SEC Comment Letter for OLD REPUBLIC INTERNATIONAL CORP (ORI) (CIK 0000074260) (ORI) — Sep 5, 2006
OLD REPUBLIC INTERNATIONAL CORP (ORI) (CIK 0000074260)
Date: Sept. 5, 2006 · CIK: 0000074260 · Accession: 0000000000-06-042670
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 001-10607
Letter
Mail Stop 6010 Via Facsimile and U.S. Mail May 25, 2006 Mr. Aldo C. Zucaro Chairman, Chief Executive Officer and President Old Republic International Corporation 307 North Michigan Avenue Chicago, Illinois 60601
Re: Old Republic In ternational Corporation Form 10-K for fiscal year ended December 31, 2005 File No. 001-10607
Dear Mr. Zucaro:
We have limited our review of your filing to those issues we have addressed in our comments. In our comments, we ask you to provide us with information so we may better understand your disclosure. After re viewing this information, we may raise additional comments.
Please understand that the purpose of our re view process is to assist you in your compliance with the applicable disclosure requirements and to enhance the overall disclosure in your filing. We look forward to working with you in these respects. We welcome any questions you may have about our comments or any other aspect of our review. Feel free to call us at the telephone numbers listed at the end of this letter.
Form 10-K for fiscal year ended December 31, 2005
Item 7 – Management Analysis of Financia l Condition and Results of Operations, page 1. You appear to have omitted a separate discussion of critical accounting estimates that involve uncertain matte rs that may possess a high degree of susceptibility to change and require estima tes or assumptions that are highly subjective and judgmental. Please refer to Section V of Financial Reporting Release No. 72. This disclosure should pr ovide investors with a fuller understanding of the uncertainties in applying critical acco unting estimates and the likelihood that materially different amounts would be reported under different conditions or using different assumptions. It should include quantification of the related variability in operating results that you expect to be reasonably likely to occur. For all critical accounting estimates, including reserving for loss and loss
Mr. Aldo C. Zucaro Old Republic International Corporation May 25, 2006 Page 2 adjustment expenses which is discussed in the comments below, please provide in disclosure-type format a discussion of the uncertainties in applying these accounting estimates, the effect that changes in estimates have had on the financial statements for each period pres ented, and the effect that reasonably likely changes in the key assumptions underl ying these estimates as of the latest balance sheet may have on the financial statements. 2. We believe your disclosure regarding the estimation of the reserve for loss and loss adjustment expenses could be improved to better explain the judgments and uncertainties surrounding this estimate a nd the potential impact on your financial statements. We believe in order to meet the principal objectives of MD&A, this disclosure should enable the investor to understand 1) management’s process for establishing the estimate 2) the reasons for changes in the historical estimate 3) whether and to what extent management has adjusted their assumptions used in the most recent estimate for trends or othe r factors identified from past experience and 4) the potential variability in the most recent estimate and the impact this variability may have on reported results , financial condition and liquidity. Please keep this objective in mind in drafting your responses to comments listed below. Please also consider providing any additional information, in disclosure-type format, to achieve this objective. 3. We believe that your disclosure of th e methodology for computing the loss and loss adjustment expense reserve at the line of business level could be improved. Please provide an expanded discussion, in disclosure-type format, of the methodology used to compute your reserv es for each line of business. For example, this might include a discussi on of the alternativ e models used, the strengths and weaknesses of each model, an explanation of why a specific model was ultimately chosen over the other models considered and an explanation of any differences between your actuarial best estimate and recorded reserves. In addition, describe your process for calcul ating the IBNR reserve. It is our understanding that companies may calcu late this reserve by estimating the ultimate unpaid liability first and then reducing that amount by cumulative paid claims and by case reserves, but there may be other methods as well. Also, describe the nature and frequency of your procedures for determining management’s best estimate of loss reserves on both an annual and interim reporting basis. 4. Recorded loss reserves for property and casualty insurers generally include a provision for uncertainty, wh en management determines that existing actuarial methodologies and assumptions do not ad equately provide for ultimate loss development. Such a provision may be e xplicit (i.e. represented by the excess of recorded reserves over actuarial indicatio ns) or implicit in the assumption-setting process. So that investor s can better understand the inhe rent uncertainties in your business and the degree of conservatism th at you have incorporated in your loss
Mr. Aldo C. Zucaro Old Republic International Corporation May 25, 2006 Page 3 reserve estimates, please a ddress as part of your di scussion of the methodology used, how you determine the provision for uncertainty. 5. In disclosure-type format, please identify and describe those key assumptions that materially affect the estimate of the rese rve for loss and loss adjustment expenses. In addition please provide the following information:
a. For each of these key assumptions and for your provision for uncertainty, quantify and explain what caused them to change historically over the periods presented.
