Old Republic Reports Results for the Fourth Quarter and Full Year 2019

News Release

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January 23, 2020 at 9:00 AM EST

Old Republic Reports Results for the Fourth Quarter and Full Year 2019

CHICAGO, Jan. 23, 2020 /PRNewswire/ -- Old Republic International Corporation (NYSE: ORI) today reported the following consolidated results (a):

 



Quarters Ended December 31,


Years Ended December 31,



2019


2018


% Change


2019


2018


% Change

Pretax income (loss)


$

346.0



$

(137.5)



351.6

%


$

1,322.4



$

438.1



201.8

%

Pretax investment gains (losses) included in pretax income (loss)


167.4



(308.2)



154.3



636.1



(235.6)



N/M


Pretax income (loss) excluding investment gains (losses)


$

178.5



$

170.6



4.6

%


$

686.2



$

673.7



1.9

%














Net income (loss)


$

275.8



$

(106.5)



N/M



$

1,056.4



$

370.5



185.1

%

Net of tax investment gains (losses) included in net income (loss)


132.2



(243.3)



154.4

%


502.2



(185.9)



N/M


Net income (loss) excluding investment gains (losses)


$

143.5



$

136.8



4.9

%


$

554.2



$

556.4



-0.4

%

 

Consolidated pretax and net income, exclusive of all investment gains or (losses), for the fourth quarter and year ended December 31, 2019 were slightly higher to basically flat vis-a-vis 2018. Consolidated results were driven by greater profitability in the Title Insurance segment. Total and per share net income continued to be significantly impacted by the required inclusion since January 1, 2018 of changes in the fair value of equity securities pursuant to Generally Accepted Accounting Principles ("GAAP"). Please see the information below and on pages 2 and 3.

 


FINANCIAL HIGHLIGHTS (a)




Quarters Ended December 31,


Years Ended December 31,



SUMMARY INCOME STATEMENTS:

2019


2018


% Change


2019


2018


% Change



Revenues:














Net premiums and fees earned

$

1,613.8



$

1,448.4



11.4

%


$

5,994.2



$

5,703.9



5.1

%



Net investment income

112.8



110.3



2.3



450.7



431.8



4.4




Other income

35.1



30.4



15.5



132.6



121.6



9.0




Total operating revenues

1,761.8



1,589.1



10.9



6,577.6



6,257.4



5.1




Investment gains (losses):














Realized from actual transactions

7.3



3.3





38.6



58.2






Realized from impairments







(2.0)








Unrealized from changes in fair value of equity securities

160.1



(311.6)





599.5



(293.8)






Total investment gains (losses)

167.4



(308.2)





636.1



(235.6)






Total revenues

1,929.3



1,280.9





7,213.7



6,021.8






Operating expenses:














Claim costs

667.5



639.9



4.3



2,572.7



2,460.7



4.5




Sales and general expenses

906.5



770.6



17.6



3,278.5



3,080.6



6.4




Interest and other charges

9.2



7.8



16.8



40.0



42.2



-5.2




Total operating expenses

1,583.2



1,418.0



11.6

%


5,891.3



5,583.7



5.5

%



Pretax income (loss)

346.0



(137.5)





1,322.4



438.1






Income taxes (credits)

70.2



(31.0)





265.9



67.5






Net income (loss)

$

275.8



$

(106.5)





$

1,056.4



$

370.5


































COMMON STOCK STATISTICS:














Net income (loss) per share: Basic

$

0.92



$

(0.36)





$

3.52



$

1.26






                                                 Diluted

$

0.91



$

(0.36)





$

3.51



$

1.24






Components of net income (loss) per share:














Basic net income (loss) excluding investment gains (losses)

$

0.48



$

0.45



6.7

%


$

1.85



$

1.89



-2.1

%



Net investment gains (losses):














Realized from actual transactions and impairments

0.02



0.01





0.10



0.16






Unrealized from changes in fair value of equity securities

0.42



(0.82)





1.57



(0.79)






Basic net income (loss)

$

0.92



$

(0.36)





