UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
FORM 10-Q
[x]
Quarterly report pursuant to section 13 or 15(d) of the Security Exchange Act of 1934
 
for the quarterly period ended: June 30, 2014  or
 
 
[ ]
Transition report pursuant to section 13 or 15(d) of the Security Exchange Act of 1934
Commission File Number:
001-10607
 
OLD REPUBLIC INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
 
No. 36-2678171
(State or other jurisdiction of
 
(IRS Employer Identification No.)
incorporation or organization)
 
 

307 North Michigan Avenue, Chicago, Illinois
 
60601
(Address of principal executive office)
 
(Zip Code)

Registrant's telephone number, including area code: 312-346-8100

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes: x No: o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes: x No: o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "accelerated filer", "large accelerated filer", and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one).

Large accelerated filer x
Accelerated filer o
 
 
Non-accelerated filer     o
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes: o No: x

Class
 
Shares Outstanding
June 30, 2014
Common Stock / $1 par value
 
260,827,571





There are 48 pages in this report




OLD REPUBLIC INTERNATIONAL CORPORATION
 
Report on Form 10-Q / June 30, 2014
 
INDEX
 
 
 
 
 
 
 
PAGE NO.
 
 
PART I
FINANCIAL INFORMATION:
 
 
 
 
 
CONSOLIDATED BALANCE SHEETS
3
 
 
 
 
CONSOLIDATED STATEMENTS OF INCOME
4
 
 
 
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
5
 
 
 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
6
 
 
 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7 - 17
 
 
 
 
MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS
18 - 44
 
 
 
 
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
45
 
 
 
 
CONTROLS AND PROCEDURES
45
 
 
 
PART II
OTHER INFORMATION:
 
 
 
 
 
ITEM 1 - LEGAL PROCEEDINGS
46
 
 
 
 
ITEM 1A - RISK FACTORS
46
 
 
 
 
ITEM 6 - EXHIBITS
46
 
 
SIGNATURE
47
 
 
EXHIBIT INDEX
48





2


Old Republic International Corporation and Subsidiaries
Consolidated Balance Sheets
($ in Millions, Except Share Data)
 
(Unaudited)
 
 
 
June 30,
 
December 31,
 
2014
 
2013
Assets
 
 
 
Investments:
 
 
 
Available for sale:
 
 
 
Fixed maturity securities, at fair value (amortized cost: $8,051.3 and $8,477.3)
$
8,424.5

 
$
8,712.3

Equity securities, at fair value (cost: $1,146.0 and $632.0)
1,390.2

 
1,004.2

Short-term investments (at fair value which approximates cost)
1,290.1

 
1,124.8

Miscellaneous investments
22.0

 
21.6

Total available for sale
11,127.0

 
10,863.1

Trading equity portfolio at fair value (cost: $34.1 and $-)
33.8

 
—

Other investments
6.1

 
5.3

Total investments
11,166.9

 
10,868.5

Other Assets:
 
 
 
Cash
146.3

 
153.3

Securities and indebtedness of related parties
21.9

 
18.0

Accrued investment income
86.2

 
87.2

Accounts and notes receivable
1,380.0

 
1,190.5

Federal income tax recoverable: Current
77.7

 
114.7

 Deferred
43.5

 
48.4

Prepaid federal income taxes
30.9

 
—

Reinsurance balances and funds held
160.6

 
189.2

Reinsurance recoverable: Paid losses
77.6

 
64.9

 Policy and claim reserves
3,317.6

 
3,150.8

Deferred policy acquisition costs
215.8

 
192.6

Sundry assets
458.3

 
455.7

Total Other Assets
6,017.0

 
5,665.9

Total Assets
$
17,183.9

 
$
16,534.4

Liabilities, Preferred Stock, and Common Shareholders' Equity
 
 
 
Liabilities:
 
 
 
Losses, claims, and settlement expenses
$
9,648.8

 
$
9,433.5

Unearned premiums
1,686.8

 
1,487.8

Other policyholders' benefits and funds
202.6

 
207.8

Total policy liabilities and accruals
11,538.4

 
11,129.2

Commissions, expenses, fees, and taxes
347.8

 
409.8

Reinsurance balances and funds
561.8

 
441.9

Debt
566.2

 
569.2

Sundry liabilities
216.4

 
209.0

Commitments and contingent liabilities

 

Total Liabilities
13,230.8

 
12,759.4

Preferred Stock  (1)
—

 
—

Common Shareholders' Equity:
 
 
 
Common stock (1)
260.8

 
260.4

Additional paid-in capital
677.5

 
673.9

Retained earnings
2,651.8

 
2,485.3

Accumulated other comprehensive income
383.3

 
378.2

Unallocated ESSOP shares (at cost)
(20.3
)
 
(23.0
)
Total Common Shareholders' Equity
3,953.1

 
3,775.0

Total Liabilities, Preferred Stock and Common Shareholders' Equity
$
17,183.9

 
$
16,534.4

________

(1)
At June 30, 2014 and December 31, 2013 , there were 75,000,000 shares of $0.01 par value preferred stock authorized, of which no shares were outstanding. As of the same dates, there were 500,000,000 shares of common stock, $1.00 par value, authorized, of which 260,827,571 and 260,462,217 were issued as of June 30, 2014 and December 31, 2013 , respectively. At June 30, 2014 and December 31, 2013 , there were 100,000,000 shares of Class B Common Stock, $1.00 par value, authorized, of which no shares were issued.

See accompanying Notes to Consolidated Financial Statements.

3


Old Republic International Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
($ in Millions, Except Share Data)
 
Quarters Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Net premiums earned
$
1,075.4

 
$
1,100.0

 
$
2,132.6

 
$
2,160.2

Title, escrow, and other fees
97.2

 
122.2

 
172.6

 
227.6

Total premiums and fees
1,172.6

 
1,222.2

 
2,305.3

 
2,387.9

Net investment income
85.4

 
78.8

 
168.2

 
158.2

Other income
25.8

 
23.2

 
49.6

 
43.6

Total operating revenues
1,283.9

 
1,324.3

 
2,523.3

 
2,589.8

Realized investment gains (losses):
 
 
 
 
 
 
 
From sales and fair value adjustments
49.9

 
137.1

 
241.2

 
141.7

From impairments
—

 
—

 
—

 
—

Total realized investment gains (losses)
49.9

 
137.1

 
241.2

 
141.7

Total revenues
1,333.9

 
1,461.5

 
2,764.5

 
2,731.5

 
 
 
 
 
 
 
 
Benefits, Claims and Expenses:
 
 
 
 
 
 
 
Benefits, claims and settlement expenses
651.7

 
521.7

 
1,207.8

 
1,100.5

Dividends to policyholders
3.4

 
3.5

 
7.4

 
8.4

Underwriting, acquisition, and other expenses
573.5

 
634.2

 
1,141.3

 
1,230.2

Interest and other charges
5.5

 
5.6

 
11.2

 
11.4

Total expenses
1,234.2

 
1,165.2

 
2,367.8

 
2,350.6

Income before income taxes (credits)
99.6

 
296.3

 
396.6

 
380.8

 
 
 
 
 
 
 
 
Income Taxes (Credits):
 
 
 
 
 
 
 
Current
31.7

 
29.9

 
137.7

 
29.1

Deferred
1.8

 
72.3

 
(1.6
)
 
101.4

Total
33.5

 
102.3

 
136.0

 
130.6

 
 
 
 
 
 
 
 
Net Income
$
66.1

 
$
193.9

 
$
260.5

 
$
250.2

 
 
 
 
 
 
 
 
Net Income Per Share:
 
 
 
 
 
 
 
Basic
$
.26

 
$
.76

 
$
1.01

 
$
.97

Diluted
$
.24

 
$
.67

 
$
.91

 
$
.88

 
 
 
 
 
 
 
 
Average shares outstanding: Basic
258,379,076

 
256,749,748

 
258,282,459

 
256,636,082

Diluted
295,051,774

 
292,842,386

 
294,902,279

 
292,548,180

 
 
 
 
 
 
 
 
Dividends Per Common Share:
 
 
 
 
 
 
 
Cash
$
.1825

 
$
.1800

 
$
.3650

 
$
.3600



See accompanying Notes to Consolidated Financial Statements.

4


Old Republic International Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income ( Unaudited )
($ in Millions)
 
Quarters Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Net Income As Reported
$
66.1

 
$
193.9

 
$
260.5

 
$
250.2

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gains (losses) on securities:
 
 
 
 
 
 
 
Unrealized gains (losses) on securities before
 
 
 
 
 
 
 
reclassifications
145.0

 
(230.4
)
 
251.4

 
(121.3
)
Amounts reclassified as realized investment
 
 
 
 
 
 
 
gains in the statements of income
(49.9
)
 
(137.1
)
 
(241.2
)
 
(141.7
)
Pretax unrealized gains (losses) on securities
95.1

 
(367.6
)
 
10.1

 
(263.0
)
Deferred income taxes (credits)
33.2

 
(128.4
)
 
3.4

 
(91.8
)
Net unrealized gains (losses) on securities, net of tax
61.8

 
(239.2
)
 
6.7

 
(171.2
)
Defined benefit pension plans:
 
 
 
 
 
 
 
Net pension adjustment before reclassifications
—

 
—

 
—

 
—

Amounts reclassified as underwriting, acquisition,
 
 
 
 
 
 
 
and other expenses in the statements of income
(.4
)
 
2.9

 
(.9
)
 
5.8

Net adjustment related to defined benefit
 
 
 
 
 
 
 
pension plans
(.4
)
 
2.9

 
(.9
)
 
5.8

Deferred income taxes (credits)
(.1
)
 
1.0

 
(.3
)
 
2.0

Net adjustment related to defined benefit pension
 
 
 
 
 
 
 
plans, net of tax
(.3
)
 
1.8

 
(.6
)
 
3.7

Foreign currency translation and other adjustments
2.2

 
(4.4
)
 
(1.0
)
 
(7.6
)
Net adjustments
63.7

 
(241.7
)
 
5.0

 
(175.1
)
Comprehensive Income (Loss)
$
129.9

 
$
(47.8
)
 
$
265.6

 
$
75.0




See accompanying Notes to Consolidated Financial Statements.

5


Old Republic International Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
($ in Millions)
 
 
Six Months Ended
 
 
June 30,
 
 
2014
 
2013
Cash flows from operating activities:
 
 
 
 
Net income
 
$
260.5

 
$
250.2

Adjustments to reconcile net income to
 
 
 
 
net cash provided by operating activities:
 
 
 
 
Deferred policy acquisition costs
 
(23.0
)
 
(10.1
)
Premiums and other receivables
 
(189.5
)
 
(75.7
)
Unpaid claims and related items
 
147.4

 
35.5

Unearned premiums and other policyholders' liabilities
 
95.1

 
57.1

Income taxes
 
35.1

 
116.6

Prepaid federal income taxes
 
(30.9
)
 
—

Reinsurance balances and funds
 
135.7

 
40.3

Realized investment (gains) losses
 
(241.2
)
 
(141.7
)
Accounts payable, accrued expenses and other
 
(16.8
)
 
6.0

Total
 
172.3

 
278.3

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Fixed maturity securities:
 
 
 
 
Maturities and early calls
 
408.3

 
562.6

Sales
 
699.0

 
48.9

Sales of:
 
 
 
 
Equity securities
 
420.2

 
161.3

Other - net
 
7.3

 
23.3

Purchases of:
 
 
 
 
Fixed maturity securities
 
(679.3
)
 
(973.4
)
Equity securities
 
(748.8
)
 
(148.4
)
Other - net
 
(23.7
)
 
(19.6
)
Net decrease (increase) in short-term investments
 
(165.3
)
 
172.0

Other - net
 
(2.8
)
 
(.4
)
Total
 
(85.1
)
 
(173.5
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Issuance of common shares
 
4.2

 
3.8

Redemption of debentures and notes
 
(3.0
)
 
(2.8
)
Dividends on common shares
 
(94.1
)
 
(92.2
)
Other - net
 
(1.3
)
 
(1.9
)
Total
 
(94.2
)
 
(93.2
)
 
 
 
 
 
Increase (decrease) in cash
 
(6.9
)
 
11.4

Cash, beginning of period
 
153.3

 
101.2

Cash, end of period
 
$
146.3

 
$
112.7

 
 
 
 
 
Supplemental cash flow information:
 
 
 
 
Cash paid (received) during the period for: Interest
 
$
10.5

 
$
10.6

Income taxes
 
$
101.0

 
$
14.4



See accompanying Notes to Consolidated Financial Statements.

6


OLD REPUBLIC INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
($ in Millions, Except Share Data)

1. Accounting Policies and Basis of Presentation:

The accompanying consolidated financial statements have been prepared in conformity with the Financial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC") of accounting principles generally accepted in the United States of America ("GAAP"). These interim financial statements should be read in conjunction with these notes and those included in the Company's 2013 Annual Report on Form 10-K incorporated herein by reference.

Pertinent accounting and disclosure pronouncements issued from time to time by the FASB are adopted by the Company as they become effective.

The financial accounting and reporting process relies on estimates and on the exercise of judgment. In the opinion of management all adjustments consisting only of normal recurring accruals necessary for a fair presentation of the results have been recorded for the interim periods. Amounts shown in the consolidated financial statements and applicable notes are stated (except as otherwise indicated and as to share data) in millions, which amounts may not add to totals shown due to truncation. Necessary reclassifications are made in prior periods' financial statements whenever appropriate to conform to the most current presentation.

2. Common Share Data:

Earnings Per Share - Consolidated basic earnings per share excludes the dilutive effect of common stock equivalents and is computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares actually outstanding for the quarterly and year-to-date periods. Diluted earnings per share are similarly calculated with the inclusion of dilutive common stock equivalents. The following table provides a reconciliation of net income and the number of shares used in basic and diluted earnings per share calculations.
 
Quarters Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Numerator:
 
 
 
 
 
 
 
Net income
$
66.1

 
$
193.9

 
$
260.5

 
$
250.2

Numerator for basic earnings per share -
 
 
 
 
 
 
 
income available to common stockholders
66.1

 
193.9

 
260.5

 
250.2

Adjustment for interest expense incurred on
 
 
 
 
 
 
 
assumed conversion of convertible notes
3.6

 
3.6

 
7.3

 
7.3

Numerator for diluted earnings per share -
 
 
 
 
 
 
 
income available to common stockholders
 
 
 
 
 
 
 
after assumed conversion of convertible notes
$
69.7

 
$
197.6

 
$
267.8

 
$
257.5

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Denominator for basic earnings per share -
 
 
 
 
 
 
 
weighted-average shares (a)
258,379,076

 
256,749,748

 
258,282,459

 
256,636,082

Effect of dilutive securities - stock based
 
 
 
 
 
 
 
   compensation awards
1,166,953

 
642,388

 
1,121,857

 
468,254

Effect of dilutive securities - convertible senior notes
35,505,745

 
35,450,250

 
35,497,963

 
35,443,844

Denominator for diluted earnings per share -
 
 
 
 
 
 
 
adjusted weighted-average shares
 
 
 
 
 
 
 
and assumed conversion of convertible notes (a)
295,051,774

 
292,842,386

 
294,902,279

 
292,548,180

Earnings per share: Basic
$
.26

 
$
.76

 
$
1.01

 
$
.97

Diluted
$
.24

 
$
.67

 
$
.91

 
$
.88

 
 
 
 
 
 
 
 
Anti-dilutive common stock equivalents
 
 
 
 
 
 
 
excluded from earning per share computations:
 
 
 
 
 
 
 
Stock based compensation awards
6,367,646

 
8,360,609

 
6,367,646

 
10,043,722

Convertible senior notes
—

 
—

 
—

 
—

Total
6,367,646

 
8,360,609

 
6,367,646

 
10,043,722

__________

(a) In calculating earnings per share, pertinent accounting rules require that common shares owned by the Company's Employee Savings and Stock Ownership Plan that are as yet unallocated to participants in the plan be excluded from the calculation. Such shares are issued and outstanding and have the same voting and other rights applicable to all other common shares.


7


3. Investments:

The Company may classify its invested assets in terms of those assets relative to which it either (1) has the positive intent and ability to hold until maturity, (2) has available for sale or (3) has the intention of trading. As of June 30, 2014 and December 31, 2013 , substantially all the Company's invested assets were classified as "available for sale."

Fixed maturity securities and other preferred and common stocks (equity securities) classified as "available for sale" are reported at fair value with changes in such values, net of deferred income taxes, reflected directly in shareholders' equity. Equity securities classified as "trading" are also recorded at fair value, however, changes in the fair value of these securities are recognized in earnings as a component of realized investment gains (losses). Fair values for fixed maturity securities and equity securities are based on quoted market prices or estimates using values obtained from independent pricing services as applicable.

The Company reviews the status and fair value changes of each of its available for sale investments on at least a quarterly basis during the year, and estimates of other-than-temporary impairments ("OTTI") in the portfolio's value are evaluated and established at each quarterly balance sheet date. In reviewing investments for OTTI, the Company, in addition to a security's market price history, considers the totality of such factors as the issuer's operating results, financial condition and liquidity, its ability to access capital markets, credit rating trends, most current audit opinion, industry and securities markets conditions, and analyst expectations to reach its conclusions. Sudden fair value declines caused by such adverse developments as newly emerged or imminent bankruptcy filings, issuer default on significant obligations, or reports of financial accounting developments that bring into question the validity of previously reported earnings or financial condition, are recognized as realized losses as soon as credible publicly available information emerges to confirm such developments. Absent issuer-specific circumstances that would result in a contrary conclusion, any equity security with an unrealized investment loss amounting to a 20% or greater decline for a six month period is considered OTTI. In the event the Company's estimate of OTTI is insufficient at any point in time, future periods' net income (loss) would be adversely affected by the recognition of additional realized or impairment losses, but its financial position would not necessarily be affected adversely inasmuch as such losses, or a portion of them, could have been recognized previously as unrealized losses in shareholders' equity. The Company recognized no OTTI adjustments for the quarters and six months ended June 30, 2014 and 2013 .

The amortized cost and estimated fair values by type and contractual maturity of fixed maturity securities are shown in the following tables. Expected maturities will differ from contractual maturities since borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Fixed Maturity Securities by Type:
 
 
 
 
 
 
 
June 30, 2014:
 
 
 
 
 
 
 
U.S. & Canadian Governments
$
1,106.4

 
$
37.7

 
$
2.8

 
$
1,141.3

Tax-exempt
96.3

 
2.2

 
.2

 
98.3

Corporate
6,848.5

 
348.0

 
11.7

 
7,184.8

 
$
8,051.3

 
$
387.9

 
$
14.7

 
$
8,424.5

December 31, 2013:
 
 
 
 
 
 
 
U.S. & Canadian Governments
$
1,133.0

 
$
36.7

 
$
8.7

 
$
1,161.1

Tax-exempt
168.1

 
3.7

 
.5

 
171.3

Corporate
7,176.0

 
268.1

 
64.3

 
7,379.8

 
$
8,477.3

 
$
308.7

 
$
73.6

 
$
8,712.3


 
Amortized
Cost
 
Estimated
Fair
Value
Fixed Maturity Securities Stratified by Contractual Maturity at June 30, 2014:
 
 
 
Due in one year or less
$
637.6

 
$
645.6

Due after one year through five years
3,617.1

 
3,841.5

Due after five years through ten years
3,611.6

 
3,739.8

Due after ten years
184.9

 
197.4

 
$
8,051.3

 
$
8,424.5



8


A summary of the Company's available for sale equity securities follows:
 

Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Equity Securities:
 
 
 
 
 
 
 
June 30, 2014
$
1,146.0

 
$
245.5

 
$
1.3

 
$
1,390.2

December 31, 2013
$
632.0

 
$
372.7

 
$
.5

 
$
1,004.2


The following table reflects the Company's gross unrealized losses and fair value, aggregated by category and length of time that individual securities have been in an unrealized loss position. Fair value and issuer's cost comparisons follow:
 
12 Months or Less
 
Greater than 12 Months
 
Total
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
June 30, 2014:
 
 
 
 
 
 
 
 
 
 
 
Available for Sale:
 
 
 
 
 
 
 
 
 
 
 
Fixed Maturity Securities:
 
 
 
 
 
 
 
 
 
 
 
  U.S. & Canadian Governments
$
59.0

 
$
1.1

 
$
80.3

 
$
1.6

 
$
139.3

 
$
2.8

  Tax-exempt
5.1

 
—

 
4.1

 
.1

 
9.2

 
.2

  Corporate
404.5

 
4.8

 
280.0

 
6.9

 
684.5

 
11.7

Subtotal
468.7

 
6.0

 
364.5

 
8.7

 
833.2

 
14.7

Equity Securities
46.2

 
1.3

 
—

 
—

 
46.2

 
1.3

Total
$
515.0

 
$
7.4

 
$
364.5

 
$
8.7

 
$
879.5

 
$
16.1

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013:
 
 
 
 
 
 
 
 
 
 
 
Available for Sale:
 
 
 
 
 
 
 
 
 
 
 
Fixed Maturity Securities:
 
 
 
 
 
 
 
 
 
 
 
  U.S. & Canadian Governments
$
301.7

 
$
8.7

 
$
—

 
$
—

 
$
301.7

 
$
8.7

  Tax-exempt
10.0

 
.5

 
—

 
—

 
10.0

 
.5

  Corporate
2,312.2

 
60.2

 
47.7

 
4.1

 
2,360.0

 
64.3

Subtotal
2,624.0

 
69.4

 
47.7

 
4.1

 
2,671.8

 
73.6

Equity Securities
31.0

 
.5

 
—

 
—

 
31.0

 
.5

Total
$
2,655.0

 
$
70.0

 
$
47.7

 
$
4.1

 
$
2,702.8

 
$
74.2


At June 30, 2014 , the Company held 187 fixed maturity and 5 equity securities in an unrealized loss position, representing 10.9% as to fixed maturities and 5.3% as to equity securities of the total number of such issues it held. At December 31, 2013 , the Company held 558 fixed maturity and 5 equity securities in an unrealized loss position, representing 30.8% as to fixed maturities and 7.2% as to equity securities of the total number of such issues it held. Of the securities in an unrealized loss position, 71 and 10 fixed maturity securities and no equity securities, had been in a continuous unrealized loss position for more than 12 months as of June 30, 2014 and December 31, 2013 , respectively. The unrealized losses on these securities are primarily attributable to an increase in the interest rate environment. As part of its assessment of other-than-temporary impairments, the Company considers its intent to continue to hold, and the likelihood that it will not be required to sell investment securities in an unrealized loss position until cost recovery, principally on the basis of its asset and liability maturity matching procedures.

Fair Value Measurements - Fair value is defined as the estimated price that is likely to be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (an exit price) at the measurement date. A fair value hierarchy is established that prioritizes the sources ("inputs") used to measure fair value into three broad levels: inputs based on quoted market prices in active markets (Level 1); observable inputs based on corroboration with available market data (Level 2); and unobservable inputs based on uncorroborated market data or a reporting entity's own assumptions (Level 3). Following is a description of the valuation methodologies and general classification used for financial instruments measured at fair value.

