Old Republic International Corporation — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, not a standalone fourth-quarter report. Old Republic is an insurance holding company with General Insurance, Title Insurance, and RFIG mortgage-insurance run-off operations.
Financial performance and position
- Revenue: Operating revenues were $6.58 billion, up 5.1% from 2018. Net premiums and fees earned rose 5.1% to $5.99 billion; net investment income increased 4.4% to $450.7 million.
- Profit: GAAP pretax income was $1.32 billion and net income was $1.06 billion, versus $438.1 million and $370.5 million, respectively, in 2018. The 2019 results included $599.5 million of unrealized equity-security gains; excluding all investment gains and losses, pretax income was $686.2 million and net income was $554.2 million, nearly flat with 2018 net income of $556.4 million. Diluted EPS was $3.51; diluted EPS excluding investment gains and losses was $1.84.
- Cash flow: Operating cash flow was $936.2 million, compared with $760.5 million in 2018. Cash and cash equivalents at year-end were $78.8 million; cash and invested assets totaled $14.53 billion.
- Underwriting and margins: The consolidated composite ratio was 95.1%, versus 94.7% in 2018. General Insurance’s ratio was 97.5% (97.2% in 2018), including a commercial-auto claim ratio of 84.0%, up from 79.3%. Title’s composite ratio was 92.2% (92.1%); its claim ratio rose to 2.7% from 2.1%. RFIG’s run-off composite ratio was 78.5%, compared with 60.9%.
- Balance sheet and debt: Total assets were $21.08 billion, up 9.1%; shareholders’ equity was $6.00 billion, up 16.6%. Debt was $974.0 million, and management reported a consolidated debt-to-equity ratio of 16.2%. The company had $14.36 billion of investments; 95.7% of fixed-maturity securities were investment grade.
- Shareholder returns: Book value per share was $19.98, up 16.0%. Cash dividends were $1.80 per share, including a $1.00 special dividend paid in September 2019.
Material changes versus 2018
- Operating revenue increased, led by General Insurance premiums and a 6.6% increase in Title premiums and fees. Title benefited from a favorable real-estate market, low interest rates, and stable market share.
- Underlying net income excluding investment gains and losses was essentially unchanged. Reported GAAP net income increased sharply primarily because equity-security fair-value gains were $599.5 million in 2019, versus losses of $293.8 million in 2018. Since 2018, GAAP requires these equity fair-value changes to flow through income.
- General Insurance premiums grew, but its composite ratio edged higher; commercial-auto claims worsened while workers’ compensation claims improved. RFIG premiums continued to contract as expected for a closed run-off book, and its pretax operating income declined to $30.3 million from $49.9 million.
- Effective July 1, 2019, CCI run-off results were reclassified from RFIG to General Insurance; management expects remaining CCI results to be immaterial.
- Under new lease accounting adopted January 1, 2019, the company recorded a $226.9 million right-of-use asset and a $241.4 million lease liability. It also recognized $18.4 million, net of tax, of previously deferred sale-leaseback gains in opening retained earnings.
Outlook, risks, and unusual items
- Management outlook: For General Insurance, management’s targets, absent significant economic or industry disruption, are an annual claim ratio in the high-60% to low-70% range, an expense ratio of 23%–25%, and a composite ratio of 90%–95%. Management emphasizes evaluating performance over multi-year insurance cycles and cautions that quarterly results are not predictive.
- Run-off and contingencies: A long-used model indicates positive underwriting performance for the mortgage-insurance run-off book over a run-off period assumed to extend through 2023, but the filing gives no assurance this will occur. The mortgage-insurance subsidiaries had $473.3 million of statutory capital, including a $352.5 million contingency reserve, at year-end.
- Reserving risk: Claim reserves were $9.93 billion gross and $6.68 billion net of reinsurance. Estimates depend on uncertain claim frequency and severity, inflation, litigation, legal developments, and reinsurance recoveries. The independent auditor identified reserve estimation as a critical audit matter. Management said year-end reserves could develop within a range of plus or minus 5%.
- Other principal risks: General Insurance faces commercial-auto severity, catastrophe and terrorism exposure, long-tail asbestos/environmental and black-lung claims, workers’ compensation trends, and reinsurer or insured credit risk. Title results depend on housing, mortgage and refinancing activity and face competitive, regulatory, fraud, and litigation risks. Investment values and income are exposed to equity-market volatility, interest-rate changes, and prolonged low yields. The holding company also depends on regulated subsidiary dividends; up to $611.6 million could be paid to the parent in 2020 without prior regulatory approval.
- Legal and audit matters: The company reported no material non-claim litigation exposure at year-end. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
- Unusual comparison items: 2017 included $130.0 million of additional RFIG claims and settlement provisions, plus other special operating charges; 2017 also included a tax benefit from the federal corporate tax-rate reduction. These items affect multi-year comparisons.
Important facts for investors to verify
- Whether commercial-auto claim severity and the General Insurance composite ratio improve, and whether pricing keeps pace with loss costs.
- The assumptions, sensitivity, and subsequent development of the $9.93 billion gross claim reserve, especially long-tail liability, workers’ compensation, and asbestos/environmental exposures.
- How much of reported earnings and book-value growth reflects recurring underwriting and investment income versus volatile equity-market gains.
- Mortgage-insurance run-off performance, risk-in-force decline, delinquency and cure trends, statutory capital, and the uncertainty around the forecast through 2023.
- Title premium growth and underwriting results under changing mortgage rates, housing activity, and refinancing volumes.
- Subsidiary dividend capacity and parent-company liquidity, given regulatory limits and dependence on subsidiary distributions.