NOTES TO FINANCIAL STATEMENTS
_________________
1.Description of Plan
A. Basis of Presentation
The accompanying financial statements of the Old Republic International Corporation Employees Savings and Stock Ownership Plan (the Plan) include plan assets for employees of Old Republic International Corporation and participating subsidiaries (the Corporation, the Plan Sponsor, the Company(ies) or the Employer(s)). These financial statements and accompanying notes together provide only general information about the Plan. The Plan Document must be referred to for a complete description of the Plan's provisions.
B. General
The Plan is a defined contribution plan, under the provisions of Section 401(k) of the Internal Revenue Code, covering a majority of employees of the Corporation and certain of its subsidiary companies and is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended (ERISA). Employees become participants in the Plan on their employment date and as soon as they elect to make contributions to the Plan. Effective as of January 1, 2008, the Plan was amended and operates, in relevant part, as a leveraged employee stock ownership plan (ESOP), and is designed to comply with Section 4975(e)(7) and the regulations thereunder of the Internal Revenue Code of 1986, as amended (Code) and is subject to the applicable provisions of ERISA.
In 2015, the Plan purchased ESSOP shares using the proceeds from a loan from the Corporation. Additionally, in 2018 and 2020, the Plan purchased ESSOP Shares using the proceeds of loans from the Corporation and participating subsidiary companies (see summary of all loans at Note 4). The shares are held in a trust established under the Plan. The borrowing and interest costs are to be repaid over the term of the loans through use of fully deductible Corporation contributions to the Plan, dividends from unallocated Corporation stock, and any earnings the net funds may earn.
On an annual basis, the Plan makes a calculation of the number of shares to be allocated (released) to the account of eligible participants. The calculation of allocated shares is made in accordance with applicable regulations under the Code and the Plan document. Shares allocated to participants will vest in accordance with the stated vesting provisions in the Plan document (see Note 1E).
The financial statements of the Plan as herein included, present separately the assets and liabilities and changes therein pertaining to the stock not yet allocated to participants under the columns titled “Unallocated Account”. Shares allocated are included in the financial statements herein under the columns titled “Non-participant Directed Account” and are entitled to diversification as afforded within the Plan document.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed by Congress. The CARES Act provides immediate and temporary relief for retirement plan sponsors and their participants with respect to employer contributions, distributions and participant loans. These required provisions were adopted by the Plan during 2020.
C. Contributions
Deferral elected contributions from employees are made on a pretax basis up to a limit of $19,500 in 2021. Participants may elect to make additional contributions, on a post-tax basis, up to a maximum of 100% of eligible compensation, as defined in the Plan, not to exceed the limits set by Section 415 of the Code. All contributions are recorded in the period in which the Companies make payroll deductions from Plan participants. Any employee who does not contribute to the Plan does not receive a Company matching contribution. Only employee contributions up to 6% are matched. However, the maximum amount of contribution which can be matched per employee cannot exceed $9,000 (6% of $150,000) per Plan year. Contributions are also subject to other Code limitations (including the limits imposed by Code Section 415).
5
OLD REPUBLIC INTERNATIONAL CORPORATION
EMPLOYEES SAVINGS AND STOCK OWNERSHIP PLAN
NOTES TO FINANCIAL STATEMENTS
_________________
Employees may also roll over into the Plan qualified distributions from their previous employer(s)’ qualified plan(s). In addition, employees who are 50 years of age at any time during the Plan year may make additional, pretax, catch-up contributions up to $6,500 in 2021. Rollovers and catch-up contributions are not eligible for company matching.
Participants direct the investment of their contributions into mutual funds offered by the Plan. In addition, participants may also direct their contributions to buy Old Republic common stock. Participants may change the investment allocation of their contributions and earnings up to 12 times per year.
A Plan participant is eligible to receive an allocation of ESSOP shares if the following criteria are met:
•the participant completes 1,000 or more hours of service during the year and
•the participant is employed by one of the Companies on December 31 of that year, died or became fully disabled during the year, or retired during the year after attaining age 65.
The Company contributions, when aggregated with the Plan’s dividends and other earnings on the unallocated ESSOP shares, are used to fund the Plan’s debt service. The debt service funding triggers the release of shares to be allocated to participants’ accounts in accordance with regulations under ERISA, the Code and the Plan Document.
