Old Republic International Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Old Republic is an insurance holding company with General Insurance, Title Insurance, and RFIG run-off segments. Dollar amounts are in millions unless noted.
Financial performance
- Q2 revenue: Operating revenues were $1,557.3, up 4.4% year over year; total revenues were $1,630.7, including $73.3 of realized and unrealized investment gains.
- Q2 earnings: Pretax operating income was $173.3, up 24.3%; net operating income was $139.8 versus $97.1. GAAP net income was $197.7 versus $101.6, and diluted EPS was $0.66 versus $0.35.
- First-half results: Operating revenues were $3,024.2, up 3.5%. Pretax operating income rose 5.0% to $303.7 and net operating income rose 25.4% to $251.6. GAAP net income declined 6.0% to $201.8; diluted EPS was $0.68 versus $0.74.
- Investments and taxes: Net investment income increased 5.8% in Q2 to $106.9 and 5.1% in the first half to $212.7. Equity fair-value changes contributed a $41.3 gain in Q2 but a $110.6 loss for the first half. The lower federal corporate tax rate—21% versus 35%—also affected comparisons.
- Underwriting: General Insurance’s Q2 combined ratio improved to 97.0% from 100.1%; its first-half ratio was 97.4% versus 98.0%. Title’s ratios were 91.1% in Q2 and 93.3% for the first half, both higher than the prior-year periods. Consolidated combined ratios were 94.3% in Q2 and 95.5% for the first half.
- Cash flow: First-half operating cash flow was $287.3 versus $259.0. Financing cash outflow was $424.6, including $382.3 of common dividends, including the special dividend paid in January. Cash ended the period at $107.9.
Financial position and material changes
- Total assets were $19,454.2 at June 30, compared with $19,403.5 at year-end 2017. Common shareholders’ equity was $5,103.4, up from $4,733.3; book value per share was $17.08, down from $17.72.
- Debt was $974.4, down from $1,448.7 at year-end. The 3.75% convertible notes were converted into 32.2 million common shares in March; the company reported a 19.1% debt-to-equity ratio.
- Cash and invested assets totaled $13,072.0, down 3.4% from year-end. Management said up to $554.6 of subsidiary dividends could be received in 2018 without prior regulatory approval and considered this sufficient for expected parent-company needs.
- General Insurance premiums earned increased 5.1% in Q2, supported by rate increases and production. Title pretax operating income declined 6.3% in Q2 and 14.3% for the first half amid higher claim costs and expenses. RFIG premiums continued to contract as its insured risk ran off.
- First-half total investment gains and losses were a net loss of $63.1, including the newly income-statement-recognized equity fair-value loss. Available-for-sale fixed-maturity securities also had net unrealized losses, affecting accumulated other comprehensive income.
Outlook, risks and unusual items
- No formal earnings guidance is provided. Management said that, absent significant economic or insurance-industry dislocations, General Insurance claim ratios were expected to fall in the high-60% to low-70% range, with expense ratios of 23%–25%.
- Management cautioned that insurance results depend on uncertain claim frequency and severity, reserve estimates, legal developments, competition, investment yields, and housing and mortgage conditions. Reserve estimates may develop favorably or unfavorably; outcomes could materially affect an individual reporting period.
- Equity-security fair-value changes began flowing through earnings in 2018, increasing potential period-to-period earnings volatility. The accounting change reclassified $502.1 from accumulated other comprehensive income to retained earnings at adoption, with no change to total shareholders’ equity.
- The Tax Cuts and Jobs Act changed the corporate tax rate. The IRS had not yet published updated loss-reserve discount tables, so the company said it could not reasonably estimate any resulting adjustment; any adjustment would be recorded when information became available.
- The filing reported no material non-claim litigation exposure lacking adequate provisions, no material changes to previously disclosed risk factors, and no material change in market-risk exposures. Management stated disclosure controls were effective and reported no material change in internal control.
Investor items to verify
- How much of reported earnings growth reflects underwriting and investment income versus realized and newly recognized unrealized equity gains or losses, and the lower tax rate.
- Whether General Insurance underwriting improvement persists, particularly in workers’ compensation and commercial automobile, and how prior-year reserve development evolves.
- Title Insurance claim and expense trends, and the continuing decline in RFIG premiums, risk in force, and claims.
- The effects of the convertible-note share issuance, special dividend, and ongoing dividends on per-share results, capital, and liquidity.
- Future reserve estimates and the eventual impact, if any, of updated IRS discount tables on loss reserves and taxes.