Old Republic International Corporation — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing is an annual report; fourth-quarter results are noted separately below. Old Republic is an insurance holding company operating through General Insurance, Title Insurance, and RFIG mortgage-guaranty/consumer-credit run-off segments.
Financial performance and condition
- Revenue: Operating revenue was $5.295 billion, up 7.6% from 2012; premiums and fees earned were $4.886 billion, up 9.3%. Including $148.1 million of realized investment gains, total revenue was $5.443 billion.
- Profit: GAAP net income was $447.8 million, versus a $68.6 million loss in 2012; diluted EPS was $1.57 versus a $0.27 loss. Net operating income, excluding realized investment gains, was $351.6 million, or $1.25 per diluted share.
- Investment gains and income: Realized pretax gains were $148.1 million, mostly from equity sales and recovery in value of securities impaired in 2008. Net investment income declined to $318.7 million from $336.5 million.
- Underwriting: The consolidated composite ratio improved to 95.0% from 110.4%; excluding RFIG run-off, it was 96.3% versus 98.1%. General Insurance’s ratio was 97.3%, while Title’s was 94.7%. RFIG’s 76.9% ratio reflects unusually favorable run-off claims experience, not ongoing new production.
- Cash flow: Operating cash flow was $686.7 million, up from $532.0 million in 2012. Cash and invested assets totaled $11.109 billion at year-end.
- Balance sheet and debt: Total assets were $16.534 billion; shareholders’ equity was $3.775 billion, or $14.64 per share. Debt was $569.2 million, including $550 million of 3.75% convertible notes due in 2018; management reported a 15.1% consolidated debt-to-equity ratio.
- Liquidity and dividends: The parent depends substantially on regulated-subsidiary distributions. Up to $427.2 million of subsidiary dividends could be paid in 2014 without prior regulatory approval. The 2013 common dividend was $0.72 per share.
Material changes versus 2012
- Results returned to profitability, aided by lower claims in the RFIG run-off segment, stronger Title results, and investment gains. RFIG pretax operating results improved to income of $110.0 million from a $508.6 million loss.
- Title revenue rose 18.7% and pretax income rose to $124.3 million from $73.8 million, reflecting market-share gains, improving housing activity, lower claims, and expense leverage.
- General Insurance revenue increased 5.6% and pretax income increased 10.5% to $288.3 million. Workers’ compensation and general-liability claim severity remained a pressure.
- Year-end equity increased 5.0%, but net unrealized investment gains declined; the fixed-maturity portfolio’s net unrealized gain fell to $235.0 million from $573.0 million.
Fourth quarter: Net income was $94.7 million, or $0.33 diluted EPS. Fourth-quarter revenue was $1.332 billion.
Outlook, risks, and unusual items
- Mortgage-insurance recapitalization: The company expected RMIC Companies to seek capital-market funding, with Old Republic potentially contributing up to $50 million. The proposed transaction could pay deferred claims with interest, end regulatory supervision, permit new business in 2014, and result in deconsolidation. Completion depended on financing and regulatory, Fannie Mae, and Freddie Mac approvals; it was not assured. Interest on deferred obligations could materially affect results.
- RFIG regulatory position: RMIC and RMICNC remained under North Carolina supervision and in run-off. Settled claims were paid 60% in cash, with 40% retained as deferred payment obligations. RFIG statutory capital, including $551.5 million of DPO reserves, was approximately $518.2 million; its consolidated GAAP capitalization was negative $13.8 million.
- Claims and reserves: Gross claims and settlement reserves were $9.434 billion, with $6.597 billion net of reinsurance. Reserve estimates are inherently uncertain; the company identified workers’ compensation severity, long-tail liability, black-lung and asbestos/environmental claims, mortgage defaults, rescissions, and salvage recoveries as important sensitivities.
- Other risks: Low investment yields may constrain income; rising rates could reduce fixed-income fair values. The company also cited catastrophe and terrorism exposures, reinsurer credit and concentration risk, housing-market sensitivity, regulatory limits on subsidiary dividends, and litigation involving title premiums and mortgage-insurance coverage/rescissions.
- Legal contingencies: Several class actions and lender disputes/arbitrations remained pending. Management did not consider a material adverse outcome probable, but could not reasonably estimate potential liabilities. A PNC mortgage-insurance suit was settled in late 2013.
- Audit and controls: KPMG issued unqualified opinions on the financial statements and internal control over financial reporting as of year-end.
Most important facts for investors to verify
- Whether the proposed RMIC recapitalization closed, secured required approvals, and enabled payment of DPOs or resumed underwriting.
- Subsequent mortgage-insurance claims, cure rates, rescissions, litigation outcomes, and reserve development behind the sharp RFIG earnings recovery.
- Whether General Insurance claim severity—especially workers’ compensation and general liability—improves, and how reserves develop.
- Title earnings sensitivity to housing, purchase, and refinancing activity, as well as market share and regulatory developments.
- Investment-income trends, interest-rate effects on portfolio value, and the parent’s access to subsidiary dividends and liquidity ahead of the 2018 note maturity.