e424b3
Filed Pursuant to Rule 424(b)(3)
Registration
No. 333-168130
Dear Fellow Shareholder:
You are cordially invited to attend a special meeting of the
shareholders of PMA Capital Corporation (PMA) to be
held on Tuesday, September 21, 2010, at 10:00 a.m.,
local time, at Philadelphia Marriott West, 111 Crawford Avenue,
West Conshohocken, Pennsylvania.
At the special meeting, you will be asked to approve the
Agreement and Plan of Merger, dated as of June 9, 2010 (the
merger agreement), by and among Old Republic
International Corporation (Old Republic), OR New
Corp., a wholly owned subsidiary of Old Republic (Merger
Sub), and PMA, pursuant to which Merger Sub will be merged
with and into PMA and PMA will continue as the surviving entity
and as a wholly owned subsidiary of Old Republic.
In the merger, each of your shares of PMA class A common
stock will be converted into the right to receive
0.55 shares of Old Republic common stock (the
exchange ratio), provided that the volume weighted
average price per share of Old Republic common stock on the
NYSE, as reported by Bloomberg LP, for the twenty consecutive
trading days ending on and including the fifth trading day prior
to, but not including, the effective date of the merger, is at
least $12.50 but not greater than $17.00 (the Old Republic
measurement price). If the Old Republic measurement price
is less than $12.50, the exchange ratio will be determined by
dividing $6.875 by the Old Republic measurement price, subject
to a maximum exchange ratio of 0.60 shares. If the Old
Republic measurement price is greater than $17.00, the exchange
ratio will be determined by dividing $9.350 by the Old Republic
measurement price, subject to a minimum exchange ratio of
0.50 shares.
This proxy statement/prospectus provides a detailed description
of the merger agreement and the proposed merger. In addition, it
contains important information regarding the special meeting.
We urge you to read this proxy statement/prospectus (and any
documents incorporated into this proxy statement/prospectus by
reference) carefully. Please pay particular attention to the
section titled Risk Factors beginning on
page 11.
The Board of Directors of PMA recommends that you vote
FOR the proposal to adopt the merger agreement.
The merger cannot be completed unless it is adopted by the
affirmative vote of a majority of the votes cast by all
shareholders entitled to vote on the merger, assuming a quorum
is present.
Your vote is very important. If you are a registered
shareholder, please vote your shares as soon as possible using
one of the following methods to ensure that your vote is
counted, regardless of whether you expect to attend the special
meeting in person: (1) call the toll-free number specified
on the enclosed proxy card and follow the instructions when
prompted, (2) access the Internet website specified on the
enclosed proxy card and follow the instructions provided to you,
or (3) complete, sign, date and return the enclosed proxy
card in the postage-paid envelope provided. If you hold your
shares in street name through a bank, broker or
other nominee, you will need to follow the instructions provided
to you by your bank, broker or other nominee to ensure that your
shares are represented and voted at the special meeting.
If you have any questions about the proposed merger or about how
to vote your shares, please call MacKenzie Partners, Inc., the
firm assisting PMA in its solicitation of proxies, toll-free at
(800)322-2885, or call PMA Investor Relations at
(610) 397-5298.
We look forward to the successful completion of the merger.
Sincerely,
Neal C. Schneider
Chairman of the Board
PMA Capital Corporation
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of the
securities to be issued under this proxy statement/prospectus or
determined if this proxy statement/prospectus is accurate or
complete. Any representation to the contrary is a criminal
offense.
This proxy statement/prospectus is dated August 4, 2010,
and is first being mailed to the shareholders of PMA on or about
August 6, 2010.
ADDITIONAL
INFORMATION
This proxy statement/prospectus incorporates important business
and financial information about PMA from other documents that
are not included in or delivered with this proxy
statement/prospectus. In addition, this proxy
statement/prospectus refers to certain additional information
about Old Republic that is not included in or delivered with
this proxy statement/prospectus. This information is available
for you to review at the public reference room of the Securities
and Exchange Commission (the SEC) located at
100 F Street, N.E., Washington, D.C. 20549, and
through the SECs website at www.sec.gov. You can also
obtain the documents incorporated by reference into and referred
to in this proxy statement/prospectus free of charge by
requesting them in writing or by telephone from the appropriate
company at the following addresses and telephone numbers:
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Old Republic
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PMA
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Old Republic International Corporation
307 North Michigan Avenue
Chicago, Illinois 60601
Attention: Investor Relations
Telephone:
(312) 346-8100
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PMA Capital Corporation
380 Sentry Parkway
Blue Bell, Pennsylvania 19422
Attention: Investor Relations
Telephone: (610) 397-5298
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If you would like to request any documents, please do so by
September 13, 2010 in order to receive them before the
special meeting.
For more information, please see the section titled Where
You Can Find More Information beginning on page 187.
ABOUT
THIS DOCUMENT
This document, which forms part of a registration statement on
Form S-4
filed with the SEC by Old Republic (File
No. 333-168130),
constitutes a prospectus of Old Republic under Section 5 of
the Securities Act of 1933, as amended (the Securities
Act), with respect to the shares of Old Republic common
stock to be issued to PMA shareholders under the merger
agreement. This document also constitutes a proxy statement
under Section 14(a) of the Securities Exchange Act of 1934,
as amended (the Exchange Act). It also constitutes a
notice of meeting with respect to the special meeting of PMA
shareholders, at which meeting PMA shareholders will be asked to
vote upon a proposal to adopt the merger agreement.
You should rely only on the information contained or
incorporated by reference into this proxy statement/prospectus.
No one has been authorized to provide you with information that
is different from that contained in, or incorporated by
reference into, this proxy statement/prospectus. This proxy
statement/prospectus is dated as of August 4, 2010. You
should not assume that the information contained in this proxy
statement/prospectus is accurate as of any date other than that
date. You should not assume that the information incorporated by
reference into this proxy statement/prospectus is accurate as of
any date other than the date of such incorporated document.
Neither our mailing of this proxy statement/prospectus to PMA
shareholders nor the issuance by Old Republic of its common
stock in connection with the merger will create any implication
to the contrary.
This proxy statement/prospectus does not constitute an offer
to sell or a solicitation of an offer to buy any securities, or
the solicitation of a proxy, in any jurisdiction to or from any
person to whom it is unlawful to make any such offer or
solicitation in such jurisdiction. Information contained in this
proxy statement/prospectus regarding PMA has been provided by
PMA and information contained in this proxy statement/prospectus
regarding Old Republic has been provided by Old Republic.
NOTICE OF
SPECIAL MEETING OF SHAREHOLDERS OF
PMA CAPITAL CORPORATION
A special meeting of shareholders of PMA Capital Corporation
(PMA) will be held on Tuesday, September 21,
2010, at 10:00 a.m., local time, at Philadelphia Marriott
West, 111 Crawford Avenue, West Conshohocken, Pennsylvania, for
the following purposes:
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to adopt the Agreement and Plan of Merger, dated as of
June 9, 2010, by and among Old Republic International
Corporation (Old Republic), OR New Corp., a wholly
owned subsidiary of Old Republic (Merger Sub), and
PMA, pursuant to which Merger Sub will be merged with and into
PMA and PMA will continue as the surviving entity, as further
described in the accompanying proxy
statement/prospectus; and
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to transact any other business that may properly be brought
before the special meeting, or any adjournments or postponements
thereof, including, without limitation, a motion to adjourn or
postpone the special meeting to another time
and/or place
for the purpose of soliciting additional proxies in favor of the
proposal to adopt the merger agreement, if necessary.
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The Board of Directors of PMA recommends that you vote
FOR the proposal to adopt the merger agreement.
Adoption of the merger agreement requires the affirmative vote
of a majority of the votes cast by all shareholders entitled to
vote on the merger, assuming a quorum is present.
Only shareholders of record at the close of business on
July 30, 2010 are entitled to notice of, and to vote at,
the special meeting and any adjournment or postponement thereof.
A complete list of shareholders entitled to vote at the special
meeting will be available and kept open at the time and place of
the special meeting and shall be subject to the inspection of
any shareholder during, and for purposes germane to, the special
meeting.
Only shareholders or their proxy holders may attend the special
meeting. If you hold shares in your name, please be prepared to
provide proper identification, such as a drivers license.
If you hold your shares in street name through a
bank, broker or other nominee, you will need to provide proof of
ownership, such as a recent account statement or letter from
your bank, broker or other nominee, along with proper
identification.
Your vote is very important. If you are a registered
shareholder, please vote your shares as soon as possible using
one of the following methods to ensure that your vote is
counted, regardless of whether you expect to attend the special
meeting in person: (1) call the toll-free number specified
on the enclosed proxy card and follow the instructions when
prompted, (2) access the Internet website specified on the
enclosed proxy card and follow the instructions provided to you,
or (3) complete, sign, date and return the enclosed proxy
card in the postage-paid envelope provided. If you hold your
shares in street name through a bank, broker or
other nominee, you will need to follow the instructions provided
to you by your bank, broker or other nominee to ensure that your
shares are represented and voted at the special meeting.
Your proxy may be revoked at any time before the vote at the
special meeting by following the procedures outlined in the
accompanying proxy statement/prospectus.
In connection with our solicitation of proxies for the special
meeting, we are mailing this proxy statement/prospectus and
proxy card on or about August 6, 2010.
By order of the Board of Directors of
PMA Capital Corporation
Neal C. Schneider
Chairman of the Board
August 4, 2010
Table of
Contents
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35
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47
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50
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58
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ii
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F-1
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Annexes
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A-1
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B-1
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iii
QUESTIONS
AND ANSWERS ABOUT THE MERGER AND THE SPECIAL MEETING
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When and where is the PMA special meeting? |
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The PMA special meeting will take place on Tuesday,
September 21, 2010 at 10:00 a.m. local time, at
Philadelphia Marriott West, 111 Crawford Avenue, West
Conshohocken, Pennsylvania. |
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Why am I receiving this document? |
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Old Republic has agreed to acquire PMA pursuant to the terms of
a merger agreement that is described in this proxy
statement/prospectus. A copy of the merger agreement is attached
to this proxy statement/prospectus as Annex A. |
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In order to complete the merger, PMA shareholders must vote to
adopt the merger agreement. PMA is holding a special meeting of
shareholders to obtain this shareholder approval. |
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This proxy statement/prospectus contains important information
about the merger and the special meeting of the shareholders of
PMA, and you should read it carefully. The enclosed voting
materials allow you to vote your shares without attending the
special meeting in person. |
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Your vote is extremely important. We encourage you to vote as
soon as possible. For more information on how to vote your
shares, please see the section titled PMA Special
Meeting beginning on page 183. |
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What shareholder vote is required to adopt the merger
agreement and approve the other items to be voted on at the PMA
special meeting? |
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Merger Agreement. Under Pennsylvania law,
which governs PMA, the merger agreement must be adopted by the
affirmative vote of a majority of the votes cast by all
shareholders entitled to vote on the merger, assuming a quorum
is present. Each share of PMA class A common stock is
entitled to one vote on the adoption of the merger agreement. |
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If these votes are not obtained, the merger will not be
completed. Your vote is very important. You are encouraged to
submit a proxy as soon as possible. |
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Adjournment of meeting. The affirmative vote
of a majority of the shares of PMA class A common stock
entitled to vote and present, in person or represented by proxy,
at the special meeting is required to adjourn or postpone the
special meeting for solicitation of additional proxies in the
event there are not sufficient votes present, in person or
represented by proxy, at the time of the special meeting to
adopt the merger agreement. |
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What will happen in the merger? |
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In the merger, OR New Corp. (Merger Sub), a wholly
owned subsidiary of Old Republic, will merge with and into PMA.
Following the merger, PMA will continue as the surviving entity
and as a wholly owned subsidiary of Old Republic. |
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What will PMA shareholders receive in the merger? How does
the collar work? |
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Upon the completion of the merger, each outstanding share of PMA
class A common stock, excluding any shares owned by PMA or
Old Republic or any subsidiary of PMA or Old Republic (other
than PMA class A common stock held in trust accounts and
the like for the benefit of a third party or in respect of an
outstanding debt), will be converted into the right to receive
0.55 shares of Old Republic common stock (the
exchange ratio), provided that the volume weighted
average price per share of Old Republic common stock on the
NYSE, as reported by Bloomberg LP, for the twenty consecutive
trading days ending on and including the fifth trading day prior
to, but not including, the effective date of the merger, is at
least $12.50 but not greater than $17.00 (the Old Republic
measurement price). The range from $12.50 to $17.00 is
referred to as the collar. |
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The exchange ratio will change if the Old Republic measurement
price is outside of the collar. If the Old Republic measurement
price is less than $12.50, the exchange ratio will be determined
by dividing $6.875 by the Old Republic measurement price,
subject to a maximum exchange ratio of 0.60 shares. If the
Old Republic measurement price is greater than $17.00, the
exchange ratio will be determined by dividing $9.350 by the Old |
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Republic measurement price, subject to a minimum exchange ratio
of 0.50 shares. See The Merger Agreement
Terms of the Merger below for additional information. |
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Are PMA shareholders able to exercise appraisal rights? |
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No. PMA shareholders are not entitled to appraisal rights
under the Pennsylvania Business Corporation Law
(PBCL) in connection with the merger. |
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When do the parties expect to complete the merger? |
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Old Republic and PMA are working to complete the merger as
quickly as practicable. We currently expect the merger to be
completed near the end of the third quarter of 2010. However,
neither Old Republic nor PMA can predict the effective time of
the merger because it is subject to conditions both within and
beyond each companys control. |
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How will the combined company be managed? |
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The current senior management team of Old Republic, including
Aldo C. Zucaro, who is currently serving as the chairman of the
board of directors and chief executive officer of Old Republic,
will continue in their respective positions and manage the
combined company. |
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What will be the composition of the board of directors of Old
Republic following the merger? |
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The Old Republic board will remain the same following the
merger, except that one of the independent directors of PMA will
join Old Republics board of directors as a
Class 2 director. |
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Why is my vote important? |
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If you do not submit a proxy or vote in person at the special
meeting, it will be more difficult for PMA to obtain the
necessary quorum to hold the meeting. If you hold your shares in
street name through a bank, broker or other nominee,
you will need to follow the instructions provided to you by your
bank, broker or other nominee to ensure that your shares are
represented and voted at the special meeting. |
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What constitutes a quorum for the meeting? |
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A majority of the outstanding shares of PMA class A common
stock having voting power being present, in person or
represented by proxy constitutes a quorum for the meeting. |
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Does PMAs board of directors recommend adoption of the
merger agreement and approval of the other matters to be voted
on at the PMA special meeting? |
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Yes. The PMA board of directors has determined that the terms of
the merger agreement and the transactions contemplated thereby
are advisable, fair to, and in the best interests of, PMA and
PMAs shareholders, and recommends that shareholders vote
FOR the proposal to adopt the merger agreement. In
addition, the PMA board of directors recommends that
shareholders vote FOR the approval of a proposal to
adjourn or postpone the special meeting for solicitation of
additional proxies in the event there are not sufficient votes
present, in person or represented by proxy, at the time of the
special meeting to adopt the merger agreement. |
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Please see The Merger PMAs Reasons for
the Merger and The Merger Old
Republics Reasons for the Merger below for
additional information. |
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What is the record date for the special meeting? |
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The record date for the PMA special meeting is July 30,
2010 (the PMA record date). Holders of PMA
class A common stock on the PMA record date are entitled to
notice of the PMA special meeting and to vote at the PMA special
meeting or any adjournment or postponement thereof. |
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Who can vote at the special meeting? |
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All PMA shareholders of record as of the close of business on
July 30, 2010, the record date for the special meeting, are
entitled to receive notice of and to vote at the special meeting. |
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What do I need to do now? |
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The parties urge you to read carefully this proxy
statement/prospectus, including its annexes and the documents
incorporated by reference herein. You also may want to review
the documents referenced under the section Where You Can
Find More Information below and consult with your
accounting, legal and tax advisors. |
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Once you have reviewed this information, please respond by
completing, signing and dating your proxy card and returning it
in the enclosed postage-paid envelope or, if available, by
submitting your proxy by telephone or through the Internet as
soon as possible so that your shares of PMA class A common
stock will be represented and voted at the special meeting, as
applicable. |
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Please refer to your proxy card or the information forwarded by
your broker or other nominee to see which voting options are
available to you. |
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The Internet and telephone proxy submission procedures are
designed to verify your stock holdings and to allow you to
confirm that your instructions have been properly recorded. |
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The method by which you submit a proxy will in no way limit your
right to vote at the special meeting if you later decide to
attend the meeting in person. If you hold your shares in
street name through a bank, broker or other nominee,
you will need to follow the instructions provided to you by your
bank, broker or other nominee to ensure that your shares are
represented and voted at the special meeting. |
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Who may attend the meeting? |
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PMA shareholders (or their authorized representatives) and
PMAs invited guests may attend the meeting. Verification
of stock ownership will be required at the meeting. If you own
your shares in your own name or hold them through a broker (and
can provide documentation showing ownership such as a letter
from your broker or a recent account statement) at the close of
business on the record date (July 30, 2010), you will be
permitted to attend the meeting. |
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How do I obtain directions to attend the special meeting in
person? |
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A: |
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You may contact PMA Investor Relations at
(610) 397-5298
to obtain directions to the special meeting. |
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What if I abstain from voting or do not vote? |
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Abstentions of shares of PMA class A common stock will be
counted as shares that are present and entitled to vote for
purposes of determining whether a quorum exists for a vote on
any particular proposal, but will not be counted as votes cast
in regard to a particular proposal. If a holder of shares of PMA
class A common stock fails to return its proxy card, such
shares will not be counted for purposes of such vote. |
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If my PMA class A common stock is held in a brokerage
account or in street name, will my broker vote my
shares for me? |
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If you are a PMA shareholder and if you do not provide your bank
or broker with instructions on how to vote your street name
shares, your bank or broker will not be permitted to vote them
unless your bank or broker already has discretionary authority
to vote such street name shares. Also, if your bank or broker
has indicated on the proxy that it does not have discretionary
authority to vote such street name shares, your bank or broker
will not be permitted to vote them. Either of these situations
results in a broker non-vote. |
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How are broker non-votes treated? |
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Broker non-votes will have no effect on the proposals to adopt
the merger agreement and approve the adjournment or postponement
of the PMA special meeting once a quorum for the meeting has
been established. Therefore, you should provide your bank or
broker with instructions on how to vote your shares, or arrange
to attend the PMA special meeting and vote your shares in person
to avoid a broker non-vote. |
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What should I do if I receive more than one set of voting
materials for the special meeting? |
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A: |
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You may receive more than one set of voting materials for the
special meeting, including multiple copies of this proxy
statement/prospectus and multiple proxy cards or voting
instruction cards. For example, if you hold your |
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shares of PMA class A common stock in more than one
brokerage account, you will receive a separate voting
instruction card for each brokerage account in which you hold
shares of PMA class A common stock. If you are a holder of
record and your shares of PMA class A common stock are
registered in more than one name, you will receive more than one
proxy card. Please complete, sign, date and return each proxy
card and voting instruction card that you receive. |
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What do I do if I want to change my vote or revoke my
proxy? |
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If you are a registered shareholder, you may change your vote at
any time before the vote takes place at the PMA special meeting.
To do so, you may either complete and submit a new proxy card
with a later date or send a written notice to the corporate
secretary of PMA stating that you would like to revoke your
proxy. In addition, you may elect to attend the PMA special
meeting and vote in person, as described above. However, if you
are not a registered shareholder, but instead hold your shares
of PMA class A common stock through a bank, broker or other
nominee, you may revoke your instructions only by informing the
bank, broker or nominee in accordance with any procedures
established by such nominee. |
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How will my shares be represented at the meeting? |
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At the meeting, the officers named in your proxy card will vote
your shares in the manner you requested if you correctly
submitted your proxy. If you sign your proxy card and return it
without indicating how you would like to vote your shares, your
proxy will be voted as the PMA board of directors recommends,
which is: |
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FOR the adoption of the merger
agreement; and
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FOR the approval of a proposal to
adjourn or postpone the special meeting for solicitation of
additional proxies in the event there are not sufficient votes
present, in person or represented by proxy, at the time of the
special meeting to adopt the merger agreement.
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What effect will the merger have on options to purchase PMA
class A common stock and other stock-based awards that have
been granted to employees and directors of PMA? |
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The terms of outstanding restricted share award agreements
between PMA and its non-employee directors provide that the
vesting of all unvested restricted shares will accelerate upon a
change in control transaction. The merger will constitute a
change in control transaction. |
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Restricted shares and options to purchase PMA class A
common stock will be converted into restricted shares and
options to purchase Old Republic common stock based on the
exchange ratio. Stock appreciation rights based on the value of
PMA class A common stock will be converted into stock
appreciation rights with respect to Old Republic common stock
based on the exchange ratio. The conversion price for the
options and the stock appreciation rights of Old Republic will
be established by dividing the current exercise price by the
exchange ratio. The converted stock options, stock appreciation
rights and restricted shares, other than restricted shares held
by non-employee directors, which will vest upon the closing of
the merger, will otherwise have the same terms and conditions as
were in effect before the merger was effective. |
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At the effective time of the merger, the performance goals
designated under each of PMAs 2009 and 2010 Officer Long
Term Incentive Plans will be deemed to have been met at 100% of
target and the performance goals designated under PMAs
2010 Officer Annual Incentive Compensation Plan will be deemed
to have been met at a payout factor of 100%. As such, the
payment of such awards will be based on the satisfaction by
participants of only the service-based and time-based vesting
requirements designated under such plans. Restricted share units
are outstanding under PMAs 2009 and 2010 Officer Long Term
Incentive Plans. At the effective time of the merger, each
outstanding restricted share unit awarded under a long-term
incentive plan will be automatically converted into a number of
restricted share units of Old Republic based on the exchange
ratio and the proportion of the performance period under the
applicable long term incentive plan that has passed at the time
of the closing of the merger. At the effective time of the
merger, PMAs 2008 Officer Long Term Incentive Plan will be
terminated. |
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See The Merger Agreement Treatment of PMA
Equity Compensation Awards and Performance-Based Compensation
Awards. |
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Should I send in my PMA stock certificates now? |
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No. If the merger is completed, written instructions will
be sent to shareholders of PMA with respect to the exchange of
their share certificates for the merger consideration described
in the merger agreement. |
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Do I have to take any action now to exchange my shares held
in book-entry form? |
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No. PMA shareholders who hold their shares in book-entry
form will receive instructions for the exchange of their shares
for the merger consideration following the completion of the
merger. |
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Are there risks associated with the merger, and what will
happen to PMA if the merger is not completed, that I should
consider in deciding how to vote? |
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Yes. There are a number of risks related to the merger and the
other transactions contemplated by the merger agreement that are
discussed in this proxy statement/prospectus and in other
documents incorporated by reference or referred to in this proxy
statement/prospectus. Please read with particular care the
detailed description of the risks described in Risk
Factors Risks Relating to the Pending Merger
below. Additional risks relating to Old Republics and
PMAs business are described under the heading Risk
Factors below and in the Old Republic SEC filings and the
PMA SEC filings referred to in Where You Can Find More
Information below. |
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If the merger is not completed, PMAs shareholders will not
receive the merger consideration and PMA will remain a stand
alone public company with its class A common stock traded
on the Nasdaq Stock Market. Under certain circumstances, PMA may
be required to reimburse Old Republic for its expenses or pay
Old Republic a fee in connection with the termination of the
merger agreement. |
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In addition, if the merger is not completed, PMAs ability
to reach a resolution with the Pennsylvania Insurance Department
with respect to the Departments examination of PMAs
insurance subsidiaries as of December 31, 2007 will be
adversely impacted. See The Merger PMAs
Reasons for the Merger Resolution of Pennsylvania
Insurance Department Examination. Based on recent
discussions with representatives of the Department, in order to
resolve the outstanding issues as a stand alone organization,
PMA will need to engage in administrative and legal review
processes which, irrespective of their ultimate outcome, will
likely hinder the long-term and
day-to-day
continuity of PMAs business operations and, in the
interim, potentially have a negative impact on the financial
ratings of its insurance subsidiaries. PMA cannot predict how
long the processes would take or whether it would ultimately be
successful. In the event that PMA is unsuccessful in its
administrative and legal appeals, PMA could be required to take
actions, such as increasing its loss and loss adjustment expense
reserves, that would materially and adversely affect its
business, financial condition and results of operations. |
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Will a proxy solicitor be used? |
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Yes. PMA has engaged MacKenzie Partners, Inc. to assist in the
solicitation of proxies for the special meeting and PMA expects
it will pay MacKenzie Partners, Inc. a fee of approximately
$10,000. PMA has also agreed to reimburse MacKenzie Partners,
Inc. for reasonable
out-of-pocket
expenses incurred in connection with the proxy solicitation and
to indemnify MacKenzie Partners, Inc. against certain losses,
costs and expenses. In addition, our officers and employees may
solicit proxies by telephone or in person, but no additional
compensation will be paid to them. |
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Who can I contact with any additional questions? |
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A: |
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If you have additional questions about the merger, you should
contact Old Republic or PMA at: |
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Old Republic International Corporation
307 North Michigan Avenue
Chicago, Illinois 60601
Attention: Investor Relations
Telephone:
(312) 346-8100
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PMA Capital Corporation
380 Sentry Parkway
Blue Bell, PA 19422
Attention: Investor Relations
Telephone: (610) 397-5298
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If you would like additional copies of this proxy
statement/prospectus, or if you need assistance voting your
shares, you should contact: |
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MacKenzie Partners, Inc.
105 Madison Avenue
New York, NY 10016
(800) 322-2885
(toll free) or
(212) 929-5500
(call collect)
PMA@mackenziepartners.com |
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Where can I find more information about the companies? |
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A: |
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You can find more information about Old Republic and PMA in the
documents described under the section entitled Where You
Can Find More Information below. |
ix
SUMMARY
This summary highlights selected information from this
statement and may not contain all the information that is
important to you. To fully understand the merger proposal and
for a more complete description of the legal terms of the
merger, you should read carefully this entire document,
including the annexes hereto and documents incorporated by
reference herein, and the other documents to which the parties
have referred you. For information on how to obtain the
documents that the parties have filed with the SEC, see the
section entitled Where You Can Find More Information
below.
Information
About the Companies
PMA Capital Corporation (PMA) is a holding company
whose operating subsidiaries provide insurance and related
fee-based services. PMAs insurance products include
workers compensation and other commercial property and
casualty lines of insurance. Fee-based services include third
party administrator (TPA), managing general agent
and program administrator services.
PMA is a Pennsylvania corporation. PMAs common stock
trades on the NASDAQ Stock
Market®
under the symbol PMACA. PMA has an A.M. Best
Company financial strength rating of A−
(Excellent), which is the 4th highest of 16 rating levels.
PMAs principal executive offices are located at 380 Sentry
Parkway, Blue Bell, Pennsylvania 19422, and its telephone number
is
(610) 397-5298.
Old Republic International Corporation (Old
Republic), a Delaware corporation, is a Chicago based
holding company engaged in the single business of insurance
underwriting. Old Republic conducts its operations through a
number of regulated insurance company subsidiaries organized
into three major segments, namely, its General (property and
liability insurance), Mortgage Guaranty, and
Title Insurance Groups.
The principal companies in Old Republics General Insurance
segment are rated either A+ (Superior) or A
(Excellent) by A.M. Best. Republic Mortgage Insurance
Company, Old Republics principal mortgage insurance
subsidiary, is rated BBB− by Fitch, Ba1 by Moodys
and BBB− by Standard & Poors.
Old Republics Title Insurance group is rated A or
higher by each of A.M. Best, Fitch, Moodys and
Standard & Poors. Old Republic common stock
trades on the NYSE under the symbol ORI. Old
Republics principal executive offices are located at 307
North Michigan Avenue, Chicago, Illinois 60601 and its telephone
number is
(312) 346-8100.
OR New Corp. (Merger Sub), a Pennsylvania
corporation, is a wholly owned subsidiary of Old Republic that
was formed solely for the purpose of effecting the merger.
Merger Sub has not conducted and will not conduct any business
prior to the merger. Merger Subs principal executive
offices are located at 307 North Michigan Avenue, Chicago,
Illinois 60601 and its telephone number is
(312) 346-8100.
Further details relating to Old Republic, Merger Sub and PMA are
described in Information About the Companies below.
The
Merger
Old Republic and PMA have entered into the merger agreement
pursuant to which Merger Sub will merge with and into PMA. As a
result of the merger, PMA will become a wholly owned subsidiary
of Old Republic and each share of PMA class A common stock
will be converted into 0.55 shares of Old Republic common
stock, subject to a collar.
Under the collar, if the volume weighted average price per share
of Old Republic common stock on the NYSE, as reported by
Bloomberg LP, for the twenty consecutive trading days ending on
and including the fifth trading day prior to, but not including,
the effective date of the merger (the Old Republic
measurement price), is less than $12.50, the exchange
ratio could be as high as 0.60 shares of Old Republic
common stock for each share of PMA class A common stock. If
the Old Republic measurement price is greater than $17.00, the
exchange ratio could be as low as 0.50 shares of Old
Republic common stock for each share of PMA class A common
stock. See The Merger Agreement Terms of the
Merger for a more complete description of the exchange
ratio and the collar.
1
The merger agreement is attached as Annex A to this proxy
statement/prospectus and is incorporated by reference. Old
Republic and PMA encourage you to read the merger agreement in
its entirety because it is the legal document that governs the
merger.
Treatment
of PMA Equity Compensation Awards and Performance-Based
Compensation Awards
PMA periodically has granted stock options, stock appreciation
rights, restricted shares and restricted share units to
employees and non-employee directors pursuant to PMAs 2002
Equity Incentive Plan, 2007 Omnibus Incentive Compensation Plan
and 2004 Director Stock Compensation Plan. As of the record
date for the PMA special meeting, there were approximately
856,871 shares of PMA class A common stock issuable
pursuant to outstanding stock options and 41,250 outstanding
restricted shares. As of the record date, there were 56,000
stock appreciation rights outstanding and 956,452 restricted
share units awarded under PMAs 2009 and 2010 Officer Long
Term Incentive Compensation Plans.
The terms of outstanding restricted share award agreements
between PMA and its non-employee directors provide that the
vesting of all unvested restricted shares will accelerate upon a
change in control transaction. The merger will constitute a
change in control transaction.
At the effective time of the merger, each outstanding stock
option and stock appreciation right that remains unexercised as
of the completion of the merger, whether or not vested or
unvested, will automatically be converted into an equivalent
stock option or stock appreciation right with respect to a
number of shares of Old Republic common stock based on the
exchange ratio. At the effective time of the merger, each
outstanding restricted share will automatically be converted
into an equivalent share of Old Republic common stock based on
the exchange ratio. The converted stock options, stock
appreciation rights and restricted shares, other than the
restricted shares held by non-employee directors, which will
vest upon the closing of the merger, will otherwise have the
same terms and conditions as were in effect before the merger
was effective.
At the effective time of the merger, the performance goals
designated under each of PMAs 2009 and 2010 Officer Long
Term Incentive Plans will be deemed to have been met at 100% of
target and the performance goals designated under PMAs
2010 Officer Annual Incentive Compensation Plan will be deemed
to have been met at a payout factor of 100%. As such, the
payment of such awards shall be based on the satisfaction by
participants of only the service-based and time-based vesting
requirements designated under such plans, if any. Restricted
share units are outstanding under PMAs 2009 and 2010
Officer Long Term Incentive Plans. At the effective time of the
merger, each outstanding restricted share unit awarded under a
long-term incentive plan will be automatically converted into a
number of restricted share units of Old Republic based on the
exchange ratio and the proportion of the performance period
under the applicable long term incentive plan that has passed at
the time of the closing of the merger. See The Merger
Agreement Treatment of PMA Equity Compensation
Awards and Performance-Based Compensation Awards.
At the effective time of the merger, PMAs 2008 Officer
Long Term Incentive Plan will be terminated.
