Old Republic International Corporation — 2018 Form 10-K
Business context and reporting period: Insurance holding company reporting for the year ended December 31, 2018, compared with 2017 and 2016. Its principal businesses are General Insurance, Title Insurance, and the RFIG mortgage-guaranty and consumer-credit-indemnity run-off operations. Management emphasizes evaluating underwriting performance over insurance cycles rather than relying on a single year.
Financial results and key metrics
| Metric | 2018 | 2017 | Change / context |
|---|---|---|---|
| Net premiums and fees earned | $5,703.9 million | $5,539.7 million | Up 3.0% |
| Operating revenues, excluding investment gains/losses | $6,257.4 million | $6,051.5 million | Up 3.4% |
| Net investment income | $431.8 million | $409.4 million | Up 5.5% |
| Investment gains/(losses) | $(235.6) million | $211.6 million | 2018 included $(293.8) million of unrealized equity-security losses |
| Pretax income | $438.1 million | $725.4 million | Down; investment results were a major factor |
| Pretax income excluding investment gains/(losses) | $673.7 million | $513.8 million | Up 31.1% |
| Net income | $370.5 million | $560.5 million | Down 33.9% |
| Net income excluding investment gains/(losses) | $556.4 million | $318.0 million | Up; comparison affected by 2017 items |
| Diluted EPS | $1.24 | $1.92 | 2018 basic EPS was $1.26 |
| Operating cash flow | $760.5 million | $452.8 million | Up 68.0% |
| Total assets | $19,327.1 million | $19,403.5 million | Down 0.4% |
| Shareholders’ equity | $5,146.2 million | $4,733.3 million | Up 8.7%; book value per share fell to $17.23 from $17.72 |
| Debt | $981.4 million | $1,448.7 million | Reduced following conversion of 3.75% convertible notes into common shares |
Cash and invested assets were $13,187.4 million at year-end, down 2.6%. Net cash provided by investing activities was $(239.5) million; financing activities used $(546.5) million, including $498.8 million of common dividends, which included the $269.2 million special dividend declared in 2017 and paid in January 2018. The filing reports a consolidated debt-to-equity ratio of 19.1%.
Underwriting: The consolidated composite ratio improved to 94.7% from 96.7% (below 100% indicates underwriting profit under the reported measure). General Insurance earned premiums rose 5.3%, pretax operating income increased 6.9% to $363.9 million, and its composite ratio was 97.2% versus 97.3%. Title premiums and fees rose 2.1%, while pretax operating income fell 7.5% to $219.3 million; its composite ratio increased to 92.1% from 90.9%. RFIG run-off pretax operating income was $49.9 million versus a $73.5 million loss in 2017.
Material changes versus the prior period
- Beginning in 2018, GAAP requires unrealized changes in the fair value of equity securities to be reflected in income. The resulting $293.8 million pretax loss materially reduced reported 2018 earnings; it does not represent an equivalent cash loss.
- Management’s operating comparison excludes investment gains and losses: pretax income on this basis rose to $673.7 million. Comparisons also reflect 2017 special charges, including $130.0 million of RFIG claim and related expense provisions, $8.0 million of hurricane claims, $32.3 million of additional employee incentive expense, and a $9.5 million life-reserve assumption adjustment.
- The federal corporate tax rate fell from 35% to 21%. The 2017 reported tax result included a $63.1 million deferred tax credit from revaluing deferred tax balances. The reported effective tax rate was 15.4% in 2018 versus 22.7% in 2017.
- General Insurance premium growth was driven principally by commercial auto/trucking, national accounts, executive indemnity and warranties. The segment’s 2018 claim ratio rose to 72.2% from 71.8%, with management attributing the increase to reserve evaluations, particularly for newer books of business.
- Title results reflected slower housing and mortgage-lending activity in 2018, alongside higher claim costs as favorable prior-year reserve development moderated.
- RFIG premiums continued to contract because the business is in run-off. CCI results improved markedly as 2018 had no comparable litigation-related charge to the $107.0 million provision in 2017; the 2017 RFIG total also included a $23.0 million mortgage-insurance provision.
Outlook, risks and contingencies
- Management stated that, absent significant economic or insurance-market dislocations, General Insurance claim ratios were expected to fall within targeted averages in the high-60% to low-70% range, with an expense ratio of 23%–25%. These are operating targets, not a consolidated earnings forecast.
- The RFIG standard model projected ultimate profitability for the mortgage-guaranty run-off book through approximately December 31, 2022; management cautioned that this outcome is not guaranteed and depends on uncertain assumptions and factors outside the company’s control.
- The parent depends substantially on regulated subsidiary dividends for debt service, shareholder dividends and corporate costs. Up to $507.8 million could be received in 2019 without prior regulatory approval; dividends above applicable limits may require approval.
- Key risks include long-tail claim and reserve uncertainty, adverse litigation or legal developments, workers’ compensation inflation and claim severity, catastrophe and terrorism exposure, reinsurance counterparty concentration, interest-rate and equity-market volatility, competition, housing and mortgage-market weakness, regulatory changes, and cybersecurity or privacy incidents.
- General Insurance gross claim reserves included $105.8 million of asbestos and environmental reserves ($74.4 million net of reinsurance). Management noted that these exposures are difficult to estimate precisely. Consolidated reserves could develop favorably or unfavorably; management described a potential reserve-development sensitivity of approximately ±5%.
- The filing reports no material non-claim litigation exposure for which adequate provisions had not been made. The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting.
Investor verification priorities
- Separate recurring underwriting and investment income from market-driven equity valuation changes; confirm how the new accounting treatment affects comparisons.
- Track General Insurance loss ratios and reserve development, especially commercial auto, workers’ compensation and general liability.
- Review Title premium trends, real-estate transaction volumes, expense ratio and claim-reserve development.
- Test RFIG run-off assumptions, mortgage-insurance delinquency and claim trends, statutory capital, and the projected profitability through 2022.
- Assess reinsurance recoverability and concentration, including the quality and collateralization of significant counterparties.
- Confirm parent-company liquidity, permitted subsidiary dividends, debt maturities and the effect of note conversion and dividends on per-share measures.
- Monitor investment portfolio sensitivity: fixed maturities totaled about $9.2 billion, with 94.3% investment-grade ratings; the filing estimates that a 100-basis-point rate increase would reduce fixed-maturity fair value by approximately 4.1%.