Old Republic International Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; comparative periods ended September 30, 2018. Old Republic is an insurance holding company operating primarily in General Insurance, Title Insurance, and the RFIG run-off business.
Financial performance
- Third quarter: Operating revenues were $1.707 billion, up 3.9%. Total revenues were $1.771 billion, down 0.5%, reflecting lower investment gains. Net income was $202.8 million, down 26.3%; diluted EPS was $0.67 versus $0.92.
- Nine months: Operating revenues were $4.816 billion, up 3.2%. Total revenues were $5.284 billion, up 11.5%. Net income was $780.6 million, up 63.6%; diluted EPS was $2.59 versus $1.59.
- Investment gains materially influenced reported earnings. Pretax gains were $63.6 million in Q3 2019 versus $135.7 million in Q3 2018, and $468.7 million for the first nine months versus $72.6 million. Most of the year-to-date increase came from unrealized fair-value gains on equity securities.
- Excluding investment gains, pretax income was $188.7 million in Q3, down 5.3%, and $507.6 million year to date, up 0.9%. Net income excluding investment gains was $152.7 million in Q3, down 9.1%, and $410.6 million year to date, down 2.1%.
- Underwriting: Consolidated composite ratio was 94.4% for Q3 and 95.2% for the first nine months, versus 93.1% and 94.7%. General Insurance’s Q3 pretax operating income fell 13.7% to $90.7 million; its composite ratio worsened to 97.7% from 95.6%. Title Insurance Q3 pretax operating income rose 7.6% to $72.8 million; its composite ratio improved to 90.6%. RFIG run-off pretax operating income fell 45.1% to $7.3 million.
- Cash flow: Nine-month operating cash flow was $666.2 million, up from $597.1 million. Investing activities used $178.6 million and financing activities used $478.3 million. Cash was $109.6 million at September 30, 2019.
- Balance sheet and debt: Total assets were $21.182 billion, up from $19.327 billion at year-end 2018; shareholders’ equity was $5.794 billion, up 12.6%. Debt was $973.7 million, down from $981.4 million. Debt-to-equity was 16.8%; debt was 14.4% of total capitalization.
- Investments and liquidity: Cash and invested assets totaled $14.180 billion. Approximately 95.4% of fixed-maturity securities were investment grade. Management said up to $507.8 million of subsidiary dividends could be paid to the parent in 2019 without prior regulatory approval and considered available liquidity sufficient for anticipated parent-company obligations.
Material changes and notable items
- Premiums and fees increased 3.8% in Q3 and 2.9% year to date. General Insurance premium growth reflected rate increases and new business; Title premium and fee revenue grew 5.2% in Q3 and 1.6% year to date.
- Management attributed weaker underlying results primarily to higher claims and weaker underwriting, partly offset by growth in net investment income. Q3 consolidated claim ratio increased to 42.5% from 41.2%.
- In September 2019, the company paid a special cash dividend of $1.00 per share. Total common dividends were $478.8 million for the first nine months, compared with $171.3 million in the prior-year period, which included a different special-dividend timing.
- Effective July 1, 2019, Consumer Credit Indemnity run-off results were reclassified from RFIG Run-off to General Insurance; management expects the remaining CCI results to be immaterial.
- Adoption of the new lease standard on January 1, 2019 recorded a $226.9 million right-of-use asset and $241.4 million lease liability. It also increased beginning retained earnings by $18.4 million, net of tax, for previously deferred sale-leaseback gains.
Outlook, risks and contingencies
- Management’s General Insurance expectations, absent significant economic or industry dislocations, are annual claim ratios in the high-60% to low-70% range, expense ratios of 23%–25%, and composite ratios of 90%–95%. These are expectations, not formal consolidated earnings guidance.
- Key uncertainties include the estimation and development of long-tail claim reserves, claim severity and frequency, inflation, litigation and legal changes, competition, investment yields and market values, and housing and mortgage conditions affecting Title and RFIG. Management cautions that reserve outcomes can differ from estimates and materially affect results in an individual reporting period.
- Equity-price and interest-rate movements are principal market risks. The company reported no material change in market-risk exposures from its 2018 Form 10-K. It also identified cybersecurity and business-interruption risks.
- Routine insurance claim litigation occurs in the ordinary course; the company reported no material non-claim litigation exposures at September 30, 2019. No material changes to previously disclosed risk factors were reported.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing provides no specific consolidated earnings forecast.
Important facts for investors to verify
- Separate recurring underwriting and investment-income trends from volatile equity fair-value gains when assessing earnings growth.
- Track General Insurance claim ratios and composite ratio against management’s stated target ranges, and assess reserve development by segment.
- Review the shrinking RFIG run-off exposure alongside its lower premiums and earnings, and confirm the CCI segment reclassification when comparing periods.
- Assess dividend sustainability, including the impact of the $1.00 special dividend, subsidiary dividend restrictions, and parent-company liquidity needs.
- Monitor investment portfolio valuation and credit quality, as well as long-tail claims, reinsurance recoverability, and other reserve-estimation uncertainties.