Newswires
OLD REPUBLIC INTERNATIONAL CORP – 10-K – Management Analysis of Financial Position and Results of Operations ($ in Millions, Except Share Data)
OVERVIEW
This management analysis of financial position and results of operations pertains to the consolidated accounts ofOld Republic International Corporation ("Old Republic ", "ORI" or "the Company"). The Company conducts its operations through a number of regulated insurance company subsidiaries organized into three major segments:General Insurance (property and liability insurance),Title Insurance and Republic Financial Indemnity Group (RFIG) Run-off. A small life and accident insurance business, accounting for 0.1% of consolidated operating revenues for the year endedDecember 31, 2022 and 0.5% of consolidated assets as of that date, is included within the Corporate & Other caption of this report. The consolidated accounts are presented in conformity with theFinancial Accounting Standards Board's (FASB) Accounting Standards Codification (ASC) of accounting principles generally accepted inthe United States of America (GAAP). As a publicly held company,Old Republic utilizes GAAP to comply with the financial reporting requirements of theSecurities and Exchange Commission (SEC). From time to time the FASB and theSEC issue various releases, most of which require additional financial statement disclosures and provide related application guidance. Recent guidance issued by the FASB is summarized further in the Notes to Consolidated Financial Statements where applicable. 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 theU.S. and those of a small number of other jurisdictions outside theU.S. in which they operate. In comparison with GAAP, the statutory accounting practices generally reflect greater conservatism and comparability among insurers, and are intended to address the primary financial security interests of policyholders and their beneficiaries. Additionally, these practices also affect a significant number of important factors such as product pricing, risk bearing capacity and capital adequacy, the determination of Federal income taxes payable currently among ORI's tax-consolidated entities, and the upstreaming of dividends by insurance subsidiaries to the parent holding company. The major differences between these statutory financial accounting practices and GAAP are summarized in Note 1 to the consolidated financial statements. The insurance business is distinguished from most others in that the prices (premiums) charged for most products are set without knowing what the ultimate loss costs will be. The Company also cannot know exactly when claims will be paid, which may be many years after a policy was issued or expired. This castsOld Republic as a risk-taking enterprise managed for the long run.Old Republic therefore conducts the business with a primary focus on achieving favorable underwriting results over cycles, and on maintaining a sound financial condition to support our subsidiaries' long-term obligations to policyholders and their beneficiaries. To achieve these objectives, adherence to insurance risk management principles is stressed, and asset diversification and quality are emphasized. In addition, management engages in an ongoing assessment of operating risks, such as cybersecurity risks, that could adversely affect the Company's business and reputation. In addition to income arising fromOld Republic's basic underwriting and related services functions, significant investment income is earned from invested funds generated by those functions and from capital resources. Investment management aims for stability of income from interest and dividends, protection of capital, and for sufficiency of liquidity to meet insurance underwriting and other obligations as they become payable in the future. Securities trading and the realization of capital gains are not primary objectives. The investment philosophy is therefore best characterized as emphasizing value, credit quality, and relatively long-term holding periods. The Company's ability to hold both fixed income and equity securities for long periods of time is enabled by the scheduling of maturities in contemplation of an appropriate matching of assets and liabilities, and by investments in dividend paying, publicly traded, large capitalization, highly liquid equity securities. In light of the above factors, the Company is managed for the long run and with little regard for quarterly or even annual reporting periods. These time frames are too short. Management believes results are best evaluated by looking at underwriting and overall operating performance trends over 10-year intervals. These likely include one or two economic and/or underwriting cycles. This provides enough time for these cycles to run its course, for premium rate changes and subsequent underwriting results to be reflected in financial statements, and for reserved loss costs to be quantified with greater accuracy.
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 International Corporation reported the following consolidated
results:
OVERALL RESULTS
Years Ended December 31: 2022 2021 2020
Pretax income $ 857.4 $ 1,922.1 $ 688.4
Pretax investment gains (losses) (201.1) 758.0 (142.0)
Pretax income excluding investment gains
(losses) $ 1,058.6 $ 1,164.0 $ 830.4
Net income $ 686.4 $ 1,534.3 $ 558.6
Net of tax investment gains (losses) (158.6) 598.4 (112.1)
Net income excluding investment gains
(losses) $ 845.1 $ 935.9 $ 670.8
Combined ratio 91.0 % 89.9 % 93.3 %
PER DILUTED SHARE
Years Ended December 31: 2022 2021 2020
Net income $ 2.26 $ 5.05 $ 1.87
Net of tax investment gains (losses) (0.53) 1.97 (0.37)
Net income excluding investment gains
(losses) $ 2.79
SHAREHOLDERS' EQUITY (BOOK VALUE)
December 31: 2022 2021 Total$ 6,166.2 $ 6,893.2 Per Common Share$ 21.05 $ 22.76
The Company reported pretax income, excluding investment gains (losses), of
underwriting results drove a consolidated combined ratio of 91.0% for the full
year 2022 compared to 89.9% and 93.3% in 2021 and 2020, respectively.
For 2022, consolidated net premiums and fees earned declined 4.1%, reflecting a decrease inTitle Insurance of 13.0%, offset by growth inGeneral Insurance of 7.1%. Conversely, consolidated net premiums and fees for 2021 represented growth of 18.8% compared to 2020, with mid-single digit increases inGeneral Insurance and significant growth in Title insurance attributable to a low interest rate environment and a robust real estate market. Net investment income increased in 2022 following relatively flat levels maintained in 2021. The increase for 2022 reflects growth in the invested asset base and higher investment yields earned. During 2022, the Company returned total capital of$862.0 , including$580.7 in dividends and$281.2 of share repurchases (12.6 million shares at an average price of$22.23 per share), leaving approximately$169.0 remaining under the current repurchase authorization as ofDecember 31, 2022 . Following the close of the year and throughFebruary 23, 2023 , the Company repurchased 1.3 million additional shares for$35.6 (average price of$25.85 ), leaving$133.1 remaining under the current repurchase authorization. Book value per share was$21.05 as ofDecember 31, 2022 , reflecting declining fair market values of the investment portfolio during the year, partially offset by strong operating earnings. With the addition of dividends declared during the year, this was an increase of 0.9% over year-end 2021. 23 --------------------------------------------------------------------------------Old Republic's business is managed for the long run. In this context management's key objectives are to achieve highly profitable operating results over the long term, and to ensure balance sheet strength for the primary needs of the insurance subsidiaries' underwriting and related services business. In this view, the evaluation of periodic and long-term results excludes consideration of all investment gains (losses). Under Generally Accepted Accounting Principles (GAAP), however, net income, inclusive of investment gains (losses), is the measure of total profitability. In management's opinion, the focus on income excluding investment gains (losses), also described herein as segment pretax operating income, provides a better way to analyze, evaluate, and establish accountability for the results of the insurance operations. The inclusion of realized investment gains (losses) in net income can mask trends in operating results, because such realizations are often highly discretionary. Similarly, the inclusion of unrealized investment gains (losses) in equity securities can further distort such operating results with significant period-to-period fluctuations. FINANCIAL HIGHLIGHTS % Change 2022 2021 Years Ended December 31: 2022 2021 2020 vs. 2021 vs. 2020 SUMMARY INCOME STATEMENTS: Revenues: Net premiums and fees earned$ 7,675.3 $ 8,003.6 $ 6,737.8 (4.1) % 18.8 % Net investment income 459.5 434.3 438.9 5.8 (1.1) Other income 149.9 145.6 131.2 3.0 11.0 Total operating revenues 8,284.9 8,583.5 7,308.0 (3.5) 17.5 Investment gains (losses): Realized from actual transactions and impairments 62.2 6.9 14.2 Unrealized from changes in fair value of equity securities (263.4) 751.1 (156.2) Total investment gains (losses) (201.1) 758.0 (142.0) Total revenues 8,083.7 9,341.6
7,166.0
Operating expenses: Loss and loss adjustment expenses 2,440.2 2,420.9 2,491.4 0.8 (2.8) Sales and general expenses 4,719.2 4,942.3 3,942.4 (4.5) 25.4 Interest and other costs 66.7 56.2 43.7 18.7 28.7 Total operating expenses 7,226.3 7,419.5 6,477.5 (2.6) % 14.5 % Pretax income 857.4 1,922.1 688.4 Income taxes 170.9 387.7 129.7 Net income$ 686.4 $ 1,534.3 $ 558.6 COMMON STOCK STATISTICS: Components of net income per share: Basic net income excluding investment gains (losses)$ 2.80 $ 3.10 $ 2.24 (9.7) % 38.4 % Net investment gains (losses): Realized from actual transactions and impairments 0.17 0.02 0.04 Unrealized from changes in fair value of equity securities (0.69) 1.96 (0.41) Basic net income$ 2.28 $ 5.08 $ 1.87 Diluted net income excluding investment gains (losses)$ 2.79 $ 3.08 $ 2.24 (9.4) % 37.5 % Net investment gains (losses): Realized from actual transactions and impairments 0.16 0.02 0.04 Unrealized from changes in fair value of equity securities (0.69) 1.95 (0.41) Diluted net income$ 2.26 $ 5.05 $ 1.87 Cash dividends on common stock$ 1.92 $ 2.38 $ 1.84 Book value per share$ 21.05 $ 22.76 $ 20.75 (7.5) % 9.7 % We believe the information presented in the following table highlights the most meaningful indicators of ORI's segmented and consolidated financial performance. The information underscores the performance of our underwriting operations, as well as our sound investment of the capital and underwriting cash flows from these operations. 24 -------------------------------------------------------------------------------- Sources of Consolidated Income 2022 2021 Years Ended December 31: 2022 2021 2020 vs. 2021 vs. 2020 Net premiums and fees earned: General insurance$ 3,808.6 $ 3,555.5 $ 3,394.2 7.1 % 4.8 % Title insurance 3,833.8 4,404.3 3,286.3 (13.0) 34.0 RFIG run-off 23.2 32.6 45.1 (28.9) (27.6) Corporate & other 9.6 11.0 12.0 (12.3) (8.8) Consolidated$ 7,675.3 $ 8,003.6 $ 6,737.8 (4.1) % 18.8 % Underwriting and related services income (loss): General insurance$ 400.9 $ 311.4 $ 151.8 28.7 % 105.1 % Title insurance 261.3 474.0 305.8 (44.9) 55.0 RFIG run-off 28.4 21.3 (5.3) 33.3 497.1 Corporate & other (24.9) (20.9) (17.0) (19.3) (22.7) Consolidated$ 665.8 $ 785.9 $ 435.2 (15.3) % 80.6 % Consolidated underwriting ratio: Loss ratio: Current year 35.5 % 32.9 % 38.2 % Prior years (3.7) (2.7) (1.2) Total 31.8 30.2 37.0 Expense ratio 59.2 59.7 56.3 Combined ratio 91.0 % 89.9 % 93.3 % Net investment income: General insurance$ 358.0 $ 342.4 $ 352.2 4.5 % (2.8) % Title insurance 47.9 43.8 42.0 9.4 4.3 RFIG run-off 6.7 11.4 15.2 (41.1) (24.7) Corporate & other 46.8 36.5 29.4 28.1 24.0 Consolidated$ 459.5 $ 434.3 $ 438.9 5.8 % (1.1) % Interest and other charges (credits): General insurance$ 69.1 $ 64.2 $ 64.2 Title insurance 0.4 2.1 3.8 RFIG run-off - - - Corporate & other (a) (2.8) (10.1) (24.3) Consolidated$ 66.7 $ 56.2 $ 43.7 18.7 % 28.7 % Segmented and consolidated pretax income excluding investment gains (losses): General insurance$ 689.8 $ 589.6 $ 439.8 17.0 % 34.1 % Title insurance 308.8 515.7 344.0 (40.1) 49.9 RFIG run-off 35.2 32.8 9.8 7.3 232.3 Corporate & other 24.6 25.7 36.7 (4.3) (29.8) Consolidated 1,058.6 1,164.0 830.4 (9.1) % 40.2 % Income taxes on above 213.4 228.1 159.6
Net income excluding investment
gains (losses) 845.1 935.9 670.8 (9.7) % 39.5 % Consolidated pretax investment gains (losses): Realized from actual transactions and impairments 62.2 6.9 14.2 Unrealized from changes in fair value of equity securities (263.4) 751.1 (156.2) Total (201.1) 758.0 (142.0) Income taxes (credits) on above (42.5) 159.6 (29.8) Net of tax investment gains (losses) (158.6) 598.4 (112.1) Net income$ 686.4 $ 1,534.3 $ 558.6 Consolidated operating cash flow$ 1,170.6 $
1,311.7
(a) Includes consolidation/elimination entries.
