Business context and reporting period
Old Republic International Corporation filed this Form 10-Q for the quarter ended March 31, 2011. The insurer operates through General Insurance, Mortgage Guaranty and Title Insurance segments, with a small life and health business and corporate operations. Figures below are in millions of dollars unless stated otherwise.
Q1 2011 includes PMA Capital Corporation, acquired October 1, 2010. Management estimated PMA added approximately $142 million to operating revenues and $7 million to net operating results compared with Q1 2010.
Financial performance
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Total operating revenues | $1,123.0 | $929.6 |
| Total revenues, including realized investment gains | $1,129.5 | $932.6 |
| Pretax income (loss) | $(24.9) | $31.2 |
| Net income (loss) | $(12.9) | $25.0 |
| Diluted EPS | $(0.05) | $0.11 |
| Net cash from operating activities | $(52.1) | $(19.3) |
| Cash dividends per common share | $0.1750 | $0.1725 |
Net premiums earned rose to $922.8 million from $752.3 million; title, escrow and other fees were $80.1 million versus $76.1 million. Net investment income fell to $91.5 million from $96.2 million. Realized investment gains were $6.4 million, with no impairment losses recognized in either quarter. The consolidated benefits and claims ratio was 63.8%, the expense ratio 47.0%, and the composite ratio 110.8% (107.0% in Q1 2010).
Segment results
| Segment | Operating revenues | Pretax operating income (loss) | Composite ratio |
|---|---|---|---|
| General Insurance | $625.5 million; +30.6% | $68.5 million; prior $69.2 million | 98.1%; prior 97.3% |
| Mortgage Guaranty | $131.2 million; −18.2% | $(101.1) million; prior $(34.1) million | 201.8%; prior 140.7% |
| Title Insurance | $339.9 million; +29.7% | $2.6 million; prior $(8.6) million | 100.8%; prior 105.9% |
Mortgage Guaranty’s Q1 2011 claim ratio was 186.7%, compared with 127.2% a year earlier. The 2010 comparison benefited from captive reinsurance and pool contract terminations, which reduced reported incurred claims and increased premiums.
Financial position, cash flow and liquidity
At March 31, 2011, total assets were $16,303.6 million, total liabilities $12,253.5 million, and common shareholders’ equity $4,050.1 million, down 1.7% from year-end 2010. Cash and investments totaled approximately $10,783.4 million, including $1,390.2 million in short-term investments and $118.1 million in cash. Fixed-maturity securities had a fair value of $8,563.7 million; equity securities were $666.8 million.
Debt was $1,021.5 million, up from $475.0 million at December 31, 2010. The company issued $550 million of 3.75% convertible senior notes due 2018 in March; the notes are convertible into common shares. Management reported a 25.2% consolidated debt-to-equity ratio. The $150 million one-year commercial paper facility was terminated in March.
Operating cash flow was negative $52.1 million. Investing activities used $446.7 million, including a $389.5 million net increase in short-term investments; financing activities provided $489.6 million, principally from note issuance, and included $44.5 million of common dividends. Management said the parent could receive up to $306.5 million in subsidiary dividends in 2011 without prior regulatory approval and considered permitted dividends adequate for expected near-term holding-company cash needs.
Changes, outlook, risks and unusual items
- Revenue growth did not translate into profitability: the company reported a $17.1 million net operating loss, versus a $23.1 million operating gain in Q1 2010. GAAP net loss was $12.9 million after $6.4 million of pretax realized investment gains.
- Mortgage Guaranty was the principal source of the deterioration, with higher claim payments, fewer claim rescissions and denials, declining premiums and a smaller invested-asset base. Management noted some improvement in reported defaults and cure rates, but described the business outlook as exposed to housing, employment and mortgage-market conditions.
- General Insurance results were broadly stable; excluding PMA, premiums were basically flat amid soft commercial pricing and recession-related pressure on insured sales and employment. Consumer credit indemnity coverage remained adverse and added 4.3 percentage points to the segment’s claim ratio.
- Title Insurance returned to pretax profitability for a fourth consecutive quarter. Management cited market-share gains and revenue growth outpacing expense growth.
- Mortgage insurers’ combined statutory risk-to-capital ratio was 31.6:1, above the stated 25:1 limit. RMIC had breached minimum capital requirements in 2010 and operated under state waivers or forbearance, some expiring July 1, 2011; regulators could withdraw waivers or restrict new business. Management said continued losses could further weaken statutory surplus.
- Significant litigation includes title-insurance consumer class actions and disputes over credit indemnity and mortgage insurance coverage rescissions. The company said ultimate outcomes were uncertain and not reasonably estimable; it did not expect a material adverse effect but gave no assurance.
- Management emphasized the long-term, cycle-sensitive nature of insurance results and said performance is best assessed over five-to-ten-year periods. The filing provides no specific earnings or revenue guidance. Management reported no material change in risk factors from the 2010 Form 10-K.
- Investment portfolio exposure is principally to fixed maturities and equities. Management identified interest-rate and equity-price exposure; it reported no material foreign-exchange or commodity risk and no material change in market risk from year-end.
Investor verification priorities
- Track Mortgage Guaranty claims, reserve estimates, rescissions and denials, delinquency trends, and statutory capital ratios and waiver status.
- Assess the adequacy and development of loss reserves across segments, particularly mortgage, consumer credit indemnity, workers’ compensation, and asbestos and environmental exposures.
- Review the outcomes and potential financial exposure from the disclosed class actions, arbitration and lender disputes.
- Verify the sustainability of operating cash flow, holding-company liquidity, subsidiary dividend capacity, and the higher debt load following the convertible-note issuance.
- Separate PMA’s contribution and prior-year mortgage contract-termination effects when comparing underlying segment trends.