Old Republic Reports Results For The Second Quarter And First Half 2019

News Release

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July 25, 2019 at 9:00 AM EDT

Old Republic Reports Results For The Second Quarter And First Half 2019

CHICAGO, July 25, 2019 /PRNewswire/ -- Old Republic International Corporation (NYSE: ORI) today reported the following consolidated results (a):




Quarters Ended June 30,


Six Months Ended June 30,



2019


2018


% Change


2019


2018


% Change

Pretax income (loss)


$

205.4



$

246.6



-16.7

%


$

723.9



$

240.6



200.9

%

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


36.9



73.3



-49.6

%


405.0



(63.1)



N/M

Pretax income (loss) excluding investment gains (losses)


$

168.4



$

173.3



-2.8

%


$

318.9



$

303.7



5.0

%














Net income (loss)


$

165.5



$

197.7



-16.3

%


$

577.7



$

201.8



186.2

%

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


29.1



57.9



-49.6

%


319.8



(49.7)



N/M

Net income (loss) excluding investment gains (losses)


$

136.3



$

139.8



-2.5

%


$

257.9



$

251.6



2.5

%

2019's second quarter and first half pretax and net income, exclusive of all investment gains or (losses), were affected by relatively lower underwriting and related services profitability. The continuing growth of net investment income ameliorated these results however. Comparisons of overall and per share net income were also substantially impacted by the required inclusion of changes in the fair value of equity securities pursuant to Generally Accepted Accounting Principles ("GAAP").


FINANCIAL HIGHLIGHTS (a)




Quarters Ended June 30,


Six Months Ended June 30,



SUMMARY INCOME STATEMENTS:

2019


2018


% Change


2019


2018


% Change



Revenues:














Net premiums and fees earned

$

1,460.5



$

1,420.2



2.8

%


$

2,818.6



$

2,750.6



2.5

%



Net investment income

113.0



106.9



5.7



225.1



212.7



5.8




Other income

34.1



30.1



13.1



64.5



60.7



6.2




Total operating revenues

1,607.7



1,557.3



3.2



3,108.3



3,024.2



2.8




Investment gains (losses):














Realized from actual transactions

12.5



32.0





24.9



47.5






Realized from impairments

(2.0)







(2.0)








Unrealized from changes in fair value of equity securities

26.3



41.3





382.0



(110.6)






Total investment gains (losses)

36.9



73.3





405.0



(63.1)






Total revenues

1,644.7



1,630.7





3,513.4



2,961.1






Operating expenses:














Claim costs

635.3



607.3



4.6



1,241.4



1,201.4



3.3




Sales and general expenses

793.5



766.6



3.5



1,526.9



1,494.7



2.2




Interest and other charges

10.4



10.0



4.0



21.0



24.4



-13.6




Total operating expenses

1,439.2



1,384.0



4.0

%


2,789.4



2,720.5



2.5

%



Pretax income (loss)

205.4



246.6





723.9



240.6






Income taxes (credits)

39.9



48.8





146.1



38.7






Net income (loss)

$

165.5



$

197.7





$

577.7



$

201.8


































COMMON STOCK STATISTICS:














Net income (loss) per share: Basic

$

0.55



$

0.66





$

1.93



$

0.70






                                                 Diluted

$

0.55



$

0.66





$

1.92



$

0.68






Components of net income (loss) per share:














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

$

0.45



$

0.47



-4.3

%


$

0.86



$

0.87



-1.1

%



Net investment gains (losses):














Realized from actual transactions and impairments

0.03



0.08





0.06



0.13






Unrealized from changes in fair value of equity securities

0.07



0.11





1.01



(0.30)






Basic net income (loss)

$

0.55



$

0.66





$

1.93



$

0.70






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

$

0.45



$

0.47



-4.3

%


$

0.86



$

0.85



1.2

%



Net investment gains (losses):














Realized from actual transactions and impairments

0.03



0.08





0.06



0.12






Unrealized from changes in fair value of equity securities

0.07



0.11





1.00



(0.29)






Diluted net income (loss)

$

0.55



$

0.66





$

1.92



$

0.68






Cash dividends on common stock

$

0.2000



$

0.1950





$

0.4000



$

0.3900






Book value per share







$

19.68



$

17.08



15.2

%

















(a) All amounts in this report are stated in millions except common stock data and percentages.












