OLD REPUBLIC INTERNATIONAL CORP – 10-K – Analysis of management’s financial condition and results of operations (in millions of dollars, except share data)
This management analysis of financial position and results of operations pertains to the consolidated accounts of
Old Republic International Corporation(" Old Republic", "ORI" or "the Company"). The Company conducts its operations through a number of regulated insurance company subsidiaries organized into three major segments: General Insurance(property and liability insurance), Title Insurance and Republic Financial Indemnity Group("RFIG") Run-off. A small life and accident insurance business, accounting for .2% of consolidated operating revenues for the year ended December 31, 2021and .5% of consolidated assets as of that date, is included within the Corporate & Other caption of this report. The consolidated accounts are presented in conformity with the Financial Accounting Standards Board's("FASB") Accounting Standards Codification ("ASC") of accounting principles generally accepted in the United States of America("GAAP"). As a publicly held company, Old Republicutilizes GAAP to comply with the financial reporting requirements of the Securities and Exchange Commission("SEC"). From time to time the FASB and the SECissue various releases, most of which require additional financial statement disclosures and provide related application guidance. Of particular relevance to the Company's financial statements is guidance recently issued by the FASB relative to lease accounting and accounting for credit losses on financial instruments, which are discussed further in the Notes to Consolidated Financial Statements. As a state regulated financial institution vested with the public interest, however, business of the Company's insurance subsidiaries is managed pursuant to the laws, regulations, and accounting practices of the various states in the U.S.and those of a small number of other jurisdictions outside the U.S.in which they operate. In comparison with GAAP, the statutory accounting practices reflect greater conservatism and comparability among insurers, and are intended to address the primary financial security interests of policyholders and their beneficiaries. Additionally, these practices also affect a significant number of important factors such as product pricing, risk bearing capacity and capital adequacy, the determination of Federal income taxes payable currently among ORI's tax-consolidated entities, and the upstreaming of dividends by insurance subsidiaries to the parent holding company. The major differences between these statutory financial accounting practices and GAAP are summarized in Note 1 to the consolidated financial statements included elsewhere in this report. 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, often many years after issuance and expiration of a policy. This basic fact casts Old Republicas 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 policyholders and their beneficiaries. To achieve these objectives, adherence to insurance risk management principles is stressed, and asset diversification and quality are emphasized. In addition, Management engages in an ongoing assessment of operating risks, such as cybersecurity risks, that could adversely affect the Company's business and reputation. In addition to income arising from Old Republic'sbasic underwriting and related services functions, significant investment income is earned from invested funds generated by those functions and from capital resources. Investment management aims for stability of income from interest and dividends, protection of capital, and for sufficiency of liquidity to meet insurance underwriting and other obligations as they become payable in the future. Securities trading and the realization of capital gains are not primary objectives. The investment philosophy is therefore best characterized as emphasizing value, credit quality, and relatively long-term holding periods. The Company's ability to hold both fixed maturity and equity securities for long periods of time is enabled by the scheduling of maturities in contemplation of an appropriate matching of assets and liabilities, and by investments in large capitalization, highly liquid equity securities. In light of the above factors, the Company is managed for the long run and without significant regard to quarterly or even annual reporting periods that American industry must observe. In Old Republic'sview, such short reporting time frames do not coincide well with the long-term nature of much of its business. Management therefore believes that the Company's operating results and financial condition can best be evaluated by observing underwriting and overall operating performance trends over five- or preferably ten-year intervals. A ten-year period will likely encompass at least one economic and/or underwriting cycle and thereby provide an appropriate time frame for such cycle to run its course, and for premium rate changes and reserved claim costs to be quantified and emerge in financial results with greater finality and effect.
This management analysis should be read in conjunction with the consolidated report
financial statements and the footnotes thereto.
22 -------------------------------------------------------------------------------- EXECUTIVE SUMMARY
Old Republic International Corporationreported the following consolidated results: OVERALL RESULTS Years Ended December 31: 2021 2020 2019 Pretax income (loss) $ 1,922.1 $ 688.4 $ 1,322.4Pretax investment gains (losses) 758.0 (142.0) 636.1 Pretax income (loss) excluding investment gains (losses) $ 1,164.0 $ 830.4 $ 686.2Net income (loss) $ 1,534.3 $ 558.6 $ 1,056.4Net of tax investment gains (losses) 598.4 (112.1) 502.2 Net income (loss) excluding investment gains (losses) $ 935.9 $ 670.8 $ 554.2PER DILUTED SHARE Years Ended December 31: 2021 2020 2019 Net income (loss) $ 5.05 $ 1.87 $ 3.51Net of tax investment gains (losses) 1.97 (0.37) 1.67 Net income (loss) excluding investment gains (losses) $ 3.08 $ 2.24 $ 1.84SHAREHOLDERS' EQUITY December 31: 2021 2020 Total $ 6,893.2 $ 6,186.6Per Common Share $ 22.76 $ 20.75The Company reported pretax income, exclusive of all investment gains of $1.16 billionfor 2021, representing growth of 40.2% compared to 2020. General Insuranceand Title Insuranceboth produced solid underwriting results that drove a consolidated combined ratio of 89.9% for 2021 compared to 93.3% and 95.3% in 2020 and 2019, respectively. In addition to these strong underwriting results, total and per share net income for 2021 also reflects an increase in the fair value of equity securities. Consolidated net premiums and fees earned of $8.0 billionfor 2021 represent growth of 18.8% compared to 2020. General Insurancenet earned premiums grew by mid-single digits over the prior year, while Title Insurancecontinued to experience significant growth in premium and fees attributable to a low interest rate environment and a robust real estate market. Net investment income remained relatively flat in 2021, reflecting growth in the invested asset base, offset by lower investment yields. Book value per share advanced to $22.76as of December 31, 2021. With the addition of dividends declared during the year, this was an increase of 21.2% over year-end 2020, primarily driven by strong operating earnings and by gains in our investment portfolio. 23 -------------------------------------------------------------------------------- Old Republic'sbusiness is managed for the long run. In this context management's key objectives are to achieve highly profitable operating results over the long term, and to ensure balance sheet strength for the primary needs of the insurance subsidiaries' underwriting and related services business. In this view, the evaluation of periodic and long-term results excludes consideration of all investment gains (losses). Under Generally Accepted Accounting Principles (GAAP), however, net income (loss), inclusive of investment gains (losses), is the measure of total profitability. In management's opinion, the focus on income (loss) excluding investment gains (losses) provides a better way to analyze, evaluate, and establish accountability for the results of the insurance operations. The inclusion of realized investment gains (losses) in net income (loss) can mask trends in operating results. That is because their realization is, more often than not, highly discretionary. Similarly, the inclusion of unrealized investment gains (losses) in equity securities can further distort such operating results with significant period-to-period fluctuations in reported net income (loss). FINANCIAL HIGHLIGHTS % Change 2021 2020 Years Ended December 31: 2021 2020 2019 vs. 2020 vs. 2019 SUMMARY INCOME STATEMENTS: Revenues: Net premiums and fees earned $ 8,003.6 $ 6,737.8 $ 6,241.118.8 % 8.0 % Net investment income 434.3 438.9 450.7 (1.1) (2.6) Other income 145.6 131.2 132.6 11.0 (1.0) Total operating revenues 8,583.5 7,308.0 6,824.4 17.5 7.1 Investment gains (losses): Realized from actual transactions 6.9 14.2 38.6 Realized from impairments - - (2.0) Unrealized from changes in fair value of equity securities 751.1 (156.2) 599.5 Total investment gains (losses) 758.0 (142.0) 636.1 Total revenues 9,341.6 7,166.0 7,460.5 Operating expenses: Claim costs 2,420.9 2,491.4 2,572.7 (2.8) (3.2) Sales and general expenses 4,942.3 3,942.4 3,525.4 25.4 11.8 Interest and other costs 56.2 43.7 40.0 28.7 9.1 Total operating expenses 7,419.5 6,477.5 6,138.1 14.5 % 5.5 % Pretax income (loss) 1,922.1 688.4 1,322.4 Income taxes (credits) 387.7 129.7 265.9 Net income (loss) $ 1,534.3 $ 558.6 $ 1,056.4COMMON STOCK STATISTICS: Components of net income (loss) per share: Basic net income (loss) excluding investment gains (losses) $ 3.10 $ 2.24 $ 1.8538.4 % 21.1 % Net investment gains (losses): Realized from actual transactions and impairments 0.02 0.04 0.10 Unrealized from changes in fair value of equity securities 1.96 (0.41) 1.57 Basic net income (loss) $ 5.08 $ 1.87 $ 3.52Diluted net income (loss) excluding investment gains (losses) $ 3.08 $ 2.24 $ 1.8437.5 % 21.7 % Net investment gains (losses): Realized from actual transactions and impairments 0.02 0.04 0.10 Unrealized from changes in fair value of equity securities 1.95 (0.41) 1.57 Diluted net income (loss) $ 5.05 $ 1.87 $ 3.51Cash dividends on common stock $ 2.38 $ 1.84 $ 1.80Book value per share $ 22.76 $ 20.75 $ 19.989.7 % 3.9 % Management believes the information presented in the table on the following page, prior to the inclusion of investment gains (losses), highlights the most meaningful, realistic indicators of ORI's segmented and consolidated financial performance. The information underscores management's view of reported results by separating the inherent volatility of securities markets and their above-noted impact on reported net income (loss). 24 --------------------------------------------------------------------------------
Major Segmented and Consolidated Elements of Income (Loss) 2021 2020 Years Ended December 31: 2021 2020 2019 vs. 2020 vs. 2019 A. Net premiums, fees, and other income: General Insurance
$ 3,555.5 $ 3,394.2 $ 3,432.44.8 % (1.1) % Title Insurance 4,404.3 3,286.3 2,736.0 34.0 20.1 Corporate & Other 11.0 12.0 13.4 (8.8) (10.0) Other income 145.6 131.2 132.6 11.0 (1.0) Subtotal 8,116.5 6,823.9 6,314.4 18.9 8.1 RFIG Run-off 32.6 45.1 59.2 (27.6) (23.8) Consolidated $ 8,149.2 $ 6,869.1 $ 6,373.718.6 % 7.8 % B. Underwriting and related services income (loss): General Insurance $ 311.4 $ 151.8 $ 84.9105.1 % 78.8 % Title Insurance 474.0 305.8 193.5 55.0 58.0 Corporate & Other (20.9) (17.0) (15.5) (22.7) (9.5) Subtotal 764.6 440.5 262.8 73.5 67.6 RFIG Run-off 21.3 (5.3) 12.7 497.1 (142.3) Consolidated $ 785.9 $ 435.2 $ 275.680.6 % 57.9 % C. Consolidated underwriting ratio: Claim ratio: Current year 32.9 % 38.2 % 41.7 % Prior years (2.7) (1.2) (.5) Total 30.2 37.0 41.2 Expense ratio 59.7 56.3 54.1 Combined ratio 89.9 % 93.3 % 95.3 % D. Net investment income: General Insurance $ 342.4 $ 352.2 $ 356.4(2.8) % (1.2) % Title Insurance 43.8 42.0 41.4 4.3 1.3 Corporate & Other 36.5 29.4 35.1 24.0 (16.2) Subtotal 422.8 423.6 433.0 (0.2) (2.2) RFIG Run-off 11.4 15.2 17.6 (24.7) (13.4) Consolidated $ 434.3 $ 438.9 $ 450.7(1.1) % (2.6) % E. Interest and other charges (credits): General Insurance $ 64.2 $ 64.2 $ 71.1Title Insurance 2.1 3.8 4.1 Corporate & Other (a) (10.1) (24.3) (35.2) Subtotal 56.2 43.7 40.0 RFIG Run-off - - - Consolidated $ 56.2 $ 43.7 $ 40.028.7 % 9.1 % F. Segmented and consolidated pretax income (loss) excluding investment gains (losses)(B+D-E): General Insurance $ 589.6 $ 439.8 $ 370.234.1 % 18.8 % Title Insurance 515.7 344.0 230.8 49.9 49.0 Corporate & Other 25.7 36.7 54.8 (29.8) (33.1) Subtotal 1,131.1 820.5 655.9 37.9 25.1 Run-off 32.8 9.8 30.3 232.3 (67.4) Consolidated 1,164.0 830.4 686.2 40.2 % 21.0 % Income taxes (credits) on above (b) 228.1 159.6 132.0
investment gains (losses) 935.9 670.8 554.2 39.5 % 21.0 % H. Consolidated pretax investment gains (losses): Realized from actual transactions and impairments 6.9 14.2 36.6 Unrealized from changes in fair value of equity securities 751.1 (156.2) 599.5 Total 758.0 (142.0) 636.1 Income taxes (credits) on above 159.6 (29.8) 133.8 Net of tax investment gains (losses) 598.4 (112.1) 502.2 I. Net income (loss)
$ 1,534.3 $ 558.6 $ 1,056.4J. Consolidated operating cash flow $ 1,311.7$
(a) Includes consolidation/elimination entries. (b) Effective tax rates
applicable to profit before tax excluding investment gains and (losses) was 19.6%,
19.2% and 19.2% for the years ended
General insurance results
General Insurance Summary Operating Results % Change 2021 2020 Years Ended December 31: 2021 2020 2019 vs. 2020 vs. 2019 Net premiums written
$ 3,680.9 $ 3,431.3 $ 3,469.07.3 % (1.1) % Net premiums earned 3,555.5 3,394.2 3,432.4 4.8 (1.1) Net investment income 342.4 352.2 356.4 (2.8) (1.2) Other income 144.5 130.3 131.9 10.9 (1.2) Operating revenues 4,042.5 3,876.8 3,920.8 4.3 (1.1) Claim costs 2,303.1 2,372.0 2,464.6 (2.9) (3.8) Sales and general expenses 1,085.4 1,000.7 1,014.7 8.5 (1.4) Interest and other costs 64.2 64.2 71.1 0.1 (9.7) Operating expenses 3,452.8 3,436.9 3,550.5 0.5 (3.2) Segmented pretax operating income (loss) $ 589.6 $ 439.8 $ 370.234.1 % 18.8 % Claim ratio 64.8 % 69.9 % 71.8 % Expense ratio 26.5 25.6 25.7 Combined ratio 91.3 % 95.5 % 97.5 % General Insurancenet premiums earned increased 4.8% for 2021, with rising premiums in commercial auto, financial indemnity, and property lines of coverage. Strong premium rate increases for most lines of coverage, other than workers' compensation, high renewal retention ratios, and new business production all contributed. Conversely, net premiums earned were down slightly in 2020 compared to 2019. The economic impacts of the COVID-19 pandemic and tightened underwriting standards were mitigated by strong premium rate increases for most insurance products. Declining workers' compensation and general liability premiums were largely offset by rising premiums in commercial auto, financial indemnity and property coverages. Net investment income decreased in both 2021 and 2020, reflecting lower investment yields partially offset by growth in the invested asset base. The reported claim ratio for General Insuranceimproved in 2021 and 2020, inclusive of favorable reserve development from prior periods and a lower current period claim provision, attributable to several years of premium rate increases and underwriting actions. Favorable development was higher in 2021 due predominantly to better than expected claims experience related to workers' compensation and commercial auto reserves on older, more developed years. The 2021 expense ratio was slightly elevated compared to the prior years, generally reflecting variability of sales and general expenses within the line of coverage mix.
Together, these factors produced significantly higher pre-tax operating income
for the declared periods.
The following table shows recent annual claim ratios and the effects of claim development trends: Effect of Prior Periods' (Favorable)/ Claim Ratio Excluding Reported Unfavorable Claim Prior Periods' Claim Claim Ratio Reserves Development Reserves Development 2017 71.8 % 0.7 % 71.1 % 2018 72.2 - 72.2 2019 71.8 0.4 71.4 2020 69.9 (0.8) 70.7 2021 64.8 % (3.8) % 68.6 % Annual claim ratios and trends may not be particularly meaningful indicators of future outcomes for an insurance company with a liability-oriented coverage mix and its relatively long claim payment patterns. Management's long-term targets, assuming the current coverage mix, are for annually reported claim ratio averages in the high 60% to low 70% range, expense ratio averages of 25% or below, and a combined ratio ranging between 90% and 95%. 26 --------------------------------------------------------------------------------
Results of the title insurance segment
Title Insurance Summary Operating Results % Change 2021 2020 Years Ended December 31: 2021 2020 2019 vs. 2020 vs. 2019 Net premiums and fees earned
$ 4,404.3 $ 3,286.3 $ 2,736.034.0 % 20.1 % Net investment income 43.8 42.0 41.4 4.3 1.3 Other income 1.1 0.9 0.7 14.9 39.1 Operating revenues 4,449.3 3,329.3 2,778.1 33.6 19.8 Claim costs 112.9 75.3 67.4 49.9 11.8 Sales and general expenses 3,818.4 2,906.1 2,475.7 31.4 17.4 Interest and other costs 2.1 3.8 4.1 (42.7) (7.7) Operating expenses 3,933.5 2,985.3 2,547.3 31.8 17.2 Segmented pretax operating income (loss) $ 515.7 $ 344.0 $ 230.849.9 % 49.0 % Claim ratio 2.6 % 2.3 % 2.5 % Expense ratio 86.7 88.4 90.5 Combined ratio 89.3 % 90.7 % 93.0 % Title Insurancenet premiums and fees earned grew by 34.0% and 20.1% for 2021 and 2020, respectively, attributable to a low interest rate environment and a robust real estate market. Increased revenue generated on purchase transactions in both years was partially offset by a decline in refinance activity beginning in 2021. Revenue from independent title agents continued to increase over prior years although at a lower rate in more recent quarters, while revenue from direct production channels declined slightly in the later part of 2021. Net investment income increased in both 2021 and 2020, reflecting growth in the invested asset base, somewhat offset by lower investment yields. Title Insurance'sreported claim ratios were relatively flat for the years presented, inclusive of favorable development. The expense ratios reflect the benefit of greater leverage of the expense structure on significantly higher premium and fee volume, tempered by an increased mix of agency produced revenues late in 2021.