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General Insurance Segment Operating Results
% Change
2022 2021
Years Ended December 31: 2022 2021 2020 vs. 2021 vs. 2020
Net premiums written $ 3,978.2 $ 3,680.9 $ 3,431.3 8.1 % 7.3 %
Net premiums earned 3,808.6 3,555.5 3,394.2 7.1 4.8
Net investment income 358.0 342.4 352.2 4.5 (2.8)
Other income 148.9 144.5 130.3 3.1 10.9
Operating revenues 4,315.6 4,042.5 3,876.8 6.8 4.3
Loss and loss adjustment expenses 2,364.6 2,303.1 2,372.0 2.7 (2.9)
Sales and general expenses 1,192.0 1,085.4 1,000.7 9.8 8.5
Interest and other costs 69.1 64.2 64.2 7.7 0.1
Operating expenses 3,625.8 3,452.8 3,436.9 5.0 0.5
Segment pretax operating income $ 689.8 $ 589.6 $ 439.8 17.0 %
34.1 %
Loss ratio:
Current year 67.2 % 68.6 % 70.7 %
Prior years (5.1) (3.8) (.8)
Total 62.1 64.8 69.9
Expense ratio 27.4 26.5 25.6
Combined ratio 89.5 % 91.3 % 95.5 %
General Insurance net premiums earned increased 7.1% for 2022 driven by growth
in most lines of coverage, in particular commercial automobile. Net premiums
earned for 2021 grew 4.8%, with rising premiums in commercial automobile,
financial indemnity, and property lines of coverage. Premium rate increases for
most lines of coverage, high renewal retention ratios, and new business
production all contributed. Net investment income increased in 2022, reflecting
higher investment yields earned and to a lesser extent, growth in the invested
asset base. For 2021, net investment income decreased reflecting lower
investment yields partially offset by growth in the invested asset base.
The reported loss ratio for General Insurance improved in 2022 and 2021,
inclusive of favorable reserve development from prior periods. Favorable
development for both periods came predominantly from the commercial automobile
and workers' compensation lines of coverage. The current period loss costs
reflect several years of premium rate increases, underwriting actions, and a
shift in the line of coverage mix.
The expense ratios generally reflect the shift in line of coverage mix.
Investments in new products and geographies in recent years have diversified the
General Insurance business, resulting in shifts in the lines of coverage mix
toward lines with higher expense ratios and lower current period loss ratios.
Together, these factors produced highly profitable combined ratios and greater
pretax operating income for the periods reported. For General Insurance , we
target combined ratios between 90% and 95% over a full underwriting cycle,
recognizing that quarterly and annual ratios and trends may deviate from this
range, particularly given the long claim payment patterns associated with the
business.
The following table shows recent annual loss ratios and the effects of loss
development trends:
Effect of Prior Periods'
(Favorable)/ Loss Ratio Excluding
Reported Unfavorable Loss Prior Periods' Loss
Loss Ratio Reserves Development Reserves Development
2018 72.2 % - % 72.2 %
2019 71.8 0.4 71.4
2020 69.9 (0.8) 70.7
2021 64.8 (3.8) 68.6
2022 62.1 % (5.1) % 67.2 %
26
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Title Insurance Segment Operating Results
% Change
2022 2021
Years Ended December 31: 2022 2021 2020 vs. 2021 vs. 2020
Net premiums and fees earned $ 3,833.8
$ 4,404.3 $ 3,286.3 (13.0) % 34.0 % Net investment income 47.9 43.8 42.0 9.4 4.3 Other income 0.9 1.1 0.9 (18.2) 14.9 Operating revenues 3,882.7 4,449.3 3,329.3 (12.7) 33.6 Loss and loss adjustment expenses 89.1 112.9 75.3 (21.1) 49.9 Sales and general expenses 3,484.2 3,818.4 2,906.1 (8.8) 31.4 Interest and other costs 0.4 2.1 3.8 (80.2) (42.7) Operating expenses 3,573.8 3,933.5 2,985.3 (9.1) 31.8 Segment pretax operating income$ 308.8 $ 515.7 $ 344.0 (40.1) % 49.9 % Loss ratio: Current year 3.6 % 3.6 % 3.6 % Prior years (1.3) (1.0) (1.3) Total 2.3 2.6 2.3 Expense ratio 90.9 86.7 88.4 Combined ratio 93.2 % 89.3 % 90.7 %Title Insurance net premiums and fees earned declined by 13.0% for 2022. Both directly produced and agency produced revenues declined, and we remain of the view that such revenues will continue to face headwinds into 2023. The main driver of these trends is increasing mortgage interest rates which continue to drive a steep reduction in refinance activity and to a lesser extent, purchase activity. An uptick in commercial transaction activity resulted in commercial premium growth during the full year. Conversely,Title Insurance net premiums and fees earned grew by 34.0% for 2021, attributable to a low interest rate environment and a robust real estate market. Increased revenue generated on purchase transactions was partially offset by a decline in refinance activity. Net investment income increased for 2022, reflecting growth in the invested asset base and higher investment yields earned. For 2021, net investment income also reflected growth in the invested asset base, however was somewhat offset by lower investment yields. The 2022Title Insurance loss ratio decreased slightly due predominantly to higher levels of favorable development as a percentage of premium. The 2022 expense ratio was elevated compared to 2021, generally reflecting the combination of lower directly produced revenues that carry higher fixed expenses, and to a lesser extent, a greater proportion of agency produced revenues that have a higher overall expense ratio. The 2022 full year expense ratio also reflects the impact of a fourth quarter state sales tax assessment payment of$17.2 (0.5 percentage points) for which the Company is currently pursuing recovery.Title Insurance's 2021 expense ratio reflects the benefit of greater leverage of the expense structure on significantly higher premium and fee volume, tempered by an increased mix of agency produced revenues late in 2021.
Together, these factors produced profitable combined ratios, albeit lower pretax
operating income for 2022.
The following table shows recent annual loss ratios and the effects of loss
development trends:
Effect of Prior Periods'
(Favorable)/ Loss Ratio Excluding
Reported Unfavorable Loss Prior Periods' Loss
Loss Ratio Reserves Development Reserves Development
2018 1.9 % (1.8) % 3.7 %
2019 2.5 (1.2) 3.7
2020 2.3 (1.3) 3.6
2021 2.6 (1.0) 3.6
2022 2.3 % (1.3) % 3.6 %
27
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RFIG Run-off Segment Operating Results - Mortgage Insurance
% Change
2022 2021
Years Ended December 31: 2022 2021
2020 vs. 2021 vs. 2020 Net premiums earned$ 23.2 $ 32.6 $ 45.1 (28.9) % (27.6) % Net investment income 6.7 11.4 15.2 (41.1) (24.7) Loss and loss adjustment expenses (17.5) (1.7) 36.9 N/M (104.7) Pretax operating income$ 35.2 $ 32.8 $ 9.8 7.3 % 232.3 % Loss ratio: Current year 80.8 % 62.2 % 108.2 % Prior years (156.3) (67.5) (26.5) Total (75.5) (5.3) 81.7 Expense ratio 53.0 39.9 30.2 Combined ratio (22.5) % 34.6 % 111.9 % Pretax operating results of RFIG Run-off reflect the continuing drop in net earned premiums in line with the declining risk in force. For 2022, favorable reserve development was the primary driver of the reduction in loss costs. Higher current year loss costs resulted from moderation in cure trends and increasing claim severity. Claim costs in 2021 reflect fewer newly reported delinquencies along with improved trends in cure rates and lower claim severity influenced by the ongoing economic recovery and strength in the real estate market. Net investment income decreased in 2022 and 2021, reflecting a declining invested asset base, driven by the payment of extraordinary dividends of$140.0 ,$100.0 and$37.5 to the parent company during 2022, 2021 and 2020, respectively, and lower investment yields earned.
