Old Republic International Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Old Republic is an insurance holding company operating through General Insurance, Title Insurance, and RFIG mortgage-guaranty and consumer-credit run-off segments. Amounts below are in millions of dollars unless stated otherwise.
Financial results and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Operating revenues | $1,393.3 | $1,283.9 | $2,704.6 | $2,523.3 |
| Total revenues, including realized gains | $1,410.0 | $1,333.9 | $2,740.2 | $2,764.5 |
| Net income | $102.0 | $66.1 | $205.5 | $260.5 |
| Diluted EPS | $0.36 | $0.24 | $0.72 | $0.91 |
| Net operating income (non-GAAP) | $91.2 | $33.6 | $182.4 | $103.7 |
| Realized investment gains | $16.6 | $49.9 | $35.5 | $241.2 |
| Consolidated composite underwriting ratio | 95.7% | 102.1% | 95.4% | 99.6% |
Q2 operating revenue rose 8.5%; net income rose 54.4%. For the first half, operating revenue increased 7.2% and net operating income increased 75.8%, while GAAP net income fell 21.1%, chiefly because the unusually large first-half 2014 realized investment gains did not recur. Net premiums and fees increased 8.6% in Q2 and 7.1% year to date. Net investment income increased 9.1% in Q2 and 9.7% year to date.
- General Insurance: Q2 earned premiums grew 5.6%; pretax operating income rose 42.5% to $85.1. Q2 claim ratio improved to 73.3% from 77.2%, and the composite underwriting ratio improved to 96.9% from 100.2%. The first-half composite ratio was 97.1% versus 98.2%.
- Title Insurance: Q2 premiums and fees increased 19.4% to $502.7; pretax operating income rose 83.3% to $47.7. Stronger housing and commercial property transactions, market-share strength, and lower relative claim and operating costs supported results. The Q2 composite ratio improved to 91.7% from 95.0%.
- RFIG run-off: Q2 pretax operating loss was $0.1, versus a $34.2 loss a year earlier; first-half pretax operating income was $35.0 versus a $14.6 loss. Lower CCI litigation-related claim costs versus 2014 helped the comparison, while Q2 mortgage-insurance results faced higher provisions for disputed claims in litigation. Premiums continued to decline as the business runs off.
Cash flow: Operating cash flow for the first half was $303.7, up from $172.3; investing activities used $215.7 and financing activities used $96.5. Cash declined $8.6 from year-end to $128.1. Common dividends paid were $95.7; the declared cash dividend was $0.185 per share for Q2.
Balance sheet at June 30, 2015: Total assets were $17,277.0; shareholders’ equity was $3,937.4, or $15.16 per share. Total debt was $961.7, versus $965.0 at year-end; debt was 19.6% of total capitalization and consolidated debt-to-equity was 24.4%. Cash, invested assets, and accrued investment income totaled $11,348.8. The company reported $11,133.4 of investments, including $8,431.5 of available-for-sale fixed maturities and $1,956.1 of equity securities. A $550.0 convertible note is due 2018 and $400.0 of senior notes are due 2024.
First-half comprehensive income was $101.1, versus $265.6 in 2014, reflecting net unrealized investment losses of $98.7 after tax. Shareholders’ equity was nearly unchanged from year-end as operating earnings were largely offset by dividends and lower investment values.
Management commentary, outlook, and risks
- Management said Q2 and first-half net operating income exceeded expectations, citing improved General Insurance underwriting and continued Title strength. No quantified earnings or revenue guidance was provided.
- Management described the company’s focus as long-term underwriting profitability, financial strength, high-quality investments, and liquidity; it cautioned that short reporting periods may not reflect insurance-cycle performance.
- RFIG mortgage insurers RMIC and RMICNC remain under North Carolina insurance supervision and in run-off. A 2014 regulatory plan permits payment of valid claims entirely in cash, and the company reported RMIC was statutorily solvent at June 30, 2015. The regulator retains authority to amend the plan. The notes contain a potential default provision tied to insolvency proceedings involving a significant subsidiary; management said it did not expect that event in the foreseeable future.
- Several material disputes remain pending, including Countrywide and Bank of America mortgage-insurance coverage disputes and patent-infringement claims. The company said it did not believe the proceedings were likely to have a material adverse effect, while warning that outcomes are uncertain and additional costs beyond reserves may arise. The Markocki title-insurance consumer class was decertified and its RESPA claim dismissed in May 2015; an individual consumer claim remains.
- Insurance reserves depend on estimates and may develop adversely, potentially affecting results in a future period. Other sensitivities include claim frequency and severity, litigation, inflation, interest rates, equity prices, housing and mortgage conditions, competition, and regulatory action. Fixed-maturity fair values are sensitive to interest rates; the reported portfolio duration was 4.3 years.
- Unrealized investment losses increased versus year-end: $94.4 gross across fixed maturities and equities, compared with $56.3 at December 31, 2014. The company reported no other-than-temporary impairment adjustments in the periods presented.
Most important facts for investors to verify
- Whether improved General Insurance and Title underwriting persists, particularly given prior-year reserve development and the sensitivity of long-tail claims.
- RFIG claim trends, litigation provisions, run-off reserves, regulatory supervision, and RMIC’s statutory solvency and compliance with its corrective plan.
- The status and potential financial exposure of Countrywide, Bank of America, RESPA, and patent disputes; ultimate damages remain uncertain.
- Investment portfolio valuation and exposure to interest-rate and equity-market movements, including the effect of unrealized losses on equity.
- Cash generation, permitted subsidiary dividends, debt maturities, and the company’s ability to fund parent obligations and shareholder dividends.
- The distinction between GAAP net income and management’s non-GAAP net operating income, especially when comparing periods with very different realized investment gains.