Together, these factors produced significantly higher pre-tax operating income
for the declared periods.
The following table shows recent annual claim ratios and the effects of claim development trends: Effect of Prior Periods' (Favorable)/ Claim Ratio Excluding Reported Unfavorable Claim Prior Periods' Claim Claim Ratio Reserves Development Reserves Development 2017 0.8 % (3.0) % 3.8 % 2018 1.9 (1.8) 3.7 2019 2.5 (1.2) 3.7 2020 2.3 (1.3) 3.6 2021 2.6 % (1.0) % 3.6 % 27
-------------------------------------------------------------------------------- RFIG Run-off Segment Results RFIG Run-off Summary Operating Results (a) % Change 2021 2020 Years Ended December 31: 2021 2020 2019 vs. 2020 vs. 2019
Mortgage Insurance(MI) Net premiums earned $ 32.6 $ 45.1 $ 58.8(27.6) % (23.3) % Net investment income 11.4 15.2 17.3 (24.7) (12.0) Claim costs (1.7) 36.9 32.3 (104.7) 14.1 MI pretax operating income (loss) $ 32.8 $ 9.8 $ 29.2232.3 % (66.2) % Claim ratio (5.3) % 81.7 % 55.0 % Expense ratio 39.9 30.2 24.8 Combined ratio 34.6 % 111.9 % 79.8 % Consumer Credit Insurance(CCI) (a) CCI pretax operating income (loss) $ - $ - $ 1.0Total MI and CCI run-off business (a) Segment pretax operating income (loss) $ 32.8 $ 9.8 $ 30.3232.3 % (67.4) % __________________ (a) Results for the CCI run-off are expected to be immaterial in the remaining run-off periods. Effective July 1, 2019, these results have been re-classified to General Insurancefor all future periods. Pretax operating results of RFIG Run-off reflect the continuing drop in net earned premiums in line with the declining risk in force and significantly lower claim costs in 2021 compared to 2020. Claim costs in 2021 reflect fewer newly reported delinquencies along with improving trends in cure rates and lower claim severity influenced by the ongoing economic recovery and continued strength in the real estate market. Claim costs for 2020 reflected greater reserve provisions due to elevated delinquencies and the economic impacts of the COVID-19 pandemic. Investment income decreased in both years reflecting a declining invested asset base and lower investment yields. Extraordinary dividends of $100.0 millionand $37.7 millionwere paid to the parent company in 2021 and 2020, respectively. The following table shows recent annual claim ratios and the effects of claim development trends: Effect of Prior Periods' (Favorable)/ Claim Ratio Excluding Reported Unfavorable Claim Prior Periods' Claim Claim Ratio Reserves Development Reserves Development 2017 57.6 % (38.3) % 95.9 % 2018 43.2 (27.0) 70.2 2019 55.0 (12.5) 67.5 2020 81.7 (26.5) 108.2 2021 (5.3) % (67.5) % 62.2 % 28
Corporate & Other Operating Results Corporate & Other Summary Operating Results % Change 2021 2020 Years Ended December 31: 2021 2020 2019 vs. 2020 vs. 2019 Net life and accident premiums earned $ 11.0
$ 12.0 $ 13.4(8.8) % (10.0) % Net investment income 36.5 29.4 35.1 24.0 (16.2) Other operating income - - - - - Operating revenues 47.5 41.4 48.5 14.7 (14.6) Claim costs 6.5 7.1 8.8 (7.9) (19.7) Insurance expenses 3.4 4.2 4.5 (17.6) (6.6) Corporate, interest and other expenses - net 11.6 (6.6) (19.7) N/M 66.3 Operating expenses 21.7 4.7 (6.3) N/M 174.7
Corporate operating income (loss) before taxes and other $25.7
(29.8) % (33.1) % This segment includes the combination of a small life and accident insurance business and the net costs associated with the parent holding company and its internal corporate services subsidiaries. The segment tends to produce highly variable results stemming from volatility inherent from the lack of scale. Interest expense increased in 2021 related to the issuance of
$650 millionof debt late in the second quarter. This increase was largely offset by net investment income from a higher level of investments.
Summary consolidated balance sheet
December 31, 20212020 Assets: Cash and fixed maturity securities $ 11,399.6
Equity securities 5,302.8
Other invested assets 116.5
Cash and invested assets 16,818.9
Accounts and premiums receivable 1,768.7
Federal income tax recoverable: Current 11.8
Reinsurance balances recoverable 4,943.4
Deferred policy acquisition costs 350.4 328.0 Sundry assets 1,088.4 995.0 Total assets
$ 24,981.8 $ 22,815.2
Liabilities and equity:
Claim reserves 11,425.5
Federal income tax payable: Current - 4.2 Deferred 249.5 137.3 Reinsurance balances and funds 866.0 725.4 Debt 1,588.5 966.4 Sundry liabilities 1,206.9 1,530.8 Total liabilities 18,088.6
Shareholders' equity 6,893.2
Total liabilities and equity
29 -------------------------------------------------------------------------------- Cash, Invested Assets, and Shareholders' Equity Cash, Invested Assets, and Shareholders' Equity % Change
December 31, Dec. '21 / Dec. '20 / As of December 31: 2021 2020 2019 Dec. '20 Dec. '19 Cash and invested assets:
Fixed maturity securities, cash and other invested assets
$ 11,516.1 $ 11,480.4 $ 10,496.90.3 % 9.4 % Equity securities 5,302.8 4,054.8 4,030.5 30.8 0.6 Total per balance sheet $ 16,818.9 $ 15,535.3 $ 14,527.48.3 % 6.9 % Total at cost for all $ 15,045.8 $ 14,151.6 $ 13,327.26.3 % 6.2 %
Composition of equity per share:
Equity before items below $ 18.50
$ 17.73 $ 17.254.3 % 2.8 % Unrealized investment gains (losses) and other accumulated comprehensive income (loss) 4.26 3.02 2.73 Total $ 22.76 $ 20.75 $ 19.989.7 % 3.9 % Segmented composition of shareholders' equity per share: Excluding RFIG Run-off segment $ 21.47 $ 19.25 $ 18.3711.5 % 4.8 % RFIG Run-off segment 1.29 1.50 1.61 Consolidated total $ 22.76 $ 20.75 $ 19.989.7 % 3.9 % Old Republic'sinvested assets portfolio is directed in consideration of enterprise-wide risk management objectives. Most importantly, these are intended to ensure solid funding of the insurance subsidiaries' long-term obligations to customers, policyholders and their beneficiaries, as well as the long-term stability of the subsidiaries' capital accounts. For these reasons, the investment portfolio contains no significant insurance risk-correlated asset exposures to real estate, mortgage-backed securities, collateralized debt obligations ("CDO's"), derivatives, hybrid securities, or illiquid private equity and hedge fund investments. Moreover, the Company does not engage in hedging or securities lending transactions, nor does it invest in securities whose values are predicated on non-regulated financial instruments exhibiting amorphous or unfunded counter-party risk attributes.
allocation of around 68% to fixed-maturity securities (bonds and notes) and
short-term investments and 32% in equity securities (common shares). the
fixed-term portfolio continues to be the anchor of insurance
obligations of underwriting subsidiaries. Maturities are stratified and
in a prudent manner at the expected time of payment of these obligations in the
to come up. The quality of the investment portfolio remains at high levels.
In recent years, a significant portion of our investable funds have been directed toward high-quality common stocks of
U.S.companies (currently limited to fewer than 100 issues). We favor those with long-term records of reasonable earnings growth and steadily increasing dividends. Pursuant to enterprise risk management guidelines and controls, we perform regular stress tests of the equities portfolio to gain reasonable assurance that periodic downdrafts in market prices would not seriously undermine our financial strength and the long-term continuity and prospects of our insurance underwriting business. 30 -------------------------------------------------------------------------------- Changes in shareholders' equity per share are reflected in the following table. As shown, these resulted mostly from net income excluding net investment gains (losses), realized and unrealized investment gains (losses), and dividend payments to shareholders.
