Old Republic International Corporation — FY2011 Form 10-K
Reporting period: Year ended December 31, 2011; the filing also reports fourth-quarter results. Old Republic is an insurance holding company operating in General, Mortgage Guaranty, and Title insurance. PMA Capital is included for all of 2011, compared with only the fourth quarter of 2010.
Financial results and position
| Metric | 2011 | 2010 |
|---|---|---|
| Operating revenues | $4,529.9 million | $3,993.5 million |
| Net premiums and fees earned | $4,050.1 million | $3,573.5 million |
| Net investment income | $364.6 million | $379.0 million |
| Net realized investment gains | $115.5 million | $109.1 million |
| Pretax income (loss) | $(236.7) million | $27.6 million |
| Net income (loss) | $(140.5) million; $(0.55) per share | $30.1 million; $0.13 per share |
| Net operating income (loss), non-GAAP | $(218.5) million; $(0.86) per diluted share | $(40.6) million; $(0.16) per diluted share |
| Operating cash flow | $(94.9) million | $(282.2) million |
| Total assets | $16,050.4 million | $15,882.7 million |
| Debt | $912.8 million | $475.0 million |
| Shareholders’ equity / book value per share | $3,772.5 million / $14.76 | $4,121.4 million / $16.16 |
The consolidated composite underwriting ratio was 115.8%, versus 111.4% in 2010; a ratio above 100% indicates underwriting losses before investment income. General Insurance improved to 96.9% from 103.0%; Title improved to 99.0% from 101.0%; Mortgage Guaranty deteriorated to 261.5% from 168.0%. The filing does not present a single conventional consolidated profit margin.
Material changes versus prior year
- Operating revenues increased 13.4%, reflecting the full-year contribution of PMA and higher Title revenues. Excluding PMA, General Insurance premiums grew approximately 4.5%.
- General Insurance pretax operating income rose to $304.3 million from $172.7 million, with lower claim costs and improved underwriting; PMA contributed approximately $34.0 million of 2011 pretax operating income.
- Mortgage Guaranty pretax operating loss widened to $678.1 million from $260.8 million as claim costs increased 38% and earned premiums declined 10.8%.
- Title Insurance pretax operating income increased to $36.2 million from $9.4 million, supported by market-share gains and expense improvements.
- Net investment income fell 3.8%. Shareholders’ equity declined 8.5%, and book value per share fell 8.7%.
- Fourth-quarter net income was $55.2 million, or $0.22 per share, compared with a $13.3 million loss, or $0.05 per share, in fourth-quarter 2010.
Liquidity, capital, and significant items
- Cash and invested assets were $10,685.2 million at year-end, including $1,476.2 million of short-term investments and $93.0 million of cash. The investment portfolio was predominantly investment-grade fixed maturities; 99.1% of fixed maturities were rated investment grade.
- Management reported a 24.2% consolidated debt-to-equity ratio. The 8.0% convertible notes, with $316.2 million principal outstanding, were due in May 2012; contractual debt payments due in 2012 totaled $319.8 million. The company said it had sufficient liquid resources to redeem those notes and a substantial portion of the 3.75% notes.
- The holding company depends principally on subsidiary dividends. Up to $361.4 million could be paid to the parent in 2012 without prior regulatory approval, subject to statutory restrictions.
- 2011 included $50.2 million of investment impairment losses. Mortgage Guaranty recorded $39.4 million of severance and similar charges and unrecoverable deferred acquisition costs, plus a $10.7 million goodwill impairment.
- Operating cash flow improved year over year but remained negative. Cash dividends paid were $178.4 million; the annual dividend was $0.70 per share.
Outlook, risks, and contingencies
- Mortgage Guaranty: RMIC stopped writing new policies on August 31, 2011 after its capital waiver expired and entered run-off. On January 19, 2012, North Carolina placed RMIC under administrative supervision and required it to pay 50% of allowed claims, deferring the balance to a temporary statutory surplus account for an initial period of up to one year. Supervision is not receivership, but may be changed or lapse. Old Republic stated it would provide no further capital to the segment and its remaining investment was $191.2 million.
- Management said mortgage losses were more likely than not to remain material in 2012 and 2013. Its model projected eventual profitability through 2020, but depended on assumptions about economic conditions, claims, rescissions, and housing and mortgage markets. Management gave no assurance the business could resume new underwriting.
- Mortgage Guaranty results remain exposed to housing prices, unemployment, claim severity, loan modifications, rescission disputes, and the future role of Fannie Mae and Freddie Mac. The supervision order reduces immediate cash claim payments but does not eliminate potential statutory impairment.
- Other material risks include uncertain insurance reserves, long-tail asbestos and environmental claims, catastrophe and terrorism exposures, reinsurer credit risk, interest-rate and equity-market movements, regulatory limits on subsidiary dividends, and competitive pressures.
- Several significant lawsuits and arbitrations involving mortgage and credit indemnity claims, title insurance, and alleged RESPA or other violations remained pending. The company said it could not reasonably estimate potential liability and did not believe material adverse impact was probable; outcomes remain uncertain.
Important facts for investors to verify
- RMIC’s statutory capital, claims experience, supervision terms, deferred claim balances, and any effect on Old Republic’s debt covenants or access to subsidiary dividends.
- Whether 2012–2013 Mortgage Guaranty losses, reserve estimates, and management’s long-term profitability assumptions remain supportable.
- Repayment or refinancing of the $316.2 million 8.0% notes due May 2012 and the company’s overall liquidity following negative operating cash flow.
- Underlying General and Title underwriting trends, separating PMA acquisition effects from organic growth and investment gains.
- Developments in material litigation and any resulting claims, settlements, or changes to reserves.
- Future reserve development and the sensitivity of book value and earnings to interest rates, investment impairments, and insurance claim assumptions.