of newly devised,
more lenient standards when such claims are resubmitted.
Following a number of challenges and appeals by the insurance
and coal mining industries, the revised regulations were, for
the most part, upheld in June, 2002 and are to be applied
prospectively. Since the final quarter of 2001 black lung claims
filed or refiled pursuant to these anticipated and now final
regulations have increased, though the volume of new claim
reports has abated in recent years. The vast majority of claims
filed to date against Old Republic pertain to business
underwritten through loss sensitive programs that permit the
charge of additional or refund of return premiums to wholly or
partially offset changes in estimated claim costs, or to
business underwritten as a service carrier on behalf of various
industry-wide involuntary market (i.e. assigned risk) pools. A
much smaller portion pertains to business produced on a
traditional risk transfer basis. The Company has established
applicable reserves for claims as they have been reported and
for claims not as yet reported on the basis of its historical
experience as well as assumptions relative to the effect of the
revised regulations. Inasmuch as a variety of challenges are
likely as the revised regulations are implemented through the
actual claim settlement process, the potential impact on
reserves, gross and net of reinsurance or retrospective premium
adjustments, resulting from such regulations cannot as yet be
estimated with reasonable certainty.
Old Republics reserve estimates also include provisions
for indemnity and settlement costs for various asbestosis and
environmental impairment (A&E) claims that have
been filed in the normal course of business against a number of
its insurance subsidiaries. Many such claims relate to policies
issued prior to 1985, including many issued during a short
period between 1981 and 1982 pursuant to an agency agreement
canceled in 1982. Over the years, the Companys property
and liability insurance subsidiaries have typically issued
general liability insurance policies with face amounts ranging
between $1.0 and $2.0 and rarely exceeding $10.0. Such policies
have, in turn, been subject to reinsurance cessions which have
typically reduced the subsidiaries net retentions to $.5
or less as to each claim. Old Republics exposure to
A&E claims cannot, however, be calculated by conventional
insurance reserving methods for a variety of reasons, including:
a) the absence of statistically valid data inasmuch as such
claims typically involve long reporting delays and very often
uncertainty as to the number and identity of insureds against
whom such claims have arisen or will arise; and b) the
litigation history of such or similar claims for insurance
industry members which has produced inconsistent court decisions
with regard to such questions as when an alleged loss occurred,
which policies provide coverage, how a loss is to be allocated
among potentially
F-15
Old
Republic International Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
responsible insureds
and/or their
insurance carriers, how policy coverage exclusions are to be
interpreted, what types of environmental impairment or toxic
tort claims are covered, when the insurers duty to defend
is triggered, how policy limits are to be calculated, and
whether
clean-up
costs constitute property damage. In recent times, the Executive
Branch
and/or the
Congress of the United States have proposed or considered
changes in the legislation and rules affecting the determination
of liability for environmental and asbestosis claims. As of
December 31, 2009, however, there is no solid evidence to
suggest that possible future changes might mitigate or reduce
some or all of these claim exposures. Because of the above
issues and uncertainties, estimation of reserves for losses and
allocated loss adjustment expenses for A&E claims in
particular is much more difficult or impossible to quantify with
a high degree of precision. Accordingly, no representation can
be made that the Companys reserves for such claims and
related costs will not prove to be overstated or understated in
the future. At December 31, 2009 and 2008,
Old Republics aggregate indemnity and loss adjustment
expense reserves specifically identified with A&E exposures
amounted to $172.8 and $172.4 gross, respectively, and
$136.9 and $145.0 net of reinsurance, respectively.
Old Republics average five year survival ratios stood
at 8.4 years (gross) and 11.5 years (net of
reinsurance) as of December 31, 2009 and 7.3 years
(gross) and 9.9 years (net of reinsurance) as of
December 31, 2008. Fluctuations in this ratio between years
can be caused by the inconsistent pay out patterns associated
with these types of claims.
Mortgage guaranty insurance reserves for unpaid claims
and claim adjustment expenses are recognized only upon an
instance of default, defined as an insured mortgage loan that
has missed two or more consecutive monthly payments. Loss
reserves are therefore based on statistical calculations that
take into account the number of reported insured mortgage loan
defaults as of each balance sheet date, as well as
experience-based estimates of loan defaults that have occurred
but have not as yet been reported (IBNR). Further,
the loss reserve estimating process takes into account a large
number of variables including trends in claim severity,
potential salvage recoveries, expected cure rates for reported
loan delinquencies at various stages of default, the level of
coverage rescissions and claims denials due to material
misrepresentation in key underwriting information or
non-compliance with prescribed underwriting guidelines, and
management judgments relative to future employment levels,
housing market activity, and mortgage loan interest costs,
demand, and extensions. Historically coverage rescissions and
claims denials as a result of material misrepresentation in key
underwriting information or non-compliance with terms of the
master policy have not been material; however, they have
increased significantly since early 2008.
Title insurance and related escrow services loss and loss
adjustment expense reserves are established as point estimates
to cover the projected settlement costs of known as well as IBNR
losses related to premium and escrow service revenues of each
reporting period. Reserves for known claims are based on an
assessment of the facts available to the Company during the
settlement process. The point estimates covering all claim
reserves take into account IBNR claims based on past experience
and evaluations of such variables as changing trends in the
types of policies issued, changes in real estate markets and
interest rate environments, and changing levels of loan
refinancing, all of which can have a bearing on the emergence,
frequency, and ultimate cost of claims.
In addition to the above reserve elements, the Company
establishes reserves for loss settlement costs that are not
directly related to individual claims. Such reserves are based
on prior years cost experience and trends, and are
intended to cover the unallocated costs of claim
departments administration of known and IBNR claims.
F-16
Old
Republic International Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
The following table shows an analysis of changes in aggregate
reserves for the Companys losses, claims and settlement
expenses for each of the years shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Gross reserves at beginning of year
|
|
$
|
7,241.3
|
|
|
$
|
6,231.1
|
|
|
$
|
5,534.7
|
|
Less: reinsurance losses recoverable
|
|
|
2,227.0
|
|
|
|
1,984.7
|
|
|
|
1,936.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserves at beginning of year:
|
|
|
|
|
|
|
|
|
|
|
|
|
General Insurance
|
|
|
3,326.9
|
|
|
|
3,279.7
|
|
|
|
3,022.8
|
|
Mortgage Guaranty
|
|
|
1,382.6
|
|
|
|
644.9
|
|
|
|
249.6
|
|
Title Insurance
|
|
|
282.4
|
|
|
|
296.9
|
|
|
|
304.1
|
|
Other
|
|
|
22.2
|
|
|
|
24.7
|
|
|
|
21.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
5,014.2
|
|
|
|
4,246.3
|
|
|
|
3,598.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred claims and claim adjustment expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provisions for insured events of the current year:
|
|
|
|
|
|
|
|
|
|
|
|
|
General Insurance
|
|
|
1,409.2
|
|
|
|
1,520.1
|
|
|
|
1,562.8
|
|
Mortgage Guaranty
|
|
|
1,284.0
|
|
|
|
1,199.5
|
|
|
|
551.3
|
|
Title Insurance
|
|
|
63.6
|
|
|
|
46.3
|
|
|
|
72.3
|
|
Other
|
|
|
36.4
|
|
|
|
41.9
|
|
|
|
37.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
2,793.3
|
|
|
|
2,807.8
|
|
|
|
2,224.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in provision for insured events of prior years:
|
|
|
|
|
|
|
|
|
|
|
|
|
General Insurance
|
|
|
(56.8
|
)
|
|
|
(83.0
|
)
|
|
|
(110.6
|
)
|
Mortgage Guaranty(a)
|
|
|
(149.9
|
)
|
|
|
(18.7
|
)
|
|
|
64.4
|
|
Title Insurance
|
|
|
6.7
|
|
|
|
(0.6
|
)
|
|
|
(16.3
|
)
|
Other
|
|
|
(1.3
|
)
|
|
|
(3.8
|
)
|
|
|
(3.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
(201.3
|
)
|
|
|
(106.1
|
)
|
|
|
(66.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred claims and claim adjustment expenses(a)
|
|
|
2,592.0
|
|
|
|
2,701.6
|
|
|
|
2,158.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims and claim adjustment expenses attributable to insured
events of the current year:
|
|
|
|
|
|
|
|
|
|
|
|
|
General Insurance
|
|
|
498.6
|
|
|
|
549.0
|
|
|
|
518.7
|
|
Mortgage Guaranty(a)
|
|
|
7.8
|
|
|
|
59.8
|
|
|
|
29.6
|
|
Title Insurance
|
|
|
7.1
|
|
|
|
5.4
|
|
|
|
7.5
|
|
Other
|
|
|
25.8
|
|
|
|
30.3
|
|
|
|
23.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
539.3
|
|
|
|
644.5
|
|
|
|
579.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims and claim adjustment expenses attributable to insured
events of prior years:
|
|
|
|
|
|
|
|
|
|
|
|
|
General Insurance
|
|
|
846.4
|
|
|
|
840.8
|
|
|
|
676.3
|
|
Mortgage Guaranty(a)
|
|
|
543.5
|
|
|
|
383.2
|
|
|
|
190.8
|
|
Title Insurance
|
|
|
68.5
|
|
|
|
54.8
|
|
|
|
55.8
|
|
Other
|
|
|
9.9
|
|
|
|
10.2
|
|
|
|
7.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
1,468.3
|
|
|
|
1,289.0
|
|
|
|
930.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total payments
|
|
|
2,007.7
|
|
|
|
1,933.5
|
|
|
|
1,509.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of reserves for unpaid claims and claim adjustment
expenses at the end of each year, net of reinsurance losses
recoverable:(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
General Insurance
|
|
|
3,334.3
|
|
|
|
3,326.9
|
|
|
|
3,279.7
|
|
Mortgage Guaranty
|
|
|
1,965.4
|
|
|
|
1,382.6
|
|
|
|
644.9
|
|
Title Insurance
|
|
|
277.1
|
|
|
|
282.4
|
|
|
|
296.9
|
|
Other
|
|
|
21.5
|
|
|
|
22.2
|
|
|
|
24.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
5,598.5
|
|
|
|
5,014.2
|
|
|
|
4,246.3
|
|
Reinsurance losses recoverable
|
|
|
2,316.5
|
|
|
|
2,227.0
|
|
|
|
1,984.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross reserves at end of year
|
|
$
|
7,915.0
|
|
|
$
|
7,241.3
|
|
|
$
|
6,231.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-17
Old
Republic International Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
(a) |
|
In common with all other insurance lines, mortgage guaranty paid
and incurred claim and claim adjustment expenses include only
those costs actually or expected to be paid by the Company.
Claims not paid by virtue of coverage rescissions and claims
denials amounted to $719.5, $211.0, and $36.4 for 2009, 2008,
and 2007, respectively. In a similar vein, changes in mortgage
guaranty aggregate case, IBNR, and loss adjustment expense
reserves shown in the following table and entering into the
determination of incurred claim costs, take into account, among
a large number of variables, claim cost reductions for
anticipated coverage rescissions and claims denials of $881.9 in
2009, $830.5 in 2008, and none in 2007. The significant decline
of $149.9 in 2009 for prior years mortgage guaranty
incurred claim provisions resulted mostly from greater than
anticipated coverage rescissions and claim denials. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Reserve increase(decrease):
|
|
|
|
|
|
|
|
|
|
|
|
|
General Insurance
|
|
$
|
7.4
|
|
|
$
|
47.2
|
|
|
$
|
256.9
|
|
Mortgage Guaranty
|
|
|
582.8
|
|
|
|
737.7
|
|
|
|
395.3
|
|
Title Insurance
|
|
|
(5.3
|
)
|
|
|
(14.5
|
)
|
|
|
(7.2
|
)
|
Other
|
|
|
(.7
|
)
|
|
|
(2.5
|
)
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
584.3
|
|
|
$
|
768.0
|
|
|
$
|
648.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b) |
|
Year end IBNR reserves carried in each segment were as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
General Insurance
|
|
$
|
1,621.6
|
|
|
$
|
1,583.8
|
|
|
$
|
1,539.0
|
|
Mortgage Guaranty
|
|
|
39.7
|
|
|
|
33.0
|
|
|
|
20.8
|
|
Title Insurance
|
|
|
191.3
|
|
|
|
200.7
|
|
|
|
223.4
|
|
Other
|
|
|
9.4
|
|
|
|
9.0
|
|
|
|
11.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,862.0
|
|
|
$
|
1,826.5
|
|
|
$
|
1,795.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three most recent calendar years, the above table
indicates that the one-year development of consolidated reserves
at the beginning of each year produced average favorable annual
developments of 2.8%. The Company believes that the factors most
responsible, in varying and continually changing degrees, for
such redundancies or deficiencies included differences in
originally estimated salvage and subrogation recoveries, in
sales and prices of homes that can impact claim costs upon the
sale of foreclosed properties, by changes in regional or local
economic conditions and employment levels, by greater numbers of
coverage rescissions and claims denials due to material
misrepresentation in key underwriting information or
non-compliance with prescribed underwriting guidelines, by the
extent of loan refinancing activity that can reduce the period
of time over which a policy remains at risk, by lower than
expected frequencies of claims incurred but not reported, by the
effect of reserve discounts applicable to workers
compensation claims, by higher than expected severity of
litigated claims in particular, by governmental or judicially
imposed retroactive conditions in the settlement of claims such
as noted above in regard to black lung disease claims, by
greater than anticipated inflation rates applicable to repairs
and the medical portion of claims in particular, and by higher
than expected claims incurred but not reported due to the slower
and highly volatile emergence patterns applicable to certain
types of claims such as those stemming from litigated, assumed
reinsurance, or the A&E types of claims noted above.
(i) Reinsurance The cost of reinsurance
is recognized over the terms of reinsurance contracts. Amounts
recoverable from reinsurers for loss and loss adjustment
expenses are estimated in a manner consistent with the claim
liability associated with the reinsured business. The Company
evaluates the financial condition of its reinsurers on a regular
basis. Allowances are established for amounts deemed
uncollectible and are included in the Companys net claim
and claim expense reserves.
F-18
Old
Republic International Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
(j) Income Taxes The Company and most of
its subsidiaries file a consolidated tax return and provide for
income taxes payable currently. Deferred income taxes included
in the accompanying consolidated financial statements will not
necessarily become payable/recoverable in the future. The
Company uses the asset and liability method of calculating
deferred income taxes. This method calls for the establishment
of a deferred tax, calculated at currently enacted tax rates
that are applied to the cumulative temporary differences between
financial statement and tax bases of assets and liabilities.
The provision for combined current and deferred income taxes
(credits) reflected in the consolidated statements of income
does not bear the usual relationship to income before income
taxes (credits) as the result of permanent and other differences
between pretax income (loss) and taxable income (loss)
determined under existing tax regulations. The more significant
differences, their effect on the statutory income tax rate
(credit), and the resulting effective income tax rates (credits)
are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Statutory tax rate (credit)
|
|
|
(35.0
|
)%
|
|
|
(35.0
|
)%
|
|
|
35.0
|
%
|
Tax rate increases (decreases):
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt interest
|
|
|
(9.0
|
)
|
|
|
(3.1
|
)
|
|
|
(6.7
|
)
|
Dividends received exclusion
|
|
|
(.6
|
)
|
|
|
(.4
|
)
|
|
|
(.9
|
)
|
Valuation allowance (see below)
|
|
|
(19.8
|
)
|
|
|
6.6
|
|
|
|
|
|
Other items net
|
|
|
.6
|
|
|
|
.1
|
|
|
|
.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate (credit)
|
|
|
(63.8
|
)%
|
|
|
(31.8
|
)%
|
|
|
28.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences that give rise to
significant portions of the Companys net deferred tax
assets (liabilities) are as follows at the dates shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses, claims, and settlement expenses
|
|
$
|
209.1
|
|
|
$
|
200.7
|
|
|
$
|
207.6
|
|
Pension and deferred compensation plans
|
|
|
47.7
|
|
|
|
46.5
|
|
|
|
27.9
|
|
Impairment losses on investments
|
|
|
127.6
|
|
|
|
124.5
|
|
|
|
|
|
Other timing differences
|
|
|
12.7
|
|
|
|
16.2
|
|
|
|
6.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets before valuation allowance
|
|
|
397.1
|
|
|
|
388.1
|
|
|
|
242.5
|
|
Valuation allowance on impaired assets
|
|
|
|
|
|
|
(54.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
397.1
|
|
|
|
334.1
|
|
|
|
242.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned premium reserves
|
|
|
27.8
|
|
|
|
23.3
|
|
|
|
23.4
|
|
Deferred policy acquisition costs
|
|
|
67.2
|
|
|
|
73.5
|
|
|
|
80.2
|
|
Mortgage guaranty insurers contingency reserves
|
|
|
136.1
|
|
|
|
301.1
|
|
|
|
501.3
|
|
Fixed maturity securities adjusted to cost
|
|
|
6.0
|
|
|
|
7.2
|
|
|
|
9.3
|
|
Net unrealized investment gains
|
|
|
202.5
|
|
|
|
1.1
|
|
|
|
41.3
|
|
Title plants and records
|
|
|
5.0
|
|
|
|
5.0
|
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
444.6
|
|
|
|
411.4
|
|
|
|
660.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
47.5
|
|
|
$
|
77.3
|
|
|
$
|
417.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
Old
Republic International Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
A valuation allowance of $54.0 was established against a
deferred tax asset related to the Companys realized losses
on investments at December 31, 2008. As of
December 31, 2009, this valuation allowance was eliminated
following an increase in the fair value of the Companys
investment portfolio. In valuing the deferred tax asset, the
Company considered certain factors including primarily the
scheduled reversals of certain deferred tax liabilities and the
impact of available carryback and carryforward periods. Based on
these considerations, the Company believes that it is more
likely than not that it will realize the benefits of the
deferred tax assets related to realized investment losses, as of
December 31, 2009.
Pursuant to special provisions of the Internal Revenue Code
pertaining to mortgage guaranty insurers, a contingency reserve
(established in accordance with insurance regulations designed
to protect policyholders against extraordinary volumes of
claims) is deductible from gross income. The tax benefits
obtained from such deductions must, however, be invested in a
special type of non-interest bearing U.S. Treasury Tax and
Loss Bonds which aggregated $221.4 at December 31, 2009.
For Federal income tax purposes, amounts deducted from the
contingency reserve are taken into gross statutory taxable
income in the period in which they are released. Contingency
reserves may be released when incurred losses exceed thresholds
established under state law or regulation, upon special request
and approval by state insurance regulators, or in any event,
upon the expiration of ten years. During 2009, the Company
released net contingency reserves of $797.1 and consequently,
$79.6 of U.S. Treasury Tax and Loss Bonds were redeemed in
2009 and $179.9 are to be redeemed during the first quarter of
2010. In addition, $262.7 of U.S. Treasury Tax and Loss
Bonds were redeemed in 2009 relating to contingency reserve
releases recorded in 2008.
In 2007, the Company adopted an accounting pronouncement which
provides recognition criteria and a related measurement model
for uncertain tax positions taken or expected to be taken in
income tax returns. Tax positions taken or expected to be taken
in a tax return by the Company are recognized in the financial
statements when it is more likely than not that the position
would be sustained upon examination by tax authorities. There
are no tax uncertainties that are expected to result in
significant increases or decreases to unrecognized tax benefits
within the next twelve month period. The Company views its
income tax exposures as primarily consisting of timing
differences whereby the ultimate deductibility of a taxable
amount is highly certain but the timing of its deductibility is
uncertain. Such differences relate principally to the timing of
deductions for loss and premium reserves. As in prior
examinations, the Internal Revenue Service (IRS) could assert
that claim reserve deductions were overstated thereby reducing
the Companys statutory taxable income in any particular
year. The Company believes that it establishes its reserves
fairly and consistently at each balance sheet date, and that it
would succeed in defending its tax position in these regards.
Because of the impact of deferred tax accounting, the possible
accelerated payment of tax to the IRS would not necessarily
affect the annual effective tax rate. The Company classifies
interest and penalties as income tax expense in the consolidated
statement of income. Examinations of the Companys
consolidated Federal income tax returns through year-end 2006
have been completed and no significant adjustments have resulted.
(k) Property and Equipment Property and
equipment is generally depreciated or amortized over the
estimated useful lives of the assets, (2 to 27 years),
substantially by the straight-line method. Depreciation and
amortization expenses related to property and equipment were
$15.2, $17.9, and $18.3 in 2009, 2008, and 2007, respectively.
Expenditures for maintenance and repairs are charged to income
as incurred, and expenditures for major renewals and additions
are capitalized.
(l) Title Plants and Records Title
plants and records are carried at original cost or appraised
value at the date of purchase. Such values represent the cost of
producing or acquiring interests in title records and indexes
and the appraised value of purchased subsidiaries title
records and indexes at dates of acquisition. The cost of
maintaining, updating, and operating title records is charged to
income as incurred. Title records and indexes are ordinarily not
amortized unless events or circumstances indicate that the
carrying amount of the capitalized costs may not be recoverable.
F-20
Old
Republic International Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
(m) Goodwill and Intangible Assets
Goodwill resulting from business combinations is no longer
amortizable against operations but must be tested annually for
possible impairment of its continued value ($167.8 and $161.4 at
December 31, 2009 and 2008, respectively). No impairment
charges were required for any period presented.
(n) Employee Benefit Plans The Company
has three pension plans covering a portion of its work force.
The three plans are the Old Republic International Salaried
Employees Restated Retirement Plan (the Old Republic Plan), the
Bituminous Casualty Corporation Retirement Income Plan (the
Bituminous Plan) and the Old Republic National Title Group
Pension Plan (the Title Plan). The plans are defined
benefit plans pursuant to which pension payments are based
primarily on years of service and employee compensation near
retirement. It is the Companys policy to fund the
plans costs as they accrue. These plans have been closed
to new participants since December 31, 2004. Prior to 2007,
the dates used to determine pension measurements were December
31 for the Old Republic Plan and the Bituminous Plan, and
September 30 for the Title Plan. Effective
December 31, 2007, the Company adopted an accounting
pronouncement which required the Company to measure the funded
status of its plans as of the end of the fiscal year.
Consequently, the Title Plan changed its measurement date
to December 31. The change in measurement date did not have
a material impact on the consolidated financial statements.
Authoritative guidance governing pension accounting requires
that the funded status of pension and other postretirement plans
be recognized in the consolidated balance sheet. The funded
status is measured as the difference between the fair value of
plan assets and the projected benefit obligations on a
plan-by-plan
basis. The funded status of an overfunded benefit plan is
recognized as a net pension asset while the funded status for
underfunded benefit plans is recognized as a net pension
liability; offsetting entries are reflected as a component of
shareholders equity in accumulated other comprehensive
income, net of deferred taxes. Changes in the funded status of
the plans are recognized in the period in which they occur.
The changes in the projected benefit obligation are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Projected benefit obligation at beginning of year
|
|
$
|
263.1
|
|
|
$
|
242.0
|
|
|
$
|
250.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases (decreases) during the year attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
|
7.9
|
|
|
|
7.9
|
|
|
|
9.6
|
|
Interest cost
|
|
|
15.9
|
|
|
|
15.3
|
|
|
|
15.2
|
|
Actuarial (gains) losses
|
|
|
8.0
|
|
|
|
8.6
|
|
|
|
(22.6
|
)
|
Benefits paid
|
|
|
(10.3
|
)
|
|
|
(10.8
|
)
|
|
|
(10.4
|
)
|
Change in plan provision
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) for the year
|
|
|
22.7
|
|
|
|
21.0
|
|
|
|
(8.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end of year
|
|
$
|
285.8
|
|
|
$
|
263.1
|
|
|
$
|
242.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-21
Old
Republic International Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
The changes in the fair value of net assets available for plan
benefits are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Fair value of net assets available for plan benefits
At beginning of the year
|
|
$
|
193.0
|
|
|
$
|
219.9
|
|
|
$
|
210.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases (decreases) during the year attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual return on plan assets
|
|
|
20.6
|
|
|
|
(20.1
|
)
|
|
|
14.9
|
|
Sponsor contributions
|
|
|
5.8
|
|
|
|
4.0
|
|
|
|
5.0
|
|
Benefits paid
|
|
|
(10.3
|
)
|
|
|
(10.8
|
)
|
|
|
(10.4
|
)
|
Administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) for year
|
|
|
16.1
|
|
|
|
(26.9
|
)
|
|
|
9.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of net assets available for plan benefits
At end of the year
|
|
$
|
209.1
|
|
|
$
|
193.0
|
|
|
$
|
219.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of aggregate annual net periodic pension costs
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Service cost
|
|
$
|
7.9
|
|
|
$
|
7.9
|
|
|
$
|
8.7
|
|
Interest cost
|
|
|
15.9
|
|
|
|
15.3
|
|
|
|
14.1
|
|
Expected return on plan assets
|
|
|
(15.5
|
)
|
|
|
(16.6
|
)
|
|
|
(16.0
|
)
|
Recognized loss
|
|
|
4.5
|
|
|
|
.7
|
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cost
|
|
$
|
12.8
|
|
|
$
|
7.4
|
|
|
$
|
9.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The pretax amounts recognized in other comprehensive income
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Amounts arising during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net recognized gain (loss)
|
|
$
|
(3.0
|
)
|
|
$
|
(45.3
|
)
|
|
$
|
20.1
|
|
Net prior service cost
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
Reclassification adjustment to components of net periodic
pension cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net recognized loss
|
|
|
4.5
|
|
|
|
.7
|
|
|
|
3.2
|
|
Net prior service cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pretax amount recognized
|
|
$
|
.3
|
|
|
$
|
(44.6
|
)
|
|
$
|
23.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts included in accumulated other comprehensive income
that have not yet been recognized as components of net periodic
pension cost consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Net recognized loss
|
|
$
|
(72.9
|
)
|
|
$
|
(74.5
|
)
|
Net prior service cost
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(74.1
|
)
|
|
$
|
(74.5
|
)
|
|
|
|
|
|
|
|
|
|
F-22
Old
Republic International Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
The amounts included in accumulated other comprehensive income
expected to be recognized as components of net periodic pension
cost during 2010 consist of the following:
|
|
|
|
|
|
|
As of
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
Net recognized loss
|
|
$
|
4.7
|
|
Net prior service cost
|
|
|
.1
|
|
|
|
|
|
|
Total
|
|
$
|
4.8
|
|
|
|
|
|
|
The projected benefit obligations for the plans were determined
using the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Settlement discount rates
|
|
|
5.98
|
%
|
|
|
6.20
|
%
|
Rates of compensation increase
|
|
|
4.25
|
%
|
|
|
4.25
|
%
|
The net periodic benefit cost for the plans were determined
using the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Settlement discount rates
|
|
|
6.20
|
%
|
|
|
6.50
|
%
|
|
|
5.75
|
%
|
Rates of compensation increase
|
|
|
4.25
|
%
|
|
|
4.25
|
%
|
|
|
3.92
|
%
|
Long-term rates of return on plans assets
|
|
|
7.84
|
%
|
|
|
7.83
|
%
|
|
|
7.83
|
%
|
The assumed settlement discount rates were determined by
matching the current estimate of each Plans projected cash
outflows against spot rate yields on a portfolio of high quality
bonds as of the measurement date. To develop the expected
long-term rate of return on assets assumption, the Plans
considered the historical returns and the future expectations
for returns for each asset class, as well as the target asset
allocation of the pension portfolios.
The accumulated benefit obligation for the plans was $256.5 and
$234.8 for the 2009 and 2008 plan years taking into account the
above measurement dates, respectively.
The following information is being provided for plans with
projected benefit obligations in excess of plan assets:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Projected benefit obligations
|
|
$
|
285.8
|
|
|
$
|
263.1
|
|
Fair value of plan assets
|
|
$
|
209.1
|
|
|
$
|
193.0
|
|
|
|
|
|
|
|
|
|
|
The following information is being provided for plans with
accumulated benefit obligations in excess of plan assets:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Projected benefit obligations
|
|
$
|
285.8
|
|
|
$
|
263.1
|
|
Accumulated benefit obligations
|
|
|
256.5
|
|
|
|
234.8
|
|
Fair value of plan assets
|
|
$
|
209.1
|
|
|
$
|
193.0
|
|
|
|
|
|
|
|
|
|
|
F-23
Old
Republic International Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
The benefits expected to be paid as of December 31, 2009
for the next 10 years are as follows: 2010: $12.6; 2011:
$13.1; 2012: $14.1; 2013: $15.1; 2014: $16.4 and for the five
years after 2014: $100.2.
The Companies made cash contributions of $5.8 to their pension
plans in 2009 and expect to make cash contributions of
approximately $1.8 in calendar year 2010.
The investment policy of the Plans is to consider the matching
of assets and liabilities, appropriate risk aversion, liquidity
needs, the preservation of capital, and the attainment of modest
growth. The weighted-average asset allocations of the Plans are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
Investment Policy Asset
|
|
|
2009
|
|
|
2008
|
|
|
Allocation % Range Target
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
Common shares of Company stock
|
|
|
11.0
|
%
|
|
|
14.1
|
%
|
|
|
Other
|
|
|
45.1
|
|
|
|
41.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
56.1
|
|
|
|
55.7
|
|
|
30% to 70%
|
Fixed maturity securities
|
|
|
35.7
|
|
|
|
37.0
|
|
|
30% to 70%
|
Other
|
|
|
8.2
|
|
|
|
7.3
|
|
|
1% to 20%
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective December 31, 2009, the Company adopted accounting
guidance which required additional disclosures about Plan
assets. These disclosures require that Plan assets be presented
by major category and be segregated among the various input
levels required by the fair value hierarchy described in
Note 1(d).
The Plans use quoted values and other data provided by the
respective investment custodians as inputs for determining fair
value of debt and equity securities. The custodians obtain
market quotations and actual transaction prices for securities
that have quoted prices in active markets using its own
proprietary method for determining the fair value of securities
that are not actively traded. In general, these methods involve
the use of matrix pricing in which the investment
custodian uses observable inputs, including, but not limited to,
investment yields, credit risks and spreads, benchmarking of
like securities, broker-dealer quotes, reported trades and
sector groupings to determine a reasonable fair value.
Short-term investments are valued at cost which approximates
fair value.
The following table presents a summary of the Plans assets
segregated among the various input levels described in
Note 1(d).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 2009:
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Equity maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares of Company stock
|
|
$
|
22.9
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
22.9
|
|
Other
|
|
|
80.3
|
|
|
|
14.0
|
|
|
|
|
|
|
|
94.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
103.2
|
|
|
|
14.0
|
|
|
|
|
|
|
|
117.3
|
|
Fixed maturity securities
|
|
|
|
|
|
|
74.6
|
|
|
|
|
|
|
|
74.6
|
|
Other
|
|
|
4.9
|
|
|
|
3.2
|
|
|
|
9.0
|
|
|
|
17.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
108.2
|
|
|
$
|
91.8
|
|
|
$
|
9.0
|
|
|
$
|
209.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 assets include publicly traded common stocks,
mutual funds and most short-term investments. Level 2
assets generally include corporate and government agency bonds
and a limited partnership investment. Level 3 assets
primarily consist of an immediate participation guaranteed fund.
There were no significant changes in the fair value of the
guaranteed fund during the year ended December 31, 2009.
F-24
Old
Republic International Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
The Company has a number of profit sharing and other incentive
compensation programs for the benefit of a substantial number of
its employees. The costs related to such programs are summarized
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Employees Savings and Stock Ownership Plan
|
|
$
|
5.4
|
|
|
$
|
2.4
|
|
|
$
|
2.5
|
|
Other profit sharing plans
|
|
|
5.9
|
|
|
|
6.3
|
|
|
|
5.1
|
|
Cash and deferred incentive compensation
|
|
$
|
16.0
|
|
|
$
|
16.4
|
|
|
$
|
24.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company sponsors an Employees Savings and Stock Ownership
Plan (ESSOP) in which a majority of its employees participate.
Current Company contributions are directed to the open market
purchase of its shares. Dividends on shares are allocated to
participants as earnings, and likewise invested in Company
stock. The Companys annual contributions are based on a
formula that takes the growth in net operating income per share
over consecutive five year periods into account. As of
December 31, 2009, there were 15,446,633 Old Republic
common shares owned by the ESSOP, of which 10,252,837 were
allocated to employees account balances. There are no
repurchase obligations in existence. See Note 3(b).
(o) Escrow Funds Segregated cash deposit
accounts and the offsetting liabilities for escrow deposits in
connection with Title Insurance Group real estate
transactions in the same amounts ($428.1 and $498.6 at
December 31, 2009 and 2008, respectively) are not included
as assets or liabilities in the accompanying consolidated
balance sheets as the escrow funds are not available for regular
operations.
(p) Earnings Per Share Consolidated
basic earnings per share excludes the dilutive effect of common
stock equivalents and is computed by dividing income (loss)
available to common shareholders by the weighted-average number
of common shares actually outstanding for the year. Diluted
earnings per share are similarly calculated with the inclusion
of dilutive common stock equivalents. The following table
provides a reconciliation of net income (loss) and number of
shares used in basic and diluted earnings per share calculations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
$
|
(99.1
|
)
|
|
$
|
(558.3
|
)
|
|
$
|
272.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic earnings per share income (loss)
available to common shareholders
|
|
|
(99.1
|
)
|
|
|
(558.3
|
)
|
|
|
272.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted earnings per share income
(loss) available to common shareholders after assumed conversions
|
|
$
|
(99.1
|
)
|
|
$
|
(558.3
|
)
|
|
$
|
272.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share
weighted-average shares(a)(b)
|
|
|
235,657,425
|
|
|
|
231,484,083
|
|
|
|
231,370,242
|
|
Effect of dilutive securities stock options
|
|
|
|
|
|
|
|
|
|
|
1,542,486
|
|
Effect of dilutive securities convertible senior
notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share - adjusted
weighted-average shares and assumed conversions(a)(b)
|
|
|
235,657,425
|
|
|
|
231,484,083
|
|
|
|
232,912,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-25
Old
Republic International Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(.42
|
)
|
|
$
|
(2.41
|
)
|
|
$
|
1.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(.42
|
)
|
|
$
|
(2.41
|
)
|
|
$
|
1.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive outstanding stock option awards excluded from
earning per share computations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
15,781,176
|
|
|
|
15,279,782
|
|
|
|
4,864,000
|
|
Convertible senior notes
|
|
|
27,452,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
43,233,447
|
|
|
|
15,279,782
|
|
|
|
4,864,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
All per share statistics have been restated to reflect all stock
dividends or splits declared through December 31, 2009. |
|
(b) |
|
In calculating earnings per share, pertinent accounting rules
require that common shares owned by the Companys Employee
Savings and Stock Ownership Plan that are as yet unallocated to
participants in the plan be excluded from the calculation. Such
shares are issued and outstanding, have the same voting and
other rights applicable to all other common shares, and may be
sold at any time by the plan. |
(q) Concentration of Credit Risk The
Company is not exposed to material concentrations of credit
risks as to any one issuer.
(r) Stock Option Compensation As
periodically amended, the Company has had a stock option plan in
effect for certain eligible key employees since 1978. Under the
current plan, options awarded at the date of grant together with
options previously issued and then-outstanding may not exceed 9%
of the Companys outstanding common stock at the end of the
month immediately preceding an option grant. The exercise price
of stock options is equal to the closing market price of the
Companys common stock on the date of grant, and the
contractual life of the grant is generally ten years from the
date of the grant. Options granted in 2001 and prior years may
be exercised to the extent of 10% of the number of shares
covered thereby on and after the date of grant, and
cumulatively, to the extent of an additional 10% on and after
each of the first through ninth subsequent calendar years.
Options granted in 2002 and thereafter may be exercised to the
extent of 10% of the number of shares covered thereby as of
December 31st of the year of the grant and,
cumulatively, to the extent of an additional 15%, 20%, 25% and
30% on and after the second through fifth calendar years,
respectively. Options granted to employees who meet certain
retirement eligibility provisions become fully vested upon
retirement.
The following table presents the stock based compensation
expense and income tax benefit recognized in the financial
statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Stock based compensation expense
|
|
$
|
4.9
|
|
|
$
|
8.0
|
|
|
$
|
10.5
|
|
Income tax benefit
|
|
$
|
1.7
|
|
|
$
|
2.8
|
|
|
$
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of each stock option award is estimated on the
date of grant using the Black-Scholes-Merton Model. The
following table presents the assumptions used in the
Black-Scholes Model for the awards granted during the periods
presented. Expected volatilities are based on the historical
experience of Old Republics common stock. The expected
term of stock options represents the period of time that stock
options granted are assumed to be outstanding. The Company uses
historical data to estimate the effect of stock option exercise
and employee departure behavior; groups of employees that have
similar historical behavior are considered separately for
F-26
Old
Republic International Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
valuation purposes. The risk-free rate of return for periods
within the contractual term of the share option is based on the
U.S. Treasury rate in effect at the time of the grant.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Expected volatility
|
|
|
.28
|
|
|
|
.21
|
|
|
|
.19
|
|
Expected dividends
|
|
|
7.74
|
%
|
|
|
6.29
|
%
|
|
|
3.56
|
%
|
Expected term (in years)
|
|
|
7
|
|
|
|
7
|
|
|
|
7
|
|
Risk-free rate
|
|
|
2.56
|
%
|
|
|
3.05
|
%
|
|
|
4.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of stock option activity under the plan as of
December 31, 2009, 2008 and 2007, and changes in
outstanding options during the years then ended is presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Outstanding at beginning of year
|
|
|
15,279,782
|
|
|
$
|
17.81
|
|
|
|
14,570,577
|
|
|
$
|
18.12
|
|
|
|
13,282,329
|
|
|
$
|
17.26
|
|
Granted
|
|
|
989,250
|
|
|
|
10.48
|
|
|
|
1,505,000
|
|
|
|
12.94
|
|
|
|
2,329,000
|
|
|
|
21.78
|
|
Exercised
|
|
|
71,493
|
|
|
|
6.79
|
|
|
|
222,795
|
|
|
|
10.21
|
|
|
|
932,593
|
|
|
|
14.98
|
|
Forfeited and canceled
|
|
|
416,363
|
|
|
|
14.28
|
|
|
|
573,000
|
|
|
|
15.82
|
|
|
|
108,159
|
|
|
|
19.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
15,781,176
|
|
|
|
17.49
|
|
|
|
15,279,782
|
|
|
|
17.81
|
|
|
|
14,570,577
|
|
|
|
18.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
11,892,055
|
|
|
$
|
17.77
|
|
|
|
10,311,431
|
|
|
$
|
17.21
|
|
|
|
8,919,827
|
|
|
$
|
16.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the year(a)
|
|
$1.05 per share
|
|
$1.18 per share
|
|
$3.73 per share
|
|
|
|
(a) |
|
Based on the Black-Scholes option pricing model and the
assumptions outlined above. |
A summary of stock options outstanding and exercisable at
December 31, 2009 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Weighted
|
|
|
|
Year(s)
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
of
|
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Ranges of Exercise Prices
|
|
Grant
|
|
|
Outstanding
|
|
|
Life
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
$6.40 to $7.23
|
|
|
2000
|
|
|
|
333,509
|
|
|
|
0.25
|
|
|
$
|
6.40
|
|
|
|
333,509
|
|
|
$
|
6.40
|
|
$14.36
|
|
|
2001
|
|
|
|
1,178,308
|
|
|
|
1.25
|
|
|
|
14.36
|
|
|
|
1,168,613
|
|
|
|
14.36
|
|
$16.85
|
|
|
2002
|
|
|
|
1,456,094
|
|
|
|
2.25
|
|
|
|
16.85
|
|
|
|
1,456,094
|
|
|
|
16.85
|
|
$14.37
|
|
|
2003
|
|
|
|
1,462,442
|
|
|
|
3.25
|
|
|
|
14.37
|
|
|
|
1,462,442
|
|
|
|
14.37
|
|
$19.32 to $20.02
|
|
|
2004
|
|
|
|
2,239,749
|
|
|
|
4.25
|
|
|
|
19.33
|
|
|
|
2,239,749
|
|
|
|
19.33
|
|
$18.41 to $20.87
|
|
|
2005
|
|
|
|
1,913,549
|
|
|
|
5.25
|
|
|
|
18.44
|
|
|
|
1,913,549
|
|
|
|
18.44
|
|
$21.36 to $22.35
|
|
|
2006
|
|
|
|
2,431,475
|
|
|
|
6.25
|
|
|
|
22.00
|
|
|
|
1,754,056
|
|
|
|
21.99
|
|
$21.78 to $23.16
|
|
|
2007
|
|
|
|
2,274,175
|
|
|
|
7.25
|
|
|
|
21.78
|
|
|
|
1,090,026
|
|
|
|
21.78
|
|
$7.73 to $12.95
|
|
|
2008
|
|
|
|
1,504,000
|
|
|
|
8.25
|
|
|
|
12.94
|
|
|
|
375,230
|
|
|
|
12.94
|
|
$10.48
|
|
|
2009
|
|
|
|
987,875
|
|
|
|
9.25
|
|
|
|
10.48
|
|
|
|
98,785
|
|
|
|
10.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
15,781,176
|
|
|
|
|
|
|
$
|
17.49
|
|
|
|
11,892,055
|
|
|
$
|
17.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-27
Old
Republic International Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Pursuant to the Companys self-imposed limits, the maximum
number of options available for future issuance as of
December 31, 2009, is 5,880,514 shares.
As of December 31, 2009, there was $4.4 of total
unrecognized compensation cost related to nonvested stock-based
compensation arrangements granted under the plan. That cost is
expected to be recognized over a weighted average period of
approximately 3 years.
The cash received from stock option exercises, the total
intrinsic value of stock options exercised, and the actual tax
benefit realized for the tax deductions from option exercises
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Cash received from stock option exercise
|
|
$
|
.5
|
|
|
$
|
2.2
|
|
|
$
|
13.9
|
|
Intrinsic value of stock options exercised
|
|
|
.3
|
|
|
|
.9
|
|
|
|
5.1
|
|
Actual tax benefit realized for tax deductions from stock
options exercised
|
|
$
|
.1
|
|
|
$
|
.3
|
|
|
$
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated debt of Old Republic and its subsidiaries is
summarized below:
On April 29, 2009, the Company completed a public offering
of $316.25 aggregate principal amount of Convertible Senior
Notes. The notes bear interest at a rate of 8.0% per year,
mature on May 15, 2012, and are convertible at any time
prior to maturity by the holder into 86.8056 shares of
common stock per one thousand dollar note.
