Old Republic International Corporation — Q3 2014 Form 10-Q
Business context and reporting period
For the quarter and nine months ended September 30, 2014, Old Republic reported insurance operations through General Insurance, Title Insurance, and the RFIG mortgage-guaranty and consumer-credit-indemnity run-off businesses. Amounts below are in millions of dollars unless stated otherwise. Comparisons are with the corresponding 2013 periods.
Financial performance and position
- Q3: Operating revenues were $1,369.4, down 0.4%. Net income was $85.8 versus $102.9; diluted EPS was $0.30 versus $0.36. Realized investment gains were $21.5, compared with $4.8.
- Nine months: Operating revenues were $3,892.7, down 1.8%. Net income was $346.4 versus $353.1; diluted EPS was $1.21 versus $1.24. Realized investment gains were $262.8 versus $146.6. Management’s non-GAAP diluted operating EPS was $0.63 versus $0.92.
- Underwriting: General Insurance premiums earned excluding CCI run-off rose 9.4% for the first nine months, but its combined ratio worsened to 98.9% from 97.4%. Title premiums and fees fell 15.1%; its combined ratio rose to 96.7% from 94.4%. RFIG’s combined ratio deteriorated to 113.0% from 81.8%, reflecting CCI claims costs despite renewed profitability in mortgage guaranty.
- Investment income and margins: Net investment income increased to $86.1 in Q3 from $78.9 and to $254.3 for nine months from $237.2. Consolidated operating pretax income, excluding realized investment gains, was $99.4 in Q3 versus $144.9 and $257.1 for nine months versus $384.0, as presented in the financial statements and management analysis.
- Cash flow: Operating cash flow was negative $370.0 for nine months, versus positive $459.0 in 2013. Excluding RFIG run-off, operating cash flow was positive $459.6. Cash at period-end was $219.9, up from $153.3 at year-end 2013.
- Balance sheet and debt: Total assets were $16,986.8 and shareholders’ equity $3,922.9, up 2.7% and 3.9%, respectively, from year-end. Debt increased to $965.0 from $569.2; debt-to-equity was 24.6%. Total investments were $10,793.7.
Material changes and unusual items
- On September 23, the company issued $400.0 of 4.875% senior notes due 2024, contributing to the increase in debt.
- Following North Carolina regulatory approval, mortgage-insurance subsidiaries RMIC and RMICNC paid approximately $657 of previously deferred settled claims in July. The payment reduced claim reserves and cash, but had no income-statement effect. The subsidiaries remain under regulatory supervision and in run-off.
- Investment gains materially supported reported earnings, especially year to date. Management said sales of low-yielding or non-income-producing securities were largely reinvested in higher-yielding U.S. equities. No other-than-temporary impairment charges were recorded.
- Comprehensive income was $13.3 in Q3 versus $172.9 in 2013, reflecting a $67.1 after-tax unrealized investment loss in the quarter.
Outlook, risks, and contingencies
The filing provides no quantitative earnings or revenue guidance. Management emphasizes long-term insurance-cycle evaluation rather than short-term forecasts. It cited pressure on workers’ compensation and general liability claims, lower housing and mortgage transaction activity affecting Title, and CCI litigation-related claim costs. Results remain exposed to claim severity and reserve-estimation changes, interest rates and investment values, competition, housing-market conditions, mortgage defaults, and regulatory actions.
RMIC’s financial condition and continuing supervision are important considerations: the debt agreements include a potential default trigger tied to insolvency proceedings involving a significant subsidiary. Management said the approved corrective plan and RMIC’s statutory solvency at September 30 made such a default unlikely in the foreseeable future, while noting the regulator may amend the plan.
Legal matters include ongoing mortgage-insurance disputes and RESPA-related actions, as well as a certified title-insurance class action. A separate Bank of America suit against the general insurance subsidiary was settled and dismissed in July. Intellectual Ventures filed a patent suit on October 9, 2014, after quarter-end. The company said it did not consider a material adverse effect from the disclosed cases probable, but acknowledged outcomes are uncertain and additional costs beyond recorded reserves could arise.
Important facts for investors to verify
- Whether General Insurance claim-cost trends and its combined ratio improve, particularly in workers’ compensation and general liability.
- Whether Title revenue stabilizes as refinance and real-estate activity change, and whether expense levels adjust to lower volume.
- Future CCI litigation settlements, RFIG reserve development, and mortgage-insurance claim trends and run-off capital requirements.
- The effect of the $400.0 debt issuance on interest costs, liquidity, and compliance with debt terms; also verify permitted subsidiary dividends and parent-company cash needs.
- Investment gains’ contribution to earnings versus recurring underwriting and investment income, and sensitivity of portfolio values to interest-rate and equity-price changes.
- Developments in the disclosed litigation and regulatory supervision; the filing does not quantify potential losses for the key disputes.