OLD REPUBLIC INTERNATIONAL CORP – 10-K – Management Analysis of Financial Position and Results of Operations ($ in Millions, Except Share Data) OVERVIEW

Edgar Online, Inc.

 This management analysis of financial position and results of operations pertains to the consolidated accounts of Old Republic International Corporation ("Old Republic" or "the Company"). The Company conducts its operations through three major regulatory segments, namely, its General (property and liability), Mortgage Guaranty, and Title insurance segments. A small life and health insurance business, accounting for 1.8% of consolidated operating revenues for the year ended December 31, 2011 and 1.6% 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. Of particular relevance to the Company's financial statements are recent disclosure requirements pertaining to uncertainties affecting income tax provisions, methodologies for establishing the fair value and recording of other-than-temporary impairments of securities, possible consolidation of variable interest entities, and composition of plan assets held by the Company's defined benefit plans. More recently, the FASB also issued new guidance relative to the calculation of deferred acquisition costs incurred by insurance entities and goodwill impairment. The requisite disclosures and explanations for these matters are covered in the pertinent sections of this Management Analysis and/or footnotes to the Company's consolidated financial statements regularly included in its annual report to the SEC on Form 10-K.  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, 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 elsewhere in this report.  The insurance business is distinguished from most others in that the prices (premiums) charged for various insurance products are set without certainty of the ultimate benefit and claim costs that will emerge 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.

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   EXECUTIVE SUMMARY    Old Republic's consolidated net operating loss for 2011 reached $218.5 compared to $40.6 in 2010 and $157.2 in 2009. In the aggregate, the general and title insurance segments reflected substantial operating improvements as underwriting accounts turned positive for the first time since 2007. By contrast, the run-off mortgage guaranty business sustained record-high operating losses as incurred claim costs intensified greatly throughout 2011. These results outweighed the better outcomes posted by the general and title insurance segments.  

While 2011 realized gains were approximately 10 percent higher than 2010, they were insufficient to drive bottom line results into positive territory.

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

                                                                                                        % Change                                                                                                   2011          2010 Years Ended December 31,                                2011          2010          2009        vs. 2010      vs. 2009 Operating revenues:       General insurance                              $ 2,547.1     $ 2,074.9     $ 2,052.7         22.8  %        1.1  %       Mortgage guaranty                                  506.1         588.4         746.1        (14.0 )       (21.1 )       Title insurance                                  1,391.8       1,238.8         914.1         12.3          35.5       Corporate and other                                 84.8          91.2          84.3         (7.0 )         8.3             Total                                    $ 4,529.9     $

3,993.5 $ 3,797.2 13.4 % 5.2 % Pretax operating income (loss):

      General insurance                              $   304.3     $   172.7     $   200.1         76.2  %      (13.7 )%       Mortgage guaranty                                 (678.1 )      (260.8 )      (486.4 )     (160.0 )        46.4       Title insurance                                     36.2           9.4           2.1        284.5         328.7       Corporate and other                                (14.6 )        

(2.8 ) 4.0 (407.4 ) (171.7 )

             Sub-total                                   (352.2 )       (81.5 )      (279.9 )     (332.2 )        70.9 Realized investment gains (losses):       From sales                                         165.8         

110.3 15.9

       From impairments                                   (50.2 )        

(1.2 ) (9.5 )

             Net realized investment gains (losses)       115.5         109.1           6.3          5.9           N/M Consolidated pretax income (loss)                       (236.7 )        

27.6 (273.6 ) N/M 110.1

             Income taxes (credits)                       (96.1 )        (2.5 )      (174.4 )        N/M          98.5 Net income (loss)                                    $  (140.5 )   $    30.1     $   (99.1 )        N/M         130.4  % Consolidated underwriting ratio:       Benefits and claim ratio                            67.8 %        

63.4 % 76.7 % 6.9 % (17.3 )%

       Expense ratio                                       48.0          48.0          41.8            -          14.8             Composite ratio                              115.8 %       111.4 %       118.5 %        3.9  %       (6.0 )% Diluted earnings per share:       Net operating income (loss)                    $   (0.86 )   $   

(0.16 ) $ (0.67 ) N/M 76.1 %

       Net realized investment gains (losses)              0.31          

0.29 0.25

       Net income (loss)                              $   (0.55 )   $    0.13     $   (0.42 )        N/M         131.0  % Cash dividends paid per share                        $    0.70     $    0.69     $    0.68          1.4  %        1.5  % Components of diluted earnings per share: 

Net operating income (loss):

            General insurance                        $    0.82     $    0.50     $    0.63             Mortgage guaranty                            (1.74 )       (0.69 )       (1.32 )             Title insurance                               0.10          0.03          0.01             Corporate and other                          (0.04 )           -          0.01                     Subtotal                             (0.86 )       (0.16 )       (0.67 )       Net realized investment gains (losses)              0.31          0.29          0.25       Net income (loss)                              $   (0.55 )   $    0.13     $   (0.42 )   __________ N/M: Not meaningful                                         31

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

The preceding table shows both operating and net income or loss to highlight the effects of realized investment gain or loss recognition on period-to-period comparisons. The composition of realized gains or losses follows: Years Ended December 31,

                                                  2011          2010          2009 Realized gains (losses) from sales of previously imparied securites:       Actual tax basis (loss) on sales                                 $ 

(154.7 ) $ (44.0 ) $ -

Accounting adjustment for impairment charges taken in prior

      periods                                                              157.5          72.2             -                  Net amount included herein                                  2.8          28.2             - Net realized gains (losses) from sales of all other securities             

163.0 82.1 15.9

                  Net gain (loss) from actual sales                         165.8         110.3          15.9 Net realized losses from impairments                                       (50.2 )        (1.2 )        (9.5 ) Net realized investment gains (losses) reported herein                 $   

115.5 $ 109.1$ 6.3

    General Insurance Results - 2011 operating earnings were affected positively by much lower incurred claim costs, slightly lower production expenses, and by the inclusion of PMA's accounts for the entire year. Corresponding results for 2010 and 2009 were affected by lower underwriting performance driven generally by reduced premium volume and moderately higher claim costs and expenses. Key indicators of this segment's year-over-year performance follow:                                                      General Insurance Group                                                                                  % Change                                                                              2011        2010 Years Ended December 31,            2011          2010          2009       vs. 2010    vs. 2009 Net premiums earned              $ 2,167.7     $ 1,782.1     $ 1,782.5       21.6  %        -  % Net investment income                270.5         260.1         258.9        4.0          .5 Benefits and claims costs          1,544.8       1,361.8       1,360.3       13.4          .1 Pretax operating income (loss)   $   304.3     $   172.7     $   200.1       76.2  %    (13.7 )%  Claim ratio                           71.3 %        76.4 %        76.3 %     (6.7 )%       .1  % Expense ratio                         25.6          26.6          25.8       (3.8 )       3.1     Composite ratio                   96.9 %       103.0 %       102.1 %     (5.9 )%       .9  %    Full year 2011 inclusion of the PMA-related accounts resulted in approximate increases of $308.7 in net premiums earned, $16.1 in net investment income, $212.0 in benefits and claim costs, and $34.0 in pretax operating income. 2010 results reflect PMA's contribution for just the final quarter. Excluding the latter's accounts for both 2011 and 2010, the remainder of general insurance net premium revenues reflected growth of approximately 4.5 percent for 2011. As reported in the past several years, the combination of ongoing recessionary conditions and a generally soft pricing environment in the commercial insurance arena has generally constrained premium growth. In more recent quarters, however, premium rates have strengthened gradually and to varying degrees in certain parts of the Company's general insurance business. At the least, these pricing improvements should help counterbalance ongoing inflationary pressures on a variety of claim costs most susceptible to them.  As summarized in the above table, aggregate insurance underwriting performance improved during 2011. Much of the gain stemmed from lower incurred claims in the consumer credit indemnity ("CCI") line which has been in run-off operating mode since 2008. The CCI coverage produced more adverse claim experience during 2010 and 2009 as a result of higher loss payment trends and increased levels of claim verification and resolution activity. In this regard, CCI claims experience burdened the overall general insurance claim ratio by 2.1, 8.6, and 7.3 percentage points in 2011, 2010, and 2009, respectively.  While the 2010 PMA merger produced a meaningful addition to the general insurance invested asset base, investment income has not grown proportionally. For each of the years 2009 to 2011, lower market yields and the relatively short-term orientation of the segment's investment portfolio have constrained income growth from this source.  Mortgage Guaranty Results - 2011 operating performance was mostly affected by a continued downtrend in earned premiums and record-high incurred claim costs. Key indicators of year-over-year performance follow:                                         32 --------------------------------------------------------------------------------

                                                     Mortgage Guaranty Group                                                                               % Change                                                                           2011        2010 Years Ended December 31,            2011         2010         2009      vs. 2010    vs. 2009 Net premiums earned              $  444.9     $  498.8     $  644.5      (10.8 )%    (22.6 )% Net investment income                59.2         84.9         92.0      (30.3 )      (7.6 ) Claim costs                       1,057.1        766.2      1,134.1       38.0       (32.4 ) Pretax operating income (loss)   $ (678.1 )   $ (260.8 )   $ (486.4 )   (160.0 )%     46.4  %  Claim ratio                         237.6 %      153.6 %      176.0 %     54.7  %    (12.7 )% Expense ratio                        23.9         14.4         12.6       66.0        14.3     Composite ratio                 261.5 %      168.0 %      188.6 %     55.7  %    (10.9 )%    During 2010 and 2009, Old Republic's mortgage guaranty subsidiaries had negotiated the terminations of various captive reinsurance and pool insurance contracts. From a financial accounting standpoint, premiums obtained with terminations of captive reinsurance agreements are recognized as income when they are received rather than being deferred to future periods when the related claim costs are expected to arise. On the other hand, terminations of pool insurance contracts cause a reduction of incurred claims due to the positive effect of reserves transferred, but negative cash flows ensue. Taken together, these terminations had the following effects on key elements of reported results and operating cash flows. Years Ended December 31,                      2010       2009 Increase in net premiums earned            $   13.6     $ 82.5 Reduction in incurred claim costs              51.8          - 

Increase in pretax operating income (loss) 65.4 79.4 Effect on operating cash flows

             $ (173.2 )   $ 78.4

No similarly significant transactions occurred during 2011.

