Nov. 3, 2009 (PR Newswire) -- CHICAGO, Nov. 3 /PRNewswire-FirstCall/ -- Old Republic International Corporation (NYSE: ORI) today announced that it will shortly file its third quarter 2009 Form 10-Q report with the Securities and Exchange Commission. The filing will take place even though the Company's independent auditors, PricewaterhouseCoopers LLP ("PwC") have communicated their disagreement with the Company's treatment of certain third quarter 2009 reinsurance transactions consummated by the Company's Mortgage Guaranty subsidiary. The transactions and the financial statement treatment afforded to them were disclosed in the Company's October 22, 2009 earnings press release as follows:
"During this year's third quarter, the Mortgage Guaranty Group recaptured business previously ceded to several captives. In substance, the transactions are cut-off reinsurance arrangements whereby the captives have remitted to the Company the reserves on existing claim obligations and a risk premium for claims that will occur after the recapture date. Accordingly, the Company recorded proceeds of $148.9 million and established a combination of claim reserves ($68.4 million) and premium reserves ($82.5 million) all of which resulted in little consequential effect on the pretax loss for the quarter and first nine months of 2009."
To effect the transactions the Company calculated a necessary, actuarially determined total premium designed to at least cover all future claims occurring after termination of the existing reinsurance contracts. The economic basis of the premium offered and agreed to by the captives consisted of the combination of an initial front end risk premium ($82.5 million) paid in cash and marketable securities, and a subsequent additional risk premium equal to all estimated future renewal premiums that would have otherwise inured to the captives had the reinsurance agreements remained in place. Accordingly, to reflect the economic substance of the cut-off reinsurance arrangements, the initial front end risk premium has been recorded as a balance sheet unearned premium reserve. This reserve will revert to earned premiums in future periods' income statements pursuant to an amortization schedule that simulates the estimated timing of the future renewal risk premiums that will henceforth be retained by the Company. In so doing, the Company will be consistent with its own and generally accepted industry-wide insurance accounting practices pertaining to cut-off reinsurance arrangements and, assuming the reasonableness of its usual risk transfer pricing methodology, its consequent underwriting results should not be materially better or worse than they would have been if the reinsurance agreements had remained in place.
PwC has informed the Company that based on its analysis of the transactions and interpretation of generally accepted accounting principles ("GAAP"), it has concluded that immediate recognition of a gain in the amount of $82.5 million is required in the third quarter of 2009. In addition, PwC has advised that, as a result of this disagreement, it is unable to complete its review of the Company's consolidated financial statements included in the third quarter 2009 Form 10-Q.
In Old Republic management's opinion, recognition of the $82.5 million initial front end risk premium as a current period revenue and bottom line gain would create the appearance of much improved third quarter 2009 results when none existed or occurred. Given the economic substance of the transactions, the appearance so created would also cause misleading inferences relative to such matters as trends in premium revenue and claim costs as well as the actual underwriting results of Old Republic's Mortgage Guaranty line for the nine quarterly periods since the onset of economic dislocations.
In view of the un-reconciled financial accounting positions taken by the Company and its independent auditors, Old Republic intends to petition the SEC to seek resolution of the matter.
Since there is no assurance that the Company's position will prevail, this press release is being issued to alert shareholders, rating agencies, and others who may be relying on the Company's published financial reports to the possibility that its accounting methodology in the above regards might not be sustained. In the latter circumstance, and with the further assumption that PwC's financial accounting position would be deemed preferable by the SEC, then Old Republic would be required to restate its previously issued financial statements for the three and nine months ended September 30, 2009.