The Company uses quoted values and other data provided by a nationally recognized independent pricing source as inputs into its quarterly process for determining fair values of its fixed maturity and equity securities. To validate the techniques or models used by pricing sources, the Company's review process includes, but is not limited to: (i) initial and ongoing evaluation of methodologies used by outside parties to calculate fair value; and (ii) comparing other sources including the fair value estimates to its knowledge of the current market and to independent fair value estimates provided by the investment custodian. The independent pricing source obtains market quotations and actual transaction prices for securities that have quoted prices in active markets and uses its own proprietary method for determining the fair value of securities that are not actively traded. In general, these methods involve the use of "matrix pricing" in which the independent pricing source uses observable market inputs including, but not limited to, investment yields, credit

9


risks and spreads, benchmarking of like securities, broker-dealer quotes, reported trades and sector groupings to determine a reasonable fair value.

Level 1 securities include U.S. and Canadian Treasury notes, publicly traded common stocks, the quoted net asset value ("NAV") mutual funds, and most short-term investments in highly liquid money market instruments. Level 2 securities generally include corporate bonds, municipal bonds, and certain U.S. and Canadian government agency securities. Securities classified within Level 3 include non-publicly traded bonds, short-term investments, and equity securities. There were no significant changes in the fair value of assets measured with the use of significant unobservable inputs as of June 30, 2014 and December 31, 2013 .

The following tables show a summary of assets measured at fair value segregated among the various input levels described above:
 
 
Fair Value Measurements
As of June 30, 2014:
 
Level 1
 
Level 2
 
Level 3
 
Total
Available for sale:
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
U.S. & Canadian Governments
 
$
464.5

 
$
676.8

 
$
—

 
$
1,141.3

Tax-exempt
 
—

 
98.3

 
—

 
98.3

Corporate
 
—

 
7,174.3

 
10.5

 
7,184.8

Equity securities
 
1,389.4

 
—

 
.8

 
1,390.2

Short-term investments
 
1,286.2

 
—

 
3.8

 
1,290.1

Trading equity portfolio
 
$
33.8

 
$
—

 
$
—

 
$
33.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2013:
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
U.S. & Canadian Governments
 
$
478.9

 
$
682.2

 
$
—

 
$
1,161.1

Tax-exempt
 
—

 
171.3

 
—

 
171.3

Corporate
 
—

 
7,369.3

 
10.5

 
7,379.8

Equity securities
 
1,003.4

 
—

 
.7

 
1,004.2

Short-term investments
 
$
1,120.5

 
$
—

 
$
4.2

 
$
1,124.8


There were no transfers between Levels 1, 2 or 3 during the quarter ended June 30, 2014 .

Investment income is reported net of allocated expenses and includes appropriate adjustments for amortization of premium and accretion of discount on fixed maturity securities acquired at other than par value. Dividends on equity securities are credited to income on the ex-dividend date. Realized investment gains and losses, which result from sales, write-downs of securities, or changes in the fair value of trading securities, are reflected as revenues in the income statement and are determined on the basis of amortized value at date of sale for fixed maturity securities, and cost in regard to equity securities; such bases apply to the specific securities sold. Unrealized investment gains and losses on available for sale securities, net of any deferred income taxes, are recorded directly as a component of accumulated other comprehensive income in shareholders' equity. At June 30, 2014 , the Company and its subsidiaries had no non-income producing fixed maturity securities.

The following table reflects the composition of net investment income, net realized gains or losses, and the net change in unrealized investment gains or losses for each of the periods shown.

10


 
Quarters Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Investment income from:
 
 
 
 
 
 
 
Fixed maturity securities
$
74.2

 
$
74.7

 
$
149.7

 
$
150.5

Equity securities
11.1

 
4.6

 
18.5

 
8.3

Short-term investments
.2

 
.2

 
.4

 
.6

Other sources
.8

 
.5

 
1.3

 
1.4

Gross investment income
86.3

 
80.2

 
170.1

 
160.9

Investment expenses (a)
.9

 
1.3

 
1.8

 
2.6

Net investment income
$
85.4

 
$
78.8

 
$
168.2

 
$
158.2

 
 
 
 
 
 
 
 
Realized gains (losses) on:
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Gains
$
8.7

 
$
2.9

 
$
21.2

 
$
3.9

Losses
(.1
)
 
—

 
(.1
)
 
(.1
)
Net
8.6

 
2.9

 
21.1

 
3.8

 
 
 
 
 
 
 
 
Equity securities & other long-term investments:
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
Available for sale
39.2

 
134.1

 
219.0

 
134.1

Trading securities:
 
 
 
 
 
 
 
Sales
.4

 
—

 
.4

 
—

Changes in fair value
(.2
)
 
—

 
(.2
)
 
—

Other long-term investments
1.7

 
—

 
.8

 
3.7

Total
49.9

 
137.1

 
241.2

 
141.7

Income taxes (credits)
17.4

 
48.0

 
84.4

 
49.5

Net realized gains (losses)
$
32.4

 
$
89.1

 
$
156.8

 
$
92.1

 
 
 
 
 
 
 
 
Changes in unrealized investment gains (losses) on:
 
 
 
 
 
 
 
Fixed maturity securities
$
74.5

 
$
(238.3
)
 
$
138.1

 
$
(264.8
)
Less: Deferred income taxes (credits)
26.0

 
(83.1
)
 
48.2

 
(92.4
)
 
48.4

 
(155.1
)
 
89.9

 
(172.4
)
 
 
 
 
 
 
 
 
Equity securities & other long-term investments
20.6

 
(129.3
)
 
(127.9
)
 
1.8

Less: Deferred income taxes (credits)
7.2

 
(45.2
)
 
(44.7
)
 
.6

 
13.4

 
(84.0
)
 
(83.1
)
 
1.1

Net changes in unrealized investment gains (losses)
$
61.8

 
$
(239.2
)
 
$
6.7

 
$
(171.2
)
__________

(a)
Investment expenses consist of personnel costs and investment management and custody service fees, as well as interest incurred on funds held of $.1 and $.5 for the quarters ended June 30, 2014 and 2013 , and $.2 and $1.0 for the six months ended June 30, 2014 and 2013 respectively.

4. Pension Plans:

Prior to December 31, 2013 , the Company had two separate pension plans covering a portion of its work force. The plans were the Old Republic International Salaried Employees Retirement Plan (the Old Republic Plan) and the PMA Capital Corporation Pension Plan (the PMA Plan). Effective December 31, 2013 , the PMA Plan was merged into the Old Republic Plan. The PMA plan was frozen as of December 31, 2005 . The benefit levels in the Old Republic Plan were similarly frozen as of December 31, 2013 . Under the terms of the freeze, the plans remain closed to new participants and eligible employees retain all of the vested rights as of the effective date of the freeze, but additional benefits do not accrue thereafter. Plan assets are comprised principally of bonds, common stocks and short-term investments. Cash contributions of $3.8 and $4.2 were made to the pension plan in the second quarter and first half of 2014 , respectively, and additional cash contributions of $10.3 are expected to be made in the remaining portion of calendar year 2014 .

5. Information About Segments of Business:

The Company is engaged in the single business of insurance underwriting. It conducts its' operations through a number of regulated insurance company subsidiaries organized into three major segments, namely its' General Insurance Group (property and liability insurance), Title Insurance Group, and the Republic Financial Indemnity Group ("RFIG") Run-off Business. The results of a small life & accident insurance business are included with those of the

11


holding company parent and minor corporate services operations. Each of the Company's segments underwrites and services only those insurance coverages which may be written by it pursuant to state insurance regulations and corporate charter provisions. Segment results exclude net realized investment gains or losses and other-than-temporary impairments as these are aggregated in the consolidated totals. The contributions of Old Republic's insurance industry segments to consolidated totals are shown in the following table.

12


 
Quarters Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
General Insurance:
 
 
 
 
 
 
 
Including CCI run-off business:
 
 
 
 
 
 
Net premiums earned
$
679.7

 
$
621.4

 
$
1,343.0

 
$
1,229.4

Net investment income and other income
95.0

 
83.8

 
184.1

 
165.5

Total revenues before realized gains or losses
$
774.8

 
$
705.2

 
$
1,527.1

 
$
1,395.0

Income (loss) before taxes (credits) and
 
 
 
 
 
 
 
realized investment gains or losses (a)
$
(11.7
)
 
$
63.0

 
$
52.9

 
$
131.9

Income tax expense (credits) on above
$
(5.4
)
 
$
20.3

 
$
15.7

 
$
43.1

 
 
 
 
 
 
 
 
All CCI run-off business:
 
 
 
 
 
 
Net premiums earned
$
7.8

 
$
7.1

 
$
14.7

 
$
15.0

Net investment income and other income
.1

 
—

 
.2

 
.1

Total revenues before realized gains or losses
$
8.0

 
$
7.2

 
$
14.9

 
$
15.1

Income (loss) before taxes (credits) and
 
 
 
 
 
 
 
realized investment gains or losses
$
(71.4
)
 
$
—

 
$
(88.7
)
 
$
(7.2
)
Income tax expense (credits) on above
$
(25.0
)
 
$
—

 
$
(31.0
)
 
$
(2.5
)
 
 
 
 
 
 
 
 
Total excluding all CCI run-off business:
 
 
 
 
Net premiums earned
$
671.8

 
$
614.2

 
$
1,328.3

 
$
1,214.4

Net investment income and other income
94.9

 
83.7

 
183.8

 
165.4

Total revenues before realized gains or losses
$
766.8

 
$
697.9

 
$
1,512.1

 
$
1,379.8

Income (loss) before taxes (credits) and
 
 
 
 
 
 
 
realized investment gains or losses (a)
$
59.7

 
$
63.1

 
$
141.6

 
$
139.2

Income tax expense (credits) on above
$
19.5

 
$
20.4

 
$
46.7

 
$
45.7

 
 
 
 
 
 
 
 
Title Insurance:
 
 
 
 
 
 
 
Net premiums earned
$
323.8

 
$
393.1

 
$
642.2

 
$
748.3

Title, escrow and other fees
97.2

 
122.2

 
172.6

 
227.6

Sub-total
421.0

 
515.4

 
814.9

 
975.9

Net investment income and other income
8.1

 
7.2

 
16.1

 
14.4

Total revenues before realized gains or losses
$
429.2

 
$
522.6

 
$
831.0

 
$
990.3

Income (loss) before taxes (credits) and
 
 
 
 
 
 
 
realized investment gains or losses (a)
$
26.0

 
$
40.4

 
$
30.8

 
$
61.9

Income tax expense (credits) on above
$
9.3

 
$
14.6

 
$
11.3

 
$
22.2

 
 
 
 
 
 
 
 
RFIG Run-off Business:
 
 
 
 
 
 
 
Excluding CCI run-off business:
 
 
 
 
 
 
Net premiums earned
$
57.0

 
$
71.6

 
$
115.8

 
$
151.6

Net investment income and other income
6.0

 
9.3

 
14.2

 
18.4

Total revenues before realized gains or losses
$
63.1

 
$
81.0

 
$
130.1

 
$
170.0

Income (loss) before taxes (credits) and
 
 
 
 
 
 
 
realized investment gains or losses
$
37.1

 
$
55.5

 
$
74.0

 
$
42.4

Income tax expense (credits) on above
$
13.0

 
$
19.4

 
$
25.9

 
$
14.8

 
 
 
 
 
 
 
 
All CCI run-off business:
 
 
 
 
 
 
 
Net premiums earned
$
7.8

 
$
7.1

 
$
14.7

 
$
15.0

Net investment income and other income
.1

 
—

 
.2

 
.1

Total revenues before realized gains or losses
$
8.0

 
$
7.2

 
$
14.9

 
$
15.1

Income (loss) before taxes (credits) and
 
 
 
 
 
 
 
realized investment gains or losses
$
(71.4
)
 
$
—

 
$
(88.7
)
 
$
(7.2
)
Income tax expense (credits) on above
$
(25.0
)
 
$
—

 
$
(31.0
)
 
$
(2.5
)
 
 
 
 
 
 
 
 
Total RFIG run-off MI and CCI business:
 
 
 
 
Net premiums earned
$
64.8

 
$
78.8

 
$
130.5

 
$
166.6

Net investment income and other income
6.2

 
9.4

 
14.5

 
18.6

Total revenues before realized gains or losses
$
71.1

 
$
88.3

 
$
145.1

 
$
185.2

Income (loss) before taxes (credits) and
 
 
 
 
 
 
 
realized investment gains or losses
$
(34.2
)
 
$
55.4

 
$
(14.6
)
 
$
35.1

Income tax expense (credits) on above
$
(11.9
)
 
$
19.3

 
$
(5.1
)
 
$
12.3

 
 
 
 
 
 
 
 

13


 
Quarters Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Consolidated Revenues:
 
 
 
 
 
 
 
Total revenues of above Company segments
$
1,267.2

 
$
1,308.9

 
$
2,488.3

 
$
2,555.5

Other sources (b)
32.0

 
29.6

 
65.5

 
63.2

Consolidated net realized investment gains (losses)
49.9

 
137.1

 
241.2

 
141.7

Consolidation elimination adjustments
(15.2
)
 
(14.2
)
 
(30.5
)
 
(28.9
)
Consolidated revenues
$
1,333.9

 
$
1,461.5

 
$
2,764.5

 
$
2,731.5

 
 
 
 
 
 
 
 
Consolidated Income Before Taxes (Credits):
 
 
 
 
 
 
 
Total income before income taxes (credits)
 
 
 
 
 
 
 
and realized investment gains or losses of
 
 
 
 
 
 
 
above Company segments
$
51.4

 
$
158.9

 
$
157.7

 
$
236.3

Other sources - net (b)
(1.7
)
 
.1

 
(2.3
)
 
2.8

Consolidated net realized investment gains (losses)
49.9

 
137.1

 
241.2

 
141.7

Consolidated income before income
 
 
 
 
 
 
 
   taxes (credits)
$
99.6

 
$
296.3

 
$
396.6

 
$
380.8

 
 
 
 
 
 
 
 
Consolidated Income Tax Expense (Credits):
 
 
 
 
 
 
 
Total income tax expense (credits)
 
 
 
 
 
 
 
for above Company segments
$
16.9

 
$
54.3

 
$
53.0

 
$
80.3

Other sources - net (b)
(.8
)
 
—

 
(1.3
)
 
.7

Income tax expense (credits) on consolidated
 
 
 
 
 
 
 
net realized investment gains (losses)
17.4

 
48.0

 
84.4

 
49.5

Consolidated income tax expense (credits)
$
33.5

 
$
102.3

 
$
136.0

 
$
130.6



 
June 30,
 
December 31,
 
2014
 
2013
Consolidated Assets:
 
 
 
General Insurance
$
13,952.5

 
$
13,276.6

Title Insurance
1,178.3

 
1,185.5

RFIG Run-off Business
1,916.4

 
1,822.3

Total assets for the above company segments
17,047.3

 
16,284.5

Other assets (b)
589.8

 
549.8

Consolidation elimination adjustments
(453.1
)
 
(299.9
)
Consolidated assets
$
17,183.9

 
$
16,534.4

__________

(a)
Income (loss) before taxes (credits) is reported net of interest charges on intercompany financing arrangements with Old Republic's holding company parent for the following segments: General - $8.1 and $16.3 compared to $7.1 and $14.2 for the quarter and six months ended June 30, 2014 and 2013 , respectively, and Title - $1.9 for both quarters ended June 30, 2014 and 2013 and $3.9 for both six month periods ended June 30, 2014 and 2013 .
(b)
Represents amounts for Old Republic's holding company parent, minor corporate services subsidiaries, and a small life and accident insurance operation.

The material increases in mortgage guaranty insurance claims and loss payments that began in 2007 gradually depleted Republic Mortgage Insurance Company's ("RMIC") statutory capital base and forced it to discontinue writing new business. The insurance laws of 16 jurisdictions, including RMIC's and its affiliate company, Republic Mortgage Insurance Company of North Carolina's ("RMICNC") domiciliary state of North Carolina, require a mortgage insurer to maintain a minimum amount of statutory capital relative to risk in force (or a similar measure) in order to continue to write new business. The formulations currently allow for a maximum risk-to-capital ratio of 25 to 1 , or alternatively stated, a "minimum policyholder position" ("MPP") of one-twenty-fifth of the total risk in force. The failure to maintain the prescribed minimum capital level in a particular state generally requires a mortgage insurer to immediately stop writing new business until it reestablishes the required level of capital or receives a waiver of the requirement from a state's insurance regulatory authority. RMIC breached the minimum capital requirement during the third quarter of 2010. RMIC had previously requested and, subsequently received waivers or forbearance of the minimum policyholder position requirements from the regulatory authorities in substantially all affected states. Following several brief extensions, the waiver from its domiciliary state of North Carolina expired on August 31, 2011, and RMIC and its sister company, RMICNC, discontinued writing new business in all states and limited themselves to servicing the run-off of their existing business. They were placed under the North Carolina Department of Insurance's ("NCDOI") administrative supervision the following year and ordered to defer the payment of 50% of all settled claims. The rate of deferred payment obligations ("DPOs") was subsequently reduced to 40% later that year by the NCDOI.

14


 
On July 1, 2014, the NCDOI issued a Final Order approving an Amended and Restated Corrective Plan (the "Amended Plan") submitted jointly on April 16, 2014, by RMIC and RMICNC. Under the Amended Plan, RMIC and RMICNC will pay 100% of their DPOs accrued as of June 30, 2014 and will settle all subsequent valid claims entirely in cash, without establishing any DPOs. In anticipation of receiving this Final Order, ORI contributed $125.0 in cash and securities to RMIC in June 2014. Both subsidiaries will remain under the supervision of the NCDOI as they continue to operate in run-off mode. The approval of the Amended Plan notwithstanding, the NCDOI retains its regulatory supervisory powers to review and amend the terms of the Amended Plan in the future as circumstances may warrant.

In mid-July 2014, in furtherance of the Final Order, RMIC and RMICNC processed payments of their accumulated DPO balances of approximately $657 relating to fully settled claims charged to periods extending between January 1, 2012 and June 30, 2014. These aggregate payments are reflected as reserves for losses and loss expenses in the accompanying financial statements, rather than general liabilities as of June 30, 2014 as reflected in regulatory financial statements at that date. The funds required for payment of such DPO liabilities are reflected as short-term investments in the June 30, 2014 balance sheet.

6. Commitments and Contingent Liabilities:

Legal proceedings against the Company and its subsidiaries routinely arise in the normal course of business and usually pertain to claim matters related to insurance policies and contracts issued by its insurance subsidiaries. Other, non-routine legal proceedings which may prove to be material to the Company or a subsidiary are discussed below.

A purported class action lawsuit is pending against the Company's principal title insurance subsidiary, Old Republic National Title Insurance Company ("ORNTIC"), in a federal district court in Pennsylvania ( Markocki et al . v. ORNTIC , U.S. District Court, Eastern District, Pennsylvania, filed June 8, 2006). The plaintiffs allege that ORNTIC failed to give consumers reissue and/or refinance credits on the premiums charged for title insurance covering mortgage refinancing transactions, as required by filed rate schedules. The suit also alleges violations of the federal Real Estate Settlement Procedures Act ("RESPA"). A class has been certified in the suit. ORNTIC is challenging the certification based on more recent case precedents.

On December 19, 2008, Old Republic Insurance Company and Republic Insured Credit Services, Inc., ("Old Republic") filed suit against Countrywide Bank FSB, Countrywide Home Loans, Inc. ("Countrywide") and Bank of New York Mellon, BNY Mellon Trust of Delaware ("BNYM") in the Circuit Court, Cook County, Illinois ( Old Republic Insurance Company, et al. v. Countrywide Bank FSB, et al. ) seeking rescission of various credit indemnity policies issued to insure home equity loans and home equity lines of credit which Countrywide had securitized or held for its own account, a declaratory judgment and money damages based upon systemic material misrepresentations and fraud by Countrywide as to the credit characteristics of the loans or by the borrowers in their loan applications. Countrywide filed a counterclaim alleging a breach of contract, bad faith and seeking a declaratory judgment challenging the factual and procedural bases that Old Republic had relied upon to deny or rescind coverage for individual defaulted loans under those policies, as well as unspecified compensatory and punitive damages. The Court ruled that Countrywide does not have standing to counterclaim with respect to the policies insuring the securitized loans because those policies were issued to BNYM. In response, Countrywide and BNYM jointly filed a motion asking the Court to allow an amended counterclaim in which BNYM would raise substantially similar allegations as those raised by Countrywide and make substantially similar requests but with respect to the policies issued to BNYM. The Court dismissed their motion, with leave to re-plead the counterclaim. BNYM's subsequent attempt to re-plead was granted by the Court.

On November 3, 2010, Bank of America, N.A. ("B of A") filed suit against Old Republic Insurance Company ("ORIC") in the U.S. District Court for the Western District of North Carolina ( Bank of America, N.A. v. Old Republic Insurance Company ) alleging breach of contract, breach of the duty of good faith and fair dealing and bad faith with respect to ORIC's handling of certain claims under a policy of credit indemnity insurance issued to B of A. The policy is not related to those issued to Countrywide, which are the subject of the above-noted separate litigation. The B of A suit seeks a declaratory judgment with respect to the interpretation of certain policy terms, B of A's compliance with certain terms and conditions of the policy, and the propriety of certain positions and procedures taken by ORIC in response to claims filed by B of A. The suit also seeks unspecified money damages, pre and post judgment interest and punitive damages. On January 23, 2012, ORIC filed a counterclaim seeking damages based on B of A's alleged interference with ORIC's subrogation rights. Effective July 1, 2014, the parties entered a confidential settlement agreement. Upon completion of conditions subsequently set out in that agreement, the parties filed a stipulation of voluntary dismissal with prejudice of their respective claims in the lawsuit on July 29, 2014.

On December 31, 2009 , two of the Company's mortgage insurance subsidiaries, Republic Mortgage Insurance Company and Republic Mortgage Insurance Company of North Carolina (together "RMIC") filed a Complaint for Declaratory Judgment in the Supreme Court of the State of New York, County of New York, against Countrywide Financial Corporation, Countrywide Home Loans, Inc., The Bank of New York Mellon Trust Company, N.A., BAC Home Loans Servicing, LP, and Bank of America N.A. as successor in interest to Countrywide Bank, N.A. (together "Countrywide") ( Republic Mortgage Insurance Company, et al v. Countrywide Financial Corporation, et al) . The suit relates to five mortgage insurance master policies (the “Policies”) issued by RMIC to Countrywide or to the Bank of New York Mellon Trust Company as co-trustee for trusts containing securitized mortgage loans that were originated or purchased by Countrywide. RMIC has rescinded its mortgage insurance coverage on over 1,500 of the loans originally covered under the Policies based upon material misrepresentations of the borrowers in their loan applications or the negligence of Countrywide in its loan underwriting practices or procedures. Each of the coverage rescissions occurred after a borrower

15


had defaulted and RMIC reviewed the claim and loan file submitted by Countrywide. The suit seeks the Court's review and interpretation of the Policies' incontestability provisions and its validation of RMIC's investigation procedures with respect to the claims and underlying loan files.

