Old Republic International Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Old Republic is an insurance holding company with General Insurance, Title Insurance, and RFIG mortgage-guaranty and consumer-credit run-off operations. Amounts are in millions except per-share data.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Operating revenues | $1,504.2 | $1,369.4 | $4,208.9 | $3,892.7 |
| Net income | $125.9 | $85.8 | $331.4 | $346.4 |
| Diluted EPS | $0.44 | $0.30 | $1.16 | $1.21 |
| Operating cash flow | $262.7 | $(542.4) | $566.5 | $(370.0) |
- Q3 operating revenue rose 9.8% and net income rose 46.7%. Q3 pretax operating income, excluding realized investment gains, was $143.3 versus $99.8; this is a company-presented non-GAAP measure.
- Nine-month operating revenue rose 8.1% and pretax operating income rose 61.9% to $413.3. Net income nevertheless fell 4.3%, primarily reflecting realized investment gains of $77.0 versus $262.8 in 2014.
- General Insurance nine-month pretax operating income increased to $264.1 from $202.4; its composite underwriting ratio improved to 96.9% from 98.9%.
- Title Insurance nine-month pretax operating income more than doubled to $118.7 from $59.0, on 16.5% growth in premiums and fees; its composite ratio improved to 93.4% from 96.7%.
- RFIG run-off recorded a Q3 pretax operating loss of $12.5, versus income of $10.4 a year earlier. Nine-month income was $22.4 versus a $4.2 loss; litigation-related claim provisions affected results.
- Q3 and nine-month net investment income increased 21.1% and 13.6%, respectively. Management said 2015 periods benefited by approximately $10.0 from a special equity-security dividend.
Financial position, liquidity and capital
- At September 30, total assets were $17,327.8, total liabilities $13,473.9, and common shareholders’ equity $3,853.8. Equity was down 1.8% from year-end 2014; book value per share was $14.95, down from $15.15, largely reflecting lower unrealized investment gains.
- Total investments were $11,135.9; cash was $160.1 and short-term investments were $600.7. Cash, invested assets and accrued investment income totaled $11,388.6 on the company’s stated fair-value basis.
- Debt was $961.7, including $550.0 of 3.75% convertible notes due 2018 and $400.0 of 4.875% senior notes due 2024. Debt was 20.0% of total capitalization; management reported consolidated debt-to-equity of 25.0%.
- Management stated that up to $461.9 of subsidiary dividends could be received in 2015 without prior regulatory approval and considered permitted dividends sufficient for expected parent-company needs. Common dividends were $0.185 per share in Q3; the nine-month amount was $0.555 per share.
- Operating cash flow improved substantially year over year. Investing activities used $365.3 and financing activities used $177.8 during the nine months; financing included $143.7 of common dividends and $34.0 for ESSOP share purchases.
Material changes, outlook and risks
- Management attributed improved core operating results to stronger General Insurance underwriting and investment income and record Title Insurance performance, supported by housing and commercial property transactions and market-share strength. No quantified earnings guidance was provided.
- General Insurance’s nine-month claim ratio improved to 73.6% from 76.1%, with management citing more restrained reserve development than in 2014. Title growth and lower claim and expense costs relative to revenue also supported results.
- RFIG remains in run-off; mortgage-guaranty earned premiums declined, and Q3 claims included increased provisions for disputed claims in litigation. RMIC and RMICNC remain under North Carolina regulatory supervision. Management said RMIC was statutorily solvent at quarter-end and believed the regulatory order reduced the risk of a debt-default trigger.
- In late September, RMIC reached a preliminary claims settlement with Countrywide and Bank of America; a final settlement remained contingent on stakeholder consents. Other mortgage-insurance disputes and patent litigation remained pending. The company said it did not believe the proceedings were likely to have a material adverse effect, while cautioning that outcomes and additional costs were uncertain.
- Investment-market risks include interest-rate and equity-price movements. Net unrealized investment losses were $222.5 for the nine months, after tax, and accumulated other comprehensive income declined to $55.8 from $292.3 at year-end. The filing reported no other-than-temporary impairment charges in the periods presented.
- Loss reserves are estimates subject to uncertainty and may develop adversely. Other disclosed risks include housing and mortgage conditions, claims frequency and severity, competition, inflation, and legal or regulatory changes. Management reported no material change in previously disclosed risk factors and effective disclosure controls.
Important facts for investors to verify
- Whether the preliminary Countrywide/Bank of America settlement received required consents and what its final financial effect was.
- Subsequent development of General Insurance and RFIG loss reserves, including disputed mortgage-guaranty claims and the adequacy of reinsurance recoverables.
- Trends in Title Insurance revenue and profitability as housing and commercial property activity changes.
- Changes in equity-market and interest-rate exposures, unrealized losses, and the effect on book value and investment income.
- RMIC’s regulatory status, statutory solvency, and any implications for the company’s debt covenants or subsidiary dividend capacity.