Consolidated debt of Old Republic and its subsidiaries is
summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
8% Convertible Senior Notes due 2012
|
|
$
|
316.2
|
|
|
$
|
358.9
|
|
|
$
|
|
|
|
$
|
|
|
Commercial paper due within 180 days with an average yield
of % and 2.65%, respectively
|
|
|
|
|
|
|
|
|
|
|
199.5
|
|
|
|
199.5
|
|
ESSOP debt with an average yield of 3.85% and 5.41%,
respectively, (Note 3(b))
|
|
|
27.9
|
|
|
|
27.9
|
|
|
|
29.5
|
|
|
|
29.5
|
|
Other miscellaneous debt
|
|
|
2.5
|
|
|
|
2.5
|
|
|
|
3.8
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
346.7
|
|
|
$
|
389.4
|
|
|
$
|
233.0
|
|
|
$
|
233.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company currently has access to the commercial paper market
for up to $150.0.
Scheduled maturities of the above debt at December 31, 2009
are as follows: 2010: $3.6; 2011: $3.1; 2012: $319.0; 2013:
$2.8; 2014: $3.0; 2015 and after: $15.0. During 2009, 2008 and
2007, $22.2, $3.8 and $6.8, respectively, of interest expense on
debt was charged to consolidated operations.
|
|
Note 3
|
Shareholders
Equity
|
All common and preferred share data herein has been
retroactively adjusted as applicable for stock dividends or
splits declared through December 31, 2009.
F-28
Old
Republic International Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
(a) Preferred Stock The following table
shows certain information pertaining to the Companys
preferred shares issued and outstanding:
|
|
|
|
|
|
|
Convertible
|
|
|
|
Series G(a)
|
|
|
Preferred Stock Series:
|
|
|
|
|
Annual cumulative dividend rate per share
|
|
$
|
(a
|
)
|
Conversion ratio of preferred into common shares
|
|
|
1 for .95
|
|
Conversion right begins
|
|
|
Anytime
|
|
Redemption and liquidation value per share
|
|
|
(a
|
)
|
Redemption beginning in year
|
|
|
(a
|
)
|
Total redemption value (millions)
|
|
|
(a
|
)
|
Vote per share
|
|
|
one
|
|
Shares outstanding:
|
|
|
|
|
December 31, 2008
|
|
|
0
|
|
December 31, 2009
|
|
|
0
|
|
|
|
|
|
|
|
|
|
(a) |
|
The Company has authorized up to 1,000,000 shares of
Series G Convertible Preferred Stock for issuance pursuant
to the Companys Stock Option Plan. Series G had been
issued under the designation G-2. As of
December 31, 2003, all Series G-2 had been
converted into shares of common stock. In 2001, the Company
created a new designation, G-3, from which no shares
have been issued as of December 31, 2009. Management
believes this designation will be the source of possible future
issuances of Series G stock. Except as otherwise stated,
Series G-2 and Series G-3 are
collectively referred to as Series G. Each share of
Series G pays a floating rate dividend based on the prime
rate of interest. At December 31, 2009, the annual dividend
rate for Series G-3 would have been 34 cents per
share. Each share of Series G is convertible at any time,
after being held six months, into .95 shares of Common
Stock. Unless previously converted, Series G shares may be
redeemed at the Companys sole option five years after
their issuance. |
(b) Common Stock At December 31,
2009, there were 500,000,000 shares of common stock
authorized. At the same date, there were 100,000,000 shares
of Class B common stock authorized, though none were
issued or outstanding. Class B common shares have
the same rights as common shares except for being entitled to
1/10th of a vote per share. In August 2008, the Company
cancelled 1,566,100 common shares previously reported as
treasury stock and restored them to unissued status; this had no
effect on total shareholders equity or the financial
position of the Company.
During the final quarter of 2008, the Company issued
9,738,475 shares of its common stock for an aggregate
consideration of $82.8 based on market quotations at date of
issuance. Of this amount, $50.0 (5,488,475 shares) was
acquired by the Old Republic Employees Savings and Stock
Ownership Plan (ESSOP), and $32.8
(4,250,000 shares) by the Companys three pension
plans and its mutual insurance affiliate.
The ESSOPs common stock purchases were financed by a $30.0
bank loan and by $20.0 of pre-fundings from ESSOP participating
subsidiaries. Common stock held by the ESSOP is classified as a
charge to the common shareholders equity account until it
is allocated to participating employees accounts
contemporaneously with the repayment of the ESSOP debt incurred
for its acquisition. Such unallocated shares are not considered
outstanding for purposes of calculating earnings per share.
Dividends on unallocated shares are used to pay debt service
costs. Dividends on allocated shares are credited to
participants accounts.
(c) Cash Dividend Restrictions The
payment of cash dividends by the Company is principally
dependent upon the amount of its insurance subsidiaries
statutory policyholders surplus available for dividend
distribution. The insurance subsidiaries ability to pay
cash dividends to the Company is in turn generally restricted by
law or
F-29
Old
Republic International Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
subject to approval of the insurance regulatory authorities of
the states in which they are domiciled. These authorities
recognize only statutory accounting practices for determining
financial position, results of operations, and the ability of an
insurer to pay dividends to its shareholders. Based on year end
2009 data, the maximum amount of dividends payable to the
Company by its insurance and a small number of non-insurance
company subsidiaries during 2010 without the prior approval of
appropriate regulatory authorities is approximately $295.6.
Dividends declared during 2009, 2008 and 2007, to the Company by
its subsidiaries amounted to $181.5, $191.2 and $175.8,
respectively.
|
|
Note 4
|
Commitments
and Contingent Liabilities:
|
(a) Reinsurance and Retention Limits In
order to maintain premium production within their capacity and
to limit maximum losses for which they might become liable under
policies theyve underwritten, Old Republics
insurance subsidiaries, as is the common practice in the
insurance industry, may cede all or a portion of their premiums
and related liabilities on certain classes of business to other
insurers and reinsurers. Although the ceding of insurance does
not ordinarily discharge an insurer from liability to a
policyholder, it is industry practice to establish the reinsured
part of risks as the liability of the reinsurer. Old Republic
also employs retrospective premium and a large variety of
risk-sharing procedures and arrangements for parts of its
business in order to reduce underwriting losses for which it
might become liable under insurance policies it issues. To the
extent that any reinsurance companies, assured or producer might
be unable to meet their obligations under existing reinsurance,
retrospective insurance and production agreements, Old Republic
would be liable for the defaulted amounts. As deemed necessary,
reinsurance ceded to other companies is secured by letters of
credit, cash,
and/or
securities.
Except as noted in the following paragraph, reinsurance
protection on property and liability coverages generally limits
the net loss on most individual claims to a maximum of: $4.1 for
workers compensation; $2.6 for commercial auto liability;
$2.6 for general liability; $8.0 for executive protection
(directors & officers and errors &
omissions); $2.0 for aviation; and $2.6 for property coverages.
Roughly 34% of the mortgage guaranty traditional primary
insurance in force is subject to lender sponsored captive
reinsurance arrangements structured primarily on an excess of
loss basis. All bulk and other insurance risk in force is
retained. Exclusive of reinsurance, the average direct primary
mortgage guaranty exposure is approximately (in whole dollars)
$38,500 per insured loan. Title insurance risk assumptions are
currently limited to a maximum of $500.0 as to any one policy.
The vast majority of title policies issued, however, carry
exposures of less than $1.0.
Since January 1, 2005, the Company has had maximum
reinsurance coverage of up to $200.0 for its workers
compensation exposures. Pursuant to regulatory requirements,
however, all workers compensation primary insurers such as
the Company remain liable for unlimited amounts in excess of
reinsured limits. Other than the substantial concentration of
workers compensation losses caused by the
September 11, 2001 terrorist attack on America, to the best
of the Companys knowledge there had not been a similar
accumulation of claims in a single location from a single
occurrence prior to that event. Nevertheless, the possibility
continues to exist that non-reinsured losses could, depending on
a wide range of severity and frequency assumptions, aggregate
several hundred million dollars to an insurer such as the
Company. Such aggregation of losses could occur in the event of
a catastrophe such as an earthquake that could lead to the death
or injury of a large number of employees concentrated in a
single facility such as a high rise building.
As a result of the September 11, 2001 terrorist attack on
America, the reinsurance industry eliminated coverage from
substantially all contracts for claims arising from acts of
terrorism. Primary insurers like the Company thus became fully
exposed to such claims. Late in 2002, the Terrorism Risk
Insurance Act of 2002 (the TRIA) was signed into
law, immediately establishing a temporary federal reinsurance
program administered by the Secretary of the Treasury. The
program applied to insured commercial property and casualty
losses resulting from an act of terrorism, as defined in the
TRIA. Congress extended and modified the program in late 2005
through the Terrorism Risk Insurance Revision and Extension Act
of 2005 (the TRIREA). TRIREA expired on
December 31, 2007. Congress enacted a revised program in
December 2007 through the Terrorism Risk Insurance Program
F-30
Old
Republic International Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Reauthorization Act of 2007 (the TRIPRA), a seven
year extension through December 2014. The TRIA automatically
voided all policy exclusions which were in effect for terrorism
related losses and obligated insurers to offer terrorism
coverage with most commercial property and casualty insurance
lines. The TRIREA revised the definition of property and
casualty insurance to exclude commercial automobile,
burglary and theft, surety, professional liability and farm
owners multi-peril insurance. TRIPRA did not make any
further changes to the definition of property and casualty
insurance, however, it does include domestic acts of terrorism
within the scope of the program. Although insurers are permitted
to charge an additional premium for terrorism coverage, insureds
may reject the coverage. Under TRIPRA, the programs
protection is not triggered for losses arising from an act of
terrorism until the industry first suffers losses of
$100 billion in the aggregate during any one year. Once the
program trigger is met, the program will pay 85% of an
insurers terrorism losses that exceed an individual
insurers deductible. The insurers deductible is 20%
of direct earned premium on property and casualty insurance.
Insurers may reinsure that portion of the risk they retain under
the program. Effective January 1, 2008, the Company
reinsured limits of $198.0 excess of $2.0 for claims arising
from certain acts of terrorism for casualty clash coverage and
catastrophe workers compensation liability insurance
coverage.
Reinsurance ceded by the Companys insurance subsidiaries
in the ordinary course of business is typically placed on an
excess of loss basis. Under excess of loss reinsurance
agreements, the companies are generally reimbursed for losses
exceeding contractually
agreed-upon
levels. Quota share reinsurance is most often effected between
the Companys insurance subsidiaries and industry-wide
assigned risk plans or captive insurers owned by assureds. Under
quota share reinsurance, the Company remits to the assuming
entity an agreed upon percentage of premiums written and is
reimbursed for underwriting expenses and proportionately related
claims costs.
Reinsurance recoverable asset balances represent amounts due
from or credited by assuming reinsurers for paid and unpaid
claims and premium reserves. Such reinsurance balances as are
recoverable from non-admitted foreign and certain other
reinsurers such as captive insurance companies owned by
assureds, as well as similar balances or credits arising from
policies that are retrospectively rated or subject to
assureds high deductible retentions are substantially
collateralized by letters of credit, securities, and other
financial instruments. Old Republic evaluates on a regular basis
the financial condition of its assuming reinsurers and assureds
who purchase its retrospectively rated or self-insured
deductible policies. Estimates of unrecoverable amounts totaling
$28.2 as of both December 31, 2009 and 2008 are included in
the Companys net claim and claim expense reserves since
reinsurance, retrospectively rated, and self-insured deductible
policies and contracts do not relieve Old Republic from its
direct obligations to assureds or their beneficiaries.
At December 31, 2009, the Companys General Insurance
Groups ten largest reinsurers represented approximately
59% of the total consolidated reinsurance recoverable on paid
and unpaid losses, with Munich Reinsurance America, Inc. the
largest reinsurer representing 28.3% of the total recoverable
balance. Of the balance due from these ten reinsurers, 83.9% was
recoverable from A or better rated reinsurance companies, 11.5%
from industry-wide insurance assigned risk pools, and 4.6% from
captive reinsurance companies. The Mortgage Guaranty
Groups total claims exposure to its largest reinsurer,
Balboa Reinsurance Company, was $133.2 million, which
represented 5.6% of total consolidated reinsured liabilities, as
of December 31, 2009.
The following information relates to reinsurance and related
data for the General Insurance and Mortgage Guaranty Groups for
the three years ended December 31, 2009. Reinsurance
transactions of the Title Insurance Group and small life
and health insurance operation are not material.
Property and liability insurance companies are required to
annualize certain policy premiums in their regulatory financial
statements though such premiums may not be contractually due nor
ultimately collectable. The annualization process relies on a
large number of estimates, and has the effect of increasing
direct, ceded, and net premiums written,
F-31
Old
Republic International Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
and of grossing up corresponding balance sheet premium balances
and liabilities such as unearned premium reserves. The accrual
of these estimates has no effect on net premiums earned or GAAP
net income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
General Insurance Group
|
|
|
|
|
|
|
|
|
|
|
|
|
Written premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
2,380.7
|
|
|
$
|
2,655.7
|
|
|
$
|
2,685.2
|
|
Assumed
|
|
|
10.4
|
|
|
|
15.2
|
|
|
|
61.5
|
|
Ceded
|
|
$
|
670.7
|
|
|
$
|
704.2
|
|
|
$
|
634.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
2,432.1
|
|
|
$
|
2,702.0
|
|
|
$
|
2,644.7
|
|
Assumed
|
|
|
16.3
|
|
|
|
29.1
|
|
|
|
173.4
|
|
Ceded
|
|
$
|
666.0
|
|
|
$
|
741.8
|
|
|
$
|
663.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims ceded
|
|
$
|
433.0
|
|
|
$
|
451.8
|
|
|
$
|
366.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Guaranty Group
|
|
|
|
|
|
|
|
|
|
|
|
|
Written premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
634.0
|
|
|
$
|
708.6
|
|
|
$
|
637.9
|
|
Assumed
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceded
|
|
$
|
4.0
|
|
|
$
|
106.5
|
|
|
$
|
95.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
648.6
|
|
|
$
|
698.4
|
|
|
$
|
612.7
|
|
Assumed
|
|
|
.2
|
|
|
|
.3
|
|
|
|
.4
|
|
Ceded
|
|
$
|
4.3
|
|
|
$
|
106.3
|
|
|
$
|
94.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims ceded
|
|
$
|
173.7
|
|
|
$
|
199.4
|
|
|
$
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance in force as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
108,884.9
|
|
|
$
|
128,267.5
|
|
|
$
|
124,738.4
|
|
Assumed
|
|
|
895.0
|
|
|
|
1,435.1
|
|
|
|
1,737.1
|
|
Ceded
|
|
$
|
2,933.9
|
|
|
$
|
7,425.2
|
|
|
$
|
7,419.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b) Leases Some of the Companys
subsidiaries maintain their offices in leased premises. Some of
these leases provide for the payment of real estate taxes,
insurance, and other operating expenses. Rental expenses for
operating leases amounted to $43.1, $42.6 and $42.5 in 2009,
2008 and 2007, respectively. These expenses relate primarily to
building leases of the Company. A number of the Companys
subsidiaries also lease other equipment for use in their
businesses. At December 31, 2009, aggregate minimum rental
commitments (net of expected
sub-lease
receipts) under noncancellable operating leases are summarized
as follows: 2010: $38.7; 2011: $31.1; 2012: $23.8; 2013: $18.6;
2014: $13.9; 2015 and after: $41.8.
(c) General In the normal course of
business, the Company and its subsidiaries are subject to
various contingent liabilities, including possible income tax
assessments resulting from tax law interpretations or issues
raised by taxing or regulatory authorities in their regular
examinations, catastrophic claim occurrences not indemnified by
reinsurers such as noted at 4(a) above, or failure to collect
all amounts on its investments or balances due from assureds and
reinsurers. The Company does not have a basis for anticipating
any significant losses or costs that could result from any known
or existing contingencies.
F-32
Old
Republic International Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
From time to time, in order to assure possible liquidity needs,
the Company may guaranty the timely payment of principal
and/or
interest on certain intercompany balances, debt, or other
securities held by some of its insurance, non-insurance, and
ESSOP affiliates. At December 31, 2009, the aggregate
principal amount of such guaranties was $160.6.
(d) Legal Proceedings Legal proceedings
against the Company and its subsidiaries routinely arise in the
normal course of business and usually pertain to claim matters
related to insurance policies and contracts issued by its
insurance subsidiaries. Other, non-routine legal proceedings
which may prove to be material to the Company or a subsidiary
are discussed below.
Purported class action lawsuits are pending against the
Companys principal title insurance subsidiary,
Old Republic National Title Insurance Company
(ORNTIC) in state and federal courts in Connecticut,
New Jersey, Ohio, Pennsylvania and Texas. The plaintiffs
allege that ORNTIC failed to give consumers reissue
and/or
refinance credits on the premiums charged for title insurance
covering mortgage refinancing transactions, as required by rate
schedules filed by ORNTIC or by state rating bureaus with the
state insurance regulatory authorities. The suits in
Pennsylvania and Texas also allege violations of the federal
Real Estate Settlement Procedures Act (RESPA).
Substantially similar lawsuits are also pending against other
unaffiliated title insurance companies in these and other states
as well, and additional lawsuits based upon similar allegations
could be filed against ORNTIC in the future. Classes have been
certified in the New Jersey and Pennsylvania actions. Settlement
agreements have been reached in the Connecticut and New Jersey
actions and are not expected to cost ORNTIC more than $2.9 and
$2.2, respectively, including attorneys fees and administrative
costs.
Since early February 2008, some 80 purported consumer class
action lawsuits have been filed against the title
industrys principal title insurance companies, their
subsidiaries and affiliates, and title insurance rating bureaus
or associations in at least 10 states. The suits are
substantially identical in alleging that the defendant title
insurers engaged in illegal price-fixing agreements to set
artificially high premium rates and conspired to create premium
rates which the state insurance regulatory authorities could not
evaluate and therefore, could not adequately regulate. A number
of them have been dismissed and others consolidated.
Approximately 57 remain nationwide. ORNTIC is currently among
the named defendants in 35 of these actions in 5 states;
its affiliate, American Guaranty Title Insurance Company is
a named defendant in 10 of the consolidated actions in
1 state; and the Company is a named defendant in 8 of the
actions in 1 state. No class has yet been certified in any
of these suits against the Company and ORNTIC, and none of the
actions against them allege RESPA violations.
National class action suits have been filed against the
Companys subsidiary, Old Republic Home Protection Company
(ORHP) in the California Superior Court,
San Diego, and the U.S. District Court in Birmingham,
Alabama. The California suit has been filed on behalf of all
persons who made a claim under an ORHP home warranty contract
from March 6, 2003 to the present. The suit alleges breach
of contract, breach of the implicit covenant of good faith and
fair dealing, violations of certain California consumer
protection laws and misrepresentation arising out of ORHPs
alleged failure to adopt and implement reasonable standards for
the prompt investigation and processing of claims under its home
warranty contracts. The suit seeks unspecified damages
consisting of the rescission of the class members
contracts, restitution of all sums paid by the class members,
punitive damages, declaratory and injunctive relief. No class
has been certified in either action. ORHP has removed the action
to the U.S. District Court for the Southern District of
California. The Alabama suit alleges that ORHP pays fees to the
real estate brokers who market its home warranty contracts and
that the payment of such fees is in violation of
Section 8(a) of RESPA. The suit seeks unspecified damages,
including treble damages under RESPA.
On December 19, 2008, Old Republic Insurance Company and
Old Republic Insured Credit Services, Inc. (Old
Republic) filed suit against Countrywide Bank FSB,
Countrywide Home Loans, Inc. (Countrywide) and Bank
of New York Mellon, BNY Mellon Trust of Delaware in the Circuit
Court, Cook County, Illinois seeking a declaratory judgment to
rescind or terminate various credit indemnity policies issued to
insure home equity loans and home equity lines of credit which
Countrywide had securitized or held for its own account. In
February of 2009 Countrywide filed a counterclaim alleging a
breach of contract, bad faith and seeking a declaratory judgment
F-33
Old
Republic International Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
challenging the factual and procedural bases that Old Republic
has relied upon to deny or rescind coverage for individual
defaulted loans under those policies. To date, Old Republic has
rescinded or denied coverage on more than 11,500 defaulted
loans, based upon material misrepresentations either by
Countrywide as to the credit characteristics of the loans or by
the borrowers in their loan applications.
On December 31, 2009, two of the Companys mortgage
insurance subsidiaries, Republic Mortgage Insurance Company and
Republic Mortgage Insurance Company of North Carolina (together
RMIC) filed a Complaint for Declaratory Judgment in
the Supreme Court of the State of New York, County of New York,
against Countrywide Financial Corporation, Countrywide Home
Loans, Inc., The Bank of New York Mellon Trust Company,
N.A., BAC Home Loans Servicing, LP, and Bank of America, N.A. as
successor in interest to Countrywide Bank, N.A. (together,
Countrywide). The suit relates to five mortgage
insurance master policies (the Policies) issued by
RMIC to Countrywide or to The Bank of New York Mellon
Trust Company as co-trustee for trusts containing
securitized mortgage loans that were originated or purchased by
Countrywide. RMIC has rescinded its mortgage insurance coverage
on over 1500 of the loans originally covered under the Policies
based upon material misrepresentations of the borrowers in their
loan applications or the negligence of Countrywide in its loan
underwriting practices or procedures. Each of the rescissions
occurred after a borrower had defaulted and RMIC reviewed the
claim and loan file submitted by Countrywide. The suit seeks the
Courts review and interpretation of the Policies
incontestability provisions and its validation of RMICs
investigation procedures with respect to the claims and
underlying loan files.
On January 29, 2010, in response to RMICs suit,
Countrywide served RMIC with a demand for arbitration under the
arbitration clauses of the same Policies. The demand proposes
arbitration in Los Angeles, California, and raises largely the
same issues as those raised in RMICs suit against
Countrywide, as well as Countrywides and RMICs
compliance with the terms, provisions and conditions of the
Policies. The demand includes a prayer for punitive,
compensatory and consequential damages.
Except in the Connecticut and New Jersey actions against the
title companies, where settlement agreements have been approved,
the ultimate impact of these lawsuits and the arbitration, all
of which seek unquantified damages, attorneys fees and
expenses, is uncertain and not reasonably estimable. The Company
and its subsidiaries intend to defend vigorously against each of
the aforementioned actions. Although the Company does not
believe that these lawsuits will have a material adverse effect
on its consolidated financial condition, results of operations
or cash flows, there can be no assurance in those regards.
|
|
Note 5
|
Consolidated
Quarterly Results Unaudited
|
Old Republics consolidated quarterly operating data for
the two years ended December 31, 2009 is presented below.
In managements opinion, however, that quarterly operating
data for insurance enterprises such as the Company is not
indicative of results to be achieved in succeeding quarters or
years. The long-term nature of the insurance business, seasonal
and cyclical factors affecting premium production, the
fortuitous nature and, at times, delayed emergence of claims,
and changes in yields on invested assets are some of the factors
necessitating a review of operating results, changes in
shareholders equity, and cash flows for periods of several
years to obtain a proper indicator of performance trends. The
data below should be read in conjunction with Old Republic
Managements Discussion and Analysis of Financial Condition
and Results of Operations.
F-34
Old
Republic International Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
In managements opinion, all adjustments consisting of
normal recurring adjustments necessary for a fair statement of
quarterly results have been reflected in the data which follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st
|
|
|
2nd
|
|
|
3rd
|
|
|
4th
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter(*)
|
|
|
Quarter
|
|
|
Year Ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Summary:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums, fees, and other income
|
|
$
|
785.0
|
|
|
$
|
818.4
|
|
|
$
|
944.4
|
|
|
$
|
865.6
|
|
Net investment income and realized gains (losses)
|
|
|
93.4
|
|
|
|
94.0
|
|
|
|
95.8
|
|
|
|
106.4
|
|
Total revenues
|
|
|
878.5
|
|
|
|
912.6
|
|
|
|
1,040.2
|
|
|
|
972.2
|
|
Benefits, claims, and expenses
|
|
|
971.3
|
|
|
|
998.3
|
|
|
|
1,069.4
|
|
|
|
1,038.2
|
|
Net income (loss)
|
|
$
|
(53.9
|
)
|
|
$
|
(15.8
|
)
|
|
$
|
7.4
|
|
|
$
|
(36.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(.23
|
)
|
|
$
|
(.07
|
)
|
|
$
|
.03
|
|
|
$
|
(.15
|
)
|
Diluted
|
|
$
|
(.23
|
)
|
|
$
|
(.07
|
)
|
|
$
|
.03
|
|
|
$
|
(.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
235,259,226
|
|
|
|
235,562,774
|
|
|
|
235,761,056
|
|
|
|
235,913,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
235,259,226
|
|
|
|
235,562,774
|
|
|
|
235,878,936
|
|
|
|
235,913,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
Third quarter results reflect the impact of the accounting
treatment for certain reinsurance commutations. Refer to further
discussion at Note 1(e). |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st
|
|
|
2nd
|
|
|
3rd
|
|
|
4th
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Year Ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Summary:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums, fees, and other income
|
|
$
|
855.4
|
|
|
$
|
844.1
|
|
|
$
|
842.4
|
|
|
$
|
804.6
|
|
Net investment income and realized gains (losses)
|
|
|
96.1
|
|
|
|
(337.4
|
)
|
|
|
100.5
|
|
|
|
31.5
|
|
Total revenues
|
|
|
951.6
|
|
|
|
506.9
|
|
|
|
943.1
|
|
|
|
836.1
|
|
Benefits, claims, and expenses
|
|
|
991.3
|
|
|
|
1,024.9
|
|
|
|
1,016.5
|
|
|
|
1,024.1
|
|
Net income
|
|
$
|
(19.0
|
)
|
|
$
|
(364.7
|
)
|
|
$
|
(48.0
|
)
|
|
$
|
(126.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(.08
|
)
|
|
$
|
(1.58
|
)
|
|
$
|
(.21
|
)
|
|
$
|
(.54
|
)
|
Diluted
|
|
$
|
(.08
|
)
|
|
$
|
(1.58
|
)
|
|
$
|
(.21
|
)
|
|
$
|
(.54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
230,495,852
|
|
|
|
230,702,352
|
|
|
|
230,735,600
|
|
|
|
233,763,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
230,495,852
|
|
|
|
230,702,352
|
|
|
|
230,735,600
|
|
|
|
233,763,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-35
Old
Republic International Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 6
|
Information
About Segments of Business
|
The Companys major business segments are organized as the
General Insurance (property and liability insurance), Mortgage
Guaranty and Title Insurance Groups. The Company includes
the results of its small life & health insurance
business with those of its holding company parent and minor
corporate services operations. Each of the Companys
segments underwrites and services only those insurance coverages
which may be written by it pursuant to state insurance
regulations and corporate charter provisions. Segment results
exclude realized investment gains or losses and impairments, and
these are aggregated in consolidated totals. The contributions
of Old Republics insurance industry segments to
consolidated totals are shown in the following table.
The Company does not derive over 10% of its consolidated
revenues from any one customer. Revenues and assets connected
with foreign operations are not significant in relation to
consolidated totals.
The General Insurance Group provides property and liability
insurance primarily to commercial clients. Old Republic
does not have a meaningful participation in personal lines of
insurance. Commercial automobile (principally trucking)
insurance is the largest type of coverage underwritten by the
General Insurance Group, accounting for 29.8% of the
Groups direct premiums written in 2009. The remaining
premiums written by the General Insurance Group are derived
largely from a wide variety of coverages, including
workers compensation, general liability, loan credit
indemnity, general aviation, directors and officers indemnity,
fidelity and surety indemnities, and home and auto warranties.
Private mortgage insurance produced by the Mortgage Guaranty
Group 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 Group insures
only first mortgage loans, primarily on residential properties
having
one-to-four
family dwelling units. The Mortgage Guaranty segments ten
largest customers were responsible for 47.6%, 50.4% and 49.5% of
traditional primary new insurance written in 2009, 2008 and
2007, respectively. The largest single customer accounted for
12.8% of traditional primary new insurance written in 2009
compared to 15.6% and 9.8% in 2008 and 2007, respectively.
The title insurance 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 policy insures
against losses arising out of defects, loans and encumbrances
affecting the insured title and not excluded or excepted from
the coverage of the policy.
The accounting policies of the segments parallel those described
in the summary of significant accounting policies pertinent
thereto.
F-36
Old
Republic International Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Segment
Reporting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
General Insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
1,782.5
|
|
|
$
|
1,989.3
|
|
|
$
|
2,155.1
|
|
Net investment income and other income
|
|
|
270.1
|
|
|
|
266.6
|
|
|
|
282.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues before realized gains or losses
|
|
$
|
2,052.7
|
|
|
$
|
2,255.9
|
|
|
$
|
2,438.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes (credits) and realized investment
gains or losses(a)
|
|
$
|
200.1
|
|
|
$
|
294.3
|
|
|
$
|
418.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (credits) on above
|
|
$
|
52.2
|
|
|
$
|
82.7
|
|
|
$
|
126.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets at year end
|
|
$
|
9,920.8
|
|
|
$
|
9,482.9
|
|
|
$
|
9,769.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Guaranty(c):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
644.5
|
|
|
$
|
592.5
|
|
|
$
|
518.2
|
|
Net investment income and other income
|
|
|
101.6
|
|
|
|
97.5
|
|
|
|
90.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues before realized gains or losses
|
|
$
|
746.1
|
|
|
$
|
690.0
|
|
|
$
|
608.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes (credits) and realized investment
gains or losses(a)
|
|
$
|
(486.4
|
)
|
|
$
|
(594.3
|
)
|
|
$
|
(110.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (credits) on above
|
|
$
|
(175.5
|
)
|
|
$
|
(213.6
|
)
|
|
$
|
(44.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets at year end
|
|
$
|
3,233.4
|
|
|
$
|
2,973.1
|
|
|
$
|
2,523.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Title Insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
611.0
|
|
|
$
|
463.1
|
|
|
$
|
638.5
|
|
Title, escrow and other fees
|
|
|
277.4
|
|
|
|
192.9
|
|
|
|
212.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
888.4
|
|
|
|
656.1
|
|
|
|
850.7
|
|
Net investment income and other income
|
|
|
25.6
|
|
|
|
25.2
|
|
|
|
27.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues before realized gains or losses
|
|
$
|
914.1
|
|
|
$
|
681.3
|
|
|
$
|
878.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes (credits) and realized investment
gains or losses(a)
|
|
$
|
2.1
|
|
|
$
|
(46.3
|
)
|
|
$
|
(14.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (credits) on above
|
|
$
|
(.4
|
)
|
|
$
|
(18.1
|
)
|
|
$
|
(6.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets at year end
|
|
$
|
852.8
|
|
|
$
|
762.4
|
|
|
$
|
770.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues of above Company segments
|
|
$
|
3,712.9
|
|
|
$
|
3,627.4
|
|
|
$
|
3,925.0
|
|
Other sources(b)
|
|
|
138.1
|
|
|
|
132.1
|
|
|
|
131.4
|
|
Consolidated net realized investment gains (losses)
|
|
|
6.3
|
|
|
|
(486.4
|
)
|
|
|
70.3
|
|
Consolidation elimination adjustments
|
|
|
(53.8
|
)
|
|
|
(35.3
|
)
|
|
|
(35.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenues
|
|
$
|
3,803.6
|
|
|
$
|
3,237.7
|
|
|
$
|
4,091.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Income (Loss) Before Taxes (Credits):
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income (loss) before income taxes (credits) and realized
investment gains or losses of above Company segments
|
|
$
|
(284.0
|
)
|
|
$
|
(346.3
|
)
|
|
$
|
292.9
|
|
Other sources net(b)
|
|
|
4.0
|
|
|
|
13.5
|
|
|
|
15.1
|
|
Consolidated net realized investment gains (losses)
|
|
|
6.3
|
|
|
|
(486.4
|
)
|
|
|
70.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income (loss) before income taxes (credits)
|
|
$
|
(273.6
|
)
|
|
$
|
(819.2
|
)
|
|
$
|
378.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Income Tax Expense (Credits):
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (credits) for above Company segments
|
|
$
|
(123.7
|
)
|
|
$
|
(148.9
|
)
|
|
$
|
75.9
|
|
Other sources net(b)
|
|
|
.9
|
|
|
|
4.3
|
|
|
|
5.3
|
|
Income tax expense (credits) on consolidated net realized
investment gains (losses)
|
|
|
(51.7
|
)
|
|
|
(116.1
|
)
|
|
|
24.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income tax expense (credits)
|
|
$
|
(174.4
|
)
|
|
$
|
(260.8
|
)
|
|
$
|
105.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-37
Old
Republic International Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Consolidated Assets:
|
|
|
|
|
|
|
|
|
Total assets for above Company segments
|
|
$
|
14,007.0
|
|
|
$
|
13,218.6
|
|
Other assets(b)
|
|
|
503.5
|
|
|
|
509.5
|
|
Consolidation elimination adjustments
|
|
|
(320.5
|
)
|
|
|
(462.0
|
)
|
|
|
|
|
|
|
|
|
|
Consolidated assets
|
|
$
|
14,190.0
|
|
|
$
|
13,266.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the above tables, net premiums earned on a GAAP basis differ
slightly from statutory amounts due to certain differences in
calculations of unearned premium reserves under each accounting
method. |
|
(a) |
|
Income (loss) before taxes (credits) is reported net of interest
charges on intercompany financing arrangements with Old
Republics holding company parent for the following
segments: General $17.9, $14.2, and $15.4 for the
years ended December 31, 2009, 2008 and 2007, respectively;
Mortgage $7.2 for the year ended December 31,
2009; and Title $5.5, $2.6, and $2.3 for the years
ended December 31, 2009, 2008, and 2007, respectively. |
|
(b) |
|
Represents amounts for Old Republics holding company
parent, minor corporate services subsidiaries, and a small life
and health insurance operation. |
|
(c) |
|
2009 results reflect the impact of the accounting treatment for
certain reinsurance commutations. Refer to further discussion at
Note 1(e). |
F-38
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Old Republic International Corporation:
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of income, comprehensive
income, preferred stock and common shareholders equity and
cash flows, present fairly, in all material respects, the
financial position of Old Republic International Corporation and
its subsidiaries at December 31, 2009 and 2008, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2009 in
conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, the Company
maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2009 based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for these financial
statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in
Managements Report on Internal Control Over Financial
Reporting under Item 9A of the 2009 Annual Report on
Form 10-K.
Our responsibility is to express opinions on these financial
statements and on the Companys internal control over
financial reporting based on our integrated audits. We conducted
our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Chicago, Illinois
February 26, 2010
F-39
Report of Independent Registered Public Accounting Firm
OLD REPUBLIC INTERNATIONAL CORPORATION AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
Schedule
|
|
|
I
|
|
|
|
|
Summary of Investments Other than Investments in
Related Parties as of December 31, 2009
|
Schedule
|
|
|
II
|
|
|
|
|
Condensed Financial Information of Registrant as of December 31,
2009 and 2008 and for the years ended December 31, 2009, 2008,
and 2007
|
Schedule
|
|
|
III
|
|
|
|
|
Supplementary Insurance Information for the years ended December
31, 2009, 2008 and 2007
|
Schedule
|
|
|
IV
|
|
|
|
|
Reinsurance for the years ended December 31, 2009, 2008 and 2007
|
Schedule
|
|
|
V
|
|
|
|
|
Valuation and Qualifying Accounts for the years ended December
31, 2009, 2008 and 2007
|
Schedule
|
|
|
VI
|
|
|
|
|
Supplemental Information Concerning Property - Casualty
Insurance Operations for the years ended December 31, 2009, 2008
and 2007
|
Schedules other than those listed are omitted for the reason
that they are not required, are not applicable or that
equivalent information has been included in the financial
statements, notes thereto, or elsewhere herein.
F-40
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Shareholders of
Old Republic International Corporation:
Our audits of the consolidated financial statements and of the
effectiveness of internal control over financial reporting
referred to in our report dated February 26, 2010 (which
report and consolidated financial statements are included under
Item 8 in this Annual Report on
Form 10-K)
also included an audit of the financial statement schedules
listed in the accompanying index. In our opinion, these
financial statement schedules present fairly, in all material
respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Chicago, Illinois
February 26, 2010
F-41
OLD
REPUBLIC INTERNATIONAL CORPORATION AND SUBSIDIARIES
SCHEDULE I SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN
RELATED PARTIES
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column B
|
|
|
Column C
|
|
|
Column D
|
|
|
|
|
|
|
|
|
|
Amount at
|
|
|
|
|
|
|
|
|
|
Which Shown
|
|
|
|
|
|
|
|
|
|
in Balance
|
|
Type of Investment
|
|
Cost(1)
|
|
|
Fair Value
|
|
|
Sheet
|
|
|
|
($ in millions)
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Government and government agencies and authorities
|
|
$
|
780.0
|
|
|
$
|
810.5
|
|
|
$
|
810.5
|
|
States, municipalities and political subdivisions
|
|
|
2,209.3
|
|
|
|
2,344.0
|
|
|
|
2,344.0
|
|
Foreign government
|
|
|
157.3
|
|
|
|
163.4
|
|
|
|
163.4
|
|
Corporate, industrial and all other
|
|
|
4,749.4
|
|
|
|
5,008.7
|
|
|
|
5,008.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,896.2
|
|
|
$
|
8,326.8
|
|
|
|
8,326.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-redeemable preferred stocks
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Common stocks:
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks, trusts and insurance companies
|
|
|
107.3
|
|
|
|
260.5
|
|
|
|
260.5
|
|
Industrial, miscellaneous and all other
|
|
|
32.4
|
|
|
|
33.2
|
|
|
|
33.2
|
|
Indexed mutual funds
|
|
|
217.6
|
|
|
|
209.0
|
|
|
|
209.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
357.5
|
|
|
$
|
502.9
|
|
|
|
502.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
|
826.7
|
|
|
|
|
|
|
|
826.7
|
|
Miscellaneous investments
|
|
|
24.0
|
|
|
|
|
|
|
|
24.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,104.6
|
|
|
|
|
|
|
|
9,680.5
|
|
Other investments
|
|
|
7.8
|
|
|
|
|
|
|
|
7.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
9,112.4
|
|
|
|
|
|
|
$
|
9,688.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents original cost of equity securities, net of
other-than-temporary
impairment adjustments of $317.3, and as to fixed maturities,
original cost reduced by repayments and adjusted for
amortization of premium or accrual of discount. |
F-42
OLD
REPUBLIC INTERNATIONAL CORPORATION AND SUBSIDIARIES
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF
REGISTRANT
BALANCE SHEETS
OLD REPUBLIC INTERNATIONAL CORPORATION (PARENT
COMPANY)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
($ in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Bonds and notes
|
|
$
|
20.5
|
|
|
$
|
20.5
|
|
Short-term investments
|
|
|
58.3
|
|
|
|
129.1
|
|
Investments in, and indebtedness of related parties
|
|
|
4,207.6
|
|
|
|
3,978.6
|
|
Other assets
|
|
|
58.0
|
|
|
|
47.3
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
4,344.5
|
|
|
$
|
4,175.7
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Common Shareholders Equity:
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
90.2
|
|
|
$
|
95.0
|
|
Debt and debt equivalents
|
|
|
344.2
|
|
|
|
29.5
|
|
Indebtedness to affiliates and subsidiaries
|
|
|
18.6
|
|
|
|
310.7
|
|
Commitments and contingent liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
453.1
|
|
|
|
435.3
|
|
|
|
|
|
|
|
|
|
|
Common Shareholders Equity:
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
240.6
|
|
|
|
240.5
|
|
Additional paid-in capital
|
|
|
412.4
|
|
|
|
405.0
|
|
Retained earnings
|
|
|
2,927.3
|
|
|
|
3,186.5
|
|
Accumulated other comprehensive income (loss)
|
|
|
353.7
|
|
|
|
(41.7
|
)
|
Unallocated ESSOP shares (at cost)
|
|
|
(42.7
|
)
|
|
|
(50.0
|
)
|
|
|
|
|
|
|
|
|
|
Total Common Shareholders Equity
|
|
|
3,891.4
|
|
|
|
3,740.3
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Common Shareholders Equity
|
|
$
|
4,344.5
|
|
|
$
|
4,175.7
|
|
|
|
|
|
|
|
|
|
|
F-43
OLD
REPUBLIC INTERNATIONAL CORPORATION AND SUBSIDIARIES
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF
REGISTRANT
STATEMENTS OF INCOME
OLD REPUBLIC INTERNATIONAL CORPORATION (PARENT
COMPANY)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in millions)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income from subsidiaries
|
|
$
|
33.0
|
|
|
$
|
19.6
|
|
|
$
|
22.4
|
|
Real estate and other income
|
|
|
4.1
|
|
|
|
4.2
|
|
|
|
4.1
|
|
Other investment income
|
|
|
.9
|
|
|
|
2.4
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
38.1
|
|
|
|
26.4
|
|
|
|
28.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest subsidiaries
|
|
|
2.9
|
|
|
|
3.8
|
|
|
|
3.0
|
|
Interest other
|
|
|
20.1
|
|
|
|
.1
|
|
|
|
3.7
|
|
Real estate and other expenses
|
|
|
3.7
|
|
|
|
3.6
|
|
|
|
3.3
|
|
General expenses, taxes and fees
|
|
|
10.7
|
|
|
|
11.5
|
|
|
|
13.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
37.6
|
|
|
|
19.1
|
|
|
|
24.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net of expenses
|
|
|
.5
|
|
|
|
7.2
|
|
|
|
4.6
|
|
Federal income taxes (credits)
|
|
|
(.3
|
)
|
|
|
2.2
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before equity in earnings (losses) of subsidiaries
|
|
|
.8
|
|
|
|
5.0
|
|
|
|
3.0
|
|
Equity in Earnings (Losses) of Subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends received
|
|
|
181.5
|
|
|
|
191.2
|
|
|
|
175.8
|
|
Earnings (losses) in excess of dividends
|
|
|
(281.5
|
)
|
|
|
(754.6
|
)
|
|
|
93.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(99.1
|
)
|
|
$
|
(558.3
|
)
|
|
$
|
272.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-44
OLD
REPUBLIC INTERNATIONAL CORPORATION AND SUBSIDIARIES
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF
REGISTRANT
STATEMENTS OF CASH FLOWS
OLD REPUBLIC INTERNATIONAL CORPORATION (PARENT
COMPANY)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in millions)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(99.1
|
)
|
|
$
|
(558.3
|
)
|
|
$
|
272.4
|
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
.3
|
|
|
|
(.1
|
)
|
|
|
|
|
Income taxes net
|
|
|
(5.0
|
)
|
|
|
26.0
|
|
|
|
17.0
|
|
Excess of equity in net (income) loss of subsidiaries over cash
dividends received
|
|
|
281.5
|
|
|
|
754.2
|
|
|
|
(93.6
|
)
|
Accounts payable, accrued expenses and other
|
|
|
2.8
|
|
|
|
9.1
|
|
|
|
(.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
180.4
|
|
|
|
230.8
|
|
|
|
195.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
|
|
|
|
|
(12.6
|
)
|
|
|
|
|
Fixed assets for company use
|
|
|
(2.3
|
)
|
|
|
|
|
|
|
(.6
|
)
|
Net repayment (issuance) of notes receivable with related parties
|
|
|
(188.2
|
)
|
|
|
(118.1
|
)
|
|
|
65.8
|
|
Net decrease (increase) in short-term investments
|
|
|
70.7
|
|
|
|
(92.7
|
)
|
|
|
(33.7
|
)
|
Investment in, and indebtedness of related
parties-net
|
|
|
|
|
|
|
(77.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(119.8
|
)
|
|
|
(300.8
|
)
|
|
|
31.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of debt
|
|
|
306.7
|
|
|
|
30.0
|
|
|
|
|
|
Net issuance (repayment) of notes and loans to related parties
|
|
|
(205.9
|
)
|
|
|
159.1
|
|
|
|
46.1
|
|
Issuance of preferred and common stock
|
|
|
1.4
|
|
|
|
86.1
|
|
|
|
15.0
|
|
Redemption of debentures and notes
|
|
|
(2.0
|
)
|
|
|
(.4
|
)
|
|
|
(115.0
|
)
|
Unallocated ESSOP shares
|
|
|
|
|
|
|
(50.0
|
)
|
|
|
|
|
Dividends on common shares
|
|
|
(160.0
|
)
|
|
|
(155.2
|
)
|
|
|
(145.4
|
)
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
(28.3
|
)
|
Other net
|
|
|
(.8
|
)
|
|
|
.3
|
|
|
|
.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(60.6
|
)
|
|
|
70.0
|
|
|
|
(227.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash
|
|
|
|
|
|
|
|
|
|
|
(.4
|
)
|
Cash, beginning of year
|
|
|
|
|
|
|
|
|
|
|
.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of year
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-45
OLD
REPUBLIC INTERNATIONAL CORPORATION AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO
CONDENSED FINANCIAL STATEMENTS
($ in
Millions)
Note 1
Summary of Significant Accounting Policies
Old Republic International Corporations condensed
financial statements are presented in accordance with the
Financial Accounting Standards Boards (FASB)
Accounting Standards Codification (ASC) of
accounting principles generally accepted in the United States of
America (GAAP) and should be read in conjunction
with the consolidated financial statements and notes thereto of
Old Republic International Corporation and Subsidiaries included
in its Annual Report on
Form 10-K.