Equity per share
December 31, 2021 2020 2019 Beginning balance
$ 20.75 $ 19.98 $ 17.23Changes in shareholders' equity: Net income (loss) excluding net investment gains (losses) 3.10 2.24 1.85 Net of tax realized investment gains (losses) 0.02 0.04 0.10
After taxes on unrealized investment gains (losses):
Fixed maturity securities (0.97) 0.91 0.96 Equity securities 1.96 (0.41) 1.57 Total net of tax realized and unrealized investment gains (losses) 1.01 0.54 2.63 Cash dividends (2.38) (1.84) (1.80) Other 0.28 (0.17) 0.07 Net change 2.01 0.77 2.75 Ending balance
$ 22.76 $ 20.75 $ 19.98Percentage change for the period 9.7 % 3.9 % 16.0 % Capitalization Capitalization December 31, 2021 2020 2019 Debt: 4.875% Senior Notes due 2024 $ 398.4 $ 397.9 $ 397.33.875% Senior Notes due 2026 547.3 546.8 546.2 3.850% Senior Notes due 2051 642.6 - - Other miscellaneous debt - 21.7 30.4 Total debt 1,588.5 966.4 974.0 Common shareholders' equity 6,893.2 6,186.6 6,000.1 Total capitalization $ 8,481.7 $ 7,153.1 $ 6,974.2Capitalization ratios: Debt 18.7 % 13.5 % 14.0 % Common shareholders' equity 81.3 86.5 86.0 Total 100.0 % 100.0 % 100.0 % 31
-------------------------------------------------------------------------------- DETAILED MANAGEMENT ANALYSIS This section of the Management Analysis of Financial Position and Results of Operations is additive to and should be read in conjunction with the Executive Summary which precedes it. RESULTS OF OPERATIONS Consolidated Overview
Throughout 2021, the economy continued to recover from the effects of the COVID-19 pandemic and the associated governmental responses ("COVID-19" or "the pandemic"). Most of
Old Republic'sbusiness operations have permitted associates to return to the office. Old Republicexperienced no meaningful interruption in its ability to service the needs of customers throughout the remote working environment or the beginning stages of the return to office. Demand for several of the Company's insurance coverages in the General Insurancesegment is related to overall economic conditions, however, the Company's exposure to the sectors impacted the most by COVID-19 has not been significant. Additionally, aside from higher reported delinquencies and resulting claims costs experienced within the RFIG Run-off segment during 2020, the overall impact of COVID-19 on the Company's claims experience has not been significant. The COVID-19 pandemic continues to adversely impact the U.S.economy and financial markets. New variants of the COVID-19 virus or a resurgence in infection rates could lead to a reduction in economic activity, resulting in a decline in demand for the Company's products. As a result, the Company's operating results, business and financial condition could be adversely affected in subsequent periods by future economic disruptions caused by the COVID-19 pandemic. Premiums & Fees
The main sources of
the periods indicated were as follows:
Earned Premiums and Fees % Change Corporate & from prior General Title RFIG Run-off Other Total period Years Ended
December 31: 2019 $ 3,432.4 $ 2,736.0 $ 59.2 $ 13.4 $ 6,241.15.1 % 2020 3,394.2 3,286.3 45.1 12.0 6,737.8 8.0 2021 $ 3,555.5 $ 4,404.3 $ 32.6 $ 11.0 $ 8,003.618.8 % Net Investment Income Net investment income is affected by trends in interest and dividend yields for the types of securities in which the Company's 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 the Company 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 that follow. 32 --------------------------------------------------------------------------------
Fair Invested Assets at Cost Value Invested Corporate Adjust- Assets at Fair General Title RFIG Run-off & Other Total ment Value As of
December 31: 2020 $ 10,987.8 $ 1,328.4 $ 545.1 $ 1,083.8 $ 13,945.2 $ 1,384.9 $ 15,330.12021 $ 11,379.7 $ 1,569.2 $ 459.0 $ 1,394.8 $ 14,802.9 $ 1,773.4 $ 16,576.3Net Investment Income Yield at Corporate Original Fair General Title RFIG Run-off & Other Total Cost Value Years Ended December 31: 2019 $ 356.4 $ 41.4 $ 17.6 $ 35.1 $ 450.73.48 % 3.30 % 2020 352.2 42.0 15.2 29.4 438.9 3.24 2.96 2021 $ 342.4 $ 43.8 $ 11.4 $ 36.5 $ 434.33.02 % 2.72 % Consolidated net investment income decreased by 1.1% in 2021 and 2.6% in 2020. This revenue source is affected by changes in the invested asset base mainly driven by consolidated operating cash flows and the issuance of debt in 2021, by a concentration of investable assets in interest-bearing securities, and by changes in market rates of return. The yields on interest bearing securities for 2021 and 2020 reflect a lower interest rate environment. Benefits and Claims The Company 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. 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, 2021and 2020: Claim and Loss Adjustment Expense Reserves December 31: 2021 2020 Gross Net Gross Net Workers' compensation $ 4,893.0 $ 2,955.6 $ 4,929.2 $ 3,044.1General liability 1,324.4 630.7 1,309.4 641.5 Commercial automobile (mostly trucking) 2,850.0 1,736.5 2,379.8 1,591.5 Other coverages 1,355.5 979.3 1,086.2 782.4 Unallocated loss adjustment expense reserves 285.2 284.8 269.1 268.3 Total General Insurancereserves 10,708.4 6,587.0 9,973.9 6,328.0 Title 594.2 594.2 556.1 556.1 RFIG Run-off 111.2 111.2 127.6 127.6 Life and accident 11.6 7.6 13.2 8.6 Total claim and loss adjustment expense reserves $ 11,425.5 $ 7,300.2 $ 10,671.0 $ 7,020.4Asbestosis and environmental claim reserves included in the above General Insurance reserves: Amount $ 118.1 $ 77.2 $ 127.6 $ 82.4% of total General Insurance reserves 1.1 % 1.2 % 1.3 % 1.3 %
A summary of changes in overall provisions for claims and related costs is
included in note 4 of the consolidated financial statements.