The following table shows recent annual loss ratios and the effects of loss
development trends:
Effect of Prior Periods'
(Favorable)/ Loss Ratio Excluding
Reported Unfavorable Loss Prior Periods' Loss
Loss Ratio Reserves Development Reserves Development
2018 43.2 % (27.0) % 70.2 %
2019 55.0 (12.5) 67.5
2020 81.7 (26.5) 108.2
2021 (5.3) (67.5) 62.2
2022 (75.5) % (156.3) % 80.8 %
28
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Corporate & Other Operating Results
% Change
2022 2021
Years Ended December 31: 2022 2021 2020 vs. 2021 vs. 2020
Net life and accident premiums earned $ 9.6 $ 11.0 $ 12.0 (12.3) % (8.8) %
Net investment income 46.8 36.5 29.4 28.1 24.0
Other operating income - - - - -
Operating revenues 56.5 47.5 41.4 19.0 14.7
Benefits and loss and loss adjustment expenses 4.0 6.5 7.1 (38.1) (7.9)
Insurance expenses 3.3 3.4 4.2 (4.1) (17.6)
Corporate, interest and other expenses - net 24.4 11.6 (6.6) 109.7 N/M
Operating expenses 31.8 21.7 4.7 46.6 N/M
Corporate & other pretax operating income $ 24.6 $ 25.7 $ 36.7 (4.3) % (29.8) %
This segment includes a small life and accident insurance business and the net
costs associated with the parent holding company and several internal corporate
services subsidiaries. The segment tends to produce highly variable results
stemming from volatility inherent from the lack of scale. Interest expense for
2022 and 2021 increased due to the issuance of $650 million of debt late in the
second quarter of 2021, partially offset by net investment income from a higher
invested asset base and higher investment yields earned.
Summary Consolidated Balance Sheet
December 31,
2022 2021
Assets:
Cash and fixed income securities $ 12,688.7
Equity securities 3,220.9
5,302.8
Other invested assets 138.0
116.5
Cash and invested assets 16,047.7
16,818.9
Accounts and premiums receivable 1,927.5
1,768.7
Federal income tax recoverable 15.7
11.8
Reinsurance balances recoverable 5,588.0
4,943.4
Deferred policy acquisition costs 382.5 350.4
Sundry assets 1,197.9 1,088.4
Total assets $ 25,159.4 $ 24,981.8
Liabilities and Shareholders' Equity:
Policy liabilities $ 2,978.8
Loss and loss adjustment expense reserves 12,221.5
11,425.5
Federal income tax - deferred 40.9 249.5
Reinsurance balances and funds 1,079.4 866.0
Debt 1,597.0 1,588.5
Sundry liabilities 1,075.3 1,206.9
Total liabilities 18,993.2 18,088.6
Shareholders' equity 6,166.2
6,893.2
Total liabilities and shareholders' equity
29
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Cash, Invested Assets, and Shareholders' Equity
% Change
December 31 , Dec. '22 / Dec. '21 /
As of December 31 : 2022 2021 2020 Dec. '21 Dec. '20
Cash and invested assets:
Fixed income securities, cash and other
invested assets $ 12,826.7 $ 11,516.1 $ 11,480.4 11.4 % 0.3 %
Equity securities 3,220.9 5,302.8 4,054.8 (39.3) 30.8
Total per balance sheet $ 16,047.7 $ 16,818.9 $ 15,535.3 (4.6) % 8.3 %
Total at cost for all $ 15,367.2 $ 15,045.8 $ 14,151.6 2.1 % 6.3 %
Composition of shareholders' equity per share:
Equity before items below$ 19.41 $ 18.50 $ 17.73 4.9 % 4.3 % Unrealized investment gains (losses) and other accumulated comprehensive income (loss) 1.64 4.26 3.02 Total$ 21.05 $ 22.76 $ 20.75 (7.5) % 9.7 % Segmented composition of shareholders' equity per share: Excluding RFIG run-off segment$ 20.15 $ 21.47 $ 19.25 (6.1) % 11.5 % RFIG run-off segment 0.90 1.29 1.50 Consolidated total$ 21.05 $ 22.76 $ 20.75 (7.5) % 9.7 %Old Republic's invested assets portfolio is directed in consideration of enterprise-wide risk management objectives. Most importantly, these are intended to ensure solid funding of the insurance subsidiaries' long-term claim payment obligations to policyholders and their beneficiaries, as well as the long-term stability of the subsidiaries' capital base. For these reasons, the investment portfolio does not contain significant levels of high risk or illiquid asset classes and has extremely limited exposure to collateralized debt obligations (CDO's), credit default and interest rate swaps, hybrid securities, asset-backed securities (ABS), guaranteed investment contracts (GIC), structured investment vehicles (SIV), auction rate variable short-term securities, limited partnerships, derivatives, hedge funds or private equity investments. Moreover, the Company does not engage in hedging or securities lending transactions, nor does it invest in securities whose values are predicated on non-regulated financial instruments exhibiting amorphous or unfunded counter-party risk attributes. As ofDecember 31, 2022 , the consolidated investment portfolio reflected an allocation of approximately 80% to fixed income (bonds and notes) and short-term investments, and 20% to equity securities (common stock). During 2022, management rebalanced the investment portfolio, thereby reducing its equity holdings and reinvesting the proceeds in fixed income securities. The fixed income portfolio continues to be the anchor for the insurance underwriting subsidiaries' obligations. The maturities of our fixed income assets are matched to the expected liabilities for claim payment obligations to policyholders and their beneficiaries. The quality of the investment portfolio remains at high levels. A significant portion of our investable funds have been directed toward high-quality common stocks ofU.S. companies. We favor those with long-term records of reasonable earnings growth and steadily increasing dividends. Pursuant to our enterprise risk management guidelines and controls, we perform regular stress tests of the equity portfolio to gain reasonable assurance that periodic downdrafts in market prices would not seriously undermine our financial strength and the long-term continuity and prospects of our insurance underwriting business. 30 -------------------------------------------------------------------------------- Changes in shareholders' equity per share are reflected in the following table. As shown, these resulted mostly from net income excluding net investment gains (losses), realized and unrealized investment gains (losses), and dividend payments to shareholders.
Shareholders' Equity Per Share
December 31,
2022 2021 2020
Beginning balance $ 22.76 $ 20.75 $ 19.98
Changes in shareholders' equity:
Net income excluding net investment gains (losses) 2.80 3.10 2.24
Net of tax realized investment gains (losses) 0.17 0.02 0.04
Net of tax unrealized investment gains (losses):
Fixed income securities (2.18) (0.97) 0.91 Equity securities (0.69) 1.96 (0.41) Total net of tax realized and unrealized investment gains (losses) (2.70) 1.01 0.54 Cash dividends (1.92) (2.38) (1.84) Other 0.11 0.28 (0.17) Net change (1.71) 2.01 0.77 Ending balance$ 21.05 $ 22.76 $ 20.75 Percentage change for the period (7.5) % 9.7 % 3.9 % Capitalization Capitalization December 31, 2022 2021 2020 Debt: 4.875% Senior Notes due 2024$ 399.0 $ 398.4 $ 397.9 3.875% Senior Notes due 2026 547.9 547.3 546.8 3.850% Senior Notes due 2051 642.9 642.6 - Other miscellaneous debt 7.1 - 21.7 Total debt 1,597.0 1,588.5 966.4 Common shareholders' equity 6,166.2 6,893.2 6,186.6 Total capitalization$ 7,763.2 $ 8,481.7 $ 7,153.1 Capitalization ratios: Debt 20.6 % 18.7 % 13.5 % Common shareholders' equity 79.4 81.3 86.5 Total 100.0 % 100.0 % 100.0 % 31
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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.
RESULTS OF OPERATIONS
Consolidated Overview
Premiums & Fees
The major sources of
the periods shown were as follows:
Net Earned Premiums and Fees
% Change
Corporate & from prior
General Title RFIG Run-off Other Total period
Years Ended December 31 :
2020 $ 3,394.2 $ 3,286.3 $ 45.1 $ 12.0 $ 6,737.8 8.0 %
2021 3,555.5 4,404.3 32.6 11.0 8,003.6 18.8
2022 $ 3,808.6 $ 3,833.8 $ 23.2 $ 9.6 $ 7,675.3 (4.1) %
For 2022, consolidated net premiums and fees earned declined 4.1%, reflecting a
decrease in Title Insurance of 13.0%, offset by growth in General Insurance of
7.1%. Conversely, consolidated net premiums and fees for 2021 represented growth
of 18.8% compared to 2020, with mid-single digit increases in General Insurance
and significant growth in Title insurance attributable to a low interest rate
environment and a robust real estate market.
Net Investment Income
Net investment income was affected mostly by trends in interest rates and levels
of investments. The following tables reflect the segmented and consolidated
invested asset bases as of the indicated dates, the investment income earned and
resulting yields on such assets. Since the Company can exercise little control
over fair values, yields are evaluated on the basis of investment income earned
in relation to the cost of the underlying invested assets, though yields based
on the fair values of such assets are also shown in the statistics that follow.
Fair
Invested Assets at Cost Value Invested
Corporate Adjust-
Assets at Fair
General Title RFIG Run-off & Other Total ment
Value
As ofDecember 31 : 2021$ 11,379.7 $ 1,569.2 $ 459.0 $ 1,394.8 $ 14,802.9 $ 1,773.4 $ 16,576.3 2022$ 11,825.2 $ 1,512.4 $ 341.6 $ 1,500.1 $ 15,179.4 $ 680.4 $ 15,859.9 Net Investment Income Yield at Corporate Fair General Title RFIG Run-off & Other Total Cost Value Years Ended December 31: 2020$ 352.2 $ 42.0 $ 15.2 $ 29.4 $ 438.9 3.24 % 2.96 % 2021 342.4 43.8 11.4 36.5 434.3 3.02 2.72 2022$ 358.0 $ 47.9 $ 6.7 $ 46.8 $ 459.5 3.07 % 2.83 % Net investment income increased 5.8% in 2022, reflecting growth in the invested asset base and higher investment yields earned. Net investment income decreased by 1.1% in 2021, affected by changes in the invested asset base mainly driven by consolidated operating cash flows and the issuance of debt in 2021, by a concentration of investable assets in interest-bearing securities, and by a lower interest rate environment. 32 --------------------------------------------------------------------------------
Loss and Loss Adjustment Expenses
Total loss 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 loss
reserve estimates for major types of insurance coverages as of December 31, 2022
and 2021:
Loss and Loss Adjustment Expense Reserves
December 31: 2022 2021
Gross Net Gross Net
Workers' compensation $ 4,855.2 $ 2,879.6 $ 4,893.0 $ 2,955.6
General liability 1,427.3 641.9 1,324.4 630.7
Commercial automobile 3,233.9 1,747.3 2,850.0 1,736.5
Other coverages 1,707.8 1,260.0 1,355.5 979.3
Unallocated loss adjustment expense reserves 296.9 295.8 285.2 284.8
Total general insurance reserves 11,521.2 6,824.8 10,708.4 6,587.0
Title 612.8 612.8 594.2 594.2
RFIG Run-off 77.9 77.9 111.2 111.2
Life and accident 9.4 6.3 11.6 7.6
Total loss and loss adjustment expense reserves $ 12,221.5 $ 7,521.9 $ 11,425.5 $ 7,300.2
Asbestosis and environmental loss reserves included
in the above general insurance reserves:
Amount $ 121.3 $ 84.0 $ 118.1 $ 77.2
% of total general insurance reserves 1.1 % 1.2 % 1.1 % 1.2 %
A summary of changes in aggregate reserves for loss and loss adjustment expenses
is included in Note 4 of the Consolidated Financial Statements.
