Old Republic International Corporation — Q1 2018 Form 10-Q
Business context and reporting period. The filing covers the quarter ended March 31, 2018, compared with the quarter ended March 31, 2017. Old Republic is an insurance underwriter and related-services provider operating through General Insurance, Title Insurance, and the RFIG mortgage-guaranty and consumer-credit run-off businesses.
Financial results and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Operating revenues | $1,466.8 million | $1,429.9 million; up 2.6% |
| Net premiums and fees earned | $1,330.4 million | $1,301.0 million; up 2.3% |
| Net investment income | $105.8 million | $101.2 million; up 4.5% |
| Pretax operating income (company-defined, non-GAAP) | $130.4 million | $149.8 million; down 13.0% |
| Net operating income (company-defined, non-GAAP) | $111.8 million | $103.4 million; up 8.1% |
| GAAP net income and diluted EPS | $4.0 million; $0.01 | $113.1 million; $0.39 diluted EPS |
| Operating cash flow | $130.8 million | $146.1 million |
GAAP total revenues were $1,330.4 million, versus $1,444.8 million, reflecting $152.0 million of unrealized equity-security losses recognized in earnings under a new accounting standard. After tax, those losses were $120.0 million. Excluding that market-driven item and using the company’s operating measure, net operating income increased; the reduced federal corporate tax rate also benefited after-tax results. Reported income tax was a $10.1 million credit.
General Insurance operating revenue rose 6.6% to $904.8 million, while pretax operating income declined 11.1% to $83.3 million. Its claim ratio was 71.5%, expense ratio 26.3%, and combined underwriting ratio 97.8% (versus 95.9% a year earlier). Title Insurance operating revenue declined 0.8% to $523.6 million and pretax operating income fell 27.0% to $29.5 million; its combined ratio was 95.8%, versus 93.6%. RFIG run-off revenue declined 35.0% to $26.7 million and pretax operating income fell 24.2% to $10.9 million.
At March 31, 2018, total assets were $18,998.8 million, total liabilities $13,950.2 million, and common shareholders’ equity $5,048.6 million. Equity increased 6.7% from year-end, but book value per share fell to $16.82 from $17.72. Cash was $103.4 million; short-term investments were $474.9 million. Debt was $974.1 million, down from $1,448.7 million at year-end; debt-to-equity was 19.3%. Total capitalization was $6,022.7 million, with debt comprising 16.2%.
Material changes versus the comparable period
- Effective January 1, 2018, changes in fair value of equity securities began flowing through earnings. The quarter’s $152.0 million pretax unrealized loss materially reduced GAAP net income. Adoption also reclassified $502.1 million from accumulated other comprehensive income to retained earnings, with no change to total shareholders’ equity.
- The federal corporate tax rate fell from 35% to 21%. Management reported a 14.3% effective tax rate on pretax operating income in Q1 2018, compared with 31.0% in Q1 2017; lower taxes helped lift net operating income despite lower pretax operating income.
- The outstanding 3.75% convertible senior notes due 2018 were converted into 32,229,787 common shares during the quarter. Common shares issued rose to 302.2 million from 269.2 million at year-end, while debt declined.
- Operating cash flow decreased 10.5%. Cash declined $22.5 million during the quarter, as operating and investing inflows were more than offset by financing outflows.
Outlook, commentary, risks and unusual items
- Management said General Insurance claim ratios are expected to remain in the high-60% to low-70% range and the expense ratio in the 23%–25% range, absent significant economic or insurance-industry disruption. These are expectations, not formal earnings guidance.
- Management emphasizes long-term underwriting performance and financial strength, noting that quarterly insurance results can be affected by seasonality, claim emergence, legal developments, inflation, competition, investment yields, and housing and mortgage conditions. The filing provides no specific consolidated earnings forecast.
- Insurance reserves are estimates subject to changes in claim frequency, severity, litigation, and other assumptions. Prior-year General Insurance reserve development was unfavorable by $15.9 million; Title and RFIG had favorable development of $8.2 million and $7.2 million, respectively. Management cautions that future development could materially affect an individual reporting period.
- Fixed-maturity securities had $123.2 million of gross unrealized losses at quarter-end; management attributed these losses primarily to interest-rate changes and reported no other-than-temporary impairment charges. Equity-security fair value losses now create greater potential volatility in reported earnings.
- Regulatory limits generally constrain insurance-subsidiary dividends to the parent. The company said it could receive up to $554.6 million in subsidiary dividends during 2018 without prior regulatory approval, which management considered sufficient for expected parent-company cash needs.
- The Tax Cuts and Jobs Act requires updated IRS discount-rate tables for tax loss reserves. Because the IRS had not published them by the filing date, the company could not reasonably estimate any resulting adjustment; it will record an adjustment when information becomes available.
- The filing reports no material non-claim litigation exposure lacking adequate provisions and no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- Reconcile the $324.1 million of cash dividends shown in financing cash flows with the reported $0.1950 cash dividend per common share; the filing excerpt does not explain the apparent difference.
- Track operating results separately from GAAP earnings: assess the effect of equity-market movements, the tax-rate change, and the new fair-value accounting treatment on comparisons.
- Monitor General Insurance expense and claim ratios, including prior-year reserve development, and Title Insurance production, costs, and underwriting margin.
- Review RFIG run-off risk-in-force, delinquencies, claim-reserve assumptions, and the effect of coverage rescissions and claim denials as the portfolio runs off.
- Assess investment-portfolio valuation and interest-rate sensitivity, reserve adequacy, reinsurance recoverability, and the eventual IRS guidance on loss-reserve discounting.
- Confirm the effects of the convertible-note share issuance on per-share results and follow the company’s dividend capacity and capital position.