Business Context and Reporting Period
Company: Old Republic International Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2009
Business Overview: The Company operates through three major segments: General Insurance (property and liability), Mortgage Guaranty, and Title Insurance. It also maintains a small life and health insurance business. The Company is a large accelerated filer.
Key Financial Metrics
| Metric ($ in Millions) | Q2 2009 | Q2 2008 | 6 Months 2009 | 6 Months 2008 |
|---|---|---|---|---|
| Total Operating Revenues | $912.2 | $937.4 | $1,790.7 | $1,888.1 |
| Net Investment Income | $93.7 | $93.1 | $187.1 | $188.4 |
| Net Income (Loss) | $(15.8) | $(364.7) | $(69.8) | $(383.8) |
| Diluted EPS | $(0.07) | $(1.58) | $(0.30) | $(1.66) |
| Total Assets | $13,718.6 | - | $13,718.6 | $13,266.0 (Dec 31, 2008) |
| Total Debt | $372.2 | - | $372.2 | $233.0 (Dec 31, 2008) |
| Shareholders' Equity | $3,753.1 | - | $3,753.1 | $3,740.3 (Dec 31, 2008) |
| Operating Cash Flow (6 Mo) | - | - | $280.4 | $328.8 |
Underwriting Ratios (6 Months 2009):
- Benefits and Claims Ratio: 81.3%
- Expense Ratio: 41.0%
- Composite Ratio: 122.3%
Material Changes vs. Prior Period
- Net Loss Improvement: The net loss for the quarter and six months ended June 30, 2009, improved significantly compared to the same periods in 2008. This improvement is largely attributable to the absence of the $437.3 million in other-than-temporary impairment (OTTI) charges on equity securities recognized in 2008.
- Operating Revenues: Total operating revenues decreased by 2.7% in Q2 2009 and 5.2% for the six-month period compared to 2008, driven primarily by a decline in General Insurance premiums.
- Segment Performance:
- General Insurance: Pretax operating income declined 17.5% in Q2 and 28.4% for the six months due to an 11% reduction in premium volume and higher loss costs in certain coverages (specifically consumer credit indemnity).
- Mortgage Guaranty: Pretax operating losses widened slightly for the six months (-7.4%) due to rising claim ratios (198.8%) driven by housing market downturns, though expenses were lower.
- Title Insurance: Recorded a quarterly operating gain for the first time since Q2 2007, with revenues up 22.1% in Q2 due to increased refinance activity.
- Debt Issuance: In April 2009, the Company issued $316.2 million in 8% convertible senior notes due 2012, increasing total debt from $233.0 million at year-end 2008 to $372.2 million.
- Investment Portfolio: Total investments increased to $9,211.7 million. The portfolio contains no fixed maturity investments in default. Unrealized losses on fixed maturities decreased compared to year-end 2008.
Guidance, Outlook, Risks, and Unusual Items
- Management Commentary: Management emphasizes long-term cycles (5-10 years) over quarterly results. They view the current depressed market valuations of mortgage guaranty investments as cyclical and intend to hold them for recovery. Operating results for the first half of 2009 reflected a greater operating loss than the prior year, excluding the impact of 2008 impairments.
- Unusual Items: The 2008 results were heavily impacted by $437.3 million in OTTI charges on equity securities (primarily mortgage guaranty companies). No such charges were recognized in 2009. Deferred income tax credits recognized in 2009 reduced the net loss, relating to losses originally recorded in 2008.
- Risks and Contingencies:
- Legal Proceedings: Numerous class action lawsuits are pending against the Title Insurance subsidiary regarding reissue/refinance credits and alleged price-fixing. A settlement in New Jersey is expected to cost no more than $2.2 million. The ultimate impact of other suits is uncertain.
- Mortgage Guaranty Risk: Rising delinquency rates and claim severities in the mortgage guaranty segment continue to pressure results. The statutory risk-to-capital ratio is 20.1:1, below the 25:1 regulatory limit.
- Investment Risk: While the portfolio is high quality (97.5% investment grade), rising interest rates and credit quality declines could lead to further unrealized losses or potential future OTTI charges if conditions deteriorate.
- Capitalization: The Company maintains a low debt-to-equity ratio of 9.9%. It has access to a $150.0 million commercial paper program ($24.8 million outstanding) and can receive up to $245.7 million in dividends from subsidiaries without regulatory approval.
Key Facts for Investor Verification
- OTTI Exposure: Verify the Company's assessment of "other-than-temporary" impairments for its equity portfolio, specifically the two major mortgage guaranty holdings (MGIC and PMI Group), which have significant unrealized losses but are held for long-term recovery.
- Mortgage Guaranty Reserves: Monitor the trend in delinquency ratios and claim severity in the Mortgage Guaranty segment, as these are the primary drivers of the segment's operating losses.
- Legal Settlements: Track the status of the pending class action lawsuits against the Title Insurance subsidiary, particularly those outside the settled New Jersey action, as damages are currently unquantified.
- Debt Service: Confirm the impact of the new $316.2 million convertible notes on future interest expenses and potential dilution upon conversion.
- General Insurance Loss Ratios: Review the development of loss reserves for consumer credit indemnity and financial indemnity coverages, which have shown adverse trends.