The percentage of net loss and loss adjustment 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: 2022 2021 2020 General 62.1 % 64.8 % 69.9 % Title 2.3 2.6 2.3 RFIG Run-off (75.5) (5.3) 81.7 Consolidated loss ratio 31.8 % 30.2 % 37.0 %
Reconciliation of consolidated loss ratio:
Provision for insured events of the current year 35.5 %
32.9 % 38.2 %
Change in provision for insured events of prior years:
net favorable development (3.7) (2.7) (1.2)
Consolidated loss ratio 31.8 % 30.2 % 37.0 %
The consolidated loss ratio reflects the changing effects of period-to-period
contributions of each segment to consolidated results, and this ratio's
variances within each segment. For the three most recent calendar years, the
above table indicates that the one-year development of consolidated reserves at
the beginning of each year produced favorable developments in 2022, 2021, and
2020, which on average decreased the consolidated loss ratio by 2.5 percentage
points.
Management believes that its overall reserving practices have been consistently
applied over many years, and that its aggregate net reserves have generally
resulted in reasonable approximations of the ultimate net costs of losses
incurred. However, no representation is made nor is any guaranty given that
ultimate net losses and related costs will not develop in future years to be
significantly greater or lower than currently established reserve estimates. In
management's opinion, such changes in net losses and related costs are not
likely to have a material effect on the Company's consolidated financial
position, although it could materially affect 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.
33
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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:
RFIG
General Title Run-off Consolidated
Years Ended December 31:
2020 25.6 % 88.4 % 30.2 % 56.3 %
2021 26.5 86.7 39.9 59.7
2022 27.4 % 90.9 % 53.0 % 59.2 %
Variations in the Company's consolidated expense ratios reflect a continually
changing mix of coverages sold and costs of producing business. 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.
General operating expenses are routinely subject to timing, and can fluctuate
with line of coverage mix, as well as investments in business expansion and
information technology. The 2022 General Insurance expense ratio generally
reflects the shift in line of coverage mix. Investments in new products and
geographies in recent years have diversified the General Insurance business,
resulting in shifts in the lines of coverage mix toward lines with higher
expense ratios and lower current period loss ratios. The 2022 Title Insurance
expense ratio was elevated compared to last year, generally reflecting the
combination of lower directly produced revenues that carry higher fixed
expenses, and to a lesser extent, a greater proportion of agency produced
revenues that have a higher overall expense ratio. The 2021 General Insurance
expense ratio was also impacted by changes in line of coverage mix and certain
operating expense charges. The 2021 Title Insurance ratios reflect the benefit
of greater leverage of the expense structure on significantly higher premium and
fee volume, tempered by an increased mix of agency produced revenues late in
2021.
Combined Ratios
The combined ratios of the above summarized net loss and loss adjustment
expenses and underwriting expenses are as follows:
RFIG
General Title Run-off Consolidated
Years Ended December 31:
2020 95.5 % 90.7 % 111.9 % 93.3 %
2021 91.3 89.3 34.6 89.9
2022 89.5 % 93.2 % (22.5) % 91.0 %
Net Investment Gains (Losses)
The Company's investment policies are not designed to maximize or emphasize the
realization of investment gains. Rather, these policies aim for a stable source
of income from interest and dividends, protection of capital, and providing
sufficient liquidity to meet insurance underwriting and other obligations as
they become payable in the future.
The following table reflects the composition of net investment gains or losses
for the periods shown.
Years Ended December 31: 2022 2021 2020
Realized investment gains (losses) from actual
transactions:
Fixed income $ (187.6) $ 1.5 $ (7.4)
Equity securities and other 373.3 5.3 21.6
Total 185.7 6.9 14.2
Impairment losses on fixed income securities (123.5) - -
Unrealized gains (losses) from changes in fair value
of equity securities
(263.4) 751.1 (156.2) Total investment gains (losses)$ (201.1)
During 2022, net realized investment gains reflect the rebalancing of the investment portfolio as well as tax planning considerations. The Company sold over$2 billion worth of equities and$1.4 billion in fixed income securities as part of the portfolio rebalance and tax planning strategy. The proceeds from these transaction, combined with$1.4 billion of maturities, were reinvested in the fixed income portfolio during the year. Dispositions of fixed income securities from scheduled maturities and early calls were 49.1%, 80.7% and 76.2% of total dispositions occurring in 34 -------------------------------------------------------------------------------- 2022, 2021, and 2020, respectively. Additionally, 2022 includes investment impairment charges of$123.5 on fixed income securities, which management intended to and subsequently disposed of during the year, driven primarily by tax planning considerations. The realization of investment gains or losses can be highly discretionary and can be affected by such factors as the timing of individual securities sales, the recording of estimated losses from write-downs of impaired securities, tax-planning and tax-rate change considerations, and modifications of investment management judgments regarding the direction of securities markets or the future prospects of individual investees or industry sectors. Income Taxes The effective consolidated income tax rates were 19.9%, 20.2%, and 18.9% in 2022, 2021, and 2020, respectively. The rates for each year reflect primarily the varying proportions of pretax operating income derived from partially tax preferred investment income (principally tax-exempt interest and dividend income). Segment Overview General Insurance Summary Operating Results % Change 2022 2021 Years Ended December 31: 2022 2021 2020 vs. 2021 vs. 2020 Net premiums earned$ 3,808.6 $ 3,555.5 $ 3,394.2 7.1 % 4.8 % Loss and loss adjustment expenses 2,364.6 2,303.1 2,372.0 2.7 (2.9) Sales and general expenses 1,192.0 1,085.4 1,000.7 9.8 8.5 Segment pretax operating income$ 689.8 $ 589.6 $ 439.8 17.0 % 34.1 %
Loss ratio:
Current year 67.2 % 68.6 % 70.7 %
Prior years (5.1) (3.8) (.8)
Total 62.1 64.8 69.9
Expense ratio 27.4 26.5 25.6
Combined ratio 89.5 % 91.3 % 95.5 %
Premiums & Fees
The percentage of net premiums earned for major insurance coverages in
Insurance Group
General Insurance Net Earned Premiums by Type of Coverage
Commercial Financial General
Automobile Workers' Compensation Indemnity Property Liability Other
Years Ended December 31 :
2020 38.4 % 25.5 % 8.0 % 8.7 % 6.0 % 13.4 %
2021 39.6 21.9 9.7 9.7 5.2 13.9
2022 39.5 % 21.3 % 10.3 % 9.8 % 5.2 % 13.9 %
General Insurance net premiums earned increased 7.1% for 2022, driven by growth
in most lines of coverage, in particular, commercial automobile. Premium rate
increases for most lines of coverages, high renewal retention ratios, and new
business production all contributed. General Insurance net premiums earned
increased 4.8% for 2021 with rising premiums in commercial automobile, financial
indemnity, and property lines of coverage. Strong premium rate increases for
most lines of coverage, other than workers' compensation, high renewal retention
ratios, and new business production all contributed.
Loss and Loss Adjustment Expenses
The percentage of net loss and loss adjustment expenses measured against
premiums earned by major types of insurance coverage were as follows:
35
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General Insurance Loss Ratios by Type of Coverage
All Commercial Workers' Financial General
Coverages Automobile Compen-sation Property Indemnity Liability Other
Years Ended
December 31:
2020 69.9 % 80.8 % 60.8 % 58.2 % 57.1 % 73.5 % 69.2 %
2021 64.8 71.5 58.9 59.3 53.9 64.1 66.6
2022 62.1 % 66.6 % 45.9 % 65.4 % 67.0 % 71.6 % 64.5 %
Overall, the General Insurance loss ratio has improved due to higher levels of
favorable development and improving current year loss ratios. The favorable
development has come from most years going back to 2009 from commercial
automobile and workers' compensation. The property loss ratio was elevated in
2022 primarily due to the impacts of Hurricane Ian, impacted by reinstatement
premiums of $16.6 and losses estimated at the Company's $10.0 net retention. The
financial indemnity loss ratio in 2022 reflects an elevated level of security
class action claims on public company D&O insurance from accident years 2018 and
2019. The Company has received large, compound rate increases on this coverage
starting in 2019.
Unfavorable asbestosis and environmental (A&E) claim developments, although not
material in any of the periods presented, are typically attributable to periodic
re-evaluations of such reserves as well as subsequent reclassifications of other
coverages' reserves, most often workers' compensation, deemed assignable to A&E
category of losses. Except for a small portion that emanates from ongoing
primary insurance operations, a large majority of the A&E claim reserves posted
by Old Republic stem mainly from its participations in assumed reinsurance
treaties and insurance pools which were discontinued during the 1980's and have
since been in run-off status. With respect to the primary portion of gross A&E
reserves, Old Republic administers the related claims through its claims
personnel as well as outside attorneys, and posted reserves reflect its best
estimates of ultimate claim costs. Claims administration for the assumed portion
of the Company's A&E exposures is handled by the claims departments of unrelated
primary or ceding reinsurance companies. While the Company performs periodic
reviews of certain claim files managed by third parties, the overall A&E
reserves it establishes respond to the paid claim and case reserve activity
reported to the Company as well as available industry statistical data such as
survival ratios. Such ratios represent the number of years' average paid losses
for the three or five most recent calendar years that are encompassed by an
insurer's A&E reserve level at any point in time. According to this simplistic
appraisal of an insurer's A&E loss reserve level, Old Republic's average five
year paid loss survival ratios stood at 6.4 years (gross) and 7.6 years (net of
reinsurance) as of December 31, 2022 and 5.9 years (gross) and 6.8 years (net of
reinsurance) as of December 31, 2021 . Fluctuations in this ratio between years
can be caused by the inconsistent pay out patterns associated with these types
of claims. For the five years ended December 31, 2022 , incurred A&E claims and
related loss settlement cost have averaged .4% of average annual General
Insurance loss and loss adjustment expenses.