PMAs
Reasons for the Merger
PMAs board of directors, at its meeting held on
June 9, 2010, considered the terms of the merger agreement
and the transactions contemplated thereby and determined them to
be advisable, fair to, and in the best interests of, PMA and
PMAs shareholders. PMA believes that a merger with Old
Republic, and the additional financial strength and stability it
can provide, will be of benefit to its shareholders, clients,
employees and other stakeholders. In evaluating the merger,
PMAs board of directors consulted with management, as well
as its legal and financial advisors, and considered a number of
factors, including the following:
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the challenges PMA would face continuing as an independent
company,
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the opportunity to resolve issues relating to the Pennsylvania
Insurance Departments examination of PMAs loss and
loss adjustment expense reserves through a merger with Old
Republic rather than engaging in administrative and legal review
processes which, irrespective of their ultimate outcome, would
likely hinder the long-term and
day-to-day
continuity of PMAs business operations and, in the
interim, potentially have a negative impact on its financial
ratings,
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the fact that the merger consideration represented a premium of
approximately 15% to the closing price of PMAs
class A common stock on June 8, 2010, the last trading
day prior to execution of the merger agreement,
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the opinion of BofA Merrill Lynch, dated June 9, 2010, to
PMAs board of directors to the effect that, as of the date
of the opinion and based on and subject to various assumptions
and limitations described in its opinion, the exchange ratio
provided for in the merger was fair, from a financial point of
view, to holders of PMA class A common stock (see the
section entitled The Merger Opinion of
PMAs Financial Advisor for a more complete
description),
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given the lengthy and thorough sale process undertaken by PMA
and its financial advisor, the probability of receiving an offer
better than the offer made by Old Republic was low,
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the benefits of the merger to PMAs shareholders, clients,
employees and other stakeholders compared to alternative
strategies where PMA continued to operate independently,
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the terms of the merger agreement,
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the decentralized nature of Old Republics operations,
which is expected to provide PMA with the ability to maintain
its operations in substantially the manner they existed prior to
the merger,
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based on the size of the transaction, the terms of the merger
agreement and discussions with the Pennsylvania Insurance
Department, PMA believes there is a high likelihood that the
transaction will be completed,
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Old Republic has higher financial strength ratings than PMA,
with Old Republics principal property and casualty
insurance subsidiaries having A.M. Best ratings of
A+ compared to PMAs A.M. Best rating of
A−, and
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that the merger is expected to qualify as a tax-free
reorganization within the meaning of
Section 368(a) of the Internal Revenue Code, which will
permit PMA shareholders to defer recognition of taxes associated
with their shares of PMA class A common stock (other than
cash paid in lieu of fractional shares) until they decide to
sell the shares of Old Republic common stock received in the
merger.
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For further details relating to PMAs reasons for approving
and recommending the merger, see The Merger
PMAs Reasons for the Merger, which is not intended
to be exhaustive.
Recommendations
of the PMA Board of Directors with Respect to the
Merger
On June 9, 2010, the PMA board of directors convened a
meeting to review and consider the proposed merger with Old
Republic. The entire board except for one director was present
at the meeting. At that meeting, PMAs board, by unanimous
vote of the directors present, determined that the terms of the
merger agreement and the transactions contemplated thereby are
advisable, fair to, and in the best interests of, PMA and
PMAs shareholders, and such directors unanimously approved
the merger agreement and the transactions contemplated by the
merger agreement. The PMA board of directors recommends that PMA
shareholders vote FOR the proposal to adopt the
merger agreement and FOR the approval of the
adjournment or postponement of the special meeting for the
solicitation of additional proxies if there are not sufficient
votes present, in person or represented by proxy, at the time of
the special meeting to adopt the merger agreement.
For further discussion of PMAs reasons for the merger and
the recommendation of the PMA board of directors, see The
Merger Background of the Merger, The
Merger PMAs Reasons for the Merger and
The Merger Recommendations of the PMA Board of
Directors with Respect to the Merger below.
Shareholders
Entitled to Vote; Vote Required
Shareholders who owned shares of PMA class A common stock
at the close of business on July 30, 2010, which is
referred to as the record date, are entitled to vote at the
special meeting. On the record date, there were
32,280,474 shares of PMA class A common stock
outstanding and entitled to vote at the special meeting, held by
approximately 134 holders of record. Shareholders may cast one
vote for each share of PMA class A common stock owned on
the record date.
3
Assuming a quorum is present, the affirmative vote of a majority
of the votes cast by all shareholders entitled to vote on the
merger is necessary for the adoption of the merger agreement.
The holders of a majority of the total number of outstanding
shares of PMA class A common stock entitled to vote as of
the record date, represented either in person or by proxy, will
constitute a quorum at the special meeting for the conduct of
business.
The affirmative vote of a majority of the shares of PMA
class A common stock entitled to vote and present, in
person or represented by proxy, at the special meeting is
required to adjourn or postpone the special meeting for
solicitation of additional proxies in the event there are not
sufficient shares present, in person or represented by proxy, at
the time of the special meeting to adopt the merger agreement.
An abstention occurs when a shareholder abstains from voting
(either in person or by proxy) on one or more of the proposals.
A broker non-vote occurs when a bank, broker or other nominee
returns a proxy but does not have authority to vote on a
particular proposal. Abstentions of shares of PMA class A
common stock will be counted as shares that are present and
entitled to vote for purposes of determining whether a quorum
exists for a vote on any particular proposal, but will not be
counted as votes cast in regard to a particular proposal. Broker
non-votes will have no effect on the proposals to adopt the
merger agreement and approve the adjournment or postponement of
the PMA special meeting once a quorum for the meeting has been
established. Therefore, you should provide your bank or broker
with instructions on how to vote your shares, or arrange to
attend the PMA special meeting and vote your shares in person to
avoid a broker non-vote. If you fail to return your proxy card,
your shares will not be counted for purposes of establishing a
quorum and will not be voted at the special meeting.
Your vote is very important. You are encouraged to vote as soon
as possible. If you do not indicate how your shares of PMA
class A common stock should be voted on a matter, the
shares of PMA class A common stock represented by your
properly completed proxy will be voted as the PMA board of
directors recommends and therefore FOR the adoption
of the merger agreement and FOR the approval of a
proposal to adjourn or postpone the special meeting for
solicitation of additional proxies in the event there are not
sufficient votes present, in person or represented by proxy, at
the time of the special meeting to adopt the merger agreement.
Opinion
of PMAs Financial Advisor
In connection with the merger, Merrill Lynch, Pierce,
Fenner & Smith Incorporated (BofA Merrill
Lynch), PMAs financial advisor, delivered to
PMAs board of directors a written opinion, dated
June 9, 2010, to the effect that, as of the date of the
opinion and based on and subject to various assumptions and
limitations described in its opinion, the exchange ratio
provided for in the merger was fair, from a financial point of
view, to holders of PMA class A common stock. The full text
of the written opinion, dated June 9, 2010, of BofA Merrill
Lynch, which describes, among other things, the assumptions
made, procedures followed, factors considered and limitations on
the review undertaken, is attached as Annex B to this
document and is incorporated by reference herein in its
entirety. BofA Merrill Lynch provided its opinion to
PMAs board of directors for the benefit and use of
PMAs board of directors in connection with and for
purposes of its evaluation of the exchange ratio from a
financial point of view. BofA Merrill Lynchs opinion does
not address any other aspect of the merger and does not
constitute a recommendation to any shareholder as to how to vote
or act in connection with the proposed merger.
Old
Republics Reasons for the Merger
It is the opinion of Old Republics management and board of
directors that the merger will enhance Old Republics
growth prospects. Old Republics management and board
believe that long-term growth can be achieved through the
greater geographic spread and certain industry specialization
offered by PMAs current business model. Furthermore, Old
Republic believes that it will acquire the continuing services
of a dedicated operating management and the well regarded
insurance services delivery of PMAs subsidiaries.
Interests
of PMA Officers and Directors in the Merger
In considering the recommendation of the PMA board of directors
with respect to the adoption of the merger agreement, PMA
shareholders should be aware that the merger agreement includes
a provision that one independent
4
member of the PMA board of directors be added to the Old
Republic board of directors following completion of the merger.
The other directors of PMA will resign effective upon closing of
the merger.
In addition, the terms of outstanding restricted stock award
agreements between PMA and its non-employee directors provide
that the vesting of all unvested restricted stock will
accelerate upon a change in control transaction. The merger will
constitute a change in control transaction.
Nine PMA officers are parties to employment and severance
agreements with PMA. The merger agreement provides as a
condition to the obligation of Old Republic to consummate the
merger that Vincent T. Donnelly, President and Chief Executive
Officer, shall have executed and delivered to PMA a voluntary
written termination of his employment agreement and PMA shall
have obtained a voluntary written termination from six of the
eight other officers that are parties to severance agreements
with PMA. The employment and severance agreements provide for
payments to the officers in the event their employment is
terminated following a change of control of PMA.
The nine officers of PMA referred to above, including the Chief
Executive Officer who is a member of PMAs board of
directors, have been advised by Old Republic that, following the
merger, they will be employed by Old Republic on terms
comparable to their employment with PMA.
PMAs board of directors was aware of these interests and
considered them, among other matters, in approving the merger
agreement and making its recommendation that the PMA
shareholders adopt the merger agreement. See The
Merger Interests of PMA Officers and Directors in
the Merger.
Material
U.S. Federal Income Tax Consequences
Old Republic and PMA each expect the merger to qualify as a
reorganization pursuant to Section 368(a) of
the Internal Revenue Code. Provided that the merger qualifies as
a reorganization under U.S. federal income tax
laws, PMA shareholders generally will not recognize any gain or
loss (except with respect to cash received in lieu of a
fractional share of Old Republic common stock) by reason of the
merger.
Please review carefully the information under the caption
Material U.S. Federal Income Tax Consequences of the
Merger for a description of the material U.S. federal
income tax consequences of the merger. PMA shareholders are
strongly urged to consult their own tax advisors as to the
specific tax consequences to them of the merger in light of
their particular circumstances, including the applicability and
effect of U.S. federal, state, local,
non-U.S. income
and other tax laws.
Accounting
Treatment
Old Republic will account for the merger under the purchase
method of accounting for business combinations. Old Republic
will be considered the acquirer of PMA for accounting purposes.
Further details relating to the accounting treatment of the
merger are described in The Merger Accounting
Treatment below.
Regulatory
Approvals Required for the Merger
PMA has three insurance company subsidiaries domiciled in the
Commonwealth of Pennsylvania. Insurance laws in Pennsylvania
require an acquiring person to obtain approval from the
Insurance Commissioner of Pennsylvania before acquiring control
of an insurance company domiciled in Pennsylvania. The Insurance
Commissioner of Pennsylvania approved the proposed merger on
August 3, 2010.
PMA has insurance subsidiaries domiciled in Bermuda and the
Cayman Islands. The laws of those jurisdictions require a notice
filing and, in the case of Bermuda, the approval of the Bermuda
Monetary Authority, before any change in the control of PMA can
occur. Old Republic has provided notice of the proposed merger
to the Bermuda Monetary Authority and the Cayman Island Monetary
Authority. The Bermuda Monetary Authority granted its approval
on June 30, 2010.
The merger is subject to review by the Antitrust Division of the
U.S. Department of Justice (the Antitrust
Division) and the Federal Trade Commission (the
FTC) under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the rules
and regulations promulgated thereunder (the HSR
Act). Old Republic and
5
PMA have filed the requisite Pre-Merger Notification and Report
Forms under the HSR Act with the Antitrust Division and the FTC
and have been notified that the waiting period has been
terminated.
For further discussion of regulatory matters relating to the
merger, see the section entitled The Merger
Regulatory Approvals Required for the Merger below.
No
Appraisal Rights in the Merger
Holders of PMAs class A common stock are not entitled
to dissenters rights of appraisal under Pennsylvania law
in connection with the merger. See The Merger
No Appraisal Rights.
Conditions
to Completion of the Merger
The parties expect to complete the merger after all of the
conditions to the merger in the merger agreement are satisfied
or waived, including after PMA receives shareholder approval of
the adoption of the merger agreement at its special meeting and
the parties receive all required regulatory approvals. The
parties currently expect to complete the merger near the end of
the third quarter of 2010. It is possible, however, that factors
outside of each partys control could require them to
complete the merger at a later time or not to complete it at all.
A number of conditions must be satisfied or waived, where
legally permissible, before the proposed merger can be
consummated. These include, among others:
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adoption by PMA shareholders of the merger agreement;
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shares of Old Republic common stock issuable to the shareholders
of PMA pursuant to the merger will have been approved for
listing on the NYSE, subject to official notice of issuance;
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absence of any order, decree or injunction issued, and of any
action taken by any court or agency or other law preventing or
making illegal the consummation of the merger;
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receipt of all required regulatory approvals; and
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receipt of voluntary written terminations of employment or
severance agreements with the Chief Executive Officer of PMA and
six of the eight other PMA officers party to such agreements
effective prior to the merger.
|
Neither Old Republic nor PMA can give any assurance when or if
all of the conditions to the merger will be either satisfied or
waived or that the merger will occur. Neither Old Republic nor
PMA currently intends to waive any material condition to the
completion of the merger. For further discussion of the
conditions to the merger, see The Merger
Agreement Conditions to Completion of the
Merger below.
No
Solicitation of Other Offers by PMA
The merger agreement contains provisions prohibiting PMA and its
subsidiaries, directors, officers, employees, agents or
representatives from taking actions to solicit, discuss or
negotiate any competing transaction proposal, with certain
exceptions, including with respect to an unsolicited bona fide
written superior proposal, as described in The
Merger Agreement No Solicitation of Other Offers by
PMA below.
Termination
of the Merger Agreement
Old Republic and PMA may jointly agree to terminate the merger
agreement at any time, even after adoption by the PMA
shareholders of the merger agreement, In addition, either Old
Republic or PMA may terminate the merger agreement if:
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the merger shall not have been consummated on or before
December 31, 2010, unless the party seeking to terminate
the merger agreement failed to perform or observe the applicable
covenants and agreements under the merger agreement;
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6
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a required regulatory approval has been denied or any
governmental entity has taken action permanently enjoining or
otherwise prohibiting or making illegal the merger, including
with respect to antitrust matters, if HSR approval has not been
obtained within 120 days of the filing of the HSR
application (such 120 day period to be extended for another
120 days if HSR approval is a reasonable possibility);
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the other party has breached a representation, warranty,
covenant or agreement that would preclude the satisfaction of
certain conditions to the consummation of the merger and such
breach is not remedied within the applicable cure period;
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the PMA board of directors shall have (i) failed to
recommend the approval and adoption of the merger agreement to
the PMA shareholders, (ii) made any PMA change of
recommendation, (iii) approved or recommended, or publicly
proposed to approve or recommend, any alternative proposal or
(iv) failed to recommend to PMAs shareholders that
they reject any tender offer or exchange offer that constitutes
an alternative transaction within the ten business day period
specified in
Rule 14e-2(a)
of the Exchange Act; or
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the PMA shareholders have not adopted the merger agreement at
the PMA special meeting. See The Merger
Agreement Termination of the Merger Agreement.
|
Termination
Fees and Expenses
Each of Old Republic and PMA has agreed that, if the merger
agreement is terminated in certain circumstances described in
the merger agreement, PMA must pay Old Republic a termination
fee of $8 million. In addition, if the merger agreement is
terminated in certain circumstances, PMA shall pay Old Republic
for its documented
out-of-pocket
expenses in connection with the merger agreement, up to
$2 million. In certain circumstances, the termination fee
is subject to offset based on any Old Republic expenses
reimbursed by PMA. The maximum amount payable by PMA to Old
Republic in the event of termination of the merger agreement is
$8 million. See The Merger Agreement
Termination of the Merger Agreement and The Merger
Agreement Termination Fees and Expenses.
Purpose
of the PMA Special Meeting
Holders of PMA class A common stock will be asked to vote
on the following proposals:
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to adopt the merger agreement; and
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to approve the adjournment or postponement of the PMA special
meeting for the solicitation of additional proxies in the event
there are not sufficient votes present, in person or represented
by proxy, at the time of the special meeting to adopt the merger
agreement.
|
PMAs board of directors recommends that PMAs
shareholders vote FOR the proposals set forth in the
two bullets above.
Voting by
PMA Directors and Executive Officers
As of July 30, 2010, directors and executive officers of
PMA held and were entitled to vote 482,103 shares of PMA
class A common stock, or approximately 1.5% of the voting
power of the issued and outstanding shares of PMA class A
common stock. Please see the section of this proxy
statement/prospectus entitled PMA Special
Meeting Voting by PMA Directors and Executive
Officers for additional information. It is currently
expected that PMAs directors and executive officers will
vote their shares in favor of adopting the merger agreement,
although none of them have entered into any agreements
obligating them to do so.
Directors
and Executive Officers of Old Republic After the
Merger
The directors and executive officers of Old Republic prior to
the merger will continue as the directors and executive officers
of Old Republic after the merger, except that following the
merger one of the independent directors of PMA will join Old
Republics board of directors as a
Class 2 director.
7
Ownership
of Old Republic After the Merger
Old Republic will issue a maximum of approximately
19,884,057 shares of Old Republic common stock pursuant to
the merger based on the number of outstanding shares of PMA
class A common stock on July 30, 2010 and assuming
conversion of all of PMAs 4.25% Convertible Debt and
the exercise of all outstanding options to purchase shares of
PMA class A common stock (which options, if unexercised,
will be converted pursuant to the merger into options to acquire
shares of Old Republic common stock). In addition, a maximum of
approximately 573,871 shares of Old Republic common stock
will be issuable in connection with outstanding PMA restricted
share units that will be converted pursuant to the merger into
restricted share units of Old Republic (the As-Converted
Award Shares). After the effective time of the merger, PMA
shareholders will own approximately 7.8% of Old Republic on a
fully diluted basis based on the outstanding shares of Old
Republic common stock and PMA class A common stock on
July 30, 2010 and assuming the issuance of the maximum
number of As-Converted Award Shares. Consequently, PMA
shareholders will have significantly less influence over the
management and policies of Old Republic than they currently
exercise over the management and policies of PMA.
Rights of
PMA Shareholders
PMA shareholders receiving merger consideration will have
different rights once they become Old Republic shareholders, due
to differences between the governing documents of Old Republic
and PMA. These differences are described in detail under
Comparison of Rights of Old Republic Shareholders and PMA
Shareholders below.
Recent
Developments
Old
Republic Second Quarter 2010 Results
On July 22, 2010 Old Republic issued a news release
covering its earnings for this years second quarter and
first half. The highlights of the release are set forth below
and should be read in conjunction with all other information
pertaining to Old Republics historical financial
statements and Old Republic Managements Discussion and
Analysis of Financial Condition and Results of Operations
appearing in this proxy statement/prospectus.
Financial
Highlights
(unaudited;
amounts in millions except per share data and
percentages)
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Quarters Ended June 30,
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Six Months Ended June 30,
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2010
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2009
|
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|
Change
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2010
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2009
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Change
|
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Operating Revenues
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$
|
935.3
|
|
|
$
|
912.2
|
|
|
|
2.5
|
%
|
|
$
|
1,864.9
|
|
|
$
|
1,790.7
|
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|
4.1
|
%
|
Net Operating Income (Loss)
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|
10.0
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(49.6
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)
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120.3
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33.2
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(103.5
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)
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132.1
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|
Net Income (Loss)
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$
|
57.4
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|
$
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(15.8
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)
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|
461.4
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%
|
|
$
|
82.5
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|
|
$
|
(69.8
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)
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|
218.2
|
%
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Diluted Earnings Per Share:
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Net Operating Income (Loss)
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$
|
0.05
|
|
|
$
|
(0.21
|
)
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|
123.8
|
%
|
|
$
|
0.16
|
|
|
$
|
(0.44
|
)
|
|
|
136.4
|
%
|
Net Income (Loss)
|
|
$
|
0.23
|
|
|
$
|
(0.07
|
)
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|
|
428.6
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%
|
|
$
|
0.35
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|
|
$
|
(0.30
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)
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|
|
216.7
|
%
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|
|
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|
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Cash Dividends Per Share:
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$
|
0.1725
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|
$
|
0.1700
|
|
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|
1.5
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%
|
|
$
|
0.3450
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|
$
|
0.3400
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|
1.5
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%
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Ending Book Value Per Share:
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$
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16.84
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|
$
|
15.93
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|
|
5.7
|
%
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Old Republics second quarter and first half operating
results, which exclude net realized investment gains or losses,
reflected significant improvement when compared to the same
periods of 2009. As noted below, substantially all of the
improvement stemmed from more positive results in Old
Republics Mortgage Guaranty line. The latter benefited
from a combination of lower provisions for outstanding claims,
and from the positive effects of largely non-recurring captive
reinsurance commutations and terminations of insured mortgage
pools. Second quarter and first half 2010 General Insurance
pretax operating earnings were reduced by relatively higher
claim costs; earnings were consequently off by 5.8 percent
for this years first half. Old Republic Title Group
results
8
turned to the profit column in both 2010s and 2009s
second quarterly periods, but remained in moderately negative
territory for the first half of both years as claim and
operating expenses outpaced revenue growth.
Consolidated Results The major components of
Old Republics consolidated results and other data for the
periods reported upon are shown below:
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Quarters Ended June 30,
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Six Months Ended June 30,
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2010
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2009
|
|
|
Change
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2010
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2009
|
|
|
Change
|
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Operating revenues:
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General insurance
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$
|
468.3
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$
|
507.0
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(7.6
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)%
|
|
$
|
947.5
|
|
|
$
|
1,030.8
|
|
|
|
(8.1
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)%
|
Mortgage guaranty
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|
152.1
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|
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|
166.5
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(8.7
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)
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|
312.6
|
|
|
|
337.8
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|
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|
(7.5
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)
|
Title insurance
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|
293.5
|
|
|
|
219.0
|
|
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|
34.0
|
|
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|
555.6
|
|
|
|
379.3
|
|
|
|
46.5
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|
Corporate and other
|
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|
21.3
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|
|
|
19.5
|
|
|
|
9.1
|
|
|
|
49.1
|
|
|
|
42.7
|
|
|
|
14.9
|
|
|
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|
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Total
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$
|
935.3
|
|
|
$
|
912.2
|
|
|
|
2.5
|
%
|
|
$
|
1,864.9
|
|
|
$
|
1,790.7
|
|
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|
4.1
|
%
|
|
|
|
|
|
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|
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|
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|
|
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Pretax operating income (loss):
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General insurance
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|
$
|
29.3
|
|
|
$
|
46.4
|
|
|
|
(36.8
|
)%
|
|
$
|
98.6
|
|
|
$
|
104.6
|
|
|
|
(5.8
|
)%
|
Mortgage guaranty
|
|
|
(22.1
|
)
|
|
|
(137.9
|
)
|
|
|
83.9
|
|
|
|
(56.3
|
)
|
|
|
(282.5
|
)
|
|
|
80.1
|
|
Title insurance
|
|
|
4.0
|
|
|
|
5.6
|
|
|
|
(28.2
|
)
|
|
|
(4.6
|
)
|
|
|
(3.4
|
)
|
|
|
(34.5
|
)
|
Corporate and other
|
|
|
(3.2
|
)
|
|
|
(0.1
|
)
|
|
|
N/M
|
|
|
|
(1.4
|
)
|
|
|
2.4
|
|
|
|
(157.0
|
)
|
|
|
|
|
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|
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|
|
|
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|
|
|
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|
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|
|
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|
|
Sub-total
|
|
|
7.9
|
|
|
|
(86.0
|
)
|
|
|
109.2
|
|
|
|
36.2
|
|
|
|
(178.8
|
)
|
|
|
120.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains (losses):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From sales
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|
|
72.8
|
|
|
|
0.3
|
|
|
|
|
|
|
|
75.8
|
|
|
|
0.3
|
|
|
|
|
|
From impairments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses)
|
|
|
72.8
|
|
|
|
0.3
|
|
|
|
N/M
|
|
|
|
75.8
|
|
|
|
0.3
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated pretax income (loss)
|
|
|
80.8
|
|
|
|
(85.6
|
)
|
|
|
194.3
|
|
|
|
112.1
|
|
|
|
(178.4
|
)
|
|
|
162.8
|
|
Income taxes (credits)
|
|
|
23.3
|
|
|
|
(69.8
|
)
|
|
|
133.5
|
|
|
|
29.5
|
|
|
|
(108.6
|
)
|
|
|
127.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
57.4
|
|
|
$
|
(15.8
|
)
|
|
|
461.4
|
%
|
|
$
|
82.5
|
|
|
$
|
(69.8
|
)
|
|
|
218.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated underwriting ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and claim ratio
|
|
|
60.4
|
%
|
|
|
78.8
|
%
|
|
|
|
|
|
|
60.0
|
%
|
|
|
81.3
|
%
|
|
|
|
|
Expense ratio
|
|
|
48.8
|
|
|
|
42.3
|
|
|
|
|
|
|
|
48.1
|
|
|
|
41.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composite ratio
|
|
|
109.2
|
%
|
|
|
121.1
|
%
|
|
|
|
|
|
|
108.1
|
%
|
|
|
122.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income (loss)
|
|
$
|
0.05
|
|
|
$
|
(0.21
|
)
|
|
|
123.8
|
%
|
|
$
|
0.16
|
|
|
$
|
(0.44
|
)
|
|
|
136.4
|
%
|
Net realized investment gains (losses)
|
|
|
0.18
|
|
|
|
0.14
|
|
|
|
|
|
|
|
0.19
|
|
|
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.23
|
|
|
$
|
(0.07
|
)
|
|
|
428.6
|
%
|
|
$
|
0.35
|
|
|
$
|
(0.30
|
)
|
|
|
216.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid per share
|
|
$
|
0.1725
|
|
|
$
|
0.1700
|
|
|
|
1.5
|
%
|
|
$
|
0.3450
|
|
|
$
|
0.3400
|
|
|
|
1.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/M: Not meaningful
The recognition of realized investment gains or losses can be
highly discretionary and arbitrary due to such factors as the
timing of individual securities sales, recognition of estimated
losses from write-downs for impaired securities, tax-planning
considerations, and changes in investment management judgments
relative to the direction of securities markets or the future
prospects of individual investees or industry sectors. Likewise,
non-recurring items which may emerge from time to time can
distort the comparability of Old Republics results from
period to period. Accordingly, Old Republics management
uses net operating income, a non-GAAP financial measure, to
9
evaluate and better explain operating performance, and believes
its use enhances an understanding of Old Republics basic
business results. Operating income, however, does not replace
net income determined in accordance with GAAP as a measure of
total profitability.
The above table shows both operating and net income (loss) to
highlight the effects of realized investment gain or loss
recognition on
period-to-period
comparisons. Realized gains in this years second quarter
and first half resulted from sales of securities, some of which
had been impaired in prior years. The following summary shows
the composition of realized gains shown in the above table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Realized gains (losses) from sales applicable to previously
impaired securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual tax basis (loss) on sales
|
|
$
|
(44.0
|
)
|
|
$
|
|
|
|
$
|
(44.0
|
)
|
|
$
|
|
|
GAAP valuation impact of the original impairment charge on
securities sold
|
|
|
71.9
|
|
|
|
|
|
|
|
71.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net total
|
|
|
27.9
|
|
|
|
|
|
|
|
27.9
|
|
|
|
|
|
Net realized gains from sales of all other securities
|
|
|
44.9
|
|
|
|
0.3
|
|
|
|
47.9
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains from all securities sales
|
|
$
|
72.8
|
|
|
$
|
0.3
|
|
|
$
|
75.8
|
|
|
$
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Litigation
Related to the Merger
On June 15, 2010 and as amended on July 30, 2010, a
purported derivative and class action lawsuit was filed by an
alleged shareholder of PMA naming PMA, its Board of Directors,
Old Republic and Merger Sub as defendants. The action was filed
in the Court of Common Pleas of Montgomery County, Pennsylvania.
The action is Alan R. Kahn and Wister S. Baisch v. Peter S.
Burgess, et al., Case
No. 2010-15690.
The complaint claims to be a class action on behalf of all of
PMAs shareholders, except the defendants and any of their
affiliates. The complaint alleges that the merger consideration
is inadequate, the proxy statement/prospectus fails to disclose
all material information about the merger, the directors of PMA
breached their fiduciary duties and failed to manage prudently
the business of PMA and Old Republic and Merger Sub aided and
abetted the alleged breaches by PMAs directors. The
complaint seeks several forms of relief, including monetary
damages and injunctive relief that would, if granted, prevent
the merger from closing on the terms set forth in the merger
agreement.
The defendants believe that the complaint has no merit and
intend to vigorously defend against the action.
On June 29, 2010, a second complaint was filed by an
alleged shareholder of PMA naming PMA and its Board of Directors
as defendants. The complaint was filed in the Court of Common
Pleas of Philadelphia, Pennsylvania. The action was Wister S.
Baisch v. Peter S. Burgess, et al., Case ID 100603098. The
matter was discontinued without prejudice by the plaintiff on
July 29, 2010 and the plaintiff joined the above described
matter.
10
RISK
FACTORS
In addition to the other information included in this proxy
statement/prospectus, including the matters addressed in
Cautionary Statement Regarding Forward-Looking
Statements below, you should carefully consider the
following risk factors before deciding whether to vote to adopt
the merger agreement. If any of the risks described below
actually materialize, the businesses, financial conditions,
results of operations, prospects or stock prices of PMA, Old
Republic or the combined company could be materially adversely
affected. See Where You Can Find More Information
below.
Risks
Relating to Old Republics Business
Risk factors are uncertainties and events over which Old
Republic has limited or no control, and which can have a
materially adverse effect on its business, results of operations
or financial condition. Old Republic and its business segments
are subject to a variety of risk factors and, within individual
segments, each type of insurance coverage may be exposed to
varying risk factors. The following sections set forth Old
Republics evaluation of the most prevalent material risk
factors for Old Republic as a whole and for each business
segment, which risks will also affect the combined company after
the merger. There may be risks which Old Republic management
does not presently consider to be material that may later prove
to be material risk factors as well.
Parent
Company
Dividend
Dependence and Liquidity
Old Republic is an insurance holding company with no operations
of its own. Its principal assets consist of the business
conducted by its insurance subsidiaries. It relies upon
dividends from such subsidiaries in order to pay the interest
and principal on its debt obligations, dividends to its
shareholders, and corporate expenses. The ability of the
insurance subsidiaries to declare and pay dividends is subject
to regulations under state laws that limit dividends based on
the amount of their statutory adjusted unassigned surplus or
statutory earnings, and require them to maintain minimum amounts
of capital, surplus and reserves. Dividends in excess of the
ordinary limitations can only be declared and paid with prior
regulatory approval, of which there can be no assurance. The
inability of the insurance subsidiaries to pay dividends in an
amount sufficient to meet Old Republics debt service and
cash dividends on stock, as well as other cash requirements
could result in liquidity issues.
Capitalization
Old Republic has access to various capital and liquidity
resources including dividends from its subsidiaries, holding
company investments, undrawn capacity under its commercial paper
program, and access to debt and equity capital markets. At
December 31, 2009 Old Republics consolidated debt to
equity ratio was 8.9%. This relatively low level of financial
leverage is assumed to provide Old Republic with additional
borrowing capacity to meet some possible future capital needs.
Risk
Factors Common to Old Republic and its Insurance
Subsidiaries
Investment
Risks
Old Republics invested assets and those of its
subsidiaries are centrally managed through a wholly owned asset
management subsidiary. Most of the investments consist of fixed
maturity securities. Changes in interest rates directly affect
the income from, and the fair value of fixed maturity
investments. Such changes could reduce the value of Old
Republics investment portfolio and adversely affect Old
Republics and its subsidiaries results of operations
and financial condition. A smaller percentage of total
investments are in indexed funds and actively managed equities.
A change in general economic conditions, the stock market, or in
many other external factors could adversely affect the value of
those investments and, in turn, Old Republics, or its
subsidiaries results and financial condition. Further, Old
Republic manages its fixed maturity investments by taking into
account the maturities of such securities and the anticipated
liquidity needs of Old Republic and its subsidiaries. Should Old
Republic suddenly experience greater than anticipated liquidity
needs for any reason, it could face a liquidity risk that could
affect adversely its financial condition or operating results.
11
Excessive
Losses and Loss Expenses
Although Old Republics business segments encompass
different types of insurance, the greatest risk factor common to
all insurance coverages is excessive losses due to unanticipated
claims frequency, severity or a combination of both. Many of the
factors affecting the frequency and severity of claims depend
upon the type of insurance coverage, but others are shared in
common. Severity and frequency can be affected by changes in
national economic conditions, unexpectedly adverse outcomes in
claims litigation, often as a result of unanticipated jury
verdicts, changes in court made law, adverse court
interpretations of insurance policy provisions resulting in
increased liability or new judicial theories of liability,
together with unexpectedly high costs of defending claims.