$

3.52



$

1.26






Diluted net income (loss) excluding investment gains (losses)

$

0.47



$

0.45



4.4

%


$

1.84



$

1.86



-1.1

%



Net investment gains (losses):














Realized from actual transactions and impairments

0.02



0.01





0.10



0.15






Unrealized from changes in fair value of equity securities

0.42



(0.82)





1.57



(0.77)






Diluted net income (loss)

$

0.91



$

(0.36)





$

3.51



$

1.24






Cash dividends on common stock (b)

$

0.200



$

0.195





$

1.800



$

0.780






Book value per share







$

19.98



$

17.23



16.0

%

















(a) All amounts in this report are stated in millions except common stock data and percentages. / (b) 2019 includes a special $1.00 dividend.












 

Old Republic's business is necessarily managed for the long run. In this context management's key objectives are to achieve a continuous, long-term improvement in operating results, and to ensure balance sheet strength for the primary needs of the insurance subsidiaries' underwriting and related services business. In this view, the evaluation of periodic and long-term results excludes consideration of all investment gains or (losses). In management's opinion, this focus provides a better way to realistically analyze, evaluate, and establish accountability for the results and benefits that arise from the basic operations of the business. According to the tenets of GAAP, however, net income, which includes all specifically defined realized and unrealized investment gains or (losses), is the measure of total profitability.

In management's opinion, the inclusion of realized investment gains or (losses) in net income can mask the reality and trends in the fundamental operating results of the insurance business. That's because their realization is, more often than not, highly discretionary. It's usually affected by such randomly occurring factors as the timing of individual securities sales, tax-planning considerations, and modifications of investment management judgments about the direction of securities markets or the prospects of individual investees or industry sectors. Moreover, the inclusion of unrealized investment gains or (losses) in equity (but not fixed maturity) securities required under GAAP can mask such operating results and trends therein and thus lead to even greater period-to-period fluctuations in reported net income. The impact of the continuous volatility in stock market valuations is most evident in its net of tax effect on net income for the periods reported upon.

The table on the next page shows an array of numbers purposefully arranged in 10 sections. Management believes the information in sections A to G and J highlight the most meaningful, realistic indicators of ORI's segmented and consolidated financial performance. The information underscores the necessity of reviewing reported results by separating the fait-accompli of economic realities from the transient vagaries of securities markets and their above-noted impact on reported GAAP net income.

 


Major Segmented and Consolidated Elements of Income (Loss)


Quarters Ended December 31,


Years Ended December 31,


2019


2018


% Change


2019


2018


% Change

A. Net premiums, fees, and other income:












General insurance

$

880.5



$

835.7



5.4

%


$

3,432.4



$

3,277.1



4.7

%

Title insurance

716.8



592.5



21.0



2,489.2



2,336.1



6.6


Corporate and other

3.1



3.4



-8.7



13.4



14.6



-8.8


Other income

35.1



30.4



15.5



132.6



121.6



9.0


Subtotal

1,635.6



1,462.1



11.9



6,067.6



5,749.5



5.5


RFIG run-off business (c)

13.3



16.6



-19.7



59.2



75.9



-22.0


Consolidated

$

1,649.0



$

1,478.8



11.5

%


$

6,126.8



$

5,825.5



5.2

%













B. Underwriting and related












services income (loss):












General insurance

$

10.2



$

13.2



-22.2

%


$

84.9



$

91.2



-6.9

%

Title insurance

67.3



52.5



28.3



193.4



185.1



4.6


Corporate and other

(4.6)



(4.5)



-2.6



(15.5)



(21.9)



29.1


Subtotal

72.9



61.1



19.3



262.8



254.3



3.4


RFIG run-off business (c)