Note 2
Investments in Consolidated Subsidiaries
Old Republic International Corporations investments in
consolidated subsidiaries are reflected in the condensed
financial statements in accordance with the equity method of
accounting. Undistributed earnings in excess of dividends
received are recorded as separate line items in the condensed
statements of income.
Note 3
Debt
In April 2009, the Company completed a public offering of
$316.25 aggregate principle amount of Convertible Senior Notes.
The notes bear interest at a rate of 8.0% per year, mature on
May 15, 2012, and are convertible at any time prior to
maturity by the holder into 86.8056 shares of common stock
per one thousand dollar note.
Old Republic International Corporation currently has access to
the commercial paper market through a wholly-owned subsidiary
for up to $150.0. The average yield of the commercial paper
outstanding at December 31, 2009 and 2008 was -% and 2.65%,
respectively.
In the fourth quarter 2008, the Company secured a $30.0 bank
loan to leverage the ESSOPs purchase of Old Republic
International common stock. The average yield of the ESSOP bank
loan was 3.85% and 5.41% at December 31, 2009 and 2008,
respectively.
F-46
OLD
REPUBLIC INTERNATIONAL CORPORATION AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
For the
years ended December 31, 2009, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column B
|
|
|
Column C
|
|
|
Column D
|
|
|
Column E
|
|
|
Column F
|
|
|
|
Deferred
|
|
|
Losses,
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Policy
|
|
|
Claims and
|
|
|
|
|
|
Policyholders
|
|
|
|
|
|
|
Acquisition
|
|
|
Settlement
|
|
|
Unearned
|
|
|
Benefits and
|
|
|
Premium
|
|
Segment
|
|
Costs
|
|
|
Expenses
|
|
|
Premiums
|
|
|
Funds
|
|
|
Revenue
|
|
|
|
($ in millions)
|
|
|
Year Ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Underwriting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Insurance Group
|
|
$
|
136.2
|
|
|
$
|
3,334.3
|
|
|
$
|
825.8
|
|
|
$
|
84.5
|
|
|
$
|
1,782.5
|
|
Mortgage Insurance Group
|
|
|
34.1
|
|
|
|
1,965.4
|
|
|
|
74.9
|
|
|
|
|
|
|
|
644.5
|
|
Title Insurance Group
|
|
|
|
|
|
|
277.1
|
|
|
|
|
|
|
|
5.7
|
|
|
|
611.0
|
|
Corporate & Other(1)
|
|
|
36.5
|
|
|
|
21.5
|
|
|
|
|
|
|
|
57.7
|
|
|
|
73.3
|
|
Reinsurance Recoverable(2)
|
|
|
|
|
|
|
2,316.5
|
|
|
|
137.4
|
|
|
|
37.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
206.9
|
|
|
$
|
7,915.0
|
|
|
$
|
1,038.1
|
|
|
$
|
185.2
|
|
|
$
|
3,111.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Underwriting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Insurance Group
|
|
$
|
147.7
|
|
|
$
|
3,326.9
|
|
|
$
|
889.9
|
|
|
$
|
85.3
|
|
|
$
|
1,989.3
|
|
Mortgage Insurance Group
|
|
|
38.0
|
|
|
|
1,382.6
|
|
|
|
89.4
|
|
|
|
|
|
|
|
592.5
|
|
Title Insurance Group
|
|
|
|
|
|
|
282.4
|
|
|
|
|
|
|
|
2.2
|
|
|
|
463.1
|
|
Corporate & Other(1)
|
|
|
37.0
|
|
|
|
22.2
|
|
|
|
|
|
|
|
57.2
|
|
|
|
80.1
|
|
Reinsurance Recoverable(2)
|
|
|
|
|
|
|
2,227.0
|
|
|
|
132.9
|
|
|
|
35.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
222.8
|
|
|
$
|
7,241.3
|
|
|
$
|
1,112.2
|
|
|
$
|
180.7
|
|
|
$
|
3,125.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Underwriting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Insurance Group
|
|
$
|
158.5
|
|
|
$
|
3,279.7
|
|
|
$
|
931.9
|
|
|
$
|
85.9
|
|
|
$
|
2,155.1
|
|
Mortgage Insurance Group
|
|
|
42.9
|
|
|
|
644.9
|
|
|
|
79.8
|
|
|
|
|
|
|
|
518.2
|
|
Title Insurance Group
|
|
|
|
|
|
|
296.9
|
|
|
|
|
|
|
|
1.7
|
|
|
|
638.5
|
|
Corporate & Other(1)
|
|
|
44.9
|
|
|
|
24.7
|
|
|
|
|
|
|
|
64.2
|
|
|
|
77.0
|
|
Reinsurance Recoverable(2)
|
|
|
|
|
|
|
1,984.7
|
|
|
|
170.4
|
|
|
|
38.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
246.5
|
|
|
$
|
6,231.1
|
|
|
$
|
1,182.2
|
|
|
$
|
190.2
|
|
|
$
|
3,389.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents amounts for Old Republics holding company
parent, minor corporate services subsidiaries and a small
life & health insurance operation. |
|
(2) |
|
In accordance with GAAP, reinsured losses and unearned premiums
are to be reported as assets. Assets and liabilities were, as a
result, increased by corresponding amounts of approximately
$2.4 billion, $2.3 billion and $2.1 billion at
December 31, 2009, 2008 and 2007, respectively. This
accounting treatment does not have any effect on the
Companys results of operations. |
F-47
OLD
REPUBLIC INTERNATIONAL CORPORATION AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
For the
years ended December 31, 2009, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column G
|
|
|
Column H
|
|
|
Column I
|
|
|
Column J
|
|
|
Column K
|
|
|
|
|
|
|
Benefits,
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims,
|
|
|
of Deferred
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
Losses and
|
|
|
Policy
|
|
|
Other
|
|
|
|
|
|
|
Investment
|
|
|
Settlement
|
|
|
Acquisition
|
|
|
Operating
|
|
|
Premiums
|
|
Segment
|
|
Income
|
|
|
Expenses
|
|
|
Costs
|
|
|
Expenses
|
|
|
Written
|
|
|
|
($ in millions)
|
|
|
Year Ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Underwriting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Insurance Group
|
|
$
|
258.9
|
|
|
$
|
1,360.3
|
|
|
$
|
280.0
|
|
|
$
|
212.1
|
|
|
$
|
1,720.4
|
|
Mortgage Insurance Group
|
|
|
92.0
|
|
|
|
1,134.1
|
|
|
|
35.4
|
|
|
|
62.9
|
|
|
|
630.0
|
|
Title Insurance Group
|
|
|
25.2
|
|
|
|
70.3
|
|
|
|
|
|
|
|
841.6
|
|
|
|
611.0
|
|
Corporate & Other(1)
|
|
|
7.2
|
|
|
|
34.1
|
|
|
|
20.2
|
|
|
|
25.8
|
|
|
|
72.9
|
|
Reinsurance Recoverable(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
383.5
|
|
|
$
|
2,598.9
|
|
|
$
|
335.7
|
|
|
$
|
1,142.5
|
|
|
$
|
3,034.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Underwriting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Insurance Group
|
|
$
|
253.6
|
|
|
$
|
1,452.3
|
|
|
$
|
294.9
|
|
|
$
|
214.2
|
|
|
$
|
1,966.6
|
|
Mortgage Insurance Group
|
|
|
86.8
|
|
|
|
1,180.7
|
|
|
|
38.7
|
|
|
|
64.9
|
|
|
|
602.0
|
|
Title Insurance Group
|
|
|
25.1
|
|
|
|
45.6
|
|
|
|
|
|
|
|
681.9
|
|
|
|
463.1
|
|
Corporate & Other(1)
|
|
|
11.6
|
|
|
|
36.8
|
|
|
|
24.2
|
|
|
|
22.1
|
|
|
|
77.4
|
|
Reinsurance Recoverable(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
377.3
|
|
|
$
|
2,715.7
|
|
|
$
|
357.8
|
|
|
$
|
983.3
|
|
|
$
|
3,109.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Underwriting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Insurance Group
|
|
$
|
260.8
|
|
|
$
|
1,461.4
|
|
|
$
|
340.2
|
|
|
$
|
218.2
|
|
|
$
|
2,112.0
|
|
Mortgage Insurance Group
|
|
|
79.0
|
|
|
|
615.8
|
|
|
|
39.5
|
|
|
|
63.4
|
|
|
|
542.9
|
|
Title Insurance Group
|
|
|
27.3
|
|
|
|
56.0
|
|
|
|
|
|
|
|
837.2
|
|
|
|
638.5
|
|
Corporate & Other(1)
|
|
|
12.7
|
|
|
|
32.9
|
|
|
|
22.8
|
|
|
|
24.7
|
|
|
|
78.4
|
|
Reinsurance Recoverable(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
379.9
|
|
|
$
|
2,166.2
|
|
|
$
|
402.5
|
|
|
$
|
1,143.7
|
|
|
$
|
3,372.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents amounts for Old Republics holding company
parent, minor corporate services subsidiaries and a small
life & health insurance operation. |
|
(2) |
|
In accordance with GAAP, reinsured losses and unearned premiums
are to be reported as assets. Assets and liabilities were, as a
result, increased by corresponding amounts of approximately
$2.4 billion, $2.3 billion and $2.1 billion at
December 31, 2009, 2008 and 2007, respectively. This
accounting treatment does not have any effect on the
Companys results of operations. |
F-48
OLD
REPUBLIC INTERNATIONAL CORPORATION AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE
For the
years ended December 31, 2009, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column B
|
|
|
Column C
|
|
|
Column D
|
|
|
Column E
|
|
|
Column F
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
Ceded
|
|
|
Assumed
|
|
|
|
|
|
of Amount
|
|
|
|
Gross
|
|
|
to Other
|
|
|
from Other
|
|
|
Net
|
|
|
Assumed
|
|
|
|
Amount
|
|
|
Companies
|
|
|
Companies
|
|
|
Amount
|
|
|
to Net
|
|
|
|
($ in millions)
|
|
|
Year Ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force
|
|
$
|
11,302.6
|
|
|
$
|
5,876.2
|
|
|
$
|
|
|
|
$
|
5,426.3
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Insurance
|
|
$
|
2,432.1
|
|
|
$
|
666.0
|
|
|
$
|
16.3
|
|
|
$
|
1,782.5
|
|
|
|
.9
|
%
|
Mortgage Insurance
|
|
|
648.6
|
|
|
|
4.3
|
|
|
|
.2
|
|
|
|
644.5
|
|
|
|
|
|
Title Insurance
|
|
|
605.2
|
|
|
|
.1
|
|
|
|
5.9
|
|
|
|
611.0
|
|
|
|
1.0
|
|
Life and Health Insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance
|
|
|
28.7
|
|
|
|
13.1
|
|
|
|
|
|
|
|
15.6
|
|
|
|
|
|
Accident and health insurance
|
|
|
74.6
|
|
|
|
16.8
|
|
|
|
|
|
|
|
57.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Life & Health Insurance
|
|
|
103.4
|
|
|
|
30.0
|
|
|
|
|
|
|
|
73.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
3,789.5
|
|
|
$
|
700.5
|
|
|
$
|
22.5
|
|
|
$
|
3,111.5
|
|
|
|
.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force
|
|
$
|
12,485.5
|
|
|
$
|
6,434.6
|
|
|
$
|
|
|
|
$
|
6,050.8
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Insurance
|
|
$
|
2,702.0
|
|
|
$
|
741.8
|
|
|
$
|
29.1
|
|
|
$
|
1,989.3
|
|
|
|
1.5
|
%
|
Mortgage Insurance
|
|
|
698.4
|
|
|
|
106.3
|
|
|
|
.3
|
|
|
|
592.5
|
|
|
|
.1
|
|
Title Insurance
|
|
|
460.2
|
|
|
|
.1
|
|
|
|
3.1
|
|
|
|
463.1
|
|
|
|
.7
|
|
Life and Health Insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance
|
|
|
32.1
|
|
|
|
14.4
|
|
|
|
|
|
|
|
17.7
|
|
|
|
|
|
Accident and health insurance
|
|
|
76.1
|
|
|
|
13.7
|
|
|
|
|
|
|
|
62.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Life & Health Insurance
|
|
|
108.3
|
|
|
|
28.2
|
|
|
|
|
|
|
|
80.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
3,969.0
|
|
|
$
|
876.5
|
|
|
$
|
32.6
|
|
|
$
|
3,125.1
|
|
|
|
1.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force
|
|
$
|
13,873.4
|
|
|
$
|
7,064.8
|
|
|
$
|
|
|
|
$
|
6,808.5
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Insurance
|
|
$
|
2,644.7
|
|
|
$
|
663.0
|
|
|
$
|
173.4
|
|
|
$
|
2,155.1
|
|
|
|
8.0
|
%
|
Mortgage Insurance
|
|
|
612.7
|
|
|
|
94.9
|
|
|
|
.4
|
|
|
|
518.2
|
|
|
|
.1
|
|
Title Insurance
|
|
|
635.9
|
|
|
|
|
|
|
|
2.7
|
|
|
|
638.5
|
|
|
|
.4
|
|
Life and Health Insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance
|
|
|
32.8
|
|
|
|
15.6
|
|
|
|
|
|
|
|
17.2
|
|
|
|
|
|
Accident and health insurance
|
|
|
74.9
|
|
|
|
15.1
|
|
|
|
|
|
|
|
59.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Life & Health Insurance
|
|
|
107.8
|
|
|
|
30.7
|
|
|
|
|
|
|
|
77.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
4,001.1
|
|
|
$
|
788.7
|
|
|
$
|
176.6
|
|
|
$
|
3,389.0
|
|
|
|
5.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-49
OLD
REPUBLIC INTERNATIONAL CORPORATION AND SUBSIDIARIES
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
For the
years ended December 31, 2009, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column B
|
|
|
Column C
|
|
|
Column D
|
|
|
Column E
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
to Other
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
Costs and
|
|
|
Accounts
|
|
|
Deductions
|
|
|
End of
|
|
Description
|
|
Period
|
|
|
Expenses
|
|
|
Describe
|
|
|
Describe
|
|
|
Period
|
|
|
|
($ in millions)
|
|
|
Year Ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from Asset Accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for unrecoverable reinsurance
|
|
$
|
28.2
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
28.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset valuation Allowance(1)
|
|
$
|
54.0
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(54.0
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from Asset Accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for unrecoverable reinsurance
|
|
$
|
28.7
|
|
|
$
|
(.4
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
28.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset valuation Allowance(1)
|
|
$
|
|
|
|
$
|
54.0
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
54.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from Asset Accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for unrecoverable reinsurance
|
|
$
|
30.2
|
|
|
$
|
(1.5
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
28.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
A valuation allowance of $54.0 was established against a
deferred tax asset related to the Companys realized losses
on investments at December 31, 2008. As of
December 31, 2009, this valuation allowance was eliminated
following an increase in the fair value of the Companys
investment portfolio. |
F-50
OLD
REPUBLIC INTERNATIONAL CORPORATION AND SUBSIDIARIES
SCHEDULE VI SUPPLEMENTAL INFORMATION
CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
For the years ended December 31, 2009, 2008 and
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column B
|
|
Column C
|
|
Column D
|
|
Column E
|
|
|
|
|
Reserves
|
|
|
|
|
|
|
|
|
for Unpaid
|
|
|
|
|
|
|
Deferred
|
|
Claims
|
|
Discount,
|
|
|
|
|
Policy
|
|
and Claim
|
|
If Any,
|
|
|
|
|
Acquisition
|
|
Adjustment
|
|
Deducted in
|
|
Unearned
|
Affiliation With Registrant(1)
|
|
Costs
|
|
Expenses(2)
|
|
Column C
|
|
Premiums(2)
|
|
|
($ in millions)
|
|
Year Ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
136.2
|
|
|
$
|
3,334.3
|
|
|
$
|
143.9
|
|
|
$
|
825.8
|
|
2008
|
|
|
147.7
|
|
|
|
3,326.9
|
|
|
|
156.8
|
|
|
|
889.9
|
|
2007
|
|
|
158.5
|
|
|
|
3,279.7
|
|
|
|
148.5
|
|
|
|
931.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column F
|
|
Column G
|
|
Column H
|
|
|
|
|
|
|
Claims and Claim
|
|
|
|
|
|
|
Adjustment Expenses
|
|
|
|
|
Net
|
|
Incurred Related to
|
|
|
Earned
|
|
Investment
|
|
Current
|
|
Prior
|
Affiliation With Registrant(1)
|
|
Premiums
|
|
Income
|
|
Year
|
|
Years
|
|
Year Ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
1,782.5
|
|
|
$
|
258.9
|
|
|
$
|
1,409.2
|
|
|
$
|
(56.8
|
)
|
2008
|
|
|
1,989.3
|
|
|
|
253.6
|
|
|
|
1,520.1
|
|
|
|
(83.0
|
)
|
2007
|
|
|
2,155.1
|
|
|
|
260.8
|
|
|
|
1,562.8
|
|
|
|
(110.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column I
|
|
Column J
|
|
Column K
|
|
|
Amortization
|
|
Paid
|
|
|
|
|
of Deferred
|
|
Claims
|
|
|
|
|
Policy
|
|
and Claim
|
|
|
|
|
Acquisition
|
|
Adjustment
|
|
Premiums
|
Affiliation With Registrant(1)
|
|
Costs
|
|
Expenses
|
|
Written
|
|
Year Ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
280.0
|
|
|
$
|
1,345.0
|
|
|
$
|
1,720.4
|
|
2008
|
|
|
294.9
|
|
|
|
1,389.8
|
|
|
|
1,966.6
|
|
2007
|
|
|
340.2
|
|
|
|
1,195.0
|
|
|
|
2,112.0
|
|
|
|
|
(1) |
|
Includes consolidated property-casualty entities. The amounts
relating to the Companys unconsolidated property-casualty
subsidiaries and the proportionate share of the
registrants and its subsidiaries 50%-or-less owned
property-casualty equity investees are immaterial and have,
therefore, been omitted from this schedule. |
|
(2) |
|
See note (2) to Schedule III. |
F-51
Old
Republic International Corporation
Financial
Statements for the Period Ended March 31, 2010
|
|
|
|
|
|
|
Page No.
|
|
|
|
|
F-53
|
|
|
|
|
F-54
|
|
|
|
|
F-55
|
|
|
|
|
F-56
|
|
|
|
|
F-57
|
|
F-52
Old
Republic International Corporation and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
($ in millions, except share data)
|
|
|
ASSETS
|
Investments:
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
Fixed maturity securities (at fair value) (amortized cost:
$7,877.1 and $7,896.2)
|
|
$
|
8,352.2
|
|
|
$
|
8,326.8
|
|
Equity securities (at fair value) (adjusted cost: $358.6 and
$357.5)
|
|
|
631.4
|
|
|
|
502.9
|
|
Short-term investments (at fair value which approximates cost)
|
|
|
783.5
|
|
|
|
826.7
|
|
Miscellaneous investments
|
|
|
23.9
|
|
|
|
24.0
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,791.2
|
|
|
|
9,680.5
|
|
Other investments
|
|
|
7.3
|
|
|
|
7.8
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
9,798.5
|
|
|
|
9,688.4
|
|
|
|
|
|
|
|
|
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
|
74.9
|
|
|
|
77.3
|
|
Securities and indebtedness of related parties
|
|
|
11.2
|
|
|
|
17.1
|
|
Accrued investment income
|
|
|
112.5
|
|
|
|
113.3
|
|
Accounts and notes receivable
|
|
|
794.4
|
|
|
|
788.6
|
|
Federal income tax recoverable:
|
|
|
|
|
|
|
|
|
Current
|
|
|
.4
|
|
|
|
7.3
|
|
Prepaid federal income taxes
|
|
|
136.0
|
|
|
|
221.4
|
|
Reinsurance balances and funds held
|
|
|
130.7
|
|
|
|
141.9
|
|
Reinsurance recoverable:
|
|
|
|
|
|
|
|
|
Paid losses
|
|
|
75.9
|
|
|
|
66.7
|
|
Policy and claim reserves
|
|
|
2,519.9
|
|
|
|
2,491.2
|
|
Deferred policy acquisition costs
|
|
|
202.0
|
|
|
|
206.9
|
|
Sundry assets
|
|
|
384.0
|
|
|
|
369.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,442.3
|
|
|
|
4,501.6
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
14,240.9
|
|
|
$
|
14,190.0
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, PREFERRED STOCK, AND COMMON SHAREHOLDERS
EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
Losses, claims, and settlement expenses
|
|
$
|
7,774.8
|
|
|
$
|
7,915.0
|
|
Unearned premiums
|
|
|
1,041.7
|
|
|
|
1,038.1
|
|
Other policyholders benefits and funds
|
|
|
185.8
|
|
|
|
185.2
|
|
|
|
|
|
|
|
|
|
|
Total policy liabilities and accruals
|
|
|
9,002.3
|
|
|
|
9,138.4
|
|
Commissions, expenses, fees, and taxes
|
|
|
267.8
|
|
|
|
266.3
|
|
Reinsurance balances and funds
|
|
|
335.8
|
|
|
|
321.3
|
|
Federal income tax payable: Deferred
|
|
|
102.8
|
|
|
|
47.5
|
|
Debt
|
|
|
347.2
|
|
|
|
346.7
|
|
Sundry liabilities
|
|
|
188.8
|
|
|
|
178.0
|
|
Commitments and contingent liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
10,245.0
|
|
|
|
10,298.6
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shareholders Equity:
|
|
|
|
|
|
|
|
|
Common stock(1)
|
|
|
241.0
|
|
|
|
240.6
|
|
Additional paid-in capital
|
|
|
416.2
|
|
|
|
412.4
|
|
Retained earnings
|
|
|
2,911.8
|
|
|
|
2,927.3
|
|
Accumulated other comprehensive income (loss)
|
|
|
468.3
|
|
|
|
353.7
|
|
Unallocated ESSOP shares (at cost)
|
|
|
(41.5
|
)
|
|
|
(42.7
|
)
|
Treasury stock (at cost)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Common Shareholders Equity
|
|
|
3,995.8
|
|
|
|
3,891.4
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities, Preferred Stock and Common Shareholders
Equity
|
|
$
|
14,240.9
|
|
|
$
|
14,190.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
At March 31, 2010 and December 31, 2009, there were
75,000,000 shares of $0.01 par value preferred stock
authorized, of which no shares were outstanding. As of the same
dates, there were 500,000,000 shares of common stock,
$1.00 par value, authorized, of which 241,029,255 at
March 31, 2010 and 240,685,448 at December 31, 2009
were issued. At March 31, 2010 and December 31, 2009,
there were 100,000,000 shares of Class B Common Stock,
$1.00 par value, authorized, of which no shares were
issued. There were no common shares classified as treasury stock
as of March 31, 2010 and December 31, 2009. |
See accompanying Notes to Consolidated Financial Statements.
F-53
Old
Republic International Corporation and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
($ in millions, except share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
752.3
|
|
|
$
|
721.8
|
|
Title, escrow, and other fees
|
|
|
76.1
|
|
|
|
55.6
|
|
|
|
|
|
|
|
|
|
|
Total premiums and fees
|
|
|
828.5
|
|
|
|
777.4
|
|
Net investment income
|
|
|
96.2
|
|
|
|
93.4
|
|
Other income
|
|
|
4.8
|
|
|
|
7.6
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
929.6
|
|
|
|
878.5
|
|
Realized investment gains (losses):
|
|
|
|
|
|
|
|
|
From sales
|
|
|
2.9
|
|
|
|
|
|
From impairments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total realized investment gains (losses)
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
932.6
|
|
|
|
878.5
|
|
|
|
|
|
|
|
|
|
|
Benefits, Claims and Expenses:
|
|
|
|
|
|
|
|
|
Benefits, claims and settlement expenses
|
|
|
491.6
|
|
|
|
649.2
|
|
Dividends to policyholders
|
|
|
2.5
|
|
|
|
2.8
|
|
Underwriting, acquisition, and other expenses
|
|
|
400.6
|
|
|
|
318.6
|
|
Interest and other charges
|
|
|
6.5
|
|
|
|
.6
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
901.3
|
|
|
|
971.3
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes (credits)
|
|
|
31.2
|
|
|
|
(92.7
|
)
|
|
|
|
|
|
|
|
|
|
Income Taxes (Credits):
|
|
|
|
|
|
|
|
|
Current
|
|
|
11.4
|
|
|
|
24.7
|
|
Deferred
|
|
|
(5.2
|
)
|
|
|
(63.5
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6.2
|
|
|
|
(38.8
|
)
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
25.0
|
|
|
$
|
(53.9
|
)
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Per Share:
|
|
|
|
|
|
|
|
|
Basic:
|
|
$
|
.11
|
|
|
$
|
(.23
|
)
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
$
|
.11
|
|
|
$
|
(.23
|
)
|
|
|
|
|
|
|
|
|
|
Average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
236,387,779
|
|
|
|
235,259,226
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
236,462,231
|
|
|
|
235,259,226
|
|
|
|
|
|
|
|
|
|
|
Dividends Per Common Share:
|
|
|
|
|
|
|
|
|
Cash:
|
|
$
|
.1725
|
|
|
$
|
.1700
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-54
Old
Republic International Corporation and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
($ in millions)
|
|
|
Net income (loss) as reported
|
|
$
|
25.0
|
|
|
$
|
(53.9
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Post-tax net unrealized gains (losses) on securities
|
|
|
111.5
|
|
|
|
(9.8
|
)
|
Other adjustments
|
|
|
3.1
|
|
|
|
.5
|
|
|
|
|
|
|
|
|
|
|
Net adjustments
|
|
|
114.6
|
|
|
|
(9.2
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
139.7
|
|
|
$
|
(63.1
|
)
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-55
Old
Republic International Corporation and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
($ in millions)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
25.0
|
|
|
$
|
(53.9
|
)
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
Deferred policy acquisition costs
|
|
|
5.3
|
|
|
|
6.1
|
|
Premiums and other receivables
|
|
|
(1.7
|
)
|
|
|
(11.4
|
)
|
Unpaid claims and related items
|
|
|
(144.5
|
)
|
|
|
118.3
|
|
Other policyholders benefits and funds
|
|
|
(21.3
|
)
|
|
|
(22.0
|
)
|
Income taxes
|
|
|
1.7
|
|
|
|
(40.8
|
)
|
Prepaid federal income taxes
|
|
|
85.4
|
|
|
|
241.9
|
|
Reinsurance balances and funds
|
|
|
16.4
|
|
|
|
13.9
|
|
Realized investment (gains) losses
|
|
|
(2.9
|
)
|
|
|
|
|
Accounts payable, accrued expenses and other
|
|
|
17.2
|
|
|
|
11.2
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(19.3
|
)
|
|
|
263.3
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
Maturities and early calls
|
|
|
169.1
|
|
|
|
208.8
|
|
Sales
|
|
|
68.9
|
|
|
|
6.9
|
|
Sales of:
|
|
|
|
|
|
|
|
|
Other investments
|
|
|
1.0
|
|
|
|
.3
|
|
Purchases of:
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
|
(221.3
|
)
|
|
|
(232.6
|
)
|
Equity securities
|
|
|
(1.0
|
)
|
|
|
|
|
Other net
|
|
|
(5.7
|
)
|
|
|
(4.4
|
)
|
Net decrease (increase) in short-term investments
|
|
|
43.5
|
|
|
|
(194.9
|
)
|
Other-net
|
|
|
2.9
|
|
|
|
.2
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
57.4
|
|
|
|
(215.6
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Issuance of debentures and notes
|
|
|
70.0
|
|
|
|
60.0
|
|
Issuance of common shares
|
|
|
2.3
|
|
|
|
.3
|
|
Redemption of debentures and notes
|
|
|
(72.5
|
)
|
|
|
(72.3
|
)
|
Dividends on common shares
|
|
|
(40.6
|
)
|
|
|
(39.9
|
)
|
Other-net
|
|
|
.3
|
|
|
|
.1
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(40.5
|
)
|
|
|
(51.8
|
)
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash:
|
|
|
(2.3
|
)
|
|
|
(4.2
|
)
|
Cash, beginning of period
|
|
|
77.3
|
|
|
|
63.9
|
|
|
|
|
|
|
|
|
|
|
Cash, end of period
|
|
$
|
74.9
|
|
|
$
|
59.7
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1.2
|
|
|
$
|
1.2
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
4.4
|
|
|
$
|
2.0
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-56
OLD
REPUBLIC INTERNATIONAL CORPORATION
($ in
Millions, Except Share Data)
|
|
1.
|
Accounting
Policies and Basis of Presentation:
|
The accompanying consolidated financial statements have been
prepared in conformity with the Financial Accounting Standards
Boards (FASB) Accounting Standards
Codification (ASC) of accounting principles
generally accepted in the United States of America
(GAAP).
Pertinent accounting and disclosure pronouncements issued from
time to time by the FASB are adopted by the Company as they
become effective. The accompanying financial statements
incorporate a new pronouncement which modifies current
accounting guidance governing consolidation of variable interest
entities. The Companys adoption of this pronouncement had
no effect on the conduct of its business and did not materially
affect its reported financial condition or net income (loss). As
of the date of this report, the Company is not aware of any new
accounting or disclosure requirements that would have a material
effect on its consolidated financial statements or the conduct
of its business.
The financial accounting and reporting process relies on
estimates and on the exercise of judgment. In the opinion of
management all adjustments, consisting only of normal recurring
accruals necessary for a fair presentation of the results have
been recorded for the interim periods. Amounts shown in the
consolidated financial statements and applicable notes are
stated (except as otherwise indicated and as to share data) in
millions, which amounts may not add to totals shown due to
truncation. Necessary reclassifications are made in prior
periods financial statements whenever appropriate to
conform to the most current presentation.
Earnings Per Share Consolidated basic
earnings per share excludes the dilutive effect of common stock
equivalents and is computed by dividing income (loss) available
to common shareholders by the weighted-average number of common
shares actually outstanding for the period. Diluted earnings per
share are similarly calculated with the inclusion of dilutive
common stock equivalents. The following table provides a
reconciliation of net income (loss) and number of shares used in
basic and diluted earnings per share calculations.
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
$
|
25.0
|
|
|
$
|
(53.9
|
)
|
|
|
|
|
|
|
|
|
|
Numerator for basic earnings per share income (loss)
available to common shareholders
|
|
|
25.0
|
|
|
|
(53.9
|
)
|
|
|
|
|
|
|
|
|
|
Numerator for diluted earnings per share income
(loss) available to common shareholders after assumed conversions
|
|
$
|
25.0
|
|
|
$
|
(53.9
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share
weighted-average shares(a)(b)
|
|
|
236,387,779
|
|
|
|
235,259,226
|
|
Effect of dilutive securities stock options
|
|
|
74,452
|
|
|
|
|
|
Effect of dilutive securities convertible senior
notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share adjusted
weighted-average shares and assumed conversions(a)(b)
|
|
|
236,462,231
|
|
|
|
235,259,226
|
|
|
|
|
|
|
|
|
|
|
F-57
OLD
REPUBLIC INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
($ in
Millions, Except Share Data)
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.11
|
|
|
$
|
(.23
|
)
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
.11
|
|
|
$
|
(.23
|
)
|
|
|
|
|
|
|
|
|
|
Anti-dilutive common share equivalents excluded from earning per
share computations:
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
14,432,230
|
|
|
|
16,030,334
|
|
Convertible senior notes
|
|
|
27,458,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
41,890,510
|
|
|
|
16,030,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
All per share statistics have been restated to reflect all stock
dividends and splits declared through March 31, 2010. |
|
(b) |
|
In calculating earnings per share, pertinent accounting rules
require that common shares owned by the Companys Employee
Savings and Stock Ownership Plan that are as yet unallocated to
participants in the plan be excluded from the calculation. Such
shares are issued and outstanding, have the same voting and
other rights applicable to all other common shares, and may be
sold at any time by the plan. |
The Company may classify its invested assets in terms of those
assets relative to which it either (1) has the positive
intent and ability to hold until maturity, (2) has
available for sale or (3) has the intention of trading. As
of March 31, 2010 and December 31, 2009, substantially
all the Companys invested assets were classified as
available for sale.
Fixed maturity securities classified as available for
sale and other preferred and common stocks (equity
securities) are included at fair value with changes in such
values, net of deferred income taxes, reflected directly in
shareholders equity. Fair values for fixed maturity
securities and equity securities are based on quoted market
prices or estimates using values obtained from independent
pricing services as applicable.
The Company reviews the status and fair value changes of each of
its investments on at least a quarterly basis during the year,
and estimates of
other-than-temporary
impairments (OTTI) in the portfolios value are
evaluated and established at each quarterly balance sheet date.
In reviewing investments for OTTI, the Company, in addition to a
securitys market price history, considers the totality of
such factors as the issuers operating results, financial
condition and liquidity, its ability to access capital markets,
credit rating trends, most current audit opinion, industry and
securities markets conditions, and analyst expectations to reach
its conclusions. Sudden fair value declines caused by such
adverse developments as newly emerged or imminent bankruptcy
filings, issuer default on significant obligations, or reports
of financial accounting developments that bring into question
the validity of previously reported earnings or financial
condition, are recognized as realized losses as soon as credible
publicly available information emerges to confirm such
developments. Absent issuer-specific circumstances that would
result in a contrary conclusion, any equity security with an
unrealized investment loss amounting to a 20% or greater decline
for a six month period is considered OTTI. In the event the
Companys estimate of OTTI is insufficient at any point in
time, future periods net income (loss) would be adversely
affected by the recognition of additional realized or impairment
losses, but its financial position would not necessarily be
affected adversely inasmuch as such losses, or a portion of
them, could have been recognized previously as unrealized losses
in shareholders equity. The Company recognized no OTTI
adjustments for the quarters ended March 31, 2010 and 2009.
F-58
OLD
REPUBLIC INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
($ in
Millions, Except Share Data)
The amortized cost and estimated fair values of fixed maturity
securities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Fixed Maturity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. & Canadian Governments
|
|
$
|
920.4
|
|
|
$
|
42.8
|
|
|
$
|
.6
|
|
|
$
|
962.6
|
|
Tax-exempt
|
|
|
2,171.8
|
|
|
|
122.0
|
|
|
|
|
|
|
|
2,293.7
|
|
Corporates
|
|
|
4,784.9
|
|
|
|
317.9
|
|
|
|
7.0
|
|
|
|
5,095.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,877.1
|
|
|
$
|
482.8
|
|
|
$
|
7.7
|
|
|
$
|
8,352.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. & Canadian Governments
|
|
$
|
937.4
|
|
|
$
|
39.6
|
|
|
$
|
3.0
|
|
|
$
|
974.0
|
|
Tax-exempt
|
|
|
2,209.3
|
|
|
|
135.0
|
|
|
|
.3
|
|
|
|
2,344.0
|
|
Corporates
|
|
|
4,749.4
|
|
|
|
273.2
|
|
|
|
14.0
|
|
|
|
5,008.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,896.2
|
|
|
$
|
448.0
|
|
|
$
|
17.4
|
|
|
$
|
8,326.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and estimated fair value of fixed maturity
securities at March 31, 2010, by contractual maturity, are
shown below. Expected maturities will differ from contractual
maturities since borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Fixed Maturity Securities:
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
858.1
|
|
|
$
|
875.4
|
|
Due after one year through five years
|
|
|
4,189.6
|
|
|
|
4,433.8
|
|
Due after five years through ten years
|
|
|
2,761.5
|
|
|
|
2,975.9
|
|
Due after ten years
|
|
|
67.7
|
|
|
|
67.0
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,877.1
|
|
|
$
|
8,352.2
|
|
|
|
|
|
|
|
|
|
|
A summary of the Companys equity securities reflecting
reported adjusted cost, net of OTTI adjustments totaling $317.3
at March 31, 2010 and December 31, 2009 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Adjusted
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
March 31, 2010
|
|
$
|
358.6
|
|
|
$
|
281.0
|
|
|
$
|
8.2
|
|
|
$
|
631.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
$
|
357.5
|
|
|
$
|
159.0
|
|
|
$
|
13.7
|
|
|
$
|
502.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-59
OLD
REPUBLIC INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
($ in
Millions, Except Share Data)
The following table reflects the Companys gross unrealized
losses and fair value, aggregated by category and length of time
that individual securities have been in an unrealized loss
position employing closing market price comparisons with an
issuers adjusted cost at March 31, 2010 and
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Months or Less
|
|
|
Greater Than 12 Months
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. & Canadian Governments
|
|
$
|
138.9
|
|
|
$
|
.6
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
138.9
|
|
|
$
|
.6
|
|
Tax-exempt
|
|
|
7.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.6
|
|
|
|
|
|
Corporates
|
|
|
296.1
|
|
|
|
4.0
|
|
|
|
42.0
|
|
|
|
2.9
|
|
|
|
338.1
|
|
|
|
7.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
442.7
|
|
|
|
4.8
|
|
|
|
42.0
|
|
|
|
2.9
|
|
|
|
484.7
|
|
|
|
7.7
|
|
Equity Securities
|
|
|
23.1
|
|
|
|
.3
|
|
|
|
97.0
|
|
|
|
7.9
|
|
|
|
120.2
|
|
|
|
8.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
465.9
|
|
|
$
|
5.1
|
|
|
$
|
139.0
|
|
|
$
|
10.8
|
|
|
$
|
605.0
|
|
|
$
|
16.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. & Canadian Governments
|
|
$
|
307.1
|
|
|
$
|
3.0
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
307.1
|
|
|
$
|
3.0
|
|
Tax-exempt
|
|
|
13.9
|
|
|
|
.2
|
|
|
|
3.1
|
|
|
|
|
|
|
|
17.1
|
|
|
|
.3
|
|
Corporates
|
|
|
302.5
|
|
|
|
5.1
|
|
|
|
139.3
|
|
|
|
8.9
|
|
|
|
441.8
|
|
|
|
14.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
623.6
|
|
|
|
8.4
|
|
|
|
142.5
|
|
|
|
8.9
|
|
|
|
766.1
|
|
|
|
17.4
|
|
Equity Securities
|
|
|
1.2
|
|
|
|
.2
|
|
|
|
99.5
|
|
|
|
13.4
|
|
|
|
100.8
|
|
|
|
13.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
624.9
|
|
|
$
|
8.6
|
|
|
$
|
242.1
|
|
|
$
|
22.4
|
|
|
$
|
867.0
|
|
|
$
|
31.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2010, the Company held 108 fixed maturity and
5 equity securities in an unrealized loss position, representing
5.3% as to fixed maturities and 31.3% as to equity securities of
the total number of such issues held by the Company. Of the 108
fixed maturity securities, 12 had been in a continuous
unrealized loss position for more than 12 months. The
unrealized losses on these securities are primarily attributable
to a post-purchase rising interest rate environment
and/or a
decline in the credit quality of some issuers. As part of its
assessment of
other-than-temporary
impairment, the Company considers its intent to continue to hold
and the likelihood that it will not be required to sell
investment securities in an unrealized loss position until cost
recovery, principally on the basis of its asset and liability
maturity matching procedures. The Company has not sold nor does
it expect to sell investments for purposes of generating cash to
pay claim or expense obligations.
Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants (an exit price) at the
measurement date. A fair value hierarchy is established that
prioritizes the sources (inputs) used to measure
fair value into three broad levels: inputs based on quoted
market prices in active markets (Level 1); observable
inputs based on corroboration with available market data
(Level 2); and unobservable inputs based on uncorroborated
market data or a reporting entitys own assumptions
(Level 3). Following is a description of the valuation
methodologies and general classification used for securities
measured at fair value.
The Company uses quoted values and other data provided by a
nationally recognized independent pricing source as inputs into
its quarterly process for determining fair values of its fixed
maturity and equity securities. To validate the techniques or
models used by pricing sources, the Companys review
process includes, but is not limited to: (i) initial and
ongoing evaluation of methodologies used by outside parties to
calculate fair value; and
F-60
OLD
REPUBLIC INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
($ in
Millions, Except Share Data)
(ii) comparing the fair value estimates to its knowledge of
the current market and to independent fair value estimates
provided by the investment custodian. The independent pricing
source obtains market quotations and actual transaction prices
for securities that have quoted prices in active markets using
its own proprietary method for determining the fair value of
securities that are not actively traded. In general, these
methods involve the use of matrix pricing in which
the independent pricing source uses observable market inputs
including, but not limited to, investment yields, credit risks
and spreads, benchmarking of like securities, broker-dealer
quotes, reported trades and sector groupings to determine a
reasonable fair value.