A summary of reserve activity, including estimates for IBNR, relating to A&E
claims at
December 31: 2022 2021
Gross Net Gross Net
Asbestosis:
Reserves at beginning of year $ 85.0 $ 54.9 $ 84.7 $ 59.1
Loss and loss expenses incurred 29.0 23.5 10.2 2.8
Loss and loss adjustment expenses paid 15.7 11.7 10.0 7.1
Reserves at end of year 98.3 66.7 85.0 54.9
Environmental:
Reserves at beginning of year 33.0 22.3 42.8 23.2
Loss and loss expenses incurred (4.9) (1.8) 6.5 4.6
Loss and loss adjustment expenses paid 5.0 3.1 16.3 5.4
Reserves at end of year 23.0 17.3 33.0 22.3
Total asbestosis and environmental reserves $ 121.3 $ 84.0 $ 118.1 $ 77.2
Sales and General Expenses
The 2022 expense ratios generally reflects the shift in line of coverage mix.
Investments in new products and geographies in recent years have diversified the
General Insurance business, resulting in shifts in the lines of coverage mix
toward lines with higher expense ratios and lower current period loss ratios.
36
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Title Insurance Summary Operating Results % Change 2022 2021 Years Ended December 31: 2022 2021 2020 vs. 2021 vs. 2020 Net premiums and fees earned$ 3,833.8 $ 4,404.3 $ 3,286.3 (13.0) % 34.0 % Loss and loss adjustment expenses 89.1 112.9 75.3 (21.1) 49.9 Sales and general expenses 3,484.2 3,818.4 2,906.1 (8.8) 31.4 Segment pretax operating income$ 308.8 $ 515.7 $ 344.0 (40.1) % 49.9 % Loss ratio: Current year 3.6 % 3.6 % 3.6 % Prior years (1.3) (1.0) (1.3) Total 2.3 2.6 2.3 Expense ratio 90.9 86.7 88.4 Combined ratio 93.2 % 89.3 % 90.7 % Premiums & FeesTitle Insurance 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 19.5% of 2022 consolidated title business revenues. Such premiums are generally recognized as income at the transaction 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 80.5% of consolidated title premium and fee revenues is produced by independent title agents. Rather than making estimates that could be subject to significant variance from actual premium and fee production, the Company recognizes revenues from those sources upon receipt. Such receipts can result in a three to four month lag relative to the effective date of the underlying title policy, and are offset concurrently by production expenses and loss reserve provisions.
The following table shows the percentage distribution of
and fee revenues by production sources:
Premium and Fee Production by Source
Direct Independent
Operations Title Agents
Years Ended December 31:
2020 24.9 % 75.1 %
2021 22.0 78.0
2022 19.5 % 80.5 %
Title Insurance net premium and fee earned declined by 13.0% in 2022. Both
directly produced and agency produced revenues have declined. The main driver of
these trends is increasing mortgage interest rates which continue to drive a
steep reduction in refinance activity and to a lesser extent, purchase activity.
An uptick in commercial transaction activity resulted in commercial premium
growth during the periods reported, and accounted for 22.5%, 15.6% and 16.0% of
2022, 2021 and 2020 earned premium, respectively. Conversely, premiums and fees
revenues for 2021 grew by 34.0%. This performance was attributable to a low
interest rate environment and a robust real estate market. Increased revenue
generated on purchase transactions was partially offset by a decline in
refinance activity.
Loss and Loss Adjustment Expenses
Title Insurance loss ratios have remained in the low single digits for a number of years due to a continuation of favorable trends in claims frequency and severity. Favorable developments of reserves established in prior years continued to reduce the loss ratios as more fully described in the Executive Summary of the Management Analysis of Financial Position and Results of Operations. Sales and General Expenses The 2022 expense ratio was elevated compared to last year, generally reflecting the combination of lower directly produced revenues that carry higher fixed expenses, and to a lesser extent, a greater proportion of agency produced revenues that have a higher overall expense ratio. The 2022 full year expense ratio also reflects the impact of a fourth quarter state sales tax assessment payment of$17.2 (0.5 percentage points) for which the Company is currently pursuing recovery. The 2021Title Insurance ratios reflect the benefit of greater leverage of the expense structure on 37 --------------------------------------------------------------------------------
significantly higher premium and fee volume, tempered by an increased mix of
agency produced revenues late in 2021.
RFIG Run-off
Summary Operating Results
% Change
2022 2021
Years Ended December 31: 2022 2021 2020 vs. 2021 vs. 2020
Net premiums earned $ 23.2 $ 32.6 $ 45.1 (28.9) % (27.6) %
Loss and loss adjustment expenses (17.5) (1.7) 36.9 N/M (104.7)
Pretax operating income $ 35.2 $ 32.8 $ 9.8 7.3 % 232.3 %
Loss ratio:
Current year 80.8 % 62.2 % 108.2 %
Prior years (156.3) (67.5) (26.5)
Total (75.5) (5.3) 81.7
Expense ratio 53.0 39.9 30.2
Combined ratio (22.5) % 34.6 % 111.9 %
RFIG Run-off's mortgage guaranty insurance carriers ceased the underwriting of
new policies effective August 31, 2011 and the existing book of business was
placed in run-off operating mode.
Premiums & Fees
RFIG Run-off's mortgage guaranty premiums primarily stem from monthly installments paid on long-duration, guaranteed renewable insurance policies. Such premiums are written and earned in the month coverage is effective. With respect to relatively few annual or single premium policies, earned premiums are largely recognized on a pro-rata basis over the terms of the policies.
The following tables provide information on production and related risk exposure
trends for
Premium and Persistency Trends: Net Earned Premiums Persistency
Years EndedDecember 31 : 2020 $ 45.1 77.6 % 2021 32.6 74.8 2022 $ 23.2 78.1 % Net Risk in Force Traditional Net Risk in Force By Type: Primary Bulk & Other Total As of December 31: 2020$ 1,842.2 $ 169.0 $ 2,011.2 2021 1,364.9 140.4 1,505.4 2022$ 1,059.1 $ 114.4 $ 1,173.5
The results of RFIG Run-off reflected the continuing drop in net earned premiums
in line with the declining risk in force.
38 --------------------------------------------------------------------------------
Loss and Loss Adjustment Expenses
Certain mortgage guaranty average loss related trends are listed below:
Average Settled Claim Reported
Delinquency
Amount (a) Ratio at End
of Period
Years EndedDecember 31 : 2020 $ 37,172 14.2 % 2021 31,682 12.4 % 2022 $ 48,313 11.8 % __________
(a) Amounts are in whole dollars.
While 2022 mortgage insurance loss costs continued to be favorable, the trends
of lower newly reported defaults and higher cure rates on loans already in
default are beginning to fall in line with pre-Covid-19 levels.
FINANCIAL POSITION
The Company's financial position at December 31, 2022 reflected increases in
assets and liabilities of 0.7% and 5.0%, respectively, and a decrease in common
shareholders' equity of (10.5)% when compared to the immediately preceding
year-end. Cash and invested assets represented 63.8% and 67.3% of consolidated
assets as of December 31, 2022 and 2021, respectively. As of year-end 2022, the
cash and invested asset base decreased by 4.6% to $16,047.7 .
Investment Portfolio
During 2022, the Company reduced its equity holdings and reinvested the proceeds primarily in intermediate-term, investment grade fixed income securities.Old Republic continues to adhere to its long-term policy of investing primarily in investment grade, marketable securities. At bothDecember 31, 2022 and 2021, nearly all of the Company's investments consisted of marketable securities. The investment portfolio does not contain significant levels of high risk or illiquid asset classes and has extremely limited exposure to collateralized debt obligations (CDO's), credit default and interest rate swaps, hybrid securities, asset-backed securities (ABS), guaranteed investment contracts (GIC), structured investment vehicles (SIV), auction rate variable short-term securities, limited partnerships, derivatives, hedge funds or private equity investments. Moreover, the Company does not engage in hedging or securities lending transactions, nor does it invest in securities whose values are predicated on non-regulated financial instruments exhibiting amorphous or unfunded counter-party risk attributes. AtDecember 31, 2022 , the Company had no fixed income investments in default as to principal and/or interest. Several years ago, interest rates dropped to a level where the Company had the opportunity to invest in high quality dividend paying equity securities to attain a higher yield than could be earned from fixed income investments with similar risk profiles. This equity portfolio grew to a high of more than 30% of the entire consolidated portfolio, including a large amount of unrealized gains. In early 2022, management decided to rebalance the portfolio and reduce its equity holdings. This decision was precipitated by several factors: the overall economic backdrop, a rapidly increasing level of inflation, theFederal Reserve signaling a tightening of monetary policy, and increasing interest rates. As a result, the Company replaced the yield that has been provided by the equity portfolio with a lower risk (in terms of volatility) source of net investment income. The Company sold more than$2 billion worth of equities, all of which were within 11% of their 52 week highs. This generated$374.5 in net realized gains on sales. As part of a tax planning initiative, the Company took advantage of depressed fixed income values from the rising interest rate environment and sold enough fixed income securities in a loss position to offset all but$62.2 in net realized gains. Following the rebalancing, atDecember 31, 2022 , the portfolio is comprised of 20% equities and 80% fixed income and short-term investments. These transactions, along with the reinvestment of approximately$1.4 billion of maturities increased the ending fixed income portfolio yield from 2.40% as ofDecember 31, 2021 to 3.32% as ofDecember 31, 2022 . Short-term maturity investment positions reflect a large variety of factors including current operating needs, expected operating cash flows, 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. Short-term investment levels were elevated atDecember 31, 2022 due to the timing of reinvesting funds from sales of investments and the planned funding of the Company's share repurchase program. 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 39 -------------------------------------------------------------------------------- base. The fixed income investment portfolio is managed so as to limit various risks inherent in the bond market. Credit risk is addressed through asset diversification and the purchase of investment grade securities. Reinvestment rate risk is reduced by concentrating on non-callable issues, and by taking asset-liability matching considerations into account. Purchases of mortgage and asset backed securities, which have variable principal prepayment options, are generally avoided. Market value risk is limited through the purchase of bonds of intermediate maturity. The combination of these investment management practices is expected to produce a more stable fixed Income investment portfolio that is not subject to extreme interest rate sensitivity and principal deterioration. The fair value of the Company's fixed income investment portfolio is sensitive, however, to fluctuations in the level of interest rates, but not materially affected by changes in anticipated cash flows caused by any prepayments. The impact of interest rate movements on the fixed income 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 income investments. By contrast, a decline in such rates reduces currently available yields but usually serves to increase the fair value of the existing fixed income investment portfolio. All such changes in fair value of securities are reflected, net of deferred income taxes, directly in the shareholders' equity account, and as a separate component of the statements of comprehensive income. Given the Company's inability to forecast or control the movement of interest rates,Old Republic sets the maturity spectrum of its fixed income securities portfolio within parameters of estimated liability payouts, and focuses the overall portfolio on high quality investments. By so doing,Old Republic believes it is reasonably assured of its ability to hold securities to maturity as it may deem necessary in changing environments, and of ultimately recovering their aggregate cost. Possible future declines in fair values forOld Republic's fixed income portfolio would negatively affect the common shareholders' equity account at any point in time, but would not necessarily result in the recognition of realized investment losses.
