Old Republic International Corporation — Q1 2023 Form 10-Q
Reporting period: Quarter ended March 31, 2023; filed May 5, 2023. Old Republic is an insurance underwriter with General Insurance, Title Insurance, and RFIG Run-off segments, plus a small life and accident business. Unless otherwise noted, figures are in millions of dollars.
Financial results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $1,758.7 | $2,206.6 | -20.3% |
| Operating revenue, excluding investment gains | $1,732.4 | $2,061.5 | -16.0% |
| Net premiums and fees earned | $1,555.2 | $1,919.0 | -19.0% |
| Net investment income | $137.8 | $106.2 | +29.7% |
| Net income | $199.8 | $306.3 | -34.8% |
| Net income excluding investment gains, a company-defined measure | $179.2 | $191.7 | -6.6% |
| Diluted earnings per share | $0.68 | $1.00 | -32.0% |
| Diluted EPS excluding investment gains | $0.61 | $0.63 | -3.2% |
| Operating cash flow | $156.6 | $278.4 | -43.8% |
Consolidated combined ratio was 92.7%, versus 91.9% a year earlier; below 100% indicates an underwriting profit. Pretax income excluding investment gains was $222.9, down 6.1%. Reported investment gains were $26.2, compared with $145.1 in Q1 2022, primarily reflecting much lower equity-security valuation gains.
Segments and material changes
- General Insurance: Earned premiums rose 5.9% to $965.1; pretax operating income increased 35.6% to $193.2. The segment combined ratio improved to 89.3% from 91.6%, including favorable prior-year reserve development of $53.4, mainly in commercial auto and workers’ compensation.
- Title Insurance: Premiums and fees fell 41.6% to $583.2, and pretax operating income declined 78.5% to $17.4. Management attributed the downturn to lower mortgage originations amid higher interest rates. The expense ratio rose to 96.7% from 90.0%, in part because of lower directly produced revenue.
- RFIG Run-off: Pretax operating income was $6.9, down 29.0%. The closed mortgage-insurance book continues to run off; results are expected to remain volatile given its limited scale.
- Investment income: Increased mainly because reinvestment yields were higher. Net investment gains fell to $26.2 from $145.1, including unrealized equity-security losses of $2.0 versus gains of $79.8 in Q1 2022.
Balance sheet, liquidity and capital
- Total assets were $25,397.9 at March 31, 2023, versus $25,159.4 at year-end 2022. Common shareholders’ equity was $6,331.9, up 2.6%; book value per share was $21.91, up 4.0% from year-end but down from $22.24 a year earlier.
- Cash and invested assets totaled $16,209.3. Fixed-income securities had fair value of $11,944.1 against amortized cost of $12,357.6, with $459.7 of gross unrealized losses; management attributed these primarily to interest-rate changes and reported no allowance for credit losses on the portfolio.
- Debt was $1,590.2, slightly below $1,597.0 at year-end. Debt represented 20.1% of total capitalization; the consolidated debt-to-equity ratio was 25.1%. Senior notes of $399.1 mature in 2024, and management said it plans to have liquidity to repay them if refinancing conditions are unfavorable.
- Cash increased to $93.7 from $81.0 at year-end. Operating cash flow was $156.6; investing activities provided $49.3, while financing activities used $193.3, including $133.7 of share repurchases and $71.2 of dividends.
- The parent’s liquidity depends principally on subsidiary distributions. Up to $924.9 of ordinary dividends could be received in 2023 without prior regulatory approval; $212.0 had been received through March 31.
Outlook, risks and unusual items
No specific consolidated earnings or revenue guidance is provided. Management emphasizes long-term underwriting and balance-sheet strength and targets a General Insurance combined ratio of 90%–95% over a full underwriting cycle. It cautions that short-term results may vary.
- Key exposures include changes in claim frequency and severity, inflation, natural disasters, legal developments, interest rates and investment values, and housing and mortgage-market conditions affecting Title Insurance and RFIG.
- Management identifies loss-reserve adequacy and recoverability of reinsured losses as critical estimates. Q1 included $69.2 of favorable prior-year reserve development; actual ultimate losses may differ materially from estimates and could affect future results.
- Fixed-income fair values remain sensitive to interest rates. The portfolio’s reported duration was 3.9 years; management estimated a 100-basis-point parallel rate increase could reduce its fair value by approximately 3.9%.
- Insurance-subsidiary dividends are subject to regulatory limits or approval. The filing also cites cybersecurity and business-interruption exposure. No material changes to previously disclosed risk factors were reported, and no material non-claim litigation exposure was identified.
- The company adopted the long-duration insurance-contract accounting standard on January 1, 2023; management reported no material impact on the consolidated financial statements.
- The $450 million share-repurchase authorization was completed after quarter-end. Q1 repurchases were reported as $133.7 in the cash-flow and equity statements; the filing gives differing average prices in its narrative and repurchase table.
Important facts for investors to verify
- Track Title Insurance recovery and mortgage-originations trends, as well as General Insurance premium growth and underwriting results.
- Assess the sustainability of favorable reserve development and the sensitivity of reported earnings to reserve revisions.
- Monitor investment yields, interest-rate-driven unrealized losses, and liquidity available for the 2024 note maturity.
- Confirm share-repurchase figures: the filing cites a Q1 average price of $25.10 in the narrative but $24.85 in the repurchase table; it reports 5,328,829 shares purchased in the table.
- Distinguish GAAP net income and EPS from management’s measures excluding investment gains, which are not GAAP measures.