Old Republic International Corporation — 2019 Q2 Form 10-Q
Business context and period: The filing covers the quarter and six months ended June 30, 2019. Old Republic is an insurance underwriting and related-services company operating primarily through General Insurance, Title Insurance, and the RFIG mortgage-guaranty and consumer-credit run-off businesses. Unless stated otherwise, dollar amounts below are in millions.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Operating revenues | $1,607.7 | $1,557.3 | $3,108.3 | $3,024.2 |
| Total revenues, including investment gains/losses | $1,644.7 | $1,630.7 | $3,513.4 | $2,961.1 |
| Pretax income | $205.4 | $246.6 | $723.9 | $240.6 |
| Net income | $165.5 | $197.7 | $577.7 | $201.8 |
| Diluted EPS | $0.55 | $0.66 | $1.92 | $0.68 |
| Net investment income | $113.0 | $106.9 | $225.1 | $212.7 |
| Operating cash flow | Not separately provided | Not separately provided | $313.4 | $287.3 |
- Core results: Management’s pretax income excluding investment gains/losses was $168.4 in Q2, down 2.8%, and $318.9 for the first half, up 5.0%. Net income excluding investment gains/losses was $136.3 in Q2, down 2.5%, and $257.9 for the first half, up 2.5%. These are management-presented measures, not GAAP net income.
- Investment-driven volatility: Equity-security fair-value changes contributed pretax gains of $26.3 in Q2 and $382.0 for the first half, compared with $41.3 and a loss of $110.6 in 2018. Total investment gains were $36.9 in Q2 and $405.0 for the first half. This helped lift first-half GAAP earnings substantially, while Q2 GAAP net income fell year over year.
- Underwriting: Consolidated composite ratio was 95.2% in Q2 versus 94.3% and 95.6% for the first half versus 95.5%. Underwriting and related-services income was $65.8 in Q2 versus $76.3, and $114.8 for the first half versus $115.3.
- Segments: General Insurance premiums earned grew 5.1% in both Q2 and the first half; segment pretax operating income was $86.7 in Q2, down 4.4%, and $195.0 for the first half, up 12.1%. Title segment pretax income was $60.2 in Q2, down 1.1%, and $80.8 for the first half, down 10.7%. RFIG run-off pretax income declined 39.7% in Q2 to $8.2 and 33.0% in the first half to $16.5.
- Balance sheet and debt: At June 30, total assets were $20,987.7, shareholders’ equity $5,893.9, and debt $975.4. Debt was largely senior notes due 2024 and 2026; consolidated debt-to-equity was 16.6%. Equity rose 14.5% from year-end 2018, with investment valuation gains contributing.
- Liquidity and cash flow: Cash was $99.8, short-term investments $353.7, and total cash and invested assets $14,081.6. First-half operating cash flow was $313.4; investing cash flow was negative $195.1 and financing cash flow negative $118.8. Common dividends paid were $119.4 in the first half. The company said up to $507.8 of subsidiary dividends could be received in 2019 without prior regulatory approval and considered permitted dividends sufficient for expected parent-company needs.
Material changes and management commentary
- Operating revenue increased 3.2% in Q2 and 2.8% in the first half; net premiums and fees increased 2.8% and 2.5%, respectively. Net investment income grew 5.7% and 5.8%.
- Management attributed Q2 and first-half core earnings pressure primarily to relatively lower underwriting and related-services profitability, partly offset by growing investment income. It cautioned that GAAP earnings comparisons are affected by required fair-value accounting for equity securities.
- General Insurance growth reflected rate increases and new business, including commercial auto, national accounts, and executive indemnity. Its Q2 composite ratio worsened to 98.1%, though the first-half ratio improved to 96.7%.
- Title revenue was broadly flat; management cited a mild slowdown in housing and mortgage lending activity and less favorable prior-year reserve development than in 2018.
- RFIG run-off premiums and investment income continued to decline as risk in force and invested assets contracted. Mortgage insurance favorable reserve development was materially lower than in the comparable 2018 periods.
- Management’s General Insurance outlook was for annual claim ratios in the high-60% to low-70% range, expense ratios of 23%–25%, and composite underwriting ratios of 90%–95%, assuming no significant economic or insurance-market dislocations. No consolidated earnings or revenue guidance was provided.
Risks, contingencies, and unusual items
- Insurance claim reserves are estimates subject to changing claim frequency and severity, legal developments, inflation, litigation outcomes, and other factors. Gross claim reserves were $9,636.3 at June 30; prior-year reserve development was favorable by $24.5 net across the reported business for the first half.
- Investment values are exposed to equity-price and interest-rate movements. Fixed-maturity portfolio duration was 3.8 years; the filing estimated that a 100-basis-point parallel rate increase could reduce its fair value by approximately 3.8%. The company reported no material change in market-risk exposures from its 2018 year-end disclosures.
- Reinsurance recoverability, reserve adequacy, and mortgage-insurance run-off exposures remain relevant estimation risks. Management noted that actual claim costs may differ from recorded reserves.
- The company recognized $2.0 of investment impairment losses in 2019. It adopted lease-accounting guidance on January 1, recording a right-of-use asset of $226.9 and lease liability of $241.4; adoption also increased beginning retained earnings by $18.4, net of tax.
- Legal proceedings arise in the ordinary course, principally insurance claims; the company reported no material non-claim litigation exposure at June 30. It reported no material changes to previously disclosed risk factors and no material changes in internal control during the quarter.
- Other risks identified include competition, economic and housing conditions, interest rates, claims trends, and cybersecurity. The company said its investment portfolio had no significant exposure to specified assets such as derivatives, mortgage-backed securities, or illiquid private-equity and hedge-fund investments.
Investor verification priorities
- Separate recurring underwriting and investment-income trends from the substantial, market-sensitive equity fair-value gains that drove first-half GAAP earnings.
- Track General Insurance expense and composite ratios, premium growth, and the effect of prior-year reserve development against management’s stated target ranges.
- Assess Title Insurance earnings alongside housing and mortgage activity and changes in favorable reserve development.
- Monitor claim-reserve adequacy, reinsurance recoverables, and RFIG run-off claims, delinquency trends, and remaining risk in force.
- Review statutory capital and dividend capacity of regulated insurance subsidiaries, as these affect holding-company liquidity and capital returns.
- Confirm future investment valuation changes, cash-flow conversion, debt levels, and the impact of lease obligations.