On January 29, 2010, in response to RMIC's suit, Countrywide served RMIC with a demand for arbitration under the arbitration clauses of the same Policies. The demand raises largely the same issues as those raised in RMIC's suit against Countrywide, but from Countrywide's perspective, as well as Countrywide's and RMIC's compliance with the terms, provisions and conditions of the Policies. The demand includes a prayer for punitive, compensatory and consequential damages. RMIC filed a motion to stay the arbitration, and Countrywide filed a motion to dismiss RMIC's lawsuit and to compel the arbitration. On July 26, 2010, the Court granted Countrywide's motion, ordering the matters be submitted to arbitration and dismissing the lawsuit. The arbitration is proceeding.

On December 30, 2011 and on January 4, 2013, purported class action suits alleging RESPA violations were filed in the Federal District Court, for the Eastern District of Pennsylvania targeting RMIC, other mortgage guaranty insurance companies, PNC Financial Services Group (as successor to National City Bank) and HSBC Bank USA, N.A., and their wholly-owned captive insurance subsidiaries. ( White, Hightower, et al. v. PNC Financial Services Group (as successor to National City Bank) et al. ), ( Ba, Chip, et al. v. HSBC Bank USA, N.A., et al. ). The lawsuits are two of twelve against various lenders, their captive reinsurers and the mortgage insurers, filed by the same law firms, all of which were substantially identical in alleging that the mortgage guaranty insurers had reinsurance arrangements with the defendant banks' captive insurance subsidiaries under which payments were made in violation of the anti-kickback and fee splitting prohibitions of Sections 8(a) and 8(b) of RESPA. Ten of the twelve suits have been dismissed. The remaining suits seek unspecified damages, costs, fees and the return of the allegedly improper payments. A class has not been certified in either suit and RMIC has filed motions to dismiss the cases.

On May 16, 2013, Bank of America, N.A. ("B of A") filed a demand for arbitration with the American Arbitration Association against both Republic Mortgage Insurance Company and Republic Mortgage Insurance Company of North Carolina (together, "RMIC") under the arbitration provisions of the RMIC Master Policy of mortgage guaranty insurance issued to B of A. The demand relates to RMIC's denials of certain claims and rescissions of coverage as to other claims. B of A alleges RMIC's actions were in breach of contract, in breach of RMIC's duty of good faith and fair dealing and in bad faith. The allegations are substantially similar to those raised by B of A's affiliates, Countrywide Financial Corporation and Countrywide Home Loans, Inc. in their arbitration demand against RMIC. B of A is a plaintiff in that proceeding as well, in its capacity as successor in interest to Countrywide Bank, N.A. B of A's demand requests a declaratory judgment with respect to the interpretation of certain policy provisions, B of A's compliance with certain terms and conditions of the policy, and the propriety of certain coverage positions and claims administration procedures of RMIC. The demand also seeks unspecified money damages, punitive, compensatory and consequential damages, interest, attorneys' fees and costs. The arbitration is proceeding.

Under GAAP, an estimated loss is accrued only if the loss is probable and reasonably estimable. The Company and its subsidiaries have defended and intend to continue defending vigorously against each of the aforementioned actions. The Company does not believe it probable that any of these actions will have a material adverse effect on its consolidated financial position, results of operations, or cash flows, though there can be no assurance in those regards. The Company has made an estimate of its potential liability under certain of these lawsuits, the counterclaim, and the arbitration, all of which seek unquantified damages, attorneys' fees, and expenses. Because of the uncertainty of the ultimate outcomes of the aforementioned disputes, additional costs may arise in future periods beyond the Company's current reserves. It is also unclear what effect, if any, the run-off operations of RMIC and its limited capital will have in the actions against it.

7. Debt:

Consolidated debt of Old Republic and its subsidiaries is summarized below:
 
June 30, 2014
 
December 31, 2013
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
3.75% Convertible Senior Notes due 2018
$
550.0

 
$
690.2

 
$
550.0

 
$
684.1

ESSOP debt with an average yield of 3.66%
 
 
 
 
 
 
 
and 3.69%, respectively
15.0

 
15.0

 
18.0

 
18.0

Other miscellaneous debt
1.1

 
1.1

 
1.2

 
1.2

Total debt
$
566.2

 
$
706.4

 
$
569.2

 
$
703.4


The Company completed a public offering of $550.0 aggregate principal amount of Convertible Senior Notes in early March, 2011. The notes bear interest at a rate of 3.75% per year, mature on March 15, 2018 , and are convertible at any time prior to maturity by the holder into 64.3407 shares (subject to periodic adjustment under certain circumstances) of common stock per one thousand dollar note.

The Company's 3.75% Convertible Senior Notes ("the Notes") contain provisions defining certain events of default, among them a court ordered proceeding due to the insolvency of a Significant Subsidiary. The Notes define Significant Subsidiary in accordance with the paragraph (w) of Rule 1-02 of the SEC's Regulation S-X. The Company's flagship

16


mortgage guaranty insurance carrier, RMIC qualifies as a Significant Subsidiary for purposes of the Notes. If RMIC were to become statutorily impaired, its insolvency could trigger a receivership proceeding which, in turn could ultimately result in an event of default. If this were to occur, the outstanding principal of the Notes could become immediately due and payable. Management believes the Final Order by the North Carolina Department of Insurance to RMIC has precluded such an event of default from occurring in the foreseeable future. Moreover, RMIC is expected to be increasingly less significant after payment of the DPO balance and as its run-off book extinguishes itself. While Old Republic believes that it will have access to the capital markets or otherwise mitigate an event of default under the Notes, there is no assurance that it would be able to do so under stressful capital market conditions.

At June 30, 2014 , the Company had sufficient liquid resources available to redeem a substantial portion of the 3.75% Notes. In the circumstances, the NCDOI could at a later date assume control of RMIC and thus possibly create an event of default for ORI if RMIC were still deemed to be a significant subsidiary at that time. At June 30, 2014, RMIC was statutorily solvent and in management's opinion such regulatory assumption of control does not appear to be imminent.

Fair Value Measurements - The Company utilizes indicative market prices, which incorporate recent actual market transactions and current bid/ask quotations to estimate the fair value of outstanding debt securities that are classified within Level 2 of the fair value hierarchy as presented below. The Company uses an internally generated interest yield market matrix table, which incorporates maturity, coupon rate, credit quality, structure and current market conditions to estimate the fair value of its outstanding debt securities that are classified within Level 3.

The following table shows a summary of the carrying value and fair value of financial liabilities segregated among the various input levels described in Note 3 above:
 
 
Carrying
 
Fair
 
 
 
 
Value
 
Value
 
Level 1
 
Level 2
 
Level 3
Financial Liabilities:
 
 
 
 
 
 
 
 
 
 
Debt:
 
 
 
 
 
 
 
 
 
 
June 30, 2014
 
$
566.2

 
$
706.4

 
$
—

 
$
690.2

 
$
16.2

December 31, 2013
 
$
569.2

 
$
703.4

 
$
—

 
$
684.1

 
$
19.2


8. Income Taxes:

Tax positions taken or expected to be taken in a tax return by the Company are recognized in the financial statements when it is more likely than not that the position would be sustained upon examination by tax authorities. To the best of management's knowledge, there are no tax uncertainties that are expected to result in significant increases or decreases to unrecognized tax benefits within the next twelve month period. The Company views its income tax exposures as primarily consisting of timing differences whereby the ultimate deductibility of a taxable amount is highly certain but the timing of its deductibility is uncertain. Such differences relate principally to the timing of deductions for loss and premium reserves. As in prior examinations, the Internal Revenue Service ("IRS") could assert that claim reserve deductions were overstated thereby reducing the Company's statutory taxable income in any particular year. The Company believes that it establishes its reserves fairly and consistently at each balance sheet date, and that it would succeed in defending its tax position in these regards. Because of the impact of deferred tax accounting, the possible accelerated payment of tax to the IRS would not necessarily affect the annual effective tax rate. During 2013, the IRS completed an examination of the Company's consolidated Federal income tax returns for the years 2005 through 2010, which produced no material change to the Company's net income. The Company classifies interest and penalties as income tax expense in the consolidated statement of income.


17


OLD REPUBLIC INTERNATIONAL CORPORATION
MANAGEMENT ANAYLSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS
Six Months Ended June 30, 2014 and 2013
($ in Millions, Except Share Data)
OVERVIEW

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 three major regulatory segments, namely, its General (property and liability), Title, and the RFIG (mortgage guaranty and consumer credit indemnity) Run-off Business. A small life and accident insurance business, accounting for 1.3% of consolidated operating revenues for the six months ended June 30, 2014 and 1.3% of consolidated assets as of that date, is included within the corporate and 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 Republic utilizes GAAP largely to comply with the financial reporting requirements of the Securities and Exchange Commission ("SEC"). From time to time the FASB and the SEC issue various releases most of which require additional financial statement disclosures and provide related application guidance.

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(a) to the consolidated financial statements included in Old Republic's 2013 Annual Report on Form 10-K.

The insurance business is distinguished from most others in that the prices (premiums) charged for various insurance products are set without certainty of the ultimate benefit and claim costs that will emerge or be incurred, often many years after issuance and expiration of a policy. This basic fact casts Old Republic as a risk-taking enterprise managed for the long run. Management therefore conducts the business with a primary focus on achieving favorable underwriting results over cycles, and on the maintenance of financial soundness in support of the insurance subsidiaries' long-term obligations to insurance beneficiaries. To achieve these objectives, adherence to insurance risk management principles is stressed, and asset diversification and quality are emphasized.

In addition to income arising from Old Republic's basic underwriting and related services functions, significant investment income is earned from invested funds generated by those functions and from shareholders' capital. Investment management aims for stability of income from interest and dividends, protection of capital, and sufficient liquidity to meet insurance underwriting and other obligations as they become payable in the future. Securities trading and the realization of capital gains are not objectives. The investment philosophy is therefore best characterized as emphasizing value, credit quality, and relatively long-term holding periods. The Company's ability to hold both fixed maturity and equity securities for long periods of time is in turn enabled by the scheduling of maturities in contemplation of an appropriate matching of assets and liabilities.

In light of the above factors, the Company's affairs are necessarily managed for the long run and without significant regard to the arbitrary strictures of quarterly or even annual reporting periods that American industry must observe. In Old Republic's view, such short reporting time frames do not comport well with the long-term nature of much of its business. Management believes that the Company's operating results and financial condition can best be evaluated by observing underwriting and overall operating performance trends over succeeding five to ten year intervals. Such extended periods can encompass one or two economic and/or underwriting cycles, and thereby provide appropriate time frames for such cycles to run their course and for reserved claim costs to be quantified with greater finality and effect.

This management analysis should be read in conjunction with the consolidated financial statements and the footnotes appended to them.


18


EXECUTIVE SUMMARY

Pretax operating income reflected basically stable earnings in General Insurance and continued profitability in the run-off mortgage guaranty (“MI”) line. Significantly higher case settlement and protracted litigation costs in the consumer credit indemnity (“CCI”) portion of the run-off business, however, negated fully the MI profit contribution. While Title Insurance operations were reasonably profitable, transitory weaknesses in real estate and mortgage markets halted the fast paced earnings progress of the past three years. Consolidated net income for both 2014 periods was enhanced by the realization of substantial gains from sales of investment securities.

The major components of consolidated results and related data are summarized in the following table:
Financial Highlights
 
 
Quarters Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Operating revenues:
 
 
 
 
 
 
 
 
 
 
 
 
General insurance
 
$
766.8

 
$
697.9

 
$
1,512.1

 
$
1,379.8

Title insurance
 
 
429.2

 
 
522.6

 
 
831.0

 
 
990.3

Corporate and other
 
 
16.7

 
 
15.4

 
 
34.9

 
 
34.2

Subtotal
 
 
1,212.8

 
 
1,236.0

 
 
2,378.2

 
 
2,404.5

RFIG run-off business
 
 
71.1

 
 
88.3

 
 
145.1

 
 
185.2

Total
 
$
1,283.9

 
$
1,324.3

 
$
2,523.3

 
$
2,589.8

Pretax operating income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
General insurance
 
$
59.7

 
$
63.1

 
$
141.6

 
$
139.2

Title insurance
 
 
26.0

 
 
40.4

 
 
30.8

 
 
61.9

Corporate and other
 
 
(1.7
)
 
 
0.1

 
 
(2.3
)
 
 
2.8

Subtotal
 
 
83.9

 
 
103.7

 
 
170.1

 
 
203.9

RFIG run-off business
 
 
(34.2
)
 
 
55.4

 
 
(14.6
)
 
 
35.1

Total
 
 
49.7

 
 
159.1

 
 
155.4

 
 
239.1

Realized investment gains (losses):
 
 
 
 
 
 
 
 
 
 
 
 
From sales and fair value adjustments
 
 
49.9

 
 
137.1

 
 
241.2

 
 
141.7

From impairments
 
 
—

 
 
—

 
 
—

 
 
—

Net realized investment gains (losses)
 
 
49.9

 
 
137.1

 
 
241.2

 
 
141.7

Consolidated pretax income (loss)
 
 
99.6

 
 
296.3

 
 
396.6

 
 
380.8

Income taxes (credits)
 
 
33.5

 
 
102.3

 
 
136.0

 
 
130.6

Net income (loss)
 
$
66.1

 
$
193.9

 
$
260.5

 
$
250.2

Components of diluted earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
Net operating income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
General insurance
 
$
0.14

 
$
0.15

 
$
0.32

 
$
0.32

Title insurance
 
 
0.06

 
 
0.09

 
 
0.07

 
 
0.14

Corporate and other
 
 
0.01

 
 
0.01

 
 
0.02

 
 
0.03

Subtotal
 
 
0.21

 
 
0.25

 
 
0.41

 
 
0.49

RFIG run-off business
 
 
(0.08
)
 
 
0.12

 
 
(0.03
)
 
 
0.08

Total
 
 
0.13

 
 
0.37

 
 
0.38

 
 
0.57

Net realized investment gains (losses)
 
 
0.11

 
 
0.30

 
 
0.53

 
 
0.31

Net income (loss)
 
$
0.24

 
$
0.67

 
$
0.91

 
$
0.88

Cash dividends paid per share
 
$
0.1825

 
$
0.1800

 
$
0.3650

 
$
0.3600

Ending book value per share
 
 
 
 
 
 
 
$
15.29

 
$
13.95


The preceding table shows both operating and net income to highlight the effects of realized investment gain or loss recognition on period-to-period earnings comparisons. Management uses net operating income, a non-GAAP financial measure, to evaluate and better explain operating performance, believing that this measure enhances an understanding of Old Republic’s core business results. Operating income, however, does not replace net income determined in accordance with GAAP as a measure of total profitability.

The recognition of realized investment gains or losses can be highly discretionary and arbitrary due to such factors as the timing of individual securities sales, recording of estimated losses from write-downs of impaired securities, tax-planning considerations, and changes in investment management judgments relative to the direction of securities markets or the future prospects of individual investees or industry sectors. Since late 2013, asset management operations have, in part, been oriented toward an enhancement of income from interest and dividends. To a large extent, this strategy has led to sales of non-income producing or low-yielding securities. Proceeds from the sales have largely been reinvested in higher yielding common shares of American companies with distinguished long-term records of earnings and dividend growth.

19


General Insurance Results - The table below shows the major components of general insurance profitability.
 
 
General Insurance Group
 
 
Quarters Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
Change
 
2014
 
2013
 
Change
A. Prior to reclassification/Including CCI run-off business:
 
 
 
 
 
 
 
 
Net premiums earned
 
$
679.7

 
$
621.4

 
9.4
 %
 
$
1,343.0

 
$
1,229.4

 
9.2
 %
Net investment income
 
 
69.9

 
 
61.6

 
13.6

 
 
136.1

 
 
123.9

 
9.8

Benefits and claim costs
 
 
597.8

 
 
462.7

 
29.2

 
 
1,098.7

 
 
909.3

 
20.8

Pretax operating income (loss)
 
$
(11.7
)
 
$
63.0

 
(118.6
)%
 
$
52.9

 
$
131.9

 
(59.9
)%
Claim ratio
 
87.9
%
 
74.5
%
 
 
 
81.8
%
 
74.0
%
 
 
Expense ratio
 
22.8

 
24.1

 
 
 
23.1

 
24.1

 
 
Composite ratio
 
110.7
%
 
98.6
%
 
 
 
104.9
%
 
98.1
%
 
 
B. All CCI run-off business reclassification(*):
 
 
 
 
 
 
 
 
Net premiums earned
 
$
7.8

 
$
7.1

 
9.6
%
 
$
14.7

 
$
15.0

 
(2.0
)%
Net investment income
 
 
0.1

 
 
—

 
53.4
%
 
 
0.2

 
 
0.1

 
67.9
 %
Benefits and claim costs
 
 
78.8

 
 
6.6

 
     N/M
 
 
120.3

 
 
21.7

 
     N/M
Pretax operating income (loss)
 
$
(71.4
)
 
$
—

 
     N/M
 
$
(88.7
)
 
$
(7.2
)
 
     N/M
Claim ratio
 
     N/M
 
93.0
%
 
 
 
     N/M
 
145.0
%
 
 
Expense ratio
 
7.7
%
 
9.4

 
 
 
9.1
%
 
4.4

 
 
Composite ratio
 
     N/M
 
102.4
%
 
 
 
     N/M
 
149.4
%
 
 
C. After reclassification/Total Excluding all CCI run-off business:
 
 
 
 
 
 
 
 
Net premiums earned
 
$
671.8

 
$
614.2

 
9.4
 %
 
$
1,328.3

 
$
1,214.4

 
9.4
%
Net investment income
 
 
69.8

 
 
61.5

 
13.5

 
 
135.8

 
 
123.7

 
9.8

Benefits and claim costs
 
 
518.9

 
 
456.1

 
13.8

 
 
996.3

 
 
887.5

 
12.3

Pretax operating income (loss)
 
$
59.7

 
$
63.1

 
(5.3
)%
 
$
141.6

 
$
139.2

 
1.8
%
Claim ratio
 
77.2
%
 
74.3
%
 
 
 
75.0
%
 
73.1
%
 
 
Expense ratio
 
23.0

 
24.2

 
 
 
23.2

 
24.3

 
 
Composite ratio
 
100.2
%
 
98.5
%
 
 
 
98.2
%
 
97.4
%
 
 
__________________

(*) In connection with the run-off mortgage guaranty ("MI") and consumer credit indemnity ("CCI") combination, $(70.8) and $(87.3) of pretax operating income (losses) for the second quarter and first half of 2014, and $.6 and $(6.4) of pretax operating income (losses) for the second quarter and first half of 2013, are retained by certain general insurance companies pursuant to various quota share and stop loss reinsurance agreements. All of these amounts, however, have been reclassified and are included for segment reporting purposes such that section (B) in the above table incorporates 100% of the CCI run-off business results.

Consolidated general insurance operations, exclusive of the CCI run-off line, produced reasonably stable pretax operating income from combined underwriting/service and net investment income. Growth in net premiums earned was moderately higher than the 8.1% gain registered for all of 2013. The continuing benefits of rate improvements and new business production accounted for greater premium revenues in 2014.

Income from insurance underwriting and related services was lower for both the second quarter and year-to-date 2014 periods. Claim costs remained under upward pressure for both workers' compensation and general liability coverages while the expense ratio trended down slightly. Net investment income benefitted from a larger invested asset base and the higher yields obtained from a greater commitment to equity securities holdings.


20


Title Insurance Results - Earnings remained positive in Old Republic's title insurance business despite a fairly significant downturn in real estate and mortgage transactions during the past twelve months or so. The following table shows the basic operating trends evidencing these changed market dynamics.
 
 
Title Insurance Group
 
 
Quarters Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
Change
 
2014
 
2013
 
Change
Net premiums and fees earned
 
$
421.0

 
$
515.4

 
(18.3
)%
 
$
814.9

 
$
975.9

 
(16.5
)%
Net investment income
 
 
7.4

 
 
6.3

 
16.7

 
 
14.5

 
 
12.9

 
12.8

Claim costs
 
 
25.4

 
 
35.2

 
(27.7
)
 
 
49.2

 
 
66.7

 
(26.2
)
Pretax operating income (loss)
 
$
26.0

 
$
40.4

 
(35.6
)%
 
$
30.8

 
$
61.9

 
(50.3
)%
Claim ratio
 
6.0
%
 
6.8
%
 
 
 
6.0
%
 
6.8
%
 
 
Expense ratio
 
89.0

 
86.2

 
 
 
91.4

 
87.7

 
 
Composite ratio
 
95.0
%
 
93.0
%
 
 
 
97.4
%
 
94.5
%
 
 

This year’s decline in title insurance premiums and fees mainly reflects a significant drop in refinance transactions since mid-year 2013. The impact of lower refinance activity was magnified by adverse winter weather conditions which likely deterred consumer spending, and by a rise in mortgage interest rates which reduced mortgage extensions. These unfavorable factors were partially offset by the Company’s continuing market share gains contributing to business production. Underwriting-wise the claim ratio was lower as claim frequency and severity continued to abate. The expense ratio rose as operating costs were down by a relatively lower percentage than the revenue reduction.

RFIG Run-off Business Results - The table below reflects RFIG’s comparative results before and after the combination of run-off MI and CCI coverages within the single run-off business segment instituted in 2012.
 