Level 1 securities include U.S. and Canadian Treasury
notes, publicly traded common stocks, the quoted net asset value
(NAV) mutual funds, and most short-term investments
in highly liquid money market instruments. Level 2
securities generally include corporate bonds, municipal bonds
and certain U.S. and Canadian government agency securities.
Securities classified within Level 3 include non-publicly
traded bonds, short-term investments and common stocks.
The following table shows a summary of assets measured at fair
value segregated among the various input levels described above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of March 31, 2010:
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
$
|
345.4
|
|
|
$
|
7,986.3
|
|
|
$
|
20.5
|
|
|
$
|
8,352.2
|
|
Equity securities
|
|
|
631.0
|
|
|
|
.1
|
|
|
|
.2
|
|
|
|
631.4
|
|
Short-term investments
|
|
$
|
777.6
|
|
|
$
|
|
|
|
$
|
5.8
|
|
|
$
|
783.5
|
|
Investment income is reported net of allocated expenses and
includes appropriate adjustments for amortization of premium and
accretion of discount on fixed maturity securities acquired at
other than par value. Dividends on equity securities are
credited to income on the ex-dividend date. Realized investment
gains and losses, which result from sales or write-downs of
securities, are reflected as revenues in the income statement
and are determined on the basis of amortized value at date of
sale for fixed maturity securities, and cost in regard to equity
securities; such bases apply to the specific securities sold.
Unrealized investment gains and losses, net of any deferred
income taxes, are recorded directly as a component of
accumulated other comprehensive income in shareholders
equity. At March 31, 2009, the Company and its subsidiaries
had no non-income producing fixed maturity securities.
F-61
OLD
REPUBLIC INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
($ in
Millions, Except Share Data)
The following table reflects the composition of net investment
income, net realized gains or losses, and the net change in
unrealized investment gains or losses for each of the years
shown.
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Investment income from:
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
$
|
94.3
|
|
|
$
|
88.6
|
|
Equity securities
|
|
|
.9
|
|
|
|
1.5
|
|
Short-term investments
|
|
|
.3
|
|
|
|
2.5
|
|
Other sources
|
|
|
1.3
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
Gross investment income
|
|
|
96.9
|
|
|
|
94.1
|
|
Investment expenses(a)
|
|
|
.7
|
|
|
|
.7
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
96.2
|
|
|
$
|
93.4
|
|
|
|
|
|
|
|
|
|
|
Realized gains (losses) on:
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
Gains
|
|
$
|
3.0
|
|
|
$
|
|
|
Losses
|
|
|
(.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities & other long-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2.9
|
|
|
|
|
|
Income taxes (credits)(b)
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses)
|
|
$
|
1.9
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized investment gains (losses) on:
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
$
|
44.3
|
|
|
$
|
83.2
|
|
Less: Deferred income taxes (credits)
|
|
|
15.5
|
|
|
|
29.1
|
|
|
|
|
|
|
|
|
|
|
Net change
|
|
$
|
28.7
|
|
|
$
|
54.1
|
|
|
|
|
|
|
|
|
|
|
Equity securities & other long-term investments
|
|
$
|
127.2
|
|
|
$
|
(83.1
|
)
|
Less: Deferred income taxes (credits)
|
|
|
44.5
|
|
|
|
(19.1
|
)
|
|
|
|
|
|
|
|
|
|
Net change
|
|
$
|
82.7
|
|
|
$
|
(63.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Investment expenses consist of personnel costs and investment
management and custody service fees, as well as a negligible
amount of interest incurred on funds held. |
|
(b) |
|
Reflects primarily the combination of fully taxable realized
investment gains or losses and judgments about the
recoverability of deferred tax assets. |
The Company has three pension plans covering a portion of its
work force. All three plans have been closed to new participants
since December 31, 2004. It is the Companys policy to
fund the plans costs as they accrue. Plan assets are
comprised principally of bonds, common stocks and short-term
investments. The Companies made no
F-62
OLD
REPUBLIC INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
($ in
Millions, Except Share Data)
cash contributions to their pension plans in the first quarter
of 2010, and expect to make cash contributions of $2.5 to their
pension plans in the remaining portion of calendar year 2010.
|
|
5.
|
Information
About Segments of Business:
|
The Company is 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 its General Insurance (property and
liability insurance), Mortgage Guaranty and Title Insurance
Groups. The results of a small life & health insurance
business are included with those of its corporate and minor
service operations. Each of the Companys segments
underwrites and services only those insurance coverages which
may be written by it pursuant to state insurance regulations and
corporate charter provisions. Segment results exclude net
realized investment gains or losses and
other-than-temporary
impairments as these are aggregated in the consolidated totals.
The contributions of Old Republics insurance industry
segments to consolidated totals are shown in the following table.
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
General Insurance Group:
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
411.8
|
|
|
$
|
457.3
|
|
Net investment income and other income
|
|
|
67.3
|
|
|
|
66.3
|
|
|
|
|
|
|
|
|
|
|
Total revenues before realized gains or losses
|
|
$
|
479.1
|
|
|
$
|
523.7
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes (credits) and realized
investment gains or losses(a)
|
|
$
|
69.2
|
|
|
$
|
58.2
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (credits) on above
|
|
$
|
21.1
|
|
|
$
|
15.6
|
|
|
|
|
|
|
|
|
|
|
Mortgage Guaranty Group:
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
136.2
|
|
|
$
|
145.3
|
|
Net investment income and other income
|
|
|
24.2
|
|
|
|
25.9
|
|
|
|
|
|
|
|
|
|
|
Total revenues before realized gains or losses
|
|
$
|
160.5
|
|
|
$
|
171.2
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes (credits) and realized
investment gains or losses(a)
|
|
$
|
(34.1
|
)
|
|
$
|
(144.6
|
)
|
|
|
|
|
|
|
|
|
|
Income tax expense (credits) on above
|
|
$
|
(13.2
|
)
|
|
$
|
(51.9
|
)
|
|
|
|
|
|
|
|
|
|
Title Insurance Group:
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
179.0
|
|
|
$
|
98.6
|
|
Title, escrow and other fees
|
|
|
76.1
|
|
|
|
55.6
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
255.2
|
|
|
|
154.3
|
|
Net investment income and other income
|
|
|
6.8
|
|
|
|
5.9
|
|
|
|
|
|
|
|
|
|
|
Total revenues before realized gains or losses
|
|
$
|
262.0
|
|
|
$
|
160.2
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes (credits) and realized
investment gains or losses(a)
|
|
$
|
(8.6
|
)
|
|
$
|
(9.0
|
)
|
|
|
|
|
|
|
|
|
|
Income tax expense (credits) on above
|
|
$
|
(3.2
|
)
|
|
$
|
(3.5
|
)
|
|
|
|
|
|
|
|
|
|
F-63
OLD
REPUBLIC INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
($ in
Millions, Except Share Data)
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Consolidated Revenues:
|
|
|
|
|
|
|
|
|
Total revenues of above Company segments
|
|
$
|
901.7
|
|
|
$
|
855.3
|
|
Other sources(b)
|
|
|
41.9
|
|
|
|
35.1
|
|
Consolidated net realized investment gains (losses)
|
|
|
2.9
|
|
|
|
|
|
Consolidation elimination adjustments
|
|
|
(14.0
|
)
|
|
|
(11.9
|
)
|
|
|
|
|
|
|
|
|
|
Consolidated revenues
|
|
$
|
932.6
|
|
|
$
|
878.5
|
|
|
|
|
|
|
|
|
|
|
Consolidated Income (Loss) Before Taxes (Credits):
|
|
|
|
|
|
|
|
|
Total income (loss) before income taxes (credits) and realized
investment gains or losses of above Company segments
|
|
$
|
26.5
|
|
|
$
|
(95.4
|
)
|
Other sources net(b)
|
|
|
1.8
|
|
|
|
2.6
|
|
Consolidated net realized investment gains (losses)
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income (loss) before income taxes (credits)
|
|
$
|
31.2
|
|
|
$
|
(92.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Consolidated Income Tax Expense (Credits):
|
|
|
|
|
|
|
|
|
Total income tax expense (credits) for above Company segments
|
|
$
|
4.6
|
|
|
$
|
(39.8
|
)
|
Other sources net(b)
|
|
|
.5
|
|
|
|
.9
|
|
Income tax expense (credits) on consolidated net realized
investment gains (losses)
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income tax expense (credits)
|
|
$
|
6.2
|
|
|
$
|
(38.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Consolidated Assets:
|
|
|
|
|
|
|
|
|
General
|
|
$
|
10,017.7
|
|
|
$
|
9,920.8
|
|
Mortgage
|
|
|
3,083.1
|
|
|
|
3,233.4
|
|
Title
|
|
|
857.3
|
|
|
|
852.8
|
|
Other assets(b)
|
|
|
553.5
|
|
|
|
503.5
|
|
Consolidation elimination adjustments
|
|
|
(270.8
|
)
|
|
|
(320.5
|
)
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
14,240.9
|
|
|
$
|
14,190.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Income (loss) before taxes (credits) is reported net of interest
charges on intercompany financing arrangements with Old
Republics holding company parent for the following
segments: General $5.3 and $2.6 for the quarters
ended March 31, 2010 and 2009, respectively;
Mortgage $1.7 and $1.8 for the quarters ended
March 31, 2010 and 2009, respectively; and
Title $1.3 and $.9 for the quarters ended
March 31, 2010 and 2009, respectively. |
|
(b) |
|
Represents amounts for Old Republics holding company
parent, minor corporate services subsidiaries, and a small life
and health insurance operation. |
F-64
OLD
REPUBLIC INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
($ in
Millions, Except Share Data)
|
|
6.
|
Commitments
and Contingent Liabilities:
|
Legal proceedings against the Company and its subsidiaries
routinely arise in the normal course of business and usually
pertain to claim matters related to insurance policies and
contracts issued by its insurance subsidiaries. Other,
non-routine legal proceedings which may prove to be material to
the Company or a subsidiary are discussed below.
Purported class action lawsuits are pending against the
Companys principal title insurance subsidiary,
Old Republic National Title Insurance Company
(ORNTIC) in state and federal courts in Connecticut,
New Jersey, Ohio, Pennsylvania and Texas. The plaintiffs
allege that ORNTIC failed to give consumers reissue
and/or
refinance credits on the premiums charged for title insurance
covering mortgage refinancing transactions, as required by rate
schedules filed by ORNTIC or by state rating bureaus with the
state insurance regulatory authorities. The suits in
Pennsylvania and Texas also allege violations of the federal
Real Estate Settlement Procedures Act (RESPA).
Substantially similar lawsuits are also pending against other
unaffiliated title insurance companies in these and other states
as well, and additional lawsuits based upon similar allegations
could be filed against ORNTIC in the future. Classes have been
certified in the New Jersey and Pennsylvania actions. Settlement
agreements have been reached in the Connecticut and New Jersey
actions and are not expected to cost ORNTIC more than $2.9 and
$2.2, respectively, including attorneys fees and
administrative costs.
Since early February 2008, some 80 purported consumer class
action lawsuits have been filed against the title
industrys principal title insurance companies, their
subsidiaries and affiliates, and title insurance rating bureaus
or associations in at least 10 states. The suits are
substantially identical in alleging that the defendant title
insurers engaged in illegal price-fixing agreements to set
artificially high premium rates and conspired to create premium
rates which the state insurance regulatory authorities could not
evaluate and therefore, could not adequately regulate. A number
of them have been dismissed and others consolidated.
Approximately 49 remain nationwide. ORNTIC is currently among
the named defendants in 27 of these actions in 4 states;
its affiliate, American Guaranty Title Insurance Company,
is a named defendant in 10 of the consolidated actions in
1 state. The Company is not a named defendant in any of the
actions. No class has yet been certified in any of these suits
against ORNTIC, and none of the actions against it allege RESPA
violations.
National class action suits have been filed against the
Companys subsidiary, Old Republic Home Protection Company
(ORHP) in the California Superior Court,
San Diego, and the U.S. District Court in Birmingham,
Alabama. The California suit has been filed on behalf of all
persons who made a claim under an ORHP home warranty contract
from March 6, 2003 to the present. The suit alleges breach
of contract, breach of the implicit covenant of good faith and
fair dealing, violations of certain California consumer
protection laws and misrepresentation arising out of ORHPs
alleged failure to adopt and implement reasonable standards for
the prompt investigation and processing of claims under its home
warranty contracts. The suit seeks unspecified damages
consisting of the rescission of the class members
contracts, restitution of all sums paid by the class members,
punitive damages, and declaratory and injunctive relief. No
class has been certified in either action. ORHP has removed the
action to the U.S. District Court for the Southern District
of California. The Alabama suit alleges that ORHP pays fees to
the real estate brokers who market its home warranty contracts
and that the payment of such fees is in violation of
Section 8(a) of RESPA. The suit seeks unspecified damages,
including treble damages under RESPA.
On December 19, 2008, Old Republic Insurance Company and
Old Republic Insured Credit Services, Inc. (Old
Republic) filed suit against Countrywide Bank FSB,
Countrywide Home Loans, Inc. (Countrywide) and Bank
of New York Mellon, BNY Mellon Trust of Delaware in the Circuit
Court, Cook County, Illinois seeking a declaratory judgment to
rescind or terminate various credit indemnity policies issued to
insure home equity loans and home equity lines of credit which
Countrywide had securitized or held for its own account. In
February of 2009, Countrywide filed a counterclaim alleging a
breach of contract, bad faith and seeking a declaratory judgment
challenging the factual and procedural bases that Old Republic
has relied upon to deny or rescind coverage for
F-65
OLD
REPUBLIC INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
($ in
Millions, Except Share Data)
individual defaulted loans under those policies. As of
March 31, 2010, Old Republic had rescinded or denied
coverage on more than 14,000 defaulted loans, based upon
material misrepresentations either by Countrywide as to the
credit characteristics of the loans or by the borrowers in their
loan applications.
On December 31, 2009, two of the Companys mortgage
insurance subsidiaries, Republic Mortgage Insurance Company and
Republic Mortgage Insurance Company of North Carolina (together
RMIC) filed a Complaint for Declaratory Judgment in
the Supreme Court of the State of New York, County of New York,
against Countrywide Financial Corporation, Countrywide Home
Loans, Inc., The Bank of New York Mellon Trust Company,
N.A., BAC Home Loans Servicing, LP, and Bank of America, N.A. as
successor in interest to Countrywide Bank, N.A. (together,
Countrywide). The suit relates to five mortgage
insurance master policies (the Policies) issued by
RMIC to Countrywide or to The Bank of New York Mellon
Trust Company as co-trustee for trusts containing
securitized mortgage loans that were originated or purchased by
Countrywide. RMIC has rescinded its mortgage insurance coverage
on over 1,500 of the loans originally covered under the Policies
based upon material misrepresentations of the borrowers in their
loan applications or the negligence of Countrywide in its loan
underwriting practices or procedures. Each of the coverage
rescissions occurred after a borrower had defaulted and RMIC
reviewed the claim and loan file submitted by Countrywide. The
suit seeks the Courts review and interpretation of the
Policies incontestability provisions and its validation of
RMICs investigation procedures with respect to the claims
and underlying loan files.
On January 29, 2010, in response to RMICs suit,
Countrywide served RMIC with a demand for arbitration under the
arbitration clauses of the same Policies. The demand raises
largely the same issues as those raised in RMICs suit
against Countrywide, as well as Countrywides and
RMICs compliance with the terms, provisions and conditions
of the Policies. The demand includes a prayer for punitive,
compensatory and consequential damages.
Except in the Connecticut and New Jersey actions against the
title companies, where settlement agreements have been approved,
the ultimate impact of these lawsuits and the arbitration, all
of which seek unquantified damages, attorneys fees and
expenses, is uncertain and not reasonably estimable. The Company
and its subsidiaries intend to defend vigorously against each of
the aforementioned actions. Although the Company does not
believe that these lawsuits will have a material adverse effect
on its consolidated financial condition, results of operations
or cash flows, there can be no assurance in those regards.
On April 29, 2009, the Company completed a public offering
of $316.25 aggregate principal amount of Convertible Senior
Notes. The notes bear interest at a rate of 8.0% per year,
mature on May 15, 2012, and are convertible at any time
prior to maturity by the holder into 86.8246 shares of
common stock per one thousand dollar note.
Consolidated debt of Old Republic and its subsidiaries is
summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
8% Convertible Senior Notes due 2012
|
|
$
|
316.2
|
|
|
$
|
390.5
|
|
|
$
|
316.2
|
|
|
$
|
358.9
|
|
ESSOP debt with an average yield of 3.73% and 3.85%, respectively
|
|
|
25.8
|
|
|
|
25.8
|
|
|
|
27.9
|
|
|
|
27.9
|
|
Other miscellaneous debt
|
|
|
5.1
|
|
|
|
5.1
|
|
|
|
2.5
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
347.2
|
|
|
$
|
421.5
|
|
|
$
|
346.7
|
|
|
$
|
389.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company currently has access to the commercial paper market
for up to $150.0.
F-66
OLD
REPUBLIC INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
($ in
Millions, Except Share Data)
Tax positions taken or expected to be taken in a tax return by
the Company are recognized in the financial statements when it
is more likely than not that the position would be sustained
upon examination by tax authorities. There are no tax
uncertainties that are expected to result in significant
increases or decreases to unrecognized tax benefits within the
next twelve month period. The Company views its income tax
exposures as primarily consisting of timing differences whereby
the ultimate deductibility of a taxable amount is highly certain
but the timing of its deductibility is uncertain. Such
differences relate principally to the timing of deductions for
loss and premium reserves. As in prior examinations, the
Internal Revenue Service (IRS) could assert that claim reserve
deductions were overstated thereby reducing the Companys
statutory taxable income in any particular year. The Company
believes that it establishes its reserves fairly and
consistently at each balance sheet date, and that it would
succeed in defending its tax position in these regards. Because
of the impact of deferred tax accounting, the possible
accelerated payment of tax to the IRS would not necessarily
affect the annual effective tax rate. The Company classifies
interest and penalties as income tax expense in the consolidated
statement of income. Examinations of the Companys
consolidated Federal income tax returns through year-end 2006
have been completed and no significant adjustments have resulted.
F-67
TABLE OF
CONTENTS
|
|
|
|
|
ARTICLE I THE MERGER
|
|
A-1
|
1.1
|
|
The Merger
|
|
A-1
|
1.2
|
|
Effective Time
|
|
A-1
|
1.3
|
|
Effects of the Merger
|
|
A-1
|
1.4
|
|
Conversion of Stock
|
|
A-1
|
1.5
|
|
Stock Options and Other Stock-Based Awards
|
|
A-2
|
1.6
|
|
Articles of Incorporation
|
|
A-4
|
1.7
|
|
Directors and Officers
|
|
A-4
|
1.8
|
|
Tax Consequences
|
|
A-5
|
|
|
|
ARTICLE II DELIVERY OF MERGER CONSIDERATION
|
|
A-5
|
2.1
|
|
Exchange Agent
|
|
A-5
|
2.2
|
|
Deposit of Merger Consideration
|
|
A-5
|
2.3
|
|
Delivery of Merger Consideration
|
|
A-5
|
|
|
|
ARTICLE III REPRESENTATIONS AND WARRANTIES OF COMPANY
|
|
A-7
|
3.1
|
|
Corporate Organization
|
|
A-7
|
3.2
|
|
Capitalization
|
|
A-8
|
3.3
|
|
Authority; No Violation
|
|
A-9
|
3.4
|
|
Consents and Approvals
|
|
A-9
|
3.5
|
|
Reports; Regulatory Matters
|
|
A-10
|
3.6
|
|
Financial Statements
|
|
A-11
|
3.7
|
|
Brokers Fees
|
|
A-12
|
3.8
|
|
Absence of Certain Changes or Events
|
|
A-12
|
3.9
|
|
Legal Proceedings
|
|
A-12
|
3.10
|
|
Taxes and Tax Returns
|
|
A-13
|
3.11
|
|
Employee Matters
|
|
A-14
|
3.12
|
|
Compliance with Applicable Law
|
|
A-15
|
3.13
|
|
Certain Contracts
|
|
A-15
|
3.14
|
|
Investment Securities and Commodities
|
|
A-16
|
3.15
|
|
Property
|
|
A-16
|
3.16
|
|
Intellectual Property
|
|
A-17
|
3.17
|
|
Environmental Liability
|
|
A-18
|
3.18
|
|
Insurance Business Matters
|
|
A-18
|
3.19
|
|
State Takeover Laws
|
|
A-20
|
3.20
|
|
Interested Party Transactions
|
|
A-20
|
3.21
|
|
Reorganization
|
|
A-20
|
3.22
|
|
Opinion
|
|
A-21
|
3.23
|
|
Company Information
|
|
A-21
|
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT
|
|
A-21
|
4.1
|
|
Corporate Organization
|
|
A-21
|
4.2
|
|
Capitalization
|
|
A-21
|
4.3
|
|
Authority; No Violation
|
|
A-22
|
4.4
|
|
Consents and Approvals
|
|
A-22
|
4.5
|
|
Reports; Regulatory Matters
|
|
A-23
|
A-i
|
|
|
|
|
4.6
|
|
Financial Statements
|
|
A-24
|
4.7
|
|
Brokers Fees
|
|
A-24
|
4.8
|
|
Absence of Certain Changes or Events
|
|
A-25
|
4.9
|
|
Legal Proceedings
|
|
A-25
|
4.10
|
|
Taxes and Tax Returns
|
|
A-25
|
4.11
|
|
Compliance with Applicable Law
|
|
A-25
|
4.12
|
|
Certain Contracts
|
|
A-25
|
4.13
|
|
Investment Securities and Commodities
|
|
A-25
|
4.14
|
|
Intellectual Property
|
|
A-26
|
4.15
|
|
Insurance Business Matters
|
|
A-26
|
4.16
|
|
Reorganization; Approvals
|
|
A-27
|
4.17
|
|
Parent Information
|
|
A-27
|
4.18
|
|
Parent Ownership of Company Securities
|
|
A-27
|
|
|
|
ARTICLE V COVENANTS RELATING TO CONDUCT OF BUSINESS
|
|
A-27
|
5.1
|
|
Conduct of Business Prior to the Effective Time
|
|
A-27
|
5.2
|
|
Forbearances
|
|
A-27
|
5.3
|
|
Parent Forbearances
|
|
A-29
|
|
|
|
ARTICLE VI ADDITIONAL AGREEMENTS
|
|
A-29
|
6.1
|
|
Regulatory Matters
|
|
A-29
|
6.2
|
|
Access to Information
|
|
A-31
|
6.3
|
|
Shareholder Approval
|
|
A-32
|
6.4
|
|
NYSE Listing
|
|
A-32
|
6.5
|
|
Maintenance of Tax-Free Reorganization
|
|
A-32
|
6.6
|
|
Employee Matters
|
|
A-32
|
6.7
|
|
Indemnification; Directors and Officers Insurance
|
|
A-33
|
6.8
|
|
Additional Agreements
|
|
A-34
|
6.9
|
|
Advise of Changes
|
|
A-34
|
6.10
|
|
Exemption from Liability Under Section 16(b)
|
|
A-34
|
6.11
|
|
No Solicitation
|
|
A-34
|
|
|
|
ARTICLE VII CONDITIONS PRECEDENT
|
|
A-36
|
7.1
|
|
Conditions to Each Partys Obligation to Effect the Merger
|
|
A-36
|
7.2
|
|
Conditions to Obligations of Parent
|
|
A-37
|
7.3
|
|
Conditions to Obligations of Company
|
|
A-38
|
ARTICLE VIII TERMINATION AND AMENDMENT
|
|
A-38
|
8.1
|
|
Termination
|
|
A-38
|
8.2
|
|
Effect of Termination
|
|
A-39
|
8.3
|
|
Fees and Expenses
|
|
A-39
|
8.4
|
|
Termination Fee
|
|
A-39
|
8.5
|
|
Amendment
|
|
A-40
|
8.6
|
|
Extension; Waiver
|
|
A-40
|
|
|
|
ARTICLE IX GENERAL PROVISIONS
|
|
A-40
|
9.1
|
|
Closing
|
|
A-40
|
9.2
|
|
Standard
|
|
A-40
|
9.3
|
|
Non-survival of Representations, Warranties and Agreements
|
|
A-40
|
A-ii
|
|
|
|
|
9.4
|
|
Notices
|
|
A-41
|
9.5
|
|
Interpretation
|
|
A-41
|
9.6
|
|
Counterparts
|
|
A-42
|
9.7
|
|
Entire Agreement
|
|
A-42
|
9.8
|
|
Governing Law; Jurisdiction
|
|
A-42
|
9.9
|
|
Publicity
|
|
A-42
|
9.10
|
|
Assignment; Third Party Beneficiaries
|
|
A-42
|
9.11
|
|
Specific Performance
|
|
A-43
|
A-iii
INDEX OF
DEFINED TERMS
|
|
|
|
|
|
|
Section
|
|
Adjusted Option
|
|
|
1.5(a)
|
|
Adjusted SAR
|
|
|
1.5(b)
|
|
Agreement
|
|
|
Preamble
|
|
Alternative Proposal
|
|
|
6.11(a)(i)
|
|
Alternative Transaction
|
|
|
6.11(a)
|
|
Annual Bonus Plan
|
|
|
1.5(e)
|
|
Articles of Merger
|
|
|
1.2(a)
|
|
Bankruptcy and Equity Exception
|
|
|
3.3(a)
|
|
Cash Amount
|
|
|
1.5(c)
|
|
Certificate
|
|
|
1.4(d)
|
|
Change of Recommendation
|
|
|
6.11(d)
|
|
Change of Recommendation Notice
|
|
|
6.11(d)(iii)
|
|
Claim
|
|
|
6.7(a)
|
|
Closing
|
|
|
9.1
|
|
Closing Date
|
|
|
9.1
|
|
Code
|
|
|
Recitals
|
|
Company
|
|
|
Preamble
|
|
Company Articles
|
|
|
3.1(b)
|
|
Company Benefit Plans
|
|
|
3.11(a)
|
|
Company Bylaws
|
|
|
3.1(b)
|
|
Company Capitalization Date
|
|
|
3.2(a)
|
|
Company Common Stock
|
|
|
1.4(b)
|
|
Company Contract
|
|
|
3.13(a)
|
|
Company Deferred Stock Units
|
|
|
1.5(d)
|
|
Company Disclosure Schedule
|
|
|
Art. III
|
|
Company IP
|
|
|
3.17(a)
|
|
Company LTIP
|
|
|
1.5(e)
|
|
Company Options
|
|
|
1.5(a)
|
|
Company Preferred Stock
|
|
|
3.2(a)
|
|
Company Regulatory Agreement
|
|
|
3.5(b)
|
|
Company Restricted Shares
|
|
|
1.5(b)
|
|
Company SARs
|
|
|
1.5(b)
|
|
Company SEC Reports
|
|
|
3.5(c)(i)
|
|
Confidentiality Agreement
|
|
|
6.2(b)
|
|
Controlled Group Liability
|
|
|
3.11(f)
|
|
Convertible Stock
|
|
|
1.4(c)
|
|
Covered Employees
|
|
|
6.6(a)
|
|
D & O Insurance
|
|
|
6.7(c)
|
|
DOJ
|
|
|
6.1(d)(ii)
|
|
DOS
|
|
|
1.2
|
|
DPC Common Shares
|
|
|
1.4(b)
|
|
Effective Time
|
|
|
1.2
|
|
Employees
|
|
|
5.2(c)(i)
|
|
End Date
|
|
|
8.1(c)
|
|
A-iv
|
|
|
|
|
|
|
Section
|
|
ERISA
|
|
|
3.11(a)
|
|
ERISA Affiliate
|
|
|
3.11(g)
|
|
Excess Shares
|
|
|
2.3(f)(ii)
|
|
Exchange Act
|
|
|
3.5(c)(i)
|
|
Exchange Agent
|
|
|
2.1
|
|
Exchange Agent Agreement
|
|
|
2.1
|
|
Exchange Fund
|
|
|
2.2
|
|
Exchange Ratio
|
|
|
1.4(c)
|
|
Expenses
|
|
|
8.4(b)
|
|
Form S-4
|
|
|
3.4(c)
|
|
FTC
|
|
|
6.1(d)(ii)
|
|
GAAP
|
|
|
3.1(c)
|
|
Governmental Entity
|
|
|
3.4(b)
|
|
HSR Act
|
|
|
3.4(e)
|
|
Incentive Stock Option
|
|
|
1.5(a)
|
|
Indemnified Party
|
|
|
6.7(a)
|
|
Insurance Contracts
|
|
|
3.18(d)
|
|
Insurance Subsidiary
|
|
|
3.18(a)
|
|
Intellectual Property
|
|
|
3.16(a)
|
|
IRS
|
|
|
3.10(a)
|
|
Law
|
|
|
6.1(i)
|
|
Letter of Transmittal
|
|
|
2.3(a)(i)
|
|
License Agreement
|
|
|
3.16(a)
|
|
Licensed Company IP
|
|
|
3.16(a)
|
|
Licensed Parent IP
|
|
|
4.14(a)
|
|
Liens
|
|
|
3.2(c)
|
|
Material Adverse Effect
|
|
|
3.8(a)
|
|
Maximum Amount
|
|
|
6.7(c)
|
|
Merger
|
|
|
Recitals
|
|
Merger Consideration
|
|
|
1.4(c)
|
|
Merger Sub
|
|
|
Preamble
|
|
NYSE
|
|
|
1.5(c)
|
|
Owned Company IP
|
|
|
3.16(a)
|
|
Owned Parent IP
|
|
|
4.14(a)
|
|
Owned Properties
|
|
|
3.15(a)
|
|
Parent
|
|
|
Preamble
|
|
Parent Bylaws
|
|
|
4.3(b)(i)
|
|
Parent Capitalization Date
|
|
|
4.2
|
|
Parent Certificate
|
|
|
4.3(b)
|
|
Parent Common Stock
|
|
|
1.4(c)
|
|
Parent Contract
|
|
|
4.12(a)
|
|
Parent Deferred Stock Unit
|
|
|
1.5(d)
|
|
Parent Disclosure Schedule
|
|
|
Art. IV
|
|
Parent Insurance Subsidiary
|
|
|
4.15(a)
|
|
Parent IP
|
|
|
4.14(a)
|
|
A-v
|
|
|
|
|
|
|
Section
|
|
Parent Measurement Price
|
|
|
1.4(c)
|
|
Parent Preferred Stock
|
|
|
4.2
|
|
Parent Regulatory Agreement
|
|
|
4.5(b)
|
|
Parent SEC Reports
|
|
|
4.5(c)(i)
|
|
Parent Stock Plans
|
|
|
4.2
|
|
PBCL
|
|
|
1.1
|
|
Performance Based Compensation Plans
|
|
|
1.5(e)
|
|
Permitted Encumbrances
|
|
|
3.15(a)(iv)
|
|
Pre-Termination Company Takeover Proposal Event
|
|
|
8.4(b)
|
|
Proxy Statement
|
|
|
3.4(c)
|
|
Real Property
|
|
|
3.16(b)
|
|
Regulatory Agencies
|
|
|
3.5(a)
|
|
Regulatory Approvals
|
|
|
3.4
|
|
Regulatory Laws
|
|
|
6.1(h)
|
|
Reinsurance Contract
|
|
|
3.18(g)
|
|
SAP
|
|
|
3.18(b)
|
|
Sarbanes-Oxley Act
|
|
|
3.5(c)
|
|
SEC
|
|
|
1.5(g)
|
|
Securities Act
|
|
|
3.2(a)(ii)
|
|
Service Ratio
|
|
|
1.5(d)
|
|
Statutory Statements
|
|
|
3.18(b)
|
|
Subsidiary
|
|
|
3.1(c)
|
|
Superior Proposal
|
|
|
6.11(d)
|
|
Surviving Company
|
|
|
Recitals
|
|
Takeover Statutes
|
|
|
3.19
|
|
Tax
|
|
|
3.10(h)
|
|
Tax Return
|
|
|
3.10(i)
|
|
Taxes
|
|
|
3.10(h)
|
|
Termination Date
|
|
|
8.1(c)
|
|
Termination Fee
|
|
|
8.4(a)
|
|
Trust Account Common Shares
|
|
|
1.4(b)
|
|
Unaccelerated Company Restricted Shares
|
|
|
1.5(b)
|
|
Voting Debt
|
|
|
3.2(a)
|
|
A-vi
AGREEMENT
AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of June 9, 2010
(this Agreement), among PMA Capital
Corporation, a Pennsylvania corporation
(Company), Old Republic International
Corporation, a Delaware corporation (Parent)
and OR New Corp., a Pennsylvania corporation and wholly owned
subsidiary of Parent (Merger Sub).
WITNESSETH:
WHEREAS, the Boards of Directors of Company, Parent and Merger
Sub have adopted this Agreement and have determined that it is
in the best interests of their respective companies and
shareholders to consummate the strategic business combination
transaction provided for in this Agreement in which Merger Sub
will, on the terms and subject to the conditions set forth in
this Agreement, merge with and into Company (the
Merger), with Company as the surviving
company in the Merger (sometimes referred to in such capacity as
the Surviving Company);
WHEREAS, for federal income Tax purposes, it is the intent of
the parties hereto that the Merger qualify as a
reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as
amended (the Code), and this Agreement is
intended to be and is adopted as a plan of
reorganization within the meaning of
Section 1.368-2(g)
of the Treasury Regulations and for purposes of
Sections 354 and 361 of the Code;
WHEREAS, this Agreement is intended to be a plan of merger
pursuant to Section 1922 of the PBCL (as hereinafter
defined); and
WHEREAS, the parties desire to make certain representations,
warranties and agreements in connection with the Merger and also
to prescribe certain conditions to the Merger.
NOW THEREFORE, in consideration of the mutual covenants,
representations, warranties and agreements contained herein, and
other good and valuable consideration, the sufficiency of which
is hereby acknowledged, and intending to be legally bound
hereby, the parties agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. Subject to
the terms and conditions of this Agreement, in accordance with
the Pennsylvania Business Corporation Law of 1988, as amended,
15 Pa. C.S.A. §§ 1101, et seq. (the
PBCL) at the Effective Time, Merger Sub shall
merge with and into Company. Company shall be the Surviving
Company in the Merger and shall continue its existence as a
corporation under the laws of the Commonwealth of Pennsylvania.
As of the Effective Time, the separate corporate existence of
Merger Sub shall cease.
1.2 Effective Time. Subject
to the provisions of this Agreement, as soon as practicable
following the Closing on the Closing Date, the parties hereto
shall (a) file articles of merger, in customary form (the
Articles of Merger) with the Pennsylvania
Department of State (the DOS), and
(b) duly make all other filings and recordings required by
the PBCL in order to effectuate the Merger. The Merger shall
become effective upon the filing of the Articles of Merger with
the DOS or at such later time as may be agreed to by Parent and
Company in writing and specified in the Articles of Merger (the
date and time that the Merger becomes effective is referred to
as the Effective Time).
1.3 Effects of the
Merger. At and after the Effective Time, the
Merger shall have the effects set forth in Section 1929 of
the PBCL.
1.4 Conversion of Stock. At
the Effective Time, by virtue of the Merger and without any
action on the part of the Parent, Merger Sub, Company or the
holder of any of the following securities:
(a) Each share of common stock, par value $0.01 per share,
of Merger Sub issued and outstanding immediately prior to the
Effective Time shall be converted into and become one validly
issued, fully paid and non-assessable share of common stock,
$0.01 par value, of the Surviving Company. From and after
the
A-1
Effective Time, all certificates representing the common stock
of Merger Sub shall be deemed for all purposes to represent the
number of shares of common stock of the Surviving Company into
which they were converted in accordance with the immediately
preceding sentence.
(b) All shares of Class A common stock, $5.00 par
value, of Company issued and outstanding immediately prior to
the Effective Time (the Company Common Stock)
that are owned by Company or Parent or by any wholly-owned
subsidiary of Company or Parent (other than shares of Company
Common Stock owned by Company or Parent and held in trust
accounts, managed accounts, mutual funds and the like, or
otherwise held in a fiduciary or agency capacity, that are
beneficially owned by third parties (any such shares,
Trust Account Common Shares) and other
than shares of Company Common Stock held, directly or
indirectly, by Company or Parent in respect of a debt previously
contracted (any such shares, DPC Common
Shares)) shall be cancelled and shall cease to exist
and no stock of Parent or other consideration shall be delivered
in exchange therefor.
(c) Subject to Section 1.4(e), each share of Company
Common Stock, except for shares of Company Common Stock owned by
Company or Parent which are not Trust Account Common Shares
and DPC Common Shares, (Convertible Stock)
shall be converted, in accordance with the procedures set forth
in Article II, into the right to receive 0.5500 (such
amount, as it may be adjusted pursuant to Section 6.11, the
Exchange Ratio) shares of common stock, par
value $1.00 per share, of Parent (Parent Common
Stock), (the Merger Consideration),
provided that the Parent Measurement Price is at least $12.50
but not greater than $17.00. If the Parent Measurement Price is
less than $12.50, each share of Convertible Stock shall be
converted into the right to receive the number of shares of
Parent Common Stock equal to the exchange ratio determined by
dividing $6.8750 by the Parent Measurement Price. In the event
the foregoing calculation results in an Exchange Ratio greater
than 0.6000, the Exchange Ratio shall be fixed at 0.6000. If the
Parent Measurement Price is greater than $17.00, each share of
Convertible Stock shall be converted into the right to receive
shares of Parent Common Stock equal to the exchange ratio
determined by dividing $9.3500 by the Parent Measurement Price.
In the event that the foregoing calculation results in an
Exchange Ratio less than 0.5000, the Exchange Ratio shall be
fixed at 0.5000. Parent Measurement Price
shall mean the volume weighted average price per share of Parent
Common Stock on the New York Stock Exchange only as reported by
Bloomberg LP for the twenty (20) consecutive trading days
ending on and including the fifth (5th) trading day prior to,
but not including, the closing date of the merger, rounded to
the nearest one-tenth of one cent ($0.001).
(d) All of the shares of Company Common Stock converted
into the right to receive the Merger Consideration pursuant to
this Article I shall no longer be outstanding and shall
automatically be cancelled and shall cease to exist as of the
Effective Time, and each certificate previously representing any
such shares of Company Common Stock (each, a
Certificate) shall thereafter represent only
the right to receive the Merger Consideration
and/or cash
in lieu of fractional shares into which the shares of Company
Common Stock represented by such Certificate have been converted
pursuant to this Section 1.4 and Section 2.3(f), as
well as any dividends to which holders of Company Common Stock
become entitled in accordance with Section 2.3(c).
(e) If, between the date of this Agreement and the
Effective Time, the outstanding shares of Parent Common Stock
shall have been increased, decreased, changed into or exchanged
for a different number or kind of shares or securities as a
result of a reorganization, recapitalization, reclassification,
stock dividend, stock split, reverse stock split, or other
similar change in capitalization, an appropriate and
proportionate adjustment shall be made to the Merger
Consideration.
1.5 Stock Options; Other Stock-Based Awards;
Convertible Notes. (a) Immediately prior
to the Effective Time, each option to purchase shares of Company
Common Stock (collectively, the Company
Options) that is outstanding immediately prior to the
Effective Time, whether or not then vested or exercisable, shall
become fully vested and exercisable (but only if the applicable
option award agreement as in effect on March 31, 2010 (or,
if the grant was made after such date and prior to the date of
this Agreement, on the date of the initial grant) or the Company
Benefit Plan under which the Company Option was granted provides
that such Company Option shall vest (or shall become
exercisable) upon a change in control or any other event that
includes the Merger) and shall be
A-2
converted into an option (an Adjusted Option)
to purchase the number of whole shares of Parent Common Stock
that is equal to the number of shares of Company Common Stock
subject to such Company Option immediately prior to the
Effective Time multiplied by the Exchange Ratio (rounded down to
the nearest whole share), at an exercise price per share of
Parent Common Stock equal to the exercise price for each such
share of Company Common Stock subject to such Company Option
immediately prior to the Effective Time divided by the
Exchange Ratio (rounded up to the nearest whole penny), and
otherwise on the same terms and conditions as applied to each
such Company Option immediately prior to the Effective Time;
provided, that
(i) in the case of any Company Option to which
Section 421 of the Code applies as of the Effective Time by
reason of its qualification under Section 422 of the Code
(each, an Incentive Stock Option), the exercise
price, the number of shares of Parent Common Stock subject to
such option and the terms and conditions of exercise of such
option shall be determined in a manner consistent with the
requirements of Section 424(a) of the Code and the Treasury
Regulations promulgated thereunder; and
(ii) in the case of any Company Option that is not an
Incentive Stock Option and that was granted or became vested on
or after January 1, 2005, or that was materially modified
(within the meaning of
Section 1.409A-6(a)(i)
of the Treasury Regulations) after October 3, 2004, the
exercise price, the number of shares of Parent Common Stock
subject to such option and the terms and conditions of exercise
of such option shall be determined in a manner consistent with
the requirements of
Section 1.409A-(b)(5)(v)(D)
of the Treasury Regulations.
(b) Immediately prior to the Effective Time, each stock
appreciation right that is based on the value of Company Common
Stock (collectively, the Company SARs) that
is outstanding immediately prior to the Effective Time, whether
or not then vested or exercisable, shall become fully vested and
exercisable (but only if the applicable stock appreciation right
award agreement as in effect on March 31, 2010 (or, if the
grant was made after such date and prior to the date of this
Agreement, on the date of the initial grant) or the Company
Benefit Plan under which the Company SAR was granted provides
that such Company SAR shall vest (or shall become exercisable)
upon a change in control or any other event that includes the
Merger) and shall be converted into a stock appreciation right
(an Adjusted SAR) with respect to the number
of whole shares of Parent Common Stock that is equal to the
number of shares of Company Common Stock subject to such Company
SAR immediately prior to the Effective Time multiplied by the
Exchange Ratio (rounded down to the nearest whole share), at an
exercise or base price per share of Parent Common Stock equal to
the exercise or base price for each such share of Company Common
Stock subject to such Company SAR immediately prior to the
Effective Time divided by the Exchange Ratio (rounded up
to the nearest whole penny), and otherwise on the same terms and
conditions as applied to each such Company SAR immediately prior
to the Effective Time; provided, that, in the case of any
Company SAR that was granted or became vested on or after
January 1, 2005, or that was materially modified (within
the meaning of
Section 1.409A-6(a)(i)
of the Treasury Regulations) after October 3, 2004, the
exercise or base price, the number of shares of Parent Common
Stock subject to such stock appreciation right and the terms and
conditions of exercise of such stock appreciation right shall be
determined in a manner consistent with the requirements of
Section 1.409A-(b)(5)(v)(D)
of the Treasury Regulations.