2.0



7.0



-71.7



12.7



29.7



-57.3


Consolidated

$

74.9



$

68.2



9.8

%


$

275.6



$

284.0



-3.0

%

C. Consolidated underwriting ratio:












Claim ratio

41.4

%


44.2

%




42.9

%


43.1

%



Expense ratio

53.7



50.9





52.2



51.6




Composite ratio

95.1

%


95.1

%




95.1

%


94.7

%















D. Net investment income:












General insurance

$

90.6



$

87.2



3.9

%


$

356.4



$

341.0



4.5

%

Title insurance

10.6



10.0



5.9



41.4



38.8



6.6


Corporate and other

7.2



8.3



-13.5



35.1



31.7



10.7


Subtotal

108.4



105.5



2.7



433.0



411.7



5.2


RFIG run-off business

4.3



4.7



-7.2



17.6



20.1



-12.6


Consolidated

$

112.8



$

110.3



2.3

%


$

450.7



$

431.8



4.4

%

E. Interest and other charges (credits):












General insurance

$

16.4



$

15.6





$

71.1



$

68.3




Title insurance

0.8



1.3





4.1



4.6




Corporate and other (a)

(8.0)



(9.0)





(35.2)



(30.6)




Subtotal

9.2



7.8





40.0



42.2




RFIG run-off business












Consolidated

$

9.2



$

7.8



16.8

%


$

40.0



$

42.2



-5.2

%













F. Segmented and consolidated












pretax income (loss) excluding












investment gains (losses)(B+D-E):












General insurance

$

84.4



$

84.8



-0.4

%


$

370.2



$

363.9



1.7

%

Title insurance

77.1



61.1



26.1



230.8



219.3



5.2


Corporate and other

10.5



12.8



-17.6



54.8



40.4



35.5


Subtotal

172.1



158.8



8.4



655.9



623.8



5.2


RFIG run-off business (c)

6.4



11.8



-45.9



30.3



49.9



-39.3


Consolidated

178.5



170.6



4.6

%


686.2



673.7



1.9

%

Income taxes (credits) on above (b)

35.0



33.8





132.0



117.2




G. Net income (loss) excluding












investment gains (losses)

143.5



136.8



4.9

%


554.2



556.4



-0.4

%

H. Consolidated pretax investment












gains (losses):












Realized from actual transactions












and impairments

7.3



3.3





36.6



58.2




Unrealized from changes in












fair value of equity securities

160.1



(311.6)





599.5



(293.8)




Total

167.4



(308.2)





636.1



(235.6)




Income taxes (credits) on above

35.1



(64.8)





133.8



(49.6)




Net of tax investment gains (losses)

132.2



(243.3)





502.2



(185.9)




 I. Net income (loss)

$

275.8



$

(106.5)





$

1,056.4



$

370.5




J. Consolidated operating cash flow







$

936.2



$

760.5




























(a) Includes consolidation/elimination entries. (b) The effective tax rates applicable to pretax income excluding investment gains or losses were 19.6% and 19.2% for the fourth quarter and year ended December 31, 2019, respectively, and 19.8% and 17.4% for the fourth quarter and year ended 2018, respectively. (c) See Note (a) in RFIG Run-off Segments Results on page (6).

 

General Insurance Segment Results - The table below reflects the major elements affecting this segment's financial performance for the periods shown.

 


General Insurance Summary Operating Results


Quarters Ended December 31,


Years Ended December 31,


2019


2018


% Change


2019


2018


% Change

Net premiums earned

$

880.5



$

835.7



5.4

%


$

3,432.4



$

3,277.1



4.7

%

Net investment income

90.6



87.2



3.9



356.4



341.0



4.5


Other income

34.9



30.7



13.7



131.9



121.3



8.8


Operating revenues

1,006.0



953.7



5.5



3,920.8



3,739.4



4.8


Claim costs

642.6



626.5



2.6



2,464.6



2,365.8



4.2


Sales and general expenses

262.4



226.8



15.7



1,014.7



941.3



7.8


Interest and other charges

16.4



15.6



5.4



71.1



68.3



4.1


Operating expenses

921.6



868.9



6.1



3,550.5



3,375.5



5.2


Segment pretax operating income (loss) (a)

$

84.4



$

84.8



-0.4

%


$

370.2



$

363.9



1.7

%













Claim ratio

73.0

%


75.0

%




71.8

%


72.2

%



Expense ratio

25.8



23.5





25.7



25.0




Composite ratio

98.8

%


98.5

%




97.5

%


97.2

%



__________________

(a)

In connection with the combined run-off mortgage guaranty ("MI") and consumer credit indemnity ("CCI"), $3.0 and $3.8 of pretax operating income for the fourth quarter and year 2018 were retained by certain general insurance companies pursuant to various quota share and stop loss reinsurance agreements. All of these amounts historically have been reclassified such that 100% of the CCI run-off business is reported in the RFIG run-off segment. Effective July 1, 2019, the results of the CCI run-off business are being classified in the General Insurance Segment for all future periods.