The following tables show certain information relating to the Company's fixed
income and equity portfolios as of the dates shown:
Fixed Income Securities Stratified by Credit Quality (a)
December 31: 2022 2021 Aaa 22.1 % 25.1 % Aa 10.0 12.3 A 34.1 31.9 Baa 32.3 28.5 Total investment grade 98.5 97.8 Non-investment grade or non-rated issuers 1.5 2.2 Total 100.0 % 100.0 % __________ (a) Credit quality ratings referred to herein are a blend of those assigned by the major credit rating agencies forU.S. and Canadian Governments, Agencies, Corporates and Municipal issuers. 40 -------------------------------------------------------------------------------- Gross Unrealized Losses Stratified by Industry Concentration forFixed Income Securities Gross Amortized Unrealized December 31, 2022 Cost Losses
Industrial$ 38.4 $ 2.1 Energy 28.5 2.1 Consumer Durables 32.8 1.9 Basic Industry 39.5 1.8 Other (includes 2 industry groups) 24.7 1.0 Total$ 164.0 $ 9.0
U.S. Governments & Agencies$ 2,091.5 $ 104.3 Utilities 1,436.0 87.5 Financial, Banking & Insurance 1,387.0 82.7 Industrial 1,030.0 58.2 Consumer Staples & Durables 1,059.7 54.6 Natural Gas & Energy 896.6 54.0 Technology 595.4 35.8 Health Care 482.6 31.2 Retail 428.6 20.4 Basic Industry 373.7 17.8 Other (includes 7 industry groups) 1,533.9 54.0 Total$ 11,315.5 $ 601.0
The level of gross unrealized losses for this portfolio is primarily driven by
changes in the interest rate environment.
Gross Unrealized Losses Stratified by Industry Concentration forEquity Securities Gross Unrealized December 31, 2022 Cost Losses
Telecom$ 93.7 $ 8.6 Utilities 49.7 5.1 Industrial 48.1 4.3 Other (includes 2 industry groups) 24.0 .4 Total$ 215.6 $ 18.6 The equity portfolio has performed well in the current market downturn as, by design, it is comprised of high-quality common stocks ofU.S. companies with long-term records of reasonable earnings growth and steadily increasing dividends. 41 -------------------------------------------------------------------------------- Gross Unrealized Losses Stratified by Maturity Ranges forAll Fixed Income Securities Amortized Cost Gross Unrealized Losses Non- Non-Investment Investment December 31, 2022 All Grade Only All Grade Only Maturity Ranges: Due in one year or less$ 1,392.6 $ 39.4$ 16.0 $ .3 Due after one year through five years 5,776.0 73.1 243.9 3.8 Due after five years through ten years 4,236.3 51.3 346.3 4.7 Due after ten years 74.5 - 3.6 - Total$ 11,479.6 $ 164.0$ 610.1 $ 9.0
Gross Unrealized Losses Stratified by Duration and Amount of Unrealized Losses for
Amount of Gross Unrealized Losses
Less than 20% to Total Gross
20% of 50% More than Unrealized
December 31, 2022 Cost of Cost 50% of Cost Loss
Number of Months in Unrealized Loss Position:
Fixed Income Securities :
One to six months $ 151.5 $ - $ - $ 151.5
Seven to twelve months 287.5 - - 287.5
More than twelve months 168.6 2.3 - 170.9
Total $ 607.7 $ 2.3 $ - $ 610.1
Number of Issues in Unrealized Loss Position:
Fixed Income Securities :
One to six months 1,063 - - 1,063
Seven to twelve months 653 - - 653
More than twelve months 230 6 - 236
Total 1,946 6 - 1,952
In the above tables the unrealized losses on fixed income securities are
primarily deemed to reflect changes in the interest rate environment.
Age Distribution of
December 31: 2022 2021
Maturity Ranges:
Due in one year or less 11.4 % 11.7 %
Due after one year through five years 48.5 49.7
Due after five years through ten years 38.8 37.6
Due after ten years through fifteen years 1.2 .9
Due after fifteen years .1 .1
Total 100.0 % 100.0 %
Average Maturity in Years 4.3 4.4
Duration 3.9 4.0
Duration is used as a measure of bond price sensitivity to interest rate
changes. A duration of 3.9 as of December 31, 2022 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 fixed income investment portfolio of
approximately 3.9%.
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Liquidity and Capital Resources The parent holding company meets its liquidity and capital needs principally through dividends and interest on intercompany financing arrangements paid by its subsidiaries. The insurance subsidiaries' ability to pay cash dividends and interest to the parent company is generally restricted by law or subject to approval of the insurance regulatory authorities. The Company can receive up to$924.9 in ordinary dividends from its subsidiaries in 2023 without the prior approval of regulatory authorities. The liquidity achievable through such permitted dividend payments is sufficient to cover the parent holding company's currently expected regularly recurring cash outflows represented mostly by interest, anticipated cash dividend payments to shareholders, operating expenses, and the near-term capital needs of its operating subsidiaries.Old Republic's total capitalization of$7,763.2 atDecember 31, 2022 consisted of debt of$1,597.0 and common shareholders' equity of$6,166.2 . Changes in the common shareholders' equity account reflect primarily net income excluding net investment gains (losses), realized and unrealized gains (losses), dividend payments to shareholders and share repurchases for the year then ended.Old Republic has paid a cash dividend without interruption since 1942 (81 years), and it has raised the annual cash dividend payment for each of the past 41 years. The dividend rate is reviewed and approved by the Board of Directors on a quarterly basis each year. In establishing each year's cash dividend rate the Company does not follow a strict formulaic approach. Rather, it favors a gradual rise in the annual dividend rate that is largely reflective of long-term consolidated operating earnings trends. Accordingly, each year's dividend rate is set judgmentally in consideration of such key factors as the dividend paying capacity of the Company's insurance subsidiaries, the trends in average annual earnings for the five to ten most recent calendar years, and management's long-term expectations for the Company's consolidated business and its individual operating subsidiaries. OnAugust 18, 2022 , the Board of Directors authorized a$450 share repurchase program and a special cash dividend of$1.00 per share. The repurchase program is intended to comply with Rule 10b-18 and has no expiration date, does not require the purchase of any minimum number of shares and may be suspended, modified or discontinued at any time without prior notice.Old Republic may also from time to time repurchase shares pursuant to written, pre-arranged Rule 10b5-1 plans. In reaching its decision to authorize the share repurchase program and the 2022 special cash dividend, the Board evaluated such factors as the current and foreseeable liquidity and capital needs of the parent holding company and its insurance company subsidiaries. During 2022, the Company returned capital to shareholders of$862.0 , including$580.7 in dividends and$281.2 of share repurchases (12.6 million shares at an average price of$22.23 per share). Following the close of the year and throughFebruary 23, 2023 , the Company repurchased 1.3 million additional shares for$35.6 (average price of$25.85 ), leaving$133.1 remaining under the current repurchase authorization. The Company's Board of Directors also declared special cash dividends of$1.50 per share inAugust 2021 (paid onOctober 6, 2021 ) and$1.00 per share inDecember 2020 (paid onJanuary 15, 2021 ). Under state insurance regulations, the Company's three mortgage guaranty insurance subsidiaries are required to hold minimum amounts of capital based on specified formulas. Since the Company's mortgage insurance subsidiaries have discontinued writing new business the risk-to-capital ratio considerations are therefore no longer of consequence.
The Company's principal mortgage insurance subsidiaries sought and received
approval from the
dividends amounting to
respectively.
Other Assets
Substantially all of the Company's receivables are current. Reinsurance
recoverable balances on paid or estimated unpaid losses are deemed recoverable
from solvent reinsurers or have otherwise been reduced by allowances for
estimated credit losses. Deferred policy acquisition costs are estimated by
taking into account the direct costs relating to the successful acquisition of
new or renewal insurance contracts and evaluating their recoverability on the
basis of recent trends in loss costs.
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Contractual Obligations
The following table shows certain information relating to the required reporting
of contractual obligations as of
2024 and 2026 and 2028 and
2023 2025 2027 After Total
Contractual Obligations:
Debt $ 5.8 $ 400.5 $ 550.6 $ 650.0 $ 1,607.1
Interest on Debt 66.1 112.2 71.3 588.0 837.8
Operating Leases 58.8 93.3 51.5 79.3 283.1
Pension Benefits Contributions (a) - - - - -
Loss and Loss Adjustment Reserves (b) 2,914.5 3,178.8 1,782.0 4,346.1 12,221.5
Total $ 3,045.4 $ 3,785.0 $ 2,455.6 $ 5,663.5 $ 14,949.6
__________
(a) Represents estimated minimum funding of contributions for the Old Republic
International Salaried Employees Retirement Plan. Funding of the plan is
dependent on a number of factors including actual performance versus actuarial
assumptions made at the time of the actuarial valuation, as well as the
maintenance of certain funding levels relative to regulatory requirements.