  Since the advent of the current economic crisis, new mortgage guaranty production has not added significantly to the Company's net risk in force base. Ongoing weakness from the downturn in overall mortgage originations, lower industry-wide penetration of the nation's current mortgage market, and the effects of more selective underwriting guidelines employed since late 2007 have been contributing factors. Together with premium refunds related to claim rescissions and the above-noted termination of pool insurance contracts which effectively ended subsequent periods' premium inflows, these factors led to a continued decline in earned premiums during the periods reported upon. As noted below, the Company's mortgage guaranty business was placed in run-off operating mode during the third quarter of 2011, thus further reducing new premium production.  Net investment income declined in each of the past three years as a result of the lower invested asset base driven by the aggregate effect of higher claim disbursements, lower premium volume, termination of insured mortgage pools, and a low yield environment for quality securities to which the investment portfolio is directed.  The above-noted impact of captive and pool transactions premiums and claims notwithstanding, mortgage guaranty claim costs rose by 29.2 percent in 2011 and declined by 27.9 percent in 2010. While newly reported defaults have generally been in a downtrend, other offsetting factors have led to historically high claim costs. The combination of higher claim payments, and changes in actual and estimated claim rescissions or denials on new and previously reported defaults are most accountable for the variability of claim costs. The following table shows the major components of the resulting claim ratios inclusive of the above-noted effects of captive reinsurance and pool insurance contract terminations. Years Ended December 31,                                     2011

2010 2009 Components of incurred claim ratio as a percent of earned premiums:

Paid claims:

      Excluding captive and pool transactions                238.3  %     

190.4 % 110.4 %

      Captive and pool transactions                            (.7 )       

31.8 (24.9 )

          Paid claim ratio                                    237.6         

222.2 85.5

Claim reserve provisions:

      Excluding captive and pool transactions                  (.1 )      

(21.8 ) 91.4

      Captive and pool transactions                             .1        

(46.8 ) (.9 )

          Claim reserve provision ratio                           -         

(68.6 ) 90.5

    Incurred claim ratio: As reported                         237.6  %      153.6  %      176.0  %          Excluding captive and pool transactions             238.2  %      168.6  %      201.8  %    The 2011 expense ratios reflect non-recurring charges covering employment severance and similar costs, and the elimination of previously deferred acquisition costs no longer deemed recoverable in future run-off periods. The aggregate charges and their effect on 2011 expense ratios amounted to $39.4 and 8.9 percentage points. Additionally, full year                                         33 --------------------------------------------------------------------------------

2011 operating results reflect a third quarter $10.7 write-off of the historical goodwill account. For 2010 and 2009, the expense ratios reflect moderate benefits from expense management.

  As noted in prior periods' reports, the Company's flagship mortgage guaranty insurance carrier, Republic Mortgage Insurance Company ("RMIC"), 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 consequence, underwriting of new policies ceased and the existing book of business was placed in run-off operating mode. On January 19, 2012, RMIC received an Order of Supervision ("Order") from the North Carolina Department of Insurance. Pursuant to the Order, RMIC has been instructed to hereafter reduce the cash payment on all claims by 50 percent during an initial period not to exceed one year. The remaining 50 percent is to be included in RMIC's statutory capital and will be paid at a future date as and when necessary funds are available. In these circumstances, the run-off will devolve within constraints of Old Republic's year-end 2011 investment of $191.2 for its entire mortgage guaranty segment. Since no additional capital will be provided to this segment, Old Republic's future economic loss will be limited to that last amount, or 75 cents per ORI outstanding share at December 31, 2011.  The Company utilizes a proprietary model to forecast and evaluate the potential long-term performance of its book of business. Of necessity, the model takes into account actual premium and claim experience of prior periods, as well as a large number of assumptions and judgments about future outcomes that are highly sensitive to a wide range of estimates. Many of these relate to matters over which the Company has no control, including: •            The conflicted interests, as well as the mortgage servicing and              foreclosure practices of a large number of insured lending              institutions;  

• General economic and industry-specific trends and events; and

  •            The evolving or future social and economic policies of the U.S.              Government vis-à-vis such critical sectors as the banking, mortgage              lending, and housing industries, as well as its policies for              resolving the insolvencies and future role of Fannie Mae and Freddie              Mac.    These matters notwithstanding, the Company's standard model of forecasted results extending through 2020 continues to reflect ultimate profitability for the book of business. While the establishment of a premium deficiency reserve is therefore unwarranted, the model nonetheless contemplates that results for years 2012-2013 will more likely than not reflect an operating loss far in excess of RMIC's and the segment's year-end 2011 statutory capital balance. The claim cost attenuation enabled by the above-noted Order could, however, mitigate or nullify the adverse effect of such losses on those statutory capital balances.  Recent years' poor mortgage guaranty results notwithstanding, Old Republic maintains a long-term strategic interest in this important line of insurance. Any re-activation of the business, however, will require greater clarity about the future roles of Fannie Mae and Freddie Mac, or any successor to them, as well as the establishment of industry-wide risk management disciplines that address the long term catastrophe exposures of these financial guaranties. At this juncture there is no indication that these matters will be addressed by the industry or government institutions, and thus no assurance that an economically viable re-activation of Old Republic's mortgage guaranty business will occur.  Title Insurance Results - Old Republic's title insurance business reflected positive operating momentum as 2011 came to a close. Key performance indicators are shown below:                                                     Title Insurance Group                                                                               % Change                                                                           2011        2010 Years Ended December 31,           2011          2010         2009      vs. 2010    vs. 2009 Net premiums and fees earned    $ 1,362.4     $ 1,211.0     $ 888.4       12.5  %     36.3  % Net investment income                27.3          26.5        25.2        3.0         5.4 Claim costs                         105.7          96.8        70.3        9.1        37.8 Pretax operating income (loss)  $    36.2     $     9.4     $   2.1      284.5  %    328.7  %  Claim ratio                           7.8 %         8.0 %       7.9 %     (2.5 )%      1.3  % Expense ratio                        91.2          93.0        93.8       (1.9 )       (.9 )      Composite ratio                 99.0 %       101.0 %     101.7 %     (2.0 )%      (.7 )%    Growth in premiums and fees benefitted from a combination of factors. Key among these have been market share gains emanating from title industry dislocations and consolidation during the past three years or so, and greater levels of refinancing activity in more recent times. 2011 claim ratios were slightly lower in relation to 2010's as claim frequency and severity abated. Year-over-year expense ratio comparisons benefitted from continued rationalization of the expense structure.  Corporate and Other Operations - The Company's small life and health business and the net costs associated with the parent holding company and its internal services subsidiaries produced losses for 2011 and 2010, whereas a small gain was posted in 2009. Variations in the results registered by these relatively minor elements of Old Republic's operations usually stem from volatility inherent to the small scale of its life and health business, fluctuations in the costs of external debt, and net interest expenses on intra-system financing arrangements. Key performance indicators are reflected in the following summary:                                         34 --------------------------------------------------------------------------------

                                                Corporate and Other Operations                                                                          % Change                                                                      2011        2010 Years Ended December 31,            2011        2010      2009     vs. 2010    vs. 2009 Life & health premiums earned     $  74.9     $ 81.4     $ 73.3      (8.0 )%     11.0  % Net investment income                 7.4        7.3        7.2       2.4          .2 Other income                          2.4        2.5        3.6      (3.0 )     (30.1 ) Benefits and claims                  38.5       40.3       34.1      (4.6 )      18.3 Insurance expenses                   39.4       43.8       41.7     (10.0 )       5.2

Corporate and other expenses-net 21.5 9.9 4.4 117.1

125.0

Pretax operating income (loss) $ (14.6 ) $ (2.8 ) $ 4.0 (407.4 )% (171.7 )%

    Cash, Invested Assets, and Shareholders' Equity - The following table reflects Old Republic's consolidated cash and invested assets as well as shareholders' equity accounts at the dates shown:                                                                                                   % Change                                                                                               2011         2010 As of December 31,                                 2011           2010          2009        vs. 2010     vs. 2009 Cash and invested assets: Fair value basis     $ 10,685.2     $ 10,490.7    

$ 9,879.0 1.9 % 6.2 %

               Original cost basis              $ 10,081.8     $ 10,015.1    

$ 9,625.9 .7 % 4.0 %

  Shareholders' equity: Total                    $  3,772.5     $  4,121.4    

$ 3,891.4 (8.5 )% 5.9 %

               Per common share                 $    14.76     $    16.16    

$ 16.49 (8.7 )% (2.0 )%

Composition of shareholders' equity per share:

    Equity before items below                  $    13.13     $    14.36     $   14.99        (8.6 )%      (4.2 )%     Unrealized investment gains (losses) and     other          accumulated comprehensive income          (loss)                                      1.63           1.80          1.50               Total                            $    14.76     $    16.16     $   16.49        (8.7 )%      (2.0 )%    Consolidated cash flow from operating activities produced a deficit of $94.9 for the year ended 2011 compared to a deficit of $282.2 in 2010 and a positive operating cash flow of $532.9 for 2009. Most of the year-over-year improvement in 2011 stemmed largely from improved operating cash flows in the general insurance segment.  The consolidated investment portfolio reflects a current allocation of approximately 80 percent to fixed-maturity securities and 6 percent to equities as of year end 2011. As has been the case for many years, Old Republic's invested assets are managed in consideration of enterprise-wide risk management objectives. These are intended to assure solid funding of its insurance subsidiaries' long-term obligations to policyholders and other beneficiaries, and the necessary long-term stability of capital accounts.  The investment portfolio contains no significant direct insurance risk-correlated asset exposures to real estate, mortgage-backed securities, collateralized debt obligations ("CDO's"), derivatives, junk bonds, hybrid securities, or illiquid private equity investments. In a similar vein, the Company does not engage in hedging or securities lending transactions, nor does it invest in securities whose values are predicated on non-regulated financial instruments exhibiting amorphous or unfunded counter-party risk attributes.  Old Republic's equity investments at December 31, 2011 include common stock holdings in MGIC Investment Corporation fair valued at $50.3. These securities were acquired in 2007 and 2008 as passive long-term investment additions to a core segment of Old Republic's business and were written down from their original cost through impairments recorded between 2008 and December 2011.  

