Old Republic International Corporation — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing reports full-year results; fourth-quarter net income was $90.6 million, or $0.32 per diluted share. Amounts below are in millions except per-share data and ratios.
Business context
Old Republic is an insurance holding company operating principally through General Insurance (commercial property and liability), Title Insurance, and RFIG (mortgage guaranty and consumer credit indemnity) businesses in run-off. Management emphasizes long-term underwriting and financial strength, noting that annual results can be volatile and are best assessed over multi-year periods.
Financial results and condition
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Operating revenues, excluding realized investment gains | $5,674.8 | $5,258.3 | +7.9% |
| Net premiums and fees earned | $5,179.4 | $4,811.1 | +7.7% |
| Net investment income | $388.6 | $345.5 | +12.5% |
| Realized investment gains | $91.3 | $272.3 | -66.5% |
| Pretax operating income (non-GAAP) | $540.4 | $337.1 | +60.3% |
| GAAP pretax income | $631.8 | $609.4 | +3.7% |
| Net income | $422.1 | $409.7 | +3.0% |
| Diluted earnings per share | $1.48 | $1.44 | +$0.04 |
| Operating cash flow | $688.2 | $(181.2) | Turned positive |
- The consolidated composite underwriting ratio improved to 96.0% from 99.4%; below 100% indicates underwriting profit. General Insurance improved to 97.6% from 100.8%, while Title improved to 93.2% from 95.6%. RFIG run-off was 98.0%, versus 106.7%.
- General Insurance pretax operating income rose to $336.4 from $221.3, supported by premium growth, investment income and lower current- and prior-year claim provisions. Its claim ratio was 74.1%; adverse prior-year reserve development added 1.5 percentage points.
- Title pretax operating income increased to $166.8 from $99.5. Premiums and fees grew 16.3%, attributed to stronger housing and commercial property transactions and expanded market share.
- RFIG run-off pretax operating income rose to $29.4 from $10.3. Mortgage insurance income declined to $89.9 from $121.6 as premiums and investment income fell; CCI losses improved to $60.4 from $111.2 but remained heavily affected by litigation costs.
- Assets were $17,110.5, cash and invested assets $11,475.5, and shareholders’ equity $3,880.8 at year-end. Equity declined 1.1%; book value per share was $15.02, down from $15.15.
- Debt was $961.7 and the consolidated debt-to-equity ratio was 24.8%. Debt consists principally of $550.0 of 3.75% convertible notes due 2018 and $400.0 of 4.875% senior notes due 2024.
- Cash dividends were $0.74 per share for 2015. The quarterly rate increased from $0.1825 to $0.1850 per share during 2015. Up to $493.8 of subsidiary dividends could be paid to the parent in 2016 without prior regulatory approval.
Material changes and unusual items
- Operating performance strengthened substantially, particularly in General and Title. The smaller 2015 increase in GAAP net income reflects realized investment gains of $91.3, versus $272.3 in 2014.
- Operating cash flow rebounded from a 2014 deficit, primarily alongside changes in unpaid claims and related items. Excluding RFIG run-off, operations generated $812.8 of cash flow in 2015.
- Investment portfolio fair value declined to $11,225.5 from $11,068.8 in total investments? The filing reports total investments of $11,225.5 versus $11,068.8; however, cash and invested assets rose 1.6%. Net unrealized investment gains in accumulated other comprehensive income fell materially, and 2015 comprehensive income was $159.0 versus $323.9 in 2014.
- The Company released a $9.6 deferred-tax valuation allowance in 2015; net deferred tax assets rose to $154.5 from $37.0.
- RFIG net risk in force declined to $6,867.3 from $8,566.2, consistent with run-off. Mortgage insurance subsidiaries had $311.0 of statutory capital, including a $265.8 contingency reserve; GAAP capitalization was $247.2.
Outlook, risks and contingencies
- No quantified consolidated earnings or revenue guidance is provided. Management says its standard mortgage-insurance run-off model indicates aggregate profitability over an assumed period through approximately 2022, while cautioning that near-term MI results could be negative and estimates depend on uncertain economic, servicing and policy assumptions.
- RMIC and RMICNC ceased writing new mortgage insurance in 2011 and remain under North Carolina Department of Insurance supervision. The regulator may amend the corrective plan; the filing cautions that solvency, duration of run-off and continued supervision are not assured. RMIC was reported statutorily solvent at year-end.
- RMIC reached a preliminary claims settlement with Countrywide and Bank of America in September 2015; final settlement depended on stakeholder consents, and proceedings were stayed. Other mortgage-insurance disputes, RESPA class actions and patent litigation remain. Management did not consider a material adverse effect probable, but said additional costs could arise; damages in certain matters are unspecified.
- Key risks include reserve uncertainty and adverse claims development, especially in workers’ compensation and general liability; long-tail asbestos, environmental and black-lung exposures; catastrophic and terrorism losses; reinsurance collectability and concentration; investment-market and low-yield risks; housing and mortgage-market weakness; regulatory limits on subsidiary dividends; and litigation, competition and operational risks.
- General Insurance reserves for asbestos and environmental claims were $130.9 gross and $100.6 net. The company states these exposures are difficult to estimate and reserves may prove inadequate or excessive.
- The filing states that KPMG issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal control were effective.
Important facts for investors to verify
- Whether General Insurance reserve development—particularly workers’ compensation and general liability—continues to weigh on underwriting results.
- Final terms, required consents and financial consequences of the preliminary Countrywide/Bank of America settlement, plus developments in other material litigation.
- RMIC’s statutory capital and regulatory status, and whether actual run-off experience supports the model’s projected profitability through 2022.
- Whether investment income growth and underwriting gains persist despite interest-rate, equity-market and credit risks; note that 2015 investment gains were much lower than in 2014.
- Parent-company liquidity and dividend capacity, including regulatory restrictions, debt maturities and the 2018 convertible-note obligation.
- Reconcile reported investment balances and cash-flow movements against the audited statements and notes; the filing’s text contains figures presented on differing bases.