Old Republic International Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; comparisons are with the corresponding 2011 periods unless noted. Dollar amounts are in millions except per-share data. The company operates General Insurance, Title Insurance, and the RFIG mortgage-guaranty and consumer-credit run-off businesses.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Operating revenues | $1,201.9 | $1,097.9 | $2,357.0 | $2,221.0 |
| Net premiums earned | $981.4 | $890.5 | $1,925.0 | $1,813.3 |
| Net investment income | $85.0 | $93.1 | $170.9 | $184.6 |
| Net realized investment gains (losses) | $22.0 | $(2.9) | $24.9 | $3.5 |
| GAAP net loss | $(34.0) | $(66.3) | $(33.5) | $(79.2) |
| GAAP diluted loss per share | $(0.13) | $(0.26) | $(0.13) | $(0.31) |
| Operating net loss, excluding realized gains/losses | $(48.3) | $(64.3) | $(49.7) | $(81.5) |
Revenue growth reflected higher General and Title premiums and fees, partly offset by lower RFIG run-off revenue and investment income. Improved reported net results included higher realized gains and tax credits; the RFIG run-off segment continued to generate substantial operating losses.
Segments, underwriting and material changes
- General Insurance: Q2 revenue was $657.8 and pretax operating income was $59.6, versus $604.0 and $82.0. For the first half, pretax operating income fell to $140.1 from $170.9. Excluding the reclassified CCI run-off book, the composite underwriting ratio rose to 99.8% in Q2 from 95.6%, and to 97.8% for the half from 94.8%. Management cited increased claim costs in commercial auto, general liability and workers’ compensation, plus new accounting-standard acquisition-cost charges of about $11 for Q2 and $22 year to date.
- Title Insurance: Q2 premiums and fees rose 23.3% to $403.4; pretax operating income increased to $22.5 from $5.5. The six-month composite ratio improved to 97.1% from 100.5%. Management cited market-share gains, refinancing activity, lower claim ratios and expense rationalization.
- RFIG run-off: Q2 pretax operating loss narrowed to $160.2 from $186.9; the six-month loss narrowed to $251.5 from $308.4. However, CCI claim costs increased markedly, reflecting higher estimated litigation costs and lower expected salvage recoveries. Mortgage-guaranty premiums and investment income declined as the book ran off.
- The company combined CCI and mortgage-guaranty activities in the RFIG run-off segment for reporting; prior-period segment data was reclassified. Both businesses are closed to new production. Mortgage-guaranty new insurance written was only $2.0 in the first half of 2012.
Cash flow, balance sheet, debt and liquidity
- First-half operating cash flow was positive $130.3, compared with a $153.4 outflow in 2011. Investing activities provided $315.8; financing activities used $430.0, including $338.9 of debt redemptions and $90.6 of common dividends. Cash ended at $109.2.
- At June 30, total assets were $15,875.2, total liabilities $12,162.8, and shareholders’ equity $3,712.3. Book value was $14.50 per share, down from $14.76 at year-end 2011 and $15.56 at June 2011. Cash and invested assets totaled $10,464.2.
- Debt fell to $573.8 from $912.8 at year-end 2011. The company redeemed $316.2 of 8% convertible notes in May and $20.0 of junior subordinated debt in June; $550.0 of 3.75% convertible notes due 2018 remained. Debt-to-equity was 15.5%.
- Management said subsidiary dividends of up to $361.4 could be paid to the parent in 2012 without prior regulatory approval and considered liquidity adequate for expected parent-company needs. The filing says liquid resources were sufficient to redeem a substantial portion of the remaining convertible notes.
Outlook, risks and contingencies
- No quantitative earnings or revenue guidance was provided. Management emphasized long-term performance across insurance cycles. It reported that its mortgage-guaranty model continued to indicate ultimate profitability, but expected 2012–2013 operating losses to exceed RMIC’s year-end 2011 statutory capital.
- RMIC has been under North Carolina insurance-department supervision since January 2012. The order requires 50% cash payment on claims during an initial period of up to one year, with the unpaid portion retained as a deferred payment obligation. The accumulated obligation was $192.3 at June 30. Supervision is not itself a debt default, but a future receivership following statutory impairment could trigger acceleration of the 3.75% notes because RMIC is defined as a significant subsidiary. Management is considering possible responses, with no assurance they would succeed.
- Mortgage-guaranty and CCI losses have depleted capital previously allocated to those coverages. Combined mortgage-insurance subsidiaries had approximately $195.9 of statutory capital, including the deferred payment obligation; the filing says future recapitalization would require separate external funding at an unknown date.
- Material uncertainties include long-tail insurance reserve estimates, housing and mortgage-market conditions, claim rescissions and recoveries, and interest-rate effects on investment values and yields. Net investment income declined year over year amid historically low market yields.
- Pending litigation includes title-insurance class actions, mortgage-insurance disputes and RESPA-related suits. The company said it did not believe the actions were probable to have a material adverse effect, but could not reasonably estimate potential liability; outcomes remain uncertain.
- Other notable item: the company recorded no other-than-temporary investment impairments in the first half, compared with $8.0 in 2011. It reported no material change in risk factors from its 2011 Form 10-K and stated disclosure controls were effective.
Important facts for investors to verify
- RMIC’s statutory capital position, supervisory-order status, claim-payment deferrals and any implications for the 2018 notes.
- Developments in the planned external recapitalization of the run-off businesses and the sustainability of their reported loss trajectory.
- General Insurance reserve development and loss trends, particularly in commercial auto, general liability and workers’ compensation.
- Whether Title Insurance growth and underwriting improvement persist as refinancing activity and housing conditions change.
- Cash generation, permitted subsidiary dividends, debt repayments and the effect of low investment yields on income and liquidity.
- Progress and potential exposure from the disclosed litigation and mortgage-claim disputes; the filing provides no clear estimate of possible liability.