Old Republic International Corporation — Q3 2011 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2011. Old Republic is an insurer operating primarily through General Insurance, Mortgage Guaranty, and Title Insurance segments. The 2011 results include PMA Capital, which merged with Old Republic on October 1, 2010; management said PMA added $423.7 million to nine-month operating revenues and $15.0 million to net operating results, limiting comparability with 2010.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Operating revenues | $1,129.0 million | $982.6 million | $3,350.1 million | $2,847.6 million |
| Total revenues, including realized investment gains or losses | $1,113.5 million | $986.5 million | $3,338.0 million | $2,927.3 million |
| Net income (loss) | ($116.5) million | ($38.9) million | ($195.7) million | $43.5 million |
| Diluted EPS | ($0.46) | ($0.16) | ($0.77) | $0.18 |
| Net cash from operating activities | Not reported by quarter | ($127.6) million | ($172.9) million |
- Consolidated underwriting composite ratio was 122.9% for Q3 and 117.4% year to date, compared with 116.6% and 111.1% in 2010; above 100% indicates underwriting losses before investment income and other items.
- Net investment income was $90.8 million in Q3 and $275.5 million year to date, down from $92.6 million and $284.0 million. Realized investment losses were $15.5 million in Q3 and $12.0 million year to date, including impairment charges of $42.1 million and $50.2 million, respectively.
- At September 30, total assets were $15,999.1 million; investments were $10,429.5 million and cash was $108.7 million. Common shareholders’ equity was $3,827.9 million, down 7.1% from year-end 2010; equity per share was $14.98, down from $16.16.
- Debt was $912.8 million, versus $475.0 million at year-end 2010. The company issued $550 million of 3.75% convertible senior notes due 2018. Debt-to-equity was 23.8%. Nine-month common dividends paid were $133.8 million; declared dividends were $0.175 per share for Q3.
- Management said the parent could receive up to $306.5 million in subsidiary dividends during 2011 without prior regulatory approval and considered available liquidity adequate for expected parent-company needs.
Segment results and changes
- General Insurance: Nine-month premiums earned rose 28.3% to $1,601.4 million, reflecting PMA; pretax operating income rose to $204.2 million from $124.5 million. The nine-month composite ratio improved to 98.3% from 104.0%. Excluding PMA, management said premium comparisons were broadly flat amid recessionary conditions and soft commercial pricing. Consumer credit indemnity claims continued to weigh on results, though their effect eased from 2010.
- Mortgage Guaranty: Nine-month premiums fell 12.9% to $336.1 million, while pretax operating losses widened to $514.9 million from $150.3 million. The claim ratio reached 236.4% and the composite ratio 262.4%. Claims costs increased amid higher payments and severity and fewer rescissions or denials; investment income declined 27.6% to $47.7 million.
- Title Insurance: Nine-month premiums and fees increased 16.0% to $990.3 million; pretax operating income was $17.8 million versus $1.1 million. Management cited market-share gains and a lower expense ratio; the nine-month composite ratio improved to 99.9% from 102.2%.
Outlook, risks, and unusual items
- RMIC’s North Carolina capital waiver expired August 31, 2011. RMIC and its sister company agreed to stop writing new business in all states and run off existing policies. RMIC’s proposed run-off plan awaited state approval; it could be rejected, and the insurer could become capital impaired or enter receivership. The filing says legitimate claims may not all be honored and re-entry into mortgage insurance is uncertain.
- Management’s model projected ultimate profitability for the aggregate mortgage run-off book, but anticipated operating losses in Q4 2011 and 2012–2013. Management said the approximately $155.7 million capital committed to the flagship carrier could be depleted relatively quickly. A separate estimate described Old Republic’s total investment in the segment as $296.6 million and its possible loss as limited to that amount; outcomes depend on regulatory approval and uncertain assumptions.
- Mortgage segment Q3 expenses included $5.3 million of severance and similar costs, a $29.1 million write-off of deferred acquisition costs deemed unrecoverable, and a $10.7 million goodwill write-off. These items materially contributed to the unusually high expense ratio.
- The mortgage subsidiary’s capital condition could trigger an event of default under the company’s convertible notes, potentially making outstanding principal immediately payable. The company said it believed it had most of the resources needed to repay the principal if required.
- Material lawsuits include disputes involving Countrywide-related credit indemnity and mortgage insurance coverage rescissions, Bank of America, Chase, and the FDIC as receiver of AmTrust Bank. The company said it did not believe the proceedings were likely to materially affect consolidated financial condition, results, or cash flows, but could not reasonably estimate potential liabilities.
- Other identified uncertainties include insurance reserve estimates, mortgage defaults and housing conditions, interest-rate and equity-market changes, and possible additional investment impairments. Management provided no formal earnings guidance. It stated that forward-looking comments are subject to substantial risks and are not guaranteed.
Key facts for investors to verify
- Progress and regulatory approval of RMIC’s run-off plan, statutory capital position, claims-paying capacity, and any consequences for Old Republic’s debt covenants.
- Mortgage claims, rescissions and denials, delinquency trends, loss severity, and whether run-off losses exceed management’s projections.
- Recoverability of deferred tax assets and the impact of the company’s investment impairments on future earnings and equity.
- Developments in the disclosed litigation and any resulting obligations, settlements, or changes to reserve estimates.
- Underlying performance excluding PMA’s contribution, especially General Insurance growth and the trajectory of Title Insurance profitability.