Old Republic International Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; balance-sheet comparisons are against December 31, 2012. Amounts are in millions of dollars unless stated otherwise. Old Republic operates General Insurance, Title Insurance, and the RFIG mortgage-guaranty and consumer-credit run-off businesses.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Operating revenues | $1,374.6 | $1,286.1 | $3,964.4 | $3,643.2 |
| Net income (loss) | $102.9 | $(14.8) | $353.1 | $(48.4) |
| Diluted EPS | $0.36 | $(0.06) | $1.24 | $(0.19) |
| Net operating income, as presented by management | $99.7 | $(26.9) | $257.8 | $(76.7) |
| Operating cash flow | Not presented by quarter | $459.0 | $322.3 |
- Nine-month net premiums earned rose 11.3% to $3,323.6; total premiums and fees increased 10.9% to $3,660.1. Net investment income fell 6.2% to $237.2.
- Nine-month net realized investment gains were $146.6 pretax, versus $43.6 a year earlier. Management said the gains were mostly from second-quarter equity sales, including securities previously impaired in 2008. The reported gains included a $131.3 accounting adjustment related to impairment charges recorded in prior periods; no impairment charges were recorded in the periods shown.
- Consolidated composite underwriting ratio improved to 95.2% from 110.5% for the nine months, including RFIG run-off; excluding RFIG, it was 96.2% versus 97.9%. For Q3, the corresponding ratios were 94.1% and 96.1%.
- Cash from operations was $459.0; investing activities used $265.5 and financing activities used $138.4. Cash increased to $156.3 from $101.2 at year-end.
- At September 30, total assets were $16,526.4 and shareholders’ equity was $3,716.0. Debt was $569.2, including $550.0 of 3.75% convertible notes due 2018. Management reported a 15.3% debt-to-equity ratio.
- Cash and investments totaled $10,964.5. Fixed-maturity securities were $8,630.7 at fair value; the portfolio was approximately 91% fixed maturities and short-term investments and 9% equities. Investment-grade securities represented 98.7% of fixed maturities.
- Common dividends were $0.18 per share for Q3; the nine-month amount was $0.54 per share. Book value per share was $14.44 at September 30.
Changes and segment results
- General Insurance: Excluding CCI run-off, nine-month premiums earned increased 7.5% to $1,859.4, while pretax operating income rose 4.5% to $209.4. The nine-month composite ratio improved to 97.4% from 98.3%. Management cited premium growth and lower operating costs, but noted continuing severity pressure in workers’ compensation and general liability and lower investment income.
- Title Insurance: Nine-month premiums and fees grew 25.4% to $1,513.1, and pretax operating income increased 83.7% to $98.6. The composite ratio improved to 94.4% from 96.8%. Management attributed results to market-share gains, improving housing activity, lower claims trends, expense discipline, and operating leverage.
- RFIG run-off: Nine-month pretax operating income was $72.2, versus a loss of $384.5 in 2012. Premiums declined 24.3% to $243.1 as the book runs off. Lower mortgage-guaranty claim provisions and favorable development of prior-year reserves were central to the improvement; reported claim ratios were strongly affected by these reserve developments.
- General and Title growth more than offset lower RFIG run-off revenue. Net investment income declined amid low yields on newly invested funds. Rising interest rates reduced the portfolio’s net unrealized investment gains during the first nine months; accumulated other comprehensive income was $376.5, down from $481.7 at year-end.
Outlook, risks, and unusual items
- Mortgage-insurance recapitalization: In an October 24, 2013 subsequent event, the company announced that RMIC Companies, Inc. planned to raise market capital and recapitalize its three mortgage-insurance carriers. The stated objectives included fully supporting existing policies, paying deferred claim obligations, exiting North Carolina supervision, and potentially resuming new business early in 2014. Old Republic expected to contribute up to $50.0 and, if completed, retain a non-controlling equity interest. Closing depends on market conditions and regulatory and other approvals, including North Carolina, Fannie Mae, and Freddie Mac approvals.
- RMIC and its affiliate remain in run-off under North Carolina supervision. Under the approved plan, settled claims are generally paid 60% in cash, with the remaining 40% retained as deferred payment obligations; the accumulated DPO reserve was $502.2 at September 30.
- The $550.0 convertible notes contain a potential acceleration risk if a court-ordered insolvency proceeding involving RMIC, a significant subsidiary, triggers an event of default. Management said it had sufficient liquid resources to redeem a substantial portion of the notes and was evaluating options, but gave no assurance those plans would succeed under stressful market conditions.
- Multiple pending insurance-related lawsuits, arbitrations, and purported class actions involve title-insurance credits, mortgage-insurance rescissions and claim handling, and credit-indemnity policies. The company said it would defend the matters vigorously, did not consider a material adverse effect probable, and generally could not estimate potential losses. Unspecified damages are sought in several matters.
- Key operating uncertainties include insurance loss-reserve estimates, mortgage defaults and cures, housing and foreclosure trends, claim severity and inflation, investment yields and interest-rate movements, and regulatory limits on subsidiary dividends. The filing reports no material changes to previously disclosed risk factors and no material change in market-risk exposures.
- Management provided no specific financial guidance. It emphasized evaluating insurance results over longer cycles and cautioned that historical results are not necessarily indicative of future performance.
Important facts for investors to verify
- Whether the proposed RMIC recapitalization closed, obtained required approvals, and achieved the stated policyholder and DPO objectives; confirm the final capital contribution and Old Republic’s resulting ownership.
- How much of the nine-month earnings improvement reflects sustainable underwriting versus favorable RFIG reserve development and the $146.6 of realized investment gains, including the prior-impairment accounting adjustment.
- Whether mortgage-guaranty claims, cures, rescissions, and denials support current reserves, and how the $502.2 DPO balance and mortgage-insurance litigation evolve.
- Whether general-insurance claim severity, particularly workers’ compensation and liability, develops as management expects, and whether Title Insurance growth and claim trends persist.
- The convertible-note default provisions and the company’s liquidity and financing alternatives if RMIC’s status changes; also monitor interest-rate effects on investment income and equity.