Old Republic International Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods. Amounts are in millions of dollars except per-share data. Old Republic operates principally in General Insurance, Title Insurance, and the RFIG mortgage-guaranty and consumer-credit run-off business.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Operating revenues | $1,557.2 | $1,488.7 | $4,479.4 | $4,293.6 |
| Total revenues, including realized investment gains | $1,593.0 | $1,496.0 | $4,536.9 | $4,351.7 |
| Net income | $46.1 | $110.9 | $260.9 | $335.0 |
| Diluted EPS | $0.17 | $0.39 | $0.91 | $1.17 |
| Operating cash flow | Not presented by quarter | $522.1 | $401.9 |
Operating revenue increased 4.6% in Q3 and 4.3% year to date, while net income fell 58.4% and 22.1%, respectively. Nine-month net investment income was $305.7, up 6.5%; realized investment gains were $57.5, compared with $58.1. Q3 realized gains were $35.8, versus $7.2.
Q3 General Insurance operating revenue rose 7.8%, but pretax operating income fell 21.3% to $59.7. Its composite underwriting ratio was 100.6%, versus 98.1% (above 100% indicates underwriting losses before investment income). Title Insurance pretax operating income rose 15.0% to $67.3, with a 90.0% composite ratio. RFIG Run-off recorded a pretax operating loss of $109.7, versus income of $18.4. For the first nine months, segment pretax operating income was $216.2 for General, $172.8 for Title, and a loss of $88.3 for RFIG Run-off.
Financial position, liquidity and debt
At September 30, 2017, total assets were $19,747.4, total liabilities $15,017.3, and shareholders’ equity $4,730.0, up from $4,471.6 at year-end 2016. Book value was $18.09 per share. Cash was $139.2; short-term investments were $845.4; total investments were $13,330.8. Nine-month operating cash flow was $522.1, compared with $401.9 in 2016; dividends paid were $148.3.
Total debt was $1,526.9, broadly unchanged from $1,528.7 at year-end 2016. Debt was 24.4% of total capitalization, and the reported debt-to-equity ratio was 32.3%. The $549.1 carrying amount of 3.75% convertible notes is due in March 2018. Management stated permitted 2017 subsidiary dividends of up to $473.3 without prior regulatory approval were considered sufficient for expected parent-company cash needs.
Material changes, outlook and risks
- Results included $150.0 of pretax charges: $20.0 for estimated claims from Hurricanes Harvey and Irma, and $130.0 for additional RFIG run-off claim and related expense provisions tied to Great Recession-era litigation and other claims. Management estimated the combined after-tax impact at $97.5, or $0.33 per diluted share. Of the RFIG charge, $23.0 related to mortgage-guaranty claims and $107.0 to consumer-credit indemnity.
- General Insurance premiums grew, but claims costs rose, including hurricane losses and unfavorable prior-year reserve development concentrated in workers’ compensation, trucking and general liability. Management described the current-year claim ratios, excluding the hurricane provision, as moderately improved year over year.
- Title results benefited from lower claims and favorable development of prior-year reserves; management cited generally supportive housing and mortgage conditions. RFIG premiums continued to decline in run-off; improving mortgage delinquency and cure trends supported favorable reserve development, but the additional provisions materially reduced results.
- No specific consolidated earnings guidance was provided. Management said that, absent significant economic or insurance-market dislocations, General Insurance claim ratios could range around targeted high-60% to low-70% levels, with expense ratios expected within 23%–25%.
- Key uncertainties include long-tail claim-reserve estimates, catastrophe frequency and severity, inflation and legal developments, investment yields and equity values, and housing, mortgage-default and employment trends. RMIC remained under North Carolina regulatory supervision but was reported statutorily solvent. Debt covenants include a potential default trigger related to insolvency proceedings involving a significant subsidiary.
- The filing reported that the Countrywide lawsuit was dismissed with prejudice under a confidential settlement after quarter-end. Management did not believe the other discussed proceedings were probable to have a material adverse effect, while noting outcomes remain uncertain. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the $130.0 RFIG provision adequately reflects ultimate settlements and dispositions, and how remaining litigation and claims develop.
- Further hurricane loss estimates and General Insurance prior-year reserve development, especially in workers’ compensation, trucking and general liability.
- RFIG run-off claims, recoveries, reserve assumptions, and the regulatory and statutory position of RMIC and RMGIC.
- Repayment, conversion or refinancing plans for the $549.1 carrying amount of convertible notes due in March 2018.
- Investment portfolio performance and sensitivity to interest rates, equity-market changes, and future investment-credit-loss requirements.