Old Republic International Corporation — FY 2014 Form 10-K
Reporting period: Year ended December 31, 2014; comparisons are primarily with FY 2013. Old Republic is an insurance holding company operating through General Insurance, Title Insurance, and the RFIG mortgage guaranty and consumer credit indemnity run-off businesses. It emphasizes long-term underwriting results and financial strength.
Financial performance and position
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Operating revenues, before realized gains | $5.258 billion | $5.295 billion |
| Net premiums and fees earned | $4.811 billion | $4.886 billion |
| Net investment income | $345.5 million | $318.7 million |
| Realized investment gains | $272.3 million | $148.1 million |
| Pretax operating income, excluding realized gains | $337.1 million | $524.8 million |
| GAAP pretax income | $609.4 million | $672.9 million |
| Net income | $409.7 million | $447.8 million |
| Diluted earnings per share | $1.44 | $1.57 |
| Operating cash flow | $(181.2) million | $686.7 million |
- Operating income and EPS declined despite higher investment gains. Realized gains contributed $0.60 per diluted share in 2014; gains were mainly from sales of equity securities.
- General Insurance: Revenue rose 9% to $3.114 billion, but pretax operating income fell 23% to $221.3 million. The combined ratio increased to 100.8% from 97.3%, reflecting a higher claims ratio (77.9% versus 73.6%) and adverse prior-year reserve development, especially in workers’ compensation and general liability.
- Title Insurance: Revenue declined 12% to $1.792 billion and pretax operating income declined 20% to $99.5 million. Lower refinance activity reduced premiums and fees; the combined ratio was 95.6% versus 94.7%, with a low 5.2% claims ratio.
- RFIG run-off: Revenue declined 20% to $282.9 million and pretax operating income fell to $10.3 million from $110.0 million. Mortgage insurance remained profitable, benefiting from fewer defaults and favorable reserve development, but CCI litigation and settlement costs substantially offset those gains.
- Consolidated combined ratio was 99.4%, compared with 95.0% in 2013. The consolidated ratio reflects changing segment mix and is not a standalone measure of recurring profitability.
- Operating cash flow turned negative, principally reflecting cash outflows in the RFIG run-off business. Excluding RFIG, the remaining operations generated $702.8 million of operating cash flow.
- At year-end, assets were $16.988 billion, cash and invested assets $11.292 billion, shareholders’ equity $3.924 billion, and debt $965.0 million. Debt-to-equity was 24.6%; debt represented 19.7% of total capitalization. The annual dividend was $0.73 per share, up from $0.72.
Material changes and unusual items
- In September 2014, the company issued $400 million of 4.875% senior notes due 2024; year-end debt rose from $569.2 million to $965.0 million.
- After North Carolina regulators approved an amended corrective plan, Old Republic contributed $125 million to RMIC in June 2014. RMIC and RMICNC then paid approximately $657 million of previously deferred claims in July. These payments reduced invested assets and claim reserves and had no income-statement effect.
- General Insurance experienced unfavorable prior-year reserve development in 2014, unlike favorable development in 2013. Management cautions that long-tail claims and reserve estimates are inherently uncertain.
- Title premiums and fees fell as mortgage refinancing declined from 2013 levels; early-2014 weather and higher mortgage rates also weighed on activity.
Outlook, risks, and contingencies
- No specific consolidated earnings or revenue guidance for 2015 is provided in the filing. Management says results are best assessed over multi-year insurance cycles.
- RMIC and RMICNC remain under North Carolina Department of Insurance supervision and in run-off. Management’s standard model indicates aggregate profitability for the book through approximately 2022, but near-term mortgage insurance losses remain possible. At year-end, mortgage subsidiaries’ statutory capital was approximately $222.9 million, below the stated $299.7 million minimum policyholder position; RFIG’s consolidated GAAP capitalization was $206.0 million. Regulatory oversight and the uncertain run-off remain material risks.
- CCI results were hurt by substantial litigation costs, including costs related to a major banking institution. Several mortgage insurance disputes and arbitrations remain pending; two RESPA class actions had not been certified. A title-insurance class action and patent litigation were also disclosed. The company does not consider material adverse outcomes probable, but notes that outcomes and additional costs are uncertain.
- Other material risks include reserve inadequacy, claim severity and inflation, catastrophe and terrorism exposures, reinsurance recoverability, interest-rate and equity-market changes, housing and mortgage-market conditions, regulatory restrictions, and the parent company’s reliance on regulated-subsidiary dividends. Up to $461.9 million of subsidiary dividends could be paid to the parent in 2015 without prior regulatory approval.
- Fixed-maturity investments were 94.8% investment grade, down from 98.9% in 2013. Low yields may constrain investment income; rising rates could reduce portfolio fair value. The company reported no fixed-maturity securities in default.
- KPMG issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of December 31, 2014.
Investor facts to verify
- Track whether General Insurance claims and prior-year reserve development improve, particularly in workers’ compensation and general liability.
- Assess the sources and sustainability of earnings: 2014 net income included $272.3 million of realized gains while pretax operating income fell materially.
- Monitor RMIC/RMICNC regulatory status, statutory capital, claim payments, and the assumptions behind the run-off profitability model.
- Review CCI litigation developments and whether further reserve provisions or payments are required.
- Reconcile the negative consolidated operating cash flow with ongoing liquidity needs, debt service, and reliance on subsidiary dividends.
- Evaluate title results against housing, resale, and refinance activity, and monitor investment portfolio exposure to interest rates and equity markets.