Inadequate
Reserves
Reserves are the amounts that an insurance company sets aside
for its anticipated policy liabilities. Claim reserves are an
estimate of liability for unpaid claims and claims defense and
adjustment expenses, and cover both reported as well as IBNR
claims. It is not possible to calculate precisely what these
liabilities will amount to in advance and, therefore, the
reserves represent a best estimate at any point in time. Such
estimates are based upon known historical loss data and
expectations of future trends in claim frequency and severity,
interest rates and other economic considerations. The latter are
affected by a variety of factors over which insurers have little
or no control and which can be quite volatile.
Reserve estimates are periodically reviewed in light of known
developments and, where necessary, they are adjusted and refined
as circumstances may warrant. Nevertheless, the reserve setting
process is inherently uncertain. If for any of these reasons
reserve estimates prove to be inadequate, Old Republics
subsidiaries can be forced to increase their reported
liabilities; such an occurrence could result in a materially
adverse impact on their results of operations and financial
condition.
Inadequate
Pricing
Premium rates are generally determined on the basis of
historical data for claim frequency and severity as well as
related production and other expense patterns. In the event
ultimate claims and expenses exceed historically projected
levels, premium rates are likely to prove insufficient. Premium
rate inadequacy may not become evident quickly, may require time
to correct, and, much like excessive losses can affect adversely
Old Republics business, operating results and financial
condition.
Liquidity
Risk
As indicated above, Old Republic manages its fixed-maturity
investments with a view toward matching the maturities of those
investments with the anticipated liquidity needs of its
subsidiaries for the payment of claims and expenses. If a
subsidiary suddenly experienced
greater-than-anticipated
liquidity needs for any reason, it could require an injection of
funds that might not necessarily be available to meet its
obligations at a point in time.
Regulatory
Environment
Old Republics insurance businesses are subject to
extensive governmental regulation in all of the state and
similar jurisdictions in which they operate. These regulations
relate to such matters as licensing requirements, types of
insurance products that may be sold, premium rates, marketing
practices, capital and surplus requirements, investment
limitations, underwriting limitations, dividend payment
limitations, transactions with affiliates, accounting practices,
taxation and other matters. While most of the regulation is at
the state level, the federal government has increasingly
expressed an interest in regulating the insurance business and
has injected itself through the Graham-Leach-Bliley Act, the
Patriot Act, financial services regulation, changes in the
Internal Revenue Code and other legislation. All of these
regulations raise the costs of conducting an insurance business
through increased compliance expenses. Furthermore, as existing
regulations evolve through administrative and court
interpretations, and as new regulations are adopted, there can
be no way of predicting what impact these changes will have on
Old Republics businesses in the future, and the impact
could adversely affect Old Republics profitability and
limit its growth.
12
Competition
Each of Old Republics lines of insurance business is
highly competitive and is likely to remain so for the
foreseeable future. Moreover, existing competitors and the
capital markets have from time to time brought an influx of
capital and newly-organized entrants into the industry, and
changes in laws have allowed financial institutions, like banks
and savings and loans, to sell insurance products. Increases in
competition threaten to reduce demand for Old Republics
insurance products, reduce its market share, reduce its growth,
reduce its profitability and generally adversely affect its
results of operations and financial condition.
Rating
Downgrades
The competitive positions of insurance companies, in general,
have come to depend increasingly on independent ratings of their
financial strength and claims-paying ability. The rating
agencies base their ratings on criteria they establish regarding
an insurers financial strength, operating performance,
strategic position and ability to meet its obligations to
policyholders. A significant downgrade in the ratings of any of
Old Republics major policy-issuing subsidiaries could
negatively impact their ability to compete for new business and
retain existing business and, as a result, adversely affect
their operations and financial condition.
Financial
Institutions Risk
Old Republics subsidiaries have significant business
relationships with financial institutions, particularly national
banks. The subsidiaries are the beneficiaries of a considerable
amount of security in the form of letters of credit which they
hold as collateral securing the obligations of insureds and
certain reinsurers. Some of the banks themselves have
subsidiaries that reinsure Old Republics business. Other
banks are depositories holding large sums of money in escrow
accounts established by Old Republics title subsidiaries.
There is thus a risk of concentrated financial exposures in one
or more such banking institutions. If any of these institutions
fail or are unable to honor their credit obligations, or if
escrowed funds become lost or tied up due to the failure of a
bank, the result could be adverse to Old Republics
business, results of operations and financial condition.
In addition to the foregoing, the following are risk factors
that are particular to each of Old Republics three major
business segments.
General
Insurance Group
Catastrophic
Losses
While Old Republic limits the property exposures it assumes, the
casualty or liability insurance it underwrites creates an
exposure to claims arising out of catastrophes. The two
principal catastrophe exposures are earthquakes and acts of
terrorism in areas where there are large concentrations of
employees of an insured employer or other individuals who could
potentially be injured and assert claims against an insured
under workers compensation policies. Collateral damage to
property or persons from acts of terrorism and other calamities
could also expose general liability policies.
Following the September 11, 2001 terrorist attack, the
reinsurance industry eliminated coverage from substantially all
reinsurance contracts for claims arising from acts of terrorism.
As discussed elsewhere in this report, the U.S. Congress
subsequently passed TRIA, TRIREA, and TRIPRA legislation that
required primary insurers to offer coverage for certified acts
of terrorism under most commercial property and casualty
insurance policies. Although these programs established a
temporary federal reinsurance program through December 31,
2014, primary insurers like Old Republics general
insurance subsidiaries retain significant exposure for terrorist
act-related losses.
Long-Tailed
Losses
Coverage for general liability is considered long-tailed
coverage. Written in most cases on an occurrence
basis, it often takes longer for covered claims to be reported
and become known, adjusted and settled than it does for property
claims, for example, which are generally considered
short-tailed. The extremely long-tailed aspect of such claims as
pollution, asbestos, silicosis, manganism (welding rod fume
exposure), black lung, lead paint and other
13
toxic tort claims, coupled with uncertain and sometimes variable
judicial rulings on coverage and policy allocation issues and
the possibility of legislative actions, makes reserving for
these exposures highly uncertain. While Old Republic believes
that it has reasonably estimated its liabilities for such
exposures to date, and that its exposures are relatively modest,
there is a risk of materially adverse developments in both known
and as-yet-unknown claims.
Workers
Compensation Coverage
Workers compensation coverage is the second largest line
of insurance written within Old Republic. The frequency and
severity of claims under, and the adequacy of reserves for
workers compensation claims and expenses can all be
significantly influenced by such risk factors as future wage
inflation in states that index benefits, the speed with which
injured employees are able to return to work in some capacity,
the cost and rate of inflation in medical treatments, the types
of medical procedures and treatments, the cost of prescription
medications, the frequency with which closed claims reopen for
additional or related medical issues, the mortality of injured
workers with lifetime benefits and medical treatments, the use
of health insurance to cover some of the expenses, the
assumption of some of the expenses by states second injury
funds, the use of cost containment practices like preferred
provider networks, and the opportunities to recover against
third parties through subrogation. Adverse developments in any
of these factors, if significant, could have a materially
adverse effect on Old Republics operating results and
financial condition.
Reinsurance
Reinsurance is a contractual arrangement whereby one insurer
(the reinsurer) assumes some or all of the risk exposure written
by another insurer (the reinsured). Old Republic uses
reinsurance to manage its risks both in terms of the amount of
coverage it is able to write, the amount it is able to retain
for its own account, and the price at which it is able to write
it. The availability of reinsurance and its price, however, are
determined in the reinsurance market by conditions beyond Old
Republics control.
Reinsurance does not relieve the reinsured company of its
primary liability to its insureds in the event of a loss. It
merely reimburses the reinsured company. The ability and
willingness of reinsurers to honor their obligations represent
credit risks inherent in reinsurance transactions. Old Republic
addresses these risks by limiting its reinsurance to those
reinsurers it considers the best credit risks. In recent years,
however, there has been an ever decreasing number of reinsurers
considered to be acceptable risks by Old Republic.
There can be no assurance that Old Republic will be able to find
the desired or even adequate amounts of reinsurance at favorable
rates from acceptable reinsurers in the future. If unable to do
so, Old Republic would be forced to reduce the volume of
business it writes or retain increased amounts of liability
exposure. Because of the declining number of reinsurers Old
Republic finds acceptable, there is a risk that too much
reinsurance risk may become concentrated in too few reinsurers.
Each of these results could adversely affect Old Republics
business, results of operations, and financial condition.
Insureds
as Credit Risks
A significant amount of Old Republics liability and
workers compensation business, particularly for large
commercial insureds, is written on the basis of risk sharing
underwriting methods utilizing large deductibles, captive
insurance risk retentions, or other arrangements whereby the
insureds effectively retain and fund varying and at times
significant amounts of their losses. Their financial strength
and ability to pay are carefully evaluated as part of the
underwriting process and monitored periodically thereafter, and
their retained exposures are estimated and collateralized based
on pertinent credit analysis and evaluation. Because Old
Republic is primarily liable for losses incurred under its
policies, the possible failure or inability of insureds to honor
their retained liability represents a credit risk. Any
subsequently developing shortage in the amount of collateral
held would also be a risk, as would the failure or inability of
a bank to honor a letter of credit issued as collateral. These
risk factors could have a material adverse impact on Old
Republics results of operations and financial condition.
14
Guaranty
Funds and Residual Markets
In nearly all states, licensed property and casualty insurers
are required to participate in guaranty funds through
assessments covering a portion of insurance claims against
impaired or insolvent property and casualty insurers. Any
increase in the number or size of impaired companies would
likely result in an increase in Old Republics share of
such assessments.
Many states have established second injury funds that compensate
injured employees for aggravation of prior injuries or
conditions. These second injury funds are funded by assessments
or premium surcharges.
Residual market or pooling arrangements exist in many states to
provide various types of insurance coverage to those that are
otherwise unable to find private insurers willing to insure
them. All licensed property and casualty insurers writing such
coverage voluntarily are required to participate in these
residual market or pooling mechanisms.
A material increase in any of these assessments or charges could
adversely affect Old Republics results of operations and
financial condition.
Prior
Approval of Rates
Most of the lines of insurance underwritten by Old Republic are
subject to prior regulatory approval of premium rates in a
majority of the states. The process of securing regulatory
approval can be time consuming and can impair Old
Republics ability to effect necessary rate increases in an
expeditious manner. Furthermore, there is a risk that the
regulators will not approve a requested increase, particularly
in regard to workers compensation insurance with respect
to which rate increases often confront strong opposition from
local business, organized labor, and political interests.
Mortgage
Guaranty Group
Continued
Material Losses
It is likely that Old Republics mortgage insurance segment
will continue to incur material losses, particularly in its 2005
to early 2008 books of business due to the effect of the
recession that began in 2007. Any decline in the rate and
severity of losses will depend in part on improvements in
general economic conditions, unemployment rates, and the
housing, mortgage and credit markets. The timing of any such
improvements cannot be accurately forecasted and there is no
assurance that improvements will be uniform across all sectors.
Housing values and unemployment may be the last to recover. The
loan modification programs of the FDIC, Fannie Mae and Freddie
Mac and some of the lenders are still in their early stages and
it is unclear to what extent, if at all, such programs will
reduce the rate of loan defaults and, in turn, mortgage
insurance claims and losses.
Premium
Income and Long-Term Claim Exposures
Mortgage insurers such as Old Republic issue long duration,
guaranteed renewable policies covering multi-year periods during
which exposure to loss exists. Loss exposures typically manifest
themselves as recurring (normal) losses usually
concentrated between the second and fifth year following
issuance of anyone years new policies. Additionally, the
policies cover catastrophic aggregations of claims such as are
occurring during the current recession engendered by substantial
market dislocations in the housing and mortgage lending
industries.
Old Republics mortgage guaranty premiums stem principally
from monthly installment policies. Substantially all such
premiums are generally written and earned in the month coverage
is effective. Recognition of normal or catastrophic claim costs,
however, occurs only upon an instance of default, defined as an
insured mortgage loan that has missed two or more consecutive
monthly payments. Accordingly, there is a risk that the GAAP
revenue recognition for insured loans is not appropriately
matched to the risk exposure and the consequent recognition of
both normal and most significantly, future catastrophic loss
occurrences which are not permitted to be currently reserved
for. As a result, mortgage guaranty GAAP earnings for any
individual year or series of years may be materially adversely
affected, particularly by cyclical catastrophic loss events such
as the mortgage insurance industry has experienced since mid
year 2007. Reported GAAP earnings and financial condition form,
in part, the
15
basis for significant judgments and strategic evaluations made
by management, analysts, investors, and other users of the
financial statements issued by mortgage guaranty companies. The
risk exists that such judgments and evaluations are at least
partially based on GAAP financial information that does not
match revenues and expenses and is not reflective of the
long-term normal and catastrophic risk exposures assumed by
mortgage guaranty insurers at any point in time.
Inadequate
Loss Reserves
Old Republics mortgage insurance subsidiaries establish
reserves for losses and loss adjustment expenses based upon
mortgage loans reported to be in default as well as estimates of
those in default but not yet reported. Of necessity, the
reserves are at best estimates by management, taking into
consideration its judgments and assumptions regarding the
housing and mortgage markets, unemployment rates and economic
trends in general. During the current widespread, sustained
economic downturn, loss reserve estimates become subject to
greater uncertainty and volatility. The rate and severity of
actual losses could prove to be greater than expected and
require Old Republic to effect substantial increases in its loss
reserves. Depending upon the magnitude, such increases could
have a materially adverse impact on Old Republics mortgage
insurance segment and Old Republics consolidated results
of operations and financial condition. There can be no assurance
that the actual losses paid by the mortgage insurance
subsidiaries will not be materially greater than previously
established loss reserves.
Fewer
Coverage Rescissions
Old Republics mortgage insurance subsidiaries policy
provisions permit them to rescind coverage where they find
evidence that a mortgage loan did not qualify for insurance
coverage or evidence of a material misrepresentation in the loan
application by the borrower, the lender or the lenders
agent. During the past several years, the rate of rescissions
has risen dramatically. As a result, rescissions have materially
reduced loss payments, and Old Republics loss reserving
estimates reflect assumptions as to the levels of rescission
activity.
Some policyholders have increasingly challenged coverage
rescissions, and mortgage insurers, including one of Old
Republics subsidiaries, are currently involved in
litigation with policyholders regarding rescissions. It is
likely that the current rates of rescission will continue or
even increase and that there will be further litigation or
arbitral challenges to the mortgage insurance industrys
rescissions of coverage. If any of such challenges are
successful with respect to Old Republics subsidiaries, it
could have a materially adverse effect on the subsidiaries
loss reserves, loss payments and their financial condition and
results of operations, and potentially on the consolidated
financial condition and results of Old Republics
operations. Even if such challenges are unsuccessful, the costs
of addressing them would likely be substantial.
Capital
Adequacy
The past several years material increases in claims and
loss payments have eroded the mortgage insurance
subsidiaries statutory capital base. Total statutory
capital for mortgage guaranty insurers is defined as the sum of
policyholders surplus and the statutory contingency
reserves. Sixteen states have insurance laws or regulations
which require a mortgage insurer to maintain a minimum amount of
statutory capital relative to the level of risk in force. While
formulations of minimum capital may vary in certain states, the
most common measure applied allows for a maximum permitted risk
to capital ratio of 25 to 1. The failure to maintain the
prescribed minimum capital level in a particular state would
generally require a mortgage insurer to immediately stop writing
new business until it reestablishes the required level of
capital or receives a waiver of the requirement from a
states insurance regulatory authorities. Legislation
permitting the issuance of such waivers has recently been
enacted in North Carolina, where Old Republics two
principal mortgage insurance subsidiaries are domiciled, and
eight of the other states.
It is likely that Old Republics principal mortgage
insurance subsidiary, Republic Mortgage Insurance Company
(RMIC) will breach the minimum capital requirement
during 2010. In anticipation of its doing so, RMIC has requested
and received waivers of the minimum policyholder position
requirements from insurance regulatory authorities in Arizona,
Florida, Illinois, North Carolina, Oregon and Wisconsin, and has
made similar requests to the insurance regulators in some of the
other ten states that have similar minimum capital or maximum
risk-to-capital
requirements. Most of the waivers extend until July 1,
2011, but the waiver in Florida extends only
16
until February 16, 2011. Most of the other states have
indicated a willingness to waive their requirements as well,
while some have not yet committed. For those that are willing to
waive their requirements, there can be no certainty as to how
long their waivers will be in place, or that they will not
exercise their discretion to terminate their waivers earlier
than expected, or that RMIC will again meet their capital
requirements by the end of the waiver period. For those states
that have not yet committed, there can be no assurance that they
will waive their requirements. Absent a waiver, RMIC could be
barred from writing any new business in one of these states
unless and until its capital base has recovered, and there can
be no certainty when or if it will recover. New insurance
written in the states that have not issued a waiver to RMIC
represented approximately 32% of the total for through the first
quarter of 2010.
In response to the possibility that a waiver may not be granted
in all cases, Old Republic has positioned another mortgage
insurance subsidiary, Republic Mortgage Insurance Company of
North Carolina (RMIC NC), to be able to possibly
write business in place of RMIC if the latter is required to
cease. On October 7, 2009, RMIC and RMIC NC entered into an
agreement with Fannie Mae under which Fannie Mae conditionally
approved RMIC NC as an eligible, Fannie Mae approved
mortgage insurer in those states where RMIC becomes prohibited
from writing business due to a breach of the minimum capital
requirements noted above. The conditions limit the amount of
business that RMIC NC would be permitted to write, and the
approval is limited in duration and may be revoked by Fannie Mae
at any time. On March 11, 2010, a substantially similar
conditional approval was received from Freddie Mac. Accordingly,
while the Fannie Mae and Freddie Mac agreements may help the
mortgage insurance subsidiaries avoid a complete shutdown in
certain states if RMICs capital requirements are breached,
they would not permit RMIC NC to fully replace RMIC as the
segments principal mortgage insurer.
Diminished
Role for Fannie Mae Freddie Mac
The market for private mortgage insurance exists primarily as a
result of restrictions within the federal charters of the GSEs
which require an acceptable form of credit enhancement on loans
purchased by the GSEs that have
loan-to-value
(LTV) ratios in excess of 80%. These institutions
establish the levels of required coverage, the underwriting
standards for the loans they will purchase and the loss
mitigation efforts that must be followed on insured loans.
Changes in any of these respects could result in a reduction of
the Mortgage Guaranty Groups business or an increase in
its claim costs.
In response to their deteriorating financial conditions, the
GSEs were taken over and placed in conservatorship under the
Federal Housing Finance Agency (FHFA) in September
2008. As their conservator, the FHFA could change the GSEs
business practices with respect to mortgage credit enhancement,
or new federal legislation prompted by the increasing role of
the federal government in the residential mortgage market could
alter their charters or restructure the GSEs in ways that may
reduce or eliminate the purchase of private mortgage insurance.
Any such changes could have a material adverse effect on Old
Republics subsidiaries and the entire mortgage insurance
industry.
Competition
Competition is always a risk factor and comes not only from the
five other mortgage insurers which comprise the industry, but
also from the Federal Housing Administration (FHA)
as well as the GSEs and the insured mortgage lenders themselves.
Beginning in 2008, the volume of business underwritten by
private mortgage insurers began to decrease generally as a
result of more restrictive underwriting guidelines, increased
premium rates, and changes to the pricing policies of the
GSEs. These changes, coupled with certain changes to the
FHAs guidelines, resulted in a significant increase in the
FHAs insured volume and its share of the market for
mortgage default protection.
Other competitive risk factors faced by Old Republics
mortgage insurance subsidiaries stem from certain credit
enhancement alternatives to private mortgage insurance. These
include:
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the retention of mortgage loans on an uninsured basis in the
lenders portfolio of assets;
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capital markets utilizing alternative credit enhancements.
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17
Regulation
and Litigation
The possibly adverse effect of litigation and regulation are
ever present risk factors. Captive reinsurance and other risk
participating structures with mortgage lenders have been
challenged in recent years as potential violations of the Real
Estate Settlement Procedures Act (RESPA). From time
to time, the U.S. Department of Housing and Urban
Development has considered adopting RESPA regulations which
would have adversely impacted mortgage insurance by requiring
that the premiums be combined with all other settlement service
charges in a single package fee. The recently proposed Consumer
Financial Protection Agency would include new regulations for
mortgage insurance. The industry is already subject to detailed
regulation by the states insurance regulatory authorities,
compliance with which is costly. The recent losses suffered by
the industry have resulted in greater regulatory scrutiny and
burdens for Old Republics subsidiaries and the industry as
a whole. Any regulatory changes affecting capital requirements
or reserving requirements could potentially have a material
adverse effect on Old Republics mortgage insurance
subsidiaries.
Title Insurance
Group
Housing
and Mortgage Lending Markets
The principal risk factor for the title insurance segment has
been the sharp decline in residential real estate activity that
began in 2006. The tightening and collapse of credit markets,
the collapse of the housing market, the general decline in the
value of real property, rising unemployment and the uncertainty
and negative trends in general economic conditions have created
a difficult operating environment for Old Republics title
insurance subsidiaries. Depending upon their ultimate severity
and duration, these conditions could have a materially adverse
effect on the subsidiaries financial conditions and
results of operation over the near term and longer. The impact
of these conditions has been somewhat mitigated both by lower
mortgage interest rates, leading to an increase in mortgage
refinancings and by an increase in the number of agents
producing business for Old Republics title insurance
subsidiaries.
Competition
Business comes to title insurers primarily by referral from real
estate agents, lenders, developers and other settlement
providers. The sources of business lead to a great deal of
competition among title insurers. Although the top four title
insurance companies during 2009 accounted for about 92% of
industry-wide premium volume, there are numerous smaller
companies representing the remainder at the regional and local
levels. The smaller companies are an ever-present competitive
risk in the regional and local markets where their business
connections can give them a competitive edge. Moreover, there is
almost always competition among the major companies for key
employees, especially those who are engaged in the production
side of the business.
Regulation
and Litigation
Regulation is also a risk factor for title insurers. The title
insurance industry has recently been, and continues to be, under
regulatory scrutiny in a number of states with respect to
pricing practices, and alleged RESPA violations and unlawful
rebating practices. The regulatory investigations could lead to
industry-wide reductions in premium rates and escrow fees, the
inability to get rate increases when necessary, as well as to
changes that could adversely affect Old Republics ability
to compete for or retain business or raise the costs of
additional regulatory compliance.
As with Old Republics other business segments, litigation
poses a risk factor. Litigation is currently pending in a number
of states in actions against the title industry alleging
violations of rate applications in those states with respect to
title insurance issued in certain mortgage refinancing
transactions and violations of federal anti-trust laws in
settling and filing premium rates.
18
Other
Risks
Inadequate title searches are among the risk factors faced by
the entire industry. If a title search is conducted thoroughly
and accurately, there should theoretically never be a claim.
When the search is less than thorough or complete, title defects
can go undetected and claims result.
To a lesser extent, fraud is also a risk factor for all title
companies sometimes in the form of an agents
or an employees defalcation of escrowed funds, sometimes
in the form of fraudulently issued title insurance policies.
Risks
Relating to PMAs Business
The existing business of PMA is subject to significant risks.
The risks affecting PMAs business are described in
Item 1A of its
Form 10-K
for the year ended December 31, 2009, which is incorporated
herein by reference. We anticipate that these risks will
continue to apply to PMAs businesses following the merger.
Risks
Relating to the Pending Merger
The
announcement and pendency of the merger could have an adverse
effect on Old Republics or PMAs stock prices,
businesses, financial conditions, results of operations or
business prospects.
The announcement and pendency of the merger could disrupt
PMAs
and/or Old
Republics businesses in the following ways, among others:
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employees may experience uncertainty regarding their future
roles with the combined company, which might adversely affect
PMAs
and/or Old
Republics ability to retain, recruit and motivate key
personnel;
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the attention of PMA
and/or Old
Republic management may be directed toward the completion of the
merger and transaction-related considerations and may be
diverted from the
day-to-day
business operations of their respective companies, and matters
related to the merger may require commitments of time and
resources that could otherwise have been devoted to other
opportunities that might have been beneficial to Old Republic or
PMA; and
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third parties with business relationships with Old Republic or
PMA may seek to terminate
and/or
renegotiate their relationships with Old Republic or PMA as a
result of the merger, whether pursuant to the terms of their
existing agreements with PMA
and/or Old
Republic or otherwise.
|
The merger agreement also restricts PMA from engaging in certain
actions and taking certain actions without Old Republics
approval, which could prevent PMA from pursuing opportunities
that may arise prior to the closing of the merger or termination
of the merger agreement.
Any of these matters could adversely affect either or both
companies respective businesses, financial conditions,
results of operations, prospects and stock prices.
Because
the market price of Old Republic common stock will fluctuate,
PMA shareholders cannot be sure of the exchange ratio or the
precise value of the merger consideration.
Under the terms of the merger agreement, Old Republic will issue
to PMAs shareholders 0.55 shares of Old Republic
common stock for each share of PMA class A common stock,
subject to a collar. Under the collar, the exchange ratio could
be as low as 0.50 shares of Old Republic common stock for
each share of PMA class A common stock or as high as
0.60 shares of Old Republic common stock for each share of
PMA class A common stock. In addition, the price of Old
Republic common stock issuable in the merger may vary from the
price on the date that the parties entered into the merger
agreement, on the date that the parties announced the merger, at
the effective time of the merger, and on the date that you
receive the merger consideration. Changes in the Old Republic
stock price and stock prices of Old Republic and PMA generally
may result from a variety of factors, including general market,
economic and political conditions, changes in the parties
respective businesses, operations and prospects, regulatory
considerations, legal proceedings and developments, market
assessments of the benefits of the merger and the likelihood
that the merger will be consummated and the timing of such
consummation, the prospects of post-merger operations and other
factors. Many of these factors are beyond Old Republics
control. Accordingly,
19
at the time of the PMA special meeting, PMA shareholders will
not be able to calculate the precise value of the merger
consideration that they would receive upon completion of the
merger.
Many
of the anticipated benefits of combining Old Republic and PMA
may not be realized.
Old Republic and PMA entered into the merger agreement with the
expectation that the merger would result in various benefits
including, among other things, synergies, cost savings and
operating efficiencies. The success of the merger will depend,
in part, on Old Republics ability to realize these
anticipated benefits and cost savings from combining the
businesses of Old Republic and PMA. However, to realize these
anticipated benefits and cost savings, Old Republic must
successfully combine the businesses of Old Republic and PMA. If
Old Republic is not able to achieve these objectives, the
anticipated benefits and cost savings of the merger may not be
realized fully or at all or may take longer to realize than
expected.
Old Republic and PMA have operated and, until the completion of
the merger, will continue to operate independently. It is
possible that the integration process could take longer than
anticipated and could result in the loss of key employees or the
disruption of each companys ongoing businesses, which
could adversely affect Old Republics ability to achieve
the anticipated benefits of the merger. Old Republic may have
difficulty coordinating the operations and personnel of two
geographically separated companies and addressing possible
differences in corporate cultures and management philosophies.
Integration efforts between the two companies will also divert
management attention and resources. These integration activities
could have an adverse effect on the businesses of both Old
Republic and PMA during the transition period. The integration
process is subject to a number of uncertainties. Although Old
Republics plans for integration are focused on minimizing
those uncertainties to help achieve the anticipated benefits, no
assurance can be given that these benefits will be realized or,
if realized, the timing of their realization. Failure to achieve
these anticipated benefits could result in increased costs or
decreases in the amount of expected revenues and could adversely
affect Old Republics future business, financial condition,
operating results and prospects. In addition, Old Republic may
not be able to eliminate duplicative costs or realize other
efficiencies from integrating the businesses to offset part or
all of the transaction and merger-related costs incurred by Old
Republic and PMA.
Any
delay in completing the merger may substantially reduce the
benefits expected to be obtained from the merger.
The merger is subject to a number of conditions beyond the
control of PMA and Old Republic that may prevent, delay or
otherwise materially adversely affect its completion. See
The Merger Agreement Conditions to Completion
of the Merger. Old Republic and PMA cannot predict whether
or when the conditions required to complete the merger will be
satisfied. The requirements for obtaining the required
clearances and approvals could delay the effective time of the
merger for a significant period of time or prevent it from
occurring. Any delay in completing the merger may materially
adversely affect the synergies and other benefits that Old
Republic and PMA expect to achieve if the merger and the
integration of their respective businesses are completed within
the expected timeframe.
Failure
to complete the merger could negatively affect the stock prices
and the future business and financial results of Old Republic
and PMA.
If the merger is not completed, the ongoing businesses of Old
Republic or PMA may be adversely affected and Old Republic and
PMA will be subject to several risks, including the following:
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having to pay certain significant costs relating to the merger
without receiving the benefits of the merger;
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the attention of management of Old Republic and PMA will have
been diverted to the merger instead of on each companys
own operations and pursuit of other opportunities that could
have been beneficial to that company; and
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resulting negative customer perception could adversely affect
the ability of Old Republic and PMA to compete for, or to win,
new and renewal business in the marketplace.
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20
If the merger is not completed, PMAs ability to reach a
resolution with the Pennsylvania Insurance Department with
respect to the Departments examination of PMAs
insurance subsidiaries as of December 31, 2007 will be
adversely impacted. See The Merger PMAs
Reasons for the Merger Resolution of Pennsylvania
Insurance Department Examination. Based on recent
discussions with representatives of the Department, in order to
resolve the outstanding issues as a stand alone organization,
PMA will need to engage in administrative and legal review
processes which, irrespective of their ultimate outcome, will
likely hinder the long-term and
day-to-day
continuity of PMAs business operations and, in the
interim, potentially have a negative impact on the financial
ratings of its insurance subsidiaries. PMA cannot predict how
long the processes would take or whether it would ultimately be
successful. In the event that PMA is unsuccessful in its
administrative and legal appeals, PMA could be required to take
actions, such as increasing its loss and loss adjustment expense
reserves, that would materially and adversely affect its
business, financial condition and results of operations.
Old
Republic and PMA will incur substantial transaction and
merger-related costs in connection with the
merger.
Old Republic and PMA expect to incur a number of substantial
non-recurring transaction fees and other costs associated with
completing the merger, combining the operations of the two
companies and achieving desired synergies. Additional
unanticipated costs may be incurred in the integration of the
businesses of Old Republic and PMA.
Directors
and officers of PMA have certain interests that are different
from those of PMA shareholders generally.
Executive officers of PMA negotiated the terms of the merger
agreement and the PMA board of directors approved the merger
agreement and recommends that PMA shareholders vote in favor of
the proposal to adopt the merger agreement. Nine officers of PMA
have management agreements with PMA that provide for severance
payments and the acceleration of existing equity awards if the
executive officers employment with PMA is terminated
following a change in control transaction. The merger will
constitute a change in control transaction. While it is a
condition to the completion of the merger that Vincent Donnelly
and six of these officers shall have delivered written voluntary
terminations of these agreements, there can be no assurance that
they will do so, in which event Old Republic would not be
obligated to complete the merger.
Following completion of the merger, one of the independent
directors of PMA will join Old Republics board of
directors as a Class 2 director. In addition,
restricted shares held by non-employee directors of PMA will
vest upon completion of the merger. These severance
arrangements, directorship positions and equity awards are
different from or in addition to the interests of PMA
shareholders in the company. PMA shareholders should take into
account such interests when they consider the PMA board of
directors recommendation that the PMA shareholders vote
for adoption of the merger agreement. For a discussion of the
interests of directors and executive officers in the merger, see
The Merger Interests of PMA Officers and
Directors in the Merger.
In
certain circumstances, the merger agreement requires payment of
a termination fee of $8 million by PMA to Old Republic and,
under certain circumstances, PMA must allow Old Republic 3
business days to match any alternative acquisition proposal
prior to any change in the PMA boards recommendation.
These terms could discourage a third party from proposing an
alternative transaction to the merger.
Under the merger agreement, PMA may be required to pay to Old
Republic a termination fee of $8 million if the merger
agreement is terminated under certain circumstances. Should the
merger agreement be terminated in circumstances under which such
a termination fee is payable, the payment of this fee could have
material and adverse consequences to the financial condition and
operations of PMA. Additionally, under the merger agreement, in
the event of a potential change by the PMA board of directors of
its recommendation with respect to the merger, PMA must allow
Old Republic 3 business days to make a revised proposal, prior
to which the PMA board of directors may not change its
recommendation with respect to the merger agreement. These terms
could affect the structure, pricing and terms proposed by other
parties seeking to acquire or merge with PMA, and could make it
more difficult for another party to make a superior acquisition
proposal for PMA. For a description of the termination rights of
each party and the termination fee payable by PMA under the
merger agreement, see The Merger Agreement
Termination of the Merger Agreement and
The Merger Agreement Termination Fees and
Expenses.