RFIG Run-off Business
 
Quarters Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
Change
 
2014
 
2013
 
Change
A. Prior to reclassification/Excluding CCI run-off business:
 
 
 
 
 
 
 
 
Net premiums earned
 
$
57.0

 
$
71.6

 
(20.5
)%
 
$
115.8

 
$
151.6

 
(23.6
)%
Net investment income
 
 
6.0

 
 
9.3

 
(35.0
)
 
 
14.2

 
 
18.4

 
(22.7
)
Claim costs
 
 
20.3

 
 
19.7

 
3.2

 
 
43.2

 
 
115.5

 
(62.5
)
Pretax operating income (loss)
 
$
37.1

 
$
55.5

 
(33.0
)%
 
$
74.0

 
$
42.4

 
74.3
 %
Claim ratio
 
35.7
%
 
27.5
%
 
 
 
37.4
%
 
76.2
%
 
 
Expense ratio
 
9.8

 
8.1

 
 
 
11.0

 
8.0

 
 
Composite ratio
 
45.5
%
 
35.6
%
 
 
 
48.4
%
 
84.2
%
 
 
B. CCI run-off business reclassification(*):
 
 
 
 
 
 
 
 
Net premiums earned
 
$
7.8

 
$
7.1

 
9.6
%
 
$
14.7

 
$
15.0

 
(2.0
)%
Net investment income
 
 
0.1

 
 
—

 
53.4
%
 
 
0.2

 
 
0.1

 
67.9
 %
Benefits and claim costs
 
 
78.8

 
 
6.6

 
     N/M
 
 
102.3

 
 
21.7

 
     N/M
Pretax operating income (loss)
 
$
(71.4
)
 
$
—

 
     N/M
 
$
(88.7
)
 
$
(7.2
)
 
     N/M
Claim ratio
 
     N/M
 
93.0
%
 
 
 
     N/M
 
145.0
%
 
 
Expense ratio
 
7.7
%
 
9.4

 
 
 
9.1
%
 
4.4

 
 
Composite ratio
 
     N/M
 
102.4
%
 
 
 
     N/M
 
149.4
%
 
 
C. After reclassification/Total RFIG run-off MI and CCI business:
 
 
 
 
 
 
 
 
Net premiums earned
 
$
64.8

 
$
78.8

 
(17.7
)%
 
$
130.5

 
$
166.6

 
(21.7
)%
Net investment income
 
 
6.2

 
 
9.4

 
(34.2
)
 
 
14.5

 
 
18.6

 
(21.9
)
Benefits and claim costs
 
 
99.2

 
 
26.4

 
      N/M
 
 
145.6

 
 
137.2

 
6.1

Pretax operating income (loss)
 
$
(34.2
)
 
$
55.4

 
(161.9
)%
 
$
(14.6
)
 
$
35.1

 
(141.7
)%
Claim ratio
 
152.9
%
 
33.5
%
 
 
 
111.6
%
 
82.4
%
 
 
Expense ratio
 
9.5

 
8.3

 
 
 
10.8

 
7.7

 
 
Composite ratio
 
162.4
%
 
41.8
%
 
 
 
122.4
%
 
90.1
%
 
 
__________________

(*) In connection with the run-off mortgage guaranty ("MI") and consumer credit indemnity ("CCI") combination, $(70.8) and $(87.3) of pretax operating income (losses) for the second quarter and first half of 2014, and $.6 and $(6.4) of pretax

21


operating income (losses) for the second quarter and first half of 2013, are retained by certain general insurance companies pursuant to various quota share and stop loss reinsurance agreements. All of these amounts, however, have been reclassified and are included for segment reporting purposes such that section (B) in the above table incorporates 100% of the CCI run-off business results.

Consistent with a run-off operating mode, the MI and CCI lines posted further declines in quarterly earned premiums. Investment income dropped as well due to the pervasively low yield environment and a generally declining invested asset base over time. Downtrends in MI investment income were further accentuated as a greater proportion of investable assets were allocated to short-term fixed income securities. This higher liquidity was provided to fund the July 2014 processing of approximately $657 of payments for previously deferred claim settlement reserves being liquidated following a recent regulatory approval. These payments, which have no income statement effect, will reduce claim reserves in this year's third quarter and thus lessen balance sheet reserve leverage and the financial significance of the MI subsidiaries.

The resumed profitability of mortgage guaranty operations since last year’s second quarter is largely due to much reduced claim provisions and resulting costs. Key factors driving lower claim costs relate mostly to the higher rates at which previously reported defaults are cured or otherwise resolved without payment, as well as gradually improving trends in home prices, foreclosures, and real estate activity in general. Since year-end 2012, these factors have led to favorable developments of prior year-end claim reserves. For the second quarters of 2014 and 2013, favorable loss developments resulted in a lowering of claim ratios by 87.0 and 133.2 percentage points, respectively. For the first half of each year, the related loss ratio reductions amounted to 105.8 and 97.8 percentage points, respectively. The moderate increases in posted expense ratios for both 2014 periods reflect a continuing drop in earned premiums and charges taken relative to the MI subsidiaries’ attempted recapitalization efforts which were terminated earlier this year.

CCI results deteriorated significantly in 2014 as ongoing claim litigation costs burdened this portion of the RFIG run-off business. These costs rose materially in this year’s second quarter as greater net reserve provisions were made to cover the recent settlement of a litigated case and the additional costs of ongoing claim litigation with a major lending institution.

Corporate and Other Operations - The combination of a small life and accident insurance business and the net costs associated with the parent holding company and its internal services subsidiaries usually produce highly variable results. Earnings variations posted by these relatively minor elements of Old Republic's business stem from volatility inherent to the small scale of life and accident insurance operations, and net interest costs pertaining to external and intra-system financing arrangements. The interplay of these various operating elements is reflected in the following table:
 
 
Corporate and Other Operations
 
 
Quarters Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
Change
 
2014
 
2013
 
Change
Life & accident premiums earned
 
$
14.8

 
$
13.7

 
7.9
 %
 
$
31.5

 
$
30.8

 
2.4
 %
Net investment income
 
 
1.9

 
 
1.4

 
27.8

 
 
3.2

 
 
2.9

 
13.2

Other income
 
 
—

 
 
0.2

 
(87.9
)
 
 
—

 
 
0.5

 
(83.7
)
Benefits and claim costs
 
 
11.5

 
 
7.6

 
51.7

 
 
23.9

 
 
17.3

 
38.0

Insurance expenses
 
 
6.4

 
 
7.0

 
(8.8
)
 
 
14.1

 
 
14.7

 
(3.9
)
Corporate, interest, and other expenses-net
 
 
0.5

 
 
0.5

 
(6.5
)%
 
 
(0.7
)
 
 
(0.5
)
 
(26.1
)
Pretax operating income (loss)
 
$
(1.7
)
 
$
0.1

 
     N/M
 
$
(2.3
)
 
$
2.8

 
(184.1
)%


22


Cash, Invested Assets, and Shareholders' Equity - The table below reflects Old Republic’s consolidated cash and invested assets as well as shareholders’ equity account at the dates shown:
 
Cash, Invested Assets, and Shareholders' Equity
 
 
 
 
 
 
 
% Change
 
June 30,
 
Dec. 31,
 
June 30,
 
June '14/
 
June '14/
 
2014
 
2013
 
2013
 
Dec. '13
 
June '13
Cash, invested assets, and accrued
 
 
 
 
 
 
 
 
 
 
 
 
investment income:
Fair value basis
$
11,399.5

 
$
11,109.1

 
$
10,818.6

 
2.6
 %
 
5.4
%
 
Original cost basis
$
10,784.3

 
$
10,503.7

 
$
10,221.1

 
2.7
 %
 
5.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shareholders' equity:
Total
$
3,953.1

 
$
3,775.0

 
$
3,584.5

 
4.7
 %
 
10.3
%
 
Per common share
$
15.29

 
$
14.64

 
$
13.95

 
4.4
 %
 
9.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Composition of shareholders' equity per share:
 
 
 
 
 
 
 
 
 
 
 
 
Equity before items below
$
13.81

 
$
13.17

 
$
12.76

 
4.9
 %
 
8.2
%
Unrealized investment gains (losses) and other
 
 
 
 
 
 
 
 
 
 
 
 
accumulated comprehensive income (loss)
 
1.48

 
 
1.47

 
 
1.19

 
 
 
 
Total
$
15.29

 
$
14.64

 
$
13.95

 
4.4
 %
 
9.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Segmented composition of
 
 
 
 
 
 
 
 
 
 
 
 
shareholders' equity per share:
 
 
 
 
 
 
 
 
 
 
 
 
Excluding run-off segment
$
14.60

 
$
14.69

 
$
14.19

 
(0.6
)%
 
2.9
%
RFIG run-off segment
 
0.69

 
 
(0.05
)
 
 
(0.24
)
 
 
 
 
Total
$
15.29

 
$
14.64

 
$
13.95

 
4.4
 %
 
9.6
%
 
Cash flow from consolidated operating activities was $172.3 for this year's first six months compared with $278.3 for the same period in 2013. The 2014 period was most significantly affected by the timing and amount of estimated tax payments.

The consolidated investment portfolio reflects a current allocation of approximately 87 percent to fixed-maturity securities and short-term investments, and 13 percent to equities. As previously noted, exposure to equity securities has been emphasized during the last twelve months or so. Asset quality of the fixed maturity portfolio has remained at high levels.

Old Republic's invested assets are managed in consideration of enterprise-wide risk management objectives. Most importantly, these are intended to assure solid funding of its insurance subsidiaries' long-term obligations to policyholders and other beneficiaries, and the necessary long-term stability of capital accounts.

The investment portfolio contains no significant insurance risk-correlated asset exposures to real estate, mortgage-backed securities, collateralized debt obligations ("CDO's"), derivatives, junk bonds, hybrid securities, or illiquid private equity investments. In a similar vein, the Company does not engage in hedging or securities lending transactions, nor does it invest in securities whose values are predicated on non-regulated financial instruments exhibiting amorphous or unfunded counter-party risk attributes.

The following table shows the changes in the shareholders’ equity per share. As indicated, the changes resulted mostly from each year’s net income or loss, dividend payments to shareholders, and changes in the value of invested assets carried at fair value.















23


 
 
Shareholders' Equity Per Share
 
 
Quarters Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2014
 
2014
 
2013
Beginning balance
 
$
14.97

 
$
14.64

 
$
14.03

Changes in shareholders' equity:
 
 
 
 
 
 
 
 
 
Net operating income (loss)
 
 
0.13

 
 
0.40

 
 
0.61

Net realized investment gains (losses):
 
 
 
 
 
 
 
 
 
From sales and fair value adjustments
 
 
0.13

 
 
0.61

 
 
0.36

From impairments
 
 
—

 
 
—

 
 
—

Subtotal
 
 
0.13

 
 
0.61

 
 
0.36

Net unrealized investment gains (losses)
 
 
0.24

 
 
0.03

 
 
(0.67
)
Total realized and unrealized investment gains (losses)
 
0.37

 
 
0.64

 
 
(0.31
)
Cash dividends
 
 
(0.18
)
 
 
(0.37
)
 
 
(0.36
)
Stock issuance, foreign exchange, and other transactions
 
—

 
 
(0.02
)
 
 
(0.02
)
Net change
 
 
0.32

 
 
0.65

 
 
(0.08
)
Ending balance
 
$
15.29

 
$
15.29

 
$
13.95

 



24


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.

FINANCIAL ACCOUNTING AND REPORTING POLICIES

The Company's annual and interim financial statements incorporate a large number and types of estimates relative to matters which are highly uncertain at the time the estimates are made. The estimation process required of an insurance enterprise is by its very nature highly dynamic inasmuch as it necessitates a continuous evaluation, analysis, and quantification of factual data as it becomes known to 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.

Old Republic believes that its most critical accounting estimates relate to: a) the determination of other-than-temporary impairments ("OTTI") in the value of fixed maturity and equity investments; b) the valuation of deferred income tax assets; c) the establishment of deferred acquisition costs which vary directly with the production of insurance premiums; d) the recoverability of reinsured paid and/or outstanding losses; and e) the establishment of reserves for losses and loss adjustment expenses. The major assumptions and methods used in setting these estimates are discussed in the Company's 2013 Annual Report on Form 10-K.

FINANCIAL POSITION

The Company's financial position at June 30, 2014 reflected increases in assets, liabilities, and common shareholders' equity of 3.9% , 3.7% , and 4.7% , respectively, when compared to the immediately preceding year-end. Cash and invested assets represented 66.3% and 67.2% of consolidated assets as of June 30, 2014 and December 31, 2013 , respectively. As of June 30, 2014 , the cash, accrued investment income, and invested asset base increased by 2.6% to $11,399.5 .

Investments - During the first six months of 2014 and 2013 , the Company committed the majority of investable funds to short to intermediate-term fixed maturity securities and higher yielding common shares. At both June 30, 2014 and 2013 , approximately 99% of the Company's investments consisted of marketable securities. Old Republic continues to adhere to its long-term policy of investing primarily in investment grade, marketable securities. The portfolio contains no significant direct insurance risk-correlated asset exposures to real estate, mortgage-backed securities, collateralized debt obligations ("CDO's"), derivatives, junk bonds, hybrid securities, or illiquid private equity investments. In a similar vein, the Company does not engage in hedging transactions or securities lending operations, nor does it invest in securities whose values are predicated on non-regulated financial instruments exhibiting amorphous or unfunded counter-party risk attributes. At June 30, 2014 , the Company had no fixed maturity investments in default as to principal and/or interest.

Relatively high short-term maturity investment positions continued to be maintained as of June 30, 2014 . Such positions reflect a large variety of seasonal and intermediate-term factors including current operating needs, expected operating cash flows, quarter-end cash flow seasonality, 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 long-term fixed maturity investment portfolio is managed so as to limit various risks inherent in the bond market. Credit risk is addressed through asset diversification and the purchase of investment grade securities. Reinvestment rate risk is reduced by concentrating on non-callable issues, and by taking asset-liability matching considerations into account. Purchases of mortgage and asset backed securities, which have variable principal prepayment options, are generally avoided. Market value risk is limited through the purchase of bonds of intermediate maturity. The combination of these investment management practices is expected to produce a more stable long-term fixed maturity investment portfolio that is not subject to extreme interest rate sensitivity and principal deterioration.

The fair value of the Company's long-term fixed maturity investment portfolio is sensitive, however, to fluctuations in the level of interest rates, but not materially affected by changes in anticipated cash flows caused by any prepayments. The impact of interest rate movements on the long-term fixed maturity investment portfolio generally affects net unrealized gains or losses. As a general rule, rising interest rates enhance currently available yields but typically lead to a reduction in the fair value of existing fixed maturity investments. By contrast, a decline in such rates reduces currently available yields but usually serves to increase the fair value of the existing fixed maturity investment portfolio. All such changes in fair value are reflected, net of deferred income taxes, directly in the shareholders' equity account, and as a separate component of the statement of comprehensive income. Given the Company's inability to forecast or control the movement of interest rates, Old Republic sets the maturity spectrum of its fixed maturity securities portfolio within parameters of estimated liability payouts, and focuses the overall portfolio on high quality investments. By so doing, Old Republic believes it is reasonably assured of its ability to hold securities to maturity as it may deem necessary in changing environments, and of ultimately recovering their aggregate cost.

25



Possible future declines in fair values for Old Republic's available for sale bond and stock portfolios would negatively affect the common shareholders' equity account at any point in time, but would not necessarily result in the recognition of realized investment losses. The Company reviews the status and fair value changes of each of its available for sale investments on at least a quarterly basis during the year, and estimates of other-than-temporary impairments in the portfolio's value are evaluated and established at each quarterly balance sheet date. In reviewing investments for other-than-temporary impairment, the Company, in addition to a security's market price history, considers the totality of such factors as the issuer's operating results, financial condition and liquidity, its ability to access capital markets, credit rating trends, most current audit opinion, industry and securities markets conditions, and analyst expectations to reach its conclusions. Sudden fair value declines caused by such adverse developments as newly emerged or imminent bankruptcy filings, issuer default on significant obligations, or reports of financial accounting developments that bring into question the validity of previously reported earnings or financial condition, are recognized as realized losses as soon as credible publicly available information emerges to confirm such developments. Absent issuer-specific circumstances that would result in a contrary conclusion, any equity security with an unrealized investment loss amounting to a 20% or greater decline for a six month period is considered other-than-temporarily-impaired. In the event the Company's estimate of other-than-temporary impairments is insufficient at any point in time, future periods' net income (loss) would be affected adversely by the recognition of additional realized or impairment losses, but its financial condition would not necessarily be affected adversely inasmuch as such losses, or a portion of them, could have been recognized previously as unrealized losses.

The following tables show certain information relating to the Company's available for sale fixed maturity and equity portfolios as of the dates shown:
Credit Quality Ratings of Fixed Maturity Securities (a)
 
 
 
 
 
June 30,
 
December 31,
 
2014
 
2013
Aaa
13.7
%
 
13.9
%
Aa
9.8

 
9.4

A
35.0

 
35.9

Baa
37.7

 
39.7

Total investment grade
96.2

 
98.9

All other (b)
3.8

 
1.1

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 Non-Investment Grade Fixed Maturity Securities
 
 
 
 
 
 
 
 
June 30, 2014
 
Amortized
Cost
 
Gross
Unrealized
Losses
 
Fixed Maturity Securities by Industry Concentration:
 
 
 
 
 
 
Industrial
 
$
17.0

 
$
.2

 
 
Consumer Non Durable
 
6.5

 
.1

 
 
Energy
 
16.4

 
.1

 
 
Municpal
 
.5

 
—

 
 
Other (includes 3 industry groups)
 
14.6

 
.1

 
 
 
Total
 
$
55.1

(c)
$
.7

 
__________

(c)
Represents .7% of the total fixed maturity securities portfolio.


26


Gross Unrealized Losses Stratified by Industry Concentration for Investment Grade Fixed Maturity Securities
 
 
 
 
 
 
 
 
June 30, 2014
 
Amortized
Cost
 
Gross
Unrealized
Losses
 
Fixed Maturity Securities by Industry Concentration:
 
 
 
 
 
 
Utilities
 
$
187.8

 
$
3.5

 
 
U.S. Government & Agencies
 
136.6

 
2.8

 
 
Technology
 
61.2

 
1.0

 
 
Basic Industry
 
52.1

 
.9

 
 
Other (includes 16 industry groups)
 
354.9

 
5.5

 
 
 
Total
 
$
792.8

(d)
$
13.9

 
__________

(d)
Represents 9.8% of the total fixed maturity securities portfolio.

Gross Unrealized Losses Stratified by Industry Concentration for Equity Securities
 
 
 
 
 
 
 
 
June 30, 2014
 

Cost
 
Gross
Unrealized
Losses
 
Available for Sale:
 
 
 
 
 
Equity Securities by Industry Concentration:
 
 
 
 
 
 
Consumer Non Durable
 
$
30.9

 
$
1.0

 
 
Industrial
 
9.5

 
.2

 
 
Insurance
 
7.2

 
—

 
 
 
Total
 
$
47.6

(e)
$
1.3

(f)
__________

(e)
Represents 4.2% of the total available for sale equity securities portfolio.
(f)
Represents .1% of the cost of the total available for sale equity securities portfolio, while gross unrealized gains represent 21.4% of the portfolio.
Gross Unrealized Losses Stratified by Maturity Ranges for All Fixed Maturity Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortized Cost
of Fixed Maturity Securities
 
Gross Unrealized Losses
 
June 30, 2014
 
All
 
Non-
Investment
Grade Only
 
All
 
Non-
Investment
Grade Only
 
Maturity Ranges:
 
 
 
 
 
 
 
 
 
Due in one year or less
 
$
—

 
$
—

 
$
—

 
$
—

 
Due after one year through five years
 
229.8

 
16.0

 
1.8

 
.2

 
Due after five years through ten years
 
607.5

 
36.8

 
12.3

 
.3

 
Due after ten years
 
10.5

 
2.2

 
.6

 
.1

 
 
Total
 
$
848.0

 
$
55.1

 
$
14.7

 
$
.7

 


27


Gross Unrealized Losses Stratified by Duration and Amount of Unrealized Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of Gross Unrealized Losses
 
June 30, 2014
 
Less than
20% of
Cost
 
20% to
50%
of Cost
 
More than
50% of Cost
 
Total Gross
Unrealized
Loss
 
Number of Months in Loss Position:
 
 
 
 
 
 
 
 
 
Available for Sale:
 
 
 
 
 
 
 
 
 
Fixed Maturity Securities:
 
 
 
 
 
 
 
 
 
 
One to six months
 
$
.7

 
$
—

 
$
—

 
$
.7

 
 
Seven to twelve months
 
5.2

 
—

 
—

 
5.2

 
 
More than twelve months
 
8.4

 
.3

 
—

 
8.7

 
 
 
Total
 
$
14.4

 
$
.3

 
$
—

 
$
14.7

 
Equity Securities:
 
 
 
 
 
 
 
 
 
 
One to six months
 
$
1.3

 
$
—

 
$
—

 
$
1.3

 
 
Seven to twelve months
 
—

 
—

 
—

 
—

 
 
More than twelve months
 
—

 
—

 
—

 
—

 
 
 
Total
 
$
1.3

 
$
—

 
$
—

 
$
1.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of Issues in Loss Position:
 
 
 
 
 
 
 
 
 
Available for Sale:
 
 
 
 
 
 
 
 
 
Fixed Maturity Securities:
 
 
 
 
 
 
 
 
 
 
One to six months
 
50

 
—

 
—

 
50

 
 
Seven to twelve months
 
66

 
—

 
—

 
66

 
 
More than twelve months
 
70

 
1

 
—

 
71

 
 
 
Total
 
186

 
1

 
—

 
187

(g)
Equity Securities:
 
 
 
 
 
 
 
 
 
 
One to six months
 
5

 
—

 
—

 
5

 
 
Seven to twelve months
 
—

 
—

 
—

 
—

 
 
More than twelve months
 
—

 
—

 
—

 
—

 
 
 
Total
 
5

 
—

 
—

 
5

(g)
__________

(g)
At June 30, 2014 the number of issues in an unrealized loss position represent 10.9% as to fixed maturities, and 5.3% as to equity securities of the total number of such issues held by the Company.

The aging of issues with unrealized losses employs balance sheet date fair value comparisons with an issue's original cost net of other-than-temporary impairment adjustments. The percentage reduction from such cost reflects the decline as of a specific point in time ( June 30, 2014 in the above table) and, accordingly, is not indicative of a security's value having been consistently below its cost at the percentages shown nor throughout the periods shown.
Age Distribution of Fixed Maturity Securities
 
 
 
 
 
 
 
 
 
 
 
 
June 30,
 
December 31,
 
 
 
 
 
2014
 
2013
 
Maturity Ranges:
 
 
 
 
 
Due in one year or less
7.9
%
 
9.3
%
 
 
Due after one year through five years
44.9

 
46.7

 
 
Due after five years through ten years
44.9

 
41.8

 
 
Due after ten years through fifteen years
1.6

 
1.2

 
 
Due after fifteen years
.7

 
1.0

 
 
 
Total
100.0
%
 
100.0
%
 
 
 
 
 
 
 
 
 
Average Maturity in Years
5.0

 
4.8

 
Duration (h)
4.3

 
4.2

 
___________

(h)
Duration is used as a measure of bond price sensitivity to interest rate changes. A duration of 4.3 as of June 30, 2014 implies that a 100 basis point parallel increase in interest rates from current levels would result in a possible decline in the fair value of the long-term fixed maturity investment portfolio of approximately 4.3%.

28


Composition of Unrealized Gains (Losses)
 
 
 
 
 
 
 
 
 
 
 
 
June 30,
 
December 31,
 
 
 
 
 
2014
 
2013
 
Available for Sale:
 
 
 
 
Fixed Maturity Securities:
 
 
 
 
 
Amortized cost
$
8,051.3

 
$
8,477.3

 
 
Estimated fair value
8,424.5

 
8,712.3

 
 
Gross unrealized gains
387.9

 
308.7

 
 
Gross unrealized losses
(14.7
)
 
(73.6
)
 
 
 
Net unrealized gains (losses)
$
373.2

 
$
235.0

 
 
 
 
 
 
 
 
 
Equity Securities:
 
 
 
 
 
Original cost
$
1,146.0

 
$
632.0

 
 
Estimated fair value
1,390.2

 
1,004.2

 
 
Gross unrealized gains
245.5

 
372.7

 
 
Gross unrealized losses
(1.3
)
 
(.5
)
 
 
 
Net unrealized gains (losses)
$
244.2

 
$
372.1

 

Other Assets - Among other major assets, substantially all of the Company's receivables are not past due. Reinsurance recoverable balances on paid or estimated unpaid losses are deemed recoverable from solvent reinsurers or have otherwise been reduced by allowances for estimated amounts unrecoverable. Deferred policy acquisition costs are estimated by taking into account the 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. Deferred policy acquisition costs do not represent significant percentages of assets or shareholders' equity.