 

General insurance underwriting/service profitability, gauged by the composite underwriting ratios, declined slightly in the latest quarter and 2019 as a whole. Revenue-wise earned premiums edged up in mid single digits in both of these periods. With few exceptions, premiums grew for most types of coverages and markets served. The largest contributions principally stemmed from commercial automobile (trucking), national accounts, and executive indemnity coverages. The cumulative effects of recent years' and ongoing premium rate increases for most insurance products, other than workers' compensation coverages, along with new business production were main factors in top line growth. Net investment income growth was principally driven by a moderately higher invested asset base with dividends from equity security investments providing the greatest gain.

As the above table shows, the consolidated general insurance ratio of claim costs to net premiums earned declined slightly in 2019. As such, it continues to reflect the past several years' fairly consistent downtrends, and the effects of claim development shown in the following table. Small year-over-year changes in periodic expense ratios are generally reflective of ongoing product mix dynamics, and the variability of attendant sales and general expenses among various coverages.

 






Effect of Prior Periods'










(Favorable)/


Claim Ratio Excluding


Reported


Unfavorable Claim


Prior Periods' Claim


Claim Ratio


Reserves Development


Reserves Development

2015


74.1

%




1.5

%




72.6

%


2016


73.0





0.3





72.7



2017


71.8





0.7





71.1



2018


72.2









72.2



2019


71.8

%




0.4

%




71.4

%


4th Quarter 2018


75.0

%




(0.9)

%




75.9

%


4th Quarter 2019


73.0

%




2.9

%




70.1

%


 

Quarterly and annual claim ratios and the trends they display, may not be particularly meaningful indicators of future outcomes for ORI's liability-oriented mix of business and its relatively long claim payment patterns. Absent significant economic and insurance industry dislocations in the foreseeable future, management's targets are for annually reported claim ratio averages in the high 60% to low 70% range, and assuming the current mix of coverages, overall expense ratio averages between 23% and 25%, with resulting composite ratio averages between 90% and 95%.

 

Title Insurance Segment Results - The table below shows the major elements affecting this segment's financial performance for the periods shown.

 


Title Insurance Summary Operating Results


Quarters Ended December 31,


Years Ended December 31,


2019


2018


% Change


2019


2018


% Change

Net premiums and fees earned

$

716.8



$

592.5



21.0

%


$

2,489.2



$

2,336.1



6.6

%

Net investment income

10.6



10.0



5.9



41.4



38.8



6.6


Other income

0.1



(0.2)



N/M


0.7



0.3



80.2


Operating revenues

727.6



602.2



20.8



2,531.3



2,375.4



6.6


Claim costs

14.0



3.2



N/M


67.4



48.3



39.4


Sales and general expenses

635.6



536.4



18.5



2,228.9



2,103.0



6.0


Interest and other charges

0.8



1.3



-40.2



4.1



4.6



-10.7


Operating expenses

650.4



541.1



20.2



2,300.4



2,156.0



6.7


Segment pretax operating income (loss)

$

77.1



$

61.1



26.1

%


$

230.8



$

219.3



5.2

%













Claim ratio

2.0

%


0.6

%




2.7

%


2.1

%



Expense ratio

88.6



90.6





89.5



90.0




Composite ratio

90.6

%


91.2

%




92.2

%


92.1

%



 

2019 year-over-year comparisons of revenues from title premiums and fees reflect the continuation of a low interest rate environment resulting in a favorable real estate market coupled with a stable market share position. Claim costs trended higher as favorable development of prior years' claim reserve estimates edged down. The following table shows recent annual and interim periods' claim ratios and the effects of claim development trends:

