Old Republic International Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Old Republic operates General Insurance, Title Insurance, and RFIG Run-off businesses, with a small life and accident insurance operation included in Corporate & Other. Amounts below are in millions unless noted.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total operating revenues, excluding investment gains/losses | $2,098.2 | $2,204.9 | $6,287.7 | $6,317.3 |
| Net premiums and fees earned | $1,943.3 | $2,055.4 | $5,844.6 | $5,881.6 |
| Net investment income | $115.1 | $111.6 | $329.2 | $323.6 |
| Pretax operating income, excluding investment gains/losses | $257.5 | $298.6 | $757.9 | $828.8 |
| Net income (loss), GAAP | $(91.7) | $88.7 | $174.3 | $907.3 |
| Diluted EPS, GAAP | $(0.31) | $0.29 | $0.57 | $3.00 |
| Combined ratio | 91.4% | 89.8% | 91.4% | 90.4% |
Large equity-market valuation losses drove the GAAP loss in Q3: investment losses were $377.1 pretax for the quarter and $549.5 for the first nine months, including unrealized equity losses of $350.8 and $641.8, respectively. Excluding investment gains and losses, diluted EPS was $0.68 in Q3 and $1.99 for nine months; the company’s corresponding operating income declined 13.8% and 8.6% year over year.
Segment trends: General Insurance pretax operating income rose 15.0% in Q3 to $167.6 and 9.3% for nine months to $448.1; earned premiums increased 7.1% and 7.3%. Title Insurance pretax operating income fell 46.0% in Q3 to $73.3 and 30.3% for nine months to $263.8, as premiums and fees declined 15.2% and 6.9%. RFIG Run-off pretax operating income was $9.2 in Q3 and $31.3 for nine months, up 9.6% and 49.7%.
Cash flow and balance sheet: Operating cash flow was $903.4 for the first nine months, versus $970.6 a year earlier. Cash was $102.4 at September 30, 2022. Total assets were $24,947.0; total liabilities were $19,268.9; debt was $1,596.6; and common shareholders’ equity was $5,678.1. Book value per share was $18.92, down from $22.76 at year-end 2021. Debt was 21.9% of total capitalization; debt-to-equity was 28.1%.
Material changes and unusual items
- Equity portfolio fair value fell to $3,045.4 from $5,302.8 at year-end 2021. Fixed-income securities’ fair value was $10,841.8 versus amortized cost of $11,606.7; the company attributed most fixed-income unrealized losses to higher interest rates. These valuation effects contributed to lower equity and book value.
- The company recorded $120.9 of Q3 impairment losses on fixed-income securities it intended to sell, principally for tax-planning considerations. It reported no allowance for credit losses on available-for-sale fixed-income securities.
- Q3 shareholder capital return totaled $479.1, including $374.3 in dividends (including a $1.00-per-share special dividend) and $104.8 of repurchases. The board authorized a $450.0 repurchase program; 4.8 million shares were repurchased in Q3. Through November 3, a further 6.0 million shares were repurchased for $136.8, leaving $208.2 authorized.
- The board terminated the shareholders’ rights plan on August 18, 2022.
- Quarterly dividends declared were $1.23 per share, compared with $1.72 in Q3 2021. The difference includes the special dividend in 2021? The filing’s reported Q3 2022 dividend includes its special dividend; confirm the period-specific dividend composition when comparing.
Management commentary, outlook, and risks
Management said operating results were within expectations and emphasized evaluating underwriting performance over longer cycles, separately from volatile investment gains and losses. General Insurance benefited from rate increases, renewal retention, new business, and favorable prior-year reserve development. The consolidated nine-month reserve development was favorable by $148.2, but included unfavorable development in financial indemnity—partly related to large securities class-action claims from accident years 2018 and 2019—and, to a lesser extent, general liability.
Higher mortgage rates sharply reduced title refinance activity and, to a lesser extent, purchase activity. Management expected Title Insurance revenues to remain lower in Q4 2022 than in the prior-year quarter. Management also expected investment yields to increase on a comparable year-over-year basis in the next few quarters. General Insurance’s stated target combined-ratio range is 90%–95%; this is a business target, not a consolidated earnings forecast. No specific consolidated earnings or revenue guidance is provided.
Risks include uncertainty in loss-reserve estimates and reinsurance recoverability; claim severity and frequency, legal developments, catastrophe exposure and inflation; sensitivity of fixed-income fair values to interest rates and equity values to market declines; housing and mortgage activity; and cybersecurity or business interruptions. Management noted Hurricane Ian had a relatively nominal estimated net retention of $10.0, with $16.6 of reinstatement premiums currently estimated. The company reported no material non-claim litigation exposures and no material changes to the risk factors in its 2021 Form 10-K. Disclosure controls were assessed as effective; no material change in internal control was reported.
Important facts for investors to verify
- Whether operating earnings and combined ratios remain resilient if favorable reserve development diminishes or reverses, especially in financial indemnity and general liability.
- How persistent higher mortgage rates affect Title Insurance revenue, expense ratios, and Q4 results.
- The extent to which interest-rate and equity-market movements affect portfolio values, book value, and capital, and whether any additional securities are intended for sale.
- Reserve adequacy, reinsurance recoverability, and catastrophe-loss estimates, including subsequent development related to Hurricane Ian.
- Parent-company liquidity and insurance-subsidiary dividend capacity alongside the special dividend and share-repurchase commitments; the filing states up to $982.0 of ordinary subsidiary dividends were available in 2022 without prior regulatory approval, with $440.4 received through September 30.