The percentage of net claims, benefits and related settlement costs incurred
as a percentage of premiums and related fee income from the three
the main operating segments and for the consolidated activities were as follows:
Years Ended December 31: 2021 2020 2019 General 64.8 % 69.9 % 71.8 % Title 2.6 2.3 2.5 RFIG Run-off (5.3) 81.7 53.5 Consolidated claim ratio 30.2 % 37.0 % 41.2 %
Reconciliation of the consolidated loss ratio:
Provision for insured events of the current year 32.9 %
Evolution of the provision for insured events of previous years:
net (favorable) unfavorable development (2.7)
(1.2) (.5) Consolidated claim ratio 30.2 % 37.0 % 41.2 % The consolidated claim ratio reflects the changing effects of period-to-period contributions of each segment to consolidated results, and this ratio's 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 favorable developments in 2021, 2020, and 2019, which on average decreased the consolidated claim ratio by 1.6 percentage points. Management believes that its overall reserving practices have been consistently applied over many years, and that its aggregate net 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 significantly greater or lower than currently established reserve estimates. In management's opinion, such changes in net claims and related costs are not likely to have a material effect on the Company's consolidated financial position, although it could affect materially its consolidated results of operations for any one annual or interim reporting period. See further discussion in this Annual Report on Form 10-K under Item 1A - Risk Factors. Underwriting Acquisition and Other Expenses
The following table shows the expense ratios recorded by each major
business segment and under consolidation for the periods indicated:
RFIG General Title Run-off Consolidated Years Ended December 31: 2019 25.7 % 90.5 % 25.0 % 54.1 % 2020 25.6 88.4 30.2 56.3 2021 26.5 % 86.7 % 39.9 % 59.7 % Variations in the Company's consolidated expense ratios reflect a continually changing mix of coverages sold and costs of producing business in the Company's three largest operating segments. To a significant degree, expense ratios for both the
General and Title Insurancesegments 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. 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 2021 General Insuranceexpense ratio was also impacted by changes in line of coverage mix and certain operating expense charges. The Title Insuranceratios reflect the benefit of greater leverage of the expense structure on significantly higher premium and fee volume, tempered by an increased mix of agency produced revenues late in 2021. Combined Ratios
The combined net loss ratios summarized above, benefits and
subscription fees are as follows:
RFIG General Title Run-off Consolidated Years Ended December 31: 2019 97.5 % 93.0 % 78.5 % 95.3 % 2020 95.5 90.7 111.9 93.3 2021 91.3 % 89.3 % 34.6 % 89.9 % 34
-------------------------------------------------------------------------------- Net Investment Gains (Losses) The Company's investment policies are not 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 providing sufficient liquidity to meet insurance underwriting and other obligations as they become payable in the future. Dispositions of fixed maturity securities generally arise from scheduled maturities and early calls; in 2021, 2020, and 2019, 80.7%, 76.2% and 54.0%, respectively, of all such dispositions resulted from these occurrences. The realization of investment gains or losses can be highly discretionary and can be affected by such factors as the timing of individual securities sales, the recording of estimated losses from write-downs of impaired securities, tax-planning and tax-rate change considerations, and modifications of investment management judgments regarding the direction of securities markets or the future prospects of individual investees or industry sectors. The following table reflects the composition of net investment gains or losses for the periods shown. Realized Investment Gains (Losses) from Actual Transactions Impairment Losses on Securities Unrealized Equity Gains (Losses) Securities from Changes Fixed and Miscel- Fixed Miscel- in Fair Value Total Investment Maturity laneous Maturity laneous of Equity Gains Securities Investments Total Securities Investments Total Securities (Losses) Years Ended December 31: 2019
$ (1.9) $ 40.6 $ 38.6$ (2.0) $ - $ (2.0) $ 599.5$ 636.1 2020 (7.4) 21.6 14.2 - - - (156.2) (142.0) 2021 $ 1.5 $ 5.3 $ 6.9$ - $ - $ - $ 751.1$ 758.0 Income Taxes The effective consolidated income tax rates were 20.2%, 18.9%, and 20.1% in 2021, 2020, and 2019, respectively. The rates for each year reflect primarily the varying proportions of pretax operating income (loss) derived from partially tax preferred investment income (principally tax-exempt interest and dividend income), the combination of fully taxable investment income, investment gains or losses, underwriting and service income and adjustments regarding the recoverability of deferred tax assets. Segment Overview General Insurance Summary Operating Results % Change 2021 2020 Years Ended December 31: 2021
2020 2019 vs. 2020 vs. 2019 Net premiums earned
$ 3,555.5 $ 3,394.2 $ 3,432.44.8 % (1.1) % Net investment income 342.4 352.2 356.4 (2.8) (1.2) Claim costs 2,303.1 2,372.0 2,464.6 (2.9)
Sales and general expenses 1,085.4 1,000.7 1,014.7 8.5
Segmented pretax operating income (loss)
$ 589.6 $ 439.8 $ 370.234.1 % 18.8 % Claim ratio 64.8 % 69.9 % 71.8 % Expense ratio 26.5 25.6 25.7 Combined ratio 91.3 % 95.5 % 97.5 % Premiums & Fees
The percentage breakdown of net premiums earned for the main insurance covers
General Insurance Earned Premiums by Type of Coverage Commercial Inland Automobile Marine (mostly Financial and General trucking) Workers' Compensation Indemnity Property Liability Other Years Ended
December 31: 2019 37.2 % 29.1 % 6.4 % 7.6 % 6.6 % 13.1 % 2020 38.4 25.4 8.0 8.7 6.0 13.5 2021 39.7 % 21.9 % 9.7 % 9.7 % 5.2 % 13.8 % General Insurancenet premiums earned increased 4.8% for 2021 with rising premiums in commercial auto, financial indemnity, and property lines of coverage. Strong premium rate increases for most lines of coverage, other than workers' compensation, high renewal retention ratios, and new business production all contributed. Conversely, net premiums earned were down slightly in 2020 compared to 2019. The economic impacts of the COVID-19 pandemic and tightened underwriting standards were mitigated by strong premium rate increases for most insurance products. Declining workers' compensation and general liability premiums were largely offset by rising premiums in commercial auto, financial indemnity and property coverages.
Benefits and complaints
The percentage of net claims, benefits and related adjustment expenses measured
compared to the premiums earned by the main types of insurance coverage were as follows:
General Insurance Claim Ratios by Type of Coverage Commercial Inland Automobile Marine All (mostly Workers' and Financial General Coverages trucking) Compen-sation Property Indemnity Liability Other Years Ended December 31: 2019 71.8 % 84.0 % 63.2 % 62.6 % 64.0 % 77.8 % 61.4 % 2020 69.9 80.8 60.8 58.3 57.1 73.6 67.2 2021 64.8 % 70.8 % 58.9 % 59.4 % 53.9 % 64.1 % 65.7 %
The General Insuranceclaim ratio improved in 2021 and 2020 and was primarily driven by prior periods' favorable reserve developments and a lower current period claim provision as more fully described in the Executive Summary of the Management Analysis of Financial Position and Results of Operations. Unfavorable asbestosis and environmental ("A&E") claim developments, although not material in any of the periods presented, are typically attributable to periodic re-evaluations of such reserves as well as subsequent reclassifications of other coverages' reserves, most often 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 Republicstem mainly from its participations in assumed reinsurance treaties and insurance pools which were discontinued during the 1980's and have since been in run-off status. With respect to the primary portion of gross A&E reserves, Old Republicadministers 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 the Company's A&E exposures is handled by the claims departments of unrelated primary or ceding reinsurance companies. While the Company 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 the Company as well as available industry statistical data such as 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 insurer's A&E reserve level at any point in time. According to this simplistic appraisal of an insurer's A&E loss reserve level, Old Republic'saverage five year paid loss survival ratios stood at 5.9 years (gross) and 6.8 years (net of reinsurance) as of December 31, 2021and 6.3 years (gross) and 7.1 years (net of reinsurance) as of December 31, 2020. 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 .3% of General Insurancenet incurred losses for the five years ended December 31, 2021.
A summary of reserve activity, including estimates for IBNR, relating to A&E
December 31: 2021 2020 Gross Net Gross Net Asbestosis: Reserves at beginning of year
$ 84.7 $ 59.1 $ 79.2 $ 58.5Loss and loss expenses incurred 10.2 2.8 17.7 8.2 Claims and claim adjustment expenses paid 10.0 7.1 12.1 7.5 Reserves at end of year 85.0 54.9 84.7 59.1 Environmental: Reserves at beginning of year 42.8 23.2 47.6 24.8 Loss and loss expenses incurred 6.5 4.6 .8 1.7 Claims and claim adjustment expenses paid 16.3 5.4 5.6 3.2 Reserves at end of year 33.0 22.3 42.8 23.2 Total asbestosis and environmental reserves $ 118.1 $ 77.2 $ 127.6 $ 82.4Title Insurance Summary Operating Results % Change 2021 2020 Years Ended December 31: 2021 2020 2019 vs. 2020 vs. 2019 Net premiums and fees earned $ 4,404.3 $ 3,286.3 $ 2,736.034.0 % 20.1 % Net investment income 43.8 42.0 41.4 4.3 1.3 Claim costs 112.9 75.3 67.4 49.9 11.8 Sales and general expenses 3,818.4 2,906.1 2,475.7 31.4 17.4 Segmented pretax operating income (loss) $ 515.7 $ 344.0 $ 230.849.9 % 49.0 % Claim ratio 2.6 % 2.3 % 2.5 % Expense ratio 86.7 88.4 90.5 Combined ratio 89.3 % 90.7 % 93.0 % Premiums & Fees Title Insurancepremium and fee revenues stemming from the Company's direct operations (which include branch offices of its title insurers and wholly owned agency subsidiaries) represent approximately 22% of 2021 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 78% of consolidated title premium and fee revenues is produced by independent title agents. 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.
The following table shows the percentage distribution of
and royalty income by source of production:
Premium and Fee Production by Source Direct Independent Operations Title Agents Years Ended December 31: 2019 24.9 % 75.1 % 2020 24.9 75.1 2021 22.0 % 78.0 %
Title Insurancepremium and fee revenues grew by 34.0% and 20.1% in 2021 and 2020, respectively. This performance was attributable to a low interest rate environment and a robust real estate market. Increased revenue generated on purchase transactions in both years was partially offset by a decline in refinance activity beginning in 2021. 37 --------------------------------------------------------------------------------
Benefits and complaints
Title Insuranceclaim ratios have remained in the single digits for a number of years due to a continuation of favorable trends in claims frequency and severity. Favorable developments of reserves established in prior years continued to reduce the claim ratios as more fully described in the Executive Summary of the Management Analysis of Financial Position and Results of Operations. RFIG Run-off Summary Operating Results % Change 2021 2020 Years Ended December 31: 2021 2020 2019 vs. 2020 vs. 2019 Net premiums earned $ 32.6 $ 45.1 $ 58.8(27.6) % (23.3) % Net investment income 11.4 15.2 17.3 (24.7) (12.0) Claim costs (1.7) 36.9 32.3 (104.7) 14.1 Pretax operating income (loss) $ 32.8 $ 9.8 $ 29.2232.3 % (66.2) % Claim ratio (5.3) % 81.7 % 55.0 % Expense ratio 39.9 30.2 24.8 Combined ratio 34.6 % 111.9 % 79.8 % RFIG Run-off's mortgage guaranty insurance carriers ceased the underwriting of new policies effective August 31, 2011and the existing book of business was placed in run-off operating mode.
