Old Republic International Corporation — Q1 2013 Form 10-Q
Business context and period. This unaudited filing covers the quarter ended March 31, 2013, compared with the quarter ended March 31, 2012. Old Republic operates through General Insurance, Title Insurance, and the RFIG mortgage-guaranty and consumer-credit-indemnity run-off segment. RFIG is not writing new business; prior-period segment results were reclassified to reflect the combined run-off segment.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Total operating revenues | $1,265.4 million | $1,155.1 million |
| Total premiums and fees | $1,165.6 million | $1,037.5 million |
| Net investment income | $79.3 million | $85.8 million |
| Income before taxes | $84.5 million | $(2.6) million |
| Net income | $56.2 million | $0.4 million |
| Diluted EPS | $0.21 | Rounded to $0.00 |
| Operating cash flow | $143.2 million | $49.0 million |
Management reported net operating income of $53.2 million, or $0.20 per diluted share, versus a $1.4 million operating loss, or $0.01 per diluted share, in Q1 2012. This non-GAAP measure excludes realized investment gains; Q1 2013 net income included $4.5 million of realized gains. The effective tax rate was 33.5%, compared with a tax benefit in the prior-year quarter.
Underwriting and segments. The consolidated composite ratio improved to 99.2% from 107.0% (below 100% indicates underwriting profit); excluding RFIG, it was 96.5% versus 97.1%. The consolidated benefits-and-claims ratio fell to 50.1% from 59.4%, while the expense ratio rose to 49.1% from 47.6%.
- General Insurance: Operating revenue rose to $681.8 million from $645.8 million; pretax operating income declined to $76.0 million from $80.5 million. Excluding CCI run-off, the composite ratio increased to 96.4% from 95.7%, with higher claims costs partly offset by a lower expense ratio.
- Title Insurance: Revenue increased to $467.7 million from $362.2 million; pretax operating income rose to $21.5 million from $9.4 million. Premiums and fees grew 29.7%, supported by market-share gains and mortgage refinancing; the composite ratio improved to 96.4% from 98.7%.
- RFIG run-off: Revenue decreased to $96.9 million from $126.0 million; pretax operating loss narrowed to $20.2 million from $91.2 million. Lower mortgage-guaranty claims and expenses improved results, though CCI claims reflected increased litigation estimates and reduced expected salvage recoveries.
Cash, capital, and liquidity. At March 31, total assets were $16.41 billion and common shareholders’ equity was $3.67 billion, up from $16.23 billion and $3.60 billion at December 31, 2012. Cash and invested assets totaled $10.99 billion; cash was $122.6 million. Debt was $570.0 million, mainly $550.0 million of 3.75% convertible notes due 2018. The reported debt-to-equity ratio was 15.5%. The quarterly common dividend was $0.18 per share; cash dividends paid totaled $46.0 million. Management said permitted subsidiary dividends of up to $350.6 million in 2013, without prior regulatory approval, were adequate for anticipated parent-company cash needs.
Material changes and management commentary
- Operating revenue grew 9.5%; revenue excluding the run-off business grew 13.5%. Management said this was the first quarter of positive consolidated operating earnings in ten quarters.
- Title Insurance delivered the strongest growth and improvement in operating earnings. General Insurance earnings edged down, and investment income declined across segments amid low yields.
- Operating cash flow increased to $143.2 million from $49.0 million. Investing activities used $72.1 million, principally reflecting purchases of fixed-maturity securities; financing activities used $49.7 million, including common dividends.
- Shareholders’ equity per share was $14.31, up from $14.03 at year-end, but below $14.74 at March 31, 2012. The increase from year-end reflected earnings and unrealized investment gains, partly offset by dividends.
Outlook, risks, and contingencies
The filing provides no specific earnings or revenue guidance. Management emphasizes long-term underwriting performance and financial strength, and cautions that quarterly results are affected by insurance cycles, claims development, interest rates, housing and mortgage conditions, and other economic and legal developments. General Insurance faces upward pressure on workers’ compensation and liability claim costs; investment income remains exposed to low yields.
- Mortgage-guaranty run-off and debt covenant exposure: RMIC and RMICNC are under North Carolina regulatory supervision and operate under an approved run-off plan. Generally, 60% of settled claims are paid in cash and 40% retained as deferred payment obligations; accumulated DPO reserves were $374.8 million at March 31. RMIC is a “Significant Subsidiary” under the convertible notes: a qualifying insolvency-related court proceeding could trigger default and accelerate repayment. Management believes the regulatory plan precludes such an event for the foreseeable future, but gives no assurance it could address a future default under stressful market conditions.
- Litigation: Pending matters include mortgage-insurance coverage disputes and RESPA-related suits, title-insurance class actions, and other claims. Bank of America seeks damages exceeding $320 million plus interest and unspecified punitive damages in one credit-indemnity dispute. Other claims seek unspecified damages. Management says it does not believe the matters are probable to have a material adverse effect, but notes it generally cannot reasonably estimate potential liability and gives no assurance.
- Reserves and investments: Loss reserves depend on estimates of long-tail claims, mortgage defaults, rescissions, and recoveries; actual outcomes may differ. The company reported no other-than-temporary impairment charges in either comparison quarter. Fixed-income fair values are sensitive to interest-rate changes; management estimated a 100-basis-point parallel rate increase could reduce the long-term fixed-maturity portfolio’s fair value by approximately 4%.
- The company expects $15.4 million of pension contributions during the remainder of 2013. Management reported no material change in disclosed risk factors or market-risk exposures and stated disclosure controls were effective.
Investor verification points
- Reconcile GAAP net income of $56.2 million with management’s $53.2 million non-GAAP operating income and the related per-share measures.
- Monitor title-market growth and whether its underwriting improvement persists, alongside General Insurance claims trends and investment-income pressure.
- Track RFIG claim development, the $374.8 million DPO reserve, regulatory supervision, and the remaining mortgage-insurance risk in force.
- Assess the convertible notes’ potential acceleration risk tied to RMIC and the feasibility of management’s identified liquidity responses.
- Follow the material litigation, including the Bank of America claim, and changes to recorded legal liabilities or reserve assumptions.
- Review subsidiary dividend capacity, investment valuations and interest-rate sensitivity, and the effect of unrealized gains and losses on book value.