Old Republic International Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Old Republic is an insurance holding company operating primarily in General Insurance, Title Insurance, and RFIG Run-off. Amounts below are in millions of dollars except per-share data and ratios.
Financial results and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net premiums and fees earned | 1,982.3 | 1,987.3 | 3,901.3 | 3,826.2 |
| Net investment income | 107.8 | 107.6 | 214.1 | 211.9 |
| GAAP net income (loss) | (40.1) | 316.4 | 266.1 | 818.5 |
| Diluted EPS | (0.13) | 1.05 | 0.87 | 2.72 |
| Pretax income excluding investment gains (losses) | 262.8 | 275.0 | 500.4 | 530.2 |
| Net income excluding investment gains (losses) | 210.2 | 220.9 | 402.0 | 427.2 |
| Consolidated combined ratio | 90.9% | 90.6% | 91.4% | 90.8% |
| Operating cash flow | 124.7 | 219.4 | 403.2 | 515.4 |
- GAAP earnings and investments: The Q2 and six-month GAAP results included pretax investment losses of 317.4 and 172.3, respectively, largely reflecting equity-security fair-value declines. The corresponding after-tax losses were 250.4 and 135.9. Realized gains from transactions partly offset those unrealized losses.
- Margins and segments: General Insurance pretax operating income rose 11.8% in Q2 and 6.1% for six months; its combined ratios were 92.5% and 92.0%. Title Insurance pretax operating income fell 21.1% and 21.5%, with combined ratios of 90.4% and 91.7%. RFIG Run-off income increased from low prior-year bases, with favorable claims trends.
- Balance sheet and liquidity: June 30 assets were 25,295.4 and liabilities 18,902.2. Cash and invested assets totaled 16,059.9, down 4.5% from year-end 2021. Common equity was 6,393.1, down 7.3%; book value per share was 20.99 versus 22.76 at year-end. The decline reflected investment valuation losses, partly offset by operating earnings. Cash was 100.8.
- Debt and capital: Debt was 1,594.5, compared with 1,588.5 at year-end. Management reported debt-to-equity of 24.9%; debt represented 20.0% of total capitalization. Senior notes include 4.875% notes due 2024, 3.875% notes due 2026, and 3.850% notes due 2051.
- Dividends: Cash dividends declared were $0.23 per share for Q2 and $0.46 per share for the first six months. The company reported a long history of uninterrupted dividends and annual increases.
Material changes versus the prior comparable periods
- General Insurance premiums earned grew 8.8% in Q2 and 7.4% for six months, supported by rate increases, renewal retention, and new business. Its favorable underwriting trend lifted operating income, despite higher expense ratios.
- Title premiums and fees declined 7.1% in Q2 and 2.3% for six months. Management attributed weaker refinance-related activity primarily to rising mortgage rates; it expected Title revenues to remain below the prior-year periods for the rest of 2022.
- Consolidated premiums and fees were nearly flat in Q2 and up 2.0% for six months. Excluding investment gains and losses, pretax income decreased 4.4% and 5.6%, respectively.
- Fixed-income securities had 598.5 of gross unrealized losses at June 30, versus 72.2 at December 31, 2021. Management attributed these losses primarily to higher interest rates; no allowance for credit losses on available-for-sale fixed income securities was recorded, and no fixed-income investments were in default.
- Operating cash flow for the first six months fell to 403.2 from 515.4. Financing cash flow was negative 125.5, compared with positive 214.7 in 2021, which included debt issuance and a large special dividend payment.
Outlook, commentary, and risks
- Management said it manages the business for long-term underwriting performance and balance-sheet strength, and evaluates operations excluding investment gains and losses. It targets a General Insurance combined ratio of 90%–95%.
- Management expected investment yields to increase on a year-over-year basis in the next few quarters. It also anticipated lower Title revenues through the remainder of 2022 as higher mortgage rates weighed on refinancing and potentially purchase activity.
- All operating segments recorded favorable prior-year reserve development in the first six months. General Insurance favorable development in commercial auto and workers’ compensation was partly offset by unfavorable financial-indemnity development tied to large securities class-action claims from accident years 2018 and 2019. Management cautioned that reserve estimates may develop differently and materially affect results in an individual period.
- Key stated risks include interest-rate and equity-market movements, claim frequency and severity, inflation and economic conditions, competition, housing and mortgage trends, and cybersecurity or technology disruptions. Management reported no material changes to the risk factors in its 2021 Form 10-K and no material non-claim litigation exposures at June 30.
- Subsidiary ordinary dividends available to the parent without prior regulatory approval were up to 982.0 for 2022, of which 286.8 had been received through June 30. Regulatory restrictions can affect subsidiary distributions. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Track equity-market and fixed-income valuation movements, their effect on GAAP earnings, accumulated other comprehensive income, and book value.
- Monitor General Insurance pricing, expense growth, loss trends, and financial-indemnity claims, alongside the adequacy of reserves and future reserve development.
- Assess whether mortgage-rate and housing-market changes continue to reduce Title Insurance revenue and pressure its expense ratio.
- Review operating cash generation, cash and invested-asset levels, debt maturities, and the regulatory capacity of insurance subsidiaries to pay dividends to the parent.
- Compare reported GAAP results with management’s operating measures, which exclude investment gains and losses, and note that those measures are not substitutes for GAAP results.