Premiums and fees
RFIG Run-off's mortgage guaranty premiums primarily stem from monthly installments paid on long-duration, guaranteed renewable insurance policies. 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.
The following tables provide information on production and exposure to associated risks
Trends in Premiums and Persistence: Persistence of Net Earned Premiums
December 31: 2019 $ 58.8 77.5 % 2020 45.1 77.6 2021 $ 32.6 74.8 %
RFIG The volume of premiums earned in run-off reflected a continuous decline in line with
the decreasing risk in force.
Net Risk in Force Traditional Net Risk in Force By Type: Primary Bulk & Other Total As of
December 31: 2019 $ 2,388.3 $ 201.8 $ 2,590.12020 1,842.2 169.0 2,011.2 2021 $ 1,364.9 $ 140.4 $ 1,505.4
Breakdown of risks by state of ownership:
FL IL GA CA NJ MD NY TX PA NC As of
December 31: 2019 8.9 % 6.7 % 6.1 % 5.7 % 5.0 % 4.9 % 3.9 % 4.8 % 4.1 % 3.8 % 2020 9.2 7.0 6.0 5.8 5.3 5.1 4.2 4.5 4.1 3.7 2021 9.8 % 7.2 % 6.1 % 5.8 % 5.5 % 5.1 % 4.9 % 4.4 % 4.1 % 3.6 % 38
Benefits and complaints
Some trends related to average claims related to mortgage guarantees are listed below:
Average Settled Claim Reported
Amount (a) Ratio at End
December 31: 2019 $ 49,195 10.1 % 2020 37,172 14.2 % 2021 $ 31,682 12.4 % __________
(a) Amounts are in whole dollars.
Total delinquency rates for top ten states (including “other” cases) (b):
FL IL GA CA NJ MD NY TX PA NC As of
December 31: 2019 8.8 % 9.0 % 8.6 % 6.5 % 12.4 % 10.4 % 20.7 % 12.4 % 12.4 % 9.6 % 2020 13.1 13.8 12.7 9.9 18.2 15.2 25.5 18.7 15.7 13.2 2021 10.5 % 12.4 % 9.3 % 7.3 % 14.8 % 12.8 % 23.1 % 16.3 % 14.9 % 11.2 % __________
(b) As determined by the risk prevailing at the
represent approximately 56.5% of the total risk in force.
The RFIG Run-off 2021 claim costs reflect fewer newly reported delinquencies along with improving trends in cure rates and lower claim severity influenced by the ongoing economic recovery and continued strength in the real estate market. The 2020 claim ratio reflects greater reserve provisions due to elevated delinquencies and the economic impacts of the COVID-19 pandemic. FINANCIAL POSITION The Company's financial position at
December 31, 2021reflected increases in assets, liabilities and common shareholders' equity of 9.5%, 8.8% and 11.4%, respectively, when compared to the immediately preceding year-end. Cash and invested assets represented 67.3% and 68.1% of consolidated assets as of December 31, 2021and 2020, respectively. As of year-end 2021, the cash and invested asset base increased by 8.3% to $16,818.9.
During 2021 and 2020, the Company committed the majority of investable funds to short to intermediate-term fixed maturity securities and higher yielding publicly traded large capitalization equity securities.
Old Republiccontinues to adhere to its long-term policy of investing primarily in investment grade, marketable securities. At both December 31, 2021and 2020, nearly all of the Company's investments consisted of marketable securities. The investment portfolio contains no significant insurance risk-correlated asset exposures to real estate, mortgage-backed securities, collateralized debt obligations ("CDO's"), derivatives, hybrid securities, or illiquid private equity and hedge fund investments. Moreover, the Company does not engage in hedging or securities lending transactions, nor does it invest in securities whose values are predicated on non-regulated financial instruments exhibiting amorphous or unfunded counter-party risk attributes. At December 31, 2021, the Company had no fixed maturity investments in default as to principal and/or interest. Short-term maturity investment positions reflect a large variety of seasonal and intermediate-term factors including current operating needs, expected operating cash flows, seasonality of quarterly cash flow, debt maturities, 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. The Company 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, the Company 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 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 39 -------------------------------------------------------------------------------- combination of these investment management practices is expected to produce a more stable fixed maturity investment portfolio that is not subject to extreme interest rate sensitivity and principal deterioration. The fair value of the Company's 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 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 of securities are reflected, net of deferred income taxes, directly in the shareholders' equity account, and as a separate component of the statements of comprehensive income. Given the Company's inability to forecast or control the movement of interest rates, Old Republicsets 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 Republicbelieves 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 Republic'sfixed maturity portfolio 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.
The following tables present certain information relating to the Company’s property, plant and equipment
maturity and equity portfolios on the dates indicated:
Fixed Maturity Securities Stratified by Credit Quality (a) December 31: 2021 2020 Aaa 25.1 % 24.6 % Aa 12.3 13.1 A 31.9 33.0 Baa 28.5 26.5 Total investment grade 97.8 97.2 All other (b) 2.2 2.8 Total 100.0 % 100.0 % __________ (a) Credit quality ratings referred to herein are a blend of those assigned by the major credit rating agencies for
U.S.and Canadian Governments, Agencies, Corporates and Municipal issuers, which are converted to the above ratings classifications. (b) "All other" includes non-investment grade or non-rated issuers. Gross Unrealized Losses Stratified by Industry Concentration for Fixed Maturity SecuritiesGross Amortized Unrealized December 31, 2021 Cost Losses
$ 390.9 $ 14.7Consumer Staples 222.2 6.7 U.S. Government & Agencies 745.6 6.6 Industrial 315.3 6.6 Retail 166.8 5.4 Health Care 155.2 5.0 Technology 147.1 3.8 Other (includes 13 industry groups) 940.7 22.9 Total $ 3,084.2(c) $ 72.2__________
(c) Represents 29.6% of the total fixed-maturity portfolio.
40 -------------------------------------------------------------------------------- Gross Unrealized Losses Stratified by Industry Concentration for
Equity SecuritiesGross Unrealized December 31, 2021 Cost Losses
$ 301.0 $ 48.8Telecom 72.5 16.8 Basic Industry 37.4 6.9 Insurance 44.7 5.4 Other (includes 4 industry groups) 141.0 6.5 Total $ 596.8(d) $ 84.5(e) __________
(d) Represents 15.9% of the total equity portfolio.
(e) Represents 2.3% of the cost of the total equity portfolio, while
unrealized capital gains represent 43.0% of the equity portfolio.
Gross Unrealized Losses Stratified by Maturity Ranges for
All Fixed Maturity SecuritiesAmortized Cost Gross Unrealized Losses Non- Non-Investment Grade Investment December 31, 2021 All Only All Grade Only Maturity Ranges: Due in one year or less $ 188.3$ - $ .1$ - Due after one year through five years 594.0 - 5.5 - Due after five years through ten years 2,242.1 33.6 64.7 .6 Due after ten years 59.6 - 1.7 - Total $ 3,084.2$ 33.6 $ 72.2 $ .6
Gross unrealized losses stratified by duration and amount of unrealized losses for
Amount of Gross Unrealized Losses Less than 20% to Total Gross 20% of 50% More than Unrealized December 31, 2021 Cost of Cost 50% of Cost Loss Number of Months in Unrealized Loss Position:
Fixed Maturity Securities: One to six months $ 12.1$ - $ - $ 12.1Seven to twelve months 49.6 - - 49.6 More than twelve months 10.3 - - 10.3 Total $ 72.2$ - $ - $ 72.2Number of Issues in Unrealized Loss Position: Fixed Maturity Securities: One to six months 208 - - 208 Seven to twelve months 211 - - 211 More than twelve months 32 - - 32 Total 451 - - 451 (f) __________ (f) At December 31, 2021, the number of issues in an unrealized loss position represent 23.8% of the total number of such fixed maturity issues held by the Company. 41 --------------------------------------------------------------------------------
Distribution by age of
December 31: 2021 2020
Due in one year or less 11.7 % 9.8 % Due after one year through five years 49.7 57.0 Due after five years through ten years 37.6 31.4 Due after ten years through fifteen years .9 1.7 Due after fifteen years .1 .1 Total 100.0 % 100.0 % Average Maturity in Years 4.4 4.3 Duration (g) 4.0 3.8 ___________ (g) Duration is used as a measure of bond price sensitivity to interest rate changes. A duration of 4.0 as of
December 31, 2021implies 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 fixed maturity investment portfolio of approximately 4.0%.
