Business Context and Reporting Period
Company: Old Republic International Corp.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2011
Business Overview: The Company operates three major segments: General Insurance (property and liability), Mortgage Guaranty, and Title Insurance. A small life and health business is included in corporate operations. The reporting period includes the impact of the PMA Capital Corporation merger completed in October 2010.
Key Financial Metrics
| Metric ($ in Millions) | Q2 2011 | Q2 2010 | YTD 2011 | YTD 2010 |
|---|---|---|---|---|
| Total Revenues | $1,094.9 | $1,008.1 | $2,224.5 | $1,940.7 |
| Net Income (Loss) | $(66.3) | $57.4 | $(79.2) | $82.5 |
| Diluted EPS | $(0.26) | $0.23 | $(0.31) | $0.35 |
| Net Investment Income | $93.1 | $95.0 | $184.6 | $191.3 |
| Total Assets | $16,086.9 | $15,882.7 (Dec '10) | - | - |
| Total Debt | $923.1 | $475.0 (Dec '10) | - | - |
| Shareholders' Equity | $3,972.4 | $4,121.4 (Dec '10) | - | - |
| Composite Underwriting Ratio | 118.4% | 109.2% | 114.6% | 108.1% |
Material Changes vs. Prior Period
- Profitability Reversal: The Company reported a net loss of $66.3 million for Q2 2011, a significant decline from a net income of $57.4 million in Q2 2010. This was driven by a $108.3 million pretax loss compared to an $80.8 million pretax gain in the prior year.
- Investment Realized Gains: Net realized investment gains dropped from $72.8 million in Q2 2010 to a net loss of $2.9 million in Q2 2011. The 2011 result included $8.0 million in impairment losses, whereas 2010 included significant gains from the sale of previously impaired securities.
- Debt Increase: Total debt increased to $923.1 million from $475.0 million at year-end 2010, primarily due to a $550.0 million public offering of Convertible Senior Notes in March 2011.
- Segment Performance:
- General Insurance: Improved pretax operating income to $71.0 million (Q2 2011) from $29.3 million (Q2 2010), aided by the PMA acquisition and lower claim costs.
- Mortgage Guaranty: Deteriorated significantly with a pretax operating loss of $175.8 million (Q2 2011) compared to $22.1 million (Q2 2010), driven by a claim ratio of 253.9% due to higher claim payments and severity.
- Title Insurance: Remained stable with a slight increase in pretax operating income to $5.5 million (Q2 2011) from $4.0 million (Q2 2010).
Guidance, Outlook, and Risks
- Mortgage Guaranty Capital Adequacy: The Company's flagship mortgage guaranty carrier is operating under a regulatory capital waiver extended to August 31, 2011. Management anticipates that new business production may cease temporarily if approval to underwrite through a separately capitalized subsidiary is not secured. The existing book of business may be placed into run-off mode.
- Legal Proceedings: Significant litigation includes class actions against the Title Insurance subsidiary regarding reissue/refinance credits and price-fixing allegations (mostly dismissed or stayed). Additionally, disputes exist with Countrywide/Bank of America and J.P. Morgan Chase regarding mortgage insurance coverage rescissions, with damages currently unquantified.
- Investment Portfolio: The portfolio is heavily weighted toward fixed-maturity securities (approx. 83%). Management notes that rising interest rates typically reduce fair value but enhance yields. The Company recognized $8.0 million in other-than-temporary impairments (OTTI) in the first half of 2011.
- Dividends: The Company has paid uninterrupted dividends since 1942. The quarterly cash dividend was $0.1750 per share for Q2 2011.
Investor Verification Checklist
- Mortgage Segment Run-off: Verify the status of the regulatory waiver and the likelihood of the mortgage guaranty segment entering a run-off mode, which could impact long-term revenue growth.
- Claim Reserve Adequacy: Review the development of claim reserves in the Mortgage Guaranty segment, where the claim ratio exceeded 250%, and assess the impact of reduced claim rescissions on future profitability.
- Debt Service: Confirm the impact of the new $550 million Convertible Senior Notes (3.75% interest) on future interest expenses and liquidity.
- Legal Exposure: Monitor the outcomes of the pending litigation regarding title insurance pricing and mortgage insurance rescissions, as damages are currently unquantified.
- Investment Impairments: Track the $8.0 million OTTI charge and the valuation of equity securities in mortgage guaranty businesses (MGIC and PMI Group), which remain below original cost.