(c) Immediately prior to the Effective Time, each
restricted share of Company Common Stock that is outstanding
immediately prior to the Effective Time (collectively, the
Company Restricted Shares) shall (i) if
and to the extent that the applicable restricted stock award
agreement as in effect on March 31, 2010 (or, if the grant
was made after such date and prior to the date of this
Agreement, on the date of the initial grant) or the Company
Benefit Plan under which the Company Restricted Share was
granted provides that such Company Restricted Shares shall vest
(or that applicable restrictions shall lapse) upon a change in
control or any other event that includes the Merger, vest in
full and be converted into the right to receive the Merger
Consideration as provided in Section 1.4(c) of the
Agreement and (ii) if and to the extent that the applicable
restricted stock award agreement as in effect on March 31,
2010 (or, if the grant was made after such date and prior to the
date of this Agreement, on the date of the initial grant) or the
Company Benefit Plan under which the Company Restricted Share
was granted does not provide that such Company Restricted shares
shall vest (or that applicable restrictions shall lapse) upon a
change in control or any other event that includes the Merger
(any such Company Restricted Shares, Unaccelerated
Company Restricted Shares), be converted into the
number of whole shares (rounded to the nearest whole share) of
Parent Common Stock equal to the Exchange Ratio times each such
holders number of Unaccelerated Company Restricted Shares
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outstanding immediately prior to Effective Time and will be
subject to the same terms and conditions as the Unaccelerated
Company Restricted Shares (including applicable vesting
requirements).
(d) As of the Effective Time, all amounts denominated in
Company Common Stock as awards under the Company LTIPs
(collectively, the Company Deferred Stock
Units) shall, by virtue of the Merger and without any
action on the part of the holder thereof, be converted into
deferred stock units with respect to the number of shares of
Parent Common Stock that is equal to the number of shares of
Company Common Stock in which such Company Deferred Stock Units
are denominated immediately prior to the Effective Time
multiplied by each of the Exchange Ratio and the Service Ratio
(rounded to the nearest whole share) (Parent Deferred
Stock Units), and otherwise on the same terms and
conditions (including applicable vesting requirements,
accelerated vesting thereof and deferral provisions) as applied
to such Company Deferred Stock Units immediately prior to the
Effective Time. The Service Ratio shall equal
the number of days in the performance period set forth in the
award for such Company Deferred Stock Units that are completed
as of the Closing Date divided by the number of days in such
performance period. The obligations in respect of the Parent
Deferred Stock Units shall be payable or distributable in
accordance with the terms of the Company Benefit Plan relating
to such Parent Deferred Stock Units.
(e) Notwithstanding subsection (d) above, as of the
Effective Time, the performance goals designated under each of
the Companys 2009 and 2010 Officer Long Term Incentive
Plans (the Company LTIPs) and the
Companys 2010 Officer Annual Incentive Compensation Plan
(the Annual Bonus Plan) and, together with
the Company LTIPs, the Performance-Based Compensation
Plans) shall be deemed to have been met at 100% of
target with respect to each of the Company LTIPs and at a payout
factor of 100% with respect to the Annual Bonus Plan, and
thereafter the payment of such awards shall be based on the
satisfaction by participants of only the service-based and
time-based vesting requirements designated under the
Performance-Based Compensation Plans, if any. Companys
2008 Officer Long Term Incentive Plan shall be terminated
effective as of the Closing Date.
(f) Prior to the Effective Time, Company, the Board of
Directors of Company and the Compensation Committee of the Board
of Directors of Company, as applicable, shall adopt resolutions
and take all other actions necessary to effectuate the
provisions of this Section 1.5.
(g) Parent shall reserve and take all other action
necessary or appropriate to have available for issuance or
transfer a sufficient number of shares of Parent Common Stock
for delivery upon exercise of the Adjusted Options, vesting of
Parent Common Stock in respect of Unaccelerated Company
Restricted Shares and Parent Deferred Stock Units and conversion
of any convertible debt of the Company. To the extent not
specifically provided above, all of the conversions and
adjustments made pursuant to this Section 1.5, including
without limitation, the determination of the number of shares of
Parent Common Stock subject to any award and the exercise price
of the Adjusted Options and Adjusted SARs, shall be made in a
manner consistent with the requirements of Section 409A of
the Code. Promptly after the Effective Time, Parent shall
prepare and file with the Securities and Exchange Commission
(the SEC) a post-effective amendment
converting the
Form S-4
to a
Form S-8
(or file such other appropriate form) registering a number of
shares of Parent Common Stock necessary to fulfill Parents
obligations under this paragraph (g).
1.6 Articles of Incorporation;
Bylaws. At the Effective Time, the articles
of incorporation of the Company shall be amended and restated so
that they are identical to the articles of incorporation of
Merger Sub as in effect immediately prior to the Effective Time
(until thereafter amended as provided therein or by applicable
law), except that Article I of the articles of
incorporation of the Surviving Company will read as follows:
The name of the corporation is PMA Companies, Inc. (the
Company). At the Effective Time, the
bylaws of the Company shall be amended and restated so that they
are identical to the bylaws of Merger Sub as in effect
immediately prior to the Effective Time (until thereafter
amended as provided therein or by applicable law) except that
the name of the corporation reflected therein shall be changed
to PMA Companies, Inc. until thereafter amended as
provided therein or by applicable law.
1.7 Directors and
Officers. The directors of the Company other
than Vincent T. Donnelly immediately prior to the Effective Time
shall submit their resignations to be effective as of the
Effective Time. It is intended that the directors and officers
of Merger Sub and Vincent T. Donnelly shall, from and after the
Effective Time, become the directors and officers, respectively,
of the Surviving Company until their successors shall have been
duly elected, appointed or qualified or until their earlier
death, resignation or removal in accordance with the articles of
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incorporation of the Surviving Company. Following the Effective
Time, Parent shall take such actions as may be required to add
one of Companys independent directors to the Parent Board
of Directors (to serve as a Class 2 director).
1.8 Tax Consequences. It is
intended that the Merger will qualify as a
reorganization within the meaning of
Section 368(a) of the Code, and that this Agreement shall
constitute, and is adopted as, a plan of
reorganization within the meaning of
Section 1.368-2(g)
of the Treasury Regulations for purposes of Section 354 and
361 of the Code.
ARTICLE II
DELIVERY OF
MERGER CONSIDERATION
2.1 Exchange Agent. Prior to
the Effective Time, Parent shall appoint a bank or trust company
reasonably acceptable to Company, or Parents transfer
agent, pursuant to an agreement (the Exchange Agent
Agreement) to act as exchange agent (the
Exchange Agent) hereunder.
2.2 Deposit of Merger
Consideration. At or prior to the Effective
Time, Parent shall authorize the Exchange Agent to issue an
aggregate number of shares of Parent Common Stock equal to the
aggregate Merger Consideration (together with the proceeds from
the sale of the Excess Shares by the Exchange Agent, the
Exchange Fund).
2.3 Delivery of Merger
Consideration. (a) As soon as reasonably
practicable after the Effective Time, the Exchange Agent shall
mail to each holder of record of Certificate(s) which
immediately prior to the Effective Time represented outstanding
shares of Company Common Stock whose shares were converted into
the right to receive the Merger Consideration pursuant to
Section 1.4 and any cash in lieu of fractional shares of
Parent Common Stock to be issued or paid in consideration
therefor (i) a letter of transmittal (which shall specify
that delivery shall be effected, and risk of loss and title to
Certificate(s) shall pass, only upon actual delivery of
Certificate(s) (or affidavits of loss in lieu of such
Certificates) to the Exchange Agent and shall be substantially
in such form and have such other provisions as shall be
prescribed by the Exchange Agent Agreement (the Letter
of Transmittal)) and (ii) instructions for use in
surrendering Certificate(s) in exchange for the Merger
Consideration, any cash in lieu of fractional shares of Parent
Common Stock to be issued or paid in consideration therefor and
any dividends or distributions to which such holder is entitled
pursuant to Section 2.3(c).
(b) Upon surrender to the Exchange Agent of its Certificate
or Certificates, accompanied by a properly completed Letter of
Transmittal, a holder of Company Common Stock will be entitled
to receive promptly after the Effective Time the Merger
Consideration and any cash in lieu of fractional shares of
Parent Common Stock to be issued or paid in consideration
therefor in respect of the shares of Company Common Stock
represented by its Certificate or Certificates. Until so
surrendered, each such Certificate shall represent after the
Effective Time, for all purposes, only the right to receive,
without interest, the Merger Consideration and any cash in lieu
of fractional shares of Parent Common Stock to be issued or paid
in consideration therefor upon surrender of such Certificate in
accordance with, and any dividends or distributions to which
such holder is entitled pursuant to, this Article II.
(c) No dividends or other distributions with respect to
Parent Common Stock shall be paid to the holder of any
unsurrendered Certificate with respect to the shares of Parent
Common Stock represented thereby, in each case unless and until
the surrender of such Certificate in accordance with this
Article II. Subject to the effect of applicable abandoned
property, escheat or similar laws, following surrender of any
such Certificate in accordance with this Article II, the
record holder thereof shall be entitled to receive, without
interest, (i) the amount of dividends or other
distributions with a record date after the Effective Time
theretofore payable with respect to whole shares of Parent
Common Stock represented by such Certificate and not paid
and/or
(ii) at the appropriate payment date, the amount of
dividends or other distributions payable with respect to shares
of Parent Common Stock represented by such Certificate with a
record date after the Effective Time (but before such surrender
date) and with a payment date subsequent to the issuance of the
Parent Common Stock issuable with respect to such Certificate.
(d) In the event of a transfer of ownership of a
Certificate representing Company Common Stock that is not
registered in the stock transfer records of Company, the
fractional shares of Parent Common Stock and cash in lieu of
fractional shares of Parent Common Stock comprising the Merger
Consideration shall be issued or paid in
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exchange therefor to a person other than the person in whose
name the Certificate so surrendered is registered if the
Certificate formerly representing such Company Common Stock
shall be properly endorsed or otherwise be in proper form for
transfer and the person requesting such payment or issuance
shall pay any transfer or other similar Taxes required by reason
of the payment or issuance to a person other than the registered
holder of the Certificate or establish to the satisfaction of
Parent that the Tax has been paid or is not applicable. The
Exchange Agent (or subsequent to the earlier of (i) the
one-year anniversary of the Effective Time and (ii) the
expiration or termination of the Exchange Agent Agreement,
Parent) shall be entitled to deduct and withhold from any cash
in lieu of fractional shares of Parent Common Stock otherwise
payable pursuant to this Agreement to any holder of Company
Common Stock such amounts as the Exchange Agent or Parent, as
the case may be, is required to deduct and withhold under the
Code and the Treasury Regulations promulgated thereunder, or any
provision of state, local or foreign Tax Law, with respect to
the making of such payment. To the extent the amounts are so
withheld by the Exchange Agent or Parent, as the case may be,
and timely paid over to the appropriate Governmental Entity,
such withheld amounts shall be treated for all purposes of this
Agreement as having been paid to the holder of shares of Company
Common Stock in respect of whom such deduction and withholding
was made by the Exchange Agent or Parent, as the case may be.
(e) After the Effective Time, there shall be no transfers
on the stock transfer books of Company of the shares of Company
Common Stock that were issued and outstanding immediately prior
to the Effective Time other than to settle transfers of Company
Common Stock that occurred prior to the Effective Time. If,
after the Effective Time, Certificates representing such shares
are presented for transfer to the Exchange Agent, they shall be
cancelled and exchanged for the Merger Consideration and any
cash in lieu of fractional shares of Parent Common Stock to be
issued or paid in consideration therefor in accordance with the
procedures set forth in this Article II.
(f) Notwithstanding anything to the contrary contained in
this Agreement, no fractional shares of Parent Common Stock
shall be issued upon the surrender of Certificates for exchange,
no dividend or distribution with respect to Parent Common Stock
shall be payable on or with respect to any fractional share, and
such fractional share interests shall not entitle the owner
thereof to vote or to any other rights of a shareholder of
Parent. In lieu of the issuance of any such fractional share,
each former shareholder of Company who otherwise would be
entitled to receive such fractional share shall be paid an
amount in cash (rounded to the nearest cent) equal to such
holders proportionate interest in the net proceeds from
the sale or sales in the open market by the Exchange Agent, on
behalf of all such holders, of the aggregate fractional shares
of Parent Company Stock that would otherwise have been issued
pursuant to this Article II. As soon as practicable
following the Closing Date, the Exchange Agent shall determine
the excess of (i) the number of full shares of Parent
Common Stock delivered to the Exchange Agent by Parent over
(ii) the aggregate number of full shares of Parent Common
Stock to be distributed to holders of shares of Company Common
Stock (such excess, the Excess Shares), and
the Exchange Agent, as agent for the former holders of Company
Common Stock, shall sell the Excess Shares at the prevailing
prices on the NYSE. The sale of the Excess Shares by the
Exchange Agent shall be executed on the NYSE through one or more
member firms of the NYSE and shall be executed in round lots to
the extent practicable. All commissions, transfer Taxes and
other
out-of-pocket
transaction costs, including the expenses and compensation of
the Exchange Agent, incurred in connection with such sale of
Excess Shares shall reduce, but not below zero, the amount of
cash paid to former shareholders of Company in respect of
fractional shares. The Exchange Agent shall determine the
portion of the proceeds of such sale to which each former holder
of Company Common Stock shall be entitled, if any, by
multiplying the amount of the proceeds of such sale by a
fraction the numerator of which is the amount of fractional
share interests to which such holder of Company Common Stock is
entitled (after taking into account all shares of Company Common
Stock held at the Effective Time by such holder) and the
denominator of which is the aggregate amount of fractional share
interests to which all holders of Company Common Stock are
entitled. Until the proceeds of such sale have been distributed
to the former holders of shares of Company Common Stock, the
Exchange Agent will hold such proceeds in trust for such former
holders. As soon as practicable after the determination of the
amount of cash to be paid to such former holders of shares of
Company Common Stock in lieu of any fractional interests, the
Exchange Agent shall make available in accordance with this
Agreement such amounts to such former holders of shares of
Company Common Stock.
(g) Any portion of the Exchange Fund that remains unclaimed
by the shareholders of Company as of the first anniversary of
the Effective Time will be paid to Parent. In such event, any
former shareholders of Company who
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have not theretofore complied with this Article II shall
thereafter look only to Parent with respect to the Merger
Consideration, any cash in lieu of any fractional shares and any
unpaid dividends and distributions on the Parent Common Stock
deliverable in respect of each share of Company Common Stock
such shareholder holds as determined pursuant to this Agreement,
in each case, without any interest thereon. Notwithstanding the
foregoing, none of Parent, the Surviving Company, the Exchange
Agent or any other person shall be liable to any former holder
of shares of Company Common Stock for any amount delivered in
good faith to a public official pursuant to applicable abandoned
property, escheat or similar laws. Any portion of the Merger
Consideration remaining unclaimed by holders of Company Common
Stock as of a date that is immediately prior to such time as
such amounts would otherwise escheat to or become property of
any Governmental Entity will, to the extent permitted by
applicable Law, become the property of the Surviving Company
free and clear of any claims or interest of any person
previously entitled thereto.
(h) In the event any Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that
fact by the person claiming such Certificate to be lost, stolen
or destroyed and, if reasonably required by Parent or the
Exchange Agent, the posting by such person of a bond in such
amount as Parent may determine is reasonably necessary as
indemnity against any claim that may be made against it with
respect to such Certificate, the Exchange Agent will issue in
exchange for such lost, stolen or destroyed Certificate the
Merger Consideration deliverable in respect thereof pursuant to
this Agreement.
ARTICLE III
REPRESENTATIONS
AND WARRANTIES OF COMPANY
Subject to and as qualified by items (i) disclosed in any
Company SEC Report filed between December 31, 2009 and the
date of this Agreement (excluding, in each case, any disclosures
set forth in any risk factor section and in any section relating
to forward-looking, safe harbor or similar statements or in any
exhibits to such Company SEC Report, or any other disclosures in
such Company SEC Report that are non-specific, cautionary,
predictive or forward-looking in nature), but in each case only
to the extent that the relevance of such disclosure to the
relevant subject matter is readily apparent, or
(ii) disclosed in the disclosure schedule (the
Company Disclosure Schedule) delivered by
Company to Parent prior to the execution of this Agreement (it
being agreed that disclosure in any section of the Company
Disclosure Schedule shall apply only to the indicated Section of
this Agreement except, with respect to a section in
Article III, to the extent that it is reasonably apparent
on the face of such disclosure that such disclosure is relevant
to another Section of Article III of this Agreement),
Company hereby represents and warrants to Parent and Merger Sub
as follows:
3.1 Corporate
Organization. (a) Company is a
corporation duly incorporated, validly existing and in good
standing under the laws of the Commonwealth of Pennsylvania.
Company has the requisite corporate power and authority to own
or lease all of its properties and assets and to carry on its
business as it is now being conducted, and is duly licensed or
qualified to do business in each jurisdiction in which the
nature of the business conducted by it or the character or
location of the properties and assets owned or leased by it
makes such licensing or qualification necessary.
(b) True, complete and correct copies of the Amended and
Restated Articles of Incorporation of Company (the
Company Articles), and the Amended and
Restated Bylaws of Company (the Company
Bylaws), as in effect as of the date of this
Agreement, have previously been made available to Parent.
(c) Each Subsidiary of Company (i) is duly
incorporated or duly formed, as applicable to each such
Subsidiary, and validly existing and in good standing under the
laws of its jurisdiction of organization, (ii) has the
requisite corporate power and authority or other power and
authority to own or lease all of its properties and assets and
to carry on its business as it is now being conducted and
(iii) is duly licensed or qualified to do business in each
jurisdiction in which the nature of the business conducted by it
or the character or location of the properties and assets owned
or leased by it makes such licensing or qualification necessary.
As used in this Agreement, the word
Subsidiary, when used with respect to either
party, means any corporation, partnership, limited liability
company or other organization, whether incorporated or
unincorporated, which is consolidated with such party for
financial reporting purposes under U.S. generally accepted
accounting principles (GAAP).
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(d) Except for minutes of the Board of Directors and the
audit committee for meetings held after March 31, 2010 that
were not approved by the Board of Directors or audit committee
before the date of this Agreement, the minute books of Company
previously made available to Parent contain true, complete and
correct records of all meetings and other corporate actions held
or taken since January 1, 2009 of its shareholders and
Board of Directors and the audit committee of its Board of
Directors.
3.2 Capitalization. (a) the
authorized capital stock of Company consists of
60,000,000 shares of Class A common stock,
$5.00 par value (the Company Common
Stock), of which as of May 10, 2010 (the
Company Capitalization Date)
32,283,001 shares were issued and outstanding (including
the Company Restricted Shares described below), and
2,000,000 shares of preferred stock, $0.01 par value
(the Company Preferred Stock), of which, as
of the Company Capitalization Date, no shares were issued or
outstanding. As of the Company Capitalization Date, Company held
1,934,944 shares of Company Common Stock in its treasury.
Except as set forth in Section 3.2(a) of the Company
Disclosure Schedule, as of the Company Capitalization Date, no
shares of Company Common Stock or Company Preferred Stock were
reserved for issuance except for 856,871 shares of Company
Common Stock reserved for issuance in connection with existing
awards under employee benefit, incentive, stock option and
dividend reinvestment and stock purchase plans (covering 856,871
Company Options) and 2,848,991 shares of Company Common
Stock reserved for issuance in connection with future awards
that have not yet been made under employee benefit, stock option
and dividend reinvestment and stock purchase plans and the
payment of the Company LTIPs. All of the issued and outstanding
shares of Company Common Stock have been duly authorized and
validly issued and are fully paid, non-assessable and free of
preemptive rights, with no personal liability attaching to the
ownership thereof. No bonds, debentures, notes or other
indebtedness having the right to vote on any matters on which
shareholders of Company may vote (Voting
Debt) are issued or outstanding. Except as described
in the first sentence of this Section 3.2(a) and except
pursuant to this Agreement and the Company LTIPs and other than
as set forth in Section 3.2(a) of the Company Disclosure
Schedule, Company does not have and is not bound by any
outstanding subscriptions, options, warrants, calls, rights,
commitments or agreements of any character calling for the
purchase or issuance of, or the payment of any amount based on,
any shares of Company Common Stock, Company Preferred Stock,
Voting Debt or any other equity securities of Company or any
securities representing the right to purchase or otherwise
receive any shares of Company Common Stock, Company Preferred
Stock, Voting Debt or other equity securities of Company. Except
as described in the first sentence of this Section 3.2(a)
and except pursuant to this Agreement, and other than as set
forth in Section 3.2(a) of the Company Disclosure Schedule,
there are no contractual obligations of Company or any of its
Subsidiaries (i) to repurchase, redeem or otherwise acquire
any shares of capital stock of Company or any equity security of
Company or its Subsidiaries or any securities representing the
right to purchase or otherwise receive any shares of capital
stock or any other equity security of Company or its
Subsidiaries, (ii) pursuant to which Company or any of its
Subsidiaries is or could be required to register shares of
Company capital stock or other securities under the Securities
Act of 1933, as amended (the Securities Act)
or (iii) that give any person the right to receive any
economic benefit or right similar to or derived from the
economic benefits and rights accruing to holders of Company
Stock, Company Preferred Stock, Voting Debt or other equity
securities of Company.
(b) Section 3.2(b) of the Company Disclosure Schedule
sets forth a true, complete and correct list of the aggregate
number of shares of Company Common Stock issuable upon the
exercise of each Company Option that was outstanding as of the
Company Capitalization Date and the weighted average exercise
price for the Company Options. Other than the Company Options,
Company Restricted Shares, Company Deferred Stock Units and
Company SARs that are outstanding as of the Company
Capitalization Date, no other equity-based awards are
outstanding as of the Company Capitalization Date. Since the
Company Capitalization Date, except as permitted in accordance
with Section 5.2 of this Agreement with respect to matters
set forth on Section 5.2 of the Company Disclosure
Schedule, Company has not (i) issued or repurchased any
shares of Company Common Stock, Company Preferred Stock, Voting
Debt or other equity securities of Company, other than the
issuance of shares of Company Common Stock in connection with
the exercise of Company Options that were outstanding on the
Company Capitalization Date or (ii) issued or awarded any
options, stock appreciation rights, restricted shares,
restricted stock units, deferred equity units, awards based on
the value of Company capital stock or any other equity-based
awards under any of the Company Benefit Plans.
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(c) Except for any director qualifying shares and except as
described on Section 3.2(c) of the Company Disclosure
Schedule, all of the issued and outstanding shares of capital
stock or other equity ownership interests of each Subsidiary of
Company are owned by Company, directly or indirectly, free and
clear of any liens, pledges, charges, claims and security
interests and similar encumbrances (Liens),
and all of such shares or equity ownership interests are duly
authorized and validly issued and are fully paid, non-assessable
and free of preemptive rights. No Subsidiary of Company has or
is bound by any outstanding subscriptions, options, warrants,
calls, commitments or agreements of any character calling for
the purchase or issuance of any shares of capital stock or any
other equity security of such Subsidiary or any securities
representing the right to purchase or otherwise receive any
shares of capital stock or any other equity security of such
Subsidiary.
3.3 Authority; No
Violation. (a) Company has full
corporate power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been
duly and validly approved and adopted by the Board of Directors
of Company. At a meeting duly called and held, the Board of
Directors of Company has determined that this Agreement is
advisable and in the best interests of Company and its
shareholders and has directed that this Agreement be submitted
to Companys shareholders for approval at a duly held
meeting of such shareholders and has adopted a resolution to the
foregoing effect. Except for the approval of this Agreement by
the affirmative vote of the holders of a majority of the votes
cast by all shareholders entitled to vote at such meeting, no
other corporate proceedings on the part of Company are necessary
to approve this Agreement or to consummate the transactions
contemplated hereby. This Agreement has been duly and validly
executed and delivered by Company and (assuming due
authorization, execution and delivery by Parent and Merger Sub)
constitutes the valid and binding obligations of Company,
enforceable against Company in accordance with its terms (except
as may be limited by bankruptcy, insolvency, fraudulent
transfer, moratorium, reorganization or similar laws of general
applicability relating to or affecting the enforcement of the
rights of creditors generally and subject to general principles
of equity (the Bankruptcy and Equity
Exception)).
(b) Except as set forth on Section 3.3(b) of the
Company Disclosure Schedule, neither the execution and delivery
of this Agreement by Company nor the consummation by Company of
the transactions contemplated hereby, nor compliance by Company
with any of the terms or provisions of this Agreement, will
(i) violate any provision of the Company Articles or
Company Bylaws or the articles of incorporation or bylaws of its
Subsidiaries or (ii) assuming that consents, approvals and
filings referred to in Section 3.4 are duly obtained
and/or made,
(A) violate any Law, judgment, order, injunction or decree
applicable to Company, any of its Subsidiaries or any of their
respective properties or assets or (B) violate, conflict
with, result in a breach of any provision of or the loss of any
benefit under, constitute a default (or an event which, with
notice or lapse of time, or both, would constitute a default)
under, result in the termination of or a right of termination or
cancellation under, accelerate the performance required by, or
result in the creation of any Lien upon any of the respective
properties or assets of Company or any of its Subsidiaries
under, or trigger or change any rights or obligations (including
any increase in payments owed) or require the consent of any
person under, or give rise to a right of cancellation, vesting,
payment, exercise, suspension or revocation of any obligation
under any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, deed of trust, license, lease,
franchise, permit, agreement, or other instrument or obligation
to which Company or any of its Subsidiaries is a party or by
which any of them or any of their respective properties or
assets is bound or affected.
3.4 Consents and
Approvals. Except for filings of applications
and notices, as applicable, with (a) the state insurance
authorities set forth in Section 3.4 of the Company
Disclosure Schedule, and approval of such applications and
notices, (b) any federal or other regulatory,
self-regulatory or enforcement authorities or any courts,
administrative agencies or commissions or other governmental
authorities or instrumentalities (each a Governmental
Entity) set forth in Section 3.4 of the Company
Disclosure Schedule, and approval of or non-objection to such
applications, filings and notices (the items described in
clauses (a) and (b), (the Regulatory
Approvals), (c) the filing with the SEC of a
Proxy Statement in definitive form relating to the meeting of
Companys shareholders to be held in connection with this
Agreement and the transactions contemplated by this Agreement
(the Proxy Statement) and of a registration
statement on
Form S-4
(the
Form S-4)
in which the Proxy Statement will be included as a prospectus,
and declaration of effectiveness of the
Form S-4
and the filing and effectiveness of the registration statement
contemplated by Section 1.5(g), (d) the filing of the
Articles of Merger
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with the DOS pursuant to the PBCL, (e) any notices or
filings required under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the HSR
Act) and (f) such filings and approvals as are
required to be made or obtained under the securities or
Blue Sky laws of various states in connection with
the issuance of the shares of Parent Common Stock pursuant to
this Agreement and approval of listing of such Parent Common
Stock on the NYSE, no consents or approvals of or filings or
registrations with any Governmental Entity are necessary in
connection with the consummation by Company of the Merger and
the other transactions contemplated by this Agreement. Except as
set forth on Section 3.4 of the Company Disclosure
Schedule, no consents or approvals of or filings or
registrations with any Governmental Entity are necessary in
connection with the execution and delivery by Company of this
Agreement.
3.5 Reports, Regulatory
Matters. (a) Except as set forth in
Section 3.5(a) of the Company Disclosure Schedule, Company
and each of its Subsidiaries have timely filed or furnished, as
applicable, all reports, registrations, statements and
certifications, together with any amendments required to be made
with respect thereto, that they were required to file or
furnish, as applicable, since January 1, 2008 with
(i) any state regulatory authority, (ii) the SEC,
(iii) any foreign regulatory authority, and (iv) any
self-regulatory authority (collectively, Regulatory
Agencies) and with each other applicable Governmental
Entity, and all other reports and statements required to be
filed or furnished by them since January 1, 2008, including
any report or statement required to be filed pursuant to the
laws, rules or regulations of the United States, any state, any
foreign entity, or any Regulatory Agency or other Governmental
Entity, and have paid all fees and assessments due and payable
in connection therewith. Except for normal examinations
conducted by Regulatory Agencies or other Governmental Entities
in the ordinary course of business of the Company and its
Subsidiaries and except as set forth in Section 3.5(a) of
the Company Disclosure Schedule, no Regulatory Agency or other
Governmental Entity has initiated since January 1, 2008 or
has pending any proceeding, enforcement action or, to the
knowledge of Company, investigation into the business,
disclosures or operations of Company or any of its Subsidiaries
and since January 1, 2008, no Regulatory Agency or other
Governmental Entity has resolved any proceeding, enforcement
action or, to the knowledge of Company, investigation into the
business, disclosures or operations of Company or any of its
Subsidiaries. Except as set forth in Section 3.5(a) of the
Company Disclosure Schedule, there is no unresolved, or, to
Companys knowledge, threatened criticism, comment,
exception or stop order by any Regulatory Agency or other
Governmental Entity with respect to any report or statement
relating to any examinations or inspections of Company or any of
its Subsidiaries, and since January 1, 2008, there have
been no formal or informal inquiries by, or disagreements or
disputes with, any Regulatory Agency or other Governmental
Entity with respect to the business, operations, policies or
procedures of Company or any of its Subsidiaries (other than
normal inquiries made by a Regulatory Agency or other
Governmental Entity in Companys ordinary course of
business).
(b) Neither Company nor any of its Subsidiaries is subject
to any
cease-and-desist
or other order or enforcement action issued by, or is a party to
any written agreement, consent agreement or memorandum of
understanding with, or is a party to any commitment letter or
similar undertaking to, or is subject to any order or directive
by, or has been ordered to pay any civil money penalty by, or
has been since January 1, 2008 a recipient of any
supervisory letter from, or since January 1, 2008 has
adopted any policies, procedures or board resolutions at the
request or suggestion of any Regulatory Agency or other
Governmental Entity that currently restricts or affects in any
material respect the conduct of its business (or to
Companys knowledge that, upon consummation of the Merger,
would restrict in any material respect the conduct of the
business of Parent or any of its Subsidiaries), or that in any
material manner relates to its capital adequacy, its ability to
pay dividends, its credit, risk management or compliance
policies, its internal controls, its management or its business,
other than those of general application that apply to similarly
situated companies or their Subsidiaries (each item in this
sentence, a Company Regulatory Agreement),
nor has Company or any of its Subsidiaries been advised since
January 1, 2008 by any Regulatory Agency or other
Governmental Entity that it is considering issuing, initiating,
ordering, or requesting any such Company Regulatory Agreement.
(c) Company has previously made available to Parent an
accurate and complete copy of each (i) final registration
statement, prospectus, report, schedule and definitive proxy
statement filed with the SEC by Company pursuant to the
Securities Act or the Securities Exchange Act of 1934, as
amended (the Exchange Act) since
January 1, 2008 (the Company SEC
Reports) and prior to the date of this Agreement and
(ii) communication mailed by Company to it shareholders
since January 1, 2008 and prior to the date of this
Agreement. No such
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Company SEC Report or communication, at the time filed or
communicated (or, if amended prior to the date hereof, as of the
date of such amendment) contained any untrue statement of a
material fact or omitted to state any material fact required to
be stated therein or necessary in order to make the statements
made therein, in light of the circumstances in which they were
made, not misleading. As of their respective dates, all Company
SEC Reports complied in all material respects with the published
rules and regulations of the SEC with respect thereto. No
executive officer of Company has failed in any respect to make
the certifications required of him or her under Section 302
or 906 of the Sarbanes-Oxley Act of 2002 (the
Sarbanes-Oxley Act). To the knowledge of
Company, other than as set forth on Section 3.5 of the
Company Disclosure Schedule, none of the Company SEC Reports is
the subject of any ongoing review or investigation by the SEC or
any other Governmental Entity and there are no unresolved SEC
comments with respect to any of such documents.
3.6 Financial
Statements. (a) The financial statements
of Company and its Subsidiaries included (or incorporated by
reference) in the Company SEC Reports (including the related
notes, where applicable) (i) have been prepared from, and
are in accordance with, the books and records of Company and its
Subsidiaries, (ii) fairly present in all material respects,
in accordance with GAAP, the consolidated results of operations,
cash flows, changes in shareholders equity and
consolidated financial position of Company and its Subsidiaries
for the respective fiscal periods or as of the respective dates
therein set forth (subject in the case of unaudited statements
to recurring year-end audit adjustments normal in nature and
amount), (iii) complied, as of their respective dates of
filing with the SEC, in all material respects with applicable
accounting requirements and with the published rules and
regulations of the SEC with respect thereto, and (iv) have
been prepared in accordance with GAAP consistently applied
during the periods involved, except, in each case, as indicated
in such statements or in the notes thereto. The books and
records of Company and its Subsidiaries have been, and are
being, maintained in all material respects in accordance with
GAAP and any other applicable legal and accounting requirements.
ParenteBeard LLC is the independent registered public accounting
firm of Company and has not resigned or been dismissed as such,
has not withdrawn or qualified any opinion issued by it with
respect to Company or its Insurance Subsidiaries, and has not
advised Company of any disagreement with Company on a matter of
accounting principles or practices, financial statement
disclosure or auditing scope or procedure.
(b) Neither Company nor any of its Subsidiaries has any
material liability of any nature whatsoever (whether absolute,
accrued, contingent, or otherwise and whether due or to become
due) of the type required to be disclosed in a balance sheet
prepared in accordance with GAAP, except for (i) those
liabilities that are reflected or reserved against on the
consolidated balance sheet of Company included in its Quarterly
Report on
Form 10-Q
for the fiscal quarter ended March 31, 2010 (including any
notes thereto) and (ii) liabilities incurred in the
ordinary course of business consistent with past practice since
March 31, 2010 or in connection with this Agreement and the
transactions contemplated hereby.
(c) The records, systems, controls, data and information of
Company and its Subsidiaries are recorded, stored, maintained
and operated under means (including any electronic, mechanical
or photographic process, whether computerized or not) that are
under the exclusive ownership and direct control of Company or
its Subsidiaries or accountants (including all means of access
thereto and therefrom), except for any non-exclusive ownership
and non-direct control that would not reasonably be expected to
have a material adverse effect on the system of internal
accounting controls described below in this Section 3.6(c).
Company (x) had implemented and maintains disclosure
controls and procedures (as defined in
Rule 13a-15(e)
of the Exchange Act) to ensure that material information
relating to Company, including its consolidated Subsidiaries, is
made known to the chief executive officer and the chief
financial officer of Company by others within those entities,
and (y) has disclosed, based on its most recent evaluation
prior to the date hereof, to Companys outside auditors and
the audit committee of Companys Board of Directors
(i) any significant deficiencies and material weaknesses in
the design or operation of internal controls over financial
reporting (as defined in
Rule 13a-15(f)
of the Exchange Act) which are reasonably likely to adversely
affect Companys ability to record, process, summarize and
report financial information and (ii) any fraud, whether or
not material, that involves management or other employees who
have a significant role in Companys internal controls over
financial reporting. These disclosures were made in writing by
management to Companys auditors and audit committee, a
copy of which has previously been made available to Parent. As
of the date hereof, there is no reason to believe that
Companys outside auditors, chief executive officer and
chief financial officer will not be able
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to give the certifications and attestations required pursuant to
the rules and regulations adopted pursuant to Section 404
of the Sarbanes-Oxley Act, without qualification, when next due.
(d) Other than as set forth on Section 3.6(d) of the
Company Disclosure Schedule, since December 31, 2009,
(i) neither Company nor any of its Subsidiaries has
received or otherwise had or obtained knowledge of any material
complaint, allegation, assertion or claim, whether written or
oral, regarding the accounting or auditing practices,
procedures, methodologies or methods of Company or any of its
Subsidiaries or their respective internal accounting controls,
including any material complaint, allegation, assertion or claim
that Company or any of its Subsidiaries has engaged in
questionable accounting or auditing practices, and (ii) no
attorney representing Company or any of its Subsidiaries,
whether or not employed by Company or any of its Subsidiaries,
has reported evidence of a material violation of securities
laws, breach of fiduciary duty or similar violation by Company
or any of its officers, directors, employees or agents to the
Board of Directors of Company or any committee thereof or to any
director or officer of Company.
3.7 Brokers
Fees. Neither Company nor any of its
Subsidiaries nor any of their respective officers or directors
has employed any broker or finder or incurred any liability for
any brokers fees, commissions or finders fees in
connection with the Merger or related transactions contemplated
by this Agreement, other than as set forth in Section 3.7
of the Company Disclosure Schedule.
3.8 Absence of Certain Changes or
Events. (a) Except as set forth on
Section 3.8(a) of the Company Disclosure Schedule, since
December 31, 2009, no event or events have occurred or
condition or conditions exist that have had or would reasonably
be expected to have, either individually or in the aggregate, a
Material Adverse Effect on Company. As used in this Agreement,
the term Material Adverse Effect means, with
respect to Parent or Company, as the case may be, a material
adverse effect on (i) the financial condition, results of
operations or business of such party and its Subsidiaries taken
as a whole (provided, however, that, a
Material Adverse Effect shall not be deemed to
include effects to the extent resulting from (A) changes,
after the date hereof, in GAAP or regulatory accounting
requirements applicable generally to companies in the industries
in which such party and its Subsidiaries operate,
(B) changes, after the date hereof, in laws, rules,
regulations or the interpretation of laws, rules or regulations
by Government Entities of general applicability to companies in
the industries in which such party and its Subsidiaries operate,
(C) actions or omissions taken with the prior written
consent of the other party or expressly required by this
Agreement, (D) changes in global, national or regional
political conditions (including acts of terrorism or war) or
changes in general business, economic or market conditions,
including changes generally in prevailing interest rates, credit
markets, securities markets or (E) the execution of this
Agreement or the public disclosure of this Agreement or the
transactions contemplated hereby, except with respect to clauses
(A), (B) and (D), to the extent that the effects of such
change are disproportionately adverse to the financial
condition, results of operations or business of such party and
its Subsidiaries, taken as a whole, as compared to other
companies in the industry in which such party and its
Subsidiaries operate) or (ii) the ability of such party to
timely consummate the transactions contemplated by this
Agreement.
(b) Since December 31, 2009 through and including the
date of this Agreement, Company and its Subsidiaries have
carried on their respective businesses in all material respects
in the ordinary course of business consistent with their past
practice.
(c) Except as disclosed on Section 3.8(c) of the
Company Disclosure Schedule, since December 31, 2009
through and including the date of this Agreement, neither
Company nor any of its Subsidiaries has (i) changed any Tax
or financial accounting methods, principles or practices of
Company or its Subsidiaries affecting its assets, liabilities or
businesses, including any reserving, renewal or residual method,
practice or policy or (ii) except for publicly disclosed
ordinary dividends on Company Common Stock and except for
distributions by wholly owned Subsidiaries of Company to Company
or another wholly owned Subsidiary of Company, made or declared
any distribution in cash or kind to its shareholder or
shareholders or repurchased any shares of its capital stock or
other equity interests.
3.9 Legal
Proceedings. (a) Neither Company nor any
of its Subsidiaries is a party to any, and there are no pending
or, to Companys knowledge, threatened, legal,
administrative, arbitral or other proceedings, claims, actions,
suits or governmental or regulatory investigations of any nature
against Company or any of its Subsidiaries or to which any of
their assets are subject, other than the proceedings, claims,
actions, suits or investigations
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disclosed in Section 3.9(a) of the Company Disclosure
Schedule or the Company SEC Reports, which proceedings, claims,
actions, suits or investigations are not reasonably expected to
result, individually or in the aggregate, in a Material Adverse
Effect with respect to Company.
(b) There is no judgment, settlement agreement, order,
injunction, decree or regulatory restriction (other than those
of general application that apply to similarly situated
companies or their Subsidiaries) imposed upon Company, any of
its Subsidiaries or the assets of Company or any of its
Subsidiaries (or that, upon consummation of the Merger, would
apply to Parent or any of its Subsidiaries).
3.10 Taxes and Tax
Returns. (a) Except as set forth in
Section 3.10 of the Company Disclosure Schedule, each of
Company and its Subsidiaries has duly and timely filed
(including all applicable extensions) all material Tax Returns
required to be filed by it on or prior to the date of this
Agreement (all such Tax Returns being accurate and complete in
all material respects), has paid all material Taxes shown
thereon as arising and has duly paid or made provision for the
payment of all Taxes that are material in amount that have been
incurred or are due or claimed to be due from it by federal,
state, foreign or local taxing authorities other than Taxes that
are not yet delinquent or are being contested in good faith,
have not been finally determined and have been adequately
reserved against under GAAP. To the knowledge of the Company,
the federal income Tax Returns of Company and its Subsidiaries
have been examined by the Internal Revenue Service (the
IRS) for all years to and including 2006, and
any material liability with respect thereto that has been
finally determined has been satisfied. Neither Company nor any
of its Subsidiaries is a party to or is bound by any Tax sharing
agreement or arrangement with respect to material amounts of
Taxes (other than such an agreement or arrangement exclusively
between or among Company and one or more of its Subsidiaries).
Within the past two years (or otherwise as part of a
plan (or series of related transactions) within the
meaning of Section 355(e) of the Code of which the Merger
is also a part), neither Company nor any of its Subsidiaries has
been a distributing corporation or a
controlled corporation in a distribution intended to
qualify under Section 355(a) of the Code. Neither Company
nor any of its Subsidiaries has participated in a listed
transaction within the meaning of Treasury
Regulation Section 1.6011-4(b)(2)
subsequent to such transaction becoming listed.
(b) Company and its Subsidiaries have complied in all
material respects with all applicable Laws relating to the
payment and withholding of Taxes and have duly and timely
withheld from employees and independent contractors salaries,
wages, other compensation, and other amounts and have paid over
to the appropriate taxing authorities all material amounts of
Taxes required to be so withheld and paid over under all
applicable Laws.
(c) As of the date hereof, (i) there are, to the
knowledge of Company, no pending audits, examinations,
investigations or other proceedings in respect of any material
amounts of Taxes of Company or any of its Subsidiaries with
respect to which Company or such Subsidiary has been notified in
writing; and (ii) neither Company nor any of its
Subsidiaries has waived any statute of limitations in respect of
a material amount of Taxes or agreed to any extension of time
with respect to an assessment or deficiency for a material
amount of Taxes (other than pursuant to extensions of time to
file Tax Returns obtained in the ordinary course).
(d) Neither Company nor any of its Subsidiaries nor any
other person on any of their behalf has executed or entered into
a closing agreement pursuant to Section 7121 of the Code or
any predecessor provision thereof or any similar provision of
Law in respect of Company or any of its Subsidiaries.
(e) There are no liens for Taxes, other than Liens for
current Taxes not yet due and payable, on the assets of Company
or any of its Subsidiaries.
(f) Since January 1, 2005, each of the Insurance
Subsidiaries has operated as an insurance company subject to
taxation under Section 831 of the Code.