The Company matching contribution is based on the following formula:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| If the percentage increase in the Corporation's average |
| operating earnings per share for the most recent five year period is |
| Less Than | | 6.00% | | 9.01% | | 15.01% | | Over |
| 6% | | to 9% | | to 15% | | to 20% | | 20% |
| Percentage of Recognized | The Resulting Employer Matching Contribution |
Compensation Contributed | on the First 6% of Employee Savings Will Be: |
| 1.00% | 30% | | 40% | | 65% | | 100% | | 140% |
| 1.01 to 2.00% | 28% | | 38% | | 63% | | 98% | | 138% |
| 2.01 to 3.00% | 26% | | 36% | | 61% | | 96% | | 136% |
| 3.01 to 4.00% | 24% | | 34% | | 59% | | 94% | | 134% |
| 4.01 to 5.00% | 22% | | 32% | | 57% | | 92% | | 132% |
| 5.01 to 6.00% | 20% | | 30% | | 55% | | 90% | | 130% |
| 6.01 to 15.00% | None | | None | | None | | None | | None |
The percentage increase in the Corporation's average operating earnings per share is obtained by comparing the average diluted operating earnings per share for the Corporation for the five years ending with the calculation year to the same average for the five years ending the year prior to the calculation year. Operating earnings per share are equal to net income per share exclusive of realized and unrealized capital gains or losses and extraordinary items and income taxes applicable thereto.
Additional amounts from consolidated annual net profits after taxes or accumulated earnings as the Board of Directors of the Companies may determine from time to time may be added to the contributions resulting from the above formula. The amounts of the Companies’ contributions are subject to the following limitations:
•No contribution shall be made by any Employer for any fiscal year which exceeds the maximum amount currently deductible by that Employer under section 404 of the Code.
•No contribution shall be made by any Employer for any fiscal year which would cause its total contribution to exceed the amount of its annual net profit before taxes and its accumulated earnings.
For plan years 2021 and 2020, the Corporation’s Board of Directors declared contributions of $16,891,922 and $26,927,483 respectively.
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OLD REPUBLIC INTERNATIONAL CORPORATION
EMPLOYEES SAVINGS AND STOCK OWNERSHIP PLAN
NOTES TO FINANCIAL STATEMENTS
_________________
D. Employee Account
When a Plan participant makes employee contributions, the contributions are allocated to the mutual fund(s) or Old Republic common stock fund as designated by the participant. These funds constitute the participant’s Employee Account which, for financial statement purposes, is included under the column entitled “Participant Directed Account.” Earnings or losses inure to each Plan participant's Employee Account on a daily basis, based upon the performance of the mutual fund(s) and Old Republic common stock fund that the Plan participant selected. Participants are fully vested in their contribution funds and earnings/losses thereon. The benefit to which a participant is entitled is the benefit that can be provided from the participant’s vested account.
For contributions made to the Plan prior to 2005, participants may make in-service withdrawals from their Employee Account no more than twice during a plan year. The minimum amount of such in-service withdrawal shall be the lower of $500 or the balance of the participant’s Employee Account as of the last day of the prior plan year. For contributions made to the Plan after 2004, participants may make in-service withdrawals, including contributions made during the year of the in-service withdrawal, only if they meet the hardship provisions outlined in the Internal Revenue Service Regulations. Effective January 1, 2014, participants may only withdraw Employee after-tax contributions that were not made during the current year and may not withdraw after-tax contributions allocated on or after January 1, 2014, nor any earnings thereon.
E. Company Account
Each year, the released shares triggered by the debt service funding and the earnings/losses thereon are allocated to the participant’s Company Account which, for financial statement purposes, is included under the column entitled “Non-Participant Directed Account.” If a Plan participant terminates service with the Companies, the amount that he/she receives from his/her Company Account depends upon his/her vested interest in such account. A Plan participant vests in his/her Company Account based on his/her "Years of Service," over a six year period, with 20% vesting after two years of service plus an additional 20% per additional vesting year.
A Plan participant earns a Year of Service for each calendar year during which he/she completes 1,000 or more hours of service for the Companies. However, a Plan participant will become 100% vested in his/her Company Account prior to six years of service if:
•the Plan participant has reached age 65, or
•termination is caused by death, or
•termination is caused by total and permanent disability which renders the employee incapable of performing satisfactory service for the Companies.
Upon meeting any of the above, the participant may elect to receive his/her benefits in the form of cash or Old Republic International Corporation common shares (Company Stock). If a participant elects a cash distribution of both his/her Company Account and Employee Account, he/she may elect to be paid:
•in one lump sum, or
•in a direct rollover to an eligible retirement plan specified by the participant, or
•in substantially equal annual or more frequent installments paid over a reasonable period of time not to exceed the life expectancy of the participant or the joint life expectancy of the participant and his/her spouse or designated beneficiary.