Substantially all changes in the shareholders' equity account reflect the Company's net income or loss, dividend payments to shareholders, and impairments or changes in market valuations of invested assets during the periods shown below:

                                       35 --------------------------------------------------------------------------------                                                                              Shareholders' Equity Per Share Years Ended December 31,                                                 2011             2010          2009 Beginning book value per share                                       $    16.16       $    16.49     $  15.91 Changes in shareholders' equity for the periods:         Net operating income (loss)                                        (.86 )           (.16 )       (.67 ) 

Net realized investment gains (losses):

                From sales                                                  .44              .29          .04                 From impairments                                           (.13 )              -          .21                    Subtotal                                                 .31              .29          .25         Net unrealized investment gains (losses)                            .03              .40         1.59                 Total realized and unrealized investment gains                 (losses)                                                    .34              .69         1.84         Cash dividends                                                     (.70 )           (.69 )       (.68 )         Stock issuance, foreign exchange, and other transactions           (.18 )           (.17 )        .09 Net change                                                                (1.40 )           (.33 )        .58 Ending book value per share                                          $    14.76       $    16.16     $  16.49    2011 Capital Raise - In 2011's first quarter, the Company obtained gross proceeds of $550.0 through a public offering of 3.75% convertible Senior Notes due in 2018. The funds were used to repay certain indebtedness assumed in connection with the 2010 acquisition of PMA Capital Corporation, and for other general corporate purposes.                                           36

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   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.  

CRITICAL ACCOUNTING ESTIMATES

    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 pertinent sections of this Management Analysis and are summarized as follows:  

(a) Other-than-temporary impairments in the value of investments:

  The Company completes a detailed analysis each quarter to assess whether the decline in the value of any investment below its cost basis is deemed other-than-temporary. All securities in an unrealized loss position are reviewed. Absent issuer-specific circumstances that would result in a contrary conclusion, any equity security with any unrealized investment loss amounting to 20% or greater decline for a six month period is considered OTTI. The decline in value of a security deemed OTTI is included in the determination of net income and a new cost basis is established for financial reporting purposes.  

For the three years ended December 31, 2011, pretax charges due to other-than-temporary impairments in the value of securities affected pretax income or loss within a range of -27.0% and -3.6% and averaged -11.6%.

(b) The valuation of deferred income tax assets

  The Company uses the asset and liability method of calculating deferred income taxes. This method results in the establishment of deferred tax assets and liabilities, calculated at currently enacted tax rates that are applicable to the cumulative temporary differences between financial statement and tax bases of assets and liabilities. Deferred income tax assets are reduced by a valuation allowance when management determines that it is more likely than not that some, or all, of the deferred tax assets will not be realized. At December 31, 2011, 2010, and 2009, the net deferred tax asset (liability) was $116.7, $45.3, and $(47.5), respectively. The Company recorded a valuation allowance against deferred tax assets of $(12.2), $(13.5), and $- at each corresponding year end, respectively. In valuing the deferred tax assets, the Company considered certain factors including primarily the scheduled reversals of certain deferred tax liabilities, the impact of available carry back and carry forward periods, estimates of future taxable income, and our ability to exercise prudent and feasible tax planning strategies. A change in any of these estimates could result in the need to record an additional valuation allowance through a charge to earnings. See Note 1(j) of the Notes to Consolidated Financial Statements for further discussion of the Company's consolidated income tax balances.  

(c) Establishment of deferred acquisition costs ("DAC")

  The eligibility for deferral and the recoverability of DAC is based on the current terms and estimated profitability of the insurance contracts to which they relate. As of the three most recent year ends, consolidated DAC balances ranged between 1.2% and 1.5% and averaged 1.4% of consolidated assets. The annual change in DAC balances for the three-year period affected underwriting, acquisition and other expenses within a range of 1.1% and 1.6%, and averaged 1.3% of such expenses. These percentages are inclusive of the 2011 write-off of previously deferred mortgage guaranty acquisition costs of $29.1 no longer deemed recoverable in future run-off periods.  

(d) The recoverability of reinsured paid and/or outstanding losses

  Assets consisting of gross paid losses recoverable from assuming reinsurers, and balance sheet date reserves similarly recoverable in future periods as gross losses are settled and paid, are established at the same time as the gross losses are paid or recorded as reserves. Accordingly, these assets are subject to the same estimation processes and valuations as the related gross amounts that are discussed below. As of the three most recent year ends, paid and outstanding reinsurance recoverable balances ranged between 30.1% and 34.5% and averaged 33.0% of the related gross reserves. See Part I, Item 1(d) for further discussion regarding recoverability of the Company's reinsurance balances.                                          37 --------------------------------------------------------------------------------

(e) The reserves for losses and loss adjustment expenses

  As discussed in pertinent sections of this management analysis, the reserves for losses and related loss adjustment expenses are based on a wide variety of factors and calculations. Among these the Company believes the most critical are:  •         The establishment of expected loss ratios for at least the two to three           most recent accident years, particularly for so-called long-tail           coverages as to which information about covered losses emerges and           becomes more accurately quantifiable over long periods of time.

Long-tail lines of business generally include workers' compensation,

auto liability, general liability, errors and omissions and directors

and officers' liability, and title insurance. Gross loss reserves

related to such long-tail coverages ranged between 66.0% and 76.5%, and

averaged 72.7% of gross consolidated claim reserves as of the three

most recent year ends. Net of reinsurance recoverables, such reserves

           ranged between 60.1% and 69.0% and averaged 65.9% as of the same dates.    •         Loss trend factors that are used to establish the above noted expected

loss ratios. These factors take into account such variables as

judgments and estimates relative to premium rate trends and adequacy,

          current and expected interest rates, current and expected social and           economic inflation trends, and insurance industry statistical claim           trends.   

• Loss development factors, expected claim rates and average claim costs,

          all of which are based on Company and/or industry statistics used to           project reported and unreported losses for each accounting period.    For the most recent calendar year, prior accident years' consolidated claim costs developed unfavorably while the two preceding years developed favorably. This development had the consequent effect of (increasing) or reducing consolidated annual loss costs for the three most recent years within a range of -4.7% and 7.2%, or by an average of approximately 2.0% per annum. As a percentage of each of these years' consolidated earned premiums and fees the (unfavorable) favorable developments have ranged between -3.0% and 5.9%, and have averaged 1.7%. Most of the variances in prior years' positive or negative claim developments have been due to a highly volatile mortgage guaranty and CCI claim environment.  In all the above regards the Company anticipates that future periods' financial statements will continue to reflect changes in estimates. As in the past such changes will result from altered circumstances, the continuum of newly emerging information and its effect on past assumptions and judgments, the effects of securities markets valuations, and changes in inflation rates and future economic conditions beyond the Company's control. As a result, Old Republic cannot predict, quantify, or guaranty the likely impact that probable changes in estimates will have on its future financial condition or results of operations.  FINANCIAL POSITION    The Company's financial position at December 31, 2011 reflected increases in assets and liabilities of 1.1% and 4.4%, respectively, and a decrease in common shareholders' equity of 8.5% when compared to the immediately preceding year-end. Cash and invested assets represented 66.6% and 66.1% of consolidated assets as of December 31, 2011 and 2010, respectively. As of December 31, 2011, the cash and invested asset base rose by 1.9% to $10,685.2 principally due to net proceeds of a public offering of convertible senior notes in early 2011.  Investments - During 2011 and 2010, the Company committed the majority of investable funds to short to intermediate-term fixed maturity securities. At both December 31, 2011 and 2010, 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. The Company does not have any exposure to European sovereign debt instruments. At December 31, 2011, 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 December 31, 2011. 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                                         38 --------------------------------------------------------------------------------   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. The conceptual framework of Old Republic's investment policy therefore makes the GAAP balance sheet fair valuation of its fixed maturity investment portfolio largely irrelevant to the long-term management of the Company.  Possible future declines in fair values for Old Republic's 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 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 fixed maturity and equity portfolios as of the dates shown: Credit Quality Ratings of Fixed Maturity Securities (a)

                                           December 31,                                        2011           2010 Aaa                                     15.2 %         21.3 % Aa                                      14.1           20.6 A                                       36.5           29.9 Baa                                     33.3           26.9 Total investment grade                  99.1           98.7 All other (b)                             .9            1.3 Total                                  100.0 %        100.0 %   __________ 

(a) Credit quality ratings used are those assigned primarily by Moody's for U.S.

Governments, Agencies and Corporate issuers and by Standard & Poor's ("S&P")

for U.S. and Canadian Municipal issuers, which are converted to equivalent

Moody's ratings classifications.

(b) "All other" includes non-investment grade or non-rated issuers.

                                       39 --------------------------------------------------------------------------------   Gross Unrealized Losses Stratified by Industry Concentration for Non-Investment Grade Fixed Maturity SecuritiesDecember 31, 2011                                                                                       Gross                                                                 Amortized           Unrealized                                                                   Cost                Losses

Fixed Maturity Securities by Industry Concentration:

   Services                                                 $           1.9       $         .4    Basic Industry                                                       4.0                 .3    Banking                                                              6.4                 .2    Industrial                                                           9.6                 .2    Energy                                                               5.7                  -       Total                                                 $          27.9   (c) $        1.2   __________ 

(c) Represents .4% of the total fixed maturity securities portfolio.

    Gross Unrealized Losses Stratified by Industry Concentration for Investment Grade Fixed Maturity SecuritiesDecember 31, 2011                                                                                       Gross                                                                 Amortized           Unrealized                                                                   Cost                Losses

Fixed Maturity Securities by Industry Concentration:

   Banking                                                  $          28.1       $        1.2    Technology                                                          54.5                 .7    Finance                                                             36.5                 .6    Insurance                                                           23.2                 .6    Other (includes 16 industry groups)                                279.7                2.8       Total                                                 $         422.3   (d) $        6.0   __________  

(d) Represents 5.4% of the total fixed maturity securities portfolio.