Liquidity - 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 of the states in which they are domiciled. The Company can receive up to $427.2 in dividends from its subsidiaries in 2014 without the prior approval of regulatory authorities. The liquidity achievable through such permitted dividend payments is considered adequate to cover the parent holding company's currently expected cash outflows represented mostly by interest and scheduled repayments on outstanding debt, quarterly cash dividend payments to shareholders, modest operating expenses, and the near-term capital needs of its operating company subsidiaries. At June 30, 2014 , the Company's consolidated debt to equity ratio was 14.3% .

The Company's 3.75% Convertible Senior Notes ("the Notes") contain provisions defining certain events of default, among them a court ordered proceeding due to the insolvency of a Significant Subsidiary. The Notes define Significant Subsidiary in accordance with the paragraph (w) of Rule 1-02 of the SEC's Regulation S-X. The Company's flagship mortgage guaranty insurance carrier, Republic Mortgage Insurance Company, ("RMIC") qualifies as a Significant Subsidiary for purposes of the Notes. If RMIC were to become statutorily impaired, its insolvency could trigger a receivership proceeding which, in turn could ultimately result in an event of default. If this were to occur, the outstanding principal of the Notes could become immediately due and payable.

On January 19, 2012, the North Carolina Department of Insurance ("NCDOI") issued a Summary Order ("Summary Order") placing RMIC under supervision. Supervision is an administrative proceeding under North Carolina law. It gives the NCDOI more oversight and control with the objective of allowing the insurer to develop a corrective plan subject to the Department's approval. It is unlike receivership which involves rehabilitation or liquidation of a company pursuant to a formal, court-ordered proceeding. Receivership results in a company's assets and management passing to a receiver who is overseen by a court. Moreover, supervision, unlike receivership, does not constitute an event of default by RMIC or its parent holding company with regard to the Notes.

On November 28, 2012, the NCDOI issued a Final Order approving the Corrective Plan ("the Plan") submitted by RMIC on September 14, 2012 as required by the Summary Order. The Plan was filed to effect a run-off of the insurance in force business with the following major objectives: provide for the payment of all valid claims settled on January 19, 2012 and thereafter in cash with respect to 60% of the total settled amounts, and with a deferred payment obligation ("DPO") for the remaining 40% which will be retained in claim reserves until a future payment of all or a portion of this 40% is approved by the NCDOI; and authorize RMIC to continue with its management of the run-off plan during an estimated ten year period ending on December 31, 2021. During this period, RMIC would remain within ORI's ownership and control, as well as under NCDOI regulatory supervision as has been the case since January 2012.

On July 1, 2014, the NCDOI issued a Final Order approving an Amended and Restated Corrective Plan (the "Amended Plan") submitted jointly on April 16, 2014, by RMIC and Republic Mortgage Insurance Company of North Carolina ("RMICNC"). Under the Amended Plan, RMIC and RMICNC will pay 100% of their DPOs accrued as of June 30, 2014 and will settle all subsequent valid claims entirely in cash, without establishing any DPOs. In anticipation of receiving this Final Order, ORI contributed $125.0 in cash and securities to RMIC in June 2014. Management believes the Final Order by the NCDOI to RMIC has precluded such an event of default from occurring in the foreseeable future. Moreover, RMIC is expected to be increasingly less significant after payment of the DPO balance and as its run-off book of business

29


extinguishes itself. The approval of the Plan notwithstanding, the NCDOI retains its regulatory supervisory powers to review and amend the terms of the Plan in the future as circumstances may warrant.

At June 30, 2014 , the Company had sufficient liquid resources available to redeem a substantial portion of the 3.75% Notes. In the circumstances, the NCDOI could at a later date assume control of RMIC and thus possibly create an event of default for ORI if RMIC were still deemed to be a significant subsidiary at that time. At June 30, 2014, RMIC was statutorily solvent and in management's opinion such regulatory assumption of control does not appear to be imminent.

Capitalization - Old Republic's total capitalization of $4,519.3 at June 30, 2014 consisted of debt of $566.2 and common shareholders' equity of $3,953.1 . Changes in the common shareholders' equity account reflect primarily operating results for the period then ended, changes in the fair value of invested assets, and dividend payments.

Old Republic has paid cash dividends to its shareholders without interruption since 1942, and has increased the annual rate in each of the past 33 calendar 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 statutory and GAAP earnings for the five most recent calendar years, and management's long-term expectations for the Company's consolidated business and its individual operating subsidiaries.

Under state insurance regulations, the Company's three mortgage guaranty insurance subsidiaries are required to operate at a maximum risk to capital ratio of 25:1 or otherwise hold minimum amounts of capital based on specified formulas. As noted in prior periods' reports, the Company's flagship mortgage guaranty insurance carrier had been operating pursuant to a waiver of minimum state regulatory capital requirements since late 2009. This waiver expired on August 31, 2011. As a result, the Company's mortgage insurance subsidiaries discontinued writing new business in all states and limited themselves to servicing the run-off of their existing business. As noted elsewhere herein, RMIC and RMICNC have been operating pursuant to a Summary Order since January 19, 2012 and December 3, 2012, respectively.

RESULTS OF OPERATIONS
 
Revenues: Premiums & Fees

Pursuant to GAAP applicable to the insurance industry, revenues are recognized as follows:

Substantially all general insurance premiums pertain to annual policies and are reflected in income on a pro-rata basis in association with the related benefits, claims and expenses. Earned but unbilled premiums are generally taken into income on the billing date, while adjustments for retrospective premiums, commissions and similar charges or credits are accrued on the basis of periodic evaluations of current underwriting experience and contractual obligations.

Title premium 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 27% of 2014 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 73% of consolidated title premium and fee revenues is produced by independent title agents and underwritten title companies. Rather than making estimates that could be subject to significant variance from actual premium and fee production, the Company recognizes revenues from those sources upon receipt. Such receipts can reflect a three to four month lag relative to the effective date of the underlying title policy, and are offset concurrently by production expenses and claim reserve provisions.

The Company's mortgage guaranty premiums primarily stem from monthly installments paid on long-duration, guaranteed renewable insurance policies. Substantially all such premiums are written and earned in the month coverage is effective. With respect to relatively few annual or single premium policies, earned premiums are largely recognized on a pro-rata basis over the terms of the policies. As described more fully in the RFIG Run-off Business' Risk Factors for premium income and long-term claim exposures in the Company's 2013 Annual Report on Form 10-K under Item 1A - Risk Factors, revenue recognition for insured loans is not appropriately matched to the risk exposure and the consequent recognition of both normal and catastrophic loss occurrences.

The major sources of Old Republic's consolidated earned premiums and fees for the periods shown were as follows:

30


 
Earned Premiums and Fees
 
General
 
Title
 
RFIG Run-off
 
Other
 
Total
 
% Change
from prior
period
Years Ended December 31:
 
 
 
 
 
 
 
 
 
 
 
2011
$
2,109.4

 
$
1,362.4

 
$
503.2

 
$
74.9

 
$
4,050.1

 
13.3
 %
2012
2,324.4

 
1,677.4

 
410.5

 
58.6

 
4,471.0

 
10.4

2013
2,513.7

 
1,996.1

 
316.5

 
59.3

 
4,885.6

 
9.3

Six Months Ended June 30:
 
 
 
 
 
 
 
 
 
 
 
2013
1,214.4

 
975.9

 
166.6

 
30.8

 
2,387.9

 
12.3

2014
1,328.3

 
814.9

 
130.5

 
31.5

 
2,305.3

 
(3.5
)
Quarters Ended June 30:
 
 
 
 
 
 
 
 
 
 
 
2013
614.2

 
515.4

 
78.8

 
13.7

 
1,222.2

 
12.3

2014
$
671.8

 
$
421.0

 
$
64.8

 
$
14.8

 
$
1,172.6

 
(4.1
)%

The percentage allocation of net premiums earned for major insurance coverages in the General Insurance Group was as follows:

 
General Insurance Earned Premiums by Type of Coverage
 
Workers'
Compensation
 
Commercial
Automobile
(mostly
trucking)
 
Financial
Indemnity
 
Inland
Marine
and
Property
 
General
Liability
 
Other
Years Ended December 31:
 
 
 
 
 
 
 
 
 
 
 
2011
38.3
%
 
33.6
%
 
4.9
%
 
7.8
%
 
5.9
%
 
9.5
%
2012
39.7

 
33.0

 
4.2

 
7.6

 
6.2

 
9.3

2013
39.6

 
32.8

 
3.8

 
7.7

 
6.3

 
9.8

Six Months Ended June 30:
 
 
 
 
 
 
 
 
 
 
 
2013
39.6

 
33.1

 
3.8

 
7.9

 
6.0

 
9.6

2014
40.5

 
32.0

 
3.9

 
7.5

 
6.3

 
9.8

Quarters Ended June 30:
 
 
 
 
 
 
 
 
 
 
 
2013
38.8

 
33.4

 
3.7

 
7.8

 
5.7

 
10.6

2014
40.0
%
 
32.1
%
 
3.8
%
 
7.5
%
 
5.9
%
 
10.7
%

The following table shows the percentage distribution of Title Group premium and fee revenues by production sources:

Title Premium and Fee Production by Source
 
Direct
Operations
 
Independent
Title
Agents &
Other
Years Ended December 31:
 
 
 
2011
32.6
%
 
67.4
%
2012
32.3

 
67.7

2013
27.9

 
72.1

Six Months Ended June 30:
 
 
 
2013
29.9

 
70.1

2014
27.3

 
72.7

Quarters Ended June 30:
 
 
 
2013
30.5

 
69.5

2014
29.8
%
 
70.2
%


31


The following tables provide information on production and related risk exposure trends for Old Republic's mortgage guaranty insurance operation:
 
Earned Premiums
 
Persistency
Premium and Persistency Trends by Type:
Direct
 
Net
 
Traditional
Primary
 
Bulk
Years Ended December 31:
 
 
 
 
 
 
 
2011
$
468.1

 
$
444.9

 
83.2
%
 
85.3
%
2012
387.3

 
368.0

 
80.7

 
85.3

2013
296.6

 
286.7

 
79.1

 
81.9

Six Months Ended June 30:
 
 
 
 
 
 
 
2013
157.2

 
151.6

 
79.5

 
82.8

2014
119.4

 
115.8

 
80.7
%
 
78.5
%
Quarters Ended June 30:
 
 
 
 
 
 
 
2013
74.2

 
71.6

 
 
 
 
2014
$
58.8

 
$
57.0

 
 
 
 

As previously discussed, the Company's flagship mortgage guaranty insurance carrier ceased the underwriting of new policies effective August 31, 2011 and the existing book of business was placed in run-off operating mode.

While there is no consensus in the marketplace as to the precise definition of "sub-prime", Old Republic generally views loans with credit (FICO) scores less than 620, loans underwritten with reduced levels of documentation and loans with loan to value ratios in excess of 95% as having a higher risk of default. Risk in force concentrations by these attributes are disclosed in the following tables for both traditional primary and bulk production. Premium rates for loans exhibiting greater risk attributes are typically higher in anticipation of potentially greater defaults and claim costs. Additionally, bulk insurance policies, which represent 6.8% of total net risk in force as of June 30, 2014 , are frequently subject to deductibles and aggregate stop losses which serve to limit the overall risk on a pool of insured loans. As the decline in the housing markets accelerated and mortgage lending standards tightened, rising defaults and the attendant increases in reserves and paid claims on higher risk loans became more significant drivers of increased claim costs.
Net Risk in Force
Net Risk in Force By Type:
Traditional
Primary
 
Bulk
 
Other
 
Total
As of December 31:
 
 
 
 
 
 
 
2011
$
14,476.9

 
$
1,017.7

 
$
176.3

 
$
15,671.0

2012
11,911.1

 
850.7

 
89.8

 
12,851.6

2013
9,579.6

 
704.8

 
48.5

 
10,333.0

As of June 30:
 
 
 
 
 
 
 
2013
10,703.0

 
773.7

 
63.3

 
11,540.1

2014
$
8,772.0

 
$
640.0

 
$
39.3

 
$
9,451.4

Analysis of Risk in Force
Risk in Force Distribution By FICO Scores:
FICO less
than 620
 
FICO 620
to 680
 
FICO
Greater
than 680
 
Unscored/
Unavailable
 
 
 
 
 
 
 
 
Traditional Primary:
 
 
 
 
 
 
 
As of December 31:
 
 
 
 
 
 
 
2011
6.2
%
 
26.8
%
 
65.7
%
 
1.3
%
2012
6.4

 
27.5

 
65.0

 
1.1

2013
6.6

 
28.1

 
64.3

 
1.0

As of June 30:
 
 
 
 
 
 
 
2013
6.5

 
27.9

 
64.4

 
1.2

2014
6.6
%
 
28.3
%
 
64.3
%
 
.8
%
 
 
 
 
 
 
 
 
Bulk(a):
 
 
 
 
 
 
 
As of December 31:
 
 
 
 
 
 
 
2011
24.0
%
 
32.2
%
 
43.7
%
 
.1
%
2012
24.0

 
32.5

 
43.3

 
.2

2013
23.5

 
33.0

 
43.3

 
.2

As of June 30:
 
 
 
 
 
 
 
2013
23.9

 
32.9

 
43.1

 
.1

2014
23.9
%
 
33.2
%
 
42.7
%
 
.2
%

32



Risk in Force Distribution By Loan to Value ("LTV") Ratio:
LTV
85.0
and below
 
LTV
85.01
to 90.0
 
LTV
90.01
to 95.0
 
LTV
Greater
than 95.0
 
 
 
 
 
 
 
 
Traditional Primary(b):
 
 
 
 
 
 
 
As of December 31:
 
 
 
 
 
 
 
2011
5.1
%
 
36.2
%
 
32.9
%
 
25.8
%
2012
4.6

 
35.2

 
32.9

 
27.3

2013
4.2

 
34.5

 
32.2

 
29.1

As of June 30:
 
 
 
 
 
 
 
2013
4.4

 
34.6

 
32.6

 
28.4

2014
4.0
%
 
34.4
%
 
31.8
%
 
29.8
%
 
 
 
 
 
 
 
 
Bulk(a):
 
 
 
 
 
 
 
As of December 31:
 
 
 
 
 
 
 
2011
57.1
%
 
22.9
%
 
9.8
%
 
10.2
%
2012
56.7

 
23.3

 
10.0

 
10.0

2013
56.9

 
23.4

 
10.2

 
9.5

As of June 30:
 
 
 
 
 
 
 
2013
56.5

 
23.5

 
10.1

 
9.9

2014
56.4
%
 
23.7
%
 
10.2
%
 
9.7
%
__________

(a)
Bulk pool risk in-force, which represented 31.9% of total bulk risk in-force at June 30, 2014 , has been allocated pro-rata based on insurance in-force.

(b)
The LTV distribution reflects base LTV ratios which are determined prior to the impact of single premiums financed and paid at the time of loan origination.

Risk in Force Distribution By Top Ten States:
 
 
 
Traditional Primary
 
TX
 
FL
 
GA
 
IL
 
CA
 
NC
 
PA
 
NJ
 
OH
 
VA
As of December 31:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2011
8.8
%
 
7.5
%
 
5.2
%
 
5.0
%
 
5.0
%
 
4.8
%
 
4.3
%
 
3.3
%
 
3.3
%
 
3.0
%
2012
8.6

 
7.7

 
5.3

 
5.1

 
5.0

 
4.8

 
4.3

 
3.5

 
3.3

 
3.1

2013
8.3

 
7.5

 
5.5

 
5.2

 
4.9

 
4.8

 
4.4

 
3.8

 
3.3

 
3.2

As of June 30:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2013
8.5

 
7.7

 
5.4

 
5.1

 
4.9

 
4.8

 
4.3

 
3.7

 
3.3

 
3.2

2014
8.0
%
 
7.3
%
 
5.6
%
 
5.2
%
 
4.9
%
 
4.8
%
 
4.3
%
 
3.9
%
 
3.3
%
 
3.3
%
 
 
 
Bulk (a)
 
TX
 
FL
 
GA
 
IL
 
CA
 
AZ
 
PA
 
NJ
 
OH
 
NY
As of December 31:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2011
5.4
%
 
9.9
%
 
4.3
%
 
4.0
%
 
14.9
%
 
3.2
%
 
3.1
%
 
3.5
%
 
3.9
%
 
6.5
%
2012
5.3

 
9.9

 
4.3

 
4.0

 
13.9

 
3.0

 
3.3

 
3.7

 
4.0

 
7.1

2013
5.4

 
9.3

 
4.4

 
3.9

 
14.1

 
2.8

 
3.4

 
4.0

 
3.8

 
7.9

As of June 30:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2013
5.3

 
9.7

 
4.3

 
4.0

 
14.0

 
2.9

 
3.3

 
3.9

 
3.9

 
7.5

2014
5.3
%
 
9.3
%
 
4.5
%
 
3.9
%
 
13.9
%
 
2.9
%
 
3.4
%
 
4.2
%
 
3.9
%
 
7.7
%

33


Risk in Force Distribution By Level of Documentation:
Full
Documentation
 
Reduced
Documentation
Traditional Primary:
 
 
 
As of December 31:
 
 
 
2011
92.8
%
 
7.2
%
2012
92.8

 
7.2

2013
92.7

 
7.3

As of June 30:
 
 
 
2013
92.7

 
7.3

2014
92.7
%
 
7.3
%
 
 
 
 
Bulk (a):
 
 
 
As of December 31:
 
 
 
2011
58.4
%
 
41.6
%
2012
58.2

 
41.8

2013
57.6

 
42.4

As of June 30:
 
 
 
2013
58.3

 
41.7

2014
58.0
%
 
42.0
%
__________

(a)
Bulk pool risk in-force, which represented 31.9% of total bulk risk in-force at June 30, 2014 , has been allocated pro-rata based on insurance in-force.
Risk in Force Distribution By Loan Type:
Fixed Rate
& ARMs
with Resets
>=5 Years
 
ARMs with
Resets <5
years
Traditional Primary:
 
 
 
As of December 31:
 
 
 
2011
97.0
%
 
3.0
%
2012
97.1

 
2.9

2013
97.2

 
2.8

As of June 30:
 
 
 
2013
97.1

 
2.9

2014
97.2
%
 
2.8
%
 
 
 
 
Bulk (a):
 
 
 
As of December 31:
 
 
 
2011
71.0
%
 
29.0
%
2012
72.6

 
27.4

2013
74.3

 
25.7

As of June 30:
 
 
 
2013
73.5

 
26.5

2014
74.1
%
 
25.9
%
__________

(a)
Bulk pool risk in-force, which represented 31.9% of total bulk risk in-force at June 30, 2014 , has been allocated pro-rata based on insurance in-force.

The Company's consumer credit indemnity ("CCI") earned premiums and related risk in force included in the table below have reflected a generally declining trend. The decline is largely due to a discontinuation of active sales efforts since 2008. The following table shows CCI net premiums earned during the indicated periods and the maximum calculated risk in force at the end of the respective periods. Net earned premiums include additional premium adjustments arising from the variable claim experience of individual policies subject to retrospective rating plans. Risk in force reflects estimates of the maximum risk exposures at the inception of individual policies adjusted for cumulative claim costs and the lower outstanding loan balances attributed to such policies through the end of the periods shown below.

34


 
Net CCI Earned Premiums
 
Risk in
Force
Years Ended December 31:
 
 
 
2011
$
58.3

 
$
1,263.1

2012
42.4

 
1,141.6

2013
29.8

 
989.4

Six Months Ended June 30:
 
 
 
2013
15.0

 
1,039.4

2014
14.7

 
$
950.4

Quarters Ended June 30:
 
 
 
2013
7.1

 
 
2014
$
7.8

 
 

Revenues: 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 below.
 
Invested Assets at Adjusted Cost
 
Fair
Value
Adjust-
ment
 
Invested
Assets at
Fair
Value
 
General
 
Title
 
RFIG Run-off
 
Corporate
and Other
 
Total
 
As of December 31:
 
 
 
 
 
 
 
 
 
 
 
 
 
2012
$
6,742.7

 
$
785.7

 
$
1,766.3

 
$
450.1

 
$
9,744.9

 
$
863.8

 
$
10,608.8

2013
7,280.1

 
876.5

 
1,681.3

 
422.5

 
10,260.6

 
607.8

 
10,868.5

As of June 30:
 
 
 
 
 
 
 
 
 
 
 
 
 
2013
6,918.4

 
828.7

 
1,753.4

 
515.8

 
10,016.4

 
600.2

 
10,616.6

2014
$
7,523.5

 
$
839.3

 
$
1,721.4

 
$
464.3

 
$
10,548.7

 
$
618.2

 
$
11,166.9


 
Net Investment Income
 
Yield at
 
General
 
Title
 
RFIG Run-off
 
Corporate
and Other
 
Total
 
Original
Cost
 
Fair
Value
Years Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31:
 
 
 
 
 
 
 
 
 
 
 
 
 
2011
$
270.5

 
$
27.3

 
$
59.3

 
$
7.4

 
$
364.6

 
3.71
%
 
3.51
%
2012
264.9

 
27.3

 
36.3

 
7.9

 
336.5

 
3.40

 
3.19

2013
249.6

 
26.6

 
36.8

 
5.6

 
318.7

 
3.17

 
2.97

Six Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30:
 
 
 
 
 
 
 
 
 
 
 
 
 
2013
123.7

 
12.9

 
18.6

 
2.9

 
158.2

 
3.18

 
2.98

2014
135.8

 
14.5

 
14.5

 
3.2

 
168.2

 
3.23

 
3.05

Quarters Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30:
 
 
 
 
 
 
 
 
 
 
 
 
 
2013
61.5

 
6.3

 
9.4

 
1.4

 
78.8

 
3.16

 
2.95

2014
$
69.8

 
$
7.4

 
$
6.2

 
$
1.9

 
$
85.4

 
3.24
%
 
3.07
%

Revenues: Net Realized 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 the providing of 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; for the first six months of 2014 and 2013 , 36.9% and 92.0% , respectively, of all such dispositions resulted from these occurrences. Dispositions of securities at a realized gain or loss reflect such factors as ongoing assessments of issuers' business prospects, rotation

35


among industry sectors, changes in credit quality, and tax planning considerations. The amount of net realized gains and losses registered in any one accounting period are affected by the aforementioned assessments of securities' values for other-than-temporary impairment. As a result of the interaction of all these factors and considerations, net realized investment gains or losses can vary significantly from period-to-period, and, in the Company's view, are not indicative of any particular trend or result in the basics of its insurance business.