The amount a Plan participant receives from his/her Company Account is also affected by forfeitures and earnings/losses. If a Plan participant terminates service prior to full vesting, the non-vested portion of his/her Company Account is forfeited. Forfeited matching amounts are re-allocated to remaining participants who made employee contributions, completed 1,000 or more hours of service for the Company during the year, and are employed by the Company on December 31 or terminated service due to retirement on or after age 65, death, or total and permanent disability. Forfeited amounts from other employer discretionary contributions not included in
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OLD REPUBLIC INTERNATIONAL CORPORATION
EMPLOYEES SAVINGS AND STOCK OWNERSHIP PLAN
NOTES TO FINANCIAL STATEMENTS
_________________
matching contributions are reallocated to all remaining eligible Plan participants who are employed by the Companies on the last day of the year. Forfeitures are allocated based upon the ratio of the Plan participant's eligible compensation to the eligible compensation of all eligible Plan participants (eligible compensation is limited to a maximum of $150,000). Forfeitures allocated in 2021 and 2020 were $685,713 and $586,062, respectively.
Each participant’s account is credited with an allocation of ESSOP shares released by the Trustee from the unallocated account and forfeitures of terminated participants’ non-vested accounts. Only those participants, who are eligible participants as described above, will receive an allocation in accordance with the Plan document.
Participants are able to divest Company Stock acquired with employer matching and profit sharing contributions after completing three years of service. The investment options available for diversification are the same mutual funds available for investment of Employee contributions. Previously diversified funds may be re-diversified into Old Republic common stock. For financial statement purposes, diversified funds are transferred from the Non-Participant Directed Account to the Participant Directed Account, but are still considered part of the Company Account.
F. Unallocated Account
The unallocated account represents all assets and liabilities of the Plan relating to the leveraging of the Plan and not yet allocated to participants.
G. Common Shares Released to Participants
The Common Shares Released to Participants represents the fair value of the ESSOP shares allocated to participants’ accounts during the year. It represents the number of shares calculated in accordance with applicable regulations under the Code. It takes into account the debt service provided by the Company contributions, and dividends received on the unallocated ESSOP shares during the year. The release fraction applied to the number of unreleased shares is the principal paid that coincides with the timing of the Company contributions, and the interest paid during the plan year (numerator) divided by the numerator plus an estimate of the remaining future principal and interest (assuming most recent interest rate at December 31) to be paid.
During 2021 and 2020, 709,323 and 554,591 ESSOP shares, respectively, were released and 6,033,488 and 6,742,811 ESSOP shares respectively, remained unallocated as of December 31, 2021 and 2020. It should be noted that there is no connection as to the number of shares being allocated and the market value of the Corporation’s common shares at any given time. Hence, the market value of the stock on the actual day of allocation (release) to participants’ accounts may vary from the fair value at December 31, 2021 and 2020, as presented in the financial statements.
H. Voting Rights
Each participant is entitled to exercise voting rights attributable to the shares allocated to his or her account and is notified by the Trustee prior to the time that such voting rights are to be exercised. The Trustee is not permitted to vote any allocated share for which instructions have not been given by a participant. The Trustee is required, however, to vote any unallocated shares on behalf of the collective best interest of Plan participants and beneficiaries.
2.Summary of Accounting Policies
A. Basis of Accounting
The Plan’s financial statements are prepared on an accrual basis of accounting in accordance with accounting principles generally accepted in the United States (“GAAP”). Necessary reclassifications are made in prior periods’ financial statements whenever appropriate to conform to the most current presentation.
8
OLD REPUBLIC INTERNATIONAL CORPORATION
EMPLOYEES SAVINGS AND STOCK OWNERSHIP PLAN
NOTES TO FINANCIAL STATEMENTS
_________________
B. Use of Estimates
The preparation of financial statements in conformity with GAAP requires the Plan’s administrator to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of additions and deductions during the reporting period. Actual results can differ from those estimates.
C. Risks and Uncertainties
Besides the investment of matching contributions into common stock of the Corporation, the Plan provides participants with various investment alternatives for their savings contributions and or diversifications. These investment alternatives are made up of various mutual funds which can be equity based, fixed income based or a combination thereof. In addition, participants may also direct their contributions to buy Old Republic common stock.
All of the above investment alternatives are exposed to various market risks including the level of interest rates, economic conditions and individual credit profiles. Due to these risks and the uncertainty related to changes in the market value of underlying investment securities, it is possible that participants’ account balances and the amounts reported in the statements of net assets available for benefits and the statements of changes in net assets available for benefits could be materially affected.