Cash and capital resources
The parent holding company meets its liquidity and capital needs principally through dividends and interest on intercompany financing arrangements paid by its subsidiaries. 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. The Company can receive up to
$982.0in ordinary dividends from its subsidiaries in 2022 without the prior approval of regulatory authorities. The liquidity achievable through such permitted dividend payments is sufficient to cover the parent holding company's currently expected cash outflows represented mostly by interest, reasonably anticipated cash dividend payments to shareholders, modest operating expenses, and the near-term capital needs of its operating subsidiaries. Old Republic'stotal capitalization of $8,481.7at December 31, 2021consisted of debt of $1,588.5and common shareholders' equity of $6,893.2. Changes in the common shareholders' equity account reflect primarily net income excluding net investment gains (losses), realized and unrealized gains (losses), and dividend payments to shareholders for the year then ended. Old Republichas paid a cash dividend without interruption since 1942 (80 years), and it has raised the annual cash dividend payment for each of the past 40 years. The dividend rate is reviewed and approved by the Board of Directors on a quarterly basis each year. In establishing each year's cash dividend rate the Company 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 year's dividend rate is set judgmentally in consideration of such key factors as the dividend paying capacity of the Company's insurance subsidiaries, the trends in average annual earnings for the five to ten most recent calendar years, and management's long-term expectations for the Company's consolidated business and its individual operating subsidiaries. The Company's Board of Directors declared special cash dividends of $1.50per share in August 2021(paid on October 6, 2021) and $1.00per share in December 2020(paid on January 15, 2021) and September 2019(paid on September 16, 2019). Under state insurance regulations, the Company's three mortgage guaranty insurance subsidiaries are required to hold minimum amounts of capital based on specified formulas. Since the Company's mortgage insurance subsidiaries have discontinued writing new business the risk-to-capital ratio considerations are therefore no longer of consequence.
The main mortgage insurance subsidiaries of the Company have requested and obtained
the approval of the
dividends amounting to
Substantially all of the Company's receivables are current. Reinsurance recoverable balances on paid or estimated unpaid losses are deemed recoverable from solvent reinsurers or have otherwise been reduced by allowances for estimated credit losses. Deferred policy acquisition costs are estimated by taking into account the direct costs relating to the successful acquisition of new or renewal insurance contracts and evaluating their recoverability on the basis of recent trends in claims costs. 42 --------------------------------------------------------------------------------
The following table shows some information about required reports
contractual obligations from
2023 and 2025 and 2027 and 2022 2024 2026 After Total Contractual Obligations: Debt $ -
$ 400.0 $ 550.0 $ 650.0 $ 1,600.0Interest on Debt 65.8 131.6 92.6 613.1 903.3 Operating Leases 61.6 96.0 59.1 91.7 308.5 Pension Benefits Contributions (a) - - - - - Claim & Claim Expense Reserves (b) 2,882.3 2,789.3 1,616.3 4,137.5 11,425.5 Total $ 3,009.8 $ 3,417.0 $ 2,318.1 $ 5,492.4 $ 14,237.4__________ (a) Represents estimated minimum funding of contributions for the Old RepublicInternational Salaried Employees Retirement Plan. Funding of the plan is dependent on a number of factors including actual performance versus actuarial assumptions made at the time of the actuarial valuation, as well as the maintenance of 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, the Company's 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.
In order to maintain premium production within its capacity and limit maximum losses for which it might become liable under its policies,
Old Republic, as is common practice in the insurance industry, may cede all or a portion of its premiums and related liabilities on certain classes of insurance, individual policies, or blocks of business to other insurers and reinsurers.
The Company does not anticipate any significant changes in its reinsurance offer
programs in 2022.
The following table presents the
reinsured by its top ten reinsurers in
% of Total A.M. Reinsurance Recoverable Total Consolidated Best on Paid on Claim Exposure Reinsured Reinsurer Rating Claims Reserves to Reinsurer Liabilities
Day One Insurance, Inc.
Not rated $ –
14.2 % Archway Insurance, Ltd. Unrated 2.5 395.6 398.2 9.4 Hannover Ruckversicherungs A+ 11.4 333.2 344.6 8.2 Munich Re America, Inc. A+ 20.6 253.2 273.8 6.5 Summit Insurance, Ltd. Unrated - 170.3 170.4 4.0 AXIS Reinsurance Company A 2.2 162.6 164.8 3.9 Swiss Reinsurance America Corporation A+ 14.4 115.5 129.9 3.1 Transatlantic Reinsurance Company A+ 5.4 117.0 122.5 2.9 Partner Reinsurance Company of the U.S. A+ 1.9 117.5 119.5 2.8
Endurance Assurance Corporation
A+ 1.1 115.5 116.6 2.8
$ 59.9 $ 2,379.7 $ 2,439.657.7 % Reinsurance recoverable asset balances represent amounts due from or credited by assuming reinsurers for paid and unpaid claims and premium reserves. Such reinsurance balances recoverable from non-admitted foreign and certain other reinsurers such as captive insurance companies owned by assureds or business producers, 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 irrevocable letters of credit, securities, and other financial instruments. Old Republicevaluates on a regular basis the financial condition of its assuming reinsurers and assureds who purchase its retrospectively rated or high deductible policies. Allowances for estimated credit losses are recognized 43 --------------------------------------------------------------------------------
since reinsurance, retrospectively rated and self-insured deductible policies
and contracts do not exempt
policyholders or their dependents.
Old Republic'sreinsurance 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. The Company may, in exchange for a ceding commission, reinsure up to 100% of the underwriting risk, and the premium applicable to such risk, to commercial institutions generally whose customers are insured by Old Republic, or individual customers who have formed captive insurance companies. The ceding commissions received compensate Old Republicfor performing the direct insurer's 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 Republic'sbusiness 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 events to a maximum of: $5.2for workers' compensation; $7.0for commercial automobile (mostly trucking) liability; $7.0for general liability; $12.0for executive protection (directors & officers and errors & omissions); $2.0for aviation; and $6.0for property coverages. Title insurance risk assumptions are generally limited to a maximum of $500.0as to any one policy. The vast majority of title policies issued, however, carry exposures of less than $1.0. The average direct primary mortgage guaranty exposure is (in whole dollars) $37,000per insured loan. Since January 1, 2005, the Company has had maximum treaty reinsurance coverage of up to $200.0for 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, 2001terrorist attack on America, to the best of the Company's 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 persons concentrated in a single facility such as a high rise building. As a result of the September 11, 2001terrorist 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 InsuranceAct 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. Congressextended and modified the program in late 2005 through the Terrorism Risk InsuranceRevision and Extension Act of 2005 (the "TRIREA"). TRIREA expired on December 31, 2007. Congressenacted a revised program in December 2007through the Terrorism Risk Insurance Program Reauthorization Act (the "TRIPRA") of 2007. The TRIPRA has been extended on several occasions, most recently on December 20, 2019for seven years. 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 did 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 program's protection is not triggered for losses arising from an act of terrorism until the industry first suffers losses in excess of a prescribed aggregate deductible during any one year. The program deductible trigger was $200.0for 2021. Once the program trigger is met, the program will be responsible for a fixed percentage of the Company's terrorism losses that exceed its deductible which ranges from 85% for 2015 and declined by one percentage point per year until it reached 80% in 2020. The Company's deductible amounts to 20% of direct earned premium on eligible property and casualty insurance coverages. The Company currently reinsures limits on a treaty basis of $195.0in excess of $5.0for claims arising from certain acts of terrorism for casualty clash and catastrophe workers' compensation liability insurance coverages. The Company also purchases facultative reinsurance on certain accounts in excess of $200.0to manage the Company's net exposures. CRITICAL ACCOUNTING ESTIMATES The Company's annual 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 such as Old Republicis by its very nature highly dynamic inasmuch as it necessitates a continuous evaluation, analysis, and quantification of factual data as it becomes known to the Company. 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 or loss, and financial condition. Changes in estimates generally 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 the Company's control. As a result, Old Republiccannot predict, 44 --------------------------------------------------------------------------------
quantify or guarantee the likely impact that likely changes in estimates
have on its future financial condition or results of operations.