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 ensure balance sheet strength for the primary needs of the fundamental insurance 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 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 fundamental operating results of an 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 since January 1, 2018 of unrealized investment gains or (losses) in equity (but not fixed maturity) securities required by a new rule of the Financial Accounting Standards Board ("FASB"), can lead to even greater period-to-period fluctuations in reported net income. The impact of the continuous spiral in stock market valuations is most evident in its net of tax effect on net income for the second quarter and first six months of 2019 and 2018.

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 June 30,


Six Months Ended June 30,


2019


2018


% Change


2019


2018


% Change

A. Net premiums, fees, and other income:












General insurance

$

850.1



$

808.5



5.1

%


$

1,681.6



$

1,599.7



5.1

%

Title insurance

591.6



588.9



0.4



1,098.5



1,102.8



-0.4


Corporate and other

3.4



3.0



14.4



6.9



6.9



-0.7


Other income

34.1



30.1



13.1



64.5



60.7



6.2


Subtotal

1,479.3



1,430.7



3.4



2,851.6



2,770.3



2.9


RFIG run-off business

15.3



19.6



-21.9



31.5



41.0



-23.1


Consolidated

$

1,494.7



$

1,450.4



3.1

%


$

2,883.2



$

2,811.4



2.6

%













B. Underwriting and related












services income (loss):












General insurance

$

16.0



$

23.8



-32.5

%


$

54.9



$

40.9



34.1

%

Title insurance

51.1



52.5



-2.6



62.8



73.8



-15.0


Corporate and other

(5.3)



(8.2)



35.5



(10.5)



(13.4)



21.5


Subtotal

61.9



68.0



-9.0



107.1



101.4



5.7


RFIG run-off business

3.9



8.3



-52.7



7.6



13.9



-45.0


Consolidated

$

65.8



$

76.3



-13.8

%


$

114.8



$

115.3



-0.4

%

C. Consolidated underwriting ratio:












Claim ratio

43.5

%


42.8

%




44.0

%


43.7

%



Expense ratio

51.7



51.5





51.6



51.8




Composite ratio

95.2

%


94.3

%




95.6

%


95.5

%















D. Net investment income:












General insurance

$

88.8



$

84.4



5.2

%


$

177.1



$

167.7



5.6

%

Title insurance

10.2



9.5



7.9



20.5



19.0



8.1


Corporate and other

9.5



7.4



26.9



18.5



15.2



21.5


Subtotal

108.6



101.5



7.0



216.2



201.9



7.0


RFIG run-off business

4.3



5.4



-19.2



8.9



10.8



-17.3


Consolidated

$

113.0



$

106.9



5.7

%


$

225.1



$

212.7



5.8

%

E. Interest and other charges:












General insurance

$

18.2



$

17.5





$

36.9


34.6


$

34.6




Title insurance

1.2



1.1





2.5



2.4




Corporate and other (a)

(9.0)



(8.7)





(18.4)



(12.6)




Subtotal

10.3



10.0





21.0



24.4




RFIG run-off business












Consolidated

$

10.4



$

10.0



4.0

%


$

21.0



$

24.4



-13.6

%













F. Segmented and consolidated












pretax income (loss) excluding












investment gains (losses):












General insurance

$

86.7



$

90.7



-4.4

%


$

195.0



$

174.0



12.1

%

Title insurance

60.2



60.9



-1.1



80.8



90.4



-10.7


Corporate and other

13.2



7.9



66.5



26.4



14.4



83.0


Subtotal

160.1



159.5



0.4



302.3



278.9



8.4


RFIG run-off business

8.2



13.7



-39.7



16.5



24.7



-33.0


Consolidated

168.4



173.3



-2.8

%


318.9



303.7



5.0

%

Income taxes (credits) on above (b)

32.1



33.4





60.9



52.0




G. Net income (loss) excluding












investment gains (losses)

136.3



139.8



-2.5

%


257.9



251.6



2.5

%

H. Consolidated pretax investment












gains (losses):












Realized from actual transactions












and impairments

10.5



32.0





22.9



47.5




Unrealized from changes in












fair value of equity securities

26.3



41.3





382.0



(110.6)




Total

36.9



73.3





405.0



(63.1)




Income taxes (credits) on above

7.7



15.4





85.1



(13.3)




Net of tax investment gains (losses)

29.1



57.9





319.8



(49.7)




I. Net income (loss)

$

165.5



$

197.7





$

577.7



$

201.8




J. Consolidated operating cash flow

$

177.2



$

156.5





$

313.4



$

287.3






(a) Includes consolidation/elimination entries. (b) The effective tax rates applicable to pretax income excluding investment gains or losses were 19.1% for both the second quarter and first half of 2019, and 19.3% and 17.1% for the second quarter and first half of 2018, respectively.



