Old Republic International Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Old Republic operates General Insurance, Title Insurance, and a run-off mortgage insurance business (RFIG). Amounts are in millions, except per-share data and ratios.
Financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Operating revenues | $1,623.9 | $1,607.7 | $3,269.6 | $3,108.3 |
| Total revenues, including investment gains/losses | $1,970.6 | $1,644.7 | $2,672.2 | $3,513.4 |
| Pretax income (loss) | $499.1 | $205.4 | $(270.8) | $723.9 |
| Net income (loss) | $397.7 | $165.5 | $(207.0) | $577.7 |
| Diluted EPS | $1.34 | $0.55 | $(0.69) | $1.92 |
| Operating income before investment gains/losses, pretax | $152.4 | $168.4 | $326.6 | $318.9 |
| Net income excluding investment gains/losses | $123.8 | $136.3 | $264.6 | $257.9 |
| Operating cash flow | $221.9 | $177.2 | $438.3 | $313.4 |
Reported earnings were heavily affected by equity-market marks: unrealized equity-security gains were $354.0 in Q2, versus $26.3 a year earlier, while the first half recorded a $608.7 unrealized loss, versus a $382.0 gain in the prior-year period. Management emphasizes operating results excluding investment gains and losses as a better indicator of underwriting performance.
- Margins: The consolidated combined ratio was 96.0% in Q2 (95.2% in Q2 2019) and 95.4% for the first half (95.6% in 2019). A ratio below 100% indicates underwriting profit.
- Segment performance: Q2 General Insurance pretax operating income was $85.2, down 1.8%; Title Insurance was $65.4, up 8.6%; RFIG Run-off posted a $4.9 loss, compared with $8.2 income. For the first half, Title pretax operating income rose 34.6% to $108.7, while General Insurance was essentially flat at $195.3 and RFIG fell to $3.4 from $16.5.
- Cash flows: First-half investing cash flow was $(226.7), including increased short-term investments; financing cash flow was $(176.3), including $125.3 of dividends and a $50.0 ESSOP share purchase. Cash ended June at $114.0, up from $78.8 at year-end.
- Margins and investment income: Net investment income was $108.7 in Q2, down 3.8%, and $222.9 for the first half, down 1.0%, as lower yields offset growth in invested assets.
Financial position and changes
- Total assets were $21,650.3 at June 30, up from $21,076.3 at December 31, 2019. Common shareholders’ equity was $5,858.9, down 2.4%; book value per share was $19.68, down from $19.98 at year-end, but up from $17.29 at March 31 after the Q2 market rebound.
- Investments totaled $14,240.8. Fixed maturities were $9,859.4 at fair value; equity securities were $3,560.1, down from $4,030.5 at year-end. The fixed-maturity portfolio was 95.5% investment grade.
- Total debt was $968.1, slightly below $974.0 at year-end. Debt was 14.2% of total capitalization; debt-to-equity was 16.5%. Senior notes of $400 million mature in October 2024; the next listed notes mature in 2026.
- Management said liquidity was sufficient for claims, operating costs, debt service, and expected dividends, and it did not expect to need additional capital. Based on year-end statutory balances, up to $611.6 in subsidiary dividends could be paid to the parent in 2020 without prior regulatory approval.
- The quarterly common dividend was $0.21 per share, versus $0.20 a year earlier. The company reported 304.0 million common shares outstanding at June 30.
Outlook, risks, and unusual items
- COVID-19 caused broad economic and market disruption. Most of approximately 9,000 associates shifted to remote work; the company reported no meaningful interruption in customer service. Management said the pandemic could reduce future premium and fee revenue and raise expense ratios.
- General Insurance premiums were pressured by economic conditions and tighter underwriting, although management described Q2 demand effects as relatively modest. It said the ultimate effect would become clearer as policies expire and premiums are audited. Claims effects were not significant in Q2 overall; the company had not materially changed reserves or reserving practices during the quarter.
- Title Insurance revenue increased as residential real estate activity remained strong, but management warned that prolonged economic weakness or reduced mortgage availability could weaken future demand, particularly in commercial real estate.
- RFIG delinquencies rose sharply amid pandemic-related unemployment and mortgage forbearance. Q2 mortgage insurance claim ratio reached 144.5%, and the segment reported a $4.9 pretax operating loss. Future claims depend in part on forbearance programs, employment recovery, and housing conditions. Management said the effects should become clearer during the rest of 2020; future extraordinary dividends from the mortgage subsidiaries require regulatory approval.
- Financial markets rebounded in Q2: equity securities generated a $354.0 fair-value gain and fixed maturities had a $467.2 increase in fair value. No other-than-temporary impairment was recorded in the first half. The company cautioned that market volatility and credit stress, including exposure to energy issuers, could persist.
- Effective June 30, the company reclassified its tax-exempt municipal portfolio from held-to-maturity to available-for-sale after changing its intent to hold it to maturity. A $48.5 after-tax unrealized gain was recorded in other comprehensive income; all fixed maturities were classified as available-for-sale at quarter-end.
- CECL adoption on January 1 resulted in a $2.3 after-tax reduction to opening retained earnings. The credit-loss allowance rose from $30.1 at adoption to $35.4 at June 30.
- Potential legislative or regulatory responses—including mandated coverage, premium returns or collection restrictions, and limits on cancellations—could adversely affect the business. Management identified claims-reserve estimation, reinsurance recoverability, deferred tax asset valuation, and investment impairment as important areas involving judgment.
- The company reported no material non-claim litigation exposure at June 30. Disclosure controls were judged effective, with no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether rising mortgage delinquencies translate into sustained RFIG claims and whether forbearance and employment recovery limit ultimate losses.
- Whether General Insurance premium trends and Title Insurance demand hold up as the pandemic and economic effects evolve.
- Whether equity-market movements continue to drive large swings in GAAP earnings and book value, and whether investment credit quality—especially energy exposure—remains sound.
- Whether reserve estimates, reinsurance recoverables, and statutory capital remain adequate as claims experience develops.
- Whether operating cash flow and regulated-subsidiary dividend capacity support debt service and shareholder dividends without additional capital.