b. Discuss whether and to wh at extent management has adjusted each of the key assumptions and the provision for un certainty used in calculating the most recent estimate of the reserve give n the historical changes, current trends observed and/or other factors as discussed in a. above. This discussion should reconcile the histor ical changes, the current trends and/or other factors observed to what management has calculated as its most recent key assumptions.
6. Please provide a quantitative and narrative di scussion in disclosure-type format of the impact that “reasonably likely” cha nges in one or more of the specific assumptions used in your reserve estima te (e.g. claim frequency and severity) would have on reported results, financia l position and liquidity. Explain why you believe the scenarios quantified are “reas onably likely.” Your quantification of the income statement impact of a 10% deficiency in net general insurance reserves does not appear to accomplish this objective.
Executive Summary
Cash, Invested Assets, and Shareholder's Equity, page 26
7. Please refer to your tabular disclosure of Old Republic’s consolidated operating revenue and income on page 24 and your di sclosure of cash and invested assets and shareholders’ equity and relate d per share amounts on page 26. Your disclosure appears to include non-GAAP pe r share amounts. Please explain to us how your disclosure of the following per share amounts complies with the guidance in ASR No. 142 and disclosure of non-GAAP measures in Item 10(e) of Regulation S-K:
• Net operating income before nonrecurring income tax benefit • Non-recurring income tax benefit • Net operating income • Net realized investment gains
Mr. Aldo C. Zucaro Old Republic International Corporation May 25, 2006 Page 4 • Cash and invested assets • Shareholders’ equity at cost
Table of Contractual Obligations, page 32
8. You have presented claim and claim expens e reserves on a net basis rather than a gross of reinsurance basis. Please provide in a disclosure-type format a revised presentation, showing these amounts on a gross basis. Expenses: Benefits and Claims, page 35
9. Based on your disclosures on page 10, it appears that reserve releases have favorably impacted your operating results each year since 1995. However, you do not discuss or quantify the impact of prior year loss development on historical operating results or the likelihood that this favorable experience trend will continue and the corresponding impact on future operating results. Please provide, in disclosure-type format, an expanded discussion that includes this information. Ensure your disclosure clar ifies the timing of th e reserve releases, why recognition occurred in th e periods that it did and why recognition in earlier periods was not required. 10. Please discuss and quantify in disclosure-type format the effect that your ceded reinsurance activitie s had on financial position, resu lts of operations, and cash flows for the periods presented. Also, discuss changes you have made to your past reinsurance strategies in developing your current strategies and the expected effect that those changes may have on your financial position, results of operations and cash flows. Describe any limitations on your ability to cede future losses on a basis consistent with histor ical results and the related impact on expected operating results and liquidity and capital resources. Such limitations could relate to changes in reinsurance market conditions, a restructuring of your reinsurance treaties or the absence of remaining limits for specific accident years under existing treaties.
Item 7A – Quantitative and Qualitative Disclosures about Market Risk, page 41
11. Your discussion in the Financial Positi on section of MD&A appears to omit the qualitative and quantitative disclosure re quired by Item 305 of Regulation S-K. Please provide this information in a disclo sure-type format or explain to us how your disclosures comply with Item 305 of Regulation S-K.
