Old Republic International Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. Old Republic is an insurance holding company operating General Insurance, Title Insurance, and the RFIG mortgage-guaranty and consumer-credit run-off business.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Operating revenues | $1,369.3 million | $1,311.3 million | +4.4% |
| Total revenues, including realized investment gains | $1,413.5 million | $1,330.2 million | +6.3% |
| Pretax operating income (company-defined, non-GAAP) | $138.1 million | $134.8 million | +2.5% |
| Net income | $122.9 million | $103.4 million | +18.9% |
| Diluted EPS | $0.43 | $0.36 | — |
| Net investment income | $96.3 million | $91.4 million | +5.3% |
| Net realized investment gains | $44.1 million pretax | $18.8 million pretax | +133.9% |
| Operating cash flow | $125.9 million | $190.8 million | -34.0% |
Net income included $28.7 million of after-tax realized investment gains, versus $12.2 million a year earlier. Net operating income, another company-defined non-GAAP measure, was $94.2 million, up 3.4%. The consolidated composite underwriting ratio was 95.5%, compared with 95.2%; the filing reports a 46.1% claim ratio and 49.4% expense ratio.
Segment results
- General Insurance: Operating revenue of $824.6 million (+2.7%) and pretax operating income of $87.0 million (+6.2%). Net premiums earned rose 2.2%; composite underwriting ratio improved to 96.9% from 97.3%. Management cited growth in trucking and home-protection coverages, offset by lower construction-account volume amid competitive pricing.
- Title Insurance: Operating revenue of $483.6 million (+10.7%) and pretax operating income of $21.4 million (+34.3%). Management attributed higher premiums and fees to favorable mortgage-rate and housing/property-market conditions, while noting recently implemented mortgage-disclosure rules were adversely affecting transaction closings.
- RFIG run-off: Revenue of $53.7 million, down from $64.4 million; pretax operating income fell 21.3% to $27.7 million. Premiums declined as the mortgage-guaranty and consumer-credit books run off. CCI remained loss-making, with a $6.3 million pretax operating loss.
Financial position, cash flow, and liquidity
- Total assets were $17.43 billion at March 31, 2016, up 1.9% from year-end 2015. Investments totaled $11.66 billion; cash was $137.1 million, down from $159.8 million at year-end.
- Shareholders’ equity was $4.14 billion, up 6.7% from year-end; book value per share was $16.00 versus $15.02. The increase reflected earnings and higher unrealized investment gains, partly offset by dividends.
- Total debt was $982.3 million, compared with $952.8 million at year-end. Debt-to-equity was 23.7%; debt represented 19.2% of total capitalization. Debt includes $546.4 million of 3.75% convertible notes due 2018 and $395.2 million of 4.875% notes due 2024.
- Operating cash flow was positive but lower year over year. Investing activities used $128.8 million and financing activities used $19.8 million; cash decreased $22.7 million during the quarter. Cash dividends paid were $48.3 million, or $0.1875 per common share.
- Management said up to $493.8 million of subsidiary dividends could be paid to the parent in 2016 without prior regulatory approval and expected permitted dividends to cover anticipated parent-company needs. Insurance-subsidiary dividends remain subject to legal and regulatory restrictions.
Changes, outlook, and material matters
- Excluding RFIG, pretax operating earnings increased 10.9%, according to management; the run-off segment’s decline limited consolidated pretax operating-income growth. Higher investment income supported operating results, while larger realized gains materially boosted reported net income.
- Unrealized investment gains increased shareholders’ equity: accumulated other comprehensive income was $210.2 million at quarter-end versus $29.2 million at December 31, 2015. Management noted that interest-rate and equity-market movements can change fair values and equity; rising rates may reduce existing bond values.
- The investment portfolio was approximately 82% fixed-maturity and short-term investments and 18% equities. 91.3% of fixed maturities were investment grade, down from 93.8% at year-end. Energy and extractive-industry exposures contributed to unrealized losses; the company recorded no other-than-temporary impairment losses in the quarter.
- RMIC and RMICNC remain under North Carolina regulatory supervision and operate in run-off. Management reported RMIC was statutorily solvent at March 31, 2016, and believed the regulatory plan made a debt-default trigger unlikely in the foreseeable future. The note indentures nevertheless identify insolvency proceedings involving RMIC as a potential event of default.
- Countrywide and Bank of America mortgage-insurance proceedings were settled and dismissed in late 2015; associated indemnity and litigation costs were within established reserves. Other disclosed litigation includes RESPA class-action claims and patent disputes. Management did not believe the matters were likely to have a material adverse effect, but said outcomes are uncertain and additional costs could arise beyond current reserves.
- The IRS was examining the company’s 2011–2013 federal income tax returns, including refund claims. Management reported no known tax uncertainties expected to cause significant changes in unrecognized tax benefits in the next 12 months.
- No specific earnings or revenue guidance was provided. Management emphasized long-term underwriting and financial-strength objectives and cautioned that quarterly results are affected by claims, competition, investment yields, housing and mortgage conditions, inflation, and legal developments. It anticipated general-insurance claim ratios would gradually move toward long-term annual targets in the high-60% to low-70% range; this is commentary, not formal guidance.
Most important facts for investors to verify
- Whether operating earnings growth persists without reliance on realized investment gains, and how portfolio income and market valuations evolve.
- General Insurance reserve development and claim-cost trends, particularly workers’ compensation and general liability; reserve estimates are judgmental and actual outcomes may differ.
- RFIG run-off claims, delinquency and cure trends, remaining risk in force, regulatory status, and RMIC’s statutory solvency.
- Title Insurance revenue and margins as housing activity, mortgage availability, and disclosure-rule effects change.
- Investment portfolio credit quality and energy-related exposures, including the effect of interest-rate or equity-price changes on equity and potential impairment charges.
- Debt maturities and covenants, subsidiary dividend capacity, and the potential effect of litigation or tax matters on cash flows and reserves.