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 June 30,


Six Months Ended June 30,


2019


2018


% Change


2019


2018


% Change

Net premiums earned

$

850.1



$

808.5



5.1

%


$

1,681.6



$

1,599.7



5.1

%

Net investment income

88.8



84.4



5.2



177.1



167.7



5.6


Other income

33.9



30.0



13.1



64.2



60.3



6.4


Operating revenues

972.9



923.0



5.4



1,923.0



1,827.8



5.2


Claim costs

606.7



578.1



5.0



1,187.1



1,144.2



3.7


Sales and general expenses

261.2



236.6



10.4



503.8



474.9



6.1


Interest and other charges

18.2



17.5



3.6



36.9



34.6



6.8


Operating expenses

886.2



832.3



6.5



1,727.9



1,653.8



4.5


Segment pretax operating income (loss) (a)

$

86.7



$

90.7



-4.4

%


$

195.0



$

174.0



12.1

%













Claim ratio

71.4

%


71.5

%




70.6

%


71.5

%



Expense ratio

26.7



25.5





26.1



25.9




Composite ratio

98.1

%


97.0

%




96.7

%


97.4

%




__________________

(a)In connection with the run-off mortgage guaranty ("MI") and consumer credit indemnity ("CCI") combination, $ - and $0.5 of pretax operating income for the second quarter and first half of 2018 were retained by certain general insurance companies pursuant to various quota share and stop loss reinsurance agreements. All of these amounts, however, have been reclassified such that 100% of the CCI run-off business is reported in the RFIG run-off segment.

General insurance underwriting/service profitability declined in this year's second quarter while strong double digit growth was registered in the first half. 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, stemming principally 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, along with new business production continued to be main contributors to top line growth.

The mid-single digit growth of investment income was principally driven by a moderately larger invested asset base with dividends from equity securities investments providing the greatest addition.

As the above table shows, the consolidated general insurance ratio of claim costs to net premiums earned remained relatively stable in 2019. As such, it continues to reflect the past several years' fairly consistent downtrend portrayed in the following table. Relatively small changes in periodic expense ratios are generally reflective of ongoing product mix dynamics, and the variability of attendant sales and general expenses.






Effect of Prior Periods'










(Favorable)/


Claim Ratio Excluding


Reported


Unfavorable Claim


Prior Periods' Claim


Claim Ratio


Reserves Development


Reserves Development

2014


77.9

%




3.9

%




74.0

%


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

%


2nd Quarter 2018


71.5

%




%




71.5

%


2nd Quarter 2019


71.4

%




0.5

%




70.9

%


1st Six Months 2018


71.5

%




1.0

%




70.5

%


1st Six Months 2019


70.6

%




(0.4)

%




71.0

%


Quarterly and annual claim provisions, 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, we currently anticipate that annually reported claim ratios should settle within targeted averages in the high 60% to low 70% range. Assuming the current mix of coverages, the overall business should reflect an expense ratio ranging between 23% and 25%, and the composite underwriting ratio should fall within a range of 90% to 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 June 30,


Six Months Ended June 30,


2019


2018


% Change


2019


2018


% Change

Net premiums and fees earned

$

591.6



$

588.9



0.4

%


$

1,098.5



$

1,102.8



-0.4

%

Net investment income

10.2



9.5



7.9



20.5



19.0



8.1


Other income

0.1



0.1



9.5



0.3



0.4



-27.2


Operating revenues

602.0



598.6



0.6



1,119.4



1,122.3



-0.3


Claim costs

18.1



17.0



6.6



32.5



29.9



8.9


Sales and general expenses

522.4



519.6



0.6



1,003.4



999.4



0.4


Interest and other charges

1.2



1.1



5.6



2.5



2.4



4.9


Operating expenses

541.8



537.7



0.8



1,038.5



1,031.8



0.7


Segment pretax operating income (loss)