The following table reflects the composition of net realized gains or losses for the periods shown. The 2013 gains on equity securities generally reflect the recovery of value realized upon subsequent sale of common stocks originally impaired in 2008. Gains realized in 2014 reflect sales of non-income producing or low yielding securities, the proceeds of which have largely been reinvested in higher yielding common shares of American companies with distinguished long-term records of earnings and dividend growth.
 
Realized Gains (Losses) on
Disposition of Securities and Fair Value Adjustments
 
Impairment Losses on Securities
 
 
 
Fixed
maturity
securities
 
Equity
securities
and miscel-
laneous
investments
 
Total
 
Fixed
maturity
securities
 
Equity
securities
and miscel-
laneous
investments
 
Total
 
Net
realized
gains
(losses)
Years Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31:
 
 

 
 
 
 
 
 
 
 
 
 
2011
$
142.6

 
$
23.1

 
$
165.8

 
$
—

 
$
(50.2
)
 
$
(50.2
)
 
$
115.5

2012
32.7

 
15.3

 
48.1

 
—

 
(.2
)
 
(.2
)
 
47.8

2013
1.7

 
146.3

 
148.1

 
—

 
—

 
—

 
148.1

Six Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30:
 
 
 
 
 
 
 
 
 
 
 
 
 
2013
3.8

 
137.8

 
141.7

 
—

 
—

 
—

 
141.7

2014
21.1

 
220.1

 
241.2

 
—

 
—

 
—

 
241.2

Quarters Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30:
 
 
 
 
 
 
 
 
 
 
 
 
 
2013
2.9

 
134.1

 
137.1

 
—

 
—

 
—

 
137.1

2014
$
8.6

 
$
41.2

 
$
49.9

 
$
—

 
$
—

 
$
—

 
$
49.9

 
Expenses: 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 June 30, 2014 and December 31, 2013 :
 
 
 
 
Claim and Loss Adjustment Expense Reserves
 
 
 
 
June 30, 2014
 
December 31, 2013
 
 
 
 
Gross
 
Net
 
Gross
 
Net
 
 
 
 
 
 
 
 
Workers' compensation
$
3,925.1

 
$
2,293.0

 
$
3,802.1

 
$
2,184.9

General liability
1,451.4

 
656.5

 
1,407.7

 
647.9

Commercial automobile (mostly trucking)
1,263.7

 
1,031.5

 
1,228.6

 
1,014.2

Other coverages
510.8

 
345.5

 
501.0

 
343.3

Unallocated loss adjustment expense reserves
215.9

 
155.7

 
195.6

 
143.7

 
 
Total general insurance reserves
7,367.1

 
4,482.5

 
7,135.2

 
4,334.1

Title
493.8

 
493.8

 
471.5

 
471.5

RFIG Run-off (a)
1,762.7

 
1,748.3

 
1,806.8

 
1,774.2

Life and accident
25.1

 
19.4

 
19.8

 
16.8

 
 
Total claim and loss adjustment expense reserves
$
9,648.8

 
$
6,744.2

 
$
9,433.5

 
$
6,596.8

Asbestosis and environmental claim reserves included
 
 
 
 
 
 
 
 
in the above general insurance reserves:
 
 
 
 
 
 
 
 
 
Amount
$
142.4

 
$
115.5

 
$
159.7

 
$
121.3

 
 
% of total general insurance reserves
1.9
%
 
2.6
%
 
2.2
%
 
2.8
%

__________

36



(a) In mid-July 2014, in furtherance of the Final Order, RMIC and RMICNC processed payments of their accumulated DPO balances of approximately $657 relating to fully settled claims charged to periods extending between January 1, 2012 and June 30, 2014. These aggregate payments are reflected as reserves for losses and loss expenses in the accompanying financial statements, rather than general liabilities as of June 30, 2014 as reflected in regulatory financial statements at that date. The funds required for payment of such DPO liabilities are reflected as short-term investments in the June 30, 2014 balance sheet.

Changes in aggregate claim and loss adjustment expense reserve estimates are shown in the following table:
 
 
 
Six Months Ended June 30,
 
 
 
2014
 
2013
Net reserve increase (decrease):
 
 
 
 
 
General Insurance
 
 
$
148.3

 
$
107.0

Title Insurance
 
 
22.2

 
37.0

RFIG Run-off
 
 
(25.9
)
 
(108.6
)
Other
 
 
2.6

 
(.3
)
Total
 
 
$
147.3

 
$
35.1


Net reserves for claims that have been incurred but not yet reported ("IBNR") carried in each segment were as follows:
 
 
 
June 30,
 
December 31,
 
 
 
2014
 
2013
General Insurance
 
 
$
2,167.5

 
$
2,118.4

Title Insurance
 
 
426.5

 
407.1

RFIG Run-off
 
 
201.9

 
121.3

Other
 
 
5.0

 
4.0

Total
 
 
$
2,801.1

 
$
2,651.0


The Company's reserve for loss and loss adjustment expenses represents the accumulation of estimates of ultimate losses, including incurred but not reported losses and loss adjustment expenses. The establishment of claim reserves by 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 possibly higher or lower than anticipated claim costs and the resulting changes in estimates are recorded in operations of the periods during which they are made. Increases to prior reserve estimates are often referred to as unfavorable development whereas any changes that decrease previous estimates of the Company's ultimate liability are referred to as favorable development.

Overview of Loss Reserving Process

The Company's reserve setting process reflects the nature of its insurance business and the decentralized basis upon which it is conducted. Old Republic's general insurance operations encompass a large variety of lines or classes of commercial insurance; it has negligible exposure to personal lines such as homeowners or private passenger automobile insurance that exhibit wide diversification of risks, significant frequency of claim occurrences, and high degrees of statistical credibility. Additionally, the Company's insurance subsidiaries do not provide significant amounts of insurance protection for premises; most of its property insurance exposures relate to cargo, incidental property, and insureds' inland marine assets. Consequently, the wide variety of policies issued and commercial insurance customers served require that loss reserves be analyzed and established in the context of the 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 the vagaries of judged or jury verdicts. Approximately 92% of the general insurance group's claim reserves stem from liability insurance coverages for commercial customers which typically require more extended periods of investigation and at times protracted litigation before they are finally settled. As a consequence of these and other factors, Old Republic does not utilize a single, overarching loss reserving approach.

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 statistical analysis of historical data. Reserve releases or additions are implicitly covered by the point estimates incorporated in

37


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 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. Long-term, disability-type workers' compensation reserves are discounted to present value based on interest rates that range from 3.5% to 4.0%.

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 so-called link ratios that represent prior years' patterns of incurred or paid loss trends between succeeding years, or past experience relative to progressions of the number of claims reported over time and ultimate average costs per claim.

Overall, reserves pertaining to several hundred large individual commercial insurance accounts that exhibit sufficient statistical credibility, and at times may be subject to retrospective premium rating plans or the utilization of varying levels or types of self-insured retentions through captive insurers and similar risk management mechanisms are established on an account by account basis using case reserves and applicable formula-driven methods. Large account reserves are usually set and analyzed for groups of coverages such as workers' compensation, commercial auto and general liability that are typically underwritten jointly for many customers. For certain so-called long-tail categories of insurance such as retained or assumed excess liability or excess workers' compensation, officers and directors' liability, and commercial umbrella liability relative to which claim development patterns are particularly long, more volatile, and immature in their early stages of development, the Company judgmentally establishes the most current accident years' loss reserves on the basis of expected loss ratios. Such expected loss ratios typically reflect currently estimated loss ratios from prior accident years, adjusted for the effect of actual and anticipated rate changes, actual and anticipated changes in coverage, reinsurance, mix of business, and other anticipated changes in external factors such as trends in loss costs or the legal and claims environment. Expected loss ratios are generally used for the two to three most recent accident years depending on the individual class or category of business. As actual claims data emerges in succeeding interim and annual periods, the original accident year loss ratio assumptions are validated or otherwise adjusted sequentially through the application of statistical projection techniques such as the Bornhuetter/Ferguson method which utilizes data from the more mature experience of prior years to arrive at a likely indication of more recent years' loss trends and costs.

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 recently considered that policy wording have each affirmed that right (See First Tennessee Bank N.A. v. Republic Mortg. Ins. Co. , Case No. 2:10-cv-02513-JPM-cgc (W.D. Tenn., Feb. 25, 2011) and JPMorgan Chase Bank N.A. v. Republic Mortg. Ins. Co. , Civil Action No. 10-06141 (SRC) (D. NJ, May 4, 2011), each decision citing supporting state law legal precedent). RMIC's mortgage insurance policy provides that the insured represents that a ll statements made and information provided to it in an application for coverage for a loan, without regard to who made the statements or provided the information, have been made and presented for and on behalf of the insured; and that s uch statements and information are neither false nor misleading in any material respect, nor omit any fact necessary to make such statements and information not false or misleading in any material respect. 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. Whenever the Company determines that an application contains a material misrepresentation, it either advises the insured in writing of its findings prior to rescinding coverage or exercises its unilateral right to rescind coverage for that loan, stating the reasons for that action in writing and returning the applicable premium. The rescission of coverage in instances of materially faulty representations or warranties provided in applications for insurance is a necessary and prevailing practice throughout

38


the insurance industry. In the case of mortgage guaranty insurance, rescissions have occurred regularly over the years but have been generally immaterial. Since 2008, however, the Company has experienced a much greater incidence of rescissions due to increased levels of observed fraud and misrepresentations in insurance applications pertaining to business underwritten between 2004 and the first half of 2008. As a result, the Company has incorporated certain assumptions regarding the expected levels of coverage rescissions and claim denials in its reserving methodology since 2008. Such estimates, which are evaluated at each balance sheet date, take into account observed as well as historical trends in rescission and denial rates. The table below shows the estimated effects of coverage rescissions and claim denials on loss reserves and settled and incurred losses.

 
June 30,
 
June 30,
 
December 31,
 
December 31,
 
2014
 
2013
 
2013
 
2012
Estimated reduction in beginning reserve
$
115.2

 
$
174.9

 
$
174.9

 
$
313.2

Total incurred claims and settlement expenses
 
 
 
 
 
 
 
reduced (increased) by changes in
 
 
 
 
 
 
 
estimated rescissions:
 
 
 
 
 
 
 
Current year
36.1

 
38.8

 
80.5

 
111.7

Prior year
3.8

 
55.7

 
71.9

 
12.2

Sub-total
40.0

 
94.6

 
152.5

 
124.0

Estimated rescission reduction in settled claims
(61.3
)
 
(120.0
)
 
(212.2
)
 
(262.3
)
Estimated reduction in ending reserve
$
93.9

 
$
149.5

 
$
115.2

 
$
174.9


As noted above, the estimated reduction in ending loss reserves reflects, in large measure, a variety of judgments relative to the level of expected coverage rescissions and claim denials on loans that are in default as of each balance sheet date. The provision for insured events of the current year resulted from actual and anticipated rescissions and claim denials attributable to newly reported delinquencies in each respective year. The provision for insured events of prior years resulted from actual rescission and claim denial activity or revisions in assumptions regarding expected rescission or claim denial rates on outstanding prior year delinquencies. The trends since 2010 reflect a continuing reduction in the level of actual and anticipated rescission and claim denial rates on total outstanding delinquencies. Claims not paid by virtue of rescission or denial represent the Company's estimated contractual risk, before consideration of the impacts of any reinsurance and deductibles or aggregate loss limits, on cases that are settled by the issuance of a rescission or denial notification. Variances between the estimated rescission and actual claim denial rate are reflected in the periods during which they occur.

Although the insured has no right under the policy to appeal a Company claim decision, the insured may, at any time, contest in writing the Company's findings or action with respect to a loan or a claim. In such cases, the Company considers any additional information supplied by the insured. This consideration may lead to further investigation, retraction or confirmation of the initial determination. If the Company concludes that it will reinstate coverage, it advises the insured in writing that it will do so immediately upon receipt of the premium previously returned. Reserves are not adjusted for potential reversals of rescissions or adverse rulings for loans under dispute since such reversals of claim rescissions and denials have historically been immaterial to the reserve estimation process.

There is currently a single instance in which the Company seeks to recover from an insured for previously paid claims. In its counterclaim in the pending arbitration with Countrywide, RMIC is seeking to rescind a June 2006 amendment to a mortgage insurance policy that it contends was fraudulently induced by Countrywide ( Countrywide Fin'l Corp. v. Republic Mortg. Ins. Co. , Case No. 72 195 Y 0011510 (AAA). The Countrywide parties are Countrywide Financial Corporation, Countrywide Home Loans, Inc., Bank of America, N.A., in its own capacity and as successor by merger of BAC Home Loan Servicing L.P.). The amendment made coverage for a loan immediately incontestable for borrower misrepresentation. The Company seeks a declaration that the amendment is null and void and to recover the claim amounts totaling at least $26.6 that it paid notwithstanding the existence of borrower misrepresentations that otherwise would have supported a rescission of coverage for those loans. The Company does not anticipate recoveries from previously paid claims in its reserving process until such time as a recovery is deemed probable and the amount can be reasonably estimated.

Incurred Loss Experience

Management believes that the Company's overall reserving practices have been consistently applied over many years. For at least the past ten years, previously established aggregate reserves have produced reasonable estimates of the cumulative ultimate net costs of claims incurred. However, there are no guarantees that such outcomes will continue, and, accordingly, no representation is made that ultimate net claim and related costs will not develop in future years to be greater or lower than currently established reserve estimates. In management's opinion, however, such potential development is 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 the Company's 2013 Annual Report on Form 10-K under Item 1A - Risk Factors.



39


The percentage of net claims, benefits and related settlement expenses incurred as a percentage of premiums and related fee revenues of the Company's three major operating segments and for consolidated operations were as follows:
 
General
 
Title
 
RFIG Run-off
 
Consolidated
Years Ended December 31:
 
 
 
 
 
 
 
2011
69.2
%
 
7.8
%
 
230.5
%
 
68.3
%
2012
73.0

 
7.2

 
221.8

 
61.9

2013
73.6

 
6.7

 
68.8

 
45.8

Six Months Ended June 30:
 
 
 
 
 
 
 
2013
73.1

 
6.8

 
82.4

 
46.4

2014
75.0

 
6.0

 
111.6

 
52.7

Quarters Ended June 30:
 
 
 
 
 
 
 
2013
74.3

 
6.8

 
33.5

 
43.0

2014
77.2
%
 
6.0
%
 
152.9
%
 
55.9
%

The percentage of net claims, benefits and related settlement expenses measured against premiums earned by major types of general insurance coverage were as follows :
 
General Insurance Claim Ratios by Type of Coverage
 
All
Coverages
 
Commercial
Automobile
(mostly
trucking)
 
Workers'
Compen-sation
 
Financial
Indemnity
 
Inland
Marine
and
Property
 
General
Liability
 
Other
Years Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31:
 
 
 
 
 
 
 
 
 
 
 
 
 
2011
69.2
%
 
71.9
%
 
72.3
%
 
39.2
%
 
70.4
%
 
64.6
%
 
62.8
%
2012
73.0

 
75.3

 
78.6

 
29.6

 
71.6

 
63.8

 
65.6

2013
73.6

 
76.1

 
79.6

 
21.4

 
59.6

 
78.5

 
67.8

Six Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30:
 
 
 
 
 
 
 
 
 
 
 
 
 
2013
73.1

 
78.5

 
77.1

 
32.1

 
60.9

 
67.9

 
69.7

2014
75.0

 
75.0

 
82.9

 
35.1

 
63.6

 
81.0

 
64.6

Quarters Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30:
 
 
 
 
 
 
 
 
 
 
 
 
 
2013
74.3

 
78.0

 
77.4

 
25.8

 
59.9

 
72.0

 
72.0

2014
77.2
%

74.9
%
 
84.8
%
 
34.6
%
 
67.5
%
 
87.6
%
 
63.0
%


The overall general insurance claims ratio shows a gradually increasing trend for the past three years. Claims ratios for the periods presented were affected by higher loss costs as workers' compensation and general liability losses continued to experience greater-than-expected severity.

During the three most recent calendar years, the general insurance group experienced favorable development of prior year loss reserves primarily due to the commercial automobile, general aviation, and the E&O/D&O (financial indemnity) lines of business; these were partially offset by unfavorable development in workers' compensation coverages and by ongoing development of asbestos and environmental ("A&E") claim reserves.

Unfavorable developments, although not material in any of the periods presented, are typically attributable to A&E claim reserves due to periodic re-evaluations of such reserves as well as subsequent reclassifications of other coverages' reserves, typically workers' compensation, deemed assignable to A&E category of losses. Except for a small portion that emanates from ongoing primary insurance operations, a large majority of the A&E claim reserves posted by Old Republic stem mainly from its participations in assumed reinsurance treaties and insurance pools which were discontinued during the 1980's and have since been in run-off status. With respect to the primary portion of gross A&E reserves, Old Republic administers the related claims through its claims personnel as well as outside attorneys, and posted reserves reflect its best estimates of ultimate claim costs. Claims administration for the assumed portion of 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 so-called survival ratios. Such ratios represent the number of years' average paid losses for the three or five most recent calendar years that are encompassed by an 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's average five year survival ratios stood at 5.2 years (gross) and 6.9 years (net of reinsurance) as of June 30, 2014 and 5.5 years (gross) and 7.8 years (net of reinsurance) as of December 31, 2013 . The survival ratios are presented on a pro forma basis (unaudited) as if PMA had been consolidated

40


with ORI for all periods presented. 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 insurance group net incurred losses for the five years ended December 31, 2013.

Title insurance loss ratios have remained in the single digits for a number of years due to a continuation of favorable trends in claims frequency and severity. Claim ratios in the most recent periods have trended lower towards more historical levels as the economic downturn and stresses in the housing and related mortgage lending industries, that began in mid-year 2007, continue to slowly subside.

The RFIG Run-off mortgage guaranty claim ratios since the second quarter 2013 reflect higher rates at which previously reported defaults are cured or otherwise resolved without payment as well as gradually improving trends in housing prices, foreclosures, and real estate activity in general. 2012 and prior years' reserve provisions have been impacted by the levels of reported delinquencies emanating from the downturn in the national economy, widespread stress in housing and mortgage finance markets, and high unemployment. Trends in expected and actual claim frequency and severity have been affected to varying degrees by several factors including, but not limited to, significant declines in home prices which limit a troubled borrower's ability to sell the mortgaged property in an amount sufficient to satisfy the remaining debt obligation, more restrictive mortgage lending standards which limit a borrower's ability to refinance the loan, increases in housing supply relative to demand, historically high levels of coverage rescissions and claims denials as a result of material misrepresentation in key underwriting information or non-compliance with prescribed underwriting guidelines, and changes in claim settlement costs. The latter costs are influenced by the amount of unpaid principal outstanding on delinquent loans as well as the rising expenses of settling claims due to higher investigation costs, legal fees, and accumulated interest expenses. The RFIG Run-off business 2014 loss costs were negatively impacted by the CCI claims settlement as disclosed elsewhere.

Certain mortgage guaranty average claims related trends are listed below:
 
Average Settled Claim Amount (a)
 
Reported Delinquency
Ratio at End of Period
 
Claims
Rescissions
and
Denials
 
Traditional
Primary
 
Bulk
 
Traditional
Primary
 
Bulk
 
Years Ended December 31:
 
 
 
 
 
 
 
 
 
2011
$
48,254

 
$
54,956

 
14.89
%
 
21.90
%
 
$
279.5

2012
46,376

 
53,221

 
14.70

 
21.57

 
262.3

2013
44,678

 
46,395

 
13.09

 
18.73

 
212.2

Six Months Ended June 30:
 
 
 
 
 
 
 
 
 
2013
44,986

 
47,631

 
13.24

 
19.64

 
120.0

2014
45,110

 
45,832

 
11.39
%
 
18.44
%
 
61.3

Quarters Ended June 30:
 
 
 
 
 
 
 
 
 
2013
45,121

 
46,741

 
 
 
 
 
58.8

2014
$
44,846

 
$
47,252

 
 
 
 
 
$
31.8

__________

(a)
Amounts are in whole dollars.
 
 
 
Traditional Primary Delinquency Ratios for Top Ten States (b):
 
TX
 
FL
 
GA
 
IL
 
CA
 
NC
 
PA
 
OH
 
NJ
 
VA
As of December 31:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2011
8.4
%
 
32.2
%
 
15.4
%
 
20.6
%
 
17.1
%
 
12.2
%
 
12.1
%
 
15.4
%
 
23.5
%
 
11.5
%
2012
7.9

 
31.6

 
13.7

 
20.8

 
14.1

 
11.2

 
13.9

 
15.6

 
26.6

 
10.8

2013
8.0

 
25.9

 
11.2

 
16.6

 
9.6

 
10.3

 
14.1

 
14.3

 
26.3

 
9.2

As of June 30:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2013
7.1

 
28.4

 
11.3

 
17.8

 
10.8

 
10.2

 
13.2

 
13.9

 
26.3

 
9.6

2014
7.0
%
 
21.6
%
 
9.3
%
 
14.1
%
 
8.3
%
 
8.7
%
 
12.7
%
 
12.3
%
 
25.2
%
 
8.0
%

 
 
 
Bulk Delinquency Ratios for Top Ten States (b):
 
TX
 
FL
 
GA
 
IL
 
CA
 
AZ
 
PA
 
OH
 
NJ
 
NY
As of December 31:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2011
14.1
%
 
34.0
%
 
19.5
%
 
26.3
%
 
21.8
%
 
19.7
%
 
20.1
%
 
19.1
%
 
28.2
%
 
23.0
%
2012
13.7

 
34.2

 
17.9

 
27.2

 
17.6

 
15.3

 
21.4

 
19.5

 
32.5

 
25.5

2013
12.6

 
28.8

 
14.2

 
21.4

 
13.2

 
12.9

 
19.9

 
16.8

 
31.1

 
23.8

As of June 30:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2013
12.1

 
31.4

 
14.2

 
23.4

 
14.8

 
13.2

 
19.2

 
18.0

 
32.9

 
24.8

2014
11.7
%
 
26.9
%
 
13.1
%
 
20.4
%
 
13.9
%
 
11.3
%
 
20.2
%
 
15.5
%
 
33.4
%
 
27.7
%

41



 
Total Delinquency Ratios for Top Ten States (includes "other" business) (b):
 
TX
 
FL
 
GA
 
IL
 
CA
 
NC
 
PA
 
OH
 
NJ
 
NY
As of December 31:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2011
8.8
%
 
31.6
%
 
15.4
%
 
20.5
%
 
18.1
%
 
11.7
%
 
12.7
%
 
15.7
%
 
24.0
%
 
19.0
%
2012
8.4

 
31.3

 
13.8

 
21.3

 
15.2

 
11.1

 
14.5

 
16.0

 
27.4

 
23.0

2013
8.4

 
26.4

 
11.5

 
17.0

 
10.7

 
10.8

 
14.6

 
14.6

 
27.1

 
22.8

As of June 30:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2013
7.5

 
28.9

 
11.6

 
18.1

 
12.1

 
10.9

 
13.7

 
14.4

 
27.2

 
22.6

2014
7.4
%
 
22.6
%
 
9.7
%
 
14.6
%
 
10.0
%
 
9.3
%
 
13.3
%
 
12.7
%
 
26.4
%
 
23.9
%
__________

(b)
As determined by risk in force as of June 30, 2014 , these 10 states represent approximately 50.6%, 59.0%, and 50.9%, of traditional primary, bulk, and total risk in force, respectively.