    Gross Unrealized Losses Stratified by Industry Concentration for Equity SecuritiesDecember 31, 2011                                                                                              Gross                                                                          Adjusted          Unrealized                                                                            Cost              Losses

Equity Securities by Industry Concentration:

         Index Funds                                                   $     

100.9 $ 3.9

        Banking                                                                1.3                 .4         Telecommunications                                                      .7                 .2         Insurance                                                                -                  -                 Total                                                 $    

 103.1   (e) $        4.6   (f)   __________ 

(e) Represents 30.2% of the total equity securities portfolio.

(f) Represents 1.4% of the cost of the total equity securities portfolio, while

     gross unrealized gains represent 71.2% of the portfolio.                                           40

--------------------------------------------------------------------------------   Gross Unrealized Losses Stratified by Maturity Ranges for All Fixed Maturity Securities                                                                         December 31, 2011                                                        Amortized Cost                                                 of Fixed Maturity Securities        Gross Unrealized Losses                                                                     Non-                              Non-                                                                  Investment                        Investment                                                      All         Grade Only          All           Grade Only Maturity Ranges: Due in one year or less                         $      23.2     $         -     $          -     $          - Due after one year through five years                 129.2            13.1              1.5               .4 Due after five years through ten years                266.4            12.8              4.5               .3 Due after ten years                                    31.3             1.9              1.2               .4         Total                                   $     450.3     $      27.9     $        7.2     $        1.2     Gross Unrealized Losses Stratified by Duration and Amount of Unrealized Losses                                                                                        December 31, 2011                                                                               Amount of Gross Unrealized Losses                                                                Less than           20% to                            Total Gross                                                                  20% of              50%           More than         Unrealized                                                                   Cost             of Cost        50% of Cost           Loss Number of Months in Loss Position: Fixed Maturity Securities:           One to six months                                $            6.0     $         -     $            -     $         6.0           Seven to twelve months                                         .4              .4                  -                .9           More than twelve months                                         -              .2                  -                .2               Total                                        $            6.5     $        .7     $            -     $         7.2 Equity Securities:           One to six months                                $            3.9     $        .2     $            -     $         4.1           Seven to twelve months                                          -              .4                  -                .4           More than twelve months                                         -               -                  -                 -               Total                                        $            3.9     $        .6     $            -     $         4.6  Number of Issues in Loss Position: Fixed Maturity Securities:           One to six months                                             116               -                  -               116           Seven to twelve months                                         10               1                  -                11           More than twelve months                                         3               1                  -                 4               Total                                                     129               2                  -               131   (g) Equity Securities:           One to six months                                               3               1                  -                 4           Seven to twelve months                                          -               1                  -                 1           More than twelve months                                         -               -                  1                 1               Total                                                       3               2                  1                 6   (g)   __________  

(g) At December 31, 2011 the number of issues in an unrealized loss position

represent 7.1% as to fixed maturities, and 14.3% as to equity securities of

     the total number of such issues held by the Company.                                            41

--------------------------------------------------------------------------------   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 adjusted cost reflects the decline as of a specific point in time (December 31, 2011 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                                                               December 31,                                                        2011                 2010 Maturity Ranges:      Due in one year or less                              12.0 %                10.5 %      Due after one year through five years                42.4                  52.2      Due after five years through ten years               42.1                  34.6      Due after ten years through fifteen years             1.6                   1.3      Due after fifteen years                               1.9                   1.4                     Total                                100.0 %               100.0 %  Average Maturity in Years                                  5.0                   4.6 Duration (h)                                               4.2                   3.8   ___________ 

(h) Duration is used as a measure of bond price sensitivity to interest rate

changes. A duration of 4.2 as of December 31, 2011 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 4.2%.

Composition of Unrealized Gains (Losses)

                                                                                              December 31,                                                                                       2011                 2010 Fixed Maturity Securities:         Amortized cost                                                         $       7,884.6       $       8,070.4         Estimated fair value                                                           8,393.2               8,532.2         Gross unrealized gains                                                           515.9                 487.0         Gross unrealized losses                                                           (7.2 )               (25.3 )                   Net unrealized gains (losses)                                $         508.6       $         461.7  Equity Securities:         Original cost                                                          $         480.5       $         648.3         Adjusted cost(*)                                                                 341.9                 402.8         Estimated fair value                                                             580.8                 672.4         Gross unrealized gains                                                           243.5                 271.7         Gross unrealized losses                                                           (4.6 )                (2.2 )                   Net unrealized gains (losses)                                $         238.9       $         269.5   __________  (*) net of OTTI adjustments  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 variable costs of producing specific types of insurance policies, and evaluating their recoverability on the basis of recent trends in claims costs. Aside from the 2011 write-off of certain mortgage guaranty balances as discussed in the Executive Summary and Note 1(f) of the Notes to Consolidated Financial Statements, the Company's deferred policy acquisition cost balances have not fluctuated substantially from period-to-period. 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 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 $361.4 in dividends from its subsidiaries in 2012 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.                                          42

--------------------------------------------------------------------------------     The Company's 3.75% and 8.0% 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'sRegulation 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 an Order of Supervision ("Order") providing for its immediate administrative supervision of RMIC's run-off operations. 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. The Order makes RMIC's statutory insolvency less likely. However, the Order could be amended or withdrawn by the NCDOI at any time or allowed to lapse after a year's time. There can be no assurance that the Order will save RMIC from becoming statutorily impaired at a later date and being placed in receivership by the NCDOI.  At December 31, 2011, the Company had sufficient liquid resources available to redeem the 8.0% Notes and a substantial portion of the 3.75% Notes. Management is exploring a number of options to address its liquidity needs in the circumstance that an event of default was to occur at a future date. These potential plans include an amendment to the 3.75% Notes removing RMIC from the definition of a Significant Subsidiary, an additional capital raise through issuance of new straight or convertible debt, or the utilization of intra system dividend capacity. While Management is confident that an event of default can be stemmed, there is no assurance that its impact could be addressed through execution of these plans.  Capitalization - Old Republic's total capitalization of $4,685.4 at December 31, 2011 consisted of debt of $912.8 and common shareholders' equity of $3,772.5. Changes in the common shareholders' equity account reflect primarily operating results for the period then ended 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 30 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 segments.  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 previously noted, underwriting of new policies consequently ceased as of that date and the existing book of business was placed in run-off operating mode.  

Contractual Obligations - The following table shows certain information relating to the Company's contractual obligations as of December 31, 2011:

                                                    Payments Due in the Following Years                                                                  2013 and       2015 and      2017 and                                       Total          2012          2014           2016          After Contractual Obligations: Debt                               $    912.8     $   319.8     $     7.9     $      6.8     $   578.1 Interest on Debt                        171.8          35.4          44.3           43.7          48.3 Operating Leases                        204.6          56.0          84.4           37.1          27.0 Pension Benefits Contributions (a)      123.9          23.1          55.3           38.6           6.8 

Claim & Claim Expense Reserves (b) 8,786.6 2,569.0 2,326.7

       841.9       3,049.0 Total                              $ 10,199.9     $ 3,003.4     $ 2,518.7     $    968.2     $ 3,709.4   __________ 

(a) Represents estimated minimum funding of contributions for the Old Republic

International Salaried Employees Restated Retirement Plan (the Old Republic

Plan), the Bituminous Casualty Corporation Retirement Income Plan (the Bitco

Plan), the Old Republic National Title Group Pension Plan (the Title Plan),

and the PMA Capital Corporation Pension Plan (the PMA Plan). Funding of the

plans is dependent on a number of factors including actual performance

versus actuarial assumptions made at the time of the actuarial valuations,

     as well as, maintaining certain funding levels relative to regulatory      requirements.                                           43

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(b) Amounts are reported gross of reinsurance. As discussed herein with respect

to the nature of loss reserves and the estimating process utilized in their

establishment, the Company's loss reserves do not have a contractual

maturity date. Estimated gross loss payments are based primarily on

historical claim payment patterns, are subject to change due to a wide

variety of factors, do not reflect anticipated recoveries under the terms of

reinsurance contracts, and cannot be predicted with certainty. Actual future

      loss payments may differ materially from the current estimates shown in the      table above.    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.  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 Mortgage Guaranty Group's Risk Factors for premium income and long-term claim exposures, revenue recognition for insured loans is not appropriately matched to the risk exposure and the consequent recognition of both normal and catastrophic loss occurrences.  Title premium and fee revenues stemming from the Company's direct operations (which include branch offices of its title insurers and wholly owned agency subsidiaries) represent approximately 33% of 2011 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 67% 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 major sources of Old Republic's consolidated earned premiums and fees for the periods shown were as follows:

                                                  Earned Premiums and Fees                                                                                          % Change                                                                                         from prior                           General      Mortgage       Title       Other      Total        period Years Ended December 31: 2009                     $ 1,782.5    $    644.5    $   888.4    $ 73.3    $ 3,388.9         2.1 % 2010                       1,782.1         498.8      1,211.0      81.4      3,573.5         5.4 2011                     $ 2,167.7    $    444.9    $ 1,362.4    $ 74.9    $ 4,050.1        13.3 %    General Insurance Group earned premiums increased in 2011 reflecting inclusion of PMA premiums of $412.4 for a full year during 2011 versus $103.7 in the final quarter of 2010. Excluding PMA's contribution, the remainder of the group's earned premiums reflected growth of 4.5% during 2011. As reported in the past several years, the combination of ongoing recessionary economic conditions and a generally soft pricing environment in the commercial insurance arena has generally constrained premium growth in recent years. However, during the past twelve months or so, premium rates have strengthened gradually and to varying degrees in certain parts of the Company's general insurance business. At the least, these pricing improvements should help counterbalance ongoing inflationary pressures on a variety of claim costs most susceptible to them.  Mortgage Guaranty Group earned premiums continued to decline during 2011 due to lower volumes of new insurance written, a continuation of elevated levels of premium refunds related to claim rescissions, the termination of certain pool insurance contracts in 2010, and the termination of new insurance underwriting effective August 31, 2011. Declining premium revenue trends for the past three years have been mitigated somewhat by greater business persistency levels for business produced in prior years, and by a continuing decline in premiums ceded to lender-owned (captive) reinsurance companies. Since the advent of the current economic crisis, new mortgage guaranty production has not added significantly to the Company's net risk in force base. Ongoing weakness from the downturn in overall mortgage originations, lower industry-wide penetration of the nation's current mortgage market, and the effects of more selective underwriting guidelines employed since late 2007 have been contributing factors. Together with premium refunds related to claim rescissions and the below-noted termination of pool insurance contracts which effectively ended subsequent periods' premium inflows, these factors led to a continued decline in earned premiums in the latest annual period. During 2010 and 2009, Old Republic's mortgage guaranty subsidiaries had negotiated the terminations of various captive reinsurance and pool insurance contracts. From a financial accounting standpoint, premiums obtained upon terminations of captive reinsurance agreements are recognized as income when they are received rather than being deferred to future periods                                         44 --------------------------------------------------------------------------------   when the related claim costs are expected to arise. On the other hand terminations of pool insurance contracts cause a reduction of incurred claims due to the positive effect of reserves transferred, but negative cash flows ensue. As a result of these captive transactions, net premiums earned in 2010 and 2009 were enhanced by $13.6 and $82.5, respectively. No similarly significant transactions occurred during 2011.  Title Group premium and fee revenues grew by 12.5% and 36.3% in 2011 and 2010, respectively, as a result of market share gains emanating from title industry dislocations and consolidations during the past three years.  