(g) As used in this Agreement, the term
Tax or Taxes means
(i) all federal, state, local, and foreign income, excise,
gross receipts, gross income, ad valorem, profits,
gains, property, capital, sales, transfer, use, payroll,
employment, severance, withholding, duties, intangibles,
franchise, backup withholding, value added and other taxes,
charges, levies or like assessments together with all penalties
and additions to tax and interest thereon and (ii) any
liability for Taxes described in clause (i) above under
Treasury
Regulation Section 1.1502-6
(or any similar provisions of state, local or foreign Law), or
as a transferee or successor or by contract.
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(h) As used in this Agreement, the term Tax
Return means a report, return or other information
(including any amendments) required to be supplied to a
governmental entity with respect to Taxes including, where
permitted or required, combined or consolidated returns for any
group of entities that includes Company or any of its
Subsidiaries.
3.11 Employee
Matters. (a) Section 3.11(a) of the
Company Disclosure Schedule sets forth a true, complete and
correct list of each employee benefit plan as
defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended (ERISA),
whether or not subject to ERISA, and each material employment,
consulting, bonus, incentive or deferred compensation, vacation,
stock option or other equity-based, severance, termination,
retention, change of control, profit-sharing, fringe benefit or
other similar plan, program, agreement or commitment, whether
written or unwritten, for the benefit of any employee, former
employee, director or former director of Company or any of its
Subsidiaries entered into, maintained or contributed to by
Company or any of its Subsidiaries or to which Company or any of
its Subsidiaries is obligated to contribute, or with respect to
which Company or any of its Subsidiaries has any liability(such
plans, programs, agreements and commitments, herein referred to
as the Company Benefit Plans).
(b) (i) Each of the Company Benefit Plans has been
operated and administered in all material respects in accordance
with applicable Law, including, but not limited to, ERISA, the
Code and in each case the regulations thereunder; (ii) each
Company Benefit Plan intended to be qualified within
the meaning of Section 401(a) of the Code has received a
favorable determination letter from the Internal Revenue
Service, or has pending a timely filed application for such
determination from the Internal Revenue Service and, to the
knowledge of Company, there is not any reason why any such
determination letter should be revoked; (iii) with respect
to each Company Benefit Plan that is subject to Title IV or
Section 302 of ERISA or Section 412 or 4971 of the
Code, (A) except as set forth on Section 3.11(b) of
the Company Disclosure Schedule, no such plan has an actual or
deemed adjusted funding target attainment percentage, as defined
in Sections 206(g) of ERISA and 436(j)(2) of the Code, that
would subject the plan to the benefit limitations imposed under
Section 436(b), (c), (d) or (e) of the Code and
(B) the amount of such liabilities as of the last day of
the most recent plan year ended prior to the date hereof was
properly reflected on the financial statements of Company or its
applicable Subsidiary previously filed with the SEC;
(iv) except as set forth on Section 3.11(b) of the
Company Disclosure Schedule and other than as required under
Section 601 et. seq. of ERISA, Section 4980B of the
Code or other similar law, no Company Benefit Plan provides
benefits or coverage in the nature of medical or life insurance
following retirement or other termination of employment (other
than death benefits when termination occurs upon death)
(v) no Controlled Group Liability has been incurred by
Company, its Subsidiaries or any of their respective ERISA
Affiliates that has not been satisfied in full, and, to the
knowledge of Company, no condition exists that presents a risk
to Company, its Subsidiaries or any of their respective ERISA
Affiliates of incurring any such liability; (vi) neither
Company nor any of its Subsidiaries contributes on behalf of
employees of Company or any of its Subsidiaries to a
multiemployer pension plan (as such term is defined
in Section 3(37) of ERISA) or a plan that has two or more
contributing sponsors at least two of whom are not under common
control, within the meaning of Section 4063 of ERISA;
(vii) all material contributions or other material amounts
that the Company is required, under any applicable Law or under
any Company Benefit Plan, to have paid as contributions to any
Company Benefit Plan in respect of current or prior plan years
have been paid or accrued in accordance with generally accepted
accounting principles; (viii) neither Company nor any of
its Subsidiaries has engaged in a transaction in connection with
which Company or any of its Subsidiaries reasonably could be
subject to either a material civil penalty assessed pursuant to
Section 409 or 502(i) of ERISA or a material tax imposed
pursuant to Section 4975 or 4976 of the Code; and
(ix) there is no pending, or, to the knowledge of the
Company, threatened or anticipated claim (other than routine
claims for benefits) against any of the Company Benefit Plans or
any trusts related thereto which could reasonably be expected to
result in any material liability of Company or any Company
Subsidiary. Each Company Benefit Plan that is a
nonqualified deferred compensation plan within the
meaning of Section 409A(d)(1) of the Code and any award
thereunder, in each case that is subject to Section 409A of
the Code has been operated at all times in compliance all
material respects with Section 409A of the Code. No Company
Option that was granted under any Company Benefit Plan on or
after January 1, 2005 or became vested after such date has
an exercise price that has been or may be less than the fair
market value of t he underlying stock as of the date such
Company Option was granted or has any feature for the deferral
of compensation other than the deferral of recognition of income
until the later of exercise or disposition of such Company
Option.
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(c) Except as set forth on Section 3.11(c) of the
Company Disclosure Schedule, neither the execution or delivery
of this Agreement nor the consummation of the transactions
contemplated by this Agreement will, either alone or in
conjunction with any other event, (i) result in any
material payment or benefit becoming due or payable, or required
to be provided, to any director, employee or independent
contractor of Company or any of its Subsidiaries or to such
individuals in the aggregate, (ii) materially increase the
amount or value of any benefit or compensation otherwise payable
or required to be provided to any such director, employee or
independent contractor, (iii) result in acceleration of the
time of payment, vesting, exercisability or funding of any such
benefit or compensation or (iv) result in any material
limitation on the right of Company or any of its Subsidiaries to
amend, merge or terminate any Company Benefit Plan or related
trust. Except as set forth on Section 3.11(c) of the
Company Disclosure Schedule, no Company Benefit Plan provides
for (A) the reimbursement of excise Taxes under
Section 4999 of the Code or any income Taxes under the Code
or (B) payments that would be non-deductible under Code
Sections 162(m) or 280G.
(d) No labor organization or group of employees of Company
or any of its Subsidiaries has made a pending demand for
recognition or certification, and there are no representation or
certification proceedings or petitions seeking a representation
proceeding presently pending or threatened to be brought or
filed, with the National Labor Relations Board or any other
labor relations tribunal or authority. There are no material
organizing activities, strikes, work stoppages, slowdowns,
lockouts, arbitrations or grievances, or other material labor
disputes pending or threatened against or involving Company or
any of its Subsidiaries. Each of Company and its Subsidiaries is
in compliance in all material respects with all applicable laws
and collective bargaining agreements respecting employment and
employment practices, terms and conditions of employment, wages
and hours and occupational safety and health.
(e) Company does not maintain any material Company Benefit
Plans (i) outside of the U.S. or (ii) for the
benefit of any individual whose principal place of employment is
outside of the U.S.
(f) Controlled Group Liability
means any and all material liabilities (i) under
Title IV of ERISA, (ii) under Section 302 of
ERISA and (iii) under Section 412 and 4971 of the Code.
(g) ERISA Affiliate means any
entity if it would have ever been considered a single employer
with Company under ERISA Section 4001(b) or part of the
same controlled group as Company for purposes of
ERISA Section 302(d)(8)(C) or Code Sections 414(b) or
(c) or a member of an affiliated service group for purposes
of Code Section 414(m).
3.12 Compliance with Applicable
Law. (a) Company and each of its
Subsidiaries hold all licenses, franchises, permits and
authorizations necessary for the lawful conduct of their
respective businesses under and pursuant to each, and are in
compliance in all respects with any, Law applicable to Company
or any of its Subsidiaries, except for any failure to hold any
licenses, franchises, permits and authorizations or any
non-compliance or default that has not had a Material Adverse
Effect on the Company, its Subsidiaries or their businesses.
(b) Company and each of its Subsidiaries has properly
administered all accounts for which it acts as a fiduciary,
including accounts for which it serves as a trustee, agent,
custodian, personal representative, guardian, or conservator in
accordance with the terms of the governing documents and
applicable Law. None of Company, any of its Subsidiaries, or any
director, officer or employee of Company or of any of its
Subsidiaries has committed any breach of trust or fiduciary duty
with respect to any such fiduciary account and the accountings
for each such fiduciary account are true and correct and
accurately reflect the assets of such fiduciary account.
3.13 Certain
Contracts. (a) Except as set forth in
Section 3.13(a) of the Company Disclosure Schedule, neither
Company nor any of its Subsidiaries is a party to or bound by
any contract, arrangement, commitment or understanding (whether
written or oral) (i) that, apart from this Agreement, is a
material contract that would be required to be filed
pursuant to Item 601(b)(10) of
Regulation S-K
of the SEC and that is to be performed after the date of this
Agreement that has not been filed or incorporated by reference
in the Company SEC Reports filed prior to the date hereof;
(ii) that contains a non-compete or client or customer
non-solicit requirement or other provision that restricts in a
material manner the conduct of, or the manner of conducting, any
line of business in any geographic area, or, to the knowledge of
the Company, upon consummation of the Merger could restrict the
ability
A-15
of Parent, the Surviving Company or any of their respective
Subsidiaries to engage in any line of business in any geographic
area; (iii) that obligates Company or any of its
Subsidiaries to conduct business on an exclusive or preferential
basis with any third party or upon consummation of the Merger
will obligate Parent, the Surviving Company or any of their
respective Subsidiaries to conduct business with any third party
on an exclusive or preferential basis, in any case of the
preceding which is material; (iv) with or to a labor union
or guild (including any collective bargaining agreement);
(v) that pertains to a material joint venture or material
partnership agreement; (vi) that is an indenture credit
agreement, loan agreement, guarantee or other agreement relating
to material indebtedness of Company or any Subsidiary, or of any
third party for which Company or any Subsidiary is a guarantor
or is otherwise liable; (vii) that requires Company or any
Subsidiary to make an investment in, or otherwise provide funds
to, any person, in each case in an amount in excess of
$1 million; (viii) that is with an agency, broker,
insurer or other person that accounted for 1% or more of the
sales of the Insurance Subsidiaries, taken as a whole, for the
12 months ended December 31, 2009; (ix) that
provides for the indemnification of any officer, director or
employee of Company or any Subsidiary; or (x) that would
prevent, materially delay or materially impede Companys
ability to consummate the Merger or the other transactions
contemplated by this Agreement. Each contract, arrangement,
commitment or understanding of the type described in this
Section 3.13(a), whether or not set forth in the Company
Disclosure Schedule, is referred to as a Company
Contract.
(b) (i) Each Company Contract is valid and binding on
Company or its applicable Subsidiary, enforceable against it in
accordance with its terms (subject to the Bankruptcy and Equity
Exception), and is in full force and effect, (ii) Company
and each of its Subsidiaries and, to Companys knowledge,
each other party thereto has duly performed all obligations
required to be performed by it to date under each Company
Contract and (iii) no event or condition exists that
constitutes or, after notice or lapse of time or both, will
constitute, a breach, violation or default on the part of
Company or any of its Subsidiaries or, to Companys
knowledge, any other party thereto under any such Company
Contract. No notice of default or termination has been received
under any Company Contract. There are no disputes pending or, to
Companys knowledge, threatened with respect to any Company
Contract.
3.14 Investment Securities and
Commodities. (a) Except as would not
reasonably be expected to have a Material Adverse Effect on
Company, each of Company and its Subsidiaries has good title to
all securities and commodities owned by it (except those sold
under repurchase agreements or held in any fiduciary or agency
capacity), free and clear of any Liens, except as set forth in
Section 3.14(a) of the Company Disclosure Schedule. Such
securities and commodities are valued on the books of Company in
accordance with GAAP in all material respects.
(b) Company and its Subsidiaries and their respective
businesses employ investment, securities, commodities, risk
management and other policies, practices and procedures which
are prudent and reasonable in the context of such business.
3.15 Property. Company or
one of its Subsidiaries (a) has good and marketable title
to all the properties and assets reflected in the latest audited
balance sheet included in such Company SEC Reports as being
owned by Company or one of its Subsidiaries or acquired after
the date thereof (except properties sold or otherwise disposed
of since the date thereof in the ordinary course of business)
(the Owned Properties), free and clear of all
material Liens of any nature whatsoever, except
(i) statutory Liens securing payments not yet due,
(ii) Liens for real property Taxes not yet due and payable,
(iii) easements, rights of way, and other similar
encumbrances that do not materially affect the use or value (as
reflected in Companys consolidated financial statements)
of the properties or assets subject thereto or affected thereby
or otherwise materially impair business operations at such
properties and (iv) such imperfections or irregularities of
title or Liens as do not materially affect the use or value (as
reflected in Companys consolidated financial statements)
of the properties or assets subject thereto or affected thereby
or otherwise materially impair business operations at such
properties (collectively, Permitted
Encumbrances), and (b) is the lessee of all
leasehold estates reflected in the latest audited financial
statements included in such Company SEC Reports or acquired
after the date thereof (except for leases that have expired by
their terms since the date thereof)(collectively, with the Owned
Properties, the Real Property), free and
clear of all Liens of any nature whatsoever, except for
Permitted Encumbrances, and is in possession of the properties
purported to be leased thereunder, and each such lease is valid
without default thereunder by the lessee or, to Companys
knowledge, the lessor. Company and its Subsidiaries own and have
good and valid title to, or have valid rights to use, all
material tangible personal property used by them in connection
with the conduct of their businesses, in each case, free and
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clear of all Liens, other than Permitted Encumbrances. To
Companys knowledge, neither the whole nor any portion of
the Real Property (x) has been damaged in any material
respect or destroyed or (y) is being condemned or otherwise
taken by any public authority, nor has any such condemnation or
taking been threatened in writing.
3.16 Intellectual Property.
(a) Definitions. For purposes of
this Agreement, the following terms shall have the meanings
assigned below:
Company IP means all Intellectual
Property owned, used, held for use or exploited by Company or
any of its Subsidiaries.
Intellectual Property means
collectively, all intellectual property and other similar
proprietary rights in any jurisdiction throughout the world,
whether owned, used or held for use under license, whether
registered or unregistered, including such rights in and to:
(i) trademarks, service marks, brand names, certification
marks, trade dress, logos, trade names and corporate names and
other indications of origin, and the goodwill associated with
any of the foregoing; (ii) patents and patent applications,
and any and all divisions, continuations,
continuations-in-part,
reissues, continuing patent applications, provisional patent
applications, reexaminations, and extensions thereof, any
counterparts claiming priority therefrom, utility models,
patents of importation/confirmation, certificates of invention,
certificates of registration and like rights, and inventions,
invention disclosures, discoveries and improvements, whether or
not patentable; (iii) trade secrets (including, those trade
secrets defined in the Uniform Trade Secrets Act and under
corresponding foreign statutory law and common law), business
technical and know-how information, non-public information, and
confidential information and rights to limit the use or
disclosure thereof by any person; (iv) all works of
authorship (whether copyrightable or not), copyrights and
proprietary rights in copyrighted works including writings,
other works of authorship, and databases (or other collections
of information, data, works or other materials);
(v) software, including data files, source code, object
code, firmware, mask works, application programming interfaces,
computerized databases and other software-related specifications
and documentation; (vi) designs and industrial designs;
(vii) Internet domain names; (viii) rights of
publicity and other rights to use the names and likeness of
individuals; (ix) moral rights; and (x) claims, causes
of action and defenses relating to the past, present and future
enforcement of any of the foregoing; in each case of (i) to
(ix) above, including any registrations of, applications to
register, and renewals and extensions of, any of the foregoing
with or by any Governmental Entity in any jurisdiction.
License Agreement means any legal
binding contract, whether written or oral, and any amendments
thereto (including license agreements,
sub-license
agreements, research agreements, development agreements,
distribution agreements, consent to use agreements, customer or
client contracts, coexistence, non assertion or settlement
agreements), pursuant to which any interest in, or any right to
use or exploit any Intellectual Property has been granted.
Licensed Company IP means the
Intellectual Property owned by a third party that Company or any
of its Subsidiaries has a right to use or exploit by virtue of a
License Agreement.
Owned Company IP means the
Intellectual Property that is owned by Company or any of its
Subsidiaries.
(b) Company and its Subsidiaries collectively own all
right, title and interest in, or have the valid right to use,
all of the Company IP, free and clear of any Liens, and there
are no obligations to, covenants to or restrictions from third
parties affecting Companys or its applicable
Subsidiarys use, enforcement, transfer or licensing of the
Owned Company IP. To the knowledge of Company, all Licensed
Company IP is being used substantially in accordance with the
applicable License Agreement.
(c) The Owned Company IP and Licensed Company IP constitute
(i) all of the Company IP and (ii) all the
Intellectual Property necessary and sufficient to conduct the
businesses of Company and its Subsidiaries as they are currently
conducted and as they have been conducted since January 1,
2010.
(d) To the knowledge of the Company, the Owned Company IP
and the Licensed Company IP, are valid, subsisting and
enforceable.
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(e) To the Companys knowledge, the current use of the
Owned Company IP does not infringe or otherwise violate any
Intellectual Property of any third party. Neither Company nor
any of its Subsidiaries has received any written notice of
infringement or conflict with the rights of any third party with
respect to the use or ownership of any Company IP.
(f) To the knowledge of Company, no Owned Company IP or
Licensed Company IP is being used or enforced in a manner that
would result in the abandonment, cancellation or
unenforceability of such Intellectual Property. To the knowledge
of the Company, no third party has infringed, misappropriated or
otherwise violated any Owned Company IP.
(g) Company and its Subsidiaries have established and are
in material compliance with commercially reasonable security
programs that are designed to protect (i) the security,
confidentiality and integrity of transactions executed through
their computer systems, including encryption and other security
protocols and techniques when appropriate and (ii) the
security, confidentiality and integrity of all confidential or
proprietary data. Neither Company nor any Subsidiary of Company
(A) has suffered a material security breach with respect to
its data systems, (B) has notified consumers of any
information security breach with respect to the information of
such consumers or (C) has notified employees of any
information security breach with respect to the information of
such employees.
(h) Company and its Subsidiaries are in compliance in all
material respects with all of their privacy policies applicable
to the protection of consumer information and all applicable
privacy laws and regulations.
3.17 Environmental
Liability. Other than any claims under any
insurance policy or reinsurance agreement of an Insurance
Subsidiary, there are no legal, administrative, arbitral or
other proceedings, claims, actions, causes of action or notices
with respect to any environmental, health or safety matters or
any private or government environmental, health or safety
investigations or remediation activities of any nature, whether
relating to the Real Property or otherwise, seeking to impose,
or that are reasonably likely to result in, any liability or
obligation of Company or any of its Subsidiaries arising under
Law or under any local, state or federal environmental, health
or safety statute, regulation, ordinance, or other requirement
of any Governmental Entity, including the Comprehensive
Environmental Response, Compensation and Liability Act of 1980,
as amended, and any similar state laws, pending or threatened
against Company or any of its Subsidiaries. To the knowledge of
Company, there is no reasonable basis for, or circumstances that
are reasonably likely to give rise to, any such proceeding,
claim, action, cause of action, notice, investigation, or
remediation activities that would result in any such liability
or obligation of Company or any of its Subsidiaries. Neither
Company nor any of its Subsidiaries is subject to any agreement,
order, judgment, decree, letter or memorandum by or with any
Governmental Entity or third party imposing any liability or
obligation with respect to any of the foregoing.
3.18 Insurance Business
Matters. (a) Each Subsidiary of Company
that conducts the business of insurance or reinsurance (each, an
Insurance Subsidiary) is (i) duly
licensed or authorized as an insurance company in its
jurisdiction of incorporation; (ii) duly licensed,
authorized or otherwise eligible to transact the business of
insurance in each other jurisdiction where it is required to be
so licensed, authorized or eligible; and (iii) duly
licensed, authorized or eligible in its jurisdiction of
incorporation and each other applicable jurisdiction where it
writes each line of insurance reported as being written in the
Statutory Statements. Each jurisdiction in which any Insurance
Subsidiary is domiciled, commercially domiciled, licensed,
authorized and eligible is set forth in Section 3.18(a) of
the Company Disclosure Schedule. There is no proceeding or
investigation pending or, to the knowledge of Company,
threatened which would reasonably be expected to lead to the
revocation, amendment, failure to renew, limitation, suspension
or restriction of any license, authorization or eligibility of
any Insurance Subsidiary to transact the business of insurance.
(b) Each statement, together with all exhibits and
schedules thereto, and all actuarial opinions, affirmations and
certifications required in connection therewith, and all
required supplemental materials, filed by each Insurance
Subsidiary with any Insurance Department since January 1,
2008 (the Statutory Statements) was prepared
in conformity with the statutory accounting practices prescribed
by the Insurance Department of the applicable country or state
of domicile and applied on a consistent basis
(SAP). Except as set forth in
Section 3.18(b) of the Company Disclosure Schedule, each
such Statutory Statement presents fairly, in all material
respects and in conformity with SAP, the statutory financial
condition of such Insurance Subsidiary on the respective date of
the
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Statutory Statement, the results of operations, changes in
capital and surplus and cash flow of such Insurance Subsidiary
for each of the applicable reporting periods, and was correct
and complete when filed. Except as set forth in
Section 3.18(b) of the Company Disclosure Schedule, no
deficiencies or violations have been asserted in writing (or, to
the knowledge of Company, orally) by any Insurance Department
with respect to any such Statutory Statement which have not been
cured or otherwise resolved to the satisfaction of such
Insurance Department. Except as set forth in
Section 3.18(b) of the Company Disclosure Schedule, there
are no permitted practices utilized by the Insurance
Subsidiaries in the preparation of the Statutory Statements.
(c) Except as set forth on Section 3.18(c) of the
Company Disclosure Schedule, the aggregate reserves for
insurance losses and loss adjustment expenses, as reflected in
each of the Statutory Statements, were (i) computed on the
basis of methodologies consistent in all material respects with
those used in computing the corresponding reserves in the prior
fiscal years (except as otherwise noted in the financial
statements and notes thereto included in such financial
statements), (ii) include provisions for all insurance loss
and loss adjustment expense reserves and related items
reasonably required to be established in accordance with
applicable laws, (iii) were determined in all material
respects in accordance with generally accepted actuarial
standards consistently applied (except as otherwise noted in
such Statutory Statements) and (iv) were fairly stated in
all material respects in accordance with sound actuarial
principles.
(d) All policies, binders, slips, certificates, and other
agreements of insurance issued or distributed by any Insurance
Subsidiary in any jurisdiction (Insurance
Contracts) have been issued or distributed, to the
extent required by Law, on forms filed with and approved by all
applicable Insurance Departments, or not objected to by any such
Insurance Department within any period provided for objection,
and all such forms comply with applicable Laws. All premium
rates with respect to the Insurance Contracts, to the extent
required by Law, have been filed with and approved by all
applicable Insurance Departments or were not objected to by any
such Insurance Department within any period provided for
objection. All such premium rates comply with applicable Laws
and are within the amount permitted by such Laws. Each of
Company and each of its Subsidiaries is and has been marketing,
selling and issuing Insurance Contracts in compliance in all
material respects with all applicable Laws, all applicable
orders and directives of all insurance regulatory authorities
and all market conduct recommendations resulting from market
conduct or other examinations of insurance regulatory
authorities in the respective jurisdictions in which such
products have been marketed, issued or sold, have been complied
with in connection with the marketing and sale of Insurance
Contracts.
(e) All underwriting, management and administration
agreements entered into by any Insurance Subsidiary are, to the
extent required by Law, in forms acceptable to all applicable
Insurance Departments or have been filed with and approved by
all applicable Insurance Departments or were not objected to by
any such Insurance Department within any period provided for
objection.
(f) All advertising, promotional, sales and solicitation
materials and all product illustrations used by any Insurance
Subsidiary or any agent, broker, intermediary, manager or
producer employed or engaged by any Insurance Subsidiary of any
Insurance Subsidiary are in compliance with applicable laws.
(g) Each reinsurance contract, treaty or arrangement
(including any facultative agreements, indemnity agreements, or
other agreements) involving the cession or assumption of
reinsurance, coinsurance, excess insurance, or retrocessions and
any terminated or expired reinsurance contract, treaty or
agreement under which there remains any outstanding material
liability (Reinsurance Contract), to which
any Insurance Subsidiary is a party or by which any Insurance
Subsidiary is bound or subject is a valid and binding obligation
of the parties thereto, is in full force and effect, and is
enforceable in accordance with its terms. Neither any Insurance
Subsidiary nor, to the knowledge of Company, any other party
thereto is in default with regard to any such Reinsurance
Contract, except for a default that is not reasonably likely to
cause a Material Adverse Effect. Except as set forth in
Section 3.18(g) of the Company Disclosure Schedule, there
are no disputes pending or, to the knowledge of Company,
threatened with respect to any such Reinsurance Contract except
for disputes in the ordinary course of business for which
reserves have been established in the financial statements of
the Company and that would not reasonably be expected to have a
Material Adverse Effect. No Insurance Subsidiary is or has been
since January 1, 2005, party to any contract of financial
reinsurance, finite risk insurance or reinsurance or coinsurance
that does not transfer sufficient risk to the reinsurer to
constitute reinsurance under SAP or GAAP.
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(h) All amounts recoverable by any Insurance Subsidiary
pursuant to any Reinsurance Contract have been properly recorded
in the books and records of account of Company and its Insurance
Subsidiaries and are properly reflected in the Statutory
Statements. To Companys knowledge, all such amounts
recoverable by Company or any of its Insurance Subsidiaries are
fully collectible (net of recorded allowance) in due course.
Except as set forth on Section 3.18(h) of the Company
Disclosure Schedule, neither Company nor any of its Insurance
Subsidiaries has received notice that any other party to any
Reinsurance Contract intends not to perform fully under any such
Reinsurance Contract, and, to Companys knowledge, the
financial condition of each party to each Reinsurance Contract
pursuant to which any Insurance Subsidiary has ceded any
premiums is not impaired to the extent that a default thereunder
could reasonably be anticipated.
(i) Since January 1, 2010, no rating agency has
imposed conditions (financial or otherwise) on retaining any
currently held rating assigned to any Insurance Subsidiary or
stated to Company that it is considering lowering any rating
assigned to any Insurance Subsidiary or placing any Insurance
Subsidiary on an under review status, except as set
forth in Section 3.18(i) of the Company Disclosure
Schedule. As of the date of this Agreement, each domestic
Insurance Subsidiary has the A.M. Best Company rating set
forth in Section 3.18(i) of the Company Disclosure Schedule.
(j) Company has made available to Parent and Merger Sub
true and complete copies of all material actuarial reports
prepared by actuaries, independent or otherwise, from and after
January 1, 2008, with respect to the Insurance
Subsidiaries, and all material attachments, addenda, supplements
and modifications thereto. There have been no actuarial reports
of similar nature covering any Insurance Subsidiary in respect
of any period subsequent to the latest period covered in such
actuarial reports. The information and data furnished by Company
and its Subsidiaries to its independent actuaries in connection
with the preparation of such actuarial reports were accurate in
all material respects for the periods covered in such reports.
3.19 State Takeover
Laws. (a) The Board of Directors of
Company adopted a resolution approving this Agreement and the
transactions contemplated hereby and such resolution has not, as
of the date hereof, been rescinded, modified or withdrawn in any
way. None of the moratorium, control
share, interested shareholder, fair
price, affiliate transaction, business
combination or other antitakeover laws and regulations
enacted under the laws of the Commonwealth of Pennsylvania are
applicable to the transactions contemplated by this Agreement,
including, without limitation, the provisions of the
Pennsylvania Takeover Disclosure Law (70 P.S.
§71 et seq.) (any such laws, Takeover
Statutes).
(b) The Board of Directors of the Company has resolved to,
and the Company after execution of this Agreement will, take all
action necessary to render the rights issued pursuant to the
terms of the Section 382 Rights Agreement dated
August 6, 2009 between the Company and American Stock
Transfer & Trust Company, LLC inapplicable to the
Merger, or the execution and consummation of this Agreement and
the transactions contemplated hereby and thereby.
3.20 Interested Party
Transactions. (a) Except as set forth in
the Company SEC Documents or Section 3.20 of the Company
Disclosure Schedule, no event has occurred since
December 31, 2009 that would be required to be reported by
Company pursuant to Item 404(a) of
Regulation S-K
promulgated by the SEC.
(b) No executive officer or director of Company or any of
Companys Subsidiaries owns, leases or licenses or is an
affiliate of any person that owns, leases or licenses any assets
(other than de minimus assets) which are used by Company or
any of Companys Subsidiaries to conduct its business as it
is currently conducted. Except as set forth in Section 3.20
of the Company Disclosure Schedule and except for any employment
or severance agreement or other benefit or compensation
arrangements to which Company or any Subsidiary of Company is a
party, neither Company nor any Subsidiary is a party to any
agreement, arrangement or other understanding with any executive
officer or director of Company or any of Companys
Subsidiaries.
(c) No current or former executive officer or director of
Company or any of Companys Subsidiaries has asserted any
claim, charge, action or cause of action against Company or any
Subsidiary of Company, except for immaterial and routine claims
for accrued vacation pay or accrued benefits under any Company
Benefit Plan.
3.21 Reorganization. As of
the date of this Agreement, Company has not taken or agreed to
take any action and is not aware of any fact or circumstance
that could reasonably be expected to prevent the Merger from
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qualifying as a reorganization within the meaning of
Section 368(a) of the Code and the Treasury Regulations
promulgated thereunder.
3.22 Opinion. Prior to the
execution of this Agreement, the Board of Directors of Company
received the opinion of Merrill Lynch, Pierce,
Fenner & Smith Incorporated, to the effect that, as of
the date thereof, and based upon and subject to the assumptions
and limitations set forth therein, the Exchange Ratio provided
for in the Merger is fair, from a financial point of view, to
the holders of Company Common Stock.
3.23 Company
Information. The information relating to
Company and its Subsidiaries that is provided by Company or its
representatives for inclusion in the Proxy Statement and
Form S-4,
or in any application, notification or other document filed with
any other Regulatory Agency or other Governmental Entity in
connection with the transactions contemplated by this Agreement,
will not, at the time the
Form S-4
becomes effective, at the date the Proxy Statement is mailed or
at the date of the meeting of holders of Company Common Stock to
approve the Merger, contain any untrue statement of a material
fact or omit to state a material fact necessary to make the
statements therein, in light of the circumstances in which they
are made, not misleading. The portions of the Proxy Statement
and
Form S-4
relating to Company and its Subsidiaries and other portions
within the reasonable control of Company and its Subsidiaries
will comply in all material respects with the provisions of the
Exchange Act and the rules and regulations thereunder.
ARTICLE IV
REPRESENTATIONS
AND WARRANTIES OF PARENT AND MERGER SUB
Subject to and as qualified by items (i) disclosed in any
Parent SEC Report filed with the SEC by Parent between
December 31, 2009, and the date of this Agreement
(excluding, in each case, any disclosures set forth in any risk
factor section and in any section relating to forward-looking,
safe harbor or similar statements or in any exhibits to such
Parent SEC Report, or any other disclosures in such Parent SEC
Report that are non-specific, cautionary, predictive or
forward-looking in nature); but in each case only to the extent
that the relevance of such disclosure to the relevant subject
matter is readily apparent, or (ii) disclosed in the
disclosure schedule (the Parent Disclosure
Schedule) delivered by Parent to Company prior to the
execution of this Agreement, (it being agreed that disclosure in
any section of the Parent Disclosure Schedule shall apply only
to the indicated Section of this Agreement except, with respect
to a Section in Article IV, to the extent that it is
reasonably apparent on the face of such disclosure that such
disclosure is relevant to another Section of Article IV of
this Agreement), Parent and Merger Sub hereby represent and
warrant to Company as follows:
4.1 Corporate
Organization. (a) Parent is a
corporation duly incorporated, validly existing and in good
standing under the laws of the State of Delaware. Merger Sub is
a corporation duly incorporated, validly existing and in good
standing under the laws of the Commonwealth of Pennsylvania.
Each of Parent and Merger Sub has the requisite corporate power
and authority to own or lease all of its respective properties
and assets and to carry on its respective business as it is now
being conducted, and is duly licensed or qualified to do
business in each jurisdiction in which the nature of the
business conducted by it or the character or location of the
properties and assets owned or leased by it makes such licensing
or qualification necessary.
(b) Each Subsidiary of Parent (i) is duly incorporated
or duly formed, as applicable to each such Subsidiary, and
validly existing and in good standing under the laws of its
jurisdiction of organization, (ii) has the requisite
corporate power and authority or other power and authority to
own or lease all of its properties and assets and to carry on
its business as it is now being conducted and (iii) is duly
licensed or qualified to do business in each jurisdiction in
which the nature of the business conducted by it or the
character or location of the properties and assets owned or
leased by it makes such licensing or qualification necessary.
4.2 Capitalization. The
authorized capital stock of Parent consists of
500,000,000 shares of Parent Common Stock, par value of
$1.00 per share, of which as of March 29, 2010 (the
Parent Capitalization Date),
241,027,380 shares were issued and outstanding,
100,000,000 shares of Class B Common Stock, $1.00
value per share (the Parent Class B Common
Stock), of which as of the Parent Capitalization Date, no
shares were issued or outstanding, and 75,000,000 shares of
preferred stock, par value $0.01 (the Parent Preferred
Stock), of which as of the Parent Capitalization Date,
no shares were issued or outstanding. As of the Parent
Capitalization Date, no shares
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of Parent Common Stock were held in Parents treasury. As
of the date of this Agreement, no shares of Parent Class B
Common Stock or Parent Preferred Stock were reserved for
issuance, and 27,452,271 shares of Parent Common Stock were
reserved for issuance in connection with Parents
8% Convertible Senior Notes due May 15, 2012 (the
Parent Convertible Notes) and upon exercise
of options issued pursuant to employee stock plans of Parent or
a Subsidiary of Parent in effect as of the date of this
Agreement (the Parent Stock Plans). All of
the issued and outstanding shares of Parent Common Stock have
been duly authorized and validly issued and are fully paid,
non-assessable and free of preemptive rights, with no personal
liability attaching to the ownership thereof. No Voting Debt of
Parent is issued or outstanding. Except pursuant to this
Agreement, the Parent Convertible Notes, the Parent Stock Plans
and Parents dividend reinvestment plan entered into by
Parent from time to time, Parent does not have and is not bound
by any outstanding subscriptions, options, warrants, calls,
rights, commitments or agreements of any character calling for
the purchase or issuance of any shares of Parent Common Stock,
Parent Class B Common Stock, Parent Preferred Stock, Voting
Debt of Parent or any other equity securities of Parent or any
securities representing the right to purchase or otherwise
receive any shares of Parent Common Stock, Parent Class B
Common Stock, Parent Preferred Stock, Voting Debt of Parent or
other equity securities of Parent. The shares of Parent Common
Stock to be issued pursuant to the Merger will be duly
authorized and validly issued and, at the Effective Time, all
such shares will be fully paid, non-assessable and free of
preemptive rights, with no personal liability attaching to the
ownership thereof.
4.3 Authority; No
Violation. (a) Each of Parent and Merger
Sub has full corporate power and authority to execute and
deliver this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this
Agreement and the consummation of the transactions contemplated
hereby have been duly and validly approved and adopted by the
Board of Directors of Parent and Merger Sub and approved and
adopted by the sole shareholder of Merger Sub and no other
corporate proceedings on the part of Parent or Merger Sub are
necessary to approve this Agreement or to consummate the
transactions contemplated hereby. This Agreement has been duly
and validly executed and delivered by each of Parent and Merger
Sub and (assuming due authorization, execution and delivery by
Company) constitutes the valid and binding obligation of each of
Parent and Merger Sub, enforceable against each of Parent and
Merger Sub in accordance with its terms (subject to the
Bankruptcy and Equity Exception).
(b) Neither the execution and delivery of this Agreement by
Parent or Merger Sub, nor the consummation by Parent or Merger
Sub of the transactions contemplated hereby, nor compliance by
Parent or Merger Sub with any of the terms or provisions of this
Agreement, will (i) violate any provision of the
Certificate of Incorporation of Parent (the Parent
Certificate) or the Bylaws of Parent (Parent
Bylaws) or the articles of incorporation or bylaws of
Merger Sub, or (ii) assuming that the consents, approvals
and filings referred to in Section 4.4 are duly obtained
and/or made,
(A) violate any Law, judgment, order, injunction or decree
applicable to Parent, any of its Subsidiaries or any of their
respective properties or assets or (B) violate, conflict
with, result in a breach of any provision of or the loss of any
benefit under, constitute a default (or an event which, with
notice or lapse of time, or both, would constitute a default)
under, result in the termination of or a right of termination or
cancellation under, accelerate the performance required by, or
result in the creation of any Lien upon any of the respective
properties or assets of Parent or any of its Subsidiaries under,
or trigger or change any rights or obligations (including any
increase in payments owed) or require the consent of any person
under, or give rise to a right of cancellation, vesting,
payment, exercise, suspension or revocation of any obligation
under any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, deed of trust, license, lease,
franchise, permit, agreement or other instrument or obligation
to which Parent or any of its Subsidiaries is a party or by
which any of them or any of their respective properties or
assets is bound or affected.
4.4 Consents and
Approvals. Except for (a) the Regulatory
Approvals, (b) the filing with the SEC of the Proxy
Statement and the filing and declaration of effectiveness of the
Form S-4
and the filing and effectiveness of the registration statement
contemplated by Section 1.5(g), (c) the filing of the
Articles of Merger with the DOS pursuant to the PBCL,
(d) any notices or filings required under the HSR Act and
the antitrust laws and regulations of any foreign jurisdiction,
and (e) such filings and approvals as are required to be
made or obtained under the securities or Blue Sky
laws of various states in connection with the issuance of the
shares of Parent Common Stock pursuant to this Agreement and
approval of listing of such Parent Common Stock on the NYSE, no
consents or approvals of or filings or registrations with any
Governmental Entity are necessary in connection with the
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consummation by Parent or Merger Sub of the Merger and the other
transactions contemplated by this Agreement. No consents or
approvals of or filings or registrations with any Governmental
Entity are necessary in connection with the execution and
delivery by Parent or Merger Sub of this Agreement.
4.5 Reports; Regulatory
Matters. (a) Parent and each of its
Subsidiaries have timely filed or furnished, as applicable, all
reports, registrations, statements and certifications, together
with any amendments required to be made with respect thereto,
that they were required to file or furnished, as applicable,
since January 1, 2008 with the Regulatory Agencies and with
each other applicable Governmental Entity, and all other reports
and statements required to be filed or furnished by them since
January 1, 2008, including any report or statement required
to be filed pursuant to the laws, rules or regulations of the
United States, any state, any foreign entity, or any Regulatory
Agency or other Governmental Entity, and have paid all fees and
assessments due and payable in connection therewith. Except as
set forth in Section 4.5(a) of the Parent Disclosure
Schedule, and for normal examinations conducted by a Regulatory
Agency or other Governmental Entity in the ordinary course of
the business of Parent and its Subsidiaries, no Regulatory
Agency or other Governmental Entity has initiated since
January 1, 2008 or has pending any proceeding, enforcement
action or, to the knowledge of Parent, investigation into the
business, disclosures or operations of Parent or any of its
Subsidiaries. Since January 1, 2008, no Regulatory Agency
or other Governmental Entity has resolved any proceeding,
enforcement action or, to the knowledge of Parent, investigation
into the business, disclosures or operations of Parent or any of
its Subsidiaries. There is no unresolved or, to Parents
knowledge, threatened criticism, comment, exception or stop
order by any Regulatory Agency or other Governmental Entity with
respect to any report or statement relating to any examinations
or inspections of Parent or any of its Subsidiaries. Since
January 1, 2008 there have been no formal or informal
inquiries by, or disagreements or disputes with, any Regulatory
Agency or other Governmental Entity with respect to the
business, operations, policies or procedures of Parent or any of
it Subsidiaries (other than normal inquiries made by a
Regulatory Agency or other Governmental Entity in Parents
ordinary course of business).
(b) Except as set forth in Section 4.5(b) of the
Parent Disclosure Schedule, neither Parent nor any of its
Subsidiaries is subject to any
cease-and-desist
or other order or enforcement action issued by, or is a party to
any written agreement, consent agreement or memorandum of
understanding with, or is a party to any commitment letter or
similar undertaking to, or is subject to any order or directive
by, or has been since January 1, 2008 a recipient of any
supervisory letter from, or has been ordered to pay any civil
money penalty by, or since January 1, 2008 has adopted any
policies, procedures or board resolutions at the request or
suggestion of, any Regulatory Agency or other Governmental
Entity that currently restricts or affects in any material
respect the conduct of its business (or to Parents
knowledge that, upon consummation of the Merger, would restrict
in any material respect the conduct of the business of Company
or any of its Subsidiaries) or that in any material manner
relates to its capital adequacy, its ability to pay dividends,
its credit, risk management or compliance policies, its internal
controls, its management or its business, other than those of
general application that apply to similarly situated companies
or their Subsidiaries (each a Parent Regulatory
Agreement), nor has Parent or any of its Subsidiaries
been advised since January 1, 2008 by any Regulatory Agency
or other Governmental Entity that it is considering issuing,
initiating, ordering or requesting any such Parent Regulatory
Agreement.
(c) Parent has previously made available to Company an
accurate and complete copy of each (i) final registration
statement, prospectus, report, schedule and definitive proxy
statement filed with the SEC by Parent pursuant to the
Securities Act or the Exchange Act since January 1, 2008
(the Parent SEC Reports) and prior to the
date of this Agreement and (ii) communication mailed by
Parent to its shareholders since January 1, 2008 and prior
to the date of this Agreement. No such Parent SEC Report or
communication, at the time filed or communicated (or, if amended
prior to the date hereof, as of the date of such amendment)
contained any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or
necessary in order to make the statements made therein, in light
of the circumstances in which they were made, not misleading. As
of their respective dates, all Parent SEC Reports complied as to
form in all material respects with the published rules and
regulations of the SEC with respect thereto. No executive
officer of Parent has failed in any respect to make the
certifications required of him or her under Section 302 or
906 of the Sarbanes-Oxley Act. To the knowledge of Parent, other
than as set forth in Section 4.5(c) of the Parent
Disclosure Schedule, none of the Parent SEC Reports is the
subject of any ongoing review or investigation by the SEC or any
other Governmental Entity and there are no unresolved SEC
comments with respect to any of such documents.
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4.6 Financial
Statements. (a) The financial statements
of Parent and its Subsidiaries included (or incorporated by
reference) in the Parent SEC Reports (including the related
notes, where applicable) (i) have been prepared from, and
are in accordance with, the books and records of Parent and its
Subsidiaries; (ii) fairly present in all material respects
the consolidated results of operations, cash flows, changes in
shareholders equity and consolidated financial position of
Parent and its Subsidiaries for the respective fiscal periods or
as of the respective dates therein set forth (subject in the
case of unaudited statements to recurring year-end audit
adjustments normal in nature and amount); (iii) complied as
of their respective dates of filing with the SEC, in all
material respects with applicable accounting requirements and
with the published rules and regulations of the SEC with respect
thereto; and (iv) have been prepared in accordance with
GAAP consistently applied during the periods involved, except in
each case, as indicated in such statements or in the notes
thereto. The books and records of Parent and its Subsidiaries
have been, and are being maintained in all material respects in
accordance with GAAP and any other applicable legal and
accounting requirements.