The following table shows CCI claims related trends for the periods shown:
 
 
 
 
 
 
 
 
 
Reported
Delinquency
Ratio at End
of Period
 
Claim
Rescissions
and Denials
 
CCI Claim Costs
 
 
 
Paid
 
Incurred
 
 
 
Amount
 
Ratio (a)
 
Amount
 
Ratio (a)
 
 
Years Ended
 
 
 
 
 
 
 
 
 
 
 
December 31:
 
 
 
 
 
 
 
 
 
 
 
2011
$
111.8

 
191.7
%
 
$
102.9

 
176.5
%
 
4.4
%
 
$
166.1

2012
73.8

 
173.9

 
112.8

 
265.7

 
3.9

 
98.1

2013
48.5

 
162.9

 
44.5

 
149.4

 
2.6

 
54.4

Six Months Ended
 
 
 
 
 
 
 
 
 
 
 
June 30:
 
 
 
 
 
 
 
 
 
 
 
2013
27.8

 
185.0

 
21.7

 
145.0

 
3.2

 
37.9

2014
18.0

 
122.7

 
102.3

 
N/M

 
2.1
%
 
16.0

Quarters Ended
 
 
 
 
 
 
 
 
 
 
 
June 30:
 
 
 
 
 
 
 
 
 
 
 
2013
13.5

 
187.9

 
6.6

 
93.0
%
 
 
 
20.4

2014
$
10.0

 
127.6
%
 
$
78.8

 
N/M

 
 
 
$
7.4

__________

(a)
Percent of net CCI earned premiums. CCI claims ratios include only those costs actually or expected to be paid by the Company and exclude claims not paid by virtue of coverage rescissions and claims denials as well as unsubstantiated claim submissions. Certain claim rescissions and denials may from time to time become the subject of disagreements between the Company and certain individual insureds. Possible future reversals of such rescissions and denials, however, may not necessarily affect the adequacy of previously established claim reserve levels nor fully impact operating results. These effects could be fully or partially negated by the imposition of additional retrospective premiums and/or the limiting effects of maximum policy limits.

Reinsurance Programs

To maintain premium production within its capacity and limit maximum losses and risks for which it might become liable under its policies, Old Republic may cede a portion or all of its premiums and liabilities on certain classes of insurance, individual policies, or blocks of business to other insurers and reinsurers. Further discussion of the Company's reinsurance programs can be found in Part 1 of the Company's 2013 Annual Report on Form 10-K.


42


Expenses: Underwriting Acquisition and Other Expenses

The following table sets forth the expense ratios registered by each major business segment and in consolidation for the periods shown:
 
General
 
Title
 
RFIG Run-off
 
Consolidated
Years Ended December 31:
 
 
 
 
 
 
 
2011
25.2
%
 
91.2
%
 
22.1
%
 
47.5
%
2012
25.7

 
89.6

 
10.4

 
48.5

2013
23.7

 
88.0

 
8.1

 
49.2

Six Months Ended June 30:
 
 
 
 
 
 
 
2013
24.3

 
87.7

 
7.7

 
49.4

2014
23.2

 
91.4

 
10.8

 
46.9

Quarters Ended June 30:
 
 
 
 
 
 
 
2013
24.2

 
86.2

 
8.3

 
49.6

2014
23.0
%
 
89.0
%
 
9.5
%
 
46.2
%

Variations in the Company's consolidated expense ratios reflect a continually changing mix of coverages sold and attendant costs of producing business in the Company's three largest business segments. To a significant degree, expense ratios for both the general and title insurance segments are mostly reflective of variable costs, such as commissions or similar charges, that rise or decline along with corresponding changes in premium and fee income. Moreover, general operating expenses can contract or expand in differing proportions due to varying levels of operating efficiencies and expense management opportunities in the face of changing market conditions. The general insurance expense ratio for 2012 was impacted by a charge related to previously deferred acquisition costs stemming from new accounting guidance issued by the FASB. The title insurance expense ratio for the current periods increased as operating expenses were down by a somewhat lower percentage than the corresponding reduction in revenues. The 2011 RFIG Run-off expense ratio reflects an accrual of employment severance and similar costs, and the elimination of previously deferred acquisition costs. The lower 2012 and 2013 operating expense ratios reflect ongoing cost control geared to a run-off operation. The moderate increases in posted expense ratios for both 2014 periods reflect a continuing drop in earned premiums and charges taken relative to the attempted recapitalization efforts which were terminated earlier this year.

Expenses: Total

The composite ratios of the above summarized net claims, benefits and underwriting expenses that reflect the sum total of all the factors enumerated above have been as follows:
 
General
 
Title
 
RFIG Run-off
 
Consolidated
Years Ended December 31:
 
 
 
 
 
 
 
2011
94.4
%
 
99.0
%
 
252.6
%
 
115.8
%
2012
98.7

 
96.8

 
232.2

 
110.4

2013
97.3

 
94.7

 
76.9

 
95.0

Six Months Ended June 30:
 
 
 
 
 
 
 
2013
97.4

 
94.5

 
90.1

 
95.8

2014
98.2

 
97.4

 
122.4

 
99.6

Quarters Ended June 30:
 
 
 
 
 
 
 
2013
98.5

 
93.0

 
41.8

 
92.6

2014
100.2
%
 
95.0
%
 
162.4
%
 
102.1
%

Expenses: Income Taxes

The effective consolidated income tax rates were 33.7% and 34.3% in the second quarter and first six months of 2014, compared to 34.5% and 34.3% in the second quarter and first six months of 2013. The rates for each period reflect primarily the varying proportions of pretax operating income (loss) derived from partially tax sheltered investment income (principally state and municipal tax-exempt interest), the combination of fully taxable investment income, realized investment gains or losses, underwriting and service income, and judgments about the recoverability of deferred tax assets.



43


OTHER INFORMATION

Reference is here made to "Information About Segments of Business" appearing elsewhere herein.

Historical data pertaining to the operating results, liquidity, and other performance indicators applicable to an insurance enterprise such as Old Republic are not necessarily indicative of results to be achieved in succeeding years. In addition to the factors cited below, the long-term nature of the insurance business, seasonal and annual patterns in premium production and incidence of claims, changes in yields obtained on invested assets, changes in government policies and free markets affecting inflation rates and general economic conditions, and changes in legal precedents or the application of law affecting the settlement of disputed and other claims can have a bearing on period-to-period comparisons and future operating results.

Some of the oral or written statements made in the Company's reports, press releases, and conference calls following earnings releases, can constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Of necessity, any such forward-looking statements involve assumptions, uncertainties, and risks that may affect the Company's future performance. With regard to Old Republic's General Insurance segment, its results can be affected, in particular, by the level of market competition, which is typically a function of available capital and expected returns on such capital among competitors, the levels of interest and inflation rates, and periodic changes in claim frequency and severity patterns caused by natural disasters, weather conditions, accidents, illnesses, work-related injuries, and unanticipated external events. RFIG Run-off and Title Insurance results can be affected by similar factors and by changes in national and regional housing demand and values, the availability and cost of mortgage loans, employment trends, and default rates on mortgage loans. RFIG Run-off results, in particular, may also be affected by various mortgage guaranty risk-sharing arrangements with business producers, as well as the risk management and pricing policies of government sponsored enterprises. Life and accident insurance earnings can be affected by the levels of employment and consumer spending, variations in mortality and health trends, and changes in policy lapsation rates. At the parent holding company level, operating earnings or losses are generally reflective of the amount of debt outstanding and its cost, interest income on temporary holdings of short-term investments, and period-to-period variations in the costs of administering the Company's widespread operations.

A more detailed listing and discussion of the risks and other factors which affect the Company's risk-taking insurance business are included in Part I, Item 1A - Risk Factors, of the Company's 2013 Annual Report to the Securities and Exchange Commission, which Item is specifically incorporated herein by reference.

Any forward-looking statements or commentaries speak only as of their dates. Old Republic undertakes no obligation to publicly update or revise any and all such comments, whether as a result of new information, future events or otherwise, and accordingly they may not be unduly relied upon.

44



OLD REPUBLIC INTERNATIONAL CORPORATION
 
 
Item 3 - Quantitative and Qualitative Disclosure About Market Risk

Market risk represents the potential for loss due to adverse changes in the fair value of financial instruments as a result of changes in interest rates, equity prices, foreign exchange rates and commodity prices. Old Republic's primary market risks consist of interest rate risk associated with investments in fixed maturities and equity price risk associated with investments in equity securities. The Company has no material foreign exchange or commodity risk.

Old Republic's market risk exposures at June 30, 2014 , have not materially changed from those identified in the Company's 2013 Annual Report on Form 10-K.

Item 4 - Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company's principal executive officer and its principal accounting officer have evaluated the Company's disclosure controls and procedures as of the end of the period covered by this quarterly report. Based upon their evaluation, the principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective for the above referenced evaluation period.

Changes in Internal Control

During the three month period ended June 30, 2014 , there were no changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Management's Report on Internal Control Over Financial Reporting

The Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

45



OLD REPUBLIC INTERNATIONAL CORPORATION
FORM 10-Q
PART II - OTHER INFORMATION
 

Item 1 - Legal Proceedings

The information contained in Note 6 "Commitments and Contingent Liabilities" of the Notes to Consolidated Financial Statements filed as Part 1 of this Quarterly Report on Form 10-Q is incorporated herein by reference.

Item 1A - Risk Factors

There have been no material changes with respect to the risk factors disclosed in the Company's 2013 Annual report on Form 10-K.

Item 6 - Exhibits

(a) Exhibits
3(A)

 
Restated Certificate of Incorporation.
 
 
 
31.1

 
Certification by Aldo C. Zucaro, Chief Executive Officer, pursuant to Rule 13a-14(a) and 15d-14(a), as
 
 
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2

 
Certification by Karl W. Mueller, Chief Financial Officer, pursuant to Rule 13a-14(a) and 15d-14(a), as
 
 
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1

 
Certification by Aldo C. Zucaro, Chief Executive Officer, pursuant to Section 1350, Chapter 63 of Title 18,
 
 
United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.2

 
Certification by Karl W. Mueller, Chief Financial Officer, pursuant to Section 1350, Chapter 63 of Title 18,
 
 
United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

46




SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
 
Old Republic International Corporation
 
 
 
(Registrant)
Date:
August 1, 2014
 
 
 
 
 
 
 
 
 
/s/ Karl W. Mueller
 
 
 
 
 
 
 
Karl W. Mueller
Senior Vice President,
Chief Financial Officer, and
Principal Accounting Officer


47

EXHIBIT INDEX


Exhibit
 
 
No.
 
Description
 
 
 
3(A)

 
Restated Certificate of Incorporation.
 
 
 
31.1

 
Certification by Aldo C. Zucaro, Chief Executive Officer, pursuant to Rule 13a-14(a) and 15d-14(a), as
 
 
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2

 
Certification by Karl W. Mueller, Chief Financial Officer, pursuant to Rule 13a-14(a) and 15d-14(a), as
 
 
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1

 
Certification by Aldo C. Zucaro, Chief Executive Officer, pursuant to Section 1350, Chapter 63 of Title 18,
 
 
United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.2

 
Certification by Karl W. Mueller, Chief Financial Officer, pursuant to Section 1350, Chapter 63 of Title 18,
 
 
United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


48

Exhibit 3(A)
RESTATED
CERTIFICATE OF INCORPORATION

OF

OLD REPUBLIC INTERNATIONAL CORPORATION



The Board of Directors, in a procedure authorized by Section 245 of the General Corporation Law of Delaware, approved and adopted at a meeting held May 8, 2014 the following Restated Certificate of Incorporation. This document only restates and integrates and does not further amend the provisions of the Corporation’s Certificate of Incorporation duly filed with the Secretary of State of Delaware on March 6, 1969 as heretofore amended or supplemented, and there is no discrepancy between those provisions and the provisions of this restated certificate.

FIRST:
The name of the corporation is Old Republic International Corporation.

SECOND:
The address of its registered office in the State of Delaware is 2711 Centerville Road, Suite 400 in the City of Wilmington 19808, County of New Castle. The name of its registered agent at such address is The Prentice-Hall Corporation System, Inc.

THIRD:
The nature of the business or purposes to be conducted or promoted are:

To acquire, own and dispose of the whole or any part of the capital stock, securities, assets or obligations of other corporations; and

To engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware.

FOURTH:
The total number of shares of all classes of capital stock which the Corporation shall have authority to issue is Six Hundred Seventy-five Million (675,000,000) shares divided into three classes as follows:

Seventy-Five Million (75,000,000) shares of Preferred Stock of the par value of one cent ($.01) per share (Preferred Stock).

Five Hundred Million (500,000,000) shares of Common Stock of the par value of $1.00 per share (Common Stock).

One Hundred Million (100,000,000) shares of Class B Common Stock of the par value of $1.00 per share (Class B Common Stock).

The designations, powers, preferences and rights, and the qualifications, limitations or restrictions of the above classes of stock are as follows:




Rev. 7/7/14


DIVISION I

Preferred Stock

1.    The Board of Directors is expressly authorized at any time, and from time to time, to issue shares of Preferred Stock in one or more series, and for such consideration as the Board may determine, with such voting powers, full or limited but not to exceed one vote per share, or without voting powers, and with such designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated in the resolution or resolutions providing for the issue thereof, and as are not stated in this Certificate of Incorporation, or any amendment thereto. All shares of any one series shall be of equal rank and identical in all respects.

2.    No dividend shall be paid or declared on any particular series of Preferred Stock unless dividends shall be paid or declared pro rata on all shares of Preferred Stock at the time outstanding of each other series which ranks equally as to dividends with such particular series.

3.    Unless and except to the extent otherwise required by law or provided in the resolution or resolutions of the Board of Directors creating any series of Preferred Stock pursuant to this Division I, the holders of the Preferred Stock shall have no voting power with respect to any matter whatsoever. In no event shall the Preferred Stock be entitled to more than one vote in respect of each share of stock. Subject to the protective conditions or restrictions of any outstanding series of Preferred Stock, any amendment to this Certificate of Incorporation which shall increase or decrease the authorized capital stock of any class or classes may be adopted by the affirmative vote of the holders of a majority of the outstanding shares of the voting stock of the Corporation.

4.    Shares of Preferred Stock redeemed, converted, exchanged, purchased, retired or surrendered to the Corporation, or which have been issued and reacquired in any manner, shall upon compliance with any applicable provisions of the General Corporation Law of the State of Delaware, have the status of authorized and unissued shares of Preferred Stock and may be reissued by the Board of Directors as part of the series of which they were originally a part or may be reclassified into and reissued as part of a new series or as a part of any other series, all subject to the protective conditions or restrictions of any outstanding series of Preferred Stock.


DIVISION II

Common Stock and Class B Common Stock

1.    Dividends. Subject to the preferential rights, if any, applicable to shares of the Preferred Stock and subject to applicable requirements, if any, with respect to the setting aside of sums for purchase, retirement or sinking funds for the Preferred Stock, the holders of the Common Stock and the Class B Common stock shall be entitled to receive to the extent permitted by law, such dividends as may be declared from time to time by the Board of Directors; provided that whenever a cash dividend is paid to the holders of Class B Common Stock, the Corporation shall also pay to the holders of the Common Stock a cash dividend per share at least equal to the cash dividend per share paid to the holders of the Class B Common Stock and further provided that the Corporation may

ORI Restated 2014     2

pay cash dividends to the holders of the Common Stock in excess of cash dividends paid, or without paying cash dividends, to holders of the Class B Common Stock.

2.    Liquidation. In the event of the voluntary or involuntary liquidation, dissolution, distribution of assets or winding up of the Corporation, after distribution in full of the preferential amounts, if any, to be distributed to the holders of shares of the Preferred Stock, holders of the Common Stock and the Class B Common Stock shall be entitled to receive all the remaining assets of the Corporation of whatever kind available for distribution to stockholders ratably in proportion to the number of shares of Common Stock and the Class B Common Stock held by them, respectively.

3.    Voting Rights. Except as may be otherwise required by law or this Certificate of Incorporation, each holder of the Common Stock shall have one vote in respect of each share of Common Stock held by him of record on the books of the Corporation on all matters voted upon by the stockholders and each holder of the Class B Common Stock shall have one-tenth (1/10) of one vote in respect of each share of Class B Common Stock held by him of record on the books of the Corporation on all matters voted upon by the stockholders; provided that the holders of the Common Stock and the Class B Common Stock shall vote together as a single class.

4.    Definition. Notwithstanding the provisions of the Designations, preferences, and rights of Series A Junior Participating Preferred Stock, the Designations, preferences and rights of Series G-3 Convertible Preferred Stock for the purposes of the Corporation’s Restated Certificate of Incorporation, as amended, the term “Common Stock” shall mean Common Stock as defined in the first paragraph of this Article FOURTH and shall not include the Class B Common Stock of the Corporation, provided, however, that for the purposes of the section titled “Voting,” the term “Common Stock” shall mean both the Common Stock as defined in the first paragraph of this Article FOURTH and the Class B Common Stock of the Corporation.


DIVISION III

Elimination of Preemptive Rights

No holder of stock of any class of the Corporation shall be entitled as a matter of right to purchase or subscribe for any part of any unissued stock of any class, or of any additional stock of any class of capital stock of the Corporation, or of any bonds, certificates of indebtedness, debentures, or other securities convertible into stock of the Corporation, now or hereafter authorized, but any such stock of other securities convertible into stock may be issued and disposed of pursuant to resolution by the Board of Directors to such persons, firms, corporations or associations and upon such terms and for such consideration (not less than the par value or stated value thereof) as the Board of Directors in the exercise of its discretion may determine and as may be permitted by law without action by the stockholders.

DESIGNATIONS, PREFERENCES AND RIGHTS OF
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK

1.    Designation.

The shares of such series shall be designated as “Series A Junior Participating Preferred Stock” (the “Series A Preferred Stock”) and the number of shares constituting the Series A Preferred

ORI Restated 2014     3

Stock shall be 10,000,000; such number of shares may be increased or decreased by resolution of the Board of Directors; provided that no decrease shall reduce the number of shares of Series A Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights, or warrants or upon conversion of any outstanding securities issued by the Corporation convertible into Series A Preferred Stock.

2.    Dividends and Distributions.

(a)    Subject to the rights of the holders of any shares of any series of Preferred Stock (or any similar stock) ranking prior and superior to the Series A Preferred Stock with respect to dividends, the holders of shares of Series A Preferred Stock, in preference to the holders of Common Stock, par value $1.00 per share (the “Common Stock”), of the Corporation, and of any other junior stock, shall be entitled to receive, when and if declared by the Board of Directors, out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of March, June, September and December in each year (each such date being referred to herein as a “Quarterly Dividend Payment Date”), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1 or (b) subject to the provision for adjustment hereinafter set forth, 100 time the aggregate per share amount (payable in kind) of all non-cash dividend or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

(b)    The Corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in paragraph (a) of this Section immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1 per share on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date.

(c)    Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled

ORI Restated 2014     4

to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall not be more than 60 days prior to the date fixed for the payment thereof.

3.    Voting Rights.

The holders of shares of Series A Preferred Stock shall have the following voting rights:

(a)    Except as provided in paragraph (c) of this Section 3 and subject to the provisions for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the Corporation.

(b)    Except as otherwise provided herein or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation.

(c)    (i)    If, on the date used to determine stockholders of record for any meeting of stockholders for the election of directors, a default in preference dividends (as defined in subparagraph (v) below) on the Series A Preferred Stock shall exist, the holders of the Series A Preferred Stock shall have the right, voting as a class as described in subparagraph (ii) below, to elect two directors (in addition to the directors elected by holders of Common Stock of the Corporation). Such right may be exercised (a) at any meeting of stockholders for the election of directors or (b) at a meeting of the holders of shares of Voting Preferred Stock (as hereinafter defined), called for the purpose in accordance with the By-Laws of the Corporation, until all such cumulative dividends (referred to above) shall have been paid in full or until non-cumulative dividends have been paid regularly for at least one year.

(ii)    The right of the holders of Series A Preferred Stock to elect two directors as described above, shall be exercised as a class concurrently with the rights of holders of any other series of Preferred Stock upon which voting rights to elect such directors have been conferred and are then exercisable. The Series A Preferred Stock and any additional series of Preferred Stock which the Corporation may issue and which may provide for the right to vote with the foregoing series of Preferred Stock are collectively referred to herein as “Voting Preferred Stock.”

(iii)    Each director elected by the holders of shares of Voting Preferred Stock shall be referred to herein as a “Preferred Director.” A Preferred Director so elected shall continue to serve as such director for a term of one year; except that upon any termination of the right of all such holders to vote as a class of Preferred Directors, the term of office of such directors shall terminate. Any Preferred Director may be removed by, and shall not be removed except by, the vote of the holders of record of a majority of the outstanding shares of Voting Preferred Stock then entitled to vote for the election of directors, present (in person or by proxy) and voting together as a single class (a) at a meeting of the stockholders, or (b) at a meeting of the holders of shares of such Voting Preferred Stock; called for the purpose in accordance with the By-laws of the Corporation, or (c) by

ORI Restated 2014     5

written consent signed by the holders of a majority of the then outstanding shares of Voting Preferred Stock then entitled to vote for the election of directors, taken together as a single class.

(iv)    So long as a default in any preference dividends on the Series A Preferred Stock shall exist or the holders of any other series of Voting Preferred Stock shall be entitled to elect Preferred Directors, (a) any vacancy in the office of a Preferred Director may be filled (except as provided in the following clause (b)) by an instrument in writing signed by the remaining Preferred Directors and filed with the Corporation and (b) in the case of the removal of any Preferred Director, the vacancy may be filled by the vote or written consent of the holders of a majority of the outstanding shares of Voting Preferred Stock then entitled to vote for the election of directors present (in person or by proxy) and voting together as a single class at such time as the removal shall be effected. Each director appointed as aforesaid by the remaining Preferred Director shall be deemed, for all purposes hereof, to be a Preferred Director. Whenever (1) no default in preference dividends on the Series A Preferred Stock shall exist and (2) the holders of other series of Voting Preferred Stock shall no longer be entitled to elect such Preferred Directors, then the number of directors constituting the Board of Directors of the Corporation shall be reduced by two.

(v)    For purposes hereof, a “default in preference dividends” on the Series A Preferred Stock shall be deemed to have occurred whenever the amount of cumulative and unpaid dividends on the Series A Preferred Stock shall be equivalent to six full quarterly dividends or more (whether or not consecutive), and, having so occurred, such default shall be deemed to exist thereafter until, but only until, all cumulative dividends on all shares of the Series A Preferred Stock then outstanding shall have been paid through the last Quarterly Dividend Payment Date or until, but only until, non-cumulative dividends have been paid regularly for at least one year.