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

                                          General Insurance Earned Premiums by Type of Coverage                          Commercial                                        Inland                          Automobile                                        Marine                            (mostly         Workers'        Financial         and          General                           trucking)      Compensation      Indemnity      Property       Liability       Other Years Ended December 31: 2009                         36.6 %           21.7 %          13.5 %          9.5 %          8.0 %         10.7 % 2010                         38.0             25.2            11.2            8.9            6.4           10.3 2011                         32.7 %           37.3 %           7.5 %          7.6 %          5.8 %          9.1 %    Earned premiums included in the above table within the Financial Indemnity Coverages category and related risk in force pertaining to the Company's consumer credit indemnity ("CCI") coverage have reflected a generally declining trend since 2008. The decline is largely due to a temporary discontinuation of active sales efforts due to the lack of market demand for the Company's current offerings. 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.                                    Net CCI Earned Premiums                                                         % of General                                                           Insurance      Risk in                                     Amount                  Group         Force Years Ended December 31: 2009                     $         121.4                      6.8 %     $ 2,004.8 2010                                87.9                      4.9         1,518.6 2011                     $          58.3                      2.7 %     $ 1,263.1   

The following tables provide information on production and related risk exposure trends for Old Republic'sMortgage Guaranty Group:

                   Mortgage Guaranty Production by Type                            Traditional New Insurance Written:       Primary        Bulk     Other       Total Years Ended December 31: 2009                      $     7,899.2    $   -    $    .5    $ 7,899.8 2010                            3,990.2        -          -      3,990.2 2011                      $     2,099.8    $   -    $     -    $ 2,099.8                             Traditional New Risk Written by Type:    Primary        Bulk     Other       Total Years Ended December 31: 2009                      $     1,681.7    $   -    $     -    $ 1,681.7 2010                              930.0        -          -        930.0 2011                      $       511.0    $   -    $     -    $   511.0                                              Earned Premiums           Persistency                                                                  Traditional

Premium and Persistency Trends by Type: Direct Net Primary

     Bulk Years Ended December 31: 2009                                    $   648.6    $ 644.5         82.8 %     88.3 % 2010                                        529.5      498.8         82.1       88.0 2011                                    $   468.1    $ 444.9         83.2 %     85.3 %                                           45

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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 6.5% of total net risk in force as of year end 2011, are frequently subject to deductibles and aggregate stop losses which serve to limit the overall risk on a pool of insured loans. As the decline in the housing markets has accelerated and mortgage lending standards have tightened, rising defaults and the attendant increases in reserves and paid claims on higher risk loans have become more significant drivers of increased claim costs.                                Net Risk in Force                             Traditional Net Risk in Force By Type:    Primary          Bulk       Other        Total As of December 31: 2009                       $    18,727.9    $ 1,776.7    $ 297.2    $ 20,801.9 2010                            16,557.4      1,187.0      256.1      18,000.6 2011                       $    14,476.9    $ 1,017.7    $ 176.3    $ 15,671.0                                       Analysis of Risk in Force                                                                         FICO                                            FICO less     FICO 620     Greater       Unscored/ Risk in Force Distribution By FICO Scores:  than 620      to 680      than 680     Unavailable  Traditional Primary: As of December 31: 2009                                            6.5 %       28.8 %       63.1 %         1.6 % 2010                                            6.4         27.5         64.7           1.4 2011                                            6.2 %       26.8 %       65.7 %         1.3 %  Bulk(a): As of December 31: 2009                                           17.6 %       33.1 %       49.2 %          .1 % 2010                                           23.2         32.1         44.6            .1 2011                                           24.0 %       32.2 %       43.7 %          .1 %                                                 LTV          LTV          LTV          LTV

Risk in Force Distribution By Loan to 85.0 85.01 90.01

      Greater Value ("LTV") Ratio:                      and below     to 90.0      to 95.0     than 95.0  Traditional Primary(b): As of December 31: 2009                                           5.4 %       36.9 %       31.2 %       26.5 % 2010                                           5.3         37.0         31.9         25.8 2011                                           5.1 %       36.2 %       32.9 %       25.8 %  Bulk(a): As of December 31: 2009                                          65.9 %       18.4 %        7.8 %        7.9 % 2010                                          57.7         22.8          9.6          9.9 2011                                          57.1 %       22.9 %        9.8 %       10.2 %   __________ 

(a) Bulk pool risk in-force, which represented 31.0% of total bulk risk in-force

     at December 31, 2011, 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. Prior to the second quarter of 2011, LTV distributions were

presented on the basis of total LTV which included the financed single

premium portion of the loan amount. Prior period data has been reclassified

     to conform to the current presentation.                                             46

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Risk in Force Distribution By Top Ten States:

                                                    Traditional Primary                     TX      FL      GA      IL      CA      NC      PA      OH      NJ      VA As of December 31: 2009               8.5 %   8.1 %   5.2 %   5.1 %   5.5 %   4.5 %   4.0 %   3.2 %   3.1 %   2.9 % 2010               8.7     7.5     5.2     5.0     5.1     4.7     4.2     3.3     3.1     2.9 2011               8.8 %   7.5 %   5.2 %   5.0 %   5.0 %   4.8 %   4.3 %   3.3 %   3.3 %   3.0 %                                                             Bulk (a)                     TX       FL      GA      IL       CA      AZ      PA      OH      NJ      NY As of December 31: 2009               4.6 %   10.4 %   4.0 %   4.0 %   17.8 %   4.1 %   2.6 %   3.2 %   3.5 %   5.4 % 2010               5.3      9.9     4.3     4.0     15.8     3.5     3.1     3.9     3.3     6.0 2011               5.4 %    9.9 %   4.3 %   4.0 %   14.9 %   3.2 %   3.1 %   3.9 %   3.5 %   6.5 %                                                                 Full             Reduced Risk in Force Distribution By Level of Documentation:     Documentation     Documentation Traditional Primary: As of December 31: 2009                                                            91.1 %             8.9 % 2010                                                            92.4               7.6 2011                                                            92.8 %             7.2 %  Bulk (a): As of December 31: 2009                                                            49.4 %            50.6 % 2010                                                            57.7              42.3 2011                                                            58.4 %            41.6 %                                              Fixed Rate                                             & ARMs       ARMs with                                           with Resets    Resets <5 Risk in Force Distribution By Loan Type:   >=5 Years       years Traditional Primary: As of December 31: 2009                                          96.3 %          3.7 % 2010                                          96.8            3.2 2011                                          97.0 %          3.0 %  Bulk (a): As of December 31: 2009                                          75.4 %         24.6 % 2010                                          69.6           30.4 2011                                          71.0 %         29.0 %   __________ 

(a) Bulk pool risk in-force, which represented 31.0% of total bulk risk in-force

     at December 31, 2011, has been allocated pro-rata based on insurance      in-force.                                              47

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

        Title Premium and Fee Production by Source                                              Independent                                                 Title                                 Direct        Agents &                               Operations        Other Years Ended December 31: 2009                              38.5 %         61.5 % 2010                              35.6           64.4 2011                              32.6 %         67.4 %  

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.                                                                                                Fair         Invested                                      Invested Assets at Adjusted Cost                         Value        Assets at                                                                Corporate                     Adjust-          Fair                      General      Mortgage        Title        and Other        Total          ment          Value As of December 31: 2010               $ 6,451.2     $ 2,039.2     $   636.0     $     394.1     $ 9,520.5     $    738.7     $ 10,259.3 2011               $ 6,610.7     $ 1,654.0     $   683.7     $     796.6     $ 9,745.2     $    750.3     $ 10,495.5                                    Net Investment Income                           Yield at                                                   Corporate                Original     Fair               General     Mortgage      Title     and Other      Total       Cost      Value Years Ended December 31: 2009         $  258.9    $     92.0    $ 25.2    $       7.2    $ 383.5       4.15 %   4.17 % 2010            260.1          84.9      26.5            7.3      379.0       3.94     3.80 2011         $  270.5    $     59.2    $ 27.3    $       7.4    $ 364.6       3.71 %   3.51 %    Consolidated net investment income declined by 3.8% and 1.2% in 2011 and 2010, respectively, and grew by 1.6% in 2009. This revenue source is affected by changes in the invested asset base which are mainly driven by consolidated operating cash flows, by a concentration of investable assets in interest-bearing securities, and by changes in market rates of return. Yield trends reflect the relatively short maturity of Old Republic's fixed maturity securities portfolio as well as continuation of a relatively lower yield environment during the past several years. Net investment income includes contributions from PMA of $19.1 and $2.9 in 2011 and the fourth quarter of 2010, respectively.  