(b) Neither Parent nor any of its Subsidiaries has any
material liability of any nature whatsoever (whether absolute,
accrued, contingent or otherwise and whether due or to become
due), except for (i) those liabilities that are reflected
or reserved against on the consolidated balance sheet of Parent
included in its Quarterly Report on
Form 10-Q
for the fiscal quarter ended March 31, 2010 (including any
notes thereto) and (ii) liabilities incurred in the
ordinary course of business consistent with past practice since
March 31, 2010 or in connection with this Agreement and the
transactions contemplated hereby.
(c) The records, systems, controls, data and information of
Parent and its Subsidiaries are recorded, stored, maintained and
operated under means (including any electronic, mechanical or
photographic process, whether computerized or not) that are
under the exclusive ownership and direct control of Parent or
its Subsidiaries or accountants (including all means of access
thereto and therefrom), except for any non-exclusive ownership
and non-direct control that would not reasonably be expected to
have a material adverse effect on the system of internal
accounting controls described below in this Section 4.6
(c). Parent (x) has implemented and maintains disclosure
controls and procedures (as defined in
Rule 13a-15(e)
of the Exchange Act) to ensure that material information
relating to Parent, including its consolidated Subsidiaries, is
made known to the chief executive officer and the chief
financial officer of Parent by others within those entities, and
(y) has disclosed, based on its most recent evaluation
prior to the date hereof, to Parents outside auditors and
the audit committee of Parents Board of Directors
(i) any significant deficiencies and material weaknesses in
the design or operation of internal controls over financial
reporting (as defined in
Rule 13a-15(f)
of the Exchange Act) which are reasonably likely to adversely
affect Parents ability to record, process, summarize and
report financial information and (ii) any fraud, whether or
not material, that involves management or other employees who
have a significant role in Parents internal controls over
financial reporting. These disclosures were made in writing by
management to Parents auditors and audit committee, a copy
of which has previously been made available to Company. As of
the date hereof, there is no reason to believe that
Parents outside auditors, chief executive officer and
chief financial officer will not be able to give the
certifications and attestations required pursuant to the rules
and regulations adopted pursuant to Section 404 of the
Sarbanes-Oxley Act, without qualification, when next due.
(d) Since December 31, 2009, (i) neither Parent
nor any of its Subsidiaries has received or otherwise had or
obtained knowledge of any material complaint, allegation,
assertion or claim, whether written or oral, regarding the
accounting or auditing practices, procedures, methodologies or
methods of Parent or any of its Subsidiaries or their respective
internal accounting controls, including any material complaint,
allegation, assertion or claim that Parent or any of its
Subsidiaries has engaged in questionable accounting or auditing
practices, and (ii) no attorney representing Parent or any
of its Subsidiaries, whether or not employed by Parent or any of
its Subsidiaries, has reported evidence of a material violation
of securities laws, breach of fiduciary duty or similar
violation by Parent or any of its officers, directors, employees
or agents to the Board of Directors of Parent or any committee
thereof or to any director or officer of Parent.
4.7 Brokers
Fees. Neither Parent nor any of its
Subsidiaries nor any of their respective officers or directors
has employed any broker or finder or incurred any liability for
any brokers fees, commissions or finders fees in
connection with the Merger or related transactions contemplated
by this Agreement, other than as set forth on Section 4.7
of the Parent Disclosure Schedule.
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4.8 Absence of Certain Changes or
Events. (a) Since December 31,
2009, no event or events have occurred or condition or
conditions exist that have had or would reasonably be expected
to have, either individually or in the aggregate, a Material
Adverse Effect on Parent.
(b) Since December 31, 2009 through and including the
date of this Agreement, Parent and its Subsidiaries have carried
on their respective businesses in all material respects in the
ordinary course of business consistent with their past practice.
4.9 Legal
Proceedings. (a) Neither Parent nor any
of its Subsidiaries is a party to any, and there are no pending
or, to Parents knowledge, threatened, legal,
administrative, arbitral or other proceedings, claims, actions
or governmental or regulatory investigations of any nature
against Parent or any of its Subsidiaries or to which any of
their assets are subject, other than the proceedings, claims,
actions, suits or investigations disclosed in
Section 4.9(a) of the Parent Disclosure Schedule or the
Parent SEC Reports, which proceedings, claims, actions, suits or
investigations are not reasonably expected to result,
individually or in the aggregate, in a Material Adverse Effect
with respect to Parent.
(b) There is no judgment, settlement agreement, order,
injunction, decree or regulatory restriction (other than those
of general application that apply to similarly situated
companies or their Subsidiaries) imposed upon Parent, any of its
Subsidiaries or the assets of Parent or any of its Subsidiaries.
4.10 Taxes and Tax
Returns. Each of Parent and its Subsidiaries
has duly and timely filed (including all applicable extensions)
all material Tax Returns required to be filed by it on or prior
to the date of this Agreement (all such Tax Returns being
accurate and complete in all material respects), has paid all
Taxes shown thereon as arising and has duly paid or made
provision for the payment of all Taxes that are material in
amount that have been incurred or are due or claimed to be due
from it by federal, state, foreign or local taxing authorities
other than Taxes that are not yet delinquent or are being
contested in good faith, have not been finally determined and
have been adequately reserved against under GAAP. There are no
material disputes pending, or claims asserted, for Taxes or
assessments upon Parent or any of its Subsidiaries for which
Parent does not have reserves that are adequate under GAAP.
4.11 Compliance with Applicable
Law. Parent and each of its Subsidiaries hold
all licenses, franchises, permits and authorizations necessary
for the lawful conduct of their respective businesses under and
pursuant to each, and are in compliance in all respects with any
Law applicable to Parent or any of its Subsidiaries, except for
any failure to hold any licenses, franchises, permits and
authorizations or any non-compliance or default that has not had
a Material Adverse Effect on Parent, its Subsidiaries or their
business.
4.12 Certain
Contracts. (a) Neither Parent nor any of
its Subsidiaries is a party to or bound by any contract,
arrangement, commitment or understanding (whether written or
oral) (i) that is a material contract that
would be required to be filed pursuant to Item 601(b)(10)
of
Regulation S-K
of the Sec and that is to be performed after the date of this
Agreement that has not been filed or incorporated by reference
in the Parent SEC Reports filed prior to the date hereof (any
such contract, arrangement, commitment or understanding of the
type described in this Section 4.12(a) whether or not set
forth in the Parent Disclosure Schedule, is referred to as a
Parent Contract).
(b) (i) Each Parent Contract is valid and binding on
Parent or its applicable Subsidiary, enforceable against it in
accordance with its terms (subject to the Bankruptcy and Equity
Exception), and is in full force and effect, (ii) Parent
and each of its Subsidiaries and, to Parents knowledge,
each other party thereto has duly performed all obligations
required to be performed by it to date under each Parent
Contract and (iii) no event or condition exists that
constitutes or, after notice or lapse of time or both, will
constitute, a breach, violation or default on the part of Parent
or any of its Subsidiaries or, to Parents knowledge, any
other party thereto under any such Parent Contract. No notice of
default or termination has been received under any Parent
Contract. There are no disputes pending or, to Parents
knowledge, threatened with respect to any Parent Contract.
4.13 Investment Securities and
Commodities. (a) Except as would not
reasonably be expected to have a Material Adverse Effect on
Parent, each of Parent and its Subsidiaries has good title to
all securities and commodities owned by it (except those sold
under repurchase agreements or held in any fiduciary or agency
capacity), free and clear of any Liens, except as set forth in
Section 4.13(a) of the Parent Disclosure Schedule. Such
securities and commodities are valued on the books of Parent in
accordance with GAAP in all material respects.
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(b) Parent and its Subsidiaries and their respective
businesses employ investment, securities, commodities, risk
management and other policies, practices and procedures which
are prudent and reasonable in the context of such business.
4.14 Intellectual Property.
(a) Definitions. For
purposes of this Agreement, the following terms shall have the
meanings assigned below:
Parent IP means all Intellectual
Property owned, used, held for use or exploited by Parent or any
of its Subsidiaries.
Licensed Parent IP means the
Intellectual Property owned by a third party that Parent or any
of its Subsidiaries has a right to use or exploit by virtue of a
License Agreement.
Owned Parent IP means the Intellectual
Property that is owned by Parent or any of its Subsidiaries.
(b) Parent and its Subsidiaries collectively own all right,
title and interest in, or have the valid right to use, all of
the Parent IP, free and clear of any Liens, and there are no
obligations to, covenants to or restrictions from third parties
affecting Parents or its applicable Subsidiarys use,
enforcement, transfer or licensing of the Owned Parent IP. To
the knowledge of Parent, all Licensed Parent IP is being used
substantially in accordance with the applicable License
Agreement.
(c) The Owned Parent IP and Licensed Parent IP constitute
(i) all of the Parent IP and (ii) all the Intellectual
Property necessary and sufficient to conduct the businesses of
Parent and its Subsidiaries as they are currently conducted and
as they have been conducted since December 31, 2009.
(d) To the knowledge of Parent, the Owned Parent IP and the
Licensed Parent IP, are valid, subsisting and enforceable.
(e) To the knowledge of Parent, the current use of the
Owned Parent IP does not infringe or otherwise violate any
Intellectual Property of any third party. Neither Parent nor any
of its Subsidiaries has received any written notice of
infringement or conflict with the rights of any third party with
respect to the use or ownership of any Parent IP.
(f) To the knowledge of Parent, no Owned Parent IP or
Licensed Parent IP is being used or enforced in a manner that
would result in the abandonment, cancellation or
unenforceability of such Intellectual Property. To the knowledge
of Parent, no third party has infringed, misappropriated or
otherwise violated any Owned Parent IP.
(g) Parent and its Subsidiaries have established and are in
material compliance with commercially reasonable security
programs that are designed to protect (i) the security,
confidentiality and integrity of transactions executed through
their computer systems, including encryption and other security
protocols and techniques when appropriate and (ii) the
security, confidentiality and integrity of all confidential or
proprietary data. Neither the Company nor any Subsidiary of
Company (A) has suffered a material security breach with
respect to its data systems, (B) has notified consumers of
any information security breach with respect to the information
of such consumers, or (C) has notified employees of any
information security breach with respect to the information of
such employees.
(h) Parent and its Subsidiaries are in compliance in all
material respects with all of their privacy policies applicable
to the protection of consumer information and all applicable
privacy laws and regulations.
4.15 Insurance Business
Matters. (a) Each Subsidiary of Parent
that conducts the business of insurance or reinsurance (each, a
Parent Insurance Subsidiary) is (i) duly
licensed or authorized as an insurance company in its
jurisdiction of incorporation; (ii) duly licensed,
authorized or otherwise eligible to transact the business of
insurance in each other jurisdiction where it is required to be
so licensed, authorized or eligible; and (iii) duly
licensed, authorized or eligible in its jurisdiction of
incorporation and each other applicable jurisdiction to write
each line of insurance reported as being written in the
Statutory Statements. Each jurisdiction in which any Parent
Insurance Subsidiary is domiciled, commercially domiciled,
licensed, authorized or eligible is set forth in
Section 4.15(a) of the Parent Disclosure Schedule. There is
no proceeding or investigation pending or, to the knowledge of
Parent, threatened which would reasonably be expected to lead to
the revocation, amendment, failure to renew, limitation,
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suspension or restriction of any license, authorization or
eligibility of any Parent Insurance Subsidiary to transact the
business of insurance.
(b) Except as set forth in Section 4.15(b) of the
Parent Disclosure Schedule, since January 1, 2009, no
rating agency has imposed conditions (financial or otherwise) on
retaining any currently held rating assigned to any Parent
Insurance Subsidiary or stated to Parent that it is considering
lowering any rating assigned to any Parent Insurance Subsidiary
or placing any Parent Insurance Subsidiary on an under
review status. As of the date of this Agreement, the
Parent Insurance Subsidiaries collectively have the
A.M. Best Company rating set forth in Section 4.15(b)
of the Parent Disclosure Schedule.
4.16 Reorganization;
Approvals. As of the date of this Agreement,
Parent has not taken or agreed to take any action and is not
aware of any fact or circumstance that could reasonably be
expected to prevent the Merger from qualifying as a
reorganization within the meaning of
Section 368(a) of the Code and the Treasury Regulations
promulgated thereunder.
4.17 Parent Information. The
information relating to Parent and its Subsidiaries that is
provided by Parent or its representatives for inclusion in the
Proxy Statement and
Form S-4,
or in any application, notification or other document filed with
any other Regulatory Agency or other Governmental Entity in
connection with the transactions contemplated by this Agreement,
will not, at the time the
Form S-4
becomes effective or at the date the Proxy Statement is mailed,
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements therein, in
light of the circumstances in which they are made, not
misleading. The portions of the Proxy Statement and
Form S-4
relating to Parent and its Subsidiaries and other portions
within the reasonable control of Parent and its Subsidiaries
will comply in all material respects with the provisions of the
Exchange Act and the rules and regulations thereunder.
4.18 Parent Ownership of Company
Securities. Neither Parent nor any Subsidiary
of Parent has at any time beneficially owned ten percent (10%)
or more of Company Common Stock outstanding at such time.
ARTICLE V
COVENANTS
RELATING TO CONDUCT OF BUSINESS
5.1 Conduct of Businesses Prior to the
Effective Time. Except as expressly permitted
by this Agreement or with the prior written consent of Parent,
during the period from the date of this Agreement to the
Effective Time, Company shall, and shall cause each of its
Subsidiaries to, (i) conduct its business in the ordinary
and usual course consistent with past practice and in compliance
in all material respects with all applicable Laws, (ii) use
commercially reasonable efforts to maintain and preserve intact
its business organization and management and advantageous
business relationships with its customers, suppliers and others
having business dealings with them and retain the services of
its officers and key employees and (iii) take no action
that is intended to or would reasonably be expected to adversely
affect or materially delay the ability of Company, Parent or
Merger Sub to obtain any necessary approvals of any Regulatory
Agency or other Government Entity required for the transactions
contemplated hereby or to perform its covenants and agreements
under this Agreement or to consummate the transactions
contemplated hereby.
5.2 Forbearances. Without
limiting the generality of Section 5.1 above, during the
period from the date of this Agreement to the Effective Time,
except as set forth in Section 5.2 of the Company
Disclosure Schedule, or as expressly permitted by this
Agreement, Company shall not, and shall not permit any of its
Subsidiaries to, without the prior written consent of Parent:
(a) Incur any indebtedness for borrowed money, or assume,
guarantee, endorse or otherwise as an accommodation become
responsible for like obligations of any other individual,
corporation or other entity;
(b) (i) adjust, split, subdivide, combine or
reclassify any of its capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu of or in
substitution for shares of capital stock;
(ii) make, declare or pay any dividend (whether in cash,
stock or other securities or property), or make any other
distribution on, or directly or indirectly redeem, purchase or
otherwise acquire, directly or indirectly
A-27
any shares of its capital stock or of any of its Subsidiaries or
any securities or obligations convertible (whether currently
convertible or convertible only after the passage of time or the
occurrence of certain events) into or exchangeable for any
shares of its or their capital stock (except (A) dividends
paid by any of the Subsidiaries of Company to Company or to any
of its wholly owned Subsidiaries and (B) the acceptance of
shares of Company Common Stock in payment of the exercise price
or withholding Taxes incurred by any employee or director in
connection with the exercise of stock options or stock
appreciation rights or the vesting of restricted shares of (or
settlement of other equity-based awards in respect of) Company
Common Stock);
(iii) grant any stock options, stock appreciation rights,
restricted shares, restricted stock units, deferred equity
units, awards based on the value of Companys capital stock
or other equity-based award with respect to shares of Company
Common Stock, or grant any individual, corporation or other
entity any right to acquire any shares of its capital
stock; or
(iv) issue any additional shares of capital stock or other
securities, except pursuant to the exercise of stock options or
the settlement of other equity-based awards granted under a
Company Benefit Plan, that are outstanding as of the date of
this Agreement or granted pursuant to Section 5.2 of the
Company Disclosure Schedule;
(c) except as required under applicable Law or the terms of
any Company Benefit Plan existing as of the date hereof,
(i) increase in any manner the compensation or benefits
including severance benefits of any of the current or former
directors, officers or employees of Company or its Subsidiaries
(collectively, Employees), (ii) pay any
pension, severance or retirement benefits to Employees,
(iii) other than with respect to any compensation and
benefits (excluding any equity-based compensation or benefits)
in accordance with past practice with respect to new hires who
would not be executive officers of Company or any Subsidiary of
Company, become a party to, establish, amend, commence,
participate in, terminate or commit itself to the adoption of
any stock option plan or other stock-based compensation plan,
compensation (including any employee co-investment fund),
severance, pension, retirement, profit-sharing, welfare benefit
or other employee benefit plan or agreement or employment
agreement with or for the benefit of any Employee (or newly
hired employees), (iv) accelerate the vesting of any
stock-based compensation or other long-term incentive
compensation under any Company Benefit Plans, or (v) enter
into any collective bargaining agreement with any labor
organization, union or association;
(d) sell, transfer, pledge, lease, grant, license,
mortgage, encumber or otherwise dispose of any of its properties
or assets to any individual, corporation or other entity other
than a Subsidiary, or create any lien of any kind with respect
to any such property or asset, or cancel, release or assign any
indebtedness to any such person or any claims held by any such
person, in each case other than in the ordinary course of
business consistent with past practice or pursuant to contracts
in force at the date of this Agreement;
(e) enter into any new line of business or change in any
material respect its investment, underwriting, risk and asset
liability management and other operating policies, except as
required by applicable law, regulation or policies imposed by
any Governmental Entity;
(f) transfer ownership, or grant any license or other
rights, to any person or entity of or in respect of any material
Company IP, other than grants of non-exclusive licenses pursuant
to License Agreements entered into in the ordinary course of
business consistent with past practice;
(g) acquire (whether by merger, consolidation or
acquisition of stock or assets or otherwise) any corporation,
partnership or other business organization or division thereof
or, other than in the ordinary course of business consistent
with past practice, make any material investment either by
purchase of stock or securities, contributions to capital,
property transfers, or purchase of any property or assets of any
other individual, corporation or other entity;
(h) take any action, or knowingly fail to take any action,
which action or failure to act is reasonably likely to prevent
the Merger from qualifying as a reorganization
within the meaning of Section 368(a) of the Code and the
Treasury Regulations promulgated thereunder;
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(i) amend its charter or bylaws (or comparable
organizational documents), or otherwise take any action to
exempt any person or entity (other than Parent or its
Subsidiaries) or any action taken by any person or entity from
any Takeover Statute or similarly restrictive provisions of its
organizational documents or terminate, amend or waive any
provisions of any confidentiality or standstill agreements in
place with any third parties;
(j) (i) amend or otherwise modify, except in the
ordinary course of business consistent with past practice, or
knowingly violate, the terms of, or terminate, any Company
Contract, or (ii) create, renew or amend any agreement or
contract or, except as may be required by applicable Law, other
binding obligation of Company or its Subsidiaries containing
(A) any material restriction on the ability of it or its
Subsidiaries to conduct its business as it is presently being
conducted or (B) any material restriction on the ability of
Company or its affiliates to engage in any type of activity or
business;
(k) commence or settle any material claim, action or
proceeding;
(l) take any action or willfully fail to take any action
that is intended or may reasonably be expected to result in any
of the conditions to the Merger set forth in Article VII
not being satisfied;
(m) implement or adopt any material change in its Tax
accounting or financial accounting principles, practices or
methods, other than as may be required by applicable Laws, GAAP
or regulatory guidelines;
(n) file or amend any material Tax Return, make or change
any material Tax election, or settle or compromise any material
Tax liability, in each case, other than in the ordinary course
of business or as required by law; or
(o) agree to take, make any commitment to take, or adopt
any resolutions of its board of directors in support of, any of
the actions prohibited by, or any material action in furtherance
of any of the actions prohibited by, this Section 5.2.
5.3 Parent
Forbearances. Except as expressly permitted
by this Agreement or with the prior written consent of Company,
during the period from the date of this Agreement to the
Effective Time, Parent shall not, and shall not permit any of
its Subsidiaries to, (a) amend, repeal or otherwise modify
any provision of the Parent Certificate or the Parent Bylaws in
a manner that would adversely affect Company, the shareholders
of Company or the transactions contemplated by this Agreement;
(b) take any action, or knowingly fail to take any action,
which action or failure to act is reasonably likely to prevent
the Merger from qualifying as a reorganization
within the meaning of Section 368(a) of the Code and the
Treasury Regulations promulgated thereunder; (c) take any
action that would, or willfully fail to take any action that is
intended to, result in any of the conditions to the Merger set
forth in Article VII not being satisfied; (d) take any
action that would prevent, materially impede or materially delay
the consummation of the transactions contemplated by this
Agreement; or (e) agree to take, make any commitment to
take, or adopt any resolutions of its board of directors in
support of, any of the actions prohibited by this
Section 5.3.
ARTICLE VI
ADDITIONAL
AGREEMENTS
6.1 Regulatory
Matters. (a) Parent and Company shall
promptly prepare and file with the SEC the
Form S-4,
in which the Proxy Statement will be included as a prospectus.
Each of Parent and Company shall use its reasonable best efforts
to have the
Form S-4
declared effective under the Securities Act as promptly as
practicable after such filing, and Company shall thereafter mail
or deliver the Proxy Statement to its shareholders. Parent shall
also use its reasonable best efforts to obtain all necessary
state securities law or Blue Sky permits and
approvals required to carry out the transactions contemplated by
this Agreement, and Company shall furnish all information
concerning Company and the holders of Company Common Stock as
may be reasonably requested in connection with any such action.
(b) Each of Parent and Company shall, upon request, furnish
to the other all information concerning itself, its
Subsidiaries, directors, officers and shareholders and such
other matters as may be reasonably necessary or advisable in
connection with the Proxy Statement, the
Form S-4
or any other statement, filing, notice or application
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made by or on behalf of Parent, Company or any of their
respective Subsidiaries to any Governmental Entity in connection
with the Merger and other transactions contemplated by this
Agreement.
(c) Subject to the terms and conditions of this Agreement,
each party will use its reasonable best efforts to take, or
cause to be taken, all actions, to file, or cause to be filed,
all documents and to do, or cause to be done, all things
necessary, proper or advisable to consummate the transactions
contemplated by this Agreement, including preparing and filing
as promptly as practicable all documentation to effect all
necessary filings, consents, waivers, approvals, authorizations,
permits or orders from all third parties and Governmental
Entities, including those required to satisfy the condition set
forth in Section 7.2(h). In furtherance and not in
limitation of the foregoing, each party hereto agrees to make or
cause to be made an appropriate filing of a Notification and
Report Form pursuant to the HSR Act with respect to the
transactions contemplated by this Agreement as promptly as
practicable after the date hereof (and in any event within 10
business days) and to make, or cause to be made, the filings and
authorizations, if any, required under any other Regulatory Laws
as promptly as reasonably practicable after the date hereof and
to supply as promptly as reasonably practicable any additional
information and documentary material that may be requested
pursuant to the HSR Act and to take or cause to be taken all
other actions necessary, proper or advisable consistent with
this Section 6.1 to cause the expiration or termination of
the applicable waiting periods, or receipt of required
authorizations, as applicable, under the HSR Act or any other
Regulatory Laws as soon as practicable. In furtherance and not
in limitation of the foregoing, the parties shall request and
shall use reasonable best efforts to obtain early termination of
the waiting period under the HSR Act.
(d) Each of Parent, on the one hand, and Company, on the
other hand, shall, in connection with the efforts referenced in
Section 6.1(c) to obtain all requisite approvals and
authorizations for the transactions contemplated by this
Agreement, use its reasonable best efforts to (i) cooperate
in all respects with each other in connection with any filing or
submission and in connection with any investigation or other
inquiry, including any proceeding initiated by a private party;
(ii) subject to applicable legal limitations and the
instructions of any Governmental Entity, keep the other party
reasonably informed of any communication received by such party
from, or given by such party to, the Federal Trade Commission
(the FTC), the Antitrust Division of the
Department of Justice (the DOJ) or any other
Governmental Entity and of any communication received or given
in connection with any proceeding by a private party, in each
case regarding any of the transactions contemplated hereby; and
(iii) subject to applicable legal limitations and the
instructions of any Governmental Entity, permit the other party
to review in advance any communication (provided that the
parties may redact references to the value of this transaction
or alternatives to this transaction) to be given by it to, and
consult with each other in advance of any meeting or conference
with, the FTC, the DOJ or any other Governmental Entity or, in
connection with any proceeding by a private party, with any
other person, and to the extent permitted by the FTC, the DOJ or
such other applicable Governmental Entity or other person, give
the other party the opportunity to attend and participate in
such meetings and conferences.
(e) In furtherance and not in limitation of the covenants
of the parties contained in Sections 6.1(c) and (d), if any
objections are asserted with respect to the transactions
contemplated hereby under any Law or if any suit is instituted
(or threatened to be instituted) by the FTC, the DOJ or any
other applicable Governmental Entity or any private party
challenging any of the transactions contemplated hereby as
violative of any Law of which would otherwise prevent,
materially impede or materially delay the consummation of the
transactions contemplated hereby, each Parent, on the one hand,
and Company, on the other hand, shall use their reasonable best
efforts to (x) take, or cause to be taken, all other
actions and (y) do, or cause to be done, all other things
necessary, proper or advisable to consummate and make effective
the transactions contemplated hereby, including taking all such
further action as may be necessary to resolve such objections,
if any, as the FTC, the DOJ, state antitrust enforcement
authorities or competition authorities of any other nation or
other jurisdiction may assert under any Law with respect to the
transactions contemplated hereby, and to avoid or eliminate each
and every impediment under any Law that may be asserted by any
Governmental Entity with respect to the Merger as so as to
enable the Closing to occur as soon as reasonably practicable
(and in any event no later than the End Date), in each case as
may be required in order to avoid the entry of, or to effect the
dissolution of, any injunction, temporary restraining order or
other order in any suit or proceeding which would otherwise have
the effect of preventing the Closing or delaying the Closing
beyond the End Date; provided that neither Company nor
any of its Subsidiaries shall consent or agree to or otherwise
take any action with respect to, any requirement, condition,
understanding, agreement or order of a Governmental Entity to
sell, to hold separate or otherwise dispose of, or to conduct,
restrict, operate, invest or
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otherwise change the assets or business of Company or any of its
affiliates, unless such requirement, condition, understanding,
agreement or order is binding on Company only in the event that
the Closing occurs. Notwithstanding anything to the contrary in
this Section 6.1 or elsewhere in this Agreement, Parent
shall not be required to agree to or accept (but in its
discretion may agree to or accept), and Company shall not,
without the prior written consent of Parent, agree to or accept,
unless requested to do so by Parent (subject to the proviso to
the immediately preceding sentence) any condition sought by any
Governmental Entity or other person in connection with any
consent or approval required to complete or otherwise in
connection with the Merger that (A) seeks to prohibit or
limit in any material respect the ownership or operation by
Company, the Surviving Company, Parent or any of their
affiliates of the business or assets of any of them, or to
compel Company, the Surviving Company, Parent or any of their
affiliates to dispose of or hold separate any significant
portion of their business or assets as a result of the Merger or
any other transactions contemplated hereby, (B) seeks to
impose limitations on the ability of Parent to acquire, hold, or
exercise full rights of direct or indirect ownership of the
Surviving Company and its Subsidiaries, including the right to
vote the capital stock of the Surviving Company on all matters
properly presented to the shareholders of the Surviving Company
and the rights to declare or pay dividends on any capital stock
of the Surviving Company and its Subsidiaries, (C) seeks to
prohibit Parent or any of its Subsidiaries from effectively
controlling in any material respect the business or operations
of Parent, the Surviving Company or its Subsidiaries and their
affiliates, (D) would individually or in the aggregate
reasonably be expected to materially and adversely affect the
benefits, taken as a whole, that Parent reasonably expects to
derive from the consummation of the transactions contemplated by
this Agreement or (E) would reasonably be expected to have
a Material Adverse Effect on the business, financial condition
or results of operations of Company and its Subsidiaries, taken
as a whole.
(f) Subject to Section 6.1(e), in the event that any
administrative or judicial action or proceeding is instituted
(or threatened to be instituted) by a Governmental Entity or
private party challenging the Merger or any other transaction
contemplated by this Agreement, or any other agreement
contemplated hereby, each of Parent, Merger Sub and Company
shall cooperate in all respects with each other and use its
respective reasonable best efforts to contest and resist any
such action or proceeding and to have vacated, lifted, reversed
or overturned any decree, judgment, injunction or other order,
whether temporary, preliminary or permanent, that is in effect
and that prohibits, prevents or restricts consummation of the
transactions contemplated by this Agreement.
(g) Each of Parent and Company shall promptly advise the
other upon receiving any communication from any Governmental
Entity the consent or approval of which is required for
consummation of the transactions contemplated by this Agreement
that causes such party to believe that there is a reasonable
likelihood that any requisite Regulatory Approval will not be
obtained or that the receipt of any such approval may be
materially delayed.
(h) As used in this Agreement, the term Regulatory
Laws means any Laws enacted by any Governmental Entity
relating to antitrust matters, insurance, or regulating
competition.
(i) As used in this Agreement, the term
Law means applicable statutes, common laws,
rules, ordinances, regulations, codes, orders, judgments,
injunctions, writs, decrees, governmental guidelines or
interpretations having the force of law or bylaws, in each case,
of a Governmental Entity.
6.2 Access to
Information. (a) Upon reasonable notice
and subject to applicable laws relating to the confidentiality
of information, Company shall, and shall cause each of its
Subsidiaries to, afford to the officers, employees, accountants,
counsel, advisors, agents and other representatives of Parent,
reasonable access, during normal business hours during the
period prior to the Effective Time, to all its personnel,
properties, books, contracts, commitments and records, and
during such period, Company shall, and shall cause its
Subsidiaries to, make available to Parent (i) a copy of
each report, schedule, registration statement and other document
filed or received by it during such period pursuant to the
requirements of federal securities laws or federal or state
banking or insurance laws (other than reports or documents that
such party is not permitted to disclose under applicable law)
and (ii) all other information concerning its business,
operations, properties and personnel as Parent may reasonably
request. Neither Company, nor any of its Subsidiaries, shall be
required to provide access to or to disclose information where
such access or disclosure would jeopardize the attorney-client
privilege of such party or its Subsidiaries or contravene any
law, rule, regulation, order, judgment, decree, fiduciary duty
or binding agreement (provided, Company will use reasonable best
efforts to obtain waivers thereof upon request by Company)
entered into prior to
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the date of this Agreement. The parties shall make appropriate
substitute disclosure arrangements under circumstances in which
the restrictions of the preceding sentence apply.
(b) All information and materials provided pursuant to this
Agreement shall be subject to the provisions of the
Confidentiality Agreements entered into between Parent and
Company as of September 12, 2009 and March 24, 2010
(the Confidentiality Agreements).
6.3 Shareholder
Approval. Except where there has been a
Change of Recommendation, Company shall call a meeting of its
shareholders to be held as soon as reasonably practicable for
the purpose of obtaining the requisite shareholder approval
required in connection with the Merger, on substantially the
terms and conditions set forth in this Agreement, and shall use
commercially reasonable efforts to cause such meeting to occur
as soon as reasonably practicable. Except where there has been a
Change of Recommendation, the Board of Directors of Company
shall use commercially reasonable efforts to obtain from its
shareholders the shareholder vote approving the Merger, on
substantially the terms and conditions set forth in this
Agreement, required to consummate the transactions contemplated
by this Agreement, and shall recommend such approval except to
the extent expressly permitted under Section 6.11(d). The
Board of Directors of Company has adopted resolutions approving
and adopting the Merger, on substantially the terms and
conditions set forth in this Agreement, and directing that the
Merger, on such terms and conditions, be submitted to
Companys shareholders for their consideration.
6.4 NYSE Listing. Parent
shall cause the shares of Parent Common Stock to be issued in
the Merger to be approved for listing on the NYSE, subject to
official notice of issuance, prior to the Effective Time.
6.5 Maintenance of Tax-Free
Reorganization.
(a) Officers of Company shall execute and deliver to each
of Companys and Parents respective law or accounting
firms, at the time the
Form S-4
or any amendment thereto is filed with the SEC and on or about
the Closing Date, certificates substantially in compliance with
IRS published advance ruling guidelines, with customary
exceptions and modifications thereto, to enable such firms to
deliver any opinions required in connection with the filing of
the
Form S-4
(or amendments thereto) and the opinions contemplated by
Sections 7.2(c) and 7.3(c).
(b) Officers of Parent shall execute and deliver to each of
Companys and Parents respective law or accounting
firms, at the time the
Form S-4
or any amendment thereto is filed with the SEC and on or about
the Closing Date, certificates substantially in compliance with
IRS published advance ruling guidelines, with customary
exceptions and modifications thereto, to enable such firms to
delivery any opinions required in connection with the filing of
the
Form S-4
(or amendments thereto) and the opinions contemplated by
Sections 7.2(c) and 7.3(c).
(c) Following the Effective Time, neither Parent nor
Company shall knowingly take (or fail to take) any action that
could cause the Merger to fail to qualify as a reorganization
under Section 368(a) of the Code and the Treasury
regulations promulgated thereunder
6.6 Employee
Matters. (a) Except as contemplated by
Sections 1.5(d) and (e), for the period from the Effective
Time through December 31, 2011, Parent shall provide to
each employee who is actively employed by Company and its
Subsidiaries on the Closing Date (collectively, the
Covered Employees) employee benefits and
compensation that are, in the aggregate, no less favorable than
the employee benefits and compensation that were provided to
such Covered Employee immediately prior to the Effective Time.
Notwithstanding any other provision of this Agreement to the
contrary, nothing in this Section 6.6 shall limit the
application after the Effective Time to Covered Employees of pay
or benefit cuts generally applicable to similarly situated
Parent employees.
(b) For all purposes (including purposes of vesting,
eligibility to participate and level of benefits) under each
employee benefit plan maintained by Parent or any of its
Subsidiaries, Parent shall cause such employee benefit plan to
recognize the service of each Covered Employee with Company or
its Subsidiaries (or their predecessor entities) to the same
extent such service was recognized immediately prior to the
Effective Time under a comparable Company Benefit Plan in which
such Covered Employee was eligible to participate immediately
prior to Effective Time; provided that the foregoing
shall not apply with respect to benefit accrual under defined
benefit pension plans or to the extent such operation would
result in a duplication of benefits for a Covered Employee with
respect to the same period of service. In addition, and without
limiting the generality of the foregoing, (i) each Covered
Employee
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shall be immediately eligible to participate, without any
waiting time, in any and all employee benefit plans maintained
by Parent or any of its Subsidiaries to the extent coverage
under such plans is comparable to, and a replacement for, a
Company Benefit Plan in which such Covered Employee participated
immediately before the consummation of the Merger, and
(ii) with respect to any health, dental, vision or other
welfare plans of Parent or any of its Subsidiaries (other than
Company and its Subsidiaries) in which any Covered Employee is
eligible to participate for the plan year in which such Covered
Employee is first eligible to participate, Parent shall use its
reasonable best efforts to (x) cause any pre-existing
condition limitations or eligibility waiting periods under such
Parent or Subsidiary plan to be waived with respect to such
Covered Employee, to the extent such limitation would have been
waived or satisfied under the Company Benefit Plan in which such
Covered Employee participated immediately prior to the Effective
Time and (y) recognize any health, dental or vision
expenses incurred by such Covered Employee in the plan year that
includes the Closing Date for purposes of any applicable
deductible and annual
out-of-pocket
expense requirements under any such health, dental or vision
plan of Parent or any of its Subsidiaries.
(c) Except as contemplated by Sections 1.5(d) and (e),
from and after the Effective Time, Parent shall, or shall cause
its Subsidiaries to, honor, in accordance with the terms thereof
as in effect as of the date hereof or as may be amended after
the date hereof, each Company Benefit Plan.
(d) Nothing in this Section 6.6 shall be construed to
limit the right of Parent or any of its Subsidiaries (including,
following the Closing Date, Company and its Subsidiaries) to
amend or terminate any Company Benefit Plan or other employee
benefit plan, to the extent such amendment or termination is
permitted by the terms of the applicable plan, nor shall
anything in this Section 6.6 be construed to prohibit the
Parent or any of its Subsidiaries (including, following the
Closing Date, Company and its Subsidiaries) from terminating the
employment of any particular Covered Employee following the
Closing Date.
(e) Without limiting the generality of Section 9.10,
the provisions of this Section 6.6 are solely for the
benefit of the parties to this Agreement, and no current or
former employee, director or independent contractor or any other
individual associated therewith shall be regarded for any
purpose as a third-party beneficiary of this Agreement, and
nothing herein shall be construed as an amendment to any Company
Benefit Plan or other employee benefit plan for any purpose.
6.7 Indemnification; Directors and
Officers Insurance. (a) In the
event of any threatened or actual claim, action, suit,
proceeding or investigation, whether civil, criminal or
administrative (a Claim), including any such
Claim in which any individual who is now, or has been at any
time prior to the date of this Agreement, or who becomes prior
to the Effective Time, a director or officer of Company or any
of its Subsidiaries or who is or was serving at the request of
Company or any of its Subsidiaries as a director or officer of
another person (Indemnified Party), is or is
threatened to be, made a party based in whole or in part on, or
arising in whole or in part out of, or pertaining to
(i) the fact that he or she is or was a director or officer
of Company or any of its Subsidiaries (or any such other person)
prior to the Effective Time or (ii) this Agreement or any
of the transactions contemplated by this Agreement, whether
asserted or arising before or after the Effective Time, the
parties shall cooperate and use their reasonable best efforts to
defend against and respond thereto. Company agrees that it shall
not settle or offer to settle any litigation or other legal
proceeding commenced prior to or after the date hereof against
Company or any of its directors or executive officers, by any
shareholder of Company or otherwise, relating to this Agreement
or the Merger without the prior written consent of Parent which
consent shall not be unreasonably withheld or delayed.
(b) All rights to indemnification and exculpation from
liabilities for acts or omissions occurring at or prior to the
Effective Time now existing in favor of any Indemnified Party as
provided in their respective certificates or articles of
incorporation or bylaws (or comparable organizational
documents), and any indemnification agreements which are
existing as of the date hereof, shall survive the Merger and
shall continue in full force and effect in accordance with their
terms. From and after the Effective Time, Parent shall or shall
cause the Surviving Company to, to the fullest extent a
Pennsylvania corporation is permitted as of the date hereof to
indemnify its own officers and directors under applicable Law
(but subject to any limitations with respect thereto under any
Law applicable to Parent or the Surviving Company after the
Effective Time), indemnify, defend and hold harmless, and
provide advancement of expenses to, each Indemnified Party
against all losses, claims, damages, costs, expenses,
liabilities or judgments or amounts that are paid in settlement
of or in connection with any Claim based in whole or in part on
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or arising in whole or in part out of the fact that such person
is or was a director or officer of Company or any of its
Subsidiaries, and pertaining to any matter existing or
occurring, or any acts or omissions occurring, at or prior to
Effective Time, whether asserted or claimed prior to, or at or
after, the Effective Time (including matters, acts or omissions
occurring in connection with the approval of this Agreement and
the consummation of the transactions contemplated hereby or
thereby) or taken at the request of Parent pursuant to
Section 6.7.
(c) Prior to the Effective Time, Company shall purchase
directors and officers liability and fiduciary
liability insurance policies (D&O
Insurance) covering for a tail period of six years
from the Effective Time acts or omissions occurring prior to the
Effective Time and covering each person now covered or covered
at the Effective Time by Companys D & O
Insurance. Company shall consult with Parent before purchasing
the D&O insurance.
(d) The provisions of this Section 6.7 shall survive
the Effective Time and are intended to be for the benefit of,
and shall be enforceable by, each Indemnified Party and his or
her heirs and representatives.
6.8 Additional
Agreements. In case at any time after the
Effective Time any further action is necessary or desirable to
carry out the purposes of this Agreement or to vest the
Surviving Company with full title to all properties, assets,
rights, approvals, immunities and franchises of either party to
the Merger, the proper officers and directors of each party and
their respective Subsidiaries shall, at Parents sole
expense, take all necessary action as may be reasonably
requested by Parent.
6.9 Advise of Changes. Each
of Parent and Company shall promptly advise the other of any
change or event (i) having or reasonably likely to have a
Material Adverse Effect on it or (ii) that it believes
would or would be reasonably likely to cause a constituent a
material breach of any of its representations, warranties or
covenants contained in this Agreement; provided,
however, that no such notification shall affect the
representations, warranties, covenants or agreements of the
parties (or remedies with respect thereto) or the conditions to
the obligations of the parties under this Agreement; and
provided further that a failure to comply with this
Section 6.9 shall not constitute a breach of this Agreement
or the failure of any condition set forth in Article VII to
be satisfied unless the underlying Material Adverse Effect or
material breach would independently result in the failure of a
condition set forth in Article VII to be satisfied.
6.10 Exemption from Liability Under
Section 16(b). Prior to the Effective
Time, Parent and Company shall each take all such steps as may
be necessary or appropriate, and the parties shall cooperate
with each other as necessary, to cause any deemed disposition of
shares of Company Common Stock or conversion of any derivative
securities in respect of such shares of Company Common Stock or
any deemed acquisition of shares of Parent Common Stock by an
individual who after the Merger is expected to be subject to
Section 16(b) of the Exchange Act with respect to Parent,
in each case in connection with the consummation of the
transactions contemplated by this Agreement, to be exempt under
Rule 16b-3
promulgated under the Exchange Act.
6.11 No
Solicitation. (a) None of Company, its
Subsidiaries or any officer, director, employee, agent or
representative (including any investment banker, financial
advisor, attorney, accountant or other representative) of
Company or any of its Subsidiaries shall directly or indirectly
(i) solicit, initiate, encourage, facilitate (including by
way of furnishing information) or take any other action designed
to facilitate any inquiries or proposals regarding any merger,
share exchange, consolidation, sale of assets, sale of shares of
capital stock (including by way of a tender offer) or similar
transactions involving Company or any of its Subsidiaries that,
if consummated, would constitute an Alternative Transaction (any
of the foregoing inquiries or proposals, including the
indication of any intention to propose any of the foregoing,
being referred to herein as an Alternative
Proposal), (ii) participate in any discussions or
negotiations regarding an Alternative Transaction or
(iii) enter into any agreement regarding any Alternative
Transaction. Notwithstanding the foregoing, the Board of
Directors of Company shall be permitted, prior to any meeting of
Companys shareholders held pursuant to Section 6.3,
and subject to compliance with the other terms of this
Section 6.11 and to first entering into a confidentiality
agreement with the person proposing such Alternative Proposal on
terms substantially similar to, and no less favorable to Company
than, those contained in the Confidentiality Agreements, to
consider and participate in discussions and negotiations with
respect to a bona fide Alternative Proposal received by Company,
and furnish information in connection therewith (provided
that, subject to confidentiality restrictions, Company shall
simultaneously provide to Parent any such information that was
not previously provided to Parent) if and only to the extent
that and so long as the Board of Directors of Company
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determines in good faith that the Alternative Proposal
constitutes or is reasonably likely to lead to a Superior
Proposal.