21
Old
Republics and PMAs shareholders will be diluted by
the merger.
The merger will dilute the ownership position of the current
shareholders of Old Republic. Old Republic will issue a maximum
of approximately 19,884,057 shares of Old Republic common
stock pursuant to the merger based on the number of outstanding
shares of PMA class A common stock on July 30, 2010
and assuming conversion of all of PMAs
4.25% Convertible Debt and the exercise of all outstanding
options to purchase shares of PMA class A common stock
(which options, if unexercised, will be converted pursuant to
the merger into options to acquire shares of Old Republic common
stock). In addition, a maximum of approximately
573,871 shares of Old Republic common stock will be
issuable in connection with outstanding PMA restricted share
units that will be converted pursuant to the merger into
restricted share units of Old Republic (the As-Converted
Award Shares). After the effective time of the merger, Old
Republic shareholders and PMA shareholders will own
approximately 92.2% and 7.8%, respectively, of Old Republic on a
fully diluted basis based on the outstanding shares of Old
Republic common stock and PMA class A common stock on
July 30, 2010 and assuming the issuance of the maximum
number of As-Converted Award Shares.
The
date that PMA shareholders will receive their merger
consideration is uncertain.
The completion of the merger is subject to adoption by PMA
shareholders and the satisfaction or waiver of certain other
conditions. While PMA and Old Republic currently expect to
complete the merger near the end of the third quarter of 2010,
such completion date could be later than expected due to delays
in receiving such adoption or satisfying the conditions to
closing. Accordingly, neither PMA nor Old Republic can provide
PMA shareholders with a definitive date on which they will
receive the merger consideration.
The
market price of Old Republic common stock after the merger may
be affected by factors different from those affecting PMA
class A common stock currently.
If the merger is completed, holders of PMA class A common
stock will become holders of Old Republic common stock. The
results of operations and market price of Old Republic common
stock may be affected by factors different from those currently
affecting the results of operations and market prices of PMA
class A common stock. These factors include:
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a greater number of shares outstanding;
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different shareholders;
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different businesses, including with respect to the types of
business written, geographical areas of operation and
underwriting guidelines; and
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different assets, including investment portfolios, and
capitalizations.
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Accordingly, the historical market prices and financial results
of PMA, which PMA shareholders considered when investing in PMA,
may not be indicative of the market prices and financial results
for the combined company after the merger.
The
market price of Old Republic common stock and Old
Republics earnings per share may decline as a result of
the merger.
The market price of Old Republic common stock may decline as a
result of, among other things, the merger if Old Republic does
not achieve the perceived benefits of the merger as rapidly or
to the extent anticipated by financial or industry analysts or
if the effect of the merger on Old Republics financial
results is not consistent with the expectations of financial or
industry analysts. In addition, the failure to achieve expected
benefits and unanticipated costs relating to the merger could
reduce Old Republics future earnings per share.
In addition, following the merger, shareholders of Old Republic
and former shareholders PMA will own interests in a company
operating an expanded business with more assets and a different
mix of liabilities. Current shareholders of Old Republic and
shareholders of PMA may not wish to continue to invest in Old
Republic, or for other reasons may wish to dispose of some or
all of their interests in Old Republic. If, following the
merger, large amounts of Old Republics common stock are
sold, the price of its common stock could decline.
22
Certain
provisions of Old Republics corporate documents could make
a future acquisition of Old Republic more
difficult.
The existence of some provisions in Old Republics
certificate of incorporation and by-laws, as currently in
effect, as well as its shareholders rights plan described
below, could discourage potential proposals to acquire Old
Republic, delay or prevent a change in control of Old Republic
or limit the price that investors may be willing to pay in the
future for shares of Old Republic common stock. As Old Republic
shareholders, former PMA shareholders will be subject to the
provisions of Old Republics corporate governing documents
which could make it more difficult to effect a change of control
of Old Republic, including:
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the ability of Old Republics board of directors to issue
and set the terms of preferred stock without the approval of Old
Republics shareholders;
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the ability of Old Republics board of directors to adopt,
amend or repeal Old Republics by-laws;
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the staggered nature of Old Republics board of directors;
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the potential restrictions on the ability of a 10% holder of Old
Republic common stock to complete a business combination with
Old Republic;
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the application of Section 203 of the General Corporation
Law of the State of Delaware (DGCL) to Old Republic,
which may limit the ability of an interested shareholder to
engage in a business combination with Old Republic; and
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restrictions on the rights of shareholders to submit proposals
to be considered at shareholders meetings.
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23
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL DATA OF PMA
Set forth below is certain selected historical consolidated
financial data relating to PMA. The financial data has been
derived from the unaudited financial statements filed as part of
PMAs Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2010 and the audited
financial statements filed as part of PMAs Annual Report
on
Form 10-K
for the year ended December 31, 2009. This financial data
should be read in conjunction with the financial statements and
the related notes and other financial information contained in
that
Form 10-Q
and
Form 10-K,
each of which is incorporated by reference into this proxy
statement/prospectus. More comprehensive financial information,
including managements discussion and analysis of
PMAs financial condition and results of operations, is
contained in other documents filed by PMA with the SEC, and the
following summary is qualified in its entirety by reference to
such other documents and all of the financial information and
notes contained in those documents. See Where You Can Find
More Information below.
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Q1 2010
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Q1 2009
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FY 2009
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FY 2008
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FY 2007
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FY 2006
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FY 2005
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(Dollar amounts in thousands, except per share data)(1)
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Gross Premiums Written
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$
|
171,905
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$
|
164,070
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$
|
561,266
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|
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$
|
528,915
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|
|
$
|
524,172
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|
|
$
|
455,756
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|
$
|
420,787
|
|
|
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|
|
|
|
|
|
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Net Premiums Written
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$
|
128,245
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$
|
117,978
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$
|
401,905
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|
$
|
414,237
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|
|
$
|
394,698
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|
|
$
|
373,001
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|
|
$
|
374,975
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Consolidated Revenues:
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Net premiums earned
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$
|
103,496
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|
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$
|
104,930
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$
|
414,771
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$
|
390,217
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|
|
$
|
378,243
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|
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$
|
367,403
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|
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$
|
357,824
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Claims service revenues and commission income
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20,975
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|
|
|
19,147
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|
|
|
78,471
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|
|
|
69,754
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|
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|
37,039
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|
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27,853
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|
|
|
23,591
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Net investment income
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9,120
|
|
|
|
8,457
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|
|
|
36,876
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|
|
|
36,069
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|
|
|
39,592
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|
|
|
35,851
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|
|
|
32,235
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Net realized investment gains (losses)
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|
426
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|
|
|
749
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|
|
|
514
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(4,724
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)
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|
563
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1,239
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|
|
|
372
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Other revenues
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|
|
392
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|
|
|
176
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|
|
|
1,083
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|
2,841
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|
|
340
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|
|
244
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|
|
406
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Total consolidated revenues
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$
|
134,409
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$
|
133,459
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$
|
531,715
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$
|
494,157
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|
|
$
|
455,777
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$
|
432,590
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|
|
$
|
414,428
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Components of net income (loss)(2):
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Pre-tax operating income (loss):
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|
|
|
|
|
|
|
|
|
|
|
The PMA Insurance Group(3)
|
|
$
|
14,267
|
|
|
$
|
15,187
|
|
|
$
|
43,050
|
|
|
$
|
46,713
|
|
|
$
|
38,045
|
|
|
$
|
26,082
|
|
|
$
|
19,511
|
|
Fee-based Business(3)
|
|
|
2,305
|
|
|
|
2,013
|
|
|
|
7,208
|
|
|
|
7,205
|
|
|
|
3,724
|
|
|
|
2,802
|
|
|
|
2,509
|
|
Corporate and Other
|
|
|
(4,366
|
)
|
|
|
(5,000
|
)
|
|
|
(19,127
|
)
|
|
|
(20,651
|
)
|
|
|
(19,564
|
)
|
|
|
(21,580
|
)
|
|
|
(24,598
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax operating income (loss)
|
|
|
12,206
|
|
|
|
12,200
|
|
|
|
31,131
|
|
|
|
33,267
|
|
|
|
22,205
|
|
|
|
7,304
|
|
|
|
(2,578
|
)
|
Income tax expense (benefit)
|
|
|
4,389
|
|
|
|
4,384
|
|
|
|
(9,357
|
)(4)
|
|
|
11,730
|
|
|
|
7,822
|
|
|
|
2,783
|
|
|
|
2,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
7,817
|
|
|
|
7,816
|
|
|
|
40,488
|
|
|
|
21,537
|
|
|
|
14,383
|
|
|
|
4,521
|
|
|
|
(5,137
|
)
|
Net realized investment gains (losses) after tax
|
|
|
277
|
|
|
|
487
|
|
|
|
334
|
|
|
|
(3,071
|
)
|
|
|
366
|
|
|
|
805
|
|
|
|
242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
8,094
|
|
|
|
8,303
|
|
|
|
40,822
|
|
|
|
18,466
|
|
|
|
14,749
|
|
|
|
5,326
|
|
|
|
(4,895
|
)
|
Loss from discontinued operations, net of tax
|
|
|
|
|
|
|
(86
|
)
|
|
|
(19,609
|
)
|
|
|
(12,777
|
)
|
|
|
(57,277
|
)
|
|
|
(1,275
|
)
|
|
|
(16,125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
8,094
|
|
|
$
|
8,217
|
|
|
$
|
21,213
|
|
|
$
|
5,689
|
|
|
$
|
(42,528
|
)
|
|
$
|
4,051
|
|
|
$
|
(21,020
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
32,199,378
|
|
|
|
31,956,183
|
|
|
|
32,133,970
|
|
|
|
31,820,173
|
|
|
|
32,169,287
|
|
|
|
32,238,278
|
|
|
|
31,682,648
|
|
Diluted
|
|
|
32,260,938
|
|
|
|
32,020,346
|
|
|
|
32,186,402
|
|
|
|
32,038,781
|
|
|
|
32,578,025
|
|
|
|
32,731,360
|
|
|
|
31,682,648
|
|
Income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
$
|
0.25
|
|
|
$
|
0.26
|
|
|
$
|
1.27
|
|
|
$
|
0.58
|
|
|
$
|
0.46
|
|
|
$
|
0.17
|
|
|
$
|
(0.15
|
)
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
(0.61
|
)
|
|
|
(0.40
|
)
|
|
|
(1.78
|
)
|
|
|
(0.04
|
)
|
|
|
(0.51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.25
|
|
|
$
|
0.26
|
|
|
$
|
0.66
|
|
|
$
|
0.18
|
|
|
$
|
(1.32
|
)
|
|
$
|
0.13
|
|
|
$
|
(0.66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
$
|
0.25
|
|
|
$
|
0.26
|
|
|
$
|
1.27
|
|
|
$
|
0.58
|
|
|
$
|
0.45
|
|
|
$
|
0.16
|
|
|
$
|
(0.15
|
)
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
(0.61
|
)
|
|
|
(0.40
|
)
|
|
|
(1.76
|
)
|
|
|
(0.04
|
)
|
|
|
(0.51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.25
|
|
|
$
|
0.26
|
|
|
$
|
0.66
|
|
|
$
|
0.18
|
|
|
$
|
(1.31
|
)
|
|
$
|
0.12
|
|
|
$
|
(0.66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity per share
|
|
$
|
12.96
|
|
|
$
|
10.91
|
|
|
$
|
12.46
|
|
|
$
|
10.78
|
|
|
$
|
11.92
|
|
|
$
|
12.83
|
|
|
$
|
12.70
|
|
Consolidated Financial Position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
857,738
|
|
|
$
|
786,307
|
|
|
$
|
862,653
|
|
|
$
|
772,241
|
|
|
$
|
815,331
|
|
|
$
|
786,344
|
|
|
$
|
763,197
|
|
Total assets from continuing operations
|
|
|
2,409,711
|
|
|
|
2,317,778
|
|
|
|
2,362,739
|
|
|
|
2,259,053
|
|
|
|
2,205,985
|
|
|
|
1,991,709
|
|
|
|
1,955,085
|
|
Total assets
|
|
|
2,409,711
|
|
|
|
2,553,043
|
|
|
|
2,362,739
|
|
|
|
2,502,716
|
|
|
|
2,581,641
|
|
|
|
2,666,407
|
|
|
|
2,888,045
|
|
Unpaid losses and LAE
|
|
|
1,274,006
|
|
|
|
1,256,435
|
|
|
|
1,269,685
|
|
|
|
1,242,258
|
|
|
|
1,212,956
|
|
|
|
1,152,704
|
|
|
|
1,169,338
|
|
Debt
|
|
|
137,445
|
|
|
|
129,380
|
|
|
|
143,380
|
|
|
|
129,380
|
|
|
|
131,262
|
|
|
|
131,211
|
|
|
|
196,181
|
|
Shareholders equity
|
|
|
418,130
|
|
|
|
351,270
|
|
|
|
401,797
|
|
|
|
344,656
|
|
|
|
378,584
|
|
|
|
419,093
|
|
|
|
406,223
|
|
24
|
|
|
(1) |
|
Unless specifically identified, amounts exclude discontinued
operations. |
|
(2) |
|
Operating income (loss), which PMA defines as GAAP net income
(loss) excluding net realized investment gains (losses) and
results from discontinued operations, is the financial
performance measure used by PMAs management and Board of
Directors to evaluate and assess the results of PMAs
businesses. Net realized investment activity is excluded because
(i) net realized investment gains and losses are
unpredictable and not necessarily indicative of current
operating fundamentals or future performance of the business
segments and (ii) in many instances, decisions to buy and
sell securities are made at the holding company level, and such
decisions result in net realized gains and losses that do not
relate to the operations of the individual segments.
Accordingly, PMA reports pre-tax operating income (loss) by
segment in Note 16 of PMAs Consolidated Financial
Statements included in PMAs annual report on
Form 10-K
incorporated into this proxy statement/prospectus by reference.
Operating income (loss) does not replace net income (loss) as
the GAAP measure of PMAs consolidated results of
operations. |
|
(3) |
|
As a result of PMAs acquisition of Midlands Management
Corporation (Midlands) in 2007, the combined
operating results of PMA Management Corp. and Midlands have been
reported in a new reporting segment, Fee-based Business. The
results of PMA Management Corp. were previously included with
the results of The PMA Insurance Group. For comparative
purposes, the financial results of The PMA Insurance Group and
PMA Management Corp. have been reclassified in all prior periods
to reflect this change. The combined operating results for
Fee-based Business also include those of PMA Management Corp. of
New England, Inc., which PMA acquired in June 2008. |
|
(4) |
|
In 2009, PMA reduced the valuation allowance on PMAs
deferred tax assets by $20.0 million, which resulted in an
income tax benefit. |
25
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION OF OLD REPUBLIC
The unaudited pro forma condensed combined financial statements
(pro forma financial statements) that follow combine
the historical accounts of Old Republic and PMA. The pro forma
balance sheet as of March 31, 2010 therefore shows the
combined financial position of Old Republic and PMA as if the
merger of the two companies had occurred on that date.
Similarly, the pro forma statements of income for the year ended
December 31, 2009 and for the three months ended
March 31, 2010 reflect the companies combined results
of operations as if their merger had occurred as of
January 1, 2009. These pro forma financial statements
should be read in conjunction with:
|
|
|
|
|
The accompanying notes to the pro forma financial statements;
|
|
|
|
Old Republics and PMAs separate unaudited historical
consolidated financial statements as of and for the three months
ended March 31, 2010 included in their respective
March 31, 2010 Reports on
Form 10-Q; and
|
|
|
|
Old Republics and PMAs separate audited historical
consolidated financial statements as of and for the year ended
December 31, 2009 included in their respective 2009 Reports
on
Form 10-K.
|
The pro forma financial statements have been prepared for
informational purposes only. The financial position and results
shown therein are not necessarily indicative of what the past
financial position and results of operations of the two combined
companies would have been, or those of their post merger periods.
26
Unaudited
Pro Forma Condensed Combined Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2010
|
|
|
|
Historical
|
|
|
Historical
|
|
|
Pro Forma
|
|
|
|
|
Pro Forma
|
|
|
|
Old Republic
|
|
|
PMA
|
|
|
Adjustments
|
|
|
Notes
|
|
Old Republic
|
|
|
|
($ in millions)
|
|
|
ASSETS
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities, at fair value
|
|
$
|
8,352.2
|
|
|
$
|
800.6
|
|
|
$
|
|
|
|
|
|
$
|
9,152.8
|
|
Equity securities, at fair value
|
|
|
631.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
631.4
|
|
Short-term investments, at fair value
|
|
|
783.5
|
|
|
|
25.9
|
|
|
|
|
|
|
|
|
|
809.4
|
|
Other investments
|
|
|
31.2
|
|
|
|
31.2
|
|
|
|
|
|
|
|
|
|
64.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
9,798.5
|
|
|
|
857.7
|
|
|
|
|
|
|
|
|
|
10,656.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
74.9
|
|
|
|
13.6
|
|
|
|
(6.0
|
)
|
|
2(k)
|
|
|
82.5
|
|
Accrued investment income
|
|
|
112.5
|
|
|
|
7.7
|
|
|
|
|
|
|
|
|
|
120.2
|
|
Accounts and notes receivable
|
|
|
794.4
|
|
|
|
275.1
|
|
|
|
|
|
|
|
|
|
1,069.5
|
|
Federal income tax recoverable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.4
|
|
Deferred
|
|
|
|
|
|
|
131.0
|
|
|
|
(121.8
|
)
|
|
2(d)
|
|
|
9.2
|
|
Prepaid federal income taxes
|
|
|
136.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
136.0
|
|
Reinsurance balances and funds held
|
|
|
130.7
|
|
|
|
61.6
|
|
|
|
|
|
|
|
|
|
192.3
|
|
Reinsurance recoverable
|
|
|
2,595.8
|
|
|
|
880.1
|
|
|
|
|
|
|
|
|
|
3,475.9
|
|
Deferred policy acquisition costs
|
|
|
202.0
|
|
|
|
44.8
|
|
|
|
(44.8
|
)
|
|
2(b)(i),2(e)
|
|
|
202.0
|
|
Goodwill and intangible assets
|
|
|
169.0
|
|
|
|
29.6
|
|
|
|
(29.6
|
)
|
|
2(c)
|
|
|
169.0
|
|
Sundry assets
|
|
|
226.2
|
|
|
|
108.5
|
|
|
|
|
|
|
|
|
|
334.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
14,240.9
|
|
|
$
|
2,409.7
|
|
|
$
|
(202.2
|
)
|
|
|
|
$
|
16,448.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, AND COMMON SHAREHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses, claims, and settlement expenses
|
|
$
|
7,774.8
|
|
|
$
|
1,274.0
|
|
|
$
|
|
|
|
|
|
$
|
9,048.8
|
|
Unearned premiums
|
|
|
1,041.7
|
|
|
|
270.1
|
|
|
|
(44.8
|
)
|
|
2(e)
|
|
|
1,267.0
|
|
Other policyholders benefits and funds
|
|
|
185.8
|
|
|
|
5.9
|
|
|
|
|
|
|
|
|
|
191.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total policy liabilities and accruals
|
|
|
9,002.3
|
|
|
|
1,550.0
|
|
|
|
(44.8
|
)
|
|
|
|
|
10,507.5
|
|
Commissions, expenses, fees, taxes, and other
|
|
|
456.6
|
|
|
|
238.5
|
|
|
|
|
|
|
|
|
|
695.1
|
|
Reinsurance balances and funds
|
|
|
335.8
|
|
|
|
65.7
|
|
|
|
|
|
|
|
|
|
401.5
|
|
Federal income tax payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
102.8
|
|
|
|
|
|
|
|
(102.8
|
)
|
|
2(d)
|
|
|
|
|
Debt
|
|
|
347.2
|
|
|
|
137.4
|
|
|
|
|
|
|
|
|
|
484.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
10,245.0
|
|
|
|
1,991.6
|
|
|
|
(147.6
|
)
|
|
|
|
|
12,089.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shareholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
241.0
|
|
|
|
171.1
|
|
|
|
(153.3
|
)
|
|
2(j),2(l)
|
|
|
258.8
|
|
Additional paid-in capital
|
|
|
416.2
|
|
|
|
111.9
|
|
|
|
99.5
|
|
|
2(j),2(l)
|
|
|
627.6
|
|
Retained earnings
|
|
|
2,911.8
|
|
|
|
163.8
|
|
|
|
(29.5
|
)
|
|
2(i),2(k),2(l)
|
|
|
3,046.1
|
|
Accumulated other comprehensive income (loss)
|
|
|
468.3
|
|
|
|
(5.9
|
)
|
|
|
5.9
|
|
|
2(l)
|
|
|
468.3
|
|
Unallocated ESSOP shares (at cost)
|
|
|
(41.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(41.5
|
)
|
Treasury stock (at cost)
|
|
|
|
|
|
|
(22.8
|
)
|
|
|
22.8
|
|
|
2(l)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Common Shareholders Equity
|
|
|
3,995.8
|
|
|
|
418.1
|
|
|
|
(54.6
|
)
|
|
|
|
|
4,359.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities, and Common Shareholders Equity
|
|
$
|
14,240.9
|
|
|
$
|
2,409.7
|
|
|
$
|
(202.2
|
)
|
|
|
|
$
|
16,448.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to the Unaudited Pro Forma Condensed
Combined Financial Statements
27
Unaudited
Pro Forma Condensed Combined Statement of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2010
|
|
|
|
Historical
|
|
|
Historical
|
|
|
Pro Forma
|
|
|
|
|
|
Pro Forma
|
|
|
|
Old Republic
|
|
|
PMA
|
|
|
Adjustments
|
|
|
Notes
|
|
|
Old Republic
|
|
|
|
($ in millions, except share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
752.3
|
|
|
$
|
103.5
|
|
|
$
|
|
|
|
|
|
|
|
$
|
855.8
|
|
Title, escrow, and other fees
|
|
|
76.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums and fees
|
|
|
828.5
|
|
|
|
103.5
|
|
|
|
|
|
|
|
|
|
|
|
932.0
|
|
Net investment income
|
|
|
96.2
|
|
|
|
9.1
|
|
|
|
|
|
|
|
|
|
|
|
105.3
|
|
Other income
|
|
|
4.8
|
|
|
|
21.4
|
|
|
|
|
|
|
|
|
|
|
|
26.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
929.6
|
|
|
|
134.0
|
|
|
|
|
|
|
|
|
|
|
|
1,063.6
|
|
Realized investment gains
|
|
|
2.9
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
932.6
|
|
|
|
134.4
|
|
|
|
|
|
|
|
|
|
|
|
1,067.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, Claims and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, claims and settlement expenses
|
|
|
491.6
|
|
|
|
75.1
|
|
|
|
|
|
|
|
|
|
|
|
566.7
|
|
Dividends to policyholders
|
|
|
2.5
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
3.0
|
|
Underwriting, acquisition, and other expenses
|
|
|
400.6
|
|
|
|
43.7
|
|
|
|
|
|
|
|
|
|
|
|
444.3
|
|
Interest and other charges
|
|
|
6.5
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
9.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
901.3
|
|
|
|
121.8
|
|
|
|
|
|
|
|
|
|
|
|
1,023.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes (credits)
|
|
|
31.2
|
|
|
|
12.6
|
|
|
|
|
|
|
|
|
|
|
|
43.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes (Credits):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
11.4
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
11.6
|
|
Deferred
|
|
|
(5.2
|
)
|
|
|
4.3
|
|
|
|
|
|
|
|
|
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6.2
|
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
10.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income from Continuing Operations
|
|
$
|
25.0
|
|
|
$
|
8.1
|
|
|
$
|
|
|
|
|
|
|
|
$
|
33.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Per Share from Continuing Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.11
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.11
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
236,387,779
|
|
|
|
32,199,378
|
|
|
|
17,709,658
|
|
|
|
|
|
|
|
254,097,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
236,462,231
|
|
|
|
32,260,938
|
|
|
|
17,743,516
|
|
|
|
|
|
|
|
254,205,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to the Unaudited Pro Forma Condensed
Combined Financial Statements
28
Unaudited
Pro Forma Condensed Combined Statement of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2009
|
|
|
|
Historical
|
|
|
Historical
|
|
|
Pro Forma
|
|
|
|
|
|
Pro Forma
|
|
|
|
Old Republic
|
|
|
PMA
|
|
|
Adjustments
|
|
|
Notes
|
|
|
Old Republic
|
|
|
|
($ in millions, except share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
3,111.5
|
|
|
$
|
414.8
|
|
|
$
|
|
|
|
|
|
|
|
$
|
3,526.3
|
|
Title, escrow, and other fees
|
|
|
277.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
277.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums and fees
|
|
|
3,388.9
|
|
|
|
414.8
|
|
|
|
|
|
|
|
|
|
|
|
3,803.7
|
|
Net investment income
|
|
|
383.5
|
|
|
|
36.9
|
|
|
|
|
|
|
|
|
|
|
|
420.4
|
|
Other income
|
|
|
24.8
|
|
|
|
79.5
|
|
|
|
|
|
|
|
|
|
|
|
104.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
3,797.2
|
|
|
|
531.2
|
|
|
|
|
|
|
|
|
|
|
|
4,328.4
|
|
Realized investment gains
|
|
|
6.3
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
6.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
3,803.6
|
|
|
|
531.7
|
|
|
|
|
|
|
|
|
|
|
|
4,335.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, Claims and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, claims and settlement expenses
|
|
|
2,591.0
|
|
|
|
291.2
|
|
|
|
|
|
|
|
|
|
|
|
2,882.2
|
|
Dividends to policyholders
|
|
|
7.8
|
|
|
|
8.7
|
|
|
|
|
|
|
|
|
|
|
|
16.5
|
|
Underwriting, acquisition, and other expenses
|
|
|
1,454.0
|
|
|
|
190.4
|
|
|
|
|
|
|
|
|
|
|
|
1,644.4
|
|
Interest and other charges
|
|
|
24.2
|
|
|
|
9.8
|
|
|
|
|
|
|
|
|
|
|
|
34.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
4,077.2
|
|
|
|
500.1
|
|
|
|
|
|
|
|
|
|
|
|
4,577.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes (credits)
|
|
|
(273.6
|
)
|
|
|
31.6
|
|
|
|
|
|
|
|
|
|
|
|
(242.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes (Credits):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
56.5
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
56.8
|
|
Deferred
|
|
|
(230.9
|
)
|
|
|
(9.5
|
)
|
|
|
|
|
|
|
|
|
|
|
(240.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(174.4
|
)
|
|
|
(9.2
|
)
|
|
|
|
|
|
|
|
|
|
|
(183.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) from Continuing Operations
|
|
$
|
(99.1
|
)
|
|
$
|
40.8
|
|
|
$
|
|
|
|
|
|
|
|
$
|
(58.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Per Share from Continuing Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.42
|
)
|
|
$
|
1.27
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.42
|
)
|
|
$
|
1.27
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
235,657,425
|
|
|
|
32,133,970
|
|
|
|
17,673,684
|
|
|
|
|
|
|
|
253,331,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
235,657,425
|
|
|
|
32,186,402
|
|
|
|
17,673,684
|
|
|
|
|
|
|
|
253,331,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to the Unaudited Pro Forma Condensed
Combined Financial Statements
29
NOTES TO
THE UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
($ in millions, except share data)
|
|
Note 1
|
Basis of
Presentation
|
On June 9, 2010, Old Republic International Corporation
(Old Republic) entered into an agreement and plan of merger with
PMA Capital Corporation (PMA). The unaudited pro forma condensed
combined balance sheet reflects the merger as if it had occurred
on March 31, 2010. The unaudited pro forma condensed
combined statements of income for the year ended
December 31, 2009 and for the three months ended
March 31, 2010 reflect the merger as if it had occurred as
of January 1, 2009. These pro forma financial statements
have been prepared by Old Republic management, after discussion
with PMAs management and are based on historical
consolidated financial statements for Old Republic and PMA.
Certain amounts from PMAs historical consolidated
financial statements have been reclassified to conform to the
Old Republic presentation.
The unaudited pro forma condensed combined statements of income
do not include any financial benefits, asset dispositions,
revenue enhancements or operating expense efficiencies which
could arise from the merger.
Note 2 Pro
forma Adjustments
Pursuant to the merger agreement, Old Republic will issue
0.55 shares of Old Republic common stock in exchange for
each outstanding common share of PMA Capital. Depending on the
Old Republic measurement price, the exchange ratio may be
adjusted upwards or downwards, but will not exceed 0.60 or be
less than 0.50. For purposes of the pro forma financial
statements, an exchange ratio of 0.55 is assumed. For financial
accounting purposes, the merger will be recorded as a purchase
of PMA by Old Republic. The purchase method of accounting
requires that the acquired companys identifiable assets
and liabilities be recorded at their estimated fair value as of
the date of acquisition. Old Republic will therefore make
necessary fair value adjustments to PMAs asset and
liability accounts as of the acquisition date in consideration
of the following factors:
(a) The use of then current market values to establish the
fair value of investment securities, and of independently
appraised values attributable to certain fixed assets such as
office buildings;
(b) The conformance of PMAs accounting policies to
Old Republics in the valuation of various assets and
liabilities. The adjustments most likely to be made in these
regards will apply to:
(i) Estimated deferred acquisition costs;
(ii) Loss and loss adjustment expense reserve estimates and
related amounts recoverable from reinsurers to reflect
variations in discount rates and the amount and timing of future
payments on such reserves; and
(iii) Pension liabilities and stock based compensation;
(c) The elimination of PMA carried goodwill and intangible
assets, substituting therefor any goodwill amount resulting from
allocation of the purchase price to individual assets, including
identifiable intangible assets, and liabilities;
(d) The adjustment of deferred income tax asset balances to
reflect limitations on the amount of PMAs net operating
loss carry forward that can inure to the merged businesses. (The
adjustment shown in the accompanying pro forma balance sheet
reflects a reclassification of Old Republics net deferred
tax liability); and
(e) The reduction of deferred acquisition costs to their
estimated fair value and the adjustment of the unearned premium
liability to fair value, determined as the undiscounted
liability less unamortized deferred acquisition costs.
30
NOTES TO
THE UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL
STATEMENTS (Continued)
Following the merger, Old Republic also anticipates that it will
make the following more significant changes to PMAs
operating and financial management model:
(f) Reconfigure a substantial portion of PMAs
investment portfolio to align it with Old Republics
investment management practices in regard to such factors as
type, quality, and maturity distribution of fixed maturity
securities holdings;
(g) Change PMAs external reinsurance ceded practices
to adhere more closely to Old Republics in regard to such
matters as amount of exposures retained, type and financial
standing of approved assuming reinsurers, and type of risk
transfer reinsurance programs; and
(h) Reduce the PMA insurance companies operating and
balance sheet leverage through internal reinsurance arrangements
with several Old Republic General Insurance Group subsidiaries
acting as companion risk carriers.
The changes contemplated at (f), (g), and (h) could also
have an effect on several purchase date adjustments noted above,
and on PMAs financial position and operating results
subsequent to the acquisition date.
In the accompanying pro forma balance sheet, the preliminary
estimated purchase price has been calculated by using the quoted
market value per share of Old Republic on July 9, 2010.
This purchase price will be adjusted subsequently to reflect the
quoted market value of the Old Republic common shares as of the
acquisitions effective date.
Calculation
of Preliminary Estimated Purchase Price
|
|
|
|
|
PMA shares outstanding as of July 9, 2010
|
|
|
32,280,474
|
|
Estimated exchange ratio
|
|
|
0.55
|
|
|
|
|
|
|
Total Old Republic shares to be issued
|
|
|
17,754,260
|
|
Old Republic closing share price on July 9, 2010
|
|
$
|
12.85
|
|
|
|
|
|
|
Estimated purchase price before adjustments for stock based
compensation
|
|
$
|
228.1
|
|
Estimated fair value of PMA options outstanding as of
July 9, 2010
|
|
$
|
1.1
|
|
|
|
|
|
|
Estimated purchase price
|
|
$
|
229.2
|
|
|
|
|
|
|
(i) The July 9, 2010 valuation of the Old Republic
shares exchangeable for PMAs stock, when compared to the
latters reported shareholders equity account as of
March 31, 2010, as adjusted for certain preliminary
purchase adjustments, largely accounts for the preliminary
negative goodwill balance ($140.3) which would be recorded as a
gain on bargain purchase upon closing of the merger.
Accordingly, such amount is reflected as an increase in retained
earnings in the pro forma balance sheet. Preliminary negative
goodwill will be adjusted based upon the final purchase price
allocation as of the closing date of the merger.
