Business Context and Reporting Period
Company: Old Republic International Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: The Company operates through three major segments: General Insurance (property and liability), Mortgage Guaranty, and Title Insurance. It also maintains a small life and health insurance business. The Company is a large accelerated filer incorporated in Delaware.
Key Financial Metrics
| Metric ($ in Millions) | Q3 2010 | Q3 2009 | 9 Months 2010 | 9 Months 2009 |
|---|---|---|---|---|
| Total Revenues | $986.5 | $1,040.2 | $2,927.3 | $2,831.4 |
| Net Premiums Earned | $797.7 | $866.8 | $2,296.4 | $2,326.3 |
| Net Investment Income | $92.6 | $96.7 | $284.0 | $283.9 |
| Net Income (Loss) | $(38.9) | $7.4 | $43.5 | $(62.3) |
| EPS (Diluted) | $(0.16) | $0.03 | $0.18 | $(0.26) |
| Total Assets | $13,994.8 | $14,190.0 | - | - |
| Total Debt | $346.4 | $346.7 | - | - |
| Shareholders' Equity | $4,037.7 | $3,891.4 | - | - |
| Cash & Short-term Investments | $1,005.3 | $904.0 | - | - |
Note: Cash & Short-term Investments calculated as Cash ($88.0) + Short-term investments ($917.3).
Material Changes vs. Prior Period
- Profitability: The Company reported a net loss of $38.9 million for Q3 2010, compared to a net income of $7.4 million in Q3 2009. However, for the nine months ended September 30, 2010, the Company reported a net income of $43.5 million, a significant improvement from a net loss of $62.3 million in the same period of 2009.
- Realized Investment Gains: A major driver of the year-to-date income was net realized investment gains of $79.7 million for the nine months of 2010, compared to a loss of $0.5 million in 2009. This was largely due to the sale of securities, including previously impaired assets.
- Segment Performance:
- General Insurance: Pretax operating income declined 40.8% in Q3 2010 ($25.8M) vs Q3 2009 ($43.7M) due to higher claim costs, specifically in Consumer Credit Indemnity (CCI).
- Mortgage Guaranty: Pretax operating loss widened to $94.0M in Q3 2010 from $77.8M in Q3 2009. However, the nine-month loss improved significantly to $150.3M from $360.4M in 2009, aided by the termination of captive reinsurance and pool contracts.
- Title Insurance: Remained profitable with pretax operating income of $5.7M in Q3 2010, up from $4.0M in Q3 2009.
- Underwriting Ratios: The consolidated composite ratio for the nine months ended September 30, 2010, was 111.1%, an improvement from 118.4% in the prior year period.
Guidance, Outlook, Risks, and Unusual Items
- Merger Activity: On October 1, 2010, Old Republic merged with PMA Capital Corporation. Pro forma information indicates combined revenues of $3,347.5 million and net income of $74.4 million for the nine months ended September 30, 2010, had the merger occurred on January 1, 2010.
- Legal Proceedings:
- Title Insurance: Multiple class action lawsuits are pending regarding reissue/refinance credits and alleged price-fixing. Settlements in Connecticut, New Jersey, and Ohio are expected to cost less than $13 million combined.
- Mortgage Guaranty: Litigation with Countrywide Financial and Bank of America regarding credit indemnity and mortgage insurance policies. Old Republic has rescinded coverage on over 17,000 defaulted loans based on material misrepresentations.
- Home Warranty: Class actions pending against Old Republic Home Protection Company alleging breach of contract and RESPA violations.
- Capital Requirements: The principal mortgage insurance subsidiary, Republic Mortgage Insurance Company (RMIC), breached minimum capital requirements in Q3 2010. The Company has obtained waivers from regulators in several states to continue writing business.
- Investment Portfolio: The portfolio is heavily weighted toward fixed maturity securities (approx. 84%). Unrealized gains on fixed maturities were $692.2 million as of September 30, 2010. The Company does not expect new FASB guidance on acquisition costs to have a material impact.
- Dividends: The Company has paid cash dividends without interruption since 1942. The quarterly dividend for Q3 2010 was $0.1725 per share.
Investor Verification Checklist
- Mortgage Guaranty Capital Status: Verify the extent of regulatory waivers obtained for RMIC and the impact of the 25.5:1 risk-to-capital ratio on future underwriting capacity.
- Consumer Credit Indemnity (CCI) Exposure: Assess the sustainability of CCI claim ratios, which significantly impacted General Insurance results, despite subsiding delinquency rates.
- Legal Contingencies: Monitor the status of the Countrywide/Bank of America litigation and the potential financial impact of the title insurance class actions.
- Investment Realized Gains: Evaluate the sustainability of earnings given the significant contribution of realized investment gains ($79.7M YTD) which are discretionary and non-recurring.
- Merger Integration: Review the integration progress and financial impact of the PMA Capital Corporation merger completed in October 2010.