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; in 2011, 2010 and 2009, 34.4%, 45.5% and 87.2%, respectively, of all such dispositions resulted from these occurrences. Dispositions of securities at a realized gain or loss reflect such factors as ongoing assessments of issuers' business prospects, rotation among industry sectors, changes in credit quality, and tax planning considerations. Additionally, the amount of net realized gains and losses registered in any one accounting period are affected by the aforementioned assessments of securities' values for other-than-temporary impairment. As a result of the interaction of all these factors and considerations, net realized investment gains or losses can vary significantly from period-to-period, and, in 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 2010 realized gains on fixed maturity securities reflect the sale of certain tax-exempt municipal bonds. The gains on equity securities generally reflect the recovery of value realized upon the subsequent sale of common stocks originally impaired in 2008. All sales proceeds were redirected to taxable bonds with higher investment yields and a diversified portfolio of equity securities, with concentrations within the utility and energy industries.                                         48 --------------------------------------------------------------------------------                           Realized Gains (Losses) on                         Disposition of Securities                           

Impairment Losses on Securities

                                   Equity                                         Equity                                  securities                                     securities                       Net                   Fixed          and miscel-                       Fixed        and miscel-                    realized                  maturity          laneous                       maturity         laneous                       gains                 securities       investments        Total       securities      investments       Total        (losses) Years Ended December 31: 2009          $        4.2     $        11.7     $    15.9     $      (1.5 )   $      (8.0 )   $    (9.5 )   $      6.3 2010                  79.1              31.2         110.3               -            (1.2 )        (1.2 )        109.1 2011          $      142.6     $        23.1     $   165.8     $         -     $     (50.2 )   $   (50.2 )   $    115.5    

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 December 31, 2011 and 2010:                                                             Claim and Loss Adjustment Expense Reserves                                                                            December 31,                                                                  2011                         2010                                                          Gross            Net          Gross          Net  Workers' compensation                                $   3,472.8      $ 1,830.8     $ 3,508.5     $ 1,823.0 General liability                                        1,392.6          645.3       1,317.3         650.4 Commercial automobile (mostly trucking)                  1,116.0          925.8       1,111.8         917.5 Other coverages                                            579.4          367.1         624.6         387.9 Unallocated loss adjustment expense reserves               172.8          

137.0 191.0 149.1

        Total general insurance reserves                 6,733.7       

3,906.1       6,753.5       3,928.1 Mortgage guaranty                                        1,690.5        1,613.9       1,729.7       1,614.0 Title                                                      314.9          314.9         281.2         281.2 Life and health                                             21.3           17.4          24.2          20.0 Unallocated loss adjustment expense reserves -     other coverages                                         26.0           

26.0 25.8 25.8

Total claim and loss adjustment expense

        reserves                                     $   8,786.6      $ 5,878.5     $ 8,814.6     $ 5,869.3 Asbestosis and environmental claim reserves included 

in the above general insurance reserves:

        Amount                                       $     182.0      $  

137.9 $ 195.7$ 144.9

         % of total general insurance reserves                2.7 %          

3.5 % 2.9 % 3.7 %

    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

  Most of Old Republic's consolidated claim and related expense reserves stem from its general insurance business. At December 31, 2011, such reserves accounted for 76.6% and 66.4% of consolidated gross and net of reinsurance reserves, respectively, while similar reserves at December 31, 2010 represented 76.6% and 66.9% of the respective consolidated amounts.  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                                         49 --------------------------------------------------------------------------------   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' ("E&O/D&O") liability coverages are usually not prone to immediate evaluation or quantification inasmuch as many such claims may be litigated over several years and their ultimate costs may be affected by the vagaries of judged or jury verdicts. Approximately 91% 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 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%. The amount of discount reflected in the year end net reserves totaled $235.1, $231.0 and $143.9 as of December 31, 2011, 2010, and 2009, respectively.  A large variety of statistical analyses and formula calculations are utilized to provide for IBNR claim costs as well as additional costs that can arise from such factors as monetary and social inflation, changes in claims administration processes, changes in reinsurance ceded and recoverability levels, and expected trends in claim costs 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.  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.                                         50 --------------------------------------------------------------------------------    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 all 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 such 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.  

Where 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 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 of necessity incorporated estimates of expected levels of coverage rescissions and claim denials in its reserving methodology since 2008. Such estimates are evaluated at each balance sheet date and take into account observed trends in rescission and denial rates.  

The table below shows the estimated effects of coverage rescissions and claim denials on loss reserves and paid and incurred losses.

                                                          2011          2010 

2009

 Estimated reduction in beginning reserve              $   710.3     $ 1,712.2     $   830.4 Total incurred claims and settlement expenses reduced (increased) by changes in estimated rescissions: Current year                                              223.1         394.1       1,087.9 Prior year                                               (340.8 )      (215.7 )       513.3 Sub-total                                                (117.6 )       178.3       1,601.3 Estimated rescission reduction in paid claims            (279.5 )    (1,180.3 )      (719.5 ) Estimated reduction in ending reserve                 $   313.2     $   

710.3 $ 1,712.2

    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. 2009 reflects a significant increase in the levels of anticipated rescissions and claim denials on reported delinquencies. The trends for 2010 and 2011 reflect a continuing reduction in the level of actual and anticipated rescission and claim denial rates on total outstanding delinquencies. Variances between the estimated rescission and actual claim denial rate are reflected in the periods during which they occur.  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. 2010 rescissions include $431.4 related to certain pool insurance contracts which were terminated during the year.  Although the insured has no right under the policy to appeal, if the insured, at any time, contests in writing the Company's findings or action with respect to a loan or a claim, 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 (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.), RMIC is seeking to rescind a June 2006 amendment to a mortgage insurance policy that it contends was fraudulently induced by Countrywide. 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                                         51 --------------------------------------------------------------------------------   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.  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.  

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 this Annual Report on Form 10-K under Item 1A - Risk Factors.  

The following table shows an analysis of changes in aggregate reserves for the Company's losses, claims, and settlement expenses for each of the years shown:

                                       52 --------------------------------------------------------------------------------   Years Ended December 31:                                      2011          2010          2009 Gross reserves at beginning of year                        $ 8,814.6     $ 7,915.0     $ 7,241.3 Less: reinsurance losses recoverable                         2,945.3       2,316.5       2,227.0 Net reserves at beginning of year:          General Insurance (d)                               3,928.1       

3,977.4 3,326.9

          Mortgage Guaranty (a)                               1,623.0       1,965.4       1,382.6          Title Insurance                                       298.0         277.1         282.4          Other                                                  20.0          21.5          22.2             Sub-total                                        5,869.3       6,241.5       5,014.2 Incurred claims and claim adjustment expenses: 

Provisions for insured events of the current year:

         General Insurance                                   1,678.5       1,426.3       1,409.2          Mortgage Guaranty (a)                                 783.9         781.4       1,284.0          Title Insurance                                       105.7          83.4          63.6          Other                                                  40.2          44.4          36.4             Sub-total                                        2,608.5       2,335.6       2,793.3

Change in provision for insured events of prior years:

General Insurance                                    (149.2 )      

(76.6 ) (56.8 )

          Mortgage Guaranty (a)                                 273.2         (15.2 )      (149.9 )          Title Insurance                                           -          13.4           6.7          Other                                                  (1.2 )        (3.2 )        (1.3 )             Sub-total                                          122.6         (81.5 )      (201.3 )             Total incurred claims and claim adjustment             expenses (a)                                     2,731.1       2,254.1       2,592.0 Payments: 

Claims and claim adjustment expenses attributable to

insured events of the current year:

         General Insurance                                     610.6         593.2         498.6          Mortgage Guaranty (b)                                  59.8          52.3           7.8          Title Insurance                                         7.9           7.2           7.1          Other                                                  30.7          33.0          25.8             Sub-total                                          709.2         685.9         539.3

Claims and claim adjustment expenses attributable to

insured events of prior years:

         General Insurance                                     940.5         805.8         846.4          Mortgage Guaranty (b)                                 997.6       1,056.1         543.5          Title Insurance                                        63.6          68.7          68.5          Other                                                  10.7           9.6           9.9             Sub-total                                        2,012.6       1,940.4       1,468.3             Total payments (b)                               2,721.9      

2,626.4 2,007.7 Amount of reserves for unpaid claims and claim adjustment expenses

at the end of each year, net of reinsurance losses

   recoverable: (c)          General Insurance                                   3,906.1       3,928.1       3,334.3          Mortgage Guaranty                                   1,622.8       1,623.0       1,965.4          Title Insurance                                       332.0         298.0         277.1          Other                                                  17.4          20.0          21.5             Sub-total                                        5,878.5       5,869.3       5,598.5 Reinsurance losses recoverable                               2,908.1       2,945.3       2,316.5 Gross reserves at end of year                              $ 8,786.6     $ 8,814.6     $ 7,915.0   __________ 

(a) In common with all other insurance lines, mortgage guaranty paid and

incurred claim and claim adjustment expenses include only those costs

actually or expected to be paid by the Company. Changes in mortgage guaranty

aggregate case, IBNR, and loss adjustment expense reserves shown in the

following table and entering into the determination of incurred claim costs,

take into account, among a large number of variables, claim cost reductions

for anticipated coverage rescissions and claims denials previously noted.

    The mortgage guaranty provision for insured events of the current year was reduced by an estimated $223.1, $394.1 and $1,087.9, respectively, for 2011, 2010 and 2009. The provision for insured events of prior years in 2011, 2010 and 2009 was increased (decreased) by an estimated $340.8, $215.7 and $(513.3), respectively. These changes were offset to varying degrees by differences between actual claim settlements relative to expected experience and by subsequent revisions to assumptions in regards to claim frequency, severity or levels of                                         53 --------------------------------------------------------------------------------

associated claim settlement costs which result from consideration of underlying trends and expectations.

                                    2011        2010        2009   Net reserve increase(decrease):   General Insurance(*)            $ (22.0 )   $ 593.8     $   7.4   Mortgage Guaranty                   (.2 )    (342.3 )     582.8   Title Insurance                    34.0        20.8        (5.3 )   Other                              (2.6 )      (1.4 )       (.7 )   Total                           $   9.2     $ 270.8     $ 584.3   __________  

(*) Includes reserves of $638.8 at December 31, 2010 assumed in conjunction with the PMA merger.