(j) In connection with the merger, 17,754,260 Old Republic
shares are expected to be issued in exchange for all of
PMAs common shares and common shares issued following
vesting of PMA restricted shares.
(k) Total transaction costs currently estimated at $6.0
will be incurred and expensed by the consolidated entity.
Consequently an adjustment of $6.0 was recorded to cash and to
retained earnings as of March 31, 2010 to reflect the
estimated transaction costs.
(l) Elimination of PMAs common stock of $171.1,
additional paid-in capital of $111.9, retained earnings of
$163.8, other comprehensive loss of $5.9, and treasury stock of
$22.8.
As noted above, the accompanying pro forma financial statements
were prepared using the quoted market price of $12.85 per share
of Old Republic, the closing price on July 9, 2010, and an
exchange ratio of 0.55 shares of Old Republic common stock
for each share of PMA class A common stock. The exchange
ratio may be adjusted to a
31
NOTES TO
THE UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL
STATEMENTS (Continued)
minimum of 0.50 or maximum of 0.60 depending on the Old Republic
measurement price (see The Merger Agreement
Terms of the Merger below). The effect of an increase in
Old Republics stock price to $18.70 per share, or an
decrease to $11.46 per share, assuming the minimum and maximum
exchange ratios, on the estimated purchase price and pro forma
common shareholders equity is as follows:
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
|
Maximum
|
|
|
Exchange ratio
|
|
|
0.50
|
|
|
|
0.60
|
|
Old Republics assumed share price at closing
|
|
$
|
18.70
|
|
|
$
|
11.46
|
|
Estimated purchase price
|
|
$
|
302.9
|
|
|
$
|
223.1
|
|
Increase (decrease) to pro forma shareholders equity:
|
|
|
|
|
|
|
|
|
Common stock
|
|
$
|
(1.7
|
)
|
|
$
|
1.6
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
$
|
75.4
|
|
|
$
|
(7.7
|
)
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
$
|
(73.7
|
)
|
|
$
|
6.1
|
|
|
|
|
|
|
|
|
|
|
As discussed above, pro forma purchase adjustments are based on
certain estimates and assumptions made as of the date of the pro
forma financial information. The actual adjustments will depend
on a number of factors, including changes in the estimated fair
value of net balance sheet assets and operating results of PMA
between March 31, 2010 and the effective date of the
merger. Old Republic expects to make such adjustments at the
effective date of the merger. These adjustments are likely to be
different from the adjustments made to prepare the pro forma
financial statements and such differences may be material.
The historical and pro forma debt of Old Republic and PMA is
summarized as follows:.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010
|
|
|
|
Historical
|
|
|
Historical
|
|
|
Pro forma
|
|
|
|
Old Republic
|
|
|
PMA
|
|
|
Old Republic
|
|
|
8.00% Convertible Senior Notes due 2012
|
|
$
|
316.2
|
|
|
$
|
|
|
|
$
|
316.2
|
|
ESSOP debt with an average yield of 3.73%
|
|
|
25.8
|
|
|
|
|
|
|
|
25.8
|
|
Trust preferred debt
|
|
|
|
|
|
|
62.5
|
|
|
|
62.5
|
|
8.50% Senior Notes due 2018
|
|
|
|
|
|
|
54.9
|
|
|
|
54.9
|
|
Surplus notes
|
|
|
|
|
|
|
10.0
|
|
|
|
10.0
|
|
Notes payable
|
|
|
|
|
|
|
10.0
|
|
|
|
10.0
|
|
4.25% Convertible debt due 2022
|
|
|
|
|
|
|
|
|
|
|
|
|
Other miscellaneous debt
|
|
|
5.1
|
|
|
|
|
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
347.2
|
|
|
$
|
137.4
|
|
|
$
|
484.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 4
|
Earnings
per Common Share
|
Pro forma earnings per common share for the three months ended
March 31, 2010 and the year ended December 31, 2009
have been calculated based on the estimated weighted average
number of common shares outstanding on a pro forma basis. The
pro forma weighted average number of common shares outstanding
was derived using Old Republics historical weighted
average common shares outstanding and PMAs historical
weighted average common shares outstanding multiplied by the
exchange ratio.
32
NOTES TO
THE UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the calculation of basic and
diluted earnings per share for the three months ended
March 31, 2010:
|
|
|
|
|
Historical PMA basic weighted average common shares outstanding
|
|
|
32,199,378
|
|
Exchange Ratio
|
|
|
0.55
|
|
|
|
|
|
|
Pro forma PMA basic weighted average common shares outstanding
|
|
|
17,709,658
|
|
Historical Old Republic basic weighted average common shares
outstanding
|
|
|
236,387,779
|
|
|
|
|
|
|
Pro forma Old Republic basic weighted average common shares
outstanding
|
|
|
254,097,437
|
|
|
|
|
|
|
Historical PMA diluted weighted average common shares outstanding
|
|
|
32,260,938
|
|
Exchange Ratio
|
|
|
0.55
|
|
|
|
|
|
|
Pro forma PMA diluted weighted average common shares outstanding
|
|
|
17,743,516
|
|
Historical Old Republic diluted weighted average common shares
outstanding
|
|
|
236,462,231
|
|
|
|
|
|
|
Pro forma Old Republic diluted weighted average common shares
outstanding
|
|
|
254,205,747
|
|
|
|
|
|
|
Pro forma Old Republic net income from continuing operations
|
|
$
|
33.1
|
|
|
|
|
|
|
Pro forma Old Republic net income per share from continuing
operations:
|
|
|
|
|
Basic
|
|
$
|
0.13
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.13
|
|
|
|
|
|
|
The following table sets forth the calculation of basic and
diluted earnings per share for the year ended December 31,
2009:
|
|
|
|
|
Historical PMA basic weighted average common shares outstanding
|
|
|
32,133,970
|
|
Exchange Ratio
|
|
|
0.55
|
|
|
|
|
|
|
Pro forma PMA basic weighted average common shares outstanding
|
|
|
17,673,684
|
|
Historical Old Republic basic weighted average common shares
outstanding
|
|
|
235,657,425
|
|
|
|
|
|
|
Pro forma Old Republic basic weighted average common shares
outstanding
|
|
|
253,331,109
|
|
|
|
|
|
|
Pro forma Old Republic diluted weighted average common shares
outstanding
|
|
|
253,331,109
|
*
|
|
|
|
|
|
Pro forma Old Republic net loss from continuing operations
|
|
$
|
(58.3
|
)
|
|
|
|
|
|
Pro forma Old Republic net loss per share from continuing
operations:
|
|
|
|
|
Basic
|
|
$
|
(0.23
|
)
|
|
|
|
|
|
Diluted
|
|
$
|
(0.23
|
)*
|
|
|
|
|
|
|
|
|
* |
|
Common share equivalents have been excluded from diluted
earnings per share calculations because their effect would be
antidilutive. |
33
NOTES TO
THE UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
Note 5
|
Book
Value per Share
|
The following table sets forth the calculation of book value per
share as of March 31, 2010. The pro forma number of common
shares outstanding was determined as if the shares issued,
pursuant to the merger, had been issued and outstanding as of
March 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
Pro Forma
|
|
|
|
Old Republic
|
|
|
Old Republic
|
|
|
Book value per common share calculation
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
$
|
3,995.8
|
|
|
$
|
4,359.3
|
|
Shares
|
|
|
236,466,473
|
|
|
|
254,204,589
|
|
|
|
|
|
|
|
|
|
|
Book value per common share
|
|
$
|
16.90
|
|
|
$
|
17.15
|
|
|
|
|
|
|
|
|
|
|
34
COMPARATIVE
PER SHARE DATA
The historical per share earnings, dividends, and book value of
Old Republic and PMA shown in the table below are derived from
their respective audited consolidated financial statements as of
and for the year ended December 31, 2009 and their
respective unaudited financial statements for the three months
ended March 31, 2010. The pro forma comparative basic and
diluted earnings per share and dividends per share data give
effect to the merger using the purchase method of accounting as
if the merger had been completed on January 1, 2009 for the
year ended December 31, 2009 and for the three months ended
March 31, 2010. The pro forma book value per share
information was computed as if the merger had been completed on
March 31, 2010. You should read this information in
conjunction with the historical financial information of Old
Republic and of PMA included or incorporated elsewhere in this
proxy statement/prospectus, including Old Republics and
PMAs financial statements and related notes. The per share
pro forma information assumes that all shares of PMA
class A common stock are converted into shares of Old
Republic common stock at the exchange ratio. The pro forma
information presented below is for illustrative purposes only
and is not necessarily indicative of the operating results or
financial position that would have been achieved if the merger
had been completed as of the beginning of the period presented,
nor is it necessarily indicative of the future operating results
or financial position of Old Republic after the merger.
The PMA pro forma equivalent per share amounts are calculated by
multiplying the applicable Old Republic pro forma combined
amount by the exchange ratio of 0.55 shares of Old Republic
common stock for each share of PMA class A common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2010
|
|
For the Year Ended December 31, 2009
|
|
|
Old Republic
|
|
PMA
|
|
Old Republic
|
|
PMA
|
|
|
|
|
Pro
|
|
|
|
Pro
|
|
|
|
Pro
|
|
|
|
Pro
|
|
|
|
|
Forma
|
|
|
|
Forma
|
|
|
|
Forma
|
|
|
|
Forma
|
|
|
Historical
|
|
Combined
|
|
Historical
|
|
Equivalent
|
|
Historical
|
|
Combined
|
|
Historical
|
|
Equivalent
|
|
Basic earnings per share from continuing operations
|
|
$
|
0.11
|
|
|
$
|
0.13
|
|
|
$
|
0.25
|
|
|
$
|
0.07
|
|
|
$
|
(0.42
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
1.27
|
|
|
$
|
(0.13
|
)
|
Diluted earnings per share from continuing operations
|
|
$
|
0.11
|
|
|
$
|
0.13
|
|
|
$
|
0.25
|
|
|
$
|
0.07
|
|
|
$
|
(0.42
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
1.27
|
|
|
$
|
(0.13
|
)
|
Dividends declared
|
|
$
|
0.1725
|
|
|
$
|
0.1725
|
|
|
|
|
|
|
$
|
0.09
|
|
|
$
|
0.68
|
|
|
$
|
0.68
|
|
|
|
|
|
|
$
|
0.37
|
|
Book value per share
|
|
$
|
16.90
|
|
|
$
|
17.15
|
|
|
$
|
12.96
|
|
|
$
|
9.43
|
|
|
$
|
16.49
|
|
|
|
N/A
|
|
|
$
|
12.46
|
|
|
|
N/A
|
|
COMPARATIVE
MARKET PRICE AND DIVIDEND INFORMATION
Old Republics common stock is listed on the NYSE under the
symbol ORI. PMAs class A common stock is
listed on the Nasdaq Global Select Market under the symbol
PMACA. The following table presents closing prices
for shares of Old Republic common stock and PMA class A
common stock on June 9, 2010, the last trading day before
the public announcement of the execution of the merger agreement
by Old Republic and PMA, and July 30, 2010, the latest
practicable trading day before the date of this proxy
statement/prospectus.
|
|
|
|
|
|
|
|
|
|
|
Old Republic
|
|
PMA Class A
|
|
|
Common Stock
|
|
Common Stock
|
|
June 9, 2010
|
|
$
|
12.91
|
|
|
$
|
6.11
|
|
July 30, 2010
|
|
$
|
12.51
|
|
|
$
|
6.71
|
|
35
The table below sets forth, for the calendar quarters indicated,
the high and low sale prices per share of Old Republic common
stock on the NYSE and per share of PMA class A common stock
on the Nasdaq Global Select Market, and cash dividends declared
for each quarterly period presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Old Republic
|
|
|
PMA
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Dividends
|
|
|
High
|
|
|
Low
|
|
|
Dividends
|
|
|
1st quarter
|
|
|
2007
|
|
|
$
|
23.74
|
|
|
$
|
21.38
|
|
|
$
|
.15
|
|
|
$
|
9.77
|
|
|
$
|
8.40
|
|
|
$
|
|
|
2nd quarter
|
|
|
2007
|
|
|
|
22.69
|
|
|
|
20.95
|
|
|
|
.16
|
|
|
|
11.40
|
|
|
|
9.12
|
|
|
|
|
|
3rd quarter
|
|
|
2007
|
|
|
|
21.91
|
|
|
|
16.56
|
|
|
|
.16
|
|
|
|
11.17
|
|
|
|
8.63
|
|
|
|
|
|
4th quarter
|
|
|
2007
|
|
|
$
|
19.57
|
|
|
$
|
13.57
|
|
|
$
|
.16
|
|
|
$
|
10.69
|
|
|
$
|
8.05
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st quarter
|
|
|
2008
|
|
|
$
|
15.96
|
|
|
$
|
11.85
|
|
|
$
|
.16
|
|
|
$
|
9.14
|
|
|
$
|
7.45
|
|
|
$
|
|
|
2nd quarter
|
|
|
2008
|
|
|
|
15.55
|
|
|
|
11.84
|
|
|
|
.17
|
|
|
|
10.23
|
|
|
|
8.24
|
|
|
|
|
|
3rd quarter
|
|
|
2008
|
|
|
|
17.25
|
|
|
|
9.19
|
|
|
|
.17
|
|
|
|
12.00
|
|
|
|
8.00
|
|
|
|
|
|
4th quarter
|
|
|
2008
|
|
|
$
|
12.99
|
|
|
$
|
6.77
|
|
|
$
|
.17
|
|
|
$
|
9.47
|
|
|
$
|
3.46
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st quarter
|
|
|
2009
|
|
|
$
|
12.80
|
|
|
$
|
7.24
|
|
|
$
|
.17
|
|
|
$
|
7.20
|
|
|
$
|
3.50
|
|
|
$
|
|
|
2nd quarter
|
|
|
2009
|
|
|
|
12.18
|
|
|
|
8.75
|
|
|
|
.17
|
|
|
|
5.35
|
|
|
|
3.70
|
|
|
|
|
|
3rd quarter
|
|
|
2009
|
|
|
|
12.85
|
|
|
|
8.98
|
|
|
|
.17
|
|
|
|
6.33
|
|
|
|
4.27
|
|
|
|
|
|
4th quarter
|
|
|
2009
|
|
|
$
|
12.49
|
|
|
$
|
10.03
|
|
|
$
|
.17
|
|
|
$
|
7.44
|
|
|
$
|
4.64
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st quarter
|
|
|
2010
|
|
|
$
|
12.75
|
|
|
$
|
10.02
|
|
|
$
|
.1725
|
|
|
$
|
6.89
|
|
|
$
|
5.60
|
|
|
$
|
|
|
Old Republic and PMA urge PMA shareholders to obtain current
market quotations for shares of Old Republic common stock and
PMA class A common stock before making any decision
regarding the adoption of the merger agreement. No assurance can
be given concerning the market price for Old Republic common
stock before or after the date on which the merger is
consummated. The market price for Old Republic common stock will
fluctuate between the date of this proxy statement/prospectus
and the date on which the merger is consummated and thereafter.
See The Merger Agreement Terms of the
Merger.
As of July 29, 2010, there were 2,609 registered holders of
Old Republics common stock. See Note 3(c) of the
Notes to Consolidated Financial Statements for the year ended
December 31, 2009 for a description of certain regulatory
restrictions on the payment of dividends by Old Republics
insurance subsidiaries.
36
COMPARATIVE
FIVE YEAR PERFORMANCE GRAPHS FOR COMMON STOCK
Old
Republic
The following table, prepared on the basis of market and related
data furnished by Standard & Poors Total Return
Service, reflects total market return data for the most recent
five calendar years ended December 31, 2009. For purposes
of the presentation, the information is shown in terms of $100
invested at the close of trading on the last trading day
preceding the first day of the fifth preceding year. The $100
investment is deemed to have been made either in Old Republic
common stock, in the S&P 500 Index of common stocks, or in
an aggregate of the common shares of the Peer Group of publicly
held insurance businesses selected by Old Republic. The
cumulative total return assumes reinvestment of cash dividends
on a pretax basis.
The information utilized to prepare the following table has been
obtained from sources believed to be reliable, but no
representation is made that it is accurate or complete in all
respects.
Comparison
of Five Year Total Market Return
OLD REPUBLIC INTERNATIONAL CORPORATION vs. S&P 500 vs. Peer
Group
(For the five years ended December 31, 2009)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec 04
|
|
|
Dec 05
|
|
|
Dec 06
|
|
|
Dec 07
|
|
|
Dec 08
|
|
|
Dec 09
|
ORI
|
|
|
$
|
100.00
|
|
|
|
$
|
110.52
|
|
|
|
$
|
125.81
|
|
|
|
$
|
86.11
|
|
|
|
$
|
70.30
|
|
|
|
$
|
63.08
|
|
S&P 500
|
|
|
|
100.00
|
|
|
|
|
104.91
|
|
|
|
|
121.48
|
|
|
|
|
128.16
|
|
|
|
|
80.74
|
|
|
|
|
102.11
|
|
Peer Group
|
|
|
|
100.00
|
|
|
|
|
115.44
|
|
|
|
|
132.48
|
|
|
|
|
122.50
|
|
|
|
|
95.42
|
|
|
|
|
106.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Peer Group consists of the following publicly held
corporations selected by the Company for its 2004 to 2009
comparison: Ace Limited, American Financial Group, Inc., The
Chubb Corporation, Cincinnati Financial Corporation, First
American Corporation, Stewart Information Services Corporation,
MGIC Investment Corporation, Markel Corporation, PMI Group Inc.,
Travelers Companies, Inc., and XL Capital Ltd.
The composition of the Peer Group companies has been approved by
Old Republics compensation committee.
37
PMA
The following graph provides an indicator of cumulative total
shareholder return on PMAs class A common stock for
the last five fiscal years compared with the cumulative total
return of the Standard & Poors 500 Stock Index
(the S&P 500), the Standard &
Poors Supercomposite Property/Casualty Insurance Index
(the S&P Super P/C) and the
Standard & Poors 600 Insurance Property/Casualty
Index (the S&P 600 P/C) for the same periods.
The graph assumes that with respect to PMAs class A
common stock, the S&P 500, the S&P Super P/C and the
S&P 600 P/C, $100 was invested on December 31, 2004,
and all dividends were reinvested.
Cumulative
Total Return
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2004
|
|
|
12/31/2005
|
|
|
12/31/2006
|
|
|
12/31/2007
|
|
|
12/31/2008
|
|
|
12/31/2009
|
PMA Capital
|
|
|
$
|
100.00
|
|
|
|
$
|
88.21
|
|
|
|
$
|
89.08
|
|
|
|
$
|
79.42
|
|
|
|
$
|
68.41
|
|
|
|
$
|
60.87
|
|
S&P 500
|
|
|
|
100.00
|
|
|
|
|
104.83
|
|
|
|
|
121.20
|
|
|
|
|
127.85
|
|
|
|
|
81.12
|
|
|
|
|
102.15
|
|
S&P Super P/C
|
|
|
|
100.00
|
|
|
|
|
116.61
|
|
|
|
|
130.75
|
|
|
|
|
113.56
|
|
|
|
|
88.06
|
|
|
|
|
93.15
|
|
S&P 600 P/C
|
|
|
|
100.00
|
|
|
|
|
126.59
|
|
|
|
|
139.64
|
|
|
|
|
122.88
|
|
|
|
|
113.63
|
|
|
|
|
97.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This document contains certain forward-looking information about
Old Republic and PMA and the combined company that is intended
to be covered by the safe harbor for forward-looking
statements provided by the Private Securities Litigation
Reform Act of 1995. These statements may be made directly in
this proxy statement/prospectus or may be incorporated into this
proxy statement/prospectus by reference to other documents and
may include statements for the period after the completion of
the merger. Representatives of Old Republic and PMA may also
make forward-looking statements. Forward-looking statements are
statements that are not historical facts. Words such as
expect, believe, will,
may, anticipate, plan,
estimate, intend, should,
can, likely, could and
similar expressions are intended to identify forward-looking
statements. These statements include statements about the
expected benefits of the merger, information about the combined
companys objectives, plans and expectations, the
likelihood of satisfaction of certain conditions to the
completion of the merger and whether and when the merger will be
completed. Forward-looking statements are not guarantees of
performance. These statements are based upon the current beliefs
and expectations of the management of each of Old Republic and
PMA and are subject to a number of risks, uncertainties and
assumptions, most of which are difficult to predict and many of
which are beyond Old Republics and PMAs control.
These include, but are not limited to, quarterly variations in
operating results, adverse changes in economic conditions in the
markets served by Old Republic or PMA or by their customers,
estimates and assumptions in determining financial results, and
the other risks described under the caption Risk
Factors in this proxy statement/prospectus, in Old
Republics Annual Report on
Form 10-K
for the year ended December 31, 2009 and Quarterly Report
on
Form 10-Q
for the three months ended March 31, 2010 and in PMAs
Annual Report on
Form 10-K
for the year ended December 31, 2009 and Quarterly Report
on
Form 10-Q
for the three months ended March 31, 2010.
Factors that could cause actual results to differ materially
from those contemplated by the forward-looking statements
include, among others, the following factors:
|
|
|
|
|
the ability to consummate the merger;
|
|
|
|
|
|
the ability to integrate the operations of Old Republic and PMA;
|
|
|
|
the amount and timing of any cost savings synergies or other
efficiencies expected to result from the merger;
|
|
|
|
the effects of competition in our markets;
|
|
|
|
the current economic condition and expected trends in the
industries we serve;
|
|
|
|
the various risks and other factors considered by the respective
boards of Old Republic and PMA as described under The
Merger PMAs Reasons for the Merger,
The Merger Recommendations of the PMA Board of
Directors with Respect to the Merger and The
Merger Old Republics Reasons for the
Merger;
|
|
|
|
the impact of political, regulatory and rating agency
developments;
|
|
|
|
future and pro forma financial condition or results of
operations and future revenues and expenses; and
|
|
|
|
business strategy and other plans and objectives for future
operations.
|
Should one or more of the risks or uncertainties described above
or elsewhere in this proxy statement/prospectus, in Old
Republics Annual Report on
Form 10-K
for the year ended December 31, 2009 or Quarterly Report on
Form 10-Q
for the three months ended March 31, 2010 or in PMAs
Annual Report on
Form 10-K
for the year ended December 31, 2009 or Quarterly Report on
Form 10-Q
for the three months ended March 31, 2010 occur, or should
underlying assumptions prove incorrect, actual results and plans
could differ materially from those expressed in any
forward-looking statements.
All forward-looking statements, expressed or implied, included
in this proxy statement/prospectus are expressly qualified in
their entirety by this cautionary statement. This cautionary
statement should also be considered in connection with any
subsequent written or oral forward-looking statements that Old
Republic, PMA or persons acting on their behalf may issue.
In light of these risks and uncertainties, the results
anticipated by the forward-looking statements discussed in this
proxy statement/prospectus or made by representatives of Old
Republic or PMA may not occur. Readers are cautioned not to
place undue reliance on these forward-looking statements, which
speak only as of the date hereof
39
or, in the case of statements incorporated by reference, on the
date of the document incorporated by reference, or, in the case
of statements made by representatives of Old Republic or PMA, on
the date those statements are made. All subsequent written and
oral forward-looking statements concerning the merger or the
combined company or other matters addressed in this proxy
statement/prospectus and attributable to Old Republic or PMA or
any person acting on their behalf are expressly qualified in
their entirety by the cautionary statements contained or
referred to in this section. Except to the extent required by
applicable law or regulation, neither Old Republic nor PMA
undertakes any obligation to update or publish revised
forward-looking statements to reflect events or circumstances
after the date hereof or the date of the forward-looking
statements or to reflect the occurrence of unanticipated events.
THE
MERGER
The following is a description of the material aspects of the
background and history behind the merger. This description may
not contain all of the information that is important to you. You
are encouraged to carefully read this entire proxy
statement/prospectus, including the merger agreement attached
hereto as Annex A, for a more complete understanding of the
merger.
Background
of the Merger
PMAs board of directors and senior management regularly
review and consider business alternatives that would enhance
shareholder value, including strategic alternatives and
opportunities for organic growth. From time to time, PMA has
evaluated strategic options in light of the business trends and
regulatory conditions impacting it or expected to impact it and
the insurance industry.
In the fall of 2008, PMAs Chief Executive Officer, Chief
Financial Officer and board had discussions about various
strategic alternatives and capital markets initiatives that
would enhance PMAs ability to implement its strategic
plan. Recognizing the challenges facing PMA including general
uncertainty with respect to the sale of PMAs run-off
operations, challenges inherent in being a smaller
publicly-traded insurance company, extreme negative economic
conditions and rating agency pressures, PMAs senior
management and board held periodic telephonic and in-person
meetings with Merrill Lynch, Pierce, Fenner & Smith
Incorporated (BofA Merrill Lynch), its financial
advisor, to discuss generally PMAs competitive position
and capital raising opportunities and strategic alternatives
that might be available to PMA. On March 28, 2008, PMA
entered a stock purchase agreement in which it agreed to sell
several subsidiaries with reinsurance run-off operations. The
sale of the run-off operations was subject to the approval of
the Pennsylvania Insurance Department. During 2008, the
Pennsylvania Insurance Department commenced its review of the
loss and loss adjustment expense reserves in connection with the
periodic financial examination of PMAs insurance and
reinsurance subsidiaries for the five years ended
December 31, 2007.
On September 17, 2008, BofA Merrill Lynch made a
presentation to the board which included an overview of the
current market environment, PMAs position in the insurance
industry and an overview of capital raising and strategic
alternatives available to PMA. Following the presentation,
PMAs Chief Executive Officer and the board requested that
BofA Merrill Lynch undertake a formal evaluation of strategic
alternatives. Among other things, the board asked BofA Merrill
Lynch to develop a timeline and list of potential merger
candidates to be approached if a sale transaction became a
viable alternative.
From October through December 2008, BofA Merrill Lynch provided
the board, in-person and telephonically, market updates and
additional information on potential merger candidates. BofA
Merrill Lynch also discussed the ability of PMA to access the
private and public equity and debt markets.
On December 12, 2008, PMAs board held a telephonic
meeting. At this meeting, which was also attended by PMAs
Chief Financial Officer and General Counsel and representatives
from BofA Merrill Lynch, the board discussed possible
divestitures, a sale of PMA and capital raising strategies for
PMA, including the potential processes and timelines. During the
meeting, the board considered PMAs ongoing discussions
with A.M. Best and the Pennsylvania Department of Insurance
regarding PMAs sale of its run-off operations. BofA
Merrill Lynch made a presentation to the board that included an
overview of the then current market conditions, a detailed
timeline and a list of potential merger candidates if the board
decided to pursue a sale transaction.
40
Throughout January and February 2009, PMAs board and
senior management continued exploring capital raising and
strategic alternatives with BofA Merrill Lynch, including the
possible sale of PMA.
On February 19, 2009, PMAs board held a meeting,
which was also attended by PMAs Chief Financial Officer
and General Counsel. Management reviewed the status of its
discussions with A.M. Best regarding PMAs sale of the
run-off operations and explained the possible impact on
PMAs financial strength ratings if the sale was not
completed. Management and the board also discussed the
Pennsylvania Insurance Departments review of the sale of
the run-off operations and potential outcomes that could result
from the review. At this meeting, management and the board also
discussed the status of PMAs capital markets and strategic
initiatives. Given the continued uncertainty surrounding the
sale of the run-off operations, the discussion focused on
alternatives in the event that the sale of the run-off
operations was not completed.
On March 20, 2009, PMAs board held a telephonic
meeting, which meeting was attended by PMAs Chief
Financial Officer and General Counsel. Management reviewed the
status of the sale of the run-off operations and advised the
board of their communications with the Pennsylvania Insurance
Department regarding the sale. Management then reported to the
board that the Pennsylvania Insurance Department had hired an
actuarial firm to review the reserves of PMAs insurance
subsidiaries. According to the Department, the results of that
preliminary analysis questioned the reasonableness of the
insurance subsidiaries loss reserves. Management explained
that it was in the process of reviewing the draft analysis and
that numerous errors and questionable assumptions were apparent
based on the review to date. At the meeting, PMAs Chief
Executive Officer noted that, given the circumstances,
PMAs capital markets and strategic initiatives were being
suspended.
On May 6, 2009, PMAs board held a meeting that was
also attended by PMAs Chief Financial Officer and General
Counsel. Management reported on the status of the sale of the
run-off operations and a potential framework that was discussed
between management and the Pennsylvania Insurance Department for
finalizing the sale of the run-off operations. The board and
management discussed the proposed framework, alternatives to
selling the run-off operations and potential ramifications if
the sale was not completed. The board authorized management to
proceed with the sale of the run-off operations based on the
terms described in the framework proposed by the Department.
In early June 2009, A.M. Best placed the ratings of PMA and
its subsidiaries under review with negative implications as a
result of the delay in the sale of PMAs run-off operations
and the potential impact to PMAs capital position when the
transaction closed. PMA and the buyer of the run-off operations
held discussions and communicated that each remained committed
to the sale and PMA believed that the sale would close based on
the revised framework discussed between PMA and the Department
in May. As a result, management, in consultation with the board,
determined that the time was appropriate to resume its
exploration of alternatives with respect to capital raising and
other strategic initiatives.
During June 2009, PMAs board instructed BofA Merrill Lynch
to have preliminary discussions with a select list of potential
partners to determine their level of interest in pursuing a
transaction with PMA. After receiving confirmation of interest
from five of the six parties contacted, the board authorized
BofA Merrill Lynch to share additional information and schedule
conversations and meetings between the potential partners and
PMAs senior management team.
On June 5, 2009, PMAs board held a telephonic
meeting, which meeting was also attended by PMAs Chief
Financial Officer and General Counsel, to discuss a recent
ratings press release by A.M. Best and communications with
the Pennsylvania Insurance Department regarding the sale of
PMAs run-off operations.
On June 29, 2009, BofA Merrill Lynch had a call with
members of Old Republics senior management and discussed
the current merger and acquisition environment which included an
overview of PMA.
Beginning in July 2009 and continuing through March 2010, BofA
Merrill Lynch spoke with 17 potential partners with PMAs
approval. A total of seven parties indicated that they were
interested in exploring a potential transaction with PMA, and
six of those parties executed confidentiality agreements with
PMA and received confidential information.
41
On July 14, 2009, PMAs Chief Executive Officer and
Chief Financial Officer met with senior management of Party 1.
Party 1 submitted a preliminary indication of interest on
July 22, 2009 based on public information. Party 1 executed
a confidentiality agreement and, over the course of the
following five months, management shared information with Party
1 and conducted multiple in-person meetings. Party 1 ultimately
withdrew from the process.
On August 6, 2009, PMAs board held a meeting, which
meeting was also attended by PMAs Chief Financial Officer
and General Counsel and representatives of BofA Merrill Lynch.
The BofA Merrill Lynch representatives reviewed the then current
market environment and their recent discussions with potential
partners.
On August 21, 2009, BofA Merrill Lynch spoke with Party
2s financial advisors. Party 2 executed a confidentiality
agreement on August 31, 2009 and received a confidential
information memorandum. During the fall of 2009, BofA Merrill
Lynch and PMAs Chief Executive Officer and Chief Financial
Officer had multiple phone calls and in-person meetings with
Party 2s senior management and their financial advisors.
Party 2 submitted an oral indication of interest in December
2009, but subsequently informed BofA Merrill Lynch it would no
longer participate in the process.
On August 28, 2009, PMA met with the senior management of
Party 3. Infrequent conversations continued between PMA
management and BofA Merrill Lynch and Party 3 through September
and October at which point Party 3 withdrew from the process.
In August 2009, BofA Merrill Lynch had conversations with Old
Republic regarding PMA. On September 3, 2009, PMAs
Chief Executive Officer and Chief Financial Officer, Old
Republics Chief Executive Officer and the President and
representatives of BofA Merrill Lynch met to discuss a potential
transaction at BofA Merrill Lynchs offices in New York
City. A confidentiality agreement was executed on
September 18, 2009 between PMA and Old Republic.
Thereafter, Old Republic commenced a preliminary due diligence
review of PMA.
On September 16, 2009, PMAs board held a meeting
which was also attended by PMAs Chief Financial Officer
and General Counsel, outside counsel and BofA Merrill Lynch to
discuss the status of the strategic alternatives review. At the
meeting, BofA Merrill Lynch presented an update to the board on
the current process, in addition to an overview of the
competitive environment following second quarter results. BofA
Merrill Lynch also provided the board additional information on
potential partners.