Mr. Aldo C. Zucaro Old Republic International Corporation May 25, 2006 Page 5 Item 8 – Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies, page 48
12. Your reinsurance activities appear to be material to operating results and include ceding commissions and retroactive risk sh aring arrangements. Please describe, in disclosure-type format, the income recognition methods and related key assumptions used in accounting for your reinsurance contracts, including how you recognize ceding commissions and retroactiv e adjustments to production costs or premiums. In your response, include the GAAP literature including paragraphs 21-26 of SFAS 113 upon which you ba se your accounting treatment.
* * * *
Please respond to these comments within 10 business days or tell us when you will provide us with a response. Your letter should key your responses to our comments. Detailed letters greatly facil itate our review. Please file your letter on EDGAR under the form type label CORRESP.
We urge all persons who are responsible for the accuracy and adequacy of the disclosure in the filing to be certain that the filing includes all in formation required under the Securities Exchange Act of 1934 and th at they have provided all information investors require for an informed invest ment decision. Since the company and its management are in possession of all facts re lating to a company’s disclosure, they are responsible for the accuracy and adequacy of the disclosures they have made.
In connection with responding to our comments, please provide in your letter a statement from the company acknowledging that:
• the company is responsible for the adequacy and accuracy of the disclosure in the filings; • staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and • the company may not assert staff comme nts as a defense in any proceeding initiated by the Commission or any person under the federal secu rities laws of the United States.
In addition, please be advi sed that the Division of En forcement has access to all information you provide to the staff of the Divi sion of Corporation Fi nance in our review of your filing or in response to our comments on your filing.
Mr. Aldo C. Zucaro Old Republic International Corporation May 25, 2006 Page 6 You may contact Frank Wyman, St aff Accountant, at 202-551-3660 or Don Abbott, Senior Staff Accountant, at 202- 551-3608, if you have questions regarding the comments. In this regard, do not hes itate to contact me, at (202) 551-3679.
S i n c e r e l y ,
J i m B . R o s e n b e r g Senior Assistant Chief Accountant
Show Raw Text
Mail Stop 6010
Via Facsimile and U.S. Mail
May 25, 2006
Mr. Aldo C. Zucaro
Chairman, Chief Executive Officer and President
Old Republic International Corporation
307 North Michigan Avenue
Chicago, Illinois 60601
Re: Old Republic In ternational Corporation
Form 10-K for fiscal year ended December 31, 2005
File No. 001-10607
Dear Mr. Zucaro:
We have limited our review of your filing to those issues we have addressed in
our comments. In our comments, we ask you to provide us with information so we may
better understand your disclosure. After re viewing this information, we may raise
additional comments.
Please understand that the purpose of our re view process is to assist you in your
compliance with the applicable disclosure requirements and to enhance the overall
disclosure in your filing. We look forward to working with you in these respects. We
welcome any questions you may have about our comments or any other aspect of our
review. Feel free to call us at the telephone numbers listed at the end of this letter.
Form 10-K for fiscal year ended December 31, 2005
Item 7 – Management Analysis of Financia l Condition and Results of Operations, page
23
1. You appear to have omitted a separate discussion of critical accounting estimates
that involve uncertain matte rs that may possess a high degree of susceptibility to
change and require estima tes or assumptions that are highly subjective and
judgmental. Please refer to Section V of Financial Reporting Release No. 72.
This disclosure should pr ovide investors with a fuller understanding of the
uncertainties in applying critical acco unting estimates and the likelihood that
materially different amounts would be reported under different conditions or
using different assumptions. It should include quantification of the related
variability in operating results that you expect to be reasonably likely to occur. For all critical accounting estimates, including reserving for loss and loss
Mr. Aldo C. Zucaro
Old Republic International Corporation
May 25, 2006 Page 2
adjustment expenses which is discussed in the comments below, please provide in
disclosure-type format a discussion of the uncertainties in applying these
accounting estimates, the effect that changes in estimates have had on the financial statements for each period pres ented, and the effect that reasonably
likely changes in the key assumptions underl ying these estimates as of the latest
balance sheet may have on the financial statements.