(b) Rescissions reduced the Company's paid losses by an estimated $279.5,

$1,180.3, and $719.5 for 2011, 2010, and 2009, respectively. 2010 includes

$431.4 related to certain pool insurance contracts which were terminated

      during the year.    

(c) Year end net IBNR reserves carried in each segment were as follows:

                             2011         2010         2009   General Insurance(**) $ 1,909.5    $ 1,905.1    $ 1,621.6   Mortgage Guaranty          63.6         46.2         39.7   Title Insurance           262.5        216.5        191.3   Other                       4.6          5.0          9.4   Total                 $ 2,240.4    $ 2,172.9    $ 1,862.0   __________  

(**) Includes reserves of $347.7 at December 31, 2010 assumed in conjunction with the PMA merger.

(d) Includes reserves acquired through the PMA merger at October 1, 2010.

    During 2010's second half, various news accounts cited possible widespread issues pertaining to the loan foreclosure procedures of lending institutions. Basically, these news reports point to faulty documentation of such foreclosure procedures. In the Company's opinion, the possible impact on its operating segments from foreclosure delays is summarized as follows: General Insurance -- the CCI coverage is largely unaffected because foreclosure is not a condition precedent to the filing of a claim by an insured lending institution. Mortgage guaranty -- a delay in the foreclosure proceedings will have the effect of delaying the filing and ultimate payment of claims. It is not anticipated that this will increase the number of delinquent loans that ultimately go to claim but will result in distressed loans remaining in the later stage of delinquency until the ultimate foreclosure is resolved. Title insurance -- The current foreclosure issues could impact this line of business by legal costs associated with defending title issues created by flaws in the foreclosure proceedings. In an extreme case, a title company could be forced to reimburse the buyer of the home as a result of a faulty foreclosure proceeding. In this event, the Company would look to the protections afforded it in the policy and seek remedies from the foreclosing lender. It is unlikely that these issues would have a material financial impact on our title insurance company.  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: Years Ended December 31:                                2011       2010       2009 General                                                 71.3 %    76.4  %    76.3  % Mortgage                                               237.6     153.6      176.0 Title                                                    7.8       8.0        7.9 Consolidated benefits and claim ratio                   67.8 %    63.4  %   

76.7 %

  Reconciliation of consolidated ratio: Provision for insured events of the current year        64.8 %    65.7  %   

82.6 % Change in provision for insured events of prior years: Due to asbestos and environmental

                          -         -      

-

 Due to all other coverages                               3.0      (2.3 )     (5.9 ) Net (favorable) unfavorable development                  3.0      (2.3 )     (5.9 ) Consolidated benefits and claim ratio                   67.8 %    63.4  %   

76.7 %

    The consolidated benefits and claim ratio reflects the changing effects of period-to-period contributions of each segment to consolidated results, and this ratio's variances within each segment. For the three most recent calendar years, the above table indicates that the one-year development of consolidated reserves at the beginning of each year                                         54 --------------------------------------------------------------------------------

produced unfavorable developments in 2011 and favorable developments in 2010 and 2009 which on average reduced the consolidated loss ratio by 1.7%.

  The percentage of net claims, benefits and related settlement expenses measured against premiums earned by major types of general insurance coverage were as follows:                                       General Insurance Claim Ratios by Type of Coverage                              Commercial                                       Inland                              Automobile                                       Marine                   All          (mostly          Workers'       Financial       and        General                Coverages      trucking)      Compen-sation     Indemnity     Property    Liability      Other Years Ended December 31: 2009              76.3 %         71.5 %            74.9 %         117.8 %       63.0 %       65.6 %       60.1 % 2010              76.4           73.0              70.7           126.9         62.8         64.6         67.1 2011              71.3 %         71.9 %            72.3 %          77.3 %       70.4 %       64.6 %       62.8 %    Excluding the impact of Old Republic's CCI business, the overall general insurance claims ratio shows reasonably consistent trends for the past three years. To a large extent, this major cost factor reflects pricing and risk selection improvements that have been applied since 2001, together with elements of reduced loss severity and frequency. The higher claim ratio for financial indemnity coverages in the periods shown was driven principally by greater claim frequencies experienced in Old Republic's CCI coverage. Even though consumer loan delinquency rates have subsided fairly steadily over the past year, CCI claims costs in 2011 continue to reflect the retention of higher reserve levels until there is greater certainty around these indicated trends.  

The following table shows CCI claims related trends for the periods shown:

                                                                      Effect on                                                                       General        Reported                                  CCI Claim Costs                     Insurance      Delinquency         Claim                          Paid                    Incurred              Claim       Ratio at End      Rescissions                   Amount     Ratio (a)      Amount     Ratio (a)     Ratio (b)       of Period       and Denials Years Ended December 31: 2009            $  256.9        211.6 %   $  214.7        176.9 %        7.3 %           6.8 %     $       974.0 2010               265.4        301.8        212.5        241.7          8.6             4.6               621.5 2011            $   93.6        160.7 %   $   84.8        145.5 %        2.1 %           4.4 %     $       166.1   __________ 

(a) Percent of net CCI earned premiums.

(b) Represents the percentage point increase in the general insurance claim

      ratio.    

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, by ongoing development of asbestos and environmental ("A&E") claim reserves, and by unfavorable development of the CCI reserves.

  CCI claims ratios in the above table 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.  Unfavorable developments attributable to A&E claim reserves are due to periodic re-evaluations of such reserves as well as subsequent reclassifications of other coverages' reserves, typically workers' compensation, deemed assignable to A&E category of losses. Except for a small portion that emanates from ongoing primary insurance operations, a large majority of the A&E claim reserves posted by Old Republic stem mainly from its participations in assumed reinsurance treaties and insurance pools which were discontinued fifteen or more years ago and have since been in run-off status. With respect to the primary portion of gross A&E reserves, Old Republic administers the related claims through its claims personnel as well as outside attorneys, and posted reserves reflect its best estimates of ultimate claim costs. Claims administration for the assumed portion of 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.                                         55 --------------------------------------------------------------------------------   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 5.9 years (gross) and 9.4 years (net of reinsurance) as of December 31, 2011 and 5.9 years (gross) and 10.0 years (net of reinsurance) as of December 31, 2010. The survival ratios are presented on a pro forma basis (unaudited) as if PMA had been consolidated 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 .2% of general insurance group net incurred losses for the five years ended December 31, 2011.  

A summary of reserve activity, including estimates for IBNR, relating to A&E claims at December 31, 2011 and 2010 is as follows:

                                                          December 31,                                                   2011                   2010                                             Gross       Net        Gross        Net Asbestos: Reserves at beginning of year             $ 134.8     $ 108.0    $ 122.0     $ 103.5 Reserves acquired pursuant to PMA merger        -           -       25.0    

11.2

 Loss and loss expenses incurred              12.7         9.7       (1.3 )      (1.0 ) Claims and claim adjustment expenses paid    18.5        11.3      (11.0 )      (5.7 ) Reserves at end of year                     129.0       106.4      134.8       108.0  Environmental: Reserves at beginning of year                60.8        36.9       50.7    

33.4

 Reserves acquired pursuant to PMA merger        -           -       14.2    

8.6

 Loss and loss expenses incurred               (.5 )        .6          -        (1.5 ) Claims and claim adjustment expenses paid     7.2         6.1       (4.0 )      (3.5 ) Reserves at end of year                      53.0        31.4       60.8    

36.9

Total asbestos and environmental reserves $ 182.0$ 137.9$ 195.7

$ 144.9

    The mortgage guaranty claim ratios for the years presented were affected mostly by varying claim payment trends and reserve provisions as well as captive and pool transactions. As indicated in the above Executive Summary, Old Republic's mortgage guaranty subsidiaries negotiated the termination of various captive reinsurance and pool insurance contracts during 2010 and 2009. Taken together all of these transactions reduced the incurred claim ratio by 15.0 and 25.8 percentage points for the years ended December 31, 2010 and 2009, respectively. These claim ratios had risen through year-end 2009 principally as a result of higher reserve provisions and paid losses. Reserve provisions have been impacted by the levels of reported delinquencies emanating from the downturn in the national economy, widespread stress in housing and mortgage finance markets, and increasing unemployment. Trends in expected and actual claim frequency and severity have been impacted to varying degrees by several factors including, but not limited to, significant declines in home prices which limit a troubled 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 recent demand, historically high levels of coverage rescissions and claims denials as a result of material misrepresentation in key underwriting information or non-compliance with prescribed underwriting guidelines, and changes in claim settlement costs. The latter costs are influenced by the amount of unpaid principal outstanding on delinquent loans as well as the rising expenses of settling claims due to higher investigations costs, legal fees, and accumulated interest expenses.  

Certain mortgage guaranty average claims related trends are listed below:

                                        Average Paid Claim             Reported Delinquency           Claims                                            Amount (a)                Ratio at End of Period        Rescissions                                    Traditional                     Traditional                         and                                      Primary           Bulk          Primary          Bulk           Denials Years Ended December 31: 2009                             $       48,492     $  59,386          16.83 %         30.81 %   $       719.5 2010                                     47,954        58,184          15.55           24.54             748.8 2011                             $       48,254     $  54,956          14.89 %         21.90 %   $       279.5   __________ 

(a) Amounts are in whole dollars.