the establishment of provisions for claims and claims settlement expenses and the
recoverability of outstanding losses reinsured. The main assumptions and
methods used to establish these estimates can be summarized as follows:
(a) Establishment of provisions for claims and claims settlement expenses
The Company's reserves for losses and loss adjustment expenses represents the accumulation of estimates of ultimate losses payable, including incurred but not reported losses and loss adjustment expenses. The establishment of claim reserves by the Company's 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 management's judgment in interpreting all such factors. At any point in time, the Company is exposed to the possibility of 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 the Company's ultimate liability are referred to as favorable development. Most of
Old Republic'sconsolidated claim and related expense reserves stem from its General Insurancebusiness. At December 31, 2021, such reserves accounted for 93.7% and 90.2% of consolidated gross and net of reinsurance reserves, respectively, while similar reserves at December 31, 2020represented 93.5% and 90.1% of the respective consolidated amounts. The Company's reserve setting process reflects the nature of its insurance business and the operationally decentralized basis upon which it is conducted. Old Republic's General Insuranceoperations encompass a large variety of coverages or classes of commercial insurance; it has negligible exposure to personal insurance coverages 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. 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 unique or different attributes of each block or class of business produced by the Company. 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' 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 judge or jury verdicts. Approximately 90% of the General Insurance'sclaim 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 Republicdoes not utilize a single, overarching loss reserving approach. The Company 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 the Company's 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 analysis of historical data. Favorable or unfavorable developments of prior year reserves are implicitly covered by the point estimates incorporated in total reserves at each balance sheet date. The Company does not project future variability or make an explicit provision for uncertainty when determining its best estimate of loss reserves. Over the most recent decade actual incurred losses have developed within a reasonable range of their original estimates. Aggregate loss reserves consist of liability estimates for claims that have been reported ("case") to the Company's 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, the Company 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. 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 and related ratios. Typically, such formulas take into account 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 45 -------------------------------------------------------------------------------- account reserves are usually set and analyzed for groups of coverages such as workers' compensation, commercial automobile (mostly trucking) and general liability that are typically underwritten jointly for many customers. For certain 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, the Company judgmentally establishes the most current accident years' loss reserves on the basis of expected claim ratios. Such expected claim ratios typically reflect currently estimated claim 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 claim ratios are generally used for the two to five most recent accident years depending on the individual class or category of business. As actual claims data emerges in succeeding interim and annual periods, the original accident year claim 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. 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, number, and ultimate costs of claims. RFIG Run-off 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 for which two or more consecutive monthly payments have been missed. Loss reserves are 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. 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. The Company has the legal right to rescind mortgage insurance coverage unilaterally as expressly stated in its policy. Moreover, two federal courts that have considered that policy wording have each affirmed that right. According to the policy, if any of those representations are materially false or misleading with respect to a loan, the Company has the right to cancel or rescind coverage for that loan retroactively to commencement of the coverage. As discussed above, the reserves for losses and related loss adjustment expenses are based on a wide variety of factors and calculations. Among these the Company believes the most critical are: •The establishment of expected claim ratios for at least the two to five most recent accident years, particularly for long-tail coverages as to which information about covered losses emerges and becomes more accurately quantifiable over long periods of time. Long-tail coverages generally include workers' compensation, commercial automobile (mostly trucking) liability, general liability, errors and omissions and directors and officers' liability, as well as title insurance. Gross loss reserves related to such long-tail coverages ranged between 94.4% and 95.2%, and averaged 94.8% of gross consolidated claim reserves as of the three most recent year ends. Net of reinsurance recoverables, such reserves ranged between 94.3% and 95.0% and averaged 94.6% as of the same dates. •Loss trends that are considered when establishing the above noted expected claim ratios which 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. The Company applies these expected claim ratios to earned premiums when estimating the periodic reserve for losses and loss adjustment expenses.
• Loss development factors, expected loss ratios and average loss costs, all
that are based on company and/or industry statistics may also be used to
reported and unreported project losses for each accounting period.
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. The Company believes that the factors most responsible, in varying and continually changing degrees, for such favorable or unfavorable development are as follows:
General Insurancenet 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 46 --------------------------------------------------------------------------------
inflation rates applicable to repairs and the medical benefits portion of
claims, and a higher than expected IBNR due to the slowdown and high volatility
emergence schemes applicable to certain types of claims such as those resulting from
litigation, assumed reinsurance or A&E claims.
developments such as a reduction in loan refinancing activity, the effect of which may be
lengthen the period that securities policies remain exposed to loss
emergence. These reserve levels may also be affected by reductions either
the land values or the volume of transactions which, under the
speculative nature of certain real estate developments, may lead to an increase
fraud, embezzlement or privileges of mechanics.
RFIG Run-off net claim reserve levels can be influenced adversely by several factors. These 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 levels of estimated rescission and claim denial activity, the deterioration of regional or national economic conditions leading to a reduction in borrowers' income and thus their ability to make payments on outstanding loans, 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. With respect to
Old Republic'ssmall life and accident insurance operations, reserve adequacy may be impacted 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 the Company's largest exposure. Consolidated claim costs developed favorably in the three most recent calendar years. This development had the consequent effect of reducing consolidated annual loss costs for the three most recent years within a range of 1.2% and 8.1%, or by an average of approximately 4.2% per annum. As a percentage of each of these years' consolidated earned premiums and fees, the favorable developments have ranged between .5% and 2.7%, and have averaged 1.6%. The consolidated cumulative development on prior year loss reserves over the past ten years through December 31, 2021has ranged from 2.4% unfavorable in 2011 to 10.7% favorable in 2016 and averaged 5.6% favorable. 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 Republic'sexisting business mix, the natural offset effects of its diverse coverage, current aggregate loss reserve levels, and loss development patterns suggests a reasonable likelihood that 2021 year-end loss reserves could ultimately develop within a range of +/- 7.5%. The most significant factors impacting the potential reserve development for each of the Company's insurance segments is discussed above. Old Republichas generally experienced favorable overall loss developments for the latest ten-year period. While General Insurancehas experienced unfavorable developments of previously established reserves during three of the last five years, the current analysis of loss development factors and economic conditions influencing the Company's insurance coverages point to a position of reserve adequacy. In management's opinion, the other segments' loss reserve development patterns (most notably those associated with title and mortgage insurance) show greater variability due to changes in economic conditions which cannot be reasonably anticipated. Consequently, management believes that using a 7.5% potential range of reserve development provides a reasonable benchmark for a sensitivity analysis of the Company's consolidated reserves as of December 31, 2021.
(b) Recoverability of outstanding claims reinsured
Assets consisting of balance sheet date reserve estimates recoverable from assuming reinsurers in future periods as gross losses are settled and paid, are established at the same time as the gross losses are recorded as reserves. Accordingly, these assets are subject to the same estimation processes and valuations as the related gross amounts as is discussed above. As of the three most recent year ends, outstanding reinsurance recoverable balances ranged between 32.7% and 36.1% and averaged 34.3% of the related gross reserves. See Note 5 for further discussion regarding recoverability of the Company's reinsurance balances. 47 -------------------------------------------------------------------------------- OTHER INFORMATION
Reference is made here to the “Business Segment Information” appearing
Historical data pertaining to the operating results, liquidity, and other performance indicators applicable to an insurance enterprise such as
Old Republicare 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. It is possible that Old Republic'soperating results, business and financial condition could be adversely affected in subsequent periods by future economic disruptions caused by the COVID-19 pandemic and the associated governmental responses. Some of the oral or written statements made in the Company's reports, press releases, and conference calls following earnings releases, can constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements involve assumptions, uncertainties, and risks that may affect the Company's future performance. With regard to Old Republic's General Insurancesegment, its results can be particularly affected 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 investment yields 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. Title Insuranceand RFIG Run-off 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. Life and accident insurance earnings can be affected by the levels of employment and consumer spending, changes in mortality and health trends, and alterations in policy lapsation rates. At the parent holding company level, operating earnings or losses are generally reflective of the amount of debt outstanding and its cost, interest income on temporary holdings of short-term investments, and period-to-period variations in the costs of administering the Company's widespread operations. General Insurance, Title Insurance, Corporate & Other, and RFIG Run-off maintain customer information and rely upon technology platforms to conduct their business. As a result, each of them and the Company are exposed to cyber risk. Many of the Company's operating subsidiaries, maintain separate IT systems which are deemed to reduce enterprise-wide risks of potential cybersecurity incidents. However, given the potential magnitude of a significant breach, the Company continually evaluates on an enterprise-wide basis its IT hardware, security infrastructure and business practices to respond to these risks and to detect and remediate in a timely manner significant cybersecurity incidents or business process interruptions.
A more detailed list and discussion of the risks and other factors that
affect the company’s risk insurance activities are included in Part I, point
1A – Risk factors, from this annual report to
Any forward-looking statements or commentaries speak only as of their dates.
Old Republicundertakes 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. 48