In addition, it is possible that the Plan could be adversely affected in subsequent periods by future economic disruptions caused by the COVID-19 pandemic and the associated governmental responses.
D. Investment Valuation and Income Recognition
The Plan’s investments are reported at fair value. Shares of mutual funds are valued at the net asset value of shares held by the Plan at the valuation date. Old Republic International Corporation common shares are traded on a national securities exchange and are valued at the last reported sales price on the last business day of the year. Short-term investments are valued at cost plus accrued interest which approximates fair value.
The statements of changes in net assets available for benefits reflect the net appreciation (depreciation) in fair value of the Plan’s investments, which consists of realized gains or losses and the unrealized appreciation (depreciation) on those investments. Interest income is recorded as earned and dividend income is recorded as earned on the ex-dividend date. Purchases and sales are recorded on a trade-date basis.
E. Termination and Withdrawal Benefit Payments
Termination and withdrawal benefit payments are recorded upon distribution payment.
F. Plan Expenses
Plan expenses including fees for trustee, legal, accounting, auditing, investment, custodial and other services are paid by the Plan and included in administrative expenses. Certain other expenses are paid or provided by the Plan Sponsor. Investment management fees paid by the Plan are included in the net fund investment appreciation (depreciation) for the year.
3. Investments
Fair Value Measurements
The Plan investments are reported at fair value in the accompanying statements of net assets available for plan benefits. Fair value is defined as the estimated price that is likely to be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (an exit price) at the measurement date. A fair value hierarchy is established that prioritizes the sources (“inputs”) used to measure fair value into three broad levels: Level 1 inputs are based on quoted market prices in active markets; Level 2 observable inputs are based on cor-
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OLD REPUBLIC INTERNATIONAL CORPORATION
EMPLOYEES SAVINGS AND STOCK OWNERSHIP PLAN
NOTES TO FINANCIAL STATEMENTS
_________________
roboration with available market data; and Level 3 unobservable inputs are based on uncorroborated market data or a reporting entity’s own assumptions.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
The valuation methodologies used for assets measured at fair value are discussed further in Note 2(D). There have been no changes in the methodologies used at December 31, 2021 from prior years.
All Plan investments are classified within Level 1 of the fair value hierarchy at December 31, 2021 and 2020.
4.Notes Payable
In December 2015, the Plan entered into a term loan agreement with the Corporation for aggregate borrowings of $34,038,664 with principle payments due in 2019 through 2023. The proceeds of the loan were used to purchase 2,200,000 shares of the Corporation’s common stock. The loan bears interest at the less of (a) 4.0% per year, or (b) the variable interest rate indexed to the one month London Interbank Offered Rate (LIBOR) plus 175 basis points calculated monthly. The interest rate was 1.84% and 1.90% at December 31, 2021 and 2020, respectively.
In May 2018, the Plan entered into 10 year term loan agreements with the Corporation and participating subsidiary companies for aggregate borrowings of $50,000,000 ($750,000 from the Corporation and $49,250,000 from the participating subsidiary companies). The proceeds of the loans were used to purchase 2,383,625 shares of the Corporation’s common stock. The loans bear a 5.00% interest rate.
In March 2020, the Plan entered into 10 year term loan agreements with the Corporation and participating subsidiary companies for aggregate borrowings of $50,000,000 ($750,000 from the Corporation and $49,250,000 from the participating subsidiary companies). The proceeds of the loans were used to purchase 3,337,000 shares of the Corporation’s common stock. The loans bear a 3.00% interest rate.
Interest on the loans is payable quarterly with any remaining accrued interest due and payable on maturity of the loan. Principal on the loans is payable in accordance with the following maturity schedule.
At December 31, 2021 and 2020, loans due to the Corporation and participating subsidiary companies aggregated $98,434,664 and $119,038,664, respectively.