                                       56 --------------------------------------------------------------------------------                                            Traditional Primary Delinquency 

Ratios for Top Ten States (b):

                      TX        FL          GA          IL         CA       NC       PA       OH       NJ       VA As of December 31: 2009               10.6 %    34.1 %      18.8 %      19.5 %     30.5 %   12.3 %   11.6 %   16.4 %   21.1 %   13.9 % 2010                9.6      32.6        17.3        19.2       22.6     11.9     11.5     16.0     20.7     11.7 2011                8.4 %    32.2 %      15.4 %      20.6 %     17.1 %   12.2 %   12.1 %   15.4 %   23.5 %   11.5 %                                              Bulk Delinquency Ratios for Top Ten States (b):                      TX       FL       GA       IL       CA       AZ       PA       OH       NJ       NY As of December 31: 2009               16.3 %   46.5 %   27.6 %   35.7 %   41.3 %   37.5 %   21.7 %   23.4 %   33.3 %   26.8 % 2010               15.2     37.0     22.3     28.6     27.7     24.6     20.6     23.2     27.9     23.2 2011               14.1 %   34.0 %   19.5 %   26.3 %   21.8 %   19.7 %   20.1 %   19.1 %   28.2 %   23.0 %                                    Total Delinquency Ratios for Top Ten

States (includes "other" business) (b):

                       TX           FL           GA           IL           CA        NC       PA       OH       NJ       VA As of December 31: 2009                 11.2 %       36.4 %       19.4 %       20.5 %       33.9 %   11.5 %   12.9 %   17.2 %   24.1 %   14.0 % 2010                  9.9         32.1         17.1         19.1         23.2     10.9     12.1     16.6     21.5     10.6 2011                  8.8 %       31.6 %       15.4 %       20.5 %       18.1 %   11.7 %   12.7 %   15.7 %   24.0 %   10.8 %   __________ 

(b) As determined by risk in force as of December 31, 2011, these 10 states

represent approximately 50.1%, 58.8%, and 50.3%, of traditional primary,

bulk, and total risk in force, respectively.

    Title insurance loss ratios have remained in the single digits for a number of years due to a continuation of favorable trends in claims frequency and severity for business underwritten since 1992 in particular. Though still reasonably contained, claim ratios have remained at elevated levels in the most recent three years by comparison to historical trends due to the continuing downturn and economic stresses in the housing and related mortgage lending industries.  

Volatility of Reserve Estimates and Sensitivity

  There is a great deal of uncertainty in the estimates of loss and loss adjustment expense reserves, and unanticipated events can have both a favorable or unfavorable impact on such estimates. The Company believes that the factors most responsible, in varying and continually changing degrees, for such favorable or unfavorable development are as follows:  General insurance net claim reserves can be affected by lower than expected frequencies of claims incurred but not reported, the effect of reserve discounts applicable to workers' compensation claims, higher than expected severity of litigated claims in particular, governmental or judicially imposed retroactive conditions in the settlement of claims such as noted elsewhere in this document in regard to black lung disease claims, greater than anticipated inflation rates applicable to repairs and the medical benefits portion of claims, and higher than expected IBNR due to the slower and highly volatile emergence patterns applicable to certain types of claims such as those stemming from litigated, assumed reinsurance, or the A&E types of claims noted above.  Mortgage guaranty net claim reserve levels can be affected adversely by several factors. These include changes in the mix of insured business toward loans that have a higher probability of default, increases in the average risk per insured loan, the levels of estimated rescission and claim denial activity, the deterioration of regional or national economic conditions leading to a reduction in borrowers' income and thus their ability to make mortgage payments, and reductions in housing values and/or increases in housing supply that can raise the rate at which defaults evolve into claims and affect their overall severity.  

Title insurance loss reserve levels can be impacted adversely by such developments as reduced loan refinancing activity, the effect of which can be to lengthen the period during which title policies remain exposed to loss emergence. Such reserve levels can also be impacted by reductions in either property values or the volume of transactions which, by virtue of the speculative nature of some real estate developments, can lead to increased occurrences of fraud, defalcations or mechanics' liens.

  With respect to Old Republic's small life and health insurance operations, reserve adequacy may be affected adversely by greater than anticipated medical care cost inflation as well as greater than expected frequency and severity of claims. In life insurance, as in general insurance, concentrations of insured lives coupled with a catastrophic event would represent the Company's largest exposure.  

Loss reserve uncertainty is illustrated by the variability in loss reserve development presented in the schedule which appears under Item 1 of this Annual Report. That schedule shows the cumulative loss reserve development for each of

                                       57 --------------------------------------------------------------------------------   the past ten years through December 31, 2011 for the general insurance business which currently represents 66.4% of Old Republic's total loss and loss adjustment expense reserves, net of reinsurance reserves. For each of these ten calendar years, prior accident years' general insurance claim reserves have developed, as a percentage of the original estimates, within a range of -8.9% unfavorable in 2001 to a 13.4% favorable development in 2005. For the ten year period the net development has averaged 6.0% favorable.  On a consolidated basis, which includes all coverages provided by the Company, the one year development on prior year loss reserves over the same ten year period has ranged from -2.2% unfavorable to 11.4% favorable and averaged 2.8%. Although management does not have a practical business reason for making projections of likely outcomes of future loss developments, its analysis and evaluation of Old Republic's existing business mix, current aggregate loss reserve levels, and loss development patterns suggests the reasonable likelihood that 2011 year-end loss reserves could ultimately develop within a range of +/- 5%. The most significant factors impacting the potential reserve development for each of the Company's insurance segments is discussed above. While the Company has generally experienced favorable loss developments for the latest ten year period on an overall basis, the current analysis of loss development factors and economic conditions influencing the Company's insurance coverages indicates a gradual downward trend in favorable development during the most recent three years, with respect to general insurance. In management's opinion, the other segments' loss reserve development patterns show greater variability due to changes in economic conditions which cannot be reasonably anticipated. Consequently, management believes that using a 5% potential range of reserve development provides a reasonable benchmark for a sensitivity analysis of the Company's consolidated reserves as of December 31, 2011.  

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 this Annual Report on Form 10-K.  Subsidiaries within the general insurance segment have generally obtained reinsurance coverage from independent insurance or reinsurance companies pursuant to excess of loss agreements. Under excess of loss reinsurance agreements the Company is generally reimbursed for claim costs exceeding contractually agreed-upon levels. During the three year period ended December 31, 2011, the Company's net retentions have risen gradually within the general insurance segment; however, such changes have not had a material impact on the Company's consolidated financial statements.  Generally, mortgage guaranty insurance risk has historically been reinsured through excess of loss contracts through insurers owned by or affiliated with lending institutions and financial and other intermediaries whose customers are insured by Old Republic. Effective December 31, 2008, the Company discontinued excess of loss reinsurance cessions to lenders' captive insurance companies for all new production originated subsequent to the effective date. Traditional pro-rata ("quota share") reinsurance arrangements will continue to be offered by the Company. During 2010 and 2009, the Mortgage Guaranty Group recaptured business previously ceded to several captives. In substance, the transactions are cut-off reinsurance commutation arrangements whereby the captives have remitted to the Company the reserves on existing claim obligations and a risk premium for claims that will occur after the recapture date. The impact of these transactions is summarized in the Executive Summary and other relevant sections within the Management Analysis of Financial Position and Results of Operations. Except for relatively few facultative reinsurance cessions covering large risks, the title insurance segment does not utilize reinsurance to manage its insurance risk.  

The Company does not anticipate any significant changes to its reinsurance programs during 2012.

Expenses: Underwriting Acquisition and Other Expenses

The following table sets forth the expense ratios registered by each major business segment and in consolidation for the periods shown:

                          General    Mortgage    Title     Consolidated Years Ended December 31: 2009                       25.8 %      12.6 %   93.8 %         41.8 % 2010                       26.6        14.4     93.0           48.0 2011                       25.6 %      23.9 %   91.2 %         48.0 %    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 has remained relatively flat for 2009 through 2011. The Mortgage Guaranty segment's expense ratios for the periods shown are reflective of the continued emphasis on operating efficiency negated by ongoing reductions in the earned premium base. In addition, the 2011 mortgage guaranty expense ratio reflects an                                         58 --------------------------------------------------------------------------------   accrual of employment severance and similar costs, and the elimination of previously deferred acquisition costs. As a consequence of the previously mentioned GAAP accounting requirement for reinsurance contract terminations, this segment's 2009 expense ratio dropped from 14.3% to 12.6%. Production expenses for the Title segment were relatively lower as a percentage of premium and fees revenue, but rose dollar-wise in reflection of greater personnel and other production costs related to the higher revenues attained and anticipated.  Expenses: Total   

The composite ratios of the above summarized net claims, benefits and underwriting expenses that reflect the sum total of all the factors enumerated above have been as follows:

                          General    Mortgage     Title    Consolidated Years Ended December 31: 2009                      102.1 %     188.6 %   101.7 %        118.5 % 2010                      103.0       168.0     101.0          111.4 2011                       96.9 %     261.5 %    99.0 %        115.8 %    Expenses: Income Taxes    The effective consolidated income tax rates (credits) were (40.6%) in 2011, (9.2%) in 2010 and (63.8%) in 2009. The rates for each year reflect primarily the varying proportions of pretax operating income (loss) derived from partially tax sheltered investment income (principally state and municipal tax-exempt interest), the combination of fully taxable investment income, realized investment gains or losses, and underwriting and service income, and judgments about the recoverability of deferred tax assets. A valuation allowance of $54.0 was established against a deferred tax asset related to the Company's realized losses on investments at December 31, 2008. During 2009, this valuation allowance was eliminated following an increase in the fair value of the Company's investment portfolio. As of <chron>December 31, 2011 and 2010, a valuation allowance was established for certain net operating loss and tax credit carryforwards which the Company did not expect to realize.                                          59 --------------------------------------------------------------------------------

   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'sGeneral Insurance segment, its results can be affected, in particular, by the level of market competition, which is typically a function of available capital and expected returns on such capital among competitors, the levels of interest and inflation rates, and periodic changes in claim frequency and severity patterns caused by natural disasters, weather conditions, accidents, illnesses, work-related injuries, and unanticipated external events. Mortgage Guaranty and Title Insurance results can be affected by similar factors and by changes in national and regional housing demand and values, the availability and cost of mortgage loans, employment trends, and default rates on mortgage loans. Mortgage Guaranty results, in particular, may also be affected by various risk-sharing arrangements with business producers as well as the risk management and pricing policies of government sponsored enterprises. Life and health insurance earnings can be affected by the levels of employment and consumer spending, variations in mortality and health trends, and changes in policy lapsation rates. At the parent holding company level, operating earnings or losses are generally reflective of the amount of debt outstanding and its cost, interest income on temporary holdings of short-term investments, and period-to-period variations in the costs of administering the Company's widespread operations.  

A more detailed listing and discussion of the risks and other factors which affect the Company's risk-taking insurance business are included in Part I, Item 1A - Risk Factors, of this 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.                                         60

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