2. We believe your disclosure regarding the estimation of the reserve for loss and
loss adjustment expenses could be improved to better explain the judgments and uncertainties surrounding this estimate a nd the potential impact on your financial
statements. We believe in order to meet the principal objectives of MD&A, this
disclosure should enable the investor to understand 1) management’s process for establishing the estimate 2) the reasons for changes in the historical estimate 3) whether and to what extent management has adjusted their assumptions used in
the most recent estimate for trends or othe r factors identified from past experience
and 4) the potential variability in the most recent estimate and the impact this
variability may have on reported results , financial condition and liquidity. Please
keep this objective in mind in drafting your responses to comments listed below.
Please also consider providing any additional information, in disclosure-type format, to achieve this objective.
3. We believe that your disclosure of th e methodology for computing the loss and
loss adjustment expense reserve at the line of business level could be improved.
Please provide an expanded discussion, in disclosure-type format, of the
methodology used to compute your reserv es for each line of business. For
example, this might include a discussi on of the alternativ e models used, the
strengths and weaknesses of each model, an explanation of why a specific model
was ultimately chosen over the other models considered and an explanation of any differences between your actuarial best estimate and recorded reserves. In addition, describe your process for calcul ating the IBNR reserve. It is our
understanding that companies may calcu late this reserve by estimating the
ultimate unpaid liability first and then reducing that amount by cumulative paid
claims and by case reserves, but there may be other methods as well. Also, describe the nature and frequency of your procedures for determining
management’s best estimate of loss reserves on both an annual and interim reporting basis.
4. Recorded loss reserves for property and casualty insurers generally include a
provision for uncertainty, wh en management determines that existing actuarial
methodologies and assumptions do not ad equately provide for ultimate loss
development. Such a provision may be e xplicit (i.e. represented by the excess of
recorded reserves over actuarial indicatio ns) or implicit in the assumption-setting
process. So that investor s can better understand the inhe rent uncertainties in your
business and the degree of conservatism th at you have incorporated in your loss
Mr. Aldo C. Zucaro
Old Republic International Corporation
May 25, 2006 Page 3
reserve estimates, please a ddress as part of your di scussion of the methodology
used, how you determine the provision for uncertainty.
5. In disclosure-type format, please identify and describe those key assumptions that
materially affect the estimate of the rese rve for loss and loss adjustment expenses.
In addition please provide the following information:
a. For each of these key assumptions and for your provision for uncertainty, quantify and explain what caused them to change historically over the
periods presented.
b. Discuss whether and to wh at extent management has adjusted each of the
key assumptions and the provision for un certainty used in calculating the
most recent estimate of the reserve give n the historical changes, current
trends observed and/or other factors as discussed in a. above. This
discussion should reconcile the histor ical changes, the current trends
and/or other factors observed to what management has calculated as its
most recent key assumptions.
6. Please provide a quantitative and narrative di scussion in disclosure-type format of
the impact that “reasonably likely” cha nges in one or more of the specific
assumptions used in your reserve estima te (e.g. claim frequency and severity)
would have on reported results, financia l position and liquidity. Explain why you
believe the scenarios quantified are “reas onably likely.” Your quantification of
the income statement impact of a 10% deficiency in net general insurance reserves does not appear to accomplish this objective.
Executive Summary
Cash, Invested Assets, and Shareholder's Equity, page 26
7. Please refer to your tabular disclosure of Old Republic’s consolidated operating
revenue and income on page 24 and your di sclosure of cash and invested assets
and shareholders’ equity and relate d per share amounts on page 26. Your
disclosure appears to include non-GAAP pe r share amounts. Please explain to us
how your disclosure of the following per share amounts complies with the guidance in ASR No. 142 and disclosure of non-GAAP measures in Item 10(e) of
Regulation S-K:
• Net operating income before nonrecurring income tax benefit
• Non-recurring income tax benefit
• Net operating income
• Net realized investment gains
Mr. Aldo C. Zucaro
Old Republic International Corporation
May 25, 2006 Page 4
• Cash and invested assets
• Shareholders’ equity at cost
Table of Contractual Obligations, page 32
8. You have presented claim and claim expens e reserves on a net basis rather than a
gross of reinsurance basis. Please provide in a disclosure-type format a revised
presentation, showing these amounts on a gross basis.