(b) Amounts are reported gross of reinsurance. As discussed herein with respect
to the nature of loss reserves and the estimating process utilized in their
establishment, the Company's loss reserves do not have a contractual maturity
date. Estimated gross loss payments are based primarily on historical claim
payment patterns, are subject to change due to a wide variety of factors, do not
reflect anticipated recoveries under the terms of reinsurance contracts, and
cannot be predicted with certainty. Actual future loss payments may differ
materially from the current estimates shown in the table above.
Reinsurance Programs
In order to maintain premium production within its capacity and limit maximum losses for which it might become liable under its policies,Old Republic , as is common practice in the insurance industry, may cede a portion or all of its premiums and related liabilities on certain classes of insurance, individual policies, or blocks of business to other insurers and reinsurers.
The following table displays the Company's
reinsured by its ten largest reinsurers as of
% of Total
A.M. Reinsurance Recoverable Total Consolidated
Best on Paid on Loss Exposure Reinsured
Reinsurer Rating Losses Reserves to Reinsurer Liabilities
Day One Insurance, Inc.
Unrated $ -
19.2 %
Archway Insurance, Ltd. Unrated 1.4 420.8 422.2 8.8
Hannover Ruckversicherungs A+ 9.8 386.6 396.4 8.3
Munich Re America, Inc. A+ 12.7 236.6 249.3 5.2
Summit Insurance, Ltd. Unrated - 195.8 195.9 4.1
AXIS Reinsurance Company A 8.6 157.1 165.7 3.5
Transatlantic Reinsurance Company A++ 5.3 131.8 137.2 2.9
Partner Reinsurance Company of the U.S. A+ 2.4 132.9 135.3 2.8
Endurance Assurance Corporation
A+ 2.3 124.8 127.1 2.6
Global Vision II Unrated - 122.6 122.6 2.6
$ 42.9 $ 2,830.6 $ 2,873.6 59.8 %
Reinsurance recoverable asset balances represent amounts due from or credited by
assuming reinsurers for paid and unpaid losses and premium reserves. Such
reinsurance balances recoverable from non-admitted foreign and certain other
reinsurers such as captive insurance companies owned by assureds or business
producers, as well as similar balances or credits arising from policies that are
retrospectively rated or subject to assureds' high deductible retentions are
substantially collateralized by irrevocable letters of credit, securities, and
other financial instruments. Old Republic evaluates on a regular basis the
financial condition of its assuming reinsurers and assureds who purchase its
retrospectively rated or high deductible policies. Allowances for estimated
credit losses are recognized since reinsurance, retrospectively rated and
self-insured deductible policies and contracts do not relieve Old Republic from
its direct obligations to assureds or their beneficiaries.
44
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Old Republic's reinsurance practices with respect to portions of its business
also result from its desire to bring its sponsoring organizations and customers
into some degree of joint venture or risk sharing relationship. The Company may,
in exchange for a ceding commission, reinsure up to 100% of the underwriting
risk, and the premium applicable to such risk, to commercial institutions
generally whose customers are insured by Old Republic , or individual customers
who have formed captive insurance companies. The ceding commissions received
compensate Old Republic for performing the direct insurer's functions of
underwriting, actuarial, claim settlement, loss control, legal, reinsurance, and
administrative services to comply with local and federal regulations, and for
providing appropriate risk management services.
Remaining portions of Old Republic's business are reinsured in most instances
with independent insurance or reinsurance companies pursuant to excess of loss
agreements. Except as noted in the following paragraph, reinsurance protection
on property and liability coverages generally limits the net loss from any one
event to a maximum of: $5.2 for workers' compensation; $7.0 for commercial
automobile liability; $7.0 for general liability; $12.0 for executive protection
(directors & officers and errors & omissions); $2.2 for aviation; and $10.0 for
property coverages. Title insurance risk assumptions are generally limited to a
maximum of $500.0 as to any one policy. The vast majority of title policies
issued, however, carry exposures of less than $1.0 . The average direct primary
mortgage guaranty exposure is (in whole dollars) $37,000 per insured loan.
The Company maintains treaty and facultative reinsurance coverage for its
workers' compensation exposures. Pursuant to regulatory requirements, however,
all workers' compensation primary insurers such as the Company remain liable for
unlimited amounts in excess of reinsured limits. Other than the substantial
concentration of workers' compensation losses caused by the September 11, 2001
terrorist attack on America, to the best of the Company's knowledge there had
not been a similar accumulation of claims in a single location from a single
occurrence prior to that event. Nevertheless, the possibility continues to exist
that non-reinsured losses could, depending on a wide range of severity and
frequency assumptions, aggregate several hundred million dollars to an insurer
such as the Company. Such aggregation of losses could occur in the event of a
catastrophe such as an earthquake that could lead to the death or injury of a
large number of persons concentrated in a single facility such as a high rise
building.
As a result of the September 11, 2001 terrorist attack on America, the
reinsurance industry eliminated coverage from substantially all contracts for
claims arising from acts of terrorism. Primary insurers like the Company thus
became fully exposed to such claims. Late in 2002, the Terrorism Risk Insurance
Act of 2002 (the TRIA) was signed into law, immediately establishing a temporary
federal reinsurance program administered by the Secretary of the Treasury . The
program applied to insured commercial property and casualty losses resulting
from an act of terrorism, as defined in the TRIA. Congress extended and modified
the program in late 2005 through the Terrorism Risk Insurance Revision and
Extension Act of 2005 (the TRIREA). TRIREA expired on December 31, 2007 .
Congress enacted a revised program in December 2007 through the Terrorism Risk
Insurance Program Reauthorization Act (the TRIPRA) of 2007. The TRIPRA has been
extended on several occasions, most recently on December 20, 2019 for seven
years.
The TRIA automatically voided all policy exclusions which were in effect for
terrorism related losses and obligated insurers to offer terrorism coverage with
most commercial property and casualty insurance lines. The TRIREA revised the
definition of "property and casualty insurance" to exclude commercial
automobile, burglary and theft, surety, professional liability and farm owners
multi-peril insurance. TRIPRA did not make any further changes to the definition
of property and casualty insurance, however, it did include domestic acts of
terrorism within the scope of the program. Although insurers are permitted to
charge an additional premium for terrorism coverage, insureds may reject the
coverage. Under TRIPRA, the program's protection is not triggered for losses
arising from an act of terrorism until the industry first suffers losses in
excess of a prescribed aggregate deductible during any one year. The program
deductible trigger was $200.0 for 2022. Once the program trigger is met, the
program will be responsible for a fixed percentage of the Company's terrorism
losses that exceed its deductible which ranges from 85% for 2015 and declined by
one percentage point per year until it reached 80% in 2020. The Company's
deductible amounts to 20% of direct earned premium on eligible property and
casualty insurance coverages. The Company currently reinsures limits on a treaty
basis of $195.0 in excess of $5.0 for claims arising from certain acts of
terrorism for casualty clash and catastrophe workers' compensation liability
insurance coverages. The Company also purchases facultative reinsurance on
certain accounts in excess of $200.0 to manage the Company's net exposures.
CRITICAL ACCOUNTING ESTIMATES
The Company's annual financial statements incorporate a large number and types
of estimates relative to matters which are highly uncertain at the time the
estimates are made. The estimation process required of an insurance enterprise
such as Old Republic 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.
Changes in estimates generally result from altered circumstances, the continuum
of newly emerging information and its effect on past assumptions and judgments,
the effects of securities markets valuations, and changes in inflation rates and
future economic conditions beyond the Company's control. As a result, Old
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.