On September 21, 2009, PMAs board held a telephonic
meeting, which meeting was also attended by PMAs Chief
Financial Officer and General Counsel and outside counsel, to
review recent discussions with the Pennsylvania Insurance
Department regarding the sale of the run-off operations and the
review by the actuary engaged by the Department of PMAs
insurance subsidiaries loss reserves. Management explained
that PMA had objected to the results of the actuarys
reserve review and was engaging additional independent
consultants to review the loss reserves. The board decided,
given the current regulatory and rating agency issues, to engage
a second outside law firm to advise the board with respect to
strategic alternatives. PMAs Chief Financial Officer and
General Counsel consulted with that law firm over the next
several weeks.
On October 7, 2009, PMAs board held a telephonic
meeting, which meeting was also attended by PMAs Chief
Financial Officer and General Counsel and outside counsel. At
the meeting, the board discussed with management the progress of
the studies commissioned by PMA with respect to its insurance
subsidiaries loss reserves, the status of discussions with
A.M. Best and the status of PMAs strategic partner
review.
On October 12, 2009, PMAs board held a telephonic
meeting, which meeting was attended by PMAs Chief
Financial Officer and General Counsel and outside counsel. The
board received a report on communications with the Pennsylvania
Insurance Department, and the board and management discussed
options available to PMA with respect to its discussions with
the Department, and the status of PMAs strategic partner
review.
PMAs Chief Executive Officer and Chief Financial Officer
met with the chief executive officer of Party 4 on
October 15, 2009. Party 4 continued to show interest into
December 2009, at which time it decided not to proceed with a
transaction.
On October 19, 2009 and October 26, 2009, PMAs
board held telephonic meetings, which were attended by
PMAs Chief Financial Officer and General Counsel and
outside counsel. At the meetings, management reviewed PMAs
meetings with the Pennsylvania Insurance Department. Management
had met with the Department and the
42
prospective buyer in connection with the sale of PMAs
run-off operations and separately with the Department on the
status of the Departments examination of the insurance
subsidiaries. Through discussions with the Department, PMA had
reached a resolution that would allow for the closing of the
sale of the run-off operations. PMA also presented its position
to the Department with respect to the examination, including the
information and analyses that supported the reasonableness of
PMAs loss reserve estimates. The Department agreed to take
the supporting information into consideration as it continued
its review of PMAs reserves. The board decided to move
forward with the sale of the run-off operations based on the
revised terms that had been negotiated.
During November 2009, Party 5 engaged in conversations with BofA
Merrill Lynch regarding PMA. On December 11, 2009, Party 5
executed a confidentiality agreement and received confidential
information. Party 5 participated in a management presentation
by PMA management on January 5, 2010. At the end of January
2010, Party 5 decided not to proceed with a transaction.
On November 5, 2009, BofA Merrill Lynch had a conference
call with senior management of PMA to discuss process and timing.
On November 5, 2009, Old Republic advised BofA Merrill
Lynch that it was not interested in continuing discussions
regarding PMA until the sale of PMAs run-off operations
had been completed.
During November 2009, PMAs Chief Executive Officer had an
initial conversation with the Chief Executive Officer of Party
6. A confidentiality agreement was sent and executed by Party 6
on November 23, 2009. Party 6 received confidential
information and, on January 7, 2010, senior management of
Party 6 attended a management presentation by PMAs
management team. On January 21, 2010, Party 6 submitted an
initial indication of interest. The board of PMA and senior
management, after reviewing the matter with BofA Merrill Lynch,
deemed the indication sufficient to continue discussions. Both
PMA management and BofA Merrill Lynch had multiple discussions
with Party 6 management and their financial advisors over the
ensuing two months, including several due diligence meetings
between March 8 and 11, 2010. On March 11, 2010, Party 6
informed BofA Merrill Lynch they were withdrawing from the
process.
On November 11, 2009, PMAs board held a meeting,
which meeting was also attended by PMAs Chief Financial
Officer and General Counsel. At the meeting, among other items,
the board received a presentation by representatives of BofA
Merrill Lynch regarding the then current capital markets
environment, potential alternatives relating to PMAs
fee-based businesses and recent discussions with potential
partners.
On December 24, 2009, PMA completed the sale of its run-off
operations.
On January 10, 2010, a confidentiality agreement was sent
to Party 7 following conversations between the chief executives
of PMA and Party 7. The confidentiality agreement was executed
on January 12, 2010 and Party 7 subsequently received
confidential information. BofA Merrill Lynch conducted a number
of calls with the financial advisors of Party 7 prior to a PMA
management presentation to Party 7 senior management on
February 16, 2010. In late February 2010, Party 7 informed
BofA Merrill Lynch it would not continue with the process.
On January 14, 2010, PMAs board held a telephonic
meeting, which meeting was also attended by PMAs Interim
Chief Financial Officer and General Counsel. At the meeting, the
board and management discussed its recent meeting with
A.M. Best and discussions with the Pennsylvania Insurance
Department.
By letter dated January 14, 2010, Old Republic submitted an
indication of interest to BofA Merrill Lynch.
On January 15, 2010, BofA Merrill Lynch shared with Old
Republic a summary and preliminary financial analysis of the
sale of PMAs run-off operations.
On January 26, 2010, PMAs board held a telephonic
meeting, which meeting was also attended by PMAs Interim
Chief Financial Officer and General Counsel and representatives
of BofA Merrill Lynch and outside counsel. At the meeting, among
other things, a representative of BofA Merrill Lynch reported on
the status of the capital markets initiative, and reviewed
initial indications of interest received to date. BofA Merrill
Lynch also shared with the board detailed information on each of
the parties engaged in discussions, including examples of what
the combined company would look like if PMA were to partner with
each company. Outside counsel advised the board with respect to
the different types of transactions that may be pursued. The
board requested that
43
management and BofA Merrill Lynch meet and return to the board
with a proposed plan for contacting, in addition to those
entities already contacted, certain of the larger insurance
companies with an interest in workers compensation
insurance, so that the board could perform a comprehensive
evaluation.
On January 29, 2010, BofA Merrill Lynch received approval
from the board to contact six larger insurance companies with an
interest in workers compensation insurance, to discuss
their interest in considering a strategic transaction with PMA.
After contacting the identified parties, BofA Merrill Lynch
informed PMA management and the board none of the parties were
interested in engaging in discussions.
On January 29, 2010, A.M. Best affirmed the
A− rating of PMAs insurance subsidiaries
with a stable outlook.
On February 2, 2010, PMAs board held a telephonic
meeting, which meeting was also attended by PMAs Interim
Chief Financial Officer and General Counsel and outside counsel.
At the meeting, management updated the board on its discussions
with the Pennsylvania Insurance Department. The board and
management discussed the difference between loss reserve
estimates of PMA and the actuary engaged by the Department with
respect to the insurance subsidiaries reserves. Management
outlined its approach with the Department going forward and
reviewed with the board the process for appealing any
examination report that might be issued by the Department.
Management said that it would bring its independent actuarial
analysis to a prompt conclusion and respond to the analysis of
the Departments actuaries using PMAs actuarial
analysis and the independent actuarial analysis, as well as the
independent claim studies. Management reviewed the status of
discussions with potential partners for the board.
On March 3, 2010, PMA received the Pennsylvania Insurance
Department Bureau of Financial Examinations report on the
financial examination of PMAs insurance subsidiaries. The
report questioned the reasonableness of those companies
reserves.
On March 4, 2010, PMAs board held a meeting, which
meeting was also attended by PMAs Interim Chief Financial
Officer and General Counsel. The Examination Report was reviewed
during the meeting and management maintained that its reserves
were reasonable. It disagreed with the report and continued to
work with the Department to determine whether a solution to the
disagreement was possible. At the meeting, representatives of
BofA Merrill Lynch provided an update on the status of the
proposed transaction, noting that there were meetings scheduled
with Party 6 and Old Republic in the next week. BofA Merrill
Lynch also reported that one party was interested in a possible
merger of equals. The board decided to continue with the
scheduled meetings.
On March 5, 2010, PMA met with the Pennsylvania Insurance
Department in an attempt to resolve the difference of opinion
between the independent actuaries engaged by PMA and the
Department with respect to the reserve position of PMAs
insurance subsidiaries.
On March 12, 2010, PMAs board held a telephonic
meeting, which meeting was attended by PMAs Interim Chief
Financial Officer and General Counsel and outside counsel. At
the meeting, management reviewed the meetings that it had with
Party 6 earlier in the week and noted that members of management
were meeting with Old Republic that same day.
On March 12, 2010, management of PMA and Old Republic and
representatives of BofA Merrill Lynch met at BofA Merrill
Lynchs offices in New York City to discuss the proposed
transaction and their respective due diligence. One of the
discussions included a review of the disagreement over reserves
between PMA and the Pennsylvania Insurance Department.
On March 13, 2010, PMAs management team had a meeting
with outside counsel and BofA Merrill Lynch to discuss the
status of conversations with the Pennsylvania Insurance
Department and the sale process that was ongoing. PMAs
Chairman, along with PMAs executive management team,
discussed all alternatives available with outside counsel and
BofA Merrill Lynch.
On March 14, 2010, PMAs board held a telephonic
meeting, which meeting was attended by PMAs Interim Chief
Financial Officer and General Counsel, outside counsel and
representatives of BofA Merrill Lynch. Management reported that
Party 6 had terminated discussions regarding a possible
transaction until the disagreement over reserves with the
Pennsylvania Insurance Department was resolved. Management also
reported that Old
44
Republic remained interested in a transaction with PMA. Old
Republic requested, as a condition for proceeding, a
30-day
exclusivity period to complete its due diligence and enter into
a definitive agreement. The board continued to discuss a
possible transaction with Old Republic, and BofA Merrill Lynch
provided additional information on Old Republic to the board.
After this discussion, the board approved entering into an
exclusivity agreement with Old Republic.
PMA communicated the status of the discussions with Old Republic
to the Pennsylvania Insurance Department on March 13 and 14,
2010 and requested the Department to reject the Bureau of
Examinations report of financial examination.
On March 14, 2010, PMA and Old Republic executed a
30-day
exclusivity agreement.
On March 15, 2010, the Pennsylvania Insurance Department
rejected the Bureau of Examinations report and ordered the
examiner to reopen the examination, obtain additional
information with respect to the insurance companies loss
and LAE reserves and monitor PMAs discussions with Old
Republic regarding a potential transaction.
On March 16, 2010, PMAs board held a telephonic
meeting, which meeting was also attended by PMAs Interim
Chief Financial Officer and General Counsel and outside counsel.
Management and the board reviewed the Annual Report on
Form 10-K
and management reported that it would be updating A.M. Best
on PMAs signed exclusivity agreement with Old Republic.
On March 19, 2010, PMAs General Counsel had a
telephone call with Old Republics General Counsel to
discuss the process for moving forward with the proposed
transaction.
During late March 2010 and early April 2010, Old Republic
continued to conduct its due diligence examination of PMA and
PMA conducted its due diligence examination of Old Republic.
Between April 5 and 9, 2010, management of PMA and Old Republic,
along with representatives of BofA Merrill Lynch, MAKO Credit
Risk Consulting LLC, a mortgage insurance business consultant
engaged by PMA, and Macquarie, Old Republics financial
advisor, met at the offices of Old Republic to conduct due
diligence for the proposed transaction.
On April 12, 2010, PMA received a draft merger agreement
from Old Republic.
On April 14, 2010, PMAs board held a meeting, which
meeting was also attended by PMAs Interim Chief Financial
Officer and General Counsel, outside counsel and representatives
of BofA Merrill Lynch and MAKO Credit Risk Consulting LLC. At
the meeting, among other items, the board received an update on
discussions with Old Republic and a report on the due diligence
being performed by Old Republic. BofA Merrill Lynch noted that
Old Republic was finalizing its due diligence on PMA and its
review of PMAs loss reserves and reinsurance. BofA Merrill
Lynch also reported on the exchange ratio that Old Republic was
considering, including potential adjustments and collar
features. The board also discussed certain terms of the draft
merger agreement received from Old Republic. The board approved
the extension of the exclusivity agreement to May 14, 2010.
Also at the meeting, management reviewed the status of its due
diligence examination of Old Republic, including its review of
the mortgage insurance business and the operating philosophy of
Old Republic. The board also discussed the operating risks of
Old Republic, including potential negative business trends and
litigation relating to Old Republics mortgage insurance
business.
On April 14, 2010, PMA and Old Republic executed a
30-day
extension to the exclusivity agreement to May 14, 2010 to
provide the parties additional time to conduct due diligence and
negotiate the merger agreement.
Also on April 14, 2010, PMA met with the Pennsylvania
Insurance Department in a further attempt to resolve the
difference of opinion between PMA and the Department with
respect to the reserve position of PMAs insurance
subsidiaries.
On April 19, 2010, PMAs board held a telephonic
meeting, which meeting was attended by PMAs Interim Chief
Financial Officer and General Counsel, outside counsel and
representatives of BofA Merrill Lynch. The board received a
status report on discussions with Old Republic, noting that Old
Republic was continuing its due diligence and advised that it
had met with the Pennsylvania Insurance Department
representatives in conjunction with Old
45
Republics due diligence. Management noted that PMA and
counsel were reviewing the draft merger agreement. BofA Merrill
Lynch updated the board on the status of discussions regarding
the exchange ratio.
Between April 26, 2010 and April 29, 2010, PMA and Old
Republic negotiated terms of the merger agreement and exchanged
drafts of the agreement. The significant terms that were
addressed included the exchange ratio, collar, termination
rights, termination fee, PMAs right to receive and respond
to other proposals, the employment and severance agreements of
senior officers and continuation of employee benefit plans.
On May 5, 2010, PMAs board of directors held a
meeting, which meeting was attended by PMAs Interim Chief
Financial Officer and General Counsel, representatives of BofA
Merrill Lynch and outside counsel. At the meeting, management
updated the board on recent discussions with the Pennsylvania
Insurance Department. In addition, representatives of BofA
Merrill Lynch reported to the board on the terms of the proposed
transaction with Old Republic and the status of negotiations
with Old Republic, including discussions regarding the possible
exchange ratio and the status of due diligence. BofA Merrill
Lynch also reviewed the process that was undertaken to contact
other interested parties, noting that a total of 17 parties were
contacted or have contacted PMA, with six parties executing a
confidentiality agreement and completing a preliminary review of
PMA. BofA Merrill Lynch continued with a presentation
summarizing the key economic terms of the possible transaction
with Old Republic then being discussed, including the proposed
exchange ratio, collar and termination fee, as well as a
preliminary valuation analysis involving PMA and Old Republic
and a review of Old Republic and its business. Outside counsel
reviewed some of the legal considerations associated with
proceeding and not proceeding with the proposed transaction. The
board also received a presentation from PMAs General
Counsel on the terms of the proposed merger agreement, including
representations and warranties, covenants, conditions to closing
and termination provisions. Counsel also discussed required
regulatory and shareholder approval requirements, as well as
employment and severance agreements. The board also discussed
potential outcomes if it decided not to move forward with the
transaction, including the possible responses by the
Pennsylvania Insurance Department and rating agencies. Following
the discussion, the board decided to continue to move forward
with the transaction.
On May 5, 2010, PMAs General Counsel had a telephonic
meeting with Old Republics General Counsel to discuss
terms of the proposed transaction.
On May 7, 2010, Old Republics Chief Executive
Officer, Chief Financial Officer and General Counsel met with
the Pennsylvania Insurance Department to discuss matters
relating to the proposed transaction with PMA.
On May 10, 2010, PMAs board held a telephonic
meeting, which meeting was also attended by PMAs Interim
Chief Financial Officer and General Counsel, outside counsel and
representatives of BofA Merrill Lynch. At the meeting, the board
received a report on the status of the proposed transaction with
Old Republic, including a review of the discussions between Old
Republics management and the Pennsylvania Insurance
Department. BofA Merrill Lynch updated the board on discussions
with Old Republics advisors regarding the proposed
exchange ratio. After discussion, the board authorized the
execution of a
30-day
extension to the exclusivity period.
On May 14, 2010, PMA and Old Republic executed an extension
to the exclusivity agreement to June 14, 2010.
On May 17, 2010, PMAs board held a telephonic
meeting, which meeting was also attended by PMAs Interim
Chief Financial Officer and General Counsel, outside counsel,
and representatives of BofA Merrill Lynch. At the meeting, the
board received a report on the status of the proposed
transaction with Old Republic, including a discussion of the
Form A approval process required by Pennsylvania insurance
law. Management also noted that an extension to the exclusivity
period had been executed and that discussions regarding the
proposed exchange ratio were ongoing. It was also reported that
PMA and Old Republic and their advisors were continuing to work
on the merger agreement, Old Republics registration
statement, PMAs proxy statement and regulatory filings.
BofA Merrill Lynch updated the board regarding discussion on the
proposed merger consideration.
Between May 19, 2010 and May 24, 2010, PMA and Old
Republic continued to negotiate terms of the merger agreement
and exchanged drafts of the agreement. The significant terms
being addressed included the exchange ratio, collar, termination
rights, termination fee, employment and severance agreements of
senior officers and continuation of employee benefit plans.
46
On May 24, 2010, PMAs board held a telephonic
meeting, which meeting was also attended by PMAs Interim
Chief Financial Officer and General Counsel, outside counsel and
representatives of BofA Merrill Lynch. Management reviewed the
status of merger agreement negotiations with Old Republic,
including proposed changes to the agreement. The board was also
updated on discussions regarding the proposed exchange ratio,
collar and termination fee.
On June 9, 2010, the board of PMA convened a meeting to
review and consider the proposed merger with Old Republic.
Present at the meeting were PMAs Interim Chief Financial
Officer and General Counsel and representatives from BofA
Merrill Lynch and outside counsel. The entire board except for
one director was present at the meeting. Management updated the
board on the final negotiations of the proposed merger.
PMAs General Counsel reviewed the terms of the merger
agreement that had been negotiated with Old Republic. Outside
counsel reviewed with the board its fiduciary duties as members
of the board. Also at this meeting, BofA Merrill Lynch reviewed
with PMAs board of directors the status of prior efforts
to solicit interest from third parties and certain key terms of
the proposed transaction. In addition, BofA Merrill Lynch
reviewed with PMAs board of directors its financial
analysis of the exchange ratio and delivered to PMAs board
of directors an oral opinion, which was confirmed by delivery of
a written opinion dated June 9, 2010, to the effect that,
as of that date and based on and subject to various assumptions
and limitations described in its opinion, the exchange ratio
provided for in the merger was fair, from a financial point of
view, to holders of PMA class A common stock. Following the
presentation, the board reviewed and discussed other strategic
alternatives and the positive and negative factors for entering
into the proposed merger. Following the discussion, PMAs
board, by unanimous vote of the directors present, determined
that the terms of the merger agreement and the transactions
contemplated thereby are advisable, fair to, and in the best
interests of, PMA and PMAs shareholders.
On the afternoon of June 9, 2010, PMA, Old Republic and
Merger Sub executed the merger agreement.
PMAs
Reasons for the Merger
PMAs board of directors, at its meeting held on
June 9, 2010, considered the terms of the merger agreement
and the transactions contemplated thereby and determined them to
be advisable, fair to, and in the best interests of, PMA and
PMAs shareholders. PMA believes that a merger with Old
Republic, and the additional financial strength and stability it
can provide, will be of benefit to its shareholders, clients,
employees and other stakeholders. In evaluating the merger,
PMAs board of directors consulted with management, as well
as its legal and financial advisors, and considered a number of
factors, including the material factors set forth below.
PMAs Challenges as an Independent
Company. Operating as a relatively small,
stand-alone public company, PMA faces continuing, and sometimes
conflicting, pressures from customers, brokers, competitors,
regulatory agencies, financial analysts and independent rating
agencies. The type of business that PMA writes and services is
particularly sensitive to PMAs financial strength rating.
The run-off operations recently sold by PMA had jeopardized
PMAs rating and required funding that could otherwise have
been used in PMAs other businesses. Following the
disposition of the run-off operations, PMA needed access to
additional capital in order to safely maintain its financial
rating, address the regulatory issues described below and grow
its business profitably. Given the current economic climate and
the fact that PMAs shares trade at a considerable discount
to their book value, PMA has had limited access to additional
capital. PMA believes that Old Republics financial
strength and its greater access to capital will provide PMA
increased stability and presents the best available alternative
for the continued growth of PMA and its businesses. Following
the merger, PMA will be part of a strong and larger diversified
company that is well capitalized. The merger will provide PMA
the opportunity for continued, potentially accelerated,
profitable growth. PMA expects that this merger will enable its
shareholders to realize a short-term premium and greater
long-term value than if PMA continued to operate as a
stand-alone entity.
Resolution of Pennsylvania Insurance Department
Examination. In connection with its examination
of PMAs insurance subsidiaries for the five years ended
December 31, 2007, the Examination Bureau of the
Pennsylvania Insurance Department issued a report in March 2010.
This report raised certain issues relative to the reasonableness
of those companies loss and loss adjustment expense
reserves as of year-end 2007. The Department subsequently
rejected that report and directed the examiner to reopen the
examination and obtain additional data, documentation and
information from PMA relative to the December 31, 2007
reserves.
47
PMA believes its original estimates of loss and loss adjustment
expense reserves were reasonable and has provided the Department
with several independent studies performed subsequent to
December 31, 2007, as well as industry and other
information in support of its position. Notwithstanding this
additional support and information, PMA has not been able to
achieve a resolution of these matters. After recent discussions
with the Department, PMA concluded that it could only resolve
these matters as a stand alone organization by engaging in
administrative and legal review processes which, irrespective of
their ultimate outcome, would likely hinder the long-term and
day-to-day
continuity of PMAs business operations, and, in the
interim, potentially have a negative impact on its financial
ratings. These discussions have also led PMAs board to
conclude that the merger with Old Republic, a company with
greater capitalization, resources and financial flexibility,
would likely provide PMA with the necessary financial
wherewithal to at once enhance PMAs own financial
resources and lead to a resolution of the outstanding regulatory
matters related to the Departments year-end 2007
examination. As indicated in the notes to the pro forma
financial data on pages 26 to 34 of Old Republics
registration statement of which this PMA proxy statement is a
part, Old Republic expects to provide reinsurance support to
PMAs insurance subsidiaries to reduce their balance sheet
leverage after the merger.
Favorable Consideration Received in
Merger. The merger consideration represented a
premium of approximately 15% to the closing price of PMAs
class A common stock on June 8, 2010, the last trading
day prior to the execution of the merger agreement. The exchange
ratio, combined with the collar, provides reasonable certainty
as to the relative value that PMA shareholders will receive in
the merger in the form of shares of Old Republic common stock.
PMAs class A common stock has historically traded at
a discount to book value that is significantly greater than the
discount at which other workers compensation specialty
insurers and diversified specialty insurers have traded. Old
Republic has historically traded at a higher book value multiple
than PMA. Old Republic is a respected organization, well
positioned to continue creating value for its shareholders. It
has a strong stock currency, and is well capitalized and
appropriately positioned to take advantage of opportunities
which will be available to it. According to its 2009 Annual
Review, Old Republic has outperformed the Standard and
Poors 500 Index over the last 50 years with an annual
book return that averaged 16.6% compared to an average annual
return of 10.9% for the S&P Index. Old Republic has paid
regular cash dividends on common shares without interruption
since 1942 and paid $0.68 per share in dividends during 2009.
Financial Presentation and Opinion of BofA Merrill
Lynch. The opinion of BofA Merrill Lynch, dated
June 9, 2010, to PMAs board of directors to the
effect that, as of the date of the opinion and based on and
subject to various assumptions and limitations described in its
opinion, the exchange ratio provided for in the merger was fair,
from a financial point of view, to holders of PMA class A
common stock as more fully described below in the section
entitled The Merger Opinion of PMAs
Financial Advisor.
Low Probability of a Superior Offer. The
results of the thorough and lengthy process undertaken by PMA
and its financial advisor in connection with its proposed sale
indicated that the probability of receiving an offer better than
the offer made by Old Republic was low. Overall, 17 potential
partners were contacted over a period of nine months and none of
those companies indicated that it was willing to make an offer
on terms better than those offered by Old Republic.
Alternative Strategies. Alternative strategies
and scenarios in which PMA would continue to operate
independently were examined by the board in consultation with
management and PMAs financial and legal advisors. After
the review of the alternative strategies, the board concluded
that none of those strategies were preferable from a financial
point of view and that a merger with Old Republic would provide
the greatest benefit to PMAs shareholders, clients,
employees and other stakeholders.
Terms of the Merger Agreement. All of the
terms of the merger agreement were considered. In particular,
the board of directors considered the risks posed to PMA and its
shareholders by the terms of the merger agreement. While the
merger agreement prohibits PMA from soliciting alternative
proposals, PMA has the right to furnish information to, and
engage in discussions with, a person who makes an unsolicited
offer that PMAs board of directors determines in good
faith is, or is reasonably likely to result in, a superior
proposal. PMA has the right to terminate the merger agreement in
order to accept a superior offer, subject to the terms and
conditions of the merger agreement, including the payment to Old
Republic of an $8 million termination fee. PMA believes
that the termination fee is reasonable and comparable to
termination fees in similar transactions. The merger agreement
48
contains limited conditions to Old Republics obligation to
complete the merger and permits PMA to specifically enforce its
provisions, providing reasonable certainty that the merger can
be completed. The merger agreement must be adopted by PMAs
shareholders before the merger can be completed.
Decentralized Operations; Continuation of PMA Companies,
Inc. PMA will continue to operate as PMA
Companies, Inc. and once the merger is consummated, PMA will be
identified as a subsidiary of Old Republic. Old Republic
operates in a decentralized manner that emphasizes
specialization by type of insurance coverage, industries and
economic sectors, and client bases. This approach is expected to
allow PMA to continue to maintain its headquarters, locations,
management team and employees in substantially the manner they
existed prior to the merger, which is expected to enable PMA to
continue to execute its strategic plan by building on its strong
relationships with its customers, clients and other partners and
with the substantial resources of its merger partner.
Likelihood of Completion of Transaction. Based
on the size of the transaction, the terms of the merger
agreement and discussions with the Pennsylvania Insurance
Department, PMA believes that there is a high likelihood that
the regulatory and other approvals required in connection with
the merger will be received.
Financial Strength Rating of Old Republic Insurance
Subsidiaries. Old Republic has a disciplined
underwriting, risk management and claims performance culture
that focuses on successful long-term growth and profitability.
Old Republics core property and casualty insurance
businesses have a strong profitability record. Old
Republics principal property and casualty insurance
subsidiaries have A.M. Best ratings of A+
compared to PMAs A.M. Best rating of
A−.
Tax-Free Nature of the Merger. The merger is
expected to qualify as a tax-free reorganization
within the meaning of Section 368(a) of the Internal
Revenue Code. This structure will permit shareholders of PMA to
defer the recognition of taxes associated with their shares of
PMA class A common stock (other than cash paid in lieu of
fractional shares) until they decide to sell the shares of Old
Republic common stock received in the merger.
Other Factors. In addition to the foregoing,
PMAs board considered the following reasons for the merger:
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PMA and Old Republic have similar cultures, core values and
business principles that will foster growth and expansion. Both
companies have similar business and operational philosophies of
disciplined underwriting, risk management and claims
performance. Likewise, both companies manage their businesses
for long-term profitability and success.
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Old Republics stated business strategy is to increase
penetration in the property and casualty business marketplace.
PMAs business has little to no overlap with Old
Republics business operations and distribution channel
partners.
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Old Republic pursues a well diversified business approach, and
Old Republic values that approach in PMA as well. PMAs
fee-based businesses now represent 16% of PMAs total
revenues, and are anticipated to continue to grow. Old Republic
is very interested and supportive of PMAs insurance and
fee-based operations, and PMA plans to continue to grow these
business segments.
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Potential Negative Factors Relating to the
Merger. During its deliberations, PMAs
board of directors considered potential risks and negative
factors, including the following:
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the risk that the merger does not close and its effect on
PMAs business and the impact of the resolution of the
financial examination being conducted by the Pennsylvania
Insurance Department;
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the risk that the merger may be delayed;
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the merger consideration represents a discount to PMAs
current book value and the highest price at which PMAs
stock has traded during recent years;
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the potential negative impact that the announcement of the
merger may have on PMAs employees, customers, clients and
other partners;
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the significant costs involved and the diversion of management
resources in negotiating the merger agreement, closing the
merger and integrating PMA with Old Republics operations;
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49
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the inherent risks and financial condition of Old
Republics mortgage guaranty and title insurance businesses
and the effect those businesses can have on the value of Old
Republics common stock;
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the merger agreement prohibits PMA from soliciting alternative
acquisition proposals; and
|
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the potential that the termination fee may discourage an
alternative proposal or result in a lower price in an
alternative transaction.
|
The foregoing discussion of the factors considered by PMAs
board of directors is not intended to be exhaustive, but,
rather, includes the material factors considered by PMAs
board of directors. In reaching its decision to approve the
merger agreement, the merger and the other transactions
contemplated by the merger agreement, PMAs board of
directors did not quantify or assign any relative weights to the
factors considered, and individual directors may have given
different weights to different factors. PMAs board of
directors considered all these factors as a whole, and overall
considered the factors to be favorable to, and supportive of,
its determination.
For the reasons set forth above, PMAs board of directors
determined that the merger agreement and the transactions
contemplated thereby are advisable, fair to and in the best
interests of PMA and PMAs shareholders, and approved the
merger agreement. PMAs board of directors recommends that
you vote FOR the approval of the merger.
Recommendations
of the PMA Board of Directors with Respect to the
Merger
By unanimous vote of the directors present, the PMA board of
directors, at a meeting held on June 9, 2010, determined
that the terms of the merger agreement and the transactions
contemplated thereby are advisable, fair to, and in the best
interests of, PMA and PMAs shareholders, and approved the
merger agreement and the transactions contemplated thereby,
including the merger. The PMA board of directors recommends that
the PMA shareholders vote FOR the proposal to adopt
the merger agreement at the special meeting. The PMA board of
directors also recommends that the PMA shareholders vote
FOR the proposal to approve the adjournment or
postponement of the special meeting for the solicitation of
additional proxies if there are not sufficient votes present, in
person or represented by proxy, at the time of the special
meeting to adopt the merger agreement.
Opinion
of PMAs Financial Advisor
PMA retained BofA Merrill Lynch to act as PMAs financial
advisor in connection with PMAs exploration of strategic
alternatives, including the merger. PMA selected BofA Merrill
Lynch to act as PMAs financial advisor in connection with
the merger on the basis of BofA Merrill Lynchs experience
in transactions similar to the merger, its reputation in the
investment community and its familiarity with PMA and its
business.
On June 9, 2010, at a meeting of PMAs board of
directors held to evaluate the merger, BofA Merrill Lynch
delivered to PMAs board of directors an oral opinion,
which was confirmed by delivery of a written opinion dated
June 9, 2010, to the effect that, as of the date of the
opinion and based on and subject to various assumptions and
limitations described in its opinion, the exchange ratio
provided for in the merger was fair, from a financial point of
view, to holders of PMA class A common stock.
The full text of BofA Merrill Lynchs written opinion to
PMAs board of directors, which describes, among other
things, the assumptions made, procedures followed, factors
considered and limitations on the review undertaken, is attached
as Annex B to this document and is incorporated by
reference herein in its entirety. The following summary of BofA
Merrill Lynchs opinion is qualified in its entirety by
reference to the full text of the opinion. BofA Merrill Lynch
delivered its opinion to PMAs board of directors for the
benefit and use of PMAs board of directors in connection
with and for purposes of its evaluation of the exchange ratio
from a financial point of view. BofA Merrill Lynchs
opinion does not address any other aspect of the merger and does
not constitute a recommendation to any shareholder as to how to
vote or act in connection with the proposed merger. In addition,
the opinion does not in any manner address the prices at which
shares of PMA class A common stock and Old Republic common
stock would trade at any time, including following announcement
or following the consummation of the transaction. The following
is a summary of BofA Merrill Lynchs opinion, including the
procedures followed, the assumptions made, the matters
considered and the limitations on review undertaken by BofA
Merrill Lynch in rendering its opinion.