 






Effect of Prior Periods'










(Favorable)/


Claim Ratio Excluding


Reported


Unfavorable Claim


Prior Periods' Claim


Claim Ratio


Reserves Development


Reserves Development

2015


4.9

%




(0.6)

%




5.5

%


2016


3.8





(1.1)





4.9



2017


0.9





(3.3)





4.2



2018


2.1





(2.0)





4.1



2019


2.7

%




(1.3)

%




4.0

%


4th Quarter 2018


0.6

%




(3.5)

%




4.1

%


4th Quarter 2019


2.0

%




(2.0)

%




4.0

%


 

Net investment income is reflective of both a moderately growing invested asset base, and the overall investment yield environment. The largest portion of investment income growth stemmed from dividends earned from the equity securities portfolio. Operating expenses remained generally aligned with revenues from premiums and fees for all periods reported upon, except in the final quarter of 2019 when they grew at a relatively slower rate than such revenues. In combination, these factors produced significantly greater pretax operating income for 2019's fourth quarter.

 

RFIG Run-off Segment Results - The table below reflects the major elements affecting this segment's financial performance for the periods shown.

 


RFIG Run-off Summary Operating Results (a)


Quarters Ended December 31,


Years Ended December 31,


2019


2018


% Change


2019


2018


% Change

A. Mortgage Insurance (MI)












Net premiums earned

$

13.3



$

16.3



-18.1

%


$

58.8



$

74.4



-20.9

%

Net investment income

4.3



4.5



-2.5



17.3



19.2



-9.9


Claim costs

8.2



8.8



-6.6



32.3



32.1



0.7


MI pretax operating income (loss)

$

6.4



$

8.7



-26.7

%


$

29.2



$

46.7



-37.3

%













Claim ratio

61.5

%


53.9

%




55.0

%


43.2

%



Expense ratio

23.5



20.3





24.8



20.0




Composite ratio

85.0

%


74.2

%




79.8

%


63.2

%















B. Consumer Credit Indemnity (CCI) (a)












CCI pretax operating income (loss)

$



$

3.0





$

1.0



$

3.2
















C. Total MI and CCI Run-off business (a)












Segment pretax operating income (loss)

$

6.4



$

11.8



-45.9

%


$

30.3



$

49.9



-39.3

%













__________________

(a)

RFIG segment pretax operating income (loss) includes amounts attributable to the Company's consumer credit indemnity run-off business of $ - and $1.0 for the fourth quarter and year 2019, respectively. These amounts were $3.0 and $3.2 for the fourth quarter and year 2018, respectively. Results for the CCI coverages are expected to be immaterial in the remaining run-off periods. Effective July 1, 2019, these results have been re-classified to the General Insurance Segment for all future periods.

 

Pretax operating results of the run-off MI business reflect: (a) the expected, continuing drop in net earned premiums from declining risk in force, and (b) lower investment income from a smaller invested asset base as claim and expense payments exceed premium receipts.

As indicated in the far right column of the following table, MI claim ratios have continued to decline fairly consistently, favorable developments of prior periods' reserves notwithstanding. The downtrend is largely due to a combination of declining new loan defaults, and stable-to-improving cure rates for outstanding delinquent loans.

 






Effect of Prior Periods'










(Favorable)/


Claim Ratio Excluding


Reported


Unfavorable Claim


Prior Periods' Claim


Claim Ratio


Reserves Development


Reserves Development

2015


56.4

%




(65.0)

%




121.4

%


2016


34.1





(39.8)





73.9



2017


57.6





(38.3)





95.9



2018


43.2





(27.0)





70.2



2019


55.0

%




(12.5)

%




67.5

%


4th Quarter 2018


53.9

%




(31.3)

%




85.2

%


4th Quarter 2019


61.5

%




(22.6)

%




84.1

%


 