(d)    Except as set forth herein (or as otherwise required by applicable law), holders of Series A Preferred Stock shall have no general or special voting rights and their consent shall not be required for taking any corporate action.

4.    Certain Restrictions.

(a)    Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Corporation shall not:

(i)    declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock;

(ii)    declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably in the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled;

(iii)    redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock, provided that the Corporation may at any time redeem, purchase or

ORI Restated 2014     6

otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or

(iv)    redeem or purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes.

(b)    The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (a) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner.

5.    Reacquired Shares.

Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein, in the Certificate of Incorporation, or in any other Certificate of Designations creating a series of Preferred Stock or any similar stock or as otherwise required by law.

6.    Liquidation, Dissolution or Winding Up.

(a)    Subject to the prior and superior rights of holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series A Preferred Stock with respect to rights upon liquidation, dissolution or winding up (voluntary or otherwise), no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the “Series A Liquidation Preference”). Following the payment of the full amount of the Series A Liquidation Preference, no additional distributions shall be made to the holders of shares of Series A Preferred Stock unless, prior thereto, the holders of shares of Common Stock shall have received an amount per share (the “Capital Adjustment”) equal to the quotient obtained by dividing (i) the Series A Liquidation Preference by (ii) 100 (the “Adjusted Number”). Following the payment of the full amount of the Series A Liquidation Preference and the Capital Adjustment in respect of all outstanding shares of Series A Preferred Stock and Common Stock, respectively, holders of Series A Preferred Stock and holders of Common Stock shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to 1 with respect to such Preferred Stock and Common Stock, on a per share basis, respectively.

(b)    In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other series of

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preferred stock, if any, which rank on a parity with the Series A Preferred Stock, then such remaining assets shall be distributed ratably to the holders of Series A Preferred Stock and the holders of such parity shares in proportion in their respective liquidation preferences. In the event, however, that there are not sufficient assets available to permit payment in full of the Capital Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock.

7.    Consolidation, Merger, etc.

In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provisions for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

8.    No Redemption.

The shares of Series A Preferred Stock shall not be redeemable.

9.    Ranking.

The Series A Preferred Stock shall rank, with respect to payment of dividends and the distribution of assets, junior to all series of any other class of the Corporation’s Preferred Stock.

10.    Amendment.

The Certificate of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Series A Preferred Stock, voting together as a single class.
    

FIFTH:
The number of directors of the Corporation shall be fixed from time to time by, or in the manner provided in its by-laws and may be increased or decreased as therein provided, but in no event shall the number of directors of the Corporation be less than five (5) nor more than eighteen (18). The directors shall be classified with respect to the time for which they shall severally hold office by dividing them as equally as the total number of directors will permit into three classes, and all directors shall hold office until their successors are elected and qualified. The term of service

ORI Restated 2014     8

of each class of directors shall be three years or until the third annual meeting of the shareholders following the election of the class. The terms of service of each class of directors shall expire in successive years. At each annual meeting of the shareholders, successors to the class of directors whose terms then expire shall be elected to serve for the full term of three years or until the third annual meeting of shareholders following their election. At each succeeding annual meeting of shareholders, the shareholders shall elect directors only of the class whose terms then expire.

SIXTH:
The Corporation is to have perpetual existence.

SEVENTH:
The private property of the stockholders shall not be subject to the payment of corporate debts to any extent whatsoever.

EIGHTH:
In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized, subject to the protective conditions or restrictions, of any outstanding series of Preferred Stock fixed by the Board of Directors pursuant to the authority conferred upon the Board of Directors by Article Fourth of this Certificate of Incorporation and Section 151 of Title 8 of the Delaware Code:

1.    To make, alter or repeal the By-Laws of the Corporation.

2.    To authorize and cause to be executed mortgages and liens on the real and personal property of the Corporation.

3.    To set apart out of any of the funds of the Corporation available for dividends a reserve or reserves for any proper purpose and to abolish any such reserve in the manner in which it was created.

4.    By a majority of the whole Board, to designated one or more committees, each committee to consist of two or more of the Directors of the Corporation. The Board may designate one or more Directors as alternate members of any committee, who may replace any absent or disqualified member of any meeting of the committee. Any such committee, to the extent provided in the resolution or in the By-Laws of the Corporation, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; provided, however, the By-laws may provide that in the absence or disqualification of any member of such committee or committees the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member.

5.    Subject to the provisions of Article Fourteenth of this Certificate of Incorporation, when and as authorized by the affirmative vote of the holders of a majority of the stock issued and outstanding having voting power given at a stockholders meeting duly called upon such notice as is required by statute, or when

ORI Restated 2014     9

authorized by the written consent of the holders of a majority of the voting stock issued and outstanding, to sell, lease or exchange all or substantially all of the property and assets of the Corporation, including its goodwill and its corporate franchises, upon which such terms and conditions and for such consideration, which may consist in whole or in part of money or property including shares of stock in, and/or other securities of any other corporation or corporations, as its Board of Directors shall deem expedient and for the best interests of the Corporation.

NINTH:
Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganizations shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders of this Corporation, as the case may be, and also on this Corporation.

TENTH:
Meetings of stockholders and of the Board of Directors may be held within or without the State of Delaware, as the By-laws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the By-laws of the Corporation. Elections of Directors need not be by written ballot unless the By-laws of the Corporation shall so provide.

ELEVENTH:
The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation.

TWELFTH:
No contract or transaction between the Corporation and one or more of its Directors or officers, or between the Corporation and any other corporation, partnership, association or other organization in which one or more of its Directors or officers are Directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the Director or officer is present at or participates in the meeting of the Board or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose if:


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(a)    The material facts as to his interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board or committee in good faith authorizes the contract or transaction by a vote sufficient for such purpose without counting the vote of the interested Director or Directors; or

(b)    The material facts as to his interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or

(c)    The contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof, or the stockholders.

Common or interested Directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction.

THIRTEENTH:
1.    The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a Director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a Director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe this conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful.

2.    The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a Director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a Director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys’ fees) and amounts paid in settlement actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation and except that no such indemnification shall be made in respect to any claim, issue or matter as to which

ORI Restated 2014     11

such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.

3.    To the extent that any person referred to in paragraphs 1 and 2 of this Article Thirteenth has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to therein or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection therewith.

4.    Any indemnification under paragraphs 1 and 2 of this Article Thirteenth (unless made by a court), shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the Director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in paragraphs 1 and 2 of this Article Thirteenth. Such determination shall be made (a) by the Board of Directors by a majority vote of a quorum (as defined in the By-Laws of the Corporation) consisting of Directors who were not parties to such action, suit or proceeding, or (b) if such quorum is not obtainable, or even if obtainable a quorum of disinterested Directors so directs, by independent legal counsel in a written opinion, or (c) by the stockholders.

5.    Expenses incurred in defending a civil or criminal action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding in the manner provided in paragraph 4 of this Article Thirteenth upon receipt of an undertaking by or on behalf of the Director, officer, employee or agent to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this Article Thirteenth.

6.    The indemnification and advancement of expenses provided by, or granted pursuant to other sections of this Article Thirteenth shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any statute, by-law, agreement, vote of stockholders or disinterested Directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office.

7.    The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a Director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a Director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article Thirteenth.

8.    The indemnification and advancement of expenses provided by, or granted pursuant to, this Article Thirteenth shall, unless otherwise provided when authorized

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or ratified, continue as to a person who has ceased to be a Director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. Any repeal or modification of this Article Thirteenth shall not adversely affect any right to indemnification or advancement of expenses of any present or former Director, officer, employee or agent of the Corporation existing at the time of such repeal or modification.

9.    For purposes of this Article Thirteenth, references to the “Corporation” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its Directors, officers, employees or agents, so that any person who is or was a Director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a Director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article Thirteenth, with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued.

10.    For purposes of this Article Thirteenth, references to “other enterprises” shall include employee benefit plans; references to “fines” shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to “serving at the request of the Corporation” shall include any service as a Director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such Director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner “not opposed to the best interests of the Corporation” as referred to in this Article Thirteenth.

11.    If this Article THIRTEENTH or any portion hereof is invalidated by any court of competent jurisdiction, then the Corporation shall nevertheless provide such indemnification and advancement of expenses as would otherwise be permitted under any portion of this Article Thirteenth that shall not have been invalidated.

FOURTEENTH:
1.    Except as set forth in paragraph 2 of this Article Fourteenth, the affirmative vote or consent of the holders of 80% of the outstanding shares of all classes of stock of the Corporation entitled to vote in elections of Directors, considered for the purposes of this Article Fourteenth as one class, shall be required to:

(a)    for the adoption of any agreement for the merger or consolidation of the Corporation with or into any other Corporation (as hereinafter defined), or

(b)    to authorize any sale, lease, exchange, mortgage, pledge or other disposition of all, or substantially all, or any Substantial Part (as hereinafter defined) of the assets of the Corporation or any Subsidiary (as hereinafter defined) to any Other Corporation, or

ORI Restated 2014     13


(c)    to authorize the issuance or transfer by the Corporation of any Substantial Amount (as hereinafter defined) of securities of the Corporation in exchange for the securities or assets of any Other Corporation if, in any such case, as of the record date for the determination of stockholders entitled to notice thereof and to vote thereon or consent thereto such Other Corporation is the Beneficial Owner (as hereinafter defined) of more than 10% of the outstanding shares of the stock of the Corporation entitled to vote in elections of Directors considered for the purposes of this Article Fourteenth as one class. Such affirmative vote or consent shall be in addition to the vote or consent of the holders of the stock of the Corporation otherwise required by law, this Certificate of Incorporation or any agreement or contract to which the Corporation is a party.

2.    The provisions of paragraph 1 of this Article Fourteenth shall not be applicable to any transaction described therein if such transaction is approved by resolution of the Board of Directors of the Corporation, provided that (a) a majority of the members of the Board of Directors voting for the approval of such transaction were duly elected and acting members of the Board of Directors prior to the time such Other Corporation shall have become a Beneficial Owner of more than 10% of the shares of stock in the Corporation entitled to vote in elections of Directors; or (b) such transaction is approved by resolution unanimously adopted by the whole Board of Directors of the Corporation at any time prior to the consummation thereof.

3.    The Board of Directors shall have the power and duty to determine for the purposes of this Article Fourteenth, on the basis of information known to such Board, if and when any Other Corporation is the Beneficial Owner of more than 10% of the outstanding shares of stock of the Corporation entitled to vote in elections of Directors, and any such determination shall be conclusive and binding for all purposes of this Article Fourteenth.

4.    As used in this Article Fourteenth, the following terms have the meanings as set forth below:

(a)    “Other Corporation” means any person, firm, corporation or other entity, other than a subsidiary of the Corporation.

(b)    “Substantial Part” means any assets having a then fair market value, in the aggregate, of more than $5,000,000.

(c)    “Subsidiary” means any corporation in which the Corporation owns, directly or indirectly, more than 50% of the voting securities.

(d)    “Substantial Amount” means any securities of the Corporation having a then fair market value of more than $5,000,000.

(e)    “Beneficial Owner” of stock means a person, or an affiliate or “associate” of such person (as such terms are defined in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934 as in effect on February 1,

ORI Restated 2014     14

1978), who directly or indirectly controls the voting of such stock, or who has any option, warrants, conversion or other rights to acquire such stock.

FIFTEENTH:
In addition to any separate class vote, if any, which may be required by law, the affirmative vote of the holders of 80% of the outstanding shares of all classes of stock of the Corporation entitled to vote in the election of Directors, such outstanding shares of stock to be considered as one class, shall be required in order to amend or repeal any of the provisions of Article Fourteenth or subsection 5 of Article Eighth of the Certificate of Incorporation. The affirmative vote of the holders of 66-2/3% of the outstanding shares of all classes of stock of the Corporation entitled to vote in the election of Directors, such outstanding shares of stock to be considered as one class, shall be required in order to amend or repeal any of the provisions of Article Fifth of the Certificate of Incorporation. The same respective stockholder vote requirements prescribed by the foregoing provisions of this Article Fifteenth shall also be required, respectively, in order to amend or repeal the respective foregoing provisions of this Article Fifteenth prescribing such stockholder vote requirement.

SIXTEENTH:
1.    The provisions of this Article Sixteenth shall apply independently of any other provision of this Certificate of Incorporation if any Other Corporation (as hereinafter defined) seeks to accomplish a Business Combination (as hereinafter defined) within the ten year period following the date the Other Corporation became an Acquiring Entity (as hereinafter defined).

2.    As used in this Article Sixteenth, the following terms shall have the meanings as set forth below:

(a)    “Acquiring Entity” means any Other Corporation which is, and for fewer than ten years has been, the Beneficial Owner of more than 10% of the outstanding shares of stock of the Corporation entitled to vote in elections of Directors, considered for the purposes of this paragraph as one class.

(b)    “Affiliate” or “Associate” of a person have the same meaning as is assigned to such terms under Rule 12b-2 of the General Rules and Regulations (the “Regulations”) under the Securities and Exchange Act of 1934 as in effect on March 1, 1983.

(c)    “Beneficial Owner” of stock means a person, or an Affiliate or Associate of such person, who is a “beneficial owner” of stock, as such term is defined under Rule 13d-3 of the Regulations as in effect on March 1, 1983, except that, without limitation, any shares of voting stock of the Corporation that any Acquiring Entity, or any Affiliate or Associate of such Acquiring Entity, has the right to acquire pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise shall be deemed beneficially owned by the Acquiring Entity.

(d)    “Business Combination” means any transaction as described in paragraph 1 of Article Fourteenth.


ORI Restated 2014     15

(e)    “Continuing Director” means a Director duly elected to the Board of Directors prior to the time the Other Corporation became an Acquiring Entity, and the term “Outside Directors” shall mean a Director who is not (i) an officer or employee of the Corporation or any relative of an officer or employee or (ii) an Acquiring Entity, or an officer, Director, employee, Affiliate or Associate of an Acquiring Entity, or a relative of any of the foregoing.

(f)    “Other Corporation” shall have the same meaning as set forth in paragraph 4 of Article Fourteenth.

For the purposes of this Article Sixteenth, the Board of Directors shall have the power and duty to determine, on the basis of information known to such Board, if and when any Other Corporation is or has become an Acquiring Entity. Any such determination shall be conclusive and binding for all purposes of this Article Sixteenth.


3.    Except as set forth in paragraph 4 of this Article Sixteenth, the affirmative vote of the holders of 66-2/3% of all classes of stock of the Corporation entitled to vote in elections of directors, considered for this purpose as one class, excluding stock of which the Acquiring Entity is the Beneficial Owner, shall be required for approval of any Business Combination with any Other Corporation unless all of the following conditions are fulfilled:

(a)    The cash or fair market value or other consideration to be received per share by common stockholders of the Corporation in such Business Combination will not, at the time of the Business Combination is effected, be less than the greater of:

(i)    the highest per share price (including brokerage commissions and/or soliciting dealers’ fees) paid by the Acquiring Entity in acquiring any of its holdings of the Corporation’s Common Stock; or

(ii)    an amount bearing a percentage relationship to the market price of the Corporation’s Common Stock immediately prior to the public announcement of such Business Combination equal to the highest percentage relationship that any per share price (including brokerage commissions and/or soliciting dealers’ fees) theretofore paid by the Acquiring Entity for any of its holding of the Corporation’s Common Stock bore to the market price of such Common Stock immediately prior to the transaction resulting in the acquisition of such Common Stock; or

(iii)    the book value of the Corporation’s Common Stock as of the end of the most recent calendar quarter determined in accordance with generally accepted accounting principles; or

(iv)    an amount calculated by multiplying the earnings per share of the Corporation’s Common Stock for the four fiscal quarters immediately preceding the record date for determination of stockholder entitled to vote on such Business Combination by the then price earnings multiple of the Acquiring Entity as customarily computed and reported in the financial press.

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Appropriate adjustments shall be made with respect to (i), (ii), (iii) and (iv) above for recapitalization and for stock splits, stock dividends, and like distributions. For purposes of subparagraph 3(a) of this Article Sixteenth, the term “other consideration to be received” shall include, without limitation, capital stock of this Corporation retained by its existing public stockholders in the event of a Business Combination in which this Corporation is the surviving corporation.

(b)    After the Other Corporation has become an Acquiring Entity:

(i)    the Corporation’s Board of Directors shall have included at all times representation by one or more Continuing Directors unless the lack of such representation results entirely from either death or normal retirement under retirement policies in effect prior to the time the Other Corporation became an Acquiring Entity; and

(ii)    there shall have been no reduction in the rate of dividends payable on the Corporation’s Common Stock except as required by law or as may be necessary to insure that the Corporation is not in breach of any covenant in any of its agreements for borrowed money, or except as may have been approved by a majority vote of the Continuing Directors; and

(iii)    such Acquiring Entity shall not have acquired any newly issued shares of stock, directly or indirectly, from the Corporation (except upon conversion of convertible securities acquired by it prior to becoming an Acquiring Entity or as a result of a pro rata stock dividend or stock split, or except with the approval of a majority vote of the Continuing Directors).

(c)    Without the approval of a majority vote of the Continuing Directors, such Acquiring Entity shall not have (i) received the benefit directly or indirectly (except proportionately as a stockholder) of any loans, advances, guarantees, pledges or other financial assistance provided by the Corporation, or (ii) made any major changes in the Corporation’s business or equity structure.

(d)    A timely mailing shall have been made to the stockholders of this Corporation containing in a prominent place (i) any recommendations as to the advisability (or inadvisability) of the Business Combination that the Continuing Directors or Outside Directors may choose to state, if there are at the time any such Directors, and (ii) the opinion of a reputable nationally recognized investment banking or financial services firm as to the fairness (or not) of the terms of the Business Combination, from the point of view of the stockholders of this Corporation other than the Acquiring Entity (such firm to be engaged solely on behalf of such other stockholders, to be paid a reasonable fee for its services by this Corporation upon receipt of such opinion, to be a firm that has not previously been significantly associated with the Acquiring Entity and, if there are at the time any such Directors, to be selected by a majority of the Continuing Directors and Outside Directors).


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4.    The provisions of paragraph 3 of this Article Sixteenth shall not be applicable to any Business Combination if (a) such transaction is approved by resolution unanimously adopted by the whole Board of Directors of the Corporation at any time prior to the consummation thereof; or (b) the Business Combination is solely between this Corporation and another corporation, 50% or more of the voting stock of which is owned by this Corporation and none of which is owned by the Acquiring Entity; provided that if this Corporation is not the surviving entity, each stockholder of this Corporation receives the same type of consideration in such transaction in proportion to his stock holdings and the provisions of this Article Sixteenth of the Corporation’s Certificate of Incorporation are continued in effect or adopted by such surviving corporation as part of its Articles of Incorporation or Certificate of Incorporation, as the case may be, without any charge.

5.    In connection with a proposed Business Combination, the Continuing Directors may retain special outside legal counsel, an investment banking firm, an accounting firm, and such other experts that they, in their discretion, may deem necessary or appropriate to assist them in their evaluation of the transaction, all at the expense of the Corporation.

6.    In addition to any other provision of this Certificate of Incorporation, there shall be required to amend, alter, change or repeal any of the provisions of this Article Sixteenth the affirmative vote of the holders of 66-2/3% of all classes of stock of the Corporation entitled to vote in elections of Directors, considered for this purpose as one class, excluding stock of which an Acquiring Entity, if any, is the Beneficial Owner.

7.    Nothing in this Article Sixteenth shall be construed to relieve an Acquiring Entity from any fiduciary obligation imposed by law. The conditions and voting requirements of this Article Sixteenth shall be in addition to the conditions and voting requirements imposed by law or other provisions of this Certificate of Incorporation, including, without limitation, Article Fourteenth.

SEVENTEENTH:
No Director of the Corporation shall be personally liable to the Corporation or its shareholders for monetary damages for any breach of fiduciary duty as a Director; provided, however, that this Article Seventeenth shall not eliminate or limit the liability of a Director (1) for any breach of the Director’s duty of loyalty to the Corporation or its shareholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) under section 174 of the General Corporation Law of the State of Delaware, or (4) for any transaction from which the director derived an improper personal benefit. If the General Corporation Law of the State of Delaware is amended after the approval by the shareholders of the Corporation of this provision to authorize corporate action further eliminating or limiting the personal liability of Directors, then the liability of a Director of the Corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law of the State of Delaware as so amended.





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[Signatures on following page]

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Any repeal or modification of the forgoing paragraph by the shareholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification.


IN WITNESS WHEREOF, said Old Republic International Corporation has caused this Restated Certificate of Incorporation to be signed and executed by its President and it’s attested by its Secretary.

OLD REPUBLIC INTERNATIONAL CORPORATION


/s/ Aldo C. Zucaro
_____________________________________________
Aldo C. Zucaro, Chairman, and Chief Executive Officer

ATTEST:


/s/ William J. Dasso
_______________________________
William J. Dasso, Assistant Secretary

ORI Restated 2014     20
Exhibit 31.1 Rule 13a–14(a)/15d-14(a) Certifications








CERTIFICATIONS



I, Aldo C. Zucaro, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of Old Republic International Corporation (“the registrant”);

2.    Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.    The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

1



5.
The registrant’s other certifying officer(s) and I have disclosed, based upon our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date: July 31, 2014

/s/ A.C. Zucaro
                                                         
A. C. Zucaro, Chairman and
Chief Executive Officer









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         Exhibit 31.2 Rule 13a–14(a)/15d-14(a) Certifications






CERTIFICATIONS



I, Karl W. Mueller, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of Old Republic International Corporation (“the registrant”);

2.    Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.    The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

1



5.
The registrant’s other certifying officer(s) and I have disclosed, based upon our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date: July 31, 2014

            
/s/ Karl W. Mueller
                                                         
Karl W. Mueller    
Senior Vice President,
Chief Financial Officer and
Principal Accounting Officer







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Item 32.1, 18 U.S.C. Section 1350 Certification










CERTIFICATION OF PERIODIC REPORT


I, Aldo C. Zucaro, the Chief Executive Officer of Old Republic International Corporation (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

(1)    the quarterly report on Form 10-Q of the Company for the quarter ended June 30, 2014 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2)    the information contained in the Report fairly presents the financial condition and results of operations of the Company.


Dated: July 31, 2014

/s/ A. C. Zucaro
                                                         
Aldo C. Zucaro, Chairman and
Chief Executive Officer
















Item 32.2, 18 U.S.C. Section 1350 Certification












CERTIFICATION OF PERIODIC REPORT


I, Karl W. Mueller, the Senior Vice President and Chief Financial Officer of Old Republic International Corporation (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

(1)
the quarterly report on Form 10-Q of the Company for the quarter ended June 30, 2014 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2)
the information contained in the Report fairly presents the financial condition and results of operations of the Company.



Dated: July 31, 2014

/s/ Karl W. Mueller        
                                                     
Karl W. Mueller, Senior Vice
President, Chief Financial                                 Officer and Principal                                     Accounting Officer