50
In connection with rendering its opinion, BofA Merrill Lynch,
among other things:
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reviewed certain publicly available business and financial
information relating to PMA and Old Republic;
|
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|
reviewed certain internal financial and operating information
with respect to the business, operations and prospects of PMA
furnished to or discussed with BofA Merrill Lynch by the
management of PMA, including certain financial forecasts
relating to PMA prepared by or at the direction of and approved
by the management of PMA under certain scenarios (such
forecasts, PMA Forecasts);
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|
reviewed certain internal financial and operating information
with respect to the business, operations and prospects of Old
Republic furnished to or discussed with BofA Merrill Lynch by
the management of Old Republic, including certain financial
forecasts relating to Old Republic prepared by the management of
Old Republic for the year ended December 31, 2010 (such
forecasts, Old Republic 2010 Forecasts);
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reviewed certain financial forecasts relating to Old Republic
prepared by or at the direction of and approved by the
management of PMA for the years ended December 31, 2011
through December 31, 2014 under certain scenarios (such
forecasts, Old Republic Extended Forecasts);
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reviewed certain reports regarding reserves for loss and loss
adjustment expense of PMA prepared by an independent actuarial
firm engaged by PMA which were made available to BofA Merrill
Lynch by PMA;
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discussed the past and current business, operations, financial
condition and prospects of PMA with members of senior
managements of PMA and Old Republic, and discussed the past and
current business, operations, financial condition and prospects
of Old Republic with members of senior managements of PMA and
Old Republic;
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discussed with the management of PMA its assessment of the
financial examination of PMAs insurance subsidiaries
currently being conducted by the Pennsylvania Insurance
Department, including the status of such examination and the
potential impact on PMA of any action that may be required to be
taken as a result thereof;
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reviewed the potential pro forma financial impact of the merger
on the future financial performance of Old Republic;
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participated in certain discussions and negotiations among
representatives of PMA and Old Republic and their financial and
legal advisors;
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reviewed the trading histories for PMA class A common stock
and Old Republic common stock and the valuation multiples
implied by the merger for PMA class A common stock and a
comparison of such trading histories and such valuation
multiples with each other and with the trading histories and
valuation multiples of other companies BofA Merrill Lynch deemed
relevant;
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compared certain financial and stock market information of PMA
and Old Republic with similar information of other companies
BofA Merrill Lynch deemed relevant;
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considered the results of BofA Merrill Lynchs efforts on
behalf of PMA to solicit, at the direction of PMA, indications
of interest from third parties with respect to a possible
acquisition of PMA;
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reviewed a draft, dated June 4, 2010, of the merger
agreement; and
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performed such other analyses and studies and considered such
other information and factors as BofA Merrill Lynch deemed
appropriate.
|
In arriving at its opinion, BofA Merrill Lynch assumed and
relied upon, without independent verification, the accuracy and
completeness of the financial and other information and data
publicly available or provided to or otherwise reviewed by or
discussed with BofA Merrill Lynch and relied upon the assurances
of the managements of PMA and Old Republic that they are not
aware of any facts or circumstances that would make such
information or data inaccurate or misleading in any material
respect. With respect to the PMA Forecasts and the Old Republic
Extended Forecasts, BofA Merrill Lynch was advised by PMA, and
assumed, that they were reasonably prepared on bases reflecting
the best currently available estimates and good faith judgments
of the management of PMA as to the future financial performance
of PMA and Old Republic, as applicable, under the scenarios
reflected therein, in each case for the periods set forth
therein. With respect to the Old Republic 2010 Forecasts, BofA
Merrill Lynch was advised by Old
51
Republic, and assumed, with the consent of PMA, that they were
reasonably prepared on bases reflecting the best currently
available estimates and good faith judgments of the management
of Old Republic as to the future financial performance of Old
Republic for the year ended December 31, 2010. As PMA was
aware, although BofA Merrill Lynch requested financial forecasts
with respect to Old Republic prepared by the management of Old
Republic for the years ended December 31, 2011 through
December 31, 2014, BofA Merrill Lynch was advised by the
management of Old Republic that it had not prepared current and
reliable financial forecasts for the periods beyond
December 31, 2010. Accordingly, based upon discussions with
the management of Old Republic and at the direction of PMA, BofA
Merrill Lynch assumed that the Old Republic Extended Forecasts
were a reasonable basis upon which to evaluate the future
financial performance of Old Republic for the years ended
December 31, 2011 through December 31, 2014 and, at
the direction of PMA, used such forecasts for such periods in
performing the analyses.
BofA Merrill Lynch did not make any physical inspection of the
properties or assets of PMA or Old Republic, nor did BofA
Merrill Lynch make or was it provided with any independent
evaluation or appraisal of the assets or liabilities (contingent
or otherwise) of PMA or Old Republic, other than the PMA
actuarial reports referenced above that BofA Merrill Lynch
reviewed and relied upon without independent verification for
purposes of its opinion. BofA Merrill Lynch is not an expert in
the evaluation of reserves for losses and loss adjustment
expenses and BofA Merrill Lynch did not make an independent
evaluation of the adequacy of the reserves of PMA or Old
Republic. In that regard, BofA Merrill Lynch made no analysis
of, and expressed no opinion as to, the adequacy of reserves for
losses and loss adjustment expenses of PMA or Old Republic. BofA
Merrill Lynch further relied, at the direction of PMA, upon the
assessment of management of PMA as to the potential impact on
PMA of any action that may be required to be taken as a result
of the Pennsylvania Insurance Department examination.
BofA Merrill Lynch did not evaluate the solvency or fair value
of PMA or Old Republic under any state, federal or other laws
relating to bankruptcy, insolvency or similar matters. BofA
Merrill Lynch assumed, at the direction of PMA, that the merger
would be consummated in accordance with its terms, without
waiver, modification or amendment of any material term,
condition or agreement and that, in the course of obtaining the
necessary governmental, regulatory and other approvals,
consents, releases and waivers for the merger, no delay,
limitation, restriction or condition, including any divestiture
requirements or amendments or modifications, will be imposed
that would have an adverse effect on PMA, Old Republic or the
contemplated benefits of the merger. BofA Merrill Lynch also
assumed, at the direction of PMA, that the merger will qualify
for federal income tax purposes as a reorganization under the
provisions of Section 368(a) of the Internal Revenue Code
of 1986, as amended. BofA Merrill Lynch also assumed, at the
direction of PMA, that the final executed Agreement would not
differ in any material respect from the draft, dated
June 4, 2010, of the merger agreement reviewed by BofA
Merrill Lynch.
BofA Merrill Lynch expressed no view or opinion as to any terms
or other aspects of the merger (other than the exchange ratio to
the extent expressly specified in its opinion), including,
without limitation, the form or structure of the merger. BofA
Merrill Lynchs opinion was limited to the fairness, from a
financial point of view, of the exchange ratio to holders of PMA
class A common stock and no opinion or view was expressed
with respect to any consideration received in connection with
the merger by the holders of any other class of securities,
creditors or other constituencies of any party. In addition, no
opinion or view was expressed with respect to the fairness
(financial or otherwise) of the amount, nature or any other
aspect of any compensation to any of the officers, directors or
employees of any party to the merger, or class of such persons,
relative to the exchange ratio. Furthermore, no opinion or view
was expressed as to the relative merits of the merger in
comparison to other strategies or transactions that might be
available to PMA or in which PMA might engage or as to the
underlying business decision of PMA to proceed with or effect
the merger. BofA Merrill Lynch did not express any opinion as to
what the value of Old Republic common stock actually would be
when issued or the prices at which PMA class A common stock
or Old Republic common stock would trade at any time, including
following announcement or consummation of the merger. In
addition, BofA Merrill Lynch expressed no opinion or
recommendation as to how any shareholder should vote or act in
connection with the merger or any related matter.
BofA Merrill Lynchs opinion was necessarily based on
financial, economic, monetary, market and other conditions and
circumstances as in effect on, and the information made
available to BofA Merrill Lynch as of, the date of its opinion.
As noted in the opinion, the credit, financial and stock markets
have been experiencing unusual volatility and BofA Merrill Lynch
expressed no opinion or view as to any potential effects of such
volatility on PMA, Old Republic or the merger. It should be
understood that subsequent developments may affect its opinion,
and
52
BofA Merrill Lynch does not have any obligation to update,
revise or reaffirm its opinion. The issuance of BofA Merrill
Lynchs opinion was approved by BofA Merrill Lynchs
Americas Fairness Opinion Review Committee.
The following represents a brief summary of the material
financial analyses presented by BofA Merrill Lynch to PMAs
board of directors in connection with its opinion. The financial
analyses summarized below include information presented in
tabular format. In order to fully understand the financial
analyses performed by BofA Merrill Lynch, the tables must be
read together with the text of each summary. The tables alone do
not constitute a complete description of the financial analyses
performed by BofA Merrill Lynch. Considering the data set forth
in the tables below without considering the full narrative
description of the financial analyses, including the
methodologies and assumptions underlying the analyses, could
create a misleading or incomplete view of the financial analyses
performed by BofA Merrill Lynch.
PMA
and Old Republic Financial Analyses
Except as otherwise noted, the following information, to the
extent it is based on market data, is based on market data as it
existed on or before June 7, 2010 and is not necessarily
indicative of current market conditions.
As described more fully below, BofA Merrill Lynch assessed the
fairness of the exchange ratio by assessing the stand-alone
value of each of PMA and Old Republic using several
methodologies, including an analysis of comparable publicly
traded companies using valuation multiples from selected
publicly traded companies and a discounted cash flow analysis.
Each of these methodologies was used to generate implied per
share valuation ranges for each of PMA and Old Republic on a
fully diluted basis, which gives effect to the impact of
restricted stock, options and convertible debt. The implied per
share valuation ranges were then used to assess the exchange
ratio implied by each methodology.
Based on Old Republics share price of $12.72 as of
June 7, 2010, BofA Merrill Lynch noted that the implied
offer price per share of PMA was $7.00, an implied premium of
14.3% to PMAs share price of $6.12 as of June 7,
2010. Such implied offer price represented a multiple of 0.54x
PMAs fully diluted book value per share as of
March 31, 2010, a multiple of 11.3x PMAs actual
earnings per share for the year 2009, a multiple of 10.1x
PMAs estimated research analysts consensus earnings per
share for the year 2010 and a multiple of 8.4x PMAs
estimated research analysts consensus earnings per share for the
year 2011. By way of background, BofA Merrill Lynch noted that,
based on the equity interests outstanding in each of PMA and Old
Republic as of June 7, 2010, the exchange ratio would
result in pro forma ownership of the combined company being
approximately 6.9% for holders of PMA class A common stock,
on a fully diluted basis, after giving effect to the net impact
of options and convertible debt. The determination of fully
diluted figures (including ownership) includes the net impact of
options under the treasury stock method using values implied by
the exchange ratio proposed in the merger agreement.
Selected Publicly Traded Companies
Analyses. BofA Merrill Lynch reviewed and
analyzed certain publicly available financial information and
market trading data of selected publicly traded companies and
compared such information to PMA and Old Republic. BofA Merrill
Lynch reviewed the following 19 companies:
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W.R. Berkley Corporation;
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Markel Corporation;
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American Financial Group, Inc.;
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HCC Insurance Holdings, Inc.;
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ProAssurance Corporation;
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RLI Corp.;
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Tower Group, Inc.;
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Argo Group International Holdings, Ltd.;
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Harleysville Group Inc.;
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Selective Insurance Group, Inc.;
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53
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AmTrust Financial Services, Inc.;
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The Navigators Group, Inc.;
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National Interstate Corporation;
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United America Indemnity, Ltd.;
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NYMAGIC, Inc.;
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Employers Holdings, Inc.;
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Amerisafe, Inc.;
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SeaBright Holdings, Inc.; and
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Eastern Insurance Holdings, Inc.
|
No company used in this analysis is identical or directly
comparable to PMA or Old Republic. BofA Merrill Lynch selected
these companies on the basis that each was a publicly traded
company with operations in the specialty insurance or
workers compensation industries. A complete analysis of
the results of the following calculations cannot be limited to a
quantitative review of such results, however, and involves
complex considerations and judgments concerning the differences
in the financial and operating characteristics of the comparable
companies and other factors that could affect the public share
prices of the comparable companies, as well as the price of
shares of common stock of PMA and Old Republic.
A summary of multiples of the stock price to book value per
share as of March 31, 2010 and stock price to earnings per
share, including the implied expected return on equity for 2011,
for each of the selected publicly traded companies is as follows:
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Price/3/31/10
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Book Value
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Price/2011E
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2011E
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per Share(1)
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Operating EPS
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Return on Equity
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Diversified Specialty
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W.R. Berkley Corporation
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1.12
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x
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10.0
|
x
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10.3
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%
|
Markel Corporation
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1.14
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x
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17.6
|
x
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6.0
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%
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American Financial Group, Inc.
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0.71
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x
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7.1
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x
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9.2
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%
|
HCC Insurance Holdings, Inc.
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0.92
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x
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8.2
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x
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10.0
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%
|
ProAssurance Corporation
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1.05
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x
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11.0
|
x
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8.6
|
%
|
RLI Corp.
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1.32
|
x
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14.0
|
x
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8.8
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%
|
Tower Group, Inc.
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0.87
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x
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6.1
|
x
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12.7
|
%
|
Argo Group International Holdings, Ltd.
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0.54
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x
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7.3
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x
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7.1
|
%
|
Harleysville Group Inc.
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1.11
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x
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9.7
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x
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10.8
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%
|
Selective Insurance Group, Inc.
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0.76
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x
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9.6
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x
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7.7
|
%
|
AmTrust Financial Services, Inc.
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1.26
|
x
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5.5
|
x
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18.7
|
%
|
The Navigators Group, Inc.
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0.79
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x
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10.7
|
x
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7.1
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%
|
National Interstate Corporation
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1.32
|
x
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|
9.3
|
x
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|
|
12.5
|
%
|
United America Indemnity, Ltd.
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|
|
0.53
|
x
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|
8.3
|
x
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|
6.0
|
%
|
NYMAGIC, Inc.
|
|
|
0.74
|
x
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|
|
NA
|
x
|
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|
NA
|
%
|
Mean
|
|
|
0.95
|
x
|
|
|
9.6
|
x
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9.7
|
%
|
Workers Compensation Focused
|
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Employers Holdings, Inc.
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|
0.70
|
x
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|
12.2
|
x
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|
5.4
|
%
|
Amerisafe, Inc.
|
|
|
1.03
|
x
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|
|
8.2
|
x
|
|
|
11.1
|
%
|
SeaBright Holdings, Inc.
|
|
|
0.58
|
x
|
|
|
11.0
|
x
|
|
|
5.0
|
%
|
Eastern Insurance Holdings, Inc.
|
|
|
0.64
|
x
|
|
|
11.5
|
x
|
|
|
5.0
|
%
|
Mean
|
|
|
0.74
|
x
|
|
|
10.7
|
x
|
|
|
6.6
|
%
|
Overall Mean
|
|
|
0.90
|
x
|
|
|
9.9
|
x
|
|
|
9.0
|
%
|
|
|
|
(1) |
|
Based on primary book value per share, which excludes the
dilutive impact of options, warrants and restricted stock. |
54
Mathematical analysis, such as determining the average, is not
in itself a meaningful method of using comparable company data.
BofA Merrill Lynch performed this analysis to understand the
range of book value multiples and estimated earnings multiples
of these comparable publicly traded companies based upon market
prices. In addition, BofA Merrill Lynch reviewed certain
operating data for these companies, such as combined ratios,
return on equity and growth in book value per share to assess
the relative valuation of these companies, based on the most
recent publicly available information. The projections and
estimates for the selected publicly traded companies used by
BofA Merrill Lynch in its analysis were based on consensus
research analysts estimates as reported in the database known as
Factset as well as historical information reported by such
companies in their SEC filings. The 2011 earnings projections
and estimates for PMA were based both on estimates of research
analysts and estimates provided to BofA Merrill Lynch by or at
the direction of and approved by the management of PMA. The 2011
earnings projections and estimates for Old Republic were based
on estimates of research analysts.
Based in part on the multiples described above, BofA Merrill
Lynch derived illustrative implied valuations per fully diluted
share of PMA and Old Republic, which gives effect to the impact
of options and convertible debt. For PMA, BofA Merrill Lynch
applied book value multiples ranging from 0.50x to 0.70x
PMAs March 31, 2010 adjusted book value per share and
applied earnings multiples of 7.0x to 9.0x 2011 earnings per
share based on research analysts estimates and PMA management
estimates. For these purposes, PMAs adjusted book value
per share reflects the potential impact of $50 million
reserve strengthening pre-tax, offset by the financial impact of
$50 million pre-tax of retroactive reinsurance protection
purchased. For Old Republic, BofA Merrill Lynch applied book
value multiples ranging from 0.70x to 0.90x Old Republics
March 31, 2010 book value per share and applied earnings
multiples of 10.0x to 12.0x 2011 earnings per share based on
research analysts estimates. BofA Merrill Lynch utilized these
selected multiples after considering the current market
conditions, current and historical trading multiples and the
size and diversification of the selected publicly traded
companies, among other things.
The resulting implied exchange ratio range was 0.3958x to
0.7124x based on the book value multiple methodology and 0.4052x
to 0.6251x based on the earnings multiple methodology using
PMAs 2011 estimate based on research analysts estimates
and Old Republics 2011 estimate based on research analysts
estimates. The following table shows the ranges of implied
valuation per fully diluted common share for each of PMA and Old
Republic and the implied exchange ratio ranges derived using the
book value multiple and earnings multiple methodologies. The
table should be read together with the more detailed summary of
the analyses set forth above.
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Implied Old Republic
|
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Implied PMA Valuation
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|
Valuation
|
|
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Selected Publicly Traded Companies
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|
per Share
|
|
per Share
|
|
Implied Exchange Ratio
|
Analysis
|
|
Minimum
|
|
Maximum
|
|
Minimum
|
|
Maximum
|
|
Minimum
|
|
Maximum
|
|
Book value multiple
|
|
$
|
6.02
|
|
|
$
|
8.43
|
|
|
$
|
11.83
|
|
|
$
|
15.21
|
|
|
0.3958x
|
|
0.7124x
|
Earnings multiple analysts estimates (2011)
|
|
$
|
5.81
|
|
|
$
|
7.47
|
|
|
$
|
11.95
|
|
|
$
|
14.34
|
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0.4052x
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0.6251x
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Discounted Cash Flow Analyses. BofA Merrill
Lynch performed discounted cash flow analyses of PMA and Old
Republic based on the PMA Forecasts, the Old Republic 2010
Forecasts and the Old Republic Extended Forecasts.
As described below, (x) the PMA scenarios reflect PMA
managements various assumptions regarding possible reserve
charges of differing amounts and, in several cases, an adverse
rating action, and (y) the Old Republic scenarios reflect
assumptions made by or at the direction of and approved by PMA
management with regards to adjusting the combined ratio of the
Mortgage Guaranty Group segment as described below. As discussed
in the The Merger Background of the
Merger, PMA management believes that PMAs loss
reserves are reasonably stated and provided independent support
to the Pennsylvania Insurance Department for this position. The
loss reserve assumptions reflected in the scenarios below are
hypothetical estimates by PMA management of possible increases
in net loss reserves that may be required to reach a resolution
of the matters with the Pennsylvania Insurance Department as an
alternative to the appeal process. The various scenarios
prepared by or at the direction of and approved by the
management of PMA are as follows:
PMA Case 1. This case reflects an assumed
$50 million pre-tax increase in reserves, which is
approximately 11% of net loss reserves at December 31, 2009
as a possible resolution of differences relating
55
to the Pennsylvania Insurance Department examination. This
scenario reflects the impact of an A.M. Best financial
strength ratings downgrade to B++.
PMA Case 2. This case reflects an assumed
$100 million pre-tax increase in reserves as a possible
resolution of differences relating to the Pennsylvania Insurance
Department examination. This scenario reflects the impact of an
A.M. Best financial strength ratings downgrade to B++.
PMA Case 3. This case reflects an assumed
$50 million pre-tax increase in reserves as a possible
resolution of differences relating to the Pennsylvania Insurance
Department examination. This scenario assumes there is no change
in PMAs A.M. Best financial strength ratings.
PMA Case 4. This case assumes that PMA no
longer writes new business and, starting in 2011, places all
operations in runoff. It is also assumes that reserves are
increased by $100 million on a pre-tax basis and the
fee-based business is sold.
Old Republic Base Case. This case assumes that
the combined ratio of the Mortgage Guaranty segment of Old
Republic is adjusted to achieve a combined ratio of 75.0% in
2014. A downside and an upside case were also run which, on
average, would have decreased or increased, as applicable, the
potential value of Old Republic common stock by approximately 3%.
The discounted cash flow analyses were performed in order to
evaluate the fully diluted equity value per share, based on what
could be achieved by each PMA and Old Republic as stand-alone
entities. BofA Merrill Lynch calculated the fully diluted equity
values per share for PMA and Old Republic as the sum of
(1) the present values of the estimated future free cash
flows per fully diluted share for each of PMA and Old Republic
for the years 2010 through 2014 using discount rates ranging
from 11.5% to 13.5% for PMAs Cases 1, 2 and 3, 12.5% to
14.5% for PMA Case 4 and 9.5% to 11.5% for the Old Republic Base
Case, and (2) the present values of the illustrative
terminal values per fully diluted share using estimated
2014 shareholders equity based on terminal book value
multiples ranging from 0.55x to 0.75x for PMA Cases 1 and 2,
0.60x to 0.80x for PMA Case 3, 0.80x to 0.90x statutory surplus
for PMA Case 4 and 0.75x to 0.95x for the Old Republic Base
Case. All selected discount rates considered risks inherent in
the insurance industry, specific risks associated with the
continuing operations of each of PMA and Old Republic on a
stand-alone basis and other considerations. BofA Merrill Lynch
selected terminal book value multiples based upon the current
and historical trading values of PMA, Old Republic and selected
publicly traded insurance companies. The per share amounts were
based on the total outstanding diluted shares, which includes
the impact of restricted stock, options and convertible debt.
The resulting implied exchange ratio range was (1) 0.2813x
to 0.5330x based on the PMA projections for PMA Case 1 and the
Old Republic Base Case projections, (2) 0.2565x to 0.4869x
based on the PMA projections for PMA Case 2 and the Old Republic
Base Case projections, (3) 0.4055x to 0.7365x based on the
PMA projections for PMA Case 3 and the Old Republic Base Case
projections and (4) 0.1916x to 0.3268x based on the PMA
projections for PMA Case 4 and the Old Republic Base Case
projections.
The following table shows the ranges of implied valuation per
fully diluted common share for each of PMA and Old Republic and
the implied exchange ratio ranges derived using the discounted
cash flow analysis. The table should be read together with the
more detailed summary of the analyses set forth above.
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Implied Old Republic
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Implied PMA Valuation
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Valuation
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per Share
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per Share
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Implied Exchange Ratio
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Discounted Cash Flow Analysis
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Minimum
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Maximum
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Minimum
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Maximum
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Minimum
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Maximum
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PMA Case 1/Old Republic Base Case
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$
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3.74
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$
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5.53
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$
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10.37
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$
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13.31
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0.2813x
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0.5330x
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PMA Case 2/Old Republic Base Case
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$
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3.41
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$
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5.05
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$
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10.37
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$
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13.31
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0.2565x
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0.4869x
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PMA Case 3/Old Republic Base Case
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$
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5.40
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$
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7.64
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$
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10.37
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$
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13.31
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0.4055x
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0.7365x
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PMA Case 4/Old Republic Base Case
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$
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2.55
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$
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3.39
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$
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10.37
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$
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13.31
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0.1916x
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0.3268x
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While a discounted cash flow analysis is a widely accepted and
practiced valuation methodology, it relies on a number of
assumptions, including growth rates, terminal values and
discount rates. The implied exchange ratio range derived from
the discounted cash flow analysis is not necessarily indicative
of PMA or Old Republics present or future value or results.
56
Other Factors. In rendering its opinion, BofA
Merrill Lynch also reviewed and considered other factors,
including:
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high and low trading prices of PMA class A common stock and
Old Republic common stock during the
52-week
period ended June 7, 2010, which implied an exchange ratio
of between 0.2755x and 0.8519x; and
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the future public market share price targets of PMA class A
common stock and Old Republic common stock as reported by
various analysts following the PMA and Old Republic common
stocks, which implied an exchange ratio of between 0.4211x and
0.6875x.
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BofA Merrill Lynch also observed that, under various financial
measures, PMA could be viewed as contributing to the combined
company a percentage higher than the percentage of the
outstanding shares to be received by PMAs shareholders in
the transaction. BofA Merrill Lynch, however, did not believe
that this analysis was meaningful since it did not, in BofA
Merrill Lynchs judgment, adequately reflect the potential
need, as described in the scenarios above, to increase reserves
as a possible resolution to the Pennsylvania Insurance
Department examination or the potential risk to the business of
a possible ratings downgrade that could result from a need to
increase reserves. Similarly, BofA Merrill Lynch did not present
an analysis based on selected precedent transactions, in light
of BofA Merrill Lynchs belief that, given PMAs
relatively unique circumstances, there were no comparable
transactions.
Miscellaneous. As noted above, the discussion
set forth above is a summary of the material financial analyses
presented by BofA Merrill Lynch to PMAs board of directors
in connection with its opinion and is not a comprehensive
description of all analyses undertaken by BofA Merrill Lynch in
connection with its opinion. The preparation of a financial
opinion is a complex analytical process involving various
determinations as to the most appropriate and relevant methods
of financial analysis and the application of those methods to
the particular circumstances and, therefore, a financial opinion
is not readily susceptible to partial analysis or summary
description. BofA Merrill Lynch believes that its analyses
summarized above must be considered as a whole. BofA Merrill
Lynch further believes that selecting portions of its analyses
and the factors considered or focusing on information presented
in tabular format, without considering all analyses and factors
or the narrative description of the analyses, could create a
misleading or incomplete view of the processes underlying BofA
Merrill Lynchs analyses and opinion. The fact that any
specific analysis has been referred to in the summary above is
not meant to indicate that such analysis was given greater
weight than any other analysis referred to in the summary.
In performing its analyses, BofA Merrill Lynch considered
industry performance, general business and economic conditions
and other matters, many of which are beyond the control of PMA
and Old Republic. The estimates of the future performance of PMA
and Old Republic in or underlying BofA Merrill Lynchs
analyses are not necessarily indicative of actual values or
actual future results, which may be significantly more or less
favorable than those estimates or those suggested by BofA
Merrill Lynchs analyses. These analyses were prepared
solely as part of BofA Merrill Lynchs analysis of the
fairness, from a financial point of view, of the exchange ratio
and were provided to PMAs board of directors in connection
with the delivery of BofA Merrill Lynchs opinion. The
analyses do not purport to be appraisals or to reflect the
prices at which a company might actually be sold or the prices
at which any securities have traded or may trade at any time in
the future. Accordingly, the estimates used in, and the ranges
of valuations resulting from, any particular analysis described
above are inherently subject to substantial uncertainty and
should not be taken to be BofA Merrill Lynchs view of the
actual values of PMA or Old Republic.
Although BofA Merrill Lynch participated in the negotiations
between the parties, the type and amount of consideration
payable in the merger was determined by PMA and Old Republic and
was approved by PMAs board of directors. The decision to
enter into the merger agreement was solely that of PMAs
board of directors. As described above, BofA Merrill
Lynchs opinion and analyses were only one of many factors
considered by PMAs board of directors in its evaluation of
the proposed merger and should not be viewed as determinative of
the views of PMAs board of directors or management with
respect to the merger or the exchange ratio.
PMA has agreed to pay BofA Merrill Lynch for its services in
connection with the merger an aggregate fee of
$3.8 million, a portion of which was payable in connection
with its opinion and a significant portion of which is
contingent upon the completion of the merger. PMA also has
agreed to reimburse BofA Merrill Lynch for its expenses incurred
in connection with BofA Merrill Lynchs engagement and to
indemnify BofA Merrill Lynch, any
57
controlling person of BofA Merrill Lynch and each of their
respective directors, officers, employees, agents and affiliates
against specified liabilities, including liabilities under the
federal securities laws.
BofA Merrill Lynch and its affiliates comprise a full service
securities firm and commercial bank engaged in securities,
commodities and derivatives trading, foreign exchange and other
brokerage activities, and principal investing as well as
providing investment, corporate and private banking, asset and
investment management, financing and financial advisory services
and other commercial services and products to a wide range of
companies, governments and individuals. In the ordinary course
of their businesses, BofA Merrill Lynch and its affiliates
invest on a principal basis or on behalf of customers or manage
funds that invest, make or hold long or short positions, finance
positions or trade or otherwise effect transactions in the
equity, debt or other securities or financial instruments
(including derivatives, bank loans or other obligations) of PMA,
Old Republic and certain of their respective affiliates.
In addition, BofA Merrill Lynch and its affiliates in the past
have provided, currently are providing, and in the future may
provide investment banking, commercial banking and other
financial services to Old Republic and have received or in the
future may receive compensation for the rendering of these
services, including (i) having acted or are acting as
lender under, or otherwise having extended credit under, certain
credit facilities and other arrangements with Old Republic,
(ii) having acted as book runner on a convertible debt
offering for Old Republic and (iii) having provided or
providing certain treasury management and trade products and
services to Old Republic.
Old
Republics Reasons for the Merger
It is the opinion of Old Republics management and board of
directors that the merger will enhance Old Republics
growth prospects. Old Republics management and board
believe that long-term growth can be achieved through the
greater geographic spread and certain industry specialization
offered by PMAs current business model. Furthermore, Old
Republic believes that it will acquire the continuing services
of a dedicated operating management and the well regarded
insurance services delivery of PMAs subsidiaries.
Interests
of PMA Officers and Directors in the Merger
In considering the recommendation of the PMA board of directors
with respect to the adoption of the merger agreement, PMA
shareholders should be aware that the merger agreement includes
an agreement that one independent member of the PMA board of
directors be added to the Old Republic board of directors
following completion of the merger. At the time the PMA board of
directors approved the merger agreement, the PMA board of
directors was aware that one member of PMAs board of
directors would become a member of Old Republics board of
directors.
In addition, the terms of restricted stock award agreements
between PMA and its non-employee directors provide that the
vesting of all unvested restricted stock will accelerate upon a
change in control transaction. The merger will constitute a
change in control transaction.
Nine PMA officers are parties to employment and severance
agreements with PMA. The merger agreement provides as a
condition to the obligation of Old Republic to consummate the
merger that Vincent T. Donnelly, President and Chief Executive
Officer, shall have executed and delivered to PMA a voluntary
written termination of his employment agreement and PMA shall
have obtained a voluntary written termination from six of the
eight other officers that are party to a severance agreement
with PMA. The employment and severance agreements provide for
payments to the officers in the event their employment is
terminated following a change of control of PMA.
The nine officers of PMA referred to above, including the Chief
Executive Officer who is a member of PMAs board of
directors, have been advised by Old Republic that, following the
merger, they will be employed by Old Republic on terms
comparable to their employment with PMA.
PMAs board of directors was aware of these interests and
considered them, among other matters, in approving the merger
agreement and making its recommendation that the PMA
shareholders adopt the merger agreement. See The
Merger PMAs Reasons for the Merger.
58
Accounting
Treatment
Accounting Standards Codification (ASC) Topic 805
requires the use of the purchase method of accounting for
business combinations. In applying the acquisition method, it is
necessary to identify the acquiree and the acquirer for
accounting purposes. Old Republic will be considered the
acquirer of PMA for accounting purposes. The purchase price will
be allocated to the identifiable assets acquired and liabilities
assumed from PMA based on their fair values as of the date of
the completion of the transaction, with any excess being
allocated to goodwill. Reported financial condition and results
of operations of Old Republic issued after completion of the
merger will reflect PMAs balances and results after
completion of the merger, but will not be restated retroactively
to reflect the historical financial position or results of
operations of PMA. Following the completion of the merger, the
earnings of the combined company will reflect purchase
accounting adjustments; for example, additional depreciation of
property, plant and equipment, amortization of identified
intangible assets or other impacts from the purchase price
allocation.
Regulatory
Approvals Required for the Merger
Insurance
Regulatory Approvals
PMA has three insurance company subsidiaries domiciled in the
Commonwealth of Pennsylvania. Insurance laws in Pennsylvania
require an acquiring person to obtain approval from the
Insurance Commissioner of Pennsylvania before acquiring control
of an insurance company domiciled in Pennsylvania. The Insurance
Commissioner of Pennsylvania approved the proposed merger on
August 3, 2010.
PMA has insurance subsidiaries domiciled in Bermuda and the
Cayman Islands. The laws of those jurisdictions require a notice
filing and, in the case of Bermuda, the consent of the Bermuda
Monetary Authority, before any change in the control of PMA can
occur. Old Republic has provided notice of the proposed merger
to the Bermuda Monetary Authority and the Cayman Island Monetary
Authority. The Bermuda Monetary Authority granted its approval
on June 30, 2010.