Expenses: Benefits and Claims, page 35
9. Based on your disclosures on page 10, it appears that reserve releases have
favorably impacted your operating results each year since 1995. However, you do not discuss or quantify the impact of prior year loss development on historical
operating results or the likelihood that this favorable experience trend will continue and the corresponding impact on future operating results. Please
provide, in disclosure-type format, an expanded discussion that includes this
information. Ensure your disclosure clar ifies the timing of th e reserve releases,
why recognition occurred in th e periods that it did and why recognition in earlier
periods was not required.
10. Please discuss and quantify in disclosure-type format the effect that your ceded reinsurance activitie s had on financial position, resu lts of operations, and cash
flows for the periods presented. Also, discuss changes you have made to your past reinsurance strategies in developing your current strategies and the expected
effect that those changes may have on your financial position, results of operations and cash flows. Describe any limitations on your ability to cede future
losses on a basis consistent with histor ical results and the related impact on
expected operating results and liquidity and capital resources. Such limitations
could relate to changes in reinsurance market conditions, a restructuring of your
reinsurance treaties or the absence of remaining limits for specific accident years under existing treaties.
Item 7A – Quantitative and Qualitative Disclosures about Market Risk, page 41
11. Your discussion in the Financial Positi on section of MD&A appears to omit the
qualitative and quantitative disclosure re quired by Item 305 of Regulation S-K.
Please provide this information in a disclo sure-type format or explain to us how
your disclosures comply with Item 305 of Regulation S-K.
Mr. Aldo C. Zucaro
Old Republic International Corporation
May 25, 2006 Page 5
Item 8 – Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies, page 48
12. Your reinsurance activities appear to be material to operating results and include
ceding commissions and retroactive risk sh aring arrangements. Please describe, in
disclosure-type format, the income recognition methods and related key
assumptions used in accounting for your reinsurance contracts, including how you
recognize ceding commissions and retroactiv e adjustments to production costs or
premiums. In your response, include the GAAP literature including paragraphs
21-26 of SFAS 113 upon which you ba se your accounting treatment.
* * * *
Please respond to these comments within 10 business days or tell us when you
will provide us with a response. Your letter should key your responses to our comments.
Detailed letters greatly facil itate our review. Please file your letter on EDGAR under the
form type label CORRESP.
We urge all persons who are responsible for the accuracy and adequacy of the
disclosure in the filing to be certain that the filing includes all in formation required under
the Securities Exchange Act of 1934 and th at they have provided all information
investors require for an informed invest ment decision. Since the company and its
management are in possession of all facts re lating to a company’s disclosure, they are
responsible for the accuracy and adequacy of the disclosures they have made.
In connection with responding to our comments, please provide in your letter a
statement from the company acknowledging that:
• the company is responsible for the adequacy and accuracy of the disclosure in the
filings;
• staff comments or changes to disclosure in response to staff comments do not
foreclose the Commission from taking any action with respect to the filing; and
• the company may not assert staff comme nts as a defense in any proceeding
initiated by the Commission or any person under the federal secu rities laws of the
United States.
In addition, please be advi sed that the Division of En forcement has access to all
information you provide to the staff of the Divi sion of Corporation Fi nance in our review
of your filing or in response to our comments on your filing.
Mr. Aldo C. Zucaro
Old Republic International Corporation
May 25, 2006 Page 6
You may contact Frank Wyman, St aff Accountant, at 202-551-3660 or Don
Abbott, Senior Staff Accountant, at 202- 551-3608, if you have questions regarding the
comments. In this regard, do not hes itate to contact me, at (202) 551-3679.
S i n c e r e l y ,
J i m B . R o s e n b e r g
Senior Assistant Chief Accountant