Old Republic International Corporation — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Old Republic is an insurance holding company operating primarily in General Insurance, Title Insurance, and the RFIG mortgage-insurance run-off business. Amounts are in millions unless noted.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total premiums and fees earned | $1,987.3 | $1,539.4 | $3,826.2 | $3,098.8 |
| Operating revenues, excluding investment gains/losses | $2,132.8 | $1,680.2 | $4,112.4 | $3,388.5 |
| Net investment income | $107.6 | $108.7 | $211.9 | $222.9 |
| Investment gains, including equity fair-value changes | $120.9 | $346.7 | $496.4 | $(597.4) |
| Net income (loss) | $316.4 | $397.7 | $818.5 | $(207.0) |
| Diluted earnings per share | $1.05 | $1.34 | $2.72 | $(0.69) |
| Operating income excluding investment gains/losses, pretax | $275.0 | $152.4 | $530.2 | $326.6 |
- Premium and fee growth was 29.1% for Q2 and 23.5% year to date. Title Insurance was the principal driver, with premiums and fees up 56.9% and 48.6%, respectively; General Insurance earned premiums increased 6.0% and 3.3%.
- Underlying operating profitability improved: pretax income excluding investment gains/losses rose 80.4% in Q2 and 62.3% for the first half. Diluted adjusted EPS, on the same exclusion basis, was $0.73 for Q2 and $1.42 year to date, versus $0.42 and $0.89.
- Reported net income moved differently from underlying results: Q2 earnings declined year over year as equity-market gains were lower than in Q2 2020; first-half results swung to profit largely because 2021 equity fair-value gains compared with substantial losses in 2020.
- Consolidated combined ratio improved to 90.6% for Q2 and 90.8% for the first half, from 96.1% and 95.6%. General Insurance’s combined ratios were 94.0% and 92.8%; Title Insurance’s were 88.4% and 89.3%.
Cash flow, balance sheet and capital
- Six-month operating cash flow was $515.4, versus $438.3 in 2020. Investing activities used $739.6; financing provided $214.7. Cash ended at $109.2, down from $118.7 at year-end 2020.
- At June 30, total assets were $24,678.4 and shareholders’ equity was $6,778.6, up 8.2% and 9.6%, respectively, from December 31, 2020. Book value per share was $22.59, up from $20.75.
- Total debt increased to $1,590.1 from $966.4; debt was 19.0% of total capitalization and consolidated debt-to-equity was 23.5%. The increase principally reflects a June issuance of $650 million of 3.85% senior notes due 2051.
- Cash dividends paid during the first half were $435.3, including a $304.0 special dividend paid in January. The regular quarterly dividend was $0.22 per share.
- Management reported that the parent could receive up to $699.3 of subsidiary dividends in 2021 without prior regulatory approval, based on year-end 2020 statutory balances, and considered permitted liquidity sufficient for expected parent obligations and needs.
Management outlook, risks and notable items
- Management cited strong underwriting, premium rate increases and new business in General Insurance, and a robust real estate market and low interest rates supporting Title Insurance. It expects General Insurance premium growth to benefit from economic recovery and Title activity to remain strong if housing and interest-rate conditions persist. No specific consolidated earnings guidance was provided.
- Management’s General Insurance targets are average claim ratios in the high-60% to low-70% range, expense ratios of 25% or below, and combined ratios of 90%–95%.
- Management said pandemic effects had been less significant in the first half of 2021 than in 2020, but new variants, renewed restrictions or economic disruption could reduce demand or increase claims. RFIG claims remain sensitive to employment recovery, loan forbearance and mortgage delinquency trends.
- Other principal risks include uncertainty in long-tail claim reserves and reinsurance recoverability, equity-price and interest-rate changes, insurance competition, housing and mortgage conditions, and cybersecurity or fraudulent payment attacks. Management noted that reserve estimate changes could materially affect results in an individual reporting period.
- The $650 million debt issue increases interest expense; management expected the increase to be offset by investment income on the proceeds. The company reported no material non-claim litigation exposures and stated disclosure controls were effective, with no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- How much of reported earnings and book-value movement reflects volatile equity fair-value gains rather than recurring underwriting and investment income.
- Whether Title Insurance growth and margins remain sustainable as refinance activity, housing demand and interest rates change.
- Whether favorable prior-year reserve development and current claims assumptions persist, particularly in General Insurance and RFIG run-off.
- The adequacy and collectability of claim reserves and reinsurance recoverables, and the sensitivity of investment values to market movements.
- The ongoing cost of the new long-term debt, the use and returns on its proceeds, and the effect of dividends on capital and liquidity.