Old Republic International Corporation (ORI) — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. All dollar amounts are in millions unless stated otherwise. Old Republic is an insurance and related-services company operating through General Insurance, Title Insurance, and the RFIG mortgage-insurance run-off business.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Operating revenues | $1,803.0 | $1,707.3 | $5,072.7 | $4,815.7 |
| Total revenues, including investment gains (losses) | $1,883.8 | $1,771.0 | $4,556.0 | $5,284.4 |
| Net income (loss) | $246.0 | $202.8 | $38.9 | $780.6 |
| Diluted EPS | $0.83 | $0.67 | $0.13 | $2.59 |
| Net income excluding investment gains (losses), as presented by management | $182.3 | $152.7 | $446.9 | $410.6 |
| Operating cash flow | $370.6 | $352.7 | $808.9 | $666.2 |
Premiums and fees rose 6.6% in Q3 and 6.0% year to date. Net investment income declined 5.6% in Q3 and 2.5% year to date, as lower yields more than offset growth in invested assets. The year-to-date net loss in equity-security fair values was $529.4, versus a $439.3 gain in 2019; this largely explains why nine-month GAAP net income fell sharply despite higher income from core operations. Q3 equity-security fair-value gains were $79.2.
- Underwriting: Consolidated combined ratio improved to 92.0% in Q3 from 94.4%, and to 94.2% year to date from 95.2%. General Insurance pretax operating income increased 20.9% in Q3 to $109.7; Title Insurance rose 41.5% to $103.1. RFIG run-off pretax operating income was $4.5 in Q3, but was down from $7.3 a year earlier.
- Margins by segment: General Insurance combined ratio was 95.5% in Q3 and 96.5% year to date; Title Insurance was 88.2% and 91.2%, respectively. RFIG’s ratio was 89.6% in Q3 but 110.7% year to date.
- Balance sheet and liquidity: Total assets were $22,248.7 and shareholders’ equity $6,074.6 at September 30. Book value per share was $20.39, up from $19.98 at year-end 2019. Cash and invested assets totaled $14,846.0; cash alone was $95.0. Management considers liquidity sufficient and does not expect to need additional capital.
- Debt: Debt was $966.2, versus $974.0 at year-end 2019. Debt was 13.7% of total capitalization; the nearest significant maturity is $400.0 of senior notes due October 2024. Debt fair value was $1,101.3.
- Claims and reserves: Gross loss and claim reserves were $10,557.1, up from $9,929.5 at year-end. The nine-month reserve roll-forward showed $41.4 of favorable prior-year claim development.
Material changes versus prior period
- Title premium and fee revenue grew 17.1% in Q3 and 16.7% year to date, supported by strong residential real estate activity and low interest rates.
- General Insurance earned premiums were slightly lower year to date, reflecting pandemic-related economic effects and underwriting changes, partly offset by rate increases. Improved claims performance supported higher segment operating income.
- RFIG faced elevated mortgage delinquencies and claims amid COVID-19, although delinquencies stabilized in Q3 and prior-year claim severity trends supported favorable reserve development.
- Equity-market volatility drove a substantial year-to-date investment loss in earnings, while fixed-maturity fair values strengthened. At June 30, the company reclassified its tax-exempt municipal-bond portfolio from held-to-maturity to available-for-sale, recognizing $48.5 of cumulative after-tax unrealized gains in other comprehensive income.
- Effective January 1, 2020, CECL adoption resulted in a $2.3 after-tax reduction to opening retained earnings. The credit-loss allowance rose from $30.1 at adoption to $35.7 at September 30.
Outlook, risks, and unusual items
- The filing gives no specific near-term earnings or revenue guidance. Management emphasizes long-term results; its General Insurance long-term targets, assuming current mix, are claim ratios in the high-60% to low-70% range, expense ratios of 25% or below, and combined ratios of 90% to 95%.
- Management said COVID-19 could reduce future General and Title premiums and fees, increase expense ratios, and worsen claims. RFIG outcomes depend in part on loan forbearance, government support, employment recovery, and housing conditions. Management believes the company’s financial condition can withstand these challenges.
- Risks include uncertain claim-reserve estimates, market and interest-rate volatility, credit stress in sectors including energy, reinsurance recoverability, and possible adverse legislative or regulatory action related to COVID-19, including mandated coverage or premium restrictions. The equity portfolio had $364.4 of gross unrealized losses, including $253.8 in energy stocks.
- RFIG subsidiaries received regulatory approval for $37.5 of extraordinary dividends in Q1; no further such dividends were paid through September 30, and future extraordinary dividends require regulatory approval. Group statutory capital, including contingency reserve, was $423.7.
- The company reported no material non-claim litigation exposures. Management reported disclosure controls were effective and no material change in internal controls during the quarter.
Important facts for investors to verify
- Whether Title Insurance growth and favorable real-estate conditions persist, and how commercial real estate weakness affects demand.
- Whether pandemic-related unemployment and mortgage forbearance lead to materially higher RFIG delinquencies, claims, or capital-retention needs.
- Whether General Insurance claims and reserve estimates remain adequate as COVID-19 effects and longer-term claims emerge.
- How equity-market movements, investment yields, and energy-sector credit conditions affect GAAP earnings, book value, and investment income.
- How much of reported earnings growth reflects underwriting operations versus investment valuation changes; management’s “excluding investment gains (losses)” measure is not GAAP.
- Availability of subsidiary dividends, regulatory approvals, and liquidity to meet claim payments, debt service, and shareholder distributions.