Old Republic International Corporation — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Old Republic is an insurance holding company operating through General Insurance, Title Insurance, and the RFIG mortgage-guaranty and consumer-credit run-off businesses. Amounts are in U.S. dollars; financial amounts are in millions unless noted.
Financial results and position
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net premiums and fees earned | $5,539.7 | $5,333.2 | +3.9% |
| Operating revenues, before realized investment gains | $6,051.5 | $5,827.6 | +3.8% |
| Net investment income | $409.4 | $387.0 | +5.8% |
| Pretax operating income | $513.8 | $613.1 | -16.2% |
| Realized investment gains | $211.6 | $72.8 | +190.4% |
| GAAP net income | $560.5 | $466.9 | +20.0% |
| Diluted EPS | $1.92 | $1.62 | +18.5% |
| Operating cash flow | $452.8 | $637.3 | -29.0% |
- Reported 2017 diluted EPS included $1.11 of net operating income per share and $0.81 per share from net realized investment gains. Operating income is a company-defined non-GAAP measure.
- Total assets were $19,403.5, cash and invested assets $13,536.4, shareholders’ equity $4,733.3, and debt $1,448.7 at year-end. Book value per share was $17.72, up 3.3%.
- Consolidated debt-to-equity was 30.6%. The filing reports a 23.4% debt share of total capitalization, a different measure.
- The consolidated underwriting composite ratio was 96.7%, versus 94.6% in 2016. General Insurance was 97.3% (97.8%); Title was 90.9% (91.7%); RFIG run-off was 177.5% (72.6%).
- Net investment yield was 3.32% on original cost, down from 3.34% in 2016. The fixed-maturity portfolio was 93.8% investment grade.
Material changes and segment performance
- General Insurance: Revenue increased 5.3% to $3,531.6 and pretax operating income rose 6.4% to $340.3. Earned premiums grew 5.9%; the claims ratio improved to 71.8%, while the expense ratio increased to 25.5%. Hurricane claims were estimated at $8.0. Management cited growth in trucking, risk management and national accounts, and home and auto warranty; competition and weaker energy-services opportunities constrained some lines.
- Title Insurance: Revenue rose 3.6% to $2,325.0 and pretax operating income increased 12.8% to $237.1. Strong housing and commercial-property activity supported revenue; lower claims and favorable prior-year reserve development contributed to the result. The expense ratio rose to 90.0%.
- RFIG run-off: Revenue declined 25.2% to $144.6 and the segment recorded a $73.5 pretax operating loss, compared with $69.8 income in 2016. A $130.0 provision for settlements and probable dispositions of known litigation and other claims comprised $23.0 for mortgage insurance and $107.0 for consumer credit indemnity (CCI). Without this provision, segment pretax operating income was $56.5.
- RFIG’s mortgage-insurance premium base continues to shrink because the business has been in run-off since 2011. The North Carolina regulator terminated administrative supervision of RMIC and RMGIC effective December 8, 2017. The mortgage-insurance subsidiaries were reported statutorily solvent, with $475.5 of statutory capital, including a $395.9 contingency reserve.
Outlook, unusual items and risks
- No specific consolidated earnings or revenue guidance is provided. Management said general-insurance claim ratios could range in the high-60% to low-70% levels absent major economic or industry dislocations; it expects expense ratios within its stated 23%–25% long-term objective range. The company anticipated no significant changes to reinsurance programs in 2018.
- Management’s mortgage-insurance model projected aggregate run-off underwriting profitability through approximately December 31, 2022, but warned that near-term operating results could be negative. The projection depends on uncertain assumptions about defaults, cures, rescissions, housing conditions, servicing practices and government policy.
- The Tax Cuts and Jobs Act, enacted in December 2017, reduced the federal corporate rate from 35% to 21% effective in 2018. Remeasuring deferred taxes produced a $63.1 income-tax credit; a further $104.9 tax credit related to unrealized investment gains was included in the reported investment-gain reconciliation. The 2017 effective tax rate was 22.7%, versus 31.9% in 2016. These tax effects materially affect comparability.
- Other 2017 charges included $32.3 for estimated employee incentive awards and $9.5 from updated assumptions for largely inactive life-insurance products. The $1.00-per-share special dividend declared in December brought 2017 declared dividends to $1.76 per share; the special dividend was payable January 31, 2018.
- Key risks include reserve estimation and long-tail claims, catastrophe and workers’ compensation exposure, low or changing investment yields and market values, reinsurance and counterparty recoverability, competition and rate regulation, and sensitivity of Title and mortgage insurance to housing and lending conditions. The parent depends on regulated subsidiary dividends; up to $554.6 was available for upstream dividends in 2018 without prior regulatory approval.
- The Countrywide litigation was dismissed with prejudice in October 2017 pursuant to a confidential settlement. The filing reported no material non-claim litigation exposure lacking adequate provisions. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Reconcile the $130.0 RFIG claims provision, including the CCI settlement and the remaining exposure to any disputed or unresolved claims.
- Assess whether General Insurance reserve development, particularly in workers’ compensation and general liability, remains manageable; review the sensitivity of long-tail reserves and the disclosed asbestos and environmental exposures.
- Separate recurring operating performance from 2017 realized investment gains and tax remeasurement effects; also assess the impact of the 2018 accounting change requiring equity-security fair-value changes in earnings.
- Track RFIG run-off delinquencies, cure rates, reserve development, statutory capital and the assumptions underlying the projected profitability through 2022.
- Evaluate operating cash-flow trends, debt maturities—including $475.1 scheduled for 2018—and the parent’s reliance on regulated subsidiary dividends to fund debt service and shareholder distributions.