As used in this Agreement, Alternative
Transaction means any of (i) a transaction
pursuant to which any person (or group of persons)(other than
Parent or its affiliates), directly or indirectly, acquires or
would acquire more than 20% of the outstanding shares of Company
or any of its Subsidiaries or of the outstanding voting power of
any new series or new class of preferred stock that would be
entitled to a class or series vote with respect to a merger with
Company or any of its Subsidiaries, whether from Company or
pursuant to a tender offer or exchange offer or otherwise,
(ii) a merger, share exchange, consolidation or other
business combination involving Company or any of its
Subsidiaries (other than the Merger), (iii) any transaction
pursuant to which any person (or group of persons)(other than
Parent or its affiliates) acquires or would acquire control of
assets (including for this purpose the outstanding equity
securities of subsidiaries of Company and securities of the
entity surviving any merger or business combination including
any of Companys Subsidiaries) of Company or any of its
Subsidiaries representing more than 20% of the fair market value
of all the assets, net revenues or net income of Company and its
Subsidiaries, taken as a whole, immediately prior to such
transaction, or (iv) any other consolidation, business
combination, recapitalization or similar transaction involving
Company or any of its Subsidiaries other than the transactions
contemplated by this Agreement.
(b) Company shall notify Parent promptly (but in no event
later than 48 hours) after receipt of any Alternative
Proposal, or any material modification of or material amendment
to any Alternative Proposal, or any request for nonpublic
information relating to Company or any of its Subsidiaries or
for access to the properties, books or records of Company or any
of its Subsidiaries, other than any such request that does not
relate to, and would not reasonably be expected to lead to, an
Alternative Proposal. Such notice to Parent shall be made orally
and in writing, and shall indicate the identity of the person
making the Alternative Proposal or intending to make or
considering making an Alternative Proposal or requesting
non-public information or access to the books and records of
Company or any of its Subsidiaries, and a copy (if in writing)
and summary of the material terms of any such Alternative
Proposal or modification or amendment to an Alternative
Proposal. Company shall use its best efforts to keep Parent
fully informed, on a current basis, of any material changes in
the status and any material changes or modifications in the
terms of any such Alternative Proposal or request. Company shall
also provide Parent 48 hours written notice before it
enters into any discussions or negotiations concerning any
Alternative Proposal in accordance with Section 6.11(a).
Company shall not enter into any confidentiality or other
agreement that would impede its ability to comply with its
obligations under this Section 6.11(b).
(c) Company and its Subsidiaries shall immediately cease
and cause to be terminated any existing discussions or
negotiations with any persons (other than Parent) conducted
heretofore with respect to any of the foregoing, and shall use
reasonable best efforts to cause all persons other than Parent
who have been furnished confidential information regarding
Company in connection with the solicitation of or discussions
regarding an Alternative Proposal within the 12 months
prior to the date hereof promptly to return or destroy such
information. Company agrees not to, and to cause its
Subsidiaries not to, release any third party from the
confidentiality and standstill provisions of any agreement to
which Company or its Subsidiaries is or may become a party, and
shall immediately take all steps necessary to terminate any
approval that may have been heretofore given under any such
provisions authorizing any person to make an Alternative
Proposal. Neither Company nor the Board of Directors of Company
shall approve or take any action to render inapplicable to any
Alternative Proposal or Alternative Transaction the Pennsylvania
Takeover Disclosure Law (70 P.S. §71, et seq.), or any
similar Takeover Statutes.
(d) Except as expressly permitted by this
Section 6.11(d), neither the Board of Directors of Company
nor any committee thereof shall (i) withdraw, modify or
qualify, or propose publicly to withdraw, modify or qualify, the
recommendation by the Board of Directors of Company of this
Agreement
and/or the
Merger to Companys shareholders, (ii) take any public
action or make any public statement in connection with the
meeting of Companys shareholders to be held pursuant to
Section 6.3 substantively inconsistent with such
recommendation or (iii) approve or recommend, or publicly
propose to approve or recommend, or fail to recommend against
any Alternative Proposal (any of the actions described in
clauses (i), (ii) or (iii), a Change of
Recommendation). Notwithstanding
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the foregoing, the Board of Directors of Company may make a
Change of Recommendation, if, and only if, each of the following
conditions is satisfied:
(i) it receives a Superior Proposal and such Superior
Proposal has not been withdrawn;
(ii) it determines in good faith (after consultation with
outside legal counsel), that in light of a Superior Proposal the
failure to effect such Change of Recommendation would be
inconsistent with its fiduciary duties under Pennsylvania law;
(iii) Parent has received written notice from Company (a
Change of Recommendation Notice) at least
three business days prior to such Change of Recommendation,
which notice shall (1) state expressly that Company has
received an Alternative Proposal which the Board of Directors of
Company has determined is a Superior Proposal and that Company
intends to effect a Change of Recommendation and the manner in
which it intends or may intend to do so and (2) include the
identity of the person making such Alternative Proposal and a
copy (if in writing) and summary of material terms of such
Alternative Proposal; provided that any material
amendment to the terms of such Alternative Proposal shall
require a new Change of Recommendation Notice at least two
business days prior to such Change of Recommendation; and
(iv) during any such notice period, Company and its
advisors have negotiated in good faith with Parent (provided
that Parent desires to negotiate) to make adjustments in the
terms and conditions of this Agreement such that such
Alternative Proposal would no longer constitute a Superior
Proposal.
As used in this Agreement, Superior Proposal
means any proposal made by a third party (A) to acquire,
directly or indirectly, for consideration consisting of cash
and/or
securities, 100% of the outstanding shares of Company Common
Stock or 100% of the assets, net revenues or net income of
Company and its Subsidiaries, taken as a whole and
(B) which is otherwise on terms which the Board of
Directors of Company determines in its reasonable good faith
judgment (after consultation with its financial advisor and
outside legal counsel), taking into account, among other things,
all legal, financial, regulatory and other aspects of the
proposal and the person making the proposal, that the proposal,
(i) if consummated would result in a transaction that is
more favorable, from a financial point of view, to
Companys shareholders than the Merger and the other
transactions contemplated hereby and (ii) is reasonably
capable of being completed, including to the extent required,
financing which is then committed or which, in the good faith
judgment of the Board of Directors of Company, is reasonably
capable of being obtained by such third party.
(e) Company shall ensure that the officers, directors and
all employees, agents and representatives (including any
investment bankers, financial advisors, attorneys, accountants
or other representatives) of Company or its Subsidiaries are
aware of the restrictions described in this Section 6.11 as
reasonably necessary to avoid violations thereof. It is
understood that any violation of the restrictions set forth in
this Section 6.11 by any officer, director, employee, agent
or representative (including any investment banker, financial
advisor, attorney, accountant or other representative) of
Company or its Subsidiaries shall be deemed to be a breach of
this Section 6.11 by Company.
(f) Nothing contained in this Section 6.11 shall
prohibit Company or its Subsidiaries from taking and disclosing
to its shareholders a position required by
Rule 14e-2(a)
or
Rule 14d-9
promulgated under the Exchange Act; provided, that it
shall not effect a Change of Recommendation except as set forth
herein.
ARTICLE VII
CONDITIONS
PRECEDENT
7.1 Conditions to Each Partys Obligation
to Effect the Merger. The respective
obligations of the parties to effect the Merger shall be subject
to the satisfaction at or prior to the Effective Time of the
following conditions:
(a) Shareholder Approval. This
Agreement, on substantially the terms and conditions set forth
in this Agreement, shall have been approved by the requisite
affirmative vote of a majority of the votes cast by the holders
of Company Common Stock entitled to vote thereon.
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(b) NYSE Listing. The shares of
Parent Common Stock to be issued to holders of Company Common
Stock upon consummation of the Merger shall have been authorized
for listing on the NYSE, subject to official notice of issuance.
(c) Form S-4. The
Form S-4
shall have become effective under the Securities Act and no stop
order suspending the effectiveness of the
Form S-4
shall have been issued and no proceedings for that purpose shall
have been initiated or threatened by the SEC.
(d) No Injunctions or Restraints;
Illegality. No order, injunction or decree
issued by any court or agency of competent jurisdiction or other
law preventing or making illegal the consummation of the Merger
or any of the other transactions contemplated by this Agreement
shall be in effect.
(e) HSR Act; Regulatory
Approvals. The waiting period (and any
extension thereof) applicable to the Merger under the HSR Act
shall have been terminated or shall have expired and all
Regulatory Approvals required to complete the Merger and the
other transactions contemplated hereby shall have been obtained
or made and shall be in full force and effect and all waiting
periods required by law shall have expired or been terminated
and any conditions imposed in connection with the foregoing,
individually or in the aggregate, shall not have the effect set
forth in the last sentence of Section 6.1(e), unless
consented to by Parent in its sole discretion.
7.2 Conditions to Obligations of
Parent. The obligation of Parent and Merger
Sub to effect the Merger is also subject to the satisfaction, or
waiver by Parent, at or prior to the Effective Time, of the
following conditions:
(a) Representations and
Warranties. Subject to the standard set forth
in Section 9.2, the representations and warranties of
Company set forth in this Agreement shall be true and correct as
of the date of this Agreement and as of the Effective Time as
though made on and as of the Effective Time (except that
representations and warranties that by their terms speak
specifically as of the date of this Agreement or another date
shall be true and correct as of such date); and Parent shall
have received a certificate signed on behalf of Company by the
Chief Executive Officer or the Chief Financial Officer of
Company to the foregoing effect.
(b) Performance of Obligations of
Company. Company shall have performed in all
material respects the obligations required to be performed by it
under this Agreement at or prior to the Effective Time; and
Parent shall have received a certificate signed on behalf of
Company by the Chief Executive Officer or the Chief Financial
Officer of Company to such effect.
(c) Federal Tax Opinion. Parent
shall have received the opinion of a nationally recognized law
or accounting firm, in form and substance reasonably
satisfactory to Parent, dated the Closing Date, substantially to
the effect that, on the basis of facts, representations and
assumptions set forth in such opinion that are consistent with
the state of facts existing at the Effective Time, the Merger
should qualify as a reorganization within the
meaning of Section 368(a) of the Code. In rendering such
opinion, counsel may require and rely upon customary
representations and covenants contained in the certificates of
officers of Company and Parent to be furnished in accordance
with Sections 6.5(a) and 6.5(b).
(d) No Material Adverse
Effect. Since December 31, 2009, there
shall not have been any event or condition, which, individually
or in the aggregate, has had or is reasonably likely to have a
Material Adverse Effect on Company, subject to and qualified by
the preamble to Article III.
(e) Employee Matters. The
President and Chief Executive Officer of the Company shall have
executed and delivered a voluntary written termination of the
employment agreement between him and Company and its Insurance
Subsidiaries. Company and its Insurance Subsidiaries shall have
obtained a voluntary written termination of the severance
agreements between Company and its Insurance Subsidiaries, on
the one hand, and officers of Company, on the other hand, from
at least six of the eight officers of Company party to such a
severance agreement. Each written termination shall be in a form
satisfactory to Parent.
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7.3 Conditions to Obligations of
Company. The obligation of Company to effect
the Merger is also subject to the satisfaction or waiver by
Company at or prior to the Effective Time of the following
conditions:
(a) Representations and
Warranties. Subject to the standard set forth
in Section 9.2, the representations and warranties of
Parent set forth in this Agreement shall be true and correct as
of the date of this Agreement and as of the Effective Time as
though made on and as of the Effective Time (except that
representations and warranties that by their terms speak
specifically as of the date of this Agreement or another date
shall be true and correct as of such date); and Company shall
have received a certificate signed on behalf of Parent by the
Chief Executive Officer or the Chief Financial Officer of Parent
to the foregoing effect.
(b) Performance of Obligations of
Parent. Parent shall have performed in all
material respects the obligations required to be performed by it
under this Agreement at or prior to the Effective Time, and
Company shall have received a certificate signed on behalf of
Parent by the Chief Executive Officer or the Chief Financial
Officer of Parent to such effect.
(c) Federal Tax Opinion. Company
shall have received the opinion of its counsel, Ballard Spahr
LLP, in form and substance reasonably satisfactory to Company,
dated the Closing Date, substantially to the effect that, on the
basis of facts, representations and assumptions set forth in
such opinion that are consistent with the state of facts
existing at the Effective Time, (A) the Merger should
qualify as a reorganization within the meaning of
Section 368(a) of the Code, (B) Company, Merger Sub
and Parent each will be a party to the
reorganization within the meaning of Section 368(b)
of the Code, and (C) no gain or loss will be recognized by
holders of Company Common Stock upon the receipt in the Merger
of the Merger Consideration (except to extent of any cash
received in lieu of the issuance of fractional shares of Parent
Common Stock). In rendering such opinion, counsel may require
and rely upon customary representations and covenants contained
in the certificates of officers of Company and Parent to be
furnished in accordance with Sections 6.5(a) and 6.5(b).
(d) No Material Adverse
Effect. Since December 31, 2009, there
shall not have been any event or condition, which, individually
or in the aggregate, has had or is reasonably likely to have a
Material Adverse Effect on Parent, subject to and qualified by
the preamble to Article IV.
ARTICLE VIII
TERMINATION
AND AMENDMENT
8.1 Termination. This
Agreement may be terminated at any time prior to the Effective
Time, whether before or after approval of the matters presented
in connection with the Merger by the shareholders of Company:
(a) by mutual consent of Company and Parent in a written
instrument authorized by the Board of Directors of Company and
Parent;
(b) by either Company or Parent, if any Governmental Entity
that must grant a Regulatory Approval to complete the Merger and
the other transactions contemplated hereby has denied approval
of the Merger or any of the other transactions contemplated
hereby and such denial has become final and non-appealable or
any Governmental Entity of competent jurisdiction shall have
issued a final and non-appealable order, injunction or decree
permanently enjoining or otherwise prohibiting or making illegal
the consummation of the transactions contemplated by this
Agreement, provided, that with respect to antitrust
matters, Company or Parent may terminate this Agreement if HSR
approval has not been obtained before the expiration of
120 days after the date of the HSR filing, provided,
however, that such 120 day period shall be extended for an
additional 120 days in the event that facts and
circumstances existing at such time indicate that there is a
reasonable possibility that HSR approval will be obtained within
such additional 120 day period with the cooperation in good
faith of both Parent and Company in pursuing such approval;
(c) by either Company or Parent, if the Merger shall not
have been consummated on or before December 31, 2010 (the
End Date); provided, that the right to
terminate this Agreement pursuant to this section shall not be
available to any party if the failure of the Closing to occur by
such date shall be due to the failure of the party seeking to
terminate this Agreement to perform or observe the covenants and
agreements of such party set forth in this Agreement;
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(d) by either Company or Parent (provided that the
terminating party is not then in material breach of any
representation, warranty, covenant or other agreement contained
herein), if there shall have been a breach of any of the
covenants or agreements or any of the representations or
warranties set forth in this Agreement on the part of Company,
in the case of a termination by Parent, or Parent or Merger Sub,
in the case of a termination by Company, which breach, either
individually or in the aggregate, would result in, if occurring
or continuing on the Closing Date, the failure of the conditions
set forth in Section 7.2 or 7.3, as the case may be, and
which is not cured within 30 days following written notice
to the party committing such breach or by its nature or timing
cannot be cured within such time period;
(e) by either Company or Parent, if the Board of Directors
of Company shall have (A) failed to recommend in the Proxy
Statement the approval and adoption of this Agreement,
(B) made any Change of Recommendation, (C) approved or
recommended, or publicly proposed to approve or recommend, any
Alternative Proposal, whether or not permitted by the terms
hereof or (D) failed to recommend to Companys
shareholders that they reject any tender offer or exchange offer
that constitutes an Alternative Transaction within the ten
business day period specified in
Rule 14e-2(a)
of the Exchange Act;
(f) by either Company or Parent, if the approval of
Companys shareholders required by Section 7.1(a)
shall not have been obtained after a meeting of Companys
shareholders has been convened for purposes of approving and
adopting this Agreement.
The party desiring to terminate this Agreement pursuant to
clause (b),(c),(d),(e) or (f) of this Section 8.1
shall give written notice of such termination to the other party
in accordance with Section 9.4, specifying the provision or
provisions hereof pursuant to which such termination is effected.
8.2 Effect of
Termination. In the event of termination of
this Agreement by either Company or Parent as provided in
Section 8.1, this Agreement shall forthwith become void and
have no effect, and none of Company, Parent, any of their
respective Subsidiaries or any of the officers or directors of
any of them shall have any liability of any nature whatsoever
under this Agreement, or in connection with the transactions
contemplated by this Agreement, except that
(i) Sections 6.2(b), 8.2, 8.3, 8.4, 8.5, 9.3, 9.4,
9.5, 9.6, 9.7, 9.8, 9.10 and 9.11 shall survive any termination
of this Agreement, and (ii) neither Company nor Parent
shall be relieved or released from any liabilities or damages
arising out of its knowing breach of any provision of this
Agreement.
8.3 Fees and
Expenses. Except with respect to costs and
expenses of printing and mailing the Proxy Statement and all
filing and other fees paid to the SEC in connection with the
Merger, which shall be borne equally by Company and Parent, all
fees and expenses incurred in connection with the Merger, this
Agreement, and the transactions contemplated by this Agreement
shall be paid by the party incurring such fees or expenses,
whether or not the Merger is consummated.
8.4 Termination
Fee. (a) In the event that either Parent
or Company shall have terminated this Agreement pursuant to
Section 8.1(e), Company shall pay to Parent, within two
business days after such Termination Date, an amount equal to
$8,000,000 (the Termination Fee) by wire
transfer of same day funds.
(b) In the event that a Pre-Termination Company Takeover
Proposal Event (as hereinafter defined) shall have occurred
after the date of this Agreement and thereafter this Agreement
is terminated pursuant to Section 8.1(c)(unless Company is
not then in material breach of this Agreement and the conditions
set forth in Section 7.1(a) have been satisfied) or
Section 8.1(f) or is terminated by Parent pursuant to
Section 8.1(d), Company shall pay to Parent the Expenses
(as hereinafter defined) on demand by wire transfer of
same-day
funds. Further, in such event, prior to the date that is six
(6) months after the date of such termination, Company
consummates any Alternative Transaction, Company shall, on the
date such Alternative Transaction is consummated, pay Parent the
Termination Fee less any Expenses paid pursuant to the
preceding sentence by wire transfer of same day funds.
(c) For purposes of this Section 8.4, a
Pre-Termination Company Takeover
Proposal Event shall be deemed to occur if, prior
to the event giving rise to the right to terminate this
Agreement, a bona fide Alternative Proposal involving Company
shall have been made known to Company or any of its Subsidiaries
or has been made directly to its shareholders generally or any
person shall have publicly announced an intention (whether or
not conditional) to make an Alternative Proposal involving
Company (the term Alternative Transaction, as used in the
definition of Alternative Proposal for purposes of this
Section 8.4, and as used in this Section 8.4, shall
have the same meaning set
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forth in Section 6.11 except that (i) the references
to more than 20% shall be deemed to be references to
50% or more and (ii) without limiting the scope
of clauses (i) or (iii), any transaction contemplated by
clauses (ii) or (iv) of such definition shall be
limited to transactions to which Company is a party and in which
the shareholders of Company immediately prior to the
consummation thereof would not hold at least
662/3%
of the total voting power of the surviving company in such
transaction or of its publicly traded parent corporation. As
used herein, Expenses means Parents
documented
out-of-pocket
expenses paid or payable to any third party in connection with
this Agreement and the transactions contemplated hereby
(including all actuaries, attorneys,
accountants and investment bankers fees and
expenses), but not to exceed $2,000,000.
(d) For the avoidance of doubt, the maximum aggregate
amount payable by Company under this Section 8.4 shall be
$8,000,000.
8.5 Amendment. This
Agreement may be amended by the parties, by action taken or
authorized by their respective Boards of Directors, at any time
before or after approval of the matters presented in connection
with Merger by the shareholders of Company; provided,
however, that after any approval of the transactions
contemplated by this Agreement by the shareholders of Company,
there may not be, without further approval of such shareholders,
any amendment of this Agreement that requires further approval
under applicable law. This Agreement may not be amended except
by an instrument in writing signed on behalf of each of the
parties.
8.6. Extension; Waiver. At
any time prior to the Effective Time, the parties, by action
taken or authorized by their respective Board of Directors, may,
to the extent legally allowed, (a) extend the time for the
performance of any of the obligations or other acts of the other
party, (b) waive any inaccuracies in the representations
and warranties contained in this Agreement or (c) waive
compliance with any of the agreements or conditions contained in
this Agreement. Any agreement on the part of a party to any such
extension or waiver shall be valid only if set forth in a
written instrument signed on behalf of such party, but such
extension or waiver or failure to insist on strict compliance
with an obligation, covenant, agreement or condition shall not
operate as a waiver of, or estoppel with respect to, any
subsequent or other failure.
ARTICLE IX
GENERAL
PROVISIONS
9.1 Closing. On the terms
and subject to the conditions set forth in this Agreement, the
closing of the Merger (the Closing) shall
take place at 10:00 a.m. on a date and at a place to be
specified by the parties, which date shall be no later than five
business days after the satisfaction or waiver (subject to
applicable law) of the latest to occur of the conditions set
forth in Article VII (other than those conditions that by
their nature are to be satisfied or waived at the Closing),
unless extended by mutual agreement of the parties (the
Closing Date).
9.2 Standard. No
representation or warranty of Company contained in
Article III or of Parent contained in Article IV shall
be deemed untrue, inaccurate or incorrect for any purpose under
this Agreement, and no party hereto shall be deemed to have
breached a representation or warranty for any purpose under this
Agreement, in any case as a consequence of the existence or
absence of any fact, circumstance or event unless such fact,
circumstance or event, individually or when taken together with
all other facts, circumstances or events inconsistent with any
representations or warranties contained in Article III, in
the case of Company, or Article IV, in the case of Parent,
has had or would reasonably be expected to have a Material
Adverse Effect with respect to Company or Parent, respectively
(disregarding for purposes of this Section 9.2 all
qualifications or limitations set forth in any representations
or warranties as to materially, Material
Adverse Effect and words of similar import).
Notwithstanding the immediately preceding sentence, (i) the
representations and warranties contained in
Sections 3.2(a), 3.2(b) and 4.2 shall be deemed untrue and
incorrect if not true and correct in all respects other than to
a de minimis extent and (ii) the representations and
warranties contained in Sections 3.2(c), 3.3(a), 3.3(b)(i),
3.7, 3.20, 3.23, 4.3(a), 4.3(b)(i), 4.7 and 4.17 shall be deemed
untrue and incorrect if not true and correct in all material
respects.
9.3 Non-survival of Representations, Warranties
and Agreements. None of the representations,
warranties, covenants and agreements set forth in this Agreement
or in any instrument delivered pursuant to this Agreement
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shall survive the Effective Time, except for Section 6.7
and for those other covenants and agreements contained in this
Agreement that by their terms apply or are to be performed in
whole or in part after the Effective Time.
9.4 Notices. All notices and
other communications in connection with this Agreement shall be
in writing and shall be deemed given if delivered personally,
sent via facsimile (with confirmation), mailed by registered or
certified mail (return receipt requested) or delivered by an
express courier (with confirmation) to the parties at the
following addresses (or at such other address for a party as
shall be specified by like notice):
(a) if to Company, to:
PMA Capital Corporation
380 Sentry Parkway
Blue Bell, PA 19422
Attention: Executive Vice President and General Counsel
Facsimile:
(610) 397-5144
With a copy to
Ballard Spahr LLP
1735 Market Street
Philadelphia, PA 19103
Attention: Justin P. Klein, Esq.
Facsimile:
(215) 864-9166
(b) if to Parent or Merger Sub, to:
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Old Republic International Corporation
307 North Michigan Avenue
Chicago, IL 60601
Attention:
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Spencer LeRoy III, Senior Vice President,
General Counsel
Facsimile: 312/726-0309
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with a copy to:
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Old Republic International Corporation
307 North Michigan Avenue
Chicago, IL 60601
Attention:
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Karl W. Mueller, Senior Vice President and
Chief Financial Officer
Facsimile: 312/726-0309
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Any party may change the address to which notices, claims,
demands and other communications hereunder are to be delivered
by giving the other parties notice in the manner set forth
herein.
9.5 Interpretation. When a
reference is made in this Agreement to Articles, Sections,
Exhibits or Schedules, such reference shall be to an Article or
Section of or Exhibit or Schedule to this Agreement unless
otherwise indicated. The table of contents and headings
contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of
this Agreement. Except as otherwise expressly provided herein,
all references to dollars or $ shall be
deemed references to the lawful money of the United States of
America. Unless otherwise indicated, the word day
shall be interpreted as a calendar day. Whenever the words
include, includes or
including are used in this Agreement, they shall be
deemed to be followed by the words without
limitation. The words hereof,
herein, hereby, and hereunder and
words of similar import when used in this Agreement shall refer
to this Agreement as a whole (including any exhibits hereto and
schedules delivered herewith) and not to any particular
provisions of this Agreement. Whenever used in this Agreement,
any noun or pronoun shall be deemed to include the plural as
well as the singular and to cover all genders. The Company
Disclosure Schedule and the Parent Disclosure Schedule, as well
as all other schedules and all exhibits hereto, shall be deemed
part of this Agreement and included in any reference to this
Agreement. This Agreement shall not be
A-41
interpreted or construed to require any person to take any
action, or fail to take any action, if to do so would violate
any applicable law.
9.6 Counterparts. This
Agreement may be executed in two or more counterparts, all of
which shall be considered one and the same agreement and shall
become effective when counterparts have been signed by each of
the parties and delivered to the other party, it being
understood that each party need not sign the same counterpart.
Either party may deliver its signed counterpart of this
Agreement to the other party by means of facsimile or any other
electronic medium, and such delivery will have the same legal
effect as hand delivery of an originally executed counterpart.
9.7 Entire Agreement. This
Agreement (including the documents and the instruments referred
to in this Agreement) and the Confidentiality Agreements
constitute the entire agreement and supersede all prior
agreements and understandings, both written and oral, between
the parties with respect to the subject matter of this Agreement.
9.8 Governing Law;
Jurisdiction. This Agreement shall be deemed
to be made in and in all respects shall be interpreted, governed
and construed in accordance with the internal laws of the
Commonwealth of Pennsylvania applicable to contracts made and
wholly-performed within such commonwealth, without regard to any
applicable conflicts of law principles, except to the extent the
PBCL is mandatorily applicable to any provision hereof. The
parties hereto agree that any suit, action or proceeding brought
by either party to enforce any provision of, or based on any
matter arising out of or in connection with, this Agreement or
the transactions contemplated hereby shall be brought in any
federal or state court located in the Commonwealth of
Pennsylvania. Each of the parties hereto submits to the
jurisdiction of any such court in any suit, action or proceeding
seeking to enforce any provision of, or based on any matter
arising out of, or in connection with, this Agreement or the
transactions contemplated hereby and hereby irrevocably waives
the benefit of jurisdiction derived from present or future
domicile or otherwise in such action or proceeding. Each party
hereto irrevocably waives, to the fullest extent permitted by
law, any objection that it may now or hereafter have to the
laying of the venue of any such suit, action or proceeding in
any such court or that any such suit, action or proceeding
brought in any such court has been brought in an inconvenient
forum.
9.9 Publicity. Neither
Company nor Parent shall, and neither Company nor Parent shall
permit any of its Subsidiaries to, issue or cause the
publication of any press release or other public announcement
with respect to, or otherwise make any public statement
concerning, the transactions contemplated by this Agreement
without the prior consent (which consent shall not be
unreasonably withheld) of Parent, in the case of a proposed
announcement or statement by Company, or Company, in the case of
a proposed announcement or statement by Parent; provided,
however, that either party may, without the prior consent of
the other party (but after prior consultation with the other
party to the extent practicable under the circumstances) issue
or cause the publication of any press release or other public
announcement to the extent required by law or by the rules and
regulations of the NYSE or NASDAQ.
9.10 Assignment; Third Party
Beneficiaries. (a) Neither this
Agreement nor any of the rights, interests or obligations under
this Agreement shall be assigned by either of the parties (other
than by Parent by operation of law in a merger of Parent)
without the prior written consent of the other party. Subject to
the preceding sentence, this Agreement shall be binding upon,
inure to the benefit of and be enforceable by each of the
parties and their respective successors and assigns. Except as
otherwise specifically provided in Section 6.7, this
Agreement (including the documents and instruments referred to
in this Agreement) is not intended to and does not confer upon
any person other than the parties hereto any rights or remedies
under this Agreement.
(b) The representations and warranties in this Agreement
are the product of negotiations among the parties hereto and are
for the sole benefit of the parties hereto. Any inaccuracies in
such representations and warranties are subject to waiver by the
parties hereto in accordance with this Agreement without notice
or liability to any other person. In some instances, the
representations and warranties in this Agreement may represent
an allocation among the parties hereto of risks associated with
particular matters regardless of the knowledge of any of the
parties hereto. Consequently, persons other than the parties
hereto may not rely upon the representations and warranties in
this Agreement as characterizations of actual facts or
circumstances as of the date of this Agreement or as of any
other date.
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9.11 Specific
Performance. The parties hereto agree that
irreparable damage would occur if any provision of this
Agreement were not performed in accordance with the terms hereof
(and, more specifically, that irreparable damage would likewise
occur if the Merger was not consummated and Companys
shareholders and holders of options to acquire Company Common
Stock and holders of other equity-based awards did not receive
the aggregate Merger Consideration in accordance with the terms
but subject to the conditions of this Agreement), and,
accordingly, that the parties shall be entitled to an injunction
or injunctions to prevent breaches of this Agreement or to
enforce specifically the performance of the terms and provisions
hereof (including the parties obligation to consummate the
Merger and Parents obligation to pay, and Companys
shareholders and holders of options and other equity-based
awards right to receive, the aggregate Merger Consideration
pursuant to the Merger, subject in each case to the terms and
conditions of this Agreement) in the courts of the Commonwealth
of Pennsylvania (or if under applicable Law exclusive
jurisdiction over such matters is vested in the federal courts,
any court of the United States located in the Commonwealth of
Pennsylvania), in addition to any other remedy to which they are
entitled at law or in equity. Notwithstanding the foregoing, to
the extent the Company pays to Parent the Termination Fee,
Parent shall not be entitled to specifically enforce the terms
and provisions of this Agreement, as the receipt by Parent of
the Termination Fee shall be Parents sole remedy under
this Agreement.
[Signatures
on the Following Page]
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IN WITNESS WHEREOF, Company, Parent and Merger Sub have caused
this Agreement to be executed by their respective officers
thereunto duly authorized as of the date first above written.
PMA CAPITAL CORPORATION
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By:
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/s/ Vincent
T. Donnelly
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Name: Vincent T. Donnelly
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Title:
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President and Chief Executive Officer
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OLD REPUBLIC INTERNATIONAL CORPORATION
Name: Aldo C. Zucaro
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Title:
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Chairman and Chief Executive Officer
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OR NEW CORP.
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By:
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/s/ Spencer
LeRoy III
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Name: Spencer LeRoy III
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Title:
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Senior Vice President and Secretary
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A-44
Annex B
Opinion of Merrill Lynch, Pierce, Fenner & Smith
Incorporated
June 9, 2010
The Board of Directors
PMA Capital Corporation
380 Sentry Parkway
Blue Bell, PA
19422-0754
Members of the Board of Directors:
We understand that PMA Capital Corporation (PMA)
proposes to enter into an Agreement and Plan of Merger (the
Agreement), among PMA, Old Republic International
Corporation (ORI or Parent) and OR New
Corp., a wholly owned subsidiary of ORI (Merger
Sub), pursuant to which, among other things, Merger Sub
will merge with and into PMA (the Merger) and each
outstanding share of the Class A common stock, par value
$5.00 per share, of PMA (PMA Common Stock), except
for shares of any PMA Common Stock owned by PMA or ORI, shall be
converted into the right to receive 0.5500 (such amount, the
Exchange Ratio) shares of common stock, par value
$1.00 per share, of ORI (ORI Common Stock), subject
to adjustment as described below. As more fully described in the
Agreement, (i) if the Parent Measurement Price (as defined
in the Agreement) is less than $12.50, then the Exchange Ratio
will be adjusted and determined by dividing $6.8750 by the
Parent Measurement Price (but in no event shall the Exchange
Ratio be greater than 0.6000), and (ii) if the Parent
Measurement Price is greater than $17.00, then the Exchange
Ratio will be adjusted and determined by dividing $9.3500 by the
Parent Measurement Price (but in no event shall the Exchange
Ratio be less than 0.5000). The terms and conditions of the
Merger are more fully set forth in the Agreement.
You have requested our opinion as to the fairness, from a
financial point of view, to the holders of PMA Common Stock of
the Exchange Ratio provided for in the Merger.
In connection with this opinion, we have, among other things:
(1) reviewed certain publicly available business and
financial information relating to PMA and ORI;
(2) reviewed certain internal financial and operating
information with respect to the business, operations and
prospects of PMA furnished to or discussed with us by the
management of PMA, including certain financial forecasts
relating to PMA prepared by or at the direction of and approved
by the management of PMA under certain scenarios (such
forecasts, PMA Forecasts);
(3) reviewed certain internal financial and operating
information with respect to the business, operations and
prospects of ORI furnished to or discussed with us by the
management of ORI, including certain financial forecasts
relating to ORI prepared by the management of ORI for the year
ended December 31, 2010 (ORI 2010 Forecasts);
(4) reviewed certain financial forecasts relating to ORI
prepared by or at the direction of and approved by the
management of PMA for the years ended December 31, 2011
through December 31, 2014 under certain scenarios (the
ORI Extended Forecasts);
(5) reviewed certain reports regarding reserves for loss
and loss adjustment expense of PMA prepared by an independent
actuarial firm engaged by PMA which were made available to us by
PMA;
Merrill Lynch, Pierce, Fenner
& Smith Incorporated member FINRA/SIPC, is a subsidiary of
Bank of America Corporation
B-1
The Board of Directors
PMA Capital Corporation
Page 2
(6) discussed the past and current business, operations,
financial condition and prospects of PMA with members of senior
managements of PMA and ORI, and discussed the past and current
business, operations, financial condition and prospects of ORI
with members of senior managements of PMA and ORI;
(7) discussed with the management of PMA its assessment of
the financial examination of PMAs insurance subsidiaries
currently being conducted by the Pennsylvania Insurance
Department (the PID Examination), including the
status of such examination and the potential impact on PMA of
any action that may be required to be taken as a result thereof;
(8) reviewed the potential pro forma financial impact of
the Merger on the future financial performance of ORI;
(9) participated in certain discussions and negotiations
among representatives of PMA and ORI and their financial and
legal advisors;
(10) reviewed the trading histories for PMA Common Stock
and ORI Common Stock and the valuation multiples implied by the
Merger for PMA Common Stock and a comparison of such trading
histories and such valuation multiples with each other and with
the trading histories and valuation multiples of other companies
we deemed relevant;
(11) compared certain financial and stock market
information of PMA and ORI with similar information of other
companies we deemed relevant;
(12) considered the results of our efforts on behalf of PMA
to solicit, at the direction of PMA, indications of interest
from third parties with respect to a possible acquisition of PMA;
(13) reviewed a draft, dated June 4, 2010, of the
Agreement (the Draft Agreement); and
(14) performed such other analyses and studies and
considered such other information and factors as we deemed
appropriate.
In arriving at our opinion, we have assumed and relied upon,
without independent verification, the accuracy and completeness
of the financial and other information and data publicly
available or provided to or otherwise reviewed by or discussed
with us and have relied upon the assurances of the managements
of PMA and ORI that they are not aware of any facts or
circumstances that would make such information or data
inaccurate or misleading in any material respect. With respect
to the PMA Forecasts and the ORI Extended Forecasts, we have
been advised by PMA, and have assumed, that they have been
reasonably prepared on bases reflecting the best currently
available estimates and good faith judgments of the management
of PMA as to the future financial performance of PMA and ORI, as
applicable, under the scenarios reflected therein, in each case
for the periods set forth therein. With respect to the ORI 2010
Forecasts, we have been advised by ORI, and have assumed, with
the consent of PMA, that they have been reasonably prepared on
bases reflecting the best currently available estimates and good
faith judgments of the management of ORI as to the future
financial performance of ORI for the year ended
December 31, 2010. As you are aware, although we have
requested financial forecasts with respect to ORI prepared by
the management of ORI for the years ended December 31, 2011
through December 31, 2014, we have been advised by the
management of ORI that it has not prepared current and reliable
financial forecasts for the periods beyond December 31,
2010. Accordingly, based upon discussions with the management of
ORI and at the direction of PMA, we have assumed that the ORI
Extended Forecasts are a reasonable basis upon which to evaluate
the future financial performance of ORI for the years ended
December 31, 2011 through December 31, 2014 and, at
the direction of PMA, have used such forecasts for such periods
in performing our analyses. We have not made any physical
inspection of the properties or assets of PMA or ORI, nor have
we made or been provided with any independent evaluation or
appraisal of the assets or liabilities (contingent or otherwise)
of PMA or ORI, other than the PMA actuarial reports referenced
above that we have reviewed and relied upon without independent
verification for purposes of this opinion. We are not experts in
the evaluation of reserves for losses and loss adjustment
expenses and we have not
B-2
The Board of Directors
PMA Capital Corporation
Page 3
made an independent evaluation of the adequacy of the reserves
of PMA or ORI. In that regard, we have made no analysis of, and
express no opinion as to, the adequacy of reserves for losses
and loss adjustment expenses of PMA or ORI. We further have
relied, at the direction of PMA, upon the assessment of
management of PMA as to the potential impact on PMA of any
action that may be required to be taken as a result of the PID
Examination.
We have not evaluated the solvency or fair value of PMA or ORI
under any state, federal or other laws relating to bankruptcy,
insolvency or similar matters. We have assumed, at the direction
of PMA, that the Merger will be consummated in accordance with
its terms, without waiver, modification or amendment of any
material term, condition or agreement and that, in the course of
obtaining the necessary governmental, regulatory and other
approvals, consents, releases and waivers for the Merger, no
delay, limitation, restriction or condition, including any
divestiture requirements or amendments or modifications, will be
imposed that would have an adverse effect on PMA, ORI or the
contemplated benefits of the Merger. We also have assumed, at
the direction of PMA, that the Merger will qualify for federal
income tax purposes as a reorganization under the provisions of
Section 368(a) of the Internal Revenue Code of 1986, as
amended. We also have assumed, at the direction of PMA, that
that the final executed Agreement will not differ in any
material respect from the Draft Agreement reviewed by us.
We express no view or opinion as to any terms or other aspects
of the Merger (other than the Exchange Ratio to the extent
expressly specified herein), including, without limitation, the
form or structure of the Merger. Our opinion is limited to the
fairness, from a financial point of view, of the Exchange Ratio
to holders of PMA Common Stock and no opinion or view is
expressed with respect to any consideration received in
connection with the Merger by the holders of any class of
securities, creditors or other constituencies of any party. In
addition, no opinion or view is expressed with respect to the
fairness (financial or otherwise) of the amount, nature or any
other aspect of any compensation to any of the officers,
directors or employees of any party to the Merger, or class of
such persons, relative to the Exchange Ratio. Furthermore, no
opinion or view is expressed as to the relative merits of the
Merger in comparison to other strategies or transactions that
might be available to PMA or in which PMA might engage or as to
the underlying business decision of PMA to proceed with or
effect the Merger. We are not expressing any opinion as to what
the value of ORI Common Stock actually will be when issued or
the prices at which PMA Common Stock or ORI Common Stock will
trade at any time, including following announcement or
consummation of the Merger. In addition, we express no opinion
or recommendation as to how any shareholder should vote or act
in connection with the Merger or any related matter.
We have acted as financial advisor to PMA in connection with the
Merger and will receive a fee for our services, a significant
portion of which is contingent upon consummation of the Merger.
In addition, PMA has agreed to reimburse our expenses and
indemnify us against certain liabilities arising out of our
engagement.
We and our affiliates comprise a full service securities firm
and commercial bank engaged in securities, commodities and
derivatives trading, foreign exchange and other brokerage
activities, and principal investing as well as providing
investment, corporate and private banking, asset and investment
management, financing and financial advisory services and other
commercial services and products to a wide range of companies,
governments and individuals. In the ordinary course of our
businesses, we and our affiliates may invest on a principal
basis or on behalf of customers or manage funds that invest,
make or hold long or short positions, finance positions or trade
or otherwise effect transactions in equity, debt or other
securities or financial instruments (including derivatives, bank
loans or other obligations) of PMA, ORI and certain of their
respective affiliates.
In addition, we and our affiliates in the past have provided,
currently are providing, and in the future may provide,
investment banking, commercial banking and other financial
services to ORI and have received or in the future may receive
compensation for the rendering of these services, including
(i) having acted or acting as lender under, or otherwise
having extended credit under, certain credit facilities and
other arrangements with ORI, (ii) having acted as book
runner on a convertible debt offering for ORI and
(iii) having provided or providing certain treasury
management and trade products and services to ORI.
B-3
The Board of Directors
PMA Capital Corporation
Page 4
It is understood that this letter is for the benefit and use of
the Board of Directors of PMA in connection with and for
purposes of its evaluation of the Merger.
Our opinion is necessarily based on financial, economic,
monetary, market and other conditions and circumstances as in
effect on, and the information made available to us as of, the
date hereof. As you are aware, the credit, financial and stock
markets have been experiencing unusual volatility and we express
no opinion or view as to any potential effects of such
volatility on PMA, ORI or the Merger. It should be understood
that subsequent developments may affect this opinion, and we do
not have any obligation to update, revise, or reaffirm this
opinion. The issuance of this opinion was approved by our
Americas Fairness Opinion Review Committee.
Based upon and subject to the foregoing, including the various
assumptions and limitations set forth herein, we are of the
opinion on the date hereof that the Exchange Ratio provided for
in the Merger is fair, from a financial point of view, to the
holders of PMA Common Stock.
Very truly yours,
/s/ Merrill
Lynch, Pierce, Fenner & Smith Incorporated
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
B-4