Maturities of the Plan’s ESSOP loans are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 2015 Term | | | | | | | | |
| | | | Loan | | 2018 Term Loans | | 2020 Term Loans |
| | | | | | | | Participating | | | | Participating |
| | | | | | | | Subsidiary | | | | Subsidiary |
| | Total | | Corporation | | Corporation | | Companies | | Corporation | | Companies |
| | | | | | | | | | | | |
| 2022 | | $ | 10,250,000 | | $ | 6,800,000 | | $ | 18,000 | | $ | 1,182,000 | | $ | 33,750 | | $ | 2,216,250 |
| 2023 | | 10,738,664 | | 6,838,664 | | 21,000 | | 1,379,000 | | 37,500 | | 2,462,500 |
| 2024 | | 11,350,000 | | — | | 129,000 | | 8,471,000 | | 41,250 | | 2,708,750 |
| 2025 | | 11,800,000 | | — | | 132,000 | | 8,668,000 | | 45,000 | | 2,955,000 |
| 2026 | | 12,250,000 | | — | | 135,000 | | 8,865,000 | | 48,750 | | 3,201,250 |
| 2027 | | 12,700,000 | | — | | 138,000 | | 9,062,000 | | 52,500 | | 3,447,500 |
| 2028 | | 9,568,000 | | — | | 88,000 | | 5,730,000 | | 56,250 | | 3,693,750 |
| 2029 | | 13,500,000 | | — | | — | | — | | 202,500 | | 13,297,500 |
| 2030 | | 6,278,000 | | — | | — | | — | | 93,500 | | 6,184,500 |
| Total | | $ | 98,434,664 | | $ | 13,638,664 | | $ | 661,000 | | $ | 43,357,000 | | $ | 611,000 | | $ | 40,167,000 |
10
OLD REPUBLIC INTERNATIONAL CORPORATION
EMPLOYEES SAVINGS AND STOCK OWNERSHIP PLAN
NOTES TO FINANCIAL STATEMENTS
_________________
The fair value of the Plan’s notes payable are equal to their carrying value. The estimated fair value is based on an internally generated interest yield market matrix table, which incorporates maturity, coupon rate, credit quality, structure and current market conditions. All notes payable are classified within Level 3 of the fair value hierarchy as described in Note 3.
5.Related Parties and Parties in Interest
Old Republic International Corporation and participating subsidiaries are parties in interest. The Plan’s Non-Participant Directed Account (Company Account) and Unallocated Account are made up of the Corporation’s common stock as noted in Note 3. Also, office personnel, space and equipment are furnished by the Companies at no charge to the Plan.
Fidelity Investments Institutional Services Company, Inc. (Fidelity Investments), a subsidiary of FMR Corporation, is the Plan’s custodian, record keeper and provider of educational information to Plan participants. Certain mutual funds are managed by subsidiaries of FMR Corporation, which makes FMR Corporation a party in interest. Fees paid by the Plan to Fidelity Investments for custodianship, transaction and maintenance were $5,325 and $9,203 during 2021 and 2020, respectively.
6.Termination Priorities
Although it has no plans to do so, the Corporation reserves the right, either with or without formal action, to terminate the Plan. Each Employer reserves the right to permanently discontinue its contributions to the Plan. In the event that an Employer permanently discontinues its contributions to the Plan, or the Corporation terminates the Plan, or the Plan is partially terminated under operation of law, the accounts of the affected participants shall be fully vested and non-forfeitable. Upon termination of the Plan, the Plan shall direct the trustee to pay all liabilities and expenses of the Trust Fund and sell shares of financed ESSOP shares held in the loan suspense account to the extent it determines such sale to be necessary in order to repay the loans.
7.Tax Status
The Internal Revenue Service (IRS) issued a favorable determination letter, dated November 17, 2017, stating that the Plan is designed in accordance with applicable sections of the Internal Revenue Code (IRC). The Plan's Sponsor believes that the Plan is designed and is currently being operated in compliance with the applicable requirements of the IRC, therefore, no provision for income taxes has been included in the Plan’s financial statements.
Plan management has evaluated the effects of accounting guidance related to uncertain income tax positions and concluded that the Plan had no significant financial statement exposure to uncertain income tax positions at December 31, 2021 and 2020. The Plan is not currently under audit by any tax jurisdiction.
8.Anti-Discrimination Refunds
Due to limits imposed by Internal Revenue Code Section 415 and ERISA, tests are performed annually to determine that the Plan has not discriminated between highly compensated employees and non-highly compensated employees. In most years, initial tests indicate that there is an excess differential between contributions by highly compensated employees and non-highly compensated employees. To bring the Plan into compliance, a determination is made as to how many contributions need to be returned to highly compensated employees so the Plan can meet the “Actual Contribution Percentage Test for Non-excludable Employees.” This amount represents the anti-discrimination refunds payable at any given year-end.
9.Subsequent Events
Subsequent events have been evaluated through the date the financial statements were issued. Effective January 1, 2022, the Plan was amended to provide for automatic enrollment contributions, designated Roth contributions, and in-service withdrawals once a participant reaches age 59.5.
11
SUPPLEMENTAL SCHEDULE
12