45
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establishment of reserves for losses and loss adjustment expenses and the
recoverability of reinsured outstanding losses. The major assumptions and
methods used in setting these estimates are summarized as follows:
(a) The establishment of reserves for losses and loss adjustment expenses
The Company's reserves for losses and loss adjustment expenses represents the accumulation of estimates of ultimate losses payable, including incurred but not reported losses and loss adjustment expenses. The establishment of loss reserves by the Company's insurance subsidiaries is a reasonably complex and dynamic process influenced by a large variety of factors as further discussed below. Consequently, reserves established are a reflection of the opinions of a large number of persons, of the application and interpretation of historical precedent and trends, of expectations as to future developments, and of management's judgment in interpreting all such factors. At any point in time, the Company is exposed to the possibility of higher or lower than anticipated loss costs and the resulting changes in estimates are recorded in operations of the periods during which they are made. Increases to prior reserve estimates are often referred to as unfavorable development whereas any changes that decrease previous estimates of the Company's ultimate liability are referred to as favorable development. Most ofOld Republic's consolidated loss and loss adjustment expense reserves stem from itsGeneral Insurance business. AtDecember 31, 2022 , such reserves accounted for 94.3% and 90.7% of consolidated gross and net of reinsurance reserves, respectively, while similar reserves atDecember 31, 2021 represented 93.7% and 90.2% of the respective consolidated amounts. The Company's reserve setting process reflects the nature of its insurance business and the operationally decentralized basis upon which it is conducted.Old Republic's General Insurance operations encompass a large variety of coverages or classes of predominantly commercial insurance; it does not have a meaningful exposure to personal insurance coverages such as homeowners or private passenger automobile insurance. Consequently, the wide variety of policies issued and commercial insurance customers served require that loss reserves be analyzed and established in the context of the unique or different attributes of each block or class of business produced by the Company. For example, accident liability claims emanating from insured trucking companies or from general aviation customers become known relatively quickly, whereas claims of a general liability nature arising from the building activities of a construction company may emerge over extended periods of time. Similarly, claims filed pursuant to errors and omissions or directors' and officers' liability coverages are usually not prone to immediate evaluation or quantification inasmuch as many such claims may be litigated over several years and their ultimate costs may be affected by judge or jury verdicts. Approximately 89% of theGeneral Insurance's loss 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 analysis of historical data. Favorable or unfavorable developments of prior year reserves are implicitly covered by the point estimates incorporated in total reserves at each balance sheet date. The Company does not project future variability or make an explicit provision for uncertainty when determining its best estimate of loss reserves. Over the most recent decade actual incurred losses have developed within a reasonable range of their original estimates. Aggregate loss reserves consist of liability estimates for claims that have been reported (case) to the Company's insurance subsidiaries and reserves for claims that have been incurred but not yet reported (IBNR) or whose ultimate costs may not become fully apparent until a future time. Additionally, the Company establishes unallocated loss adjustment expense reserves for loss settlement costs that are not directly related to individual claims. Such reserves are based on prior years' cost experience and trends, and are intended to cover the unallocated costs of claim departments' administration of case and IBNR claims over time. A large variety of statistical analyses and formula calculations are utilized to provide for IBNR claim costs as well as additional costs that can arise from such factors as monetary and social inflation, changes in claims administration processes, changes in reinsurance ceded and recoverability levels, and expected trends in claim costs and related ratios. Typically, such formulas take into account link ratios that represent prior years' patterns of incurred or paid loss trends between succeeding years, or past experience relative to progressions of the number of claims reported over time and ultimate average costs per claim. Overall, reserves pertaining to several hundred large individual commercial insurance accounts that exhibit sufficient statistical credibility, and at times may be subject to retrospective premium rating plans or the utilization of varying levels or types of self-insured retentions through captive insurers and similar risk management mechanisms are established on an account by account basis using case reserves and applicable formula-driven methods. Large account reserves are usually set and analyzed for groups of coverages such as workers' compensation, commercial automobile and general liability that are typically underwritten jointly for many customers. For certain long-tail categories of insurance such as retained or assumed excess liability or excess workers' compensation, officers and directors' liability, and commercial umbrella liability relative to which claim development patterns are particularly long, 46 -------------------------------------------------------------------------------- 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 five most recent accident years depending on the individual class or category of business. As actual claims data emerges in succeeding interim and annual periods, the original accident year loss ratio assumptions are validated or otherwise adjusted sequentially through the application of statistical projection techniques such as the Bornhuetter/Ferguson method which utilizes data from the more mature experience of prior years to arrive at a likely indication of more recent years' loss trends and costs. Title insurance and related escrow services loss and loss adjustment expense reserves are established as point estimates to cover the projected settlement costs of known as well as IBNR losses related to premium and escrow service revenues of each reporting period. Reserves for known claims are based on an assessment of the facts available to the Company during the settlement process. The point estimates covering all loss reserves take into account IBNR claims based on past experience and evaluations of such variables as changing trends in the types of policies issued, changes in real estate markets and interest rate environments, and changing levels of loan refinancing, all of which can have a bearing on the emergence, number, and ultimate costs of claims. RFIG Run-off mortgage guaranty insurance reserves for unpaid loss and loss adjustment expenses are recognized only upon an instance of default, defined as an insured mortgage loan for which two or more consecutive monthly payments have been missed. Loss reserves are based on statistical calculations that take into account the number of reported insured mortgage loan defaults as of each balance sheet date, as well as experience-based estimates of loan defaults that have occurred but have not as yet been reported. Further, the loss reserve estimating process takes into account a large number of variables including trends in claim severity, potential salvage recoveries, expected cure rates for reported loan delinquencies at various stages of default, the level of coverage rescissions and claims denials due to material misrepresentation in key underwriting information or non-compliance with prescribed underwriting guidelines, and management judgments relative to future employment levels, housing market activity, and mortgage loan interest costs, demand, and extensions. The Company has the legal right to rescind mortgage insurance coverage unilaterally as expressly stated in its policy. Moreover, two federal courts that have considered that policy wording have each affirmed that right. According to the policy, if any of those representations are materially false or misleading with respect to a loan, the Company has the right to cancel or rescind coverage for that loan retroactively to commencement of the coverage. As discussed above, the reserves for losses and related loss adjustment expenses are based on a wide variety of factors and calculations. Among these the Company believes the most critical are: •The establishment of expected loss ratios for at least the two to five most recent accident years, particularly for long-tail coverages as to which information about covered losses emerges and becomes more accurately quantifiable over long periods of time. Long-tail coverages generally include workers' compensation, commercial automobile liability, general liability, errors and omissions and directors' and officers' liability, as well as title insurance. Gross loss reserves related to such long-tail coverages ranged between 94.1% and 94.6%, and averaged 94.4% of gross consolidated loss reserves as of the three most recent year ends. Net of reinsurance recoverables, such reserves ranged between 94.3% and 94.4% and averaged 94.4% as of the same dates. •Loss trends that are considered when establishing the above noted expected loss ratios which take into account such variables as: judgments and estimates relative to premium rate trends and adequacy, current and expected interest rates, current and expected social and economic inflation trends, and insurance industry statistical claim trends. The Company applies these expected loss ratios to earned premiums when estimating the periodic reserve for losses and loss adjustment expenses.
•Loss development factors, expected claim rates and average claim costs, all of
which are based on Company and/or industry statistics may also be used to
project reported and unreported losses for each accounting period.
Volatility of Reserve Estimates and Sensitivity
There is a great deal of uncertainty in the estimates of loss and loss adjustment expense reserves, and unanticipated events can have both a favorable or unfavorable impact on such estimates. The Company believes that the factors most responsible, in varying and continually changing degrees, for such favorable or unfavorable development are as follows:General Insurance net loss reserves can be affected by actual experience differing from expectations related to: •frequency of claims incurred but not reported; •the effect of reserve discounts applicable to certain workers' compensation claims; •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; •inflation rates applicable to repairs and the medical benefits portion of claims; and 47 --------------------------------------------------------------------------------
•the emergence patterns applicable to certain types of claims such as those
stemming from litigated, assumed reinsurance, or A&E claims.
Title Insurance loss reserve levels can be impacted by such developments as: •loan refinancing activity, the effect of which can be to change the expected period during which title policies remain exposed to loss emergence; and •changes 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. RFIG Run-off net loss reserve levels can be influenced by several factors including: •changes in the mix of insured business toward loans that have a higher or lower probability of default; •increases in the average risk per insured loan; •the levels of estimated rescission and claim denial activity; •the deterioration of regional or national economic conditions leading to a reduction in borrowers' income and thus their ability to make payments on outstanding loans; and •changes in housing values and/or in housing supply that can change the rate at which defaults evolve into claims and affect their overall severity. With respect toOld Republic's small life and accident insurance operations, reserve adequacy may be impacted by: •medical care cost inflation; •frequency and severity of claims; and •catastrophic events where we have concentrations of insured lives. Consolidated loss costs developed favorably in the three most recent calendar years. This development had the consequent effect of reducing consolidated annual loss costs for the three most recent years within a range of 3.3% and 10.4%, or by an average of approximately 7.3% per annum. As a percentage of each of these years' consolidated earned premiums and fees, the favorable developments have ranged between 1.2% and 3.7%, and have averaged 2.5%. The consolidated cumulative development on prior year loss reserves over the past ten years throughDecember 31, 2022 has ranged from 4.1% favorable to 13.4% favorable and averaged 8.0% favorable (approximately$600 based on current year ending reserves). Given the long tail associated with most of the Company's lines of business, this loss reserve development has occurred over many years. The consolidated one-year development on prior year loss reserves over the past ten years throughDecember 31, 2022 has ranged from .4% unfavorable to 5.0% favorable and averaged 2.1% favorable (approximately$160.0 million based on current year ending reserves). Management does not have a practical business reason for making projections of likely outcomes of future loss developments, its analysis and evaluation ofOld Republic's existing business mix, the natural offset effects of its diverse coverage, current aggregate loss reserve levels, and loss development patterns suggests these historical outcomes are illustrative of the reasonable likelihood of how 2022 year-end loss reserves could ultimately develop. The most significant factors impacting the potential reserve development for each of the Company's insurance segments is discussed above. The current analysis of loss development factors and economic conditions influencing the Company's insurance coverages point to a position of reserve adequacy. In management's opinion, the other segments' loss reserve development patterns (most notably those associated with title and mortgage insurance) show greater variability due to changes in economic conditions which cannot be reasonably anticipated. Consequently, management believes that using the historical outcomes presented above provides a reasonable range of cumulative and one-year reserve development for a sensitivity analysis of the Company's consolidated reserves as ofDecember 31, 2022 .
(b) The recoverability of reinsured outstanding losses
Assets consisting of balance sheet date reserve estimates recoverable from
assuming reinsurers in future periods as gross losses are settled and paid, are
established at the same time as the gross losses are recorded as reserves.
Accordingly, these assets are subject to the same estimation processes and
valuations as the related gross amounts as is discussed above. As of the three
most recent year ends, outstanding reinsurance recoverable balances ranged
between 34.2% and 38.5% and averaged 36.3% of the related gross reserves. See
Note 5 for further discussion regarding recoverability of the Company's
reinsurance balances.
48
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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 asOld 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. Any such forward-looking statements involve assumptions, uncertainties, and risks that may affect the Company's future performance. With regard toOld Republic's General Insurance segment, its results can be particularly affected by the level of market competition, which is typically a function of available capital and expected returns on such capital among competitors, the levels of investment yields and inflation rates, and periodic changes in claim frequency and severity patterns caused by natural disasters, weather conditions, accidents, illnesses, work-related injuries, and unanticipated external events.Title Insurance and RFIG Run-off results can be affected by similar factors, and by changes in national and regional housing demand and values, the availability and cost of mortgage loans, employment trends, and default rates on mortgage loans. Life and accident insurance earnings can be affected by the levels of employment and consumer spending, changes in mortality and health trends, and alterations in policy lapsation rates. At the parent holding company level, operating earnings or losses are generally reflective of the amount of debt outstanding and its cost, interest income on temporary holdings of short-term investments, and period-to-period variations in the costs of administering the Company's widespread operations.General Insurance ,Title Insurance , Corporate & Other, and RFIG Run-off maintain customer information and rely upon technology platforms to conduct their business. As a result, each of them and the Company are exposed to cyber risk. Many of the Company's operating subsidiaries, maintain separate IT systems which are deemed to reduce enterprise-wide risks of potential cybersecurity incidents. However, given the potential magnitude of a significant breach, the Company continually evaluates on an enterprise-wide basis its IT hardware, security infrastructure and business practices to respond to these risks and to detect and remediate in a timely manner significant cybersecurity incidents or business process interruptions.
A more detailed 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
Commission
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. 49
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REINSURANCE GROUP OF AMERICA INC – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CNO FINANCIAL GROUP, INC. – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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