Antitrust
Approvals
The merger is subject to the expiration or termination of the
applicable waiting period under the HSR Act. Under the HSR Act,
the merger may not be consummated until notifications have been
given and certain information has been furnished to the
Antitrust Division and the FTC and the applicable waiting period
has expired or been terminated.
Old Republic and PMA have filed the requisite Pre-Merger
Notification and Report Forms under the HSR Act with the
Antitrust Division and the FTC and have been notified that the
waiting period has been terminated.
There can be no assurance that the merger will not be challenged
on antitrust or competition grounds or, if a challenge is made,
what the outcome would be. The Antitrust Division, the FTC, any
U.S. state and other applicable regulatory bodies may
challenge the merger on antitrust or competition grounds at any
time, including after the termination of the waiting period
under the HSR Act or other applicable process, as they may deem
necessary or desirable or in the public interest. Accordingly,
at any time before or after the completion of the merger, any
such party could take action under the antitrust laws,
including, without limitation, by seeking to enjoin the
effective time of the merger or permitting completion subject to
regulatory concessions or conditions. Private parties may also
seek to take legal action under antitrust laws under certain
circumstances.
Other
Regulatory Procedures
The merger may be subject to certain regulatory requirements of
other municipal, state, federal and foreign governmental
agencies and authorities, including those relating to the
insurance business and the offer and sale of securities. Old
Republic and PMA are currently working to evaluate and comply in
all material respects with these requirements, as appropriate,
and do not currently anticipate that they will hinder, delay or
restrict completion of the merger.
59
It is possible that one or more of the regulatory approvals
required to complete the merger will not be obtained on a timely
basis or at all. In addition, it is possible that any of the
governmental entities with which filings are made may seek
regulatory concessions as conditions for granting approval of
the merger. Under the merger agreement, Old Republic and PMA
have each agreed to use reasonable best efforts to complete the
merger, including to gain clearance from antitrust authorities
and obtain other required approvals. See The Merger
Agreement Reasonable Best Efforts to Obtain Required
Approvals.
Although Old Republic and PMA do not expect regulatory
authorities to raise any significant objections to the merger,
Old Republic and PMA cannot be certain that all required
regulatory approvals will be obtained or that these approvals
will not contain terms, conditions or restrictions that would be
detrimental to Old Republic after the effective time of the
merger.
No
Appraisal Rights
Holders of PMAs common stock are not entitled to
dissenters rights of appraisal under Pennsylvania law in
connection with the merger.
Listing
of Old Republic Common Stock
Old Republic will cause the shares of Old Republic common stock
to be issued in connection with the merger to be approved for
listing on the NYSE, subject to official notice of issuance,
before the closing of the merger. Approval of the listing on the
NYSE of the shares of Old Republic common stock to be issued
pursuant to the merger is a condition to each partys
obligation to complete the merger.
Delisting
and Deregistration of PMA Class A Common Stock
If the merger is completed, PMA common stock will be delisted
from the Nasdaq Global Select Market and deregistered under the
Exchange Act.
MATERIAL
U.S. FEDERAL INCOME TAX CONSEQUENCES
The following discussion sets forth the material
U.S. federal income tax consequences of the merger to
U.S. Holders (as defined below) of PMA class A common
stock. This discussion addresses only those U.S. Holders
that hold PMA class A common stock as a capital asset. It
does not address all of the U.S. federal income tax
consequences that may be relevant to a particular holder of PMA
class A common stock in light of that shareholders
particular circumstances or to a holder of PMA class A
common stock that is subject to special rules, including,
without limitation:
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a financial institution or insurance company;
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a tax-exempt organization;
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certain U.S. expatriates;
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a person that is not a U.S. Holder;
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a regulated investment company;
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a pass-through entity or an investor in such an entity;
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a trader in securities that elects
mark-to-market
accounting;
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a dealer or broker in securities or currencies;
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a person that holds PMA class A common stock as part of a
hedge, straddle, constructive sale or conversion transaction;
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a person that acquired its shares of PMA class A common
stock pursuant to the exercise of employee stock options or
otherwise in connection with the performance of services;
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60
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a person who holds shares of PMA class A common stock in an
individual retirement or other tax-deferred account;
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a person that has a functional currency other than the
U.S. dollar; and
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a person subject to the alternative minimum tax.
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For purposes of this discussion U.S. Holder
refers to a beneficial holder of PMA class A common stock
that, for U.S. federal income tax purposes, is (i) an
individual citizen or resident of the United States, (ii) a
corporation, or other entity taxable as a corporation, created
or organized in or under the laws of the United States, any
state thereof or the District of Columbia, (iii) an estate
the income of which is subject to U.S. federal income
taxation regardless of its source or (iv) a trust
(x) that is subject to the supervision of a court within
the United States and to the control of one or more
U.S. persons as described in section 7701(a)(30) of
the Internal Revenue Code (Code) or (y) that
has a valid election in effect under applicable
U.S. Treasury Regulations to be treated as a
U.S. person.
If an entity or arrangement treated as a partnership for
U.S. federal income tax purposes holds PMA class A
common stock, the tax treatment of a partner in such entity will
generally depend upon the status and activities of both the
partner and the partnership. A partner in a partnership holding
PMA class A common stock is urged to consult its tax
advisor regarding the tax consequences of the merger.
This discussion is based upon the Code, the Treasury Regulations
issued thereunder, judicial interpretations thereof, and
published positions of the Internal Revenue Service
(IRS), all as in effect on the date of the
Registration Statement of which this proxy statement/prospectus
forms a part. The discussion and the opinions to be rendered by
Locke Lord Bissell & Liddell LLP and Ballard Spahr LLP
that are described below assume that there will be no change
through the effective time of the merger in any of these
authorities or interpretations. No assurance can be given that
any of the foregoing authorities or interpretations will not be
modified, revoked, supplemented or overruled, possibly with
retroactive effect, in a manner that could adversely affect the
current and continuing validity of this discussion or such
opinions, or that the IRS will agree with the discussion or the
opinions or that, if the IRS were to take a contrary position,
such positions will not be ultimately sustained by the courts.
In addition, neither this discussion nor any of the opinions
described below addresses any state, local or non-US tax
consequences of the merger.
Holders of shares of PMA class A common stock and
persons holding options on PMA class A common stock are
strongly urged to consult their own tax advisors as to the
specific tax consequences to them of the merger in light of
their particular circumstances, including the applicability and
effect of U.S. federal, state, local,
non-U.S. income
and other tax laws.
Subject to the limitations, assumptions and qualifications set
forth in this section entitled Material U.S. Federal
Income Tax Consequences, each of Locke Lord
Bissell & Liddell LLP, counsel to Old Republic, and
Ballard Spahr LLP, counsel to PMA, will render an opinion at the
time of closing of the merger that the merger will qualify as a
reorganization within the meaning of Section 368(a) of the
Code and that Old Republic and PMA will each be a party to the
reorganization. These opinions will be subject to customary
qualifications and assumptions, including that the merger will
be completed according to the terms of the merger agreement. In
rendering the tax opinions, each counsel may require and rely on
representations of Old Republic, PMA and their affiliates, to be
delivered at the time of closing. If any of the representations
or assumptions upon which these opinions are based is or becomes
inconsistent with the actual facts, or there is a change in
applicable law, the U.S. federal income tax consequences of
the merger could be materially and adversely affected. Neither
of these tax opinions will be binding on the IRS. Neither Old
Republic nor PMA intends to request any ruling from the IRS as
to the U.S. Federal income tax consequences of the merger.
Consequently, no assurance can be given that the IRS will not
assert, or that a court will not sustain, a position contrary to
any of the tax consequences set forth below or to any of the tax
consequences described in the tax opinions.
If the merger does not qualify as a reorganization within the
meaning of Section 368(a) of the Code, then a
U.S. Holder generally would recognize gain or loss on the
exchange of PMA class A common stock for Old Republic
common stock measured by the difference between the fair market
value of the Old Republic common stock (together with any cash
received in lieu of a fractional share of Old Republic common
stock) received by such U.S. Holder and such
U.S. Holders adjusted tax basis in the PMA
class A common stock surrendered.
61
The following discussion assumes that the merger qualifies as a
reorganization within the meaning of Section 368 of the
Code and that each of Old Republic and PMA is a party to the
reorganization within the meaning of Section 368(b) of the
Code.
Material U.S. Federal Income Tax Consequences to
U.S. Holders of PMA class A common stock Who
Participate in the Merger
As a result of the merger qualifying as a reorganization within
the meaning of Section 368(a) of the Code and Old Republic
and PMA being parties to such reorganization, the material
U.S. federal income tax consequences of the merger to
U.S. Holders will be as follows:
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a U.S. Holder whose shares of PMA class A common stock
are exchanged in the merger for shares of Old Republic common
stock will not recognize gain or loss with respect to such PMA
class A common stock, except as to cash, if any, received
in lieu of a fractional share of Old Republic common stock (as
discussed below);
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a U.S. Holders aggregate tax basis in shares of Old
Republic common stock received in the merger in exchange for PMA
class A common stock (including any fractional shares
deemed received and exchanged for cash as described below) will
be the same as the aggregate tax basis of the PMA class A
common stock surrendered in the merger;
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a U.S. Holders holding period for shares of Old
Republic common stock received in the merger (including any
fractional shares deemed received and exchanged for cash, as
described below) will generally include the holding period for
the shares of PMA class A common stock surrendered in exchange
therefor in the merger;
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if a U.S. Holder acquired different blocks of PMA
class A common stock at different times or at different
prices, such shareholders tax basis and holding periods in
its Old Republic common stock will be determined with reference
to each block of PMA class A common stock; and
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to the extent that a U.S. Holder receives cash in lieu of a
fractional share of Old Republic common stock, the
U.S. Holder will be deemed to have received that fractional
share in the merger and then to have sold such fractional share
for cash in redemption of that fractional share. The shareholder
will generally recognize capital gain or loss equal to the
difference between the cash received and the tax basis allocable
to that fractional share of Old Republic common stock. This
capital gain or loss will generally be long-term capital gain or
loss if the U.S. Holders holding period for its
shares of PMA class A common stock exchanged exceeds one
year at the closing date.
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Certain
Conditions to Completing the Merger
It is a condition to Old Republics obligation to complete
the merger that Old Republic receive, on the closing date of the
merger, a written opinion of its counsel, Locke Lord
Bissell & Liddell LLP, to the effect that the merger
will be treated as a reorganization within the meaning of
Section 368(a) of the Code and that Old Republic and PMA
will each be a party to the reorganization. Similarly, it is a
condition to PMAs obligation to complete the merger that,
on the closing date of the merger, PMA receive an opinion of its
counsel, Ballard Spahr LLP, to the effect that the merger will
be treated as a reorganization within the meaning of
Section 368(a) of the Code and that Old Republic and PMA
will each be a party to the reorganization.
The opinions will be subject to limitations, assumptions and
qualifications as described under Material
U.S. Federal Income Tax Consequences above (including
an assumption as to the accuracy of tax representation
certificates to be provided by Old Republic and PMA). If events
occur between the date of this document and the closing of the
merger that render Old Republic
and/or PMA
unable to make the representations required by Locke Lord
Bissell & Liddell LLP and Ballard Spahr LLP or there
is a change in applicable law, either or both of Locke Lord
Bissell & Liddell LLP and Ballard Spahr LLP may be
unable to deliver an opinion on the closing date that the merger
will be treated as a reorganization within the meaning of
Section 368(a) of the Code. If either or both of Old
Republic and PMA waives this condition to the completion of the
merger, Old Republic and PMA intend to
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recirculate this proxy statement/prospectus and to resolicit the
adoption of the merger agreement by the holders of PMA
class A common stock. Neither Old Republic nor PMA
currently intends to waive this condition.
Backup
Withholding and Information Reporting
Non-corporate U.S. Holders may be subject to information
reporting and backup withholding on any cash payments received
in lieu of a fractional share interest in Old Republic. These
U.S. Holders will not be subject to backup withholding,
however, if they furnish a correct taxpayer identification
number and certify that they are not subject to backup
withholding on the
Form W-9
or successor form included in the letter of transmittal to be
delivered to the holders following the completion of the merger
or are otherwise exempt from backup withholding. Any amounts
withheld under the backup withholding rules will be allowed as a
refund or credit against that holders U.S. federal
income tax liability, provided the required information or
appropriate claim for refund is furnished to the IRS.
U.S. Holders receiving Old Republic common stock as a
result of the merger generally will be required to retain
records pertaining to the merger and certain U.S. Holders
will be required to file with their U.S. federal income tax
return for the year in which the merger takes place a statement
setting forth certain facts relating to the merger.
THE
MERGER AGREEMENT
The following summary describes the material provisions of
the merger agreement but does not purport to describe all of the
terms of the merger agreement. The following summary is
qualified in its entirety by reference to the complete text of
the merger agreement, which is attached as Annex A to this
proxy statement/prospectus and is incorporated by reference
herein. This summary may not contain all of the information
about the merger agreement that is important to you. You are
encouraged to carefully read the merger agreement in its
entirety.
The representations and warranties described below and included
in the merger agreement were made by each of Old Republic and
PMA to the other. These representations and warranties were made
as of specific dates and are subject to important exceptions and
limitations, including a contractual standard of materiality
different from that generally applicable under federal
securities laws. In addition, the representations and warranties
may have been included in the merger agreement for the purpose
of allocating risk between Old Republic and PMA, rather than to
establish matters as facts. The merger agreement is described in
this proxy statement/prospectus and attached as Annex A
hereto only to provide you with information regarding its terms
and conditions, and not to provide any other factual information
regarding Old Republic, PMA or their respective businesses.
Accordingly, you should not rely on the representations and
warranties in the merger agreement as characterizations of the
actual state of facts about Old Republic or PMA, and you should
read the information provided elsewhere in this proxy
statement/prospectus and in the documents incorporated by
reference into this proxy statement/prospectus for information
regarding Old Republic and PMA and their respective businesses.
See Where You Can Find More Information.
Terms of
the Merger
The merger agreement provides that, subject to the terms and
conditions of the merger agreement, and in accordance with the
PBCL, upon the completion of the merger, Merger Sub will merge
with and into PMA, with PMA continuing as the surviving
corporation and succeeding to and assuming all of the rights and
obligations of Merger Sub.
Upon the completion of the merger, each outstanding share of PMA
class A common stock, excluding any shares owned by PMA or
Old Republic or any subsidiary of PMA or Old Republic (other
than PMA class A common stock held in trust accounts and
the like for the benefit of a third party or in respect of an
outstanding debt) will be converted into the right to receive
0.55 shares of Old Republic common stock (the
exchange ratio), provided that the volume weighted
average price per share of Old Republic common stock on the
NYSE, as reported by Bloomberg LP, for the twenty consecutive
trading days ending on and including the fifth trading day prior
to, but not including, the effective date of the merger, is at
least $12.50 but not greater than $17.00 (the Old Republic
measurement price). If the Old Republic measurement price
is less than $12.50, the exchange ratio will be determined by
dividing $6.875 by the Old Republic measurement price, subject
to a maximum exchange ratio of 0.60 shares. If the Old
Republic measurement price is greater than $17.00, the exchange
ratio will be determined by
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dividing $9.350 by the Old Republic measurement price, subject
to a minimum exchange ratio of 0.50 shares. The range from
$12.50 to $17.00 is referred to as the collar.
Based on the number of shares of PMA class A common stock
outstanding on July 30, 2010, and assuming conversion of
all of PMAs 4.25% Convertible Debt and the exercise
of all outstanding options to purchase shares of PMA
class A common stock (which options, if unexercised, will
be converted pursuant to the merger into options to acquire
shares of Old Republic common stock), Old Republic would issue a
maximum of approximately 19,884,057 shares of Old Republic
common stock pursuant to the merger. In addition, following the
merger, a maximum of approximately 573,871 shares of Old
Republic common stock will be issuable in connection with
outstanding PMA restricted share units that will be converted
pursuant to the merger into restricted share units of Old
Republic.
If the number of shares of Old Republic common stock outstanding
changes before the merger is completed because of a
reorganization, recapitalization, reclassification, stock
dividend, stock split, reverse stock split, or other similar
change in capitalization, then an appropriate and proportionate
adjustment will be made to the number of shares of Old Republic
common stock into which each share of PMA class A common
stock will be converted.
Fractional
Shares
Old Republic will not issue any fractional shares of Old
Republic common stock in connection with the merger. Instead,
any PMA shareholder who would otherwise have received a fraction
of a share of Old Republic common stock will receive an amount
in cash rounded to the nearest cent (without interest). This
cash amount will be equal to such shareholders
proportionate interest in the net proceeds from the sale in the
open market by the exchange agent, on behalf of all such
holders, of the aggregate fractional shares of Old Republic
common stock that would otherwise have been issued. The sale
described in the previous sentence will occur as soon as
practicable following the merger. The exchange agent is entitled
to deduct its commissions and other
out-of-pocket
transaction costs from the proceeds of the sale, which will
reduce the amounts payable to PMA shareholders that would have
received a fractional share, but not below zero. The exchange
agent will be entitled to deduct and withhold from the cash in
lieu of fractional shares payable to any PMA shareholder the
amounts it is required to deduct and withhold under any federal,
state, local or foreign tax law. If the exchange agent withholds
any amounts, these amounts will be treated for all purposes of
the merger as having been paid to the shareholders from whom
they were withheld.
Exchange
of PMA Stock Certificates; Book-Entry Shares
Prior to the effective time, Old Republic will designate an
exchange agent for the purpose of paying the merger
consideration to PMA shareholders. At or prior to the effective
time, Old Republic will authorize the exchange agent to issue an
aggregate number of shares of Old Republic common stock equal to
the merger consideration to be paid to holders of PMA
class A common stock.
As soon as reasonably practicable following the completion of
the merger, Old Republics exchange agent will mail you a
letter of transmittal and instructions for use in surrendering
your PMA class A common stock (including any stock
certificates if you hold shares in certificated form) for common
stock of Old Republic and a fractional share payment in lieu of
any fractional shares of Old Republic common stock. When you
deliver your PMA stock certificates to the exchange agent along
with a properly executed letter of transmittal and any other
required documents, your PMA stock certificates will be
cancelled.
PLEASE DO NOT SUBMIT YOUR PMA STOCK CERTIFICATES FOR EXCHANGE
UNTIL YOU RECEIVE THE TRANSMITTAL INSTRUCTIONS AND LETTER
OF TRANSMITTAL FROM THE EXCHANGE AGENT.
If you own PMA class A common stock in book-entry form or
through a broker, bank or other holder of record, you will not
need to obtain stock certificates to submit for exchange to the
exchange agent. However, you or your broker or other nominee
will need to follow the instructions provided by the exchange
agent in order to properly surrender your shares of PMA
class A common stock.
Holders of PMA class A common stock will not be entitled to
receive any dividends or other distributions on Old Republic
common stock until the merger is completed and you have
surrendered your PMA class A common
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stock in exchange for Old Republic common stock. If Old Republic
effects any dividend or other distribution on the Old Republic
common stock with a record date occurring after the time the
merger is completed and a payment date before the date you
surrender your PMA class A common stock, you will receive
the dividend or distribution, without interest, with respect to
the whole shares of Old Republic common stock issued to you
after you surrender your PMA class A common stock and the
shares of Old Republic common stock are issued in exchange. If
Old Republic effects any dividend or other distribution on the
Old Republic common stock with a record date after the date on
which the merger is completed and a payment date after the date
you surrender your PMA class A common stock, you will
receive the dividend or distribution, without interest, on that
payment date with respect to the whole shares of Old Republic
common stock issued to you. After the effective time of the
merger, each certificate and book-entry formerly representing
shares of PMA class A common stock that has not been
surrendered will represent only the right to receive the merger
consideration.
If your PMA stock certificate has been lost, stolen or
destroyed, you may receive shares of Old Republic common stock
upon the making of an affidavit to that fact, and if reasonably
required by Old Republic or the exchange agent, the posting of a
bond as indemnity against any claim that may be made against the
surviving corporation, Old Republic, or the exchange agent with
respect to the lost, stolen or destroyed PMA stock certificate.
Old Republic will issue stock (or make a fractional share
payment) in a name other than the name in which a surrendered
PMA stock certificate is registered only if you present the
exchange agent with all documents required to show and effect
the unrecorded transfer of ownership and show that you paid any
applicable stock transfer taxes.
Upon the first anniversary of the merger, the exchange agent
will return to Old Republic the portion of the merger
consideration that remains unclaimed by holders of PMA
class A common stock. Thereafter, a holder of PMA
class A common stock must look only to Old Republic for
payment of the merger consideration to which the holder is
entitled under the terms of the merger agreement. Any portion of
the merger consideration remaining unclaimed by holders of PMA
class A common stock as of the date that is immediately
prior to such time as such amount would otherwise escheat to or
become property of any governmental entity will, to the extent
permitted by law, become the property of Old Republic, free and
clear of any claims or interest of any person previously
entitled to such merger consideration.
Treatment
of PMA Equity Compensation Awards and Performance-Based
Compensation Awards
Treatment of Stock Options. Immediately prior
to the effective time of the merger, each outstanding PMA stock
option shall become fully vested and exercisable to the extent
the applicable award agreement or PMA equity compensation plan
provides that such stock option shall vest upon an event that
includes the merger. At the effective time of the merger, each
outstanding PMA stock option that remains unexercised as of the
completion of the merger will be converted into an option to
purchase the number of whole shares of Old Republic common stock
that is equal to the number of shares of PMA class A common
stock subject to the option multiplied by the exchange ratio
(rounded down to the nearest whole share), at an exercise price
equal to the original exercise price for the stock option
divided by the exchange ratio (rounded up to the nearest whole
penny). With respect to options that are designed to qualify as
incentive stock options under Section 422 of the Internal
Revenue Code and options that are designed to satisfy an
exemption from Section 409A of the Internal Revenue Code,
the number of shares of Old Republic common stock subject to the
converted option and the exercise price for such converted
options shall be adjusted in accordance with the applicable tax
regulations to the extent necessary to preserve the applicable
tax status. The converted options will otherwise have the same
terms and conditions as were in effect before the merger was
effective.
Treatment of Stock Appreciation
Rights. Immediately prior to the effective time
of the merger, each outstanding PMA stock appreciation right
shall become fully vested and exercisable to the extent the
applicable award agreement or PMA equity compensation plan
provides that such stock appreciation right shall vest upon an
event that includes the merger. At the effective time of the
merger, each outstanding PMA stock appreciation right that
remains unexercised as of the completion of the merger will be
converted into a stock appreciation right with respect to the
number of whole shares of Old Republic common stock that is
equal to the number of shares of PMA class A common stock
subject to the stock appreciation right multiplied by the
exchange ratio (rounded down to the nearest whole share), at an
exercise price equal to the original exercise price for the
stock appreciation right divided by the exchange ratio (rounded
up to the nearest whole penny). With respect to stock
appreciation rights that are
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designed to satisfy an exemption from Section 409A of the
Internal Revenue Code, the number of shares of Old Republic
common stock underlying the converted stock appreciation right
and the exercise price for such converted stock appreciation
right shall be adjusted in accordance with the applicable tax
regulations to the extent necessary to preserve the
Section 409A exemption. The converted stock appreciation
rights will otherwise have the same terms and conditions as were
in effect before the merger was effective.
Treatment of Restricted Shares. Immediately
prior to the effective time of the merger, each outstanding PMA
restricted share shall become fully vested and exercisable to
the extent the applicable restricted share award agreement or
PMA equity compensation plan provides that such restricted share
shall vest upon an event that includes the merger and, upon the
merger, be converted into the right to receive the merger
consideration. If the applicable restricted share award
agreement or PMA equity compensation plan does not provide that
such restricted share shall vest upon an event that includes the
merger, at the effective time of the merger, such restricted
shares will be converted into the number of whole shares
(rounded to the nearest whole share) of Old Republic common
stock equal to the exchange ratio times the number of restricted
shares. The converted restricted shares will otherwise have the
same terms and conditions as were in effect before the merger
was effective, including applicable vesting requirements.
The terms of the award agreements for restricted shares issued
to the non-employee directors of PMA in May 2010 provide that
the restricted shares will vest upon a change of control. The
merger will constitute a change of control.
Treatment of Restricted Share Units. At the
effective time of the merger, all restricted share units awarded
under a long-term incentive plan shall be converted into
restricted share units with respect to the number of shares of
Old Republic common stock that is equal to the number of shares
of PMA class A common stock in which such restricted share
units are denominated multiplied by each of the exchange ratio
and the proportion of the performance period under the
applicable long-term incentive plan that has passed at the time
of the closing of the merger (rounded to the nearest number of
whole shares).
All outstanding restricted share units were granted under
PMAs 2009 and 2010 Officer Long Term Incentive Plans. At
the effective time of the merger, the performance goals
designated under each of PMAs 2009 and 2010 Officer Long
Term Incentive Plans will be deemed to have been met at 100% of
target. The payment of the awards will be based on the
satisfaction by participants of only the service-based or
time-based vesting requirements under the plans, if any. Each
plan has a term of three years.
2008 Officer Long Term Incentive Plan. At the
effective time of the merger, PMAs 2008 Officer Long Term
Incentive Plan will be terminated.
2010 Officer Annual Incentive Compensation
Plan. At the effective time of the merger, the
performance goals designated under PMAs 2010 Officer
Annual Incentive Compensation Plan will be deemed to have been
met at a payout factor of 100%. The payment of the awards shall
be based on the satisfaction by participants of only the
service-based and time-based vesting requirements designated
under the plan, if any.
Articles
of Incorporation and By-laws of the Surviving
Corporation
At the effective time, the articles of incorporation and bylaws
of PMA shall by virtue of the merger be amended and restated to
be identical to the articles of incorporation and by-laws of
Merger Sub (other than references to Merger Subs name,
which will be replaced by references to PMA Companies, Inc.).
Directors
and Officers
At the effective time, all of the directors of PMA (other than
Vincent T. Donnelly, a director and officer of PMA) will resign,
and the directors and officers of Merger Sub, together with
Mr. Donnelly, will become the directors and officers of the
surviving corporation until their successors have been elected
or until their earlier death, resignation or removal in
accordance with the organizational documents of the surviving
corporation. Following the merger, Old Republic will add one of
PMAs independent directors to its board to serve as a
Class 2 director. The officers of Old Republic are not
expected to change as a result of the merger.
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Completion
of the Merger
Unless Old Republic and PMA agree otherwise, the parties are
required to complete the merger on the fifth business day after
satisfaction or, to the extent permitted by law, waiver of all
of the conditions described under The Merger
Agreement Conditions to Completion of the
Merger below. The merger will be effective at the time the
certificate of merger is filed with the Secretary of State of
the Commonwealth of Pennsylvania or such later time as is agreed
upon by the parties and specified in the certificate of merger.
Conditions
to Completion of the Merger
The respective obligations of PMA, Old Republic and Merger Sub
to complete the merger are subject to the satisfaction of
certain conditions.
Conditions to each partys obligation to effect the
merger. The obligations of Old Republic, Merger
Sub and PMA to complete the merger are each subject to the
satisfaction of the following conditions:
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adoption by holders of PMA class A common stock of the
merger agreement;
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the approval of the listing of the Old Republic common stock to
be issued in the merger on the NYSE, subject to official notice
of issuance;
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effectiveness of the registration statement of which this proxy
statement/prospectus is a part and the absence of a stop order
or proceedings threatened or initiated by the SEC for that
purpose;
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absence of any order, decree or injunction issued, and of any
action taken by any court or agency or other law preventing or
making illegal the consummation of the merger; and
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the waiting period (and any extension thereof) applicable to the
consummation of the merger under the HSR Act will have expired
or been terminated and all regulatory approvals required to
complete the merger will have been obtained.
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Conditions to the obligations of Old Republic and Merger Sub
to effect the merger. The obligations of Old
Republic and Merger Sub to complete the merger are subject to
the satisfaction or waiver of the following conditions:
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the truth and correctness of PMAs representations and
warranties in the merger agreement (in certain circumstances,
subject to materiality or material adverse effect
qualifications) as of the date of the merger agreement and as of
the closing date as though made on and as of the closing date
(except to the extent expressly made as of an earlier date, in
which case as of such date);
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the performance by PMA, in all material respects, of all of its
obligations under the merger agreement;
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receipt of a certificate executed by the Chief Executive Officer
or the Chief Financial Officer of PMA as to the satisfaction of
the conditions described in the preceding two bullets;
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receipt of a legal opinion from Old Republics counsel to
the effect that the merger should qualify as a
reorganization within the meaning of
Section 368(a) of the Internal Revenue Code;
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since December 31, 2009, the absence of any event or
condition that has had or is reasonably likely to have,
individually or in the aggregate, a material adverse effect on
PMA; and
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receipt of voluntary written terminations of employment or
severance agreements with the Chief Executive Officer of PMA and
six of the eight other PMA officers party to such agreements
effective prior to the merger.
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Conditions to the obligations of PMA to effect the
merger. The obligations of PMA to complete the
merger are subject to the satisfaction or waiver of the
following conditions:
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the truth and correctness of Old Republics representations
and warranties in the merger agreement (in certain
circumstances, subject to materiality or material adverse effect
qualifications) as of the date of the
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merger agreement and as of the closing date as though made on
and as of the closing date (except to the extent expressly made
as of an earlier date, in which case as of such date);
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the performance by Old Republic, in all material respects, of
all of its obligations under the merger agreement;
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receipt of a certificate executed by the Chief Executive Officer
or the Chief Financial Officer of Old Republic as to the
satisfaction of the conditions described in the preceding two
bullets;
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receipt of a legal opinion from Ballard Spahr LLP to the effect
that (i) the merger should qualify as a
reorganization within the meaning of
Section 368(a) of the Code, (ii) PMA, Merger Sub and
Old Republic each will be a party to the
reorganization within the meaning of Section 368(a)
of the Internal Revenue Code and (iii) no gain or loss will
be recognized by the PMA shareholders upon the receipt of the
merger consideration (except cash received in lieu of fractional
shares); and
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since December 31, 2009, the absence of any event or
condition that has had or is reasonably likely to have,
individually or in the aggregate, a material adverse effect on
Old Republic.
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The merger agreement provides that any or all of the respective
conditions of Old Republic and Merger Sub or PMA may be waived,
in whole or in part, by Old Republic and Merger Sub or PMA, as
applicable, to the extent legally allowed. In the event that
either Old Republic or PMA were to waive a condition to the
completion of the merger set forth above that would require
material changes to the disclosure set forth in this proxy
statement/prospectus, Old Republic and PMA will recirculate this
proxy statement/prospectus and resolicit the adoption of the
merger agreement by the holders of PMA class A common
stock. Accordingly, if either or both of Old Republic and PMA
waives the condition to completion of the merger that opinions
are received from Old Republics and PMAs respective
counsel to the effect that the merger will be treated as a
reorganization within the meaning of
Section 368(a) of the Code and that Old Republic and PMA
will each be a party to the reorganization, Old Republic and PMA
intend to recirculate this proxy statement/prospectus and
resolicit the adoption of the merger agreement by the holders of
PMA class A common stock. Neither Old Republic nor PMA
currently intends to waive any material condition to the
completion of the merger, including the condition that the above
referenced opinions are received.
Representations
and Warranties
The merger agreement contains representations and warranties
made by PMA relating to, among other things, the following:
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due incorporation, good standing, qualification and corporate
power, organizational documents, corporate records and
governmental licenses, authorizations, permits and approvals to
conduct its business;
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corporate power and authority to enter into, and perform its
obligations under, the merger agreement, enforceability of the
merger agreement, approval of the merger agreement by the PMA
board of directors, and the determination of the PMA board of
directors that the merger agreement is in the best interests of
PMA and its shareholders and that the merger agreement will be
submitted to the PMA shareholders for adoption;
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required governmental filings and approvals;
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the absence of conflicts between the execution, delivery or
performance of the merger agreement and PMAs or its
subsidiaries organizational documents, any applicable law
or order, certain of PMAs contracts, or any governmental
licenses, authorizations, permits or approvals, and the absence
of any liens resulting from the execution, delivery or
performance of the merger agreement;
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capitalization and outstanding stock options and restricted
stock awards;
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PMAs subsidiaries;
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filings with the SEC and internal controls and procedures;
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financial statements;
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statutory statements of PMAs insurance subsidiaries filed
with state insurance departments;
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the accuracy of information provided by PMA for inclusion in
this proxy statement/prospectus and compliance with SEC rules
and regulations;
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the absence of a material adverse effect on PMA since
December 31, 2009;
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the absence of undisclosed liabilities;
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compliance with applicable laws, including insurance laws;
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the absence of material litigation;
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