Old Republic International Corporation — Q1 2020 Form 10-Q
Reporting period: Quarter ended March 31, 2020. Amounts are in millions of dollars except per-share data. Old Republic is an insurance holding company operating primarily through General Insurance, Title Insurance, and RFIG mortgage-insurance run-off segments.
Financial results and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Operating revenues, excluding investment gains and losses | $1,645.7 | $1,500.6; up 9.7% |
| Premiums and fees | $1,496.8 | $1,358.1; up 10.2% |
| Net investment income | $114.1 | $112.1; up 1.8% |
| Pretax income excluding investment gains and losses | $174.2 | $150.4; up 15.8% |
| Net income excluding investment gains and losses | $140.8 | $121.5; up 15.8% |
| GAAP net income (loss) | $(604.8); diluted EPS $(2.01) | $412.2; diluted EPS $1.37 |
| Operating cash flow | $216.3 | $136.2 |
| Cash at quarter end | $144.5 | $78.8 at Dec. 31, 2019 |
| Total assets | $20,352.2 | $21,076.3 at Dec. 31, 2019 |
| Common shareholders’ equity | $5,142.9 | $6,000.1 at Dec. 31, 2019 |
| Debt | $967.8 | $974.0 at Dec. 31, 2019 |
The $944.1 pretax investment loss—primarily a $962.7 unrealized loss from changes in equity-security fair values—drove the GAAP loss. The company reported no investment impairment losses. Book value per share fell to $17.29 from $19.98 at year-end. The consolidated underwriting composite ratio was 94.9%, versus 96.0% a year earlier; the claim ratio improved to 41.6% from 44.6%, while the expense ratio rose to 53.3% from 51.4%.
Segment pretax operating income, excluding investment gains and losses, was $110.1 for General Insurance (up 1.7%), $43.3 for Title Insurance (up 110.6%), and $8.4 for RFIG run-off (up 1.6%). Title’s premium and fee growth reflected strong real-estate activity and a favorable low-rate environment. General Insurance earned premiums increased 2.6%; its composite ratio was 95.6%, compared with 95.3%.
Debt was 15.8% of total capitalization and 18.8% of debt plus equity. The nearest senior-note maturity was $400.0 in October 2024. Management said current liquidity was sufficient for expected obligations and that it did not expect to need additional debt or equity capital. The parent could receive up to $611.6 in subsidiary dividends during 2020 without prior regulatory approval.
Changes, outlook, and risks
- Compared with Q1 2019, operating revenues and premiums/fees rose, and pretax and net income excluding investment gains and losses improved. Reported GAAP results reversed to a substantial loss because equity-market declines caused large unrealized investment losses.
- Management said COVID-19’s economic effects emerged mainly in the final weeks of the quarter, with minimal Q1 effect on operating revenues and earnings excluding investment gains or losses. It warned that subsequent economic disruption could reduce General Insurance premiums, title demand and fee revenue, and could raise expense ratios or claims.
- Potential mortgage-insurance claims depend partly on unemployment, housing conditions, loan forbearance under the CARES Act, and the pace of economic recovery. Management reported no material COVID-related claims or reserve impact by March 31 and had made no significant changes to General Insurance reserves at that date.
- Management described capital and liquidity as strong and said portfolio stress-test results through quarter-end were broadly consistent with expectations. It cautioned that market volatility and issuer-credit deterioration could continue; the portfolio includes energy-sector exposure, and some energy issuers faced significant stress. No fixed-maturity securities were in default, and no other-than-temporary impairments were identified.
- COVID-related regulatory actions—including possible retroactive coverage mandates, premium-return or collection restrictions, and limits on policy cancellation or non-renewal—could adversely affect premiums and claims. Remote work caused limited service interruption; management reported no material change in internal financial-reporting controls.
- CECL was adopted January 1, 2020, reducing opening retained earnings by $2.3 after tax. The initial credit-loss allowance was $30.1; the filing reports no significant first-quarter adjustment.
- The filing gives no specific company earnings or revenue guidance. Management’s stated long-term General Insurance targets are claim ratios in the high-60s to low-70s, expense ratios of 25% or below, and composite ratios of 90%–95%.
- Management reported no material non-claim litigation exposure at March 31, 2020. Insurance claim reserves remain estimates subject to future development.
Most important facts for investors to verify
- Whether equity-market movements and any further investment losses materially change reported earnings, book value, or capital.
- How COVID-19 affects premium and fee volumes, underwriting expenses, real-estate activity, claims, and reserve estimates in subsequent quarters.
- Credit quality and valuation of fixed-maturity holdings, particularly stressed energy exposures, and the adequacy of reinsurance recoverables.
- Whether statutory capital, regulatory dividend capacity, and liquidity remain sufficient, especially in the RFIG run-off business and under prolonged economic stress.
- Whether Title Insurance’s unusually strong first-quarter production and profitability are sustainable as market conditions change.