Business context and reporting period
Old Republic International Corporation filed this Form 10-Q for the quarter ended March 31, 2019. The insurer operates primarily through General Insurance, Title Insurance, and the RFIG mortgage-guaranty and consumer-credit-indemnity run-off business. Figures below are in millions of dollars unless stated otherwise; comparisons are with Q1 2018 or December 31, 2018, as applicable.
Key financial metrics
- Revenue: Operating revenues were $1,500.6, up 2.3%. Total revenues were $1,868.6, compared with $1,330.4, including investment gains and losses.
- Earnings: GAAP net income was $412.2 ($1.37 diluted per share), versus $4.0 ($0.01) in Q1 2018. Excluding investment gains and losses, pretax income was $150.4, up 15.4%, and net income was $121.5, up 8.7%.
- Investment results: Pretax investment gains were $368.0, including a $355.6 unrealized gain from changes in equity-security fair values. Q1 2018 had a $136.4 pretax investment loss, including a $152.0 unrealized equity-security loss.
- Underwriting: The consolidated composite ratio was 96.0%, compared with 96.7%; below 100% indicates underwriting profit. General Insurance’s ratio improved to 95.3% from 97.8%, while Title Insurance’s increased to 97.7% from 95.8%.
- Cash flow: Operating cash flow was $136.2 versus $130.8. Investing activities used $80.9, financing activities used $62.7, and cash ended the quarter at $92.8, down from $100.3 at year-end.
- Balance sheet and debt: Total assets were $20,296.9, up from $19,327.1 at year-end; shareholders’ equity was $5,665.6, up from $5,146.2. Debt was $975.1, and the reported debt-to-equity ratio was 17.2%. Cash and invested assets totaled $13,793.9.
- Shareholder returns: The quarterly common dividend was $0.20 per share. Book value per share was $18.94, up from $17.23 at year-end.
Material changes versus the prior comparable period
- GAAP earnings swung sharply because equity-security fair-value changes shifted from a large loss to a large gain; management emphasizes operating results excluding investment gains and losses for assessing underlying performance.
- General Insurance premiums earned rose 5.1%, and pretax operating income rose 30.0%, supported by premium growth and a lower claim ratio. Management cited rate increases and new business as contributors.
- Title Insurance premiums and fees declined 1.4%, and pretax operating income fell 30.4%; management attributed weaker revenue to a mild slowdown in housing and mortgage lending and noted higher claim costs.
- RFIG run-off pretax operating income declined 24.6% as premiums continued to contract with declining risk in force.
- Investment income increased 5.9%. Shareholders’ equity increased in part due to investment-market appreciation and operating earnings.
Outlook, risks, contingencies, and unusual items
- Outlook: No consolidated earnings guidance was provided. For General Insurance, management said that, absent significant economic or insurance-market disruption, it currently anticipates annual claim ratios in the high-60% to low-70% range, expense ratios of 23%–25%, and composite ratios of 90%–95%. Management cautioned that quarterly claim trends may not predict future outcomes.
- Key risks: Results depend on uncertain long-tail claim estimates, claim severity and frequency, legal developments, catastrophe and other external events, competition, interest rates, equity prices, housing and mortgage conditions, and cybersecurity. Management warned that actual ultimate claims may differ from reserves and could materially affect a particular reporting period.
- Reserves and reinsurance: Gross claim reserves were $9,488.4; reinsurance recoverables against claim reserves were $2,993.7. Reserve estimates rely on judgment and evolving experience. Management reported favorable prior-year reserve development overall in Q1 2019, but provided no assurance future development will remain favorable.
- Liquidity and regulation: The parent depends principally on subsidiary dividends and intercompany interest; insurance-subsidiary dividends may be restricted or require regulatory approval. The company said up to $507.8 could be received from subsidiaries in 2019 without prior regulatory approval and considered available liquidity sufficient for expected parent cash needs.
- Lease accounting: Adoption of the new lease standard on January 1, 2019 recognized a $226.9 right-of-use asset and a $241.4 lease liability. It also increased beginning retained earnings by $18.4, net of tax, for previously deferred sale-leaseback gains; management said adoption had no material overall impact.
- Legal and controls: The company reported no material non-claim litigation exposures for which adequate provisions had not been made, no material changes to previously disclosed risk factors, and effective disclosure controls.
Important facts for investors to verify
- Separate recurring underwriting and investment income performance from the quarter’s $355.6 unrealized equity-security gain when evaluating earnings quality.
- Track General Insurance reserve development and claim trends, including the sensitivity of long-tail reserves to inflation, litigation, and claims experience.
- Monitor Title Insurance results against housing and mortgage activity, and the continued decline and loss exposure of the RFIG run-off portfolio.
- Review insurer statutory capital, subsidiary dividend capacity, and reinsurance recoverability; consolidated GAAP figures alone do not establish regulated-subsidiary capacity.
- Assess the equity portfolio’s market exposure and the effects of interest-rate and equity-price changes on earnings and shareholders’ equity.