Corporate and Other Operating Results - The combination of a small life and accident insurance business and the net costs associated with the parent holding company and its internal corporate services subsidiaries usually produce highly variable results. Earnings variations stem from volatility inherent to the small scale of the life and accident insurance line, net investment income, and net interest charges (credits) pertaining to external and intra-system financing arrangements. Year-to-date 2019 results were enhanced by the elimination of interest costs associated with outstanding external debt converted into ORI common stock in March 2018. The interplay of these various elements is summarized in the following table:

 



Corporate and Other Summary Operating Results



Quarters Ended December 31,


Years Ended December 31,



2019


2018


% Change


2019


2018


% Change

Net life and accident premiums earned


$

3.1



$

3.4



-8.7

%


$

13.4



$

14.6



-8.8

%

Net investment income


7.2



8.3



-13.5



35.1



31.7



10.7


Other operating income










(0.1)



31.4


Operating revenues


10.3



11.7



-11.6



48.5



46.3



4.6


Claim costs


2.5



4.0



-38.1



8.8



16.7



-46.7


Insurance expenses


1.0



1.0



-1.0



4.5



4.8



-6.2


Corporate, interest and other expenses - net


(3.7)



(6.2)



39.6



(19.7)



(15.6)



-26.4


Operating expenses


(0.2)



(1.1)



81.5



(6.3)



5.9



-207.2


Corporate and other pretax operating income (loss)


$

10.5



$

12.8



-17.6

%


$

54.8



$

40.4



35.5

%

 

Summary Consolidated Balance Sheet - The table below shows Old Republic's consolidated financial position at the dates shown.

 




December 31,




2019


2018

Assets:






Cash and fixed maturity securities



$

10,381.5



$

9,683.0


Equity securities



4,030.5



3,380.9


Other invested assets



115.4



123.4


Cash and invested assets



14,527.4



13,187.4


Accounts and premiums receivable



1,466.7



1,499.4


Federal income tax recoverable: Current



5.7



16.8


Prepaid federal income taxes





129.8


Reinsurance balances recoverable



3,823.9



3,484.5


Deferred policy acquisition costs



325.4



316.3


Sundry assets



927.0



692.6


Total assets



$

21,076.3



$

19,327.1








Liabilities and Shareholders' Equity:






Policy liabilities



$

2,419.2



$

2,303.5


Claim reserves



9,929.5



9,471.2


Federal income tax payable: Deferred



112.2



10.3


Reinsurance balances and funds



616.0



600.4


Debt



974.0



981.4


Sundry liabilities



1,025.1



813.7


Total liabilities



15,076.1



14,180.8


Shareholders' equity



6,000.1



5,146.2


Total liabilities and shareholders' equity



$

21,076.3



$

19,327.1


 

Cash, Invested Assets, and Shareholders' Equity - The table below shows Old Republic's consolidated cash and invested assets as well as shareholders' equity at the dates shown.

 



Cash, Invested Assets, and Shareholders' Equity









% Change



December 31,


Dec. '19 /


Dec. '18 /



2019


2018


2017


Dec. '18


Dec. '17

Cash and invested assets:











Available for sale fixed maturity securities, cash











   and other invested assets, carried at fair value

$

9,475.2



$

8,761.7



$

9,203.4



8.1

%


-4.8

%


Equity securities, carried at fair value

4,030.5



3,380.9



3,265.5



19.2



3.5



Held to maturity securities, carried at amortized cost

1,021.7



1,044.8



1,067.4



-2.2



-2.1



Total per balance sheet

$

14,527.4



$

13,187.4



$

13,536.4



10.2

%


-2.6

%


Total at cost for all

$

13,327.2



$

12,950.6



$

12,783.4



2.9

%


1.3

%













Shareholders' equity: Total

$

6,000.1



$

5,146.2



$

4,733.3



16.6

%


8.7

%



Per common share

$

19.98



$

17.23



$

17.72



16.0

%


-2.8

%












Composition of shareholders' equity per share:











Equity before items below

$

17.25



$

17.04



$

16.26



1.2

%


4.8

%


Unrealized investment gains (losses) and other












accumulated comprehensive income (loss)

2.73