Old Republic International Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Old Republic is an insurance holding company with General Insurance, Title Insurance, and RFIG mortgage-insurance run-off segments.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net premiums and fees earned | $2,055.4 million | $1,732.8 million | $5,881.6 million | $4,831.6 million |
| Operating revenues, excluding investment gains/losses | $2,204.9 million | $1,871.0 million | $6,317.3 million | $5,259.5 million |
| Pretax income excluding investment gains/losses | $298.6 million | $226.2 million | $828.8 million | $552.8 million |
| Net income (GAAP) | $88.7 million | $246.0 million | $907.3 million | $38.9 million |
| Diluted EPS (GAAP) | $0.29 | $0.83 | $3.00 | $0.13 |
| Combined ratio | 89.8% | 92.3% | 90.4% | 94.4% |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $970.6 million | $808.9 million |
GAAP results were significantly affected by equity-market valuation changes: the company recorded a $199.3 million pretax unrealized equity-securities loss in Q3 2021, versus a $79.2 million gain in Q3 2020. For the first nine months, unrealized gains were $288.1 million, compared with losses of $529.4 million in 2020. Excluding investment gains and losses, diluted EPS was $0.79 for Q3 and $2.21 year to date, compared with $0.62 and $1.50, respectively, in 2020.
Segments and changes versus prior periods
- General Insurance: Q3 and year-to-date premiums earned rose 4.7% and 3.8%. Pretax operating income increased 32.8% to $145.8 million in Q3 and 34.4% to $410.0 million year to date. The segment combined ratio improved to 91.3% for Q3 and 92.3% year to date, helped by lower current-period claim provisions and favorable prior-year reserve development.
- Title Insurance: Premiums and fees earned grew 33.3% in Q3 and 42.8% year to date. Pretax operating income increased 31.7% to $135.7 million and 78.6% to $378.3 million, respectively. Management attributed growth to a low-rate environment and strong real-estate activity; purchase transactions partly offset declining refinances.
- RFIG run-off: Premiums continued to decline as risk in force ran off, but pretax operating income rose to $8.4 million in Q3 and $20.9 million year to date, reflecting lower claims and favorable reserve development. Results remain sensitive to mortgage delinquencies and claim severity.
- Consolidated net premiums and fees increased 18.6% in Q3 and 21.7% year to date. Net investment income rose 4.9% in Q3 but declined 1.7% year to date as a larger asset base was offset by lower yields.
Financial position, liquidity, and capital
- At September 30, 2021, total assets were $24.99 billion, common shareholders’ equity was $6.33 billion, and book value was $20.96 per share, up from $20.75 at year-end 2020.
- Cash was $133.4 million; short-term investments were $1.10 billion; total investments were $16.45 billion. Operating cash flow for the nine months was $970.6 million.
- Debt increased to $1.59 billion from $966.4 million at December 31, 2020, mainly following issuance of $650 million of 3.850% senior notes due 2051. The reported debt-to-equity ratio was 25.1%; debt represented 20.1% of total capitalization.
- Management said permitted ordinary subsidiary dividends of up to $699.3 million in 2021 were sufficient for expected parent-company needs. Mortgage-insurance subsidiaries also received approval for $75 million of extraordinary dividends during the first nine months.
- The board declared a $1.50-per-share special dividend in August, paid October 6, 2021. The company reported a long record of uninterrupted and increasing annual dividends.
Outlook, risks, and unusual items
- Management expected General Insurance premiums and fees could continue growing as the economy recovered. Title activity could remain strong while low rates and favorable housing conditions persist, though revenue could be below recent levels. No numerical earnings or revenue guidance was provided.
- The company said COVID-19 had not materially affected most claims experience, but renewed outbreaks or variants could weaken demand or increase claims. RFIG outcomes also depend on loan forbearance, employment recovery, and housing-market conditions.
- Key uncertainties include long-tail claim-reserve estimates, reinsurance recoverability, interest-rate and equity-price movements, competition, inflation, catastrophe and claim trends, and cybersecurity incidents or fraud. The fixed-income portfolio was 97.3% investment grade; management reported no fixed-maturity investments in default.
- Management reported no material non-claim litigation exposure and no current IRS audit. It cautioned that reserve outcomes could differ from estimates and materially affect an individual reporting period.
- Disclosure controls were concluded to be effective, with no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- How much reported earnings depend on volatile equity-security fair-value changes; compare GAAP earnings with management’s operating-results measure excluding investment gains and losses.
- Whether underwriting improvement persists without unusually favorable prior-year reserve development, particularly in General Insurance and RFIG.
- Title Insurance sustainability if refinance activity or the favorable housing market slows.
- Claim-reserve adequacy, reinsurance recoverability, and the effect of higher loss severity or inflation on long-tail liabilities.
- Debt and dividend capacity, including the timing and cash impact of the special dividend paid after quarter-end.
- Exposure to COVID-19-related economic changes, mortgage delinquencies, market declines, interest-rate movements, and cyber or funds-transfer fraud.