$

60.2



$

60.9



-1.1

%


$

80.8



$

90.4



-10.7

%













Claim ratio

3.1

%


2.9

%




3.0

%


2.7

%



Expense ratio

88.3



88.2





91.3



90.6




Composite ratio

91.4

%


91.1

%




94.3

%


93.3

%



2019 year-over-year comparisons of revenues from title premiums and fees reflect a mild slowdown in housing and mortgage lending activity. Claim costs trended slightly 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 effect of claim development trends:






Effect of Prior Periods'










(Favorable)/


Claim Ratio Excluding


Reported


Unfavorable Claim


Prior Periods' Claim


Claim Ratio


Reserves Development


Reserves Development

2014


5.2

%




(0.8)

%




6.0

%


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

%


2nd Quarter 2018


2.9

%




(1.2)

%




4.1

%


2nd Quarter 2019


3.1

%




(0.9)

%




4.0

%


1st Six Months 2018


2.7

%




(1.4)

%




4.1

%


1st Six Months 2019


3.0

%




(1.0)

%




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 have remained generally aligned with revenues from premiums and fees for all periods reported upon.

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


Quarters Ended June 30,


Six Months Ended June 30,


2019


2018


% Change


2019


2018


% Change

A. Mortgage Insurance (MI)












Net premiums earned

$

15.1



$

19.2



-21.2

%


$

31.2



$

40.2



-22.4

%

Net investment income

4.3



5.2



-16.7



8.6



10.3



-16.2


Claim costs

6.9



6.2



9.8



16.4



17.7



-7.4


MI pretax operating income (loss)

$

8.4



$

13.8



-38.9

%


$

15.5



$

24.6



-37.0

%













Claim ratio

45.5

%


32.7

%




52.8

%


44.2

%



Expense ratio

27.2



22.3





25.3



20.2




Composite ratio

72.7

%


55.0

%




78.1

%


64.4

%















B. Consumer Credit Indemnity (CCI)












Net premiums earned

$

0.1



$

0.4



-56.4

%


$

0.3



$

0.8



-55.1

%

Net investment income



0.2



-78.1



0.2



0.4



-41.4


Claim costs

0.3



0.3





(0.6)



0.3



-270.1

%

CCI pretax operating income (loss) (a)

$

(0.1)



$

(0.1)



-42.1

%


$

1.0



$



N/M













Claim ratio

208.0

%


91.2

%




-169.1

%


44.6

%



Expense ratio

9.9



95.7





53.9



101.5




Composite ratio

217.9

%


186.9

%




-115.2

%


146.1

%















C. Total MI and CCI run-off business












Net premiums earned

$

15.3



$

19.6



-21.9

%


$

31.5



$

41.0



-23.1

%

Net investment income

4.3



5.4



-19.2



8.9



10.8



-17.3


Claim costs

7.2



6.6



9.2



15.8



18.1



-12.8


Segment pretax operating income (loss) (a)

$

8.2



$

13.7



-39.7

%


$

16.5



$

24.7



-33.0

%













Claim ratio

47.4

%


33.9

%




50.1

%


44.2

%



Expense ratio

27.0



23.9





25.6



21.9




Composite ratio

74.4

%


57.8

%




75.7

%


66.1

%




__________________

(a)In connection with the run-off mortgage guaranty ("MI") and consumer credit indemnity ("CCI") combination, $ - and $0.5 of pretax operating income for the second quarter and first half of 2018 were retained by certain general insurance companies pursuant to various quota share and stop loss reinsurance agreements. All of these amounts, however, have been reclassified such that 100% of the CCI run-off business is reported in the RFIG run-off segment.

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

The reported MI incurred claim ratios reflect favorable development of 4.7 and 7.4 percentage points in this year's second quarter and first half, respectively. This compares to 37.9 and 32.5 percentage points of favorable development for the respective 2018 periods.

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 June 30,


Six Months Ended June 30,



2019


2018


% Change


2019


2018


% Change

Net life and accident premiums earned


$

3.4



$

3.0



14.4

%


$

6.9



$

6.9



-0.7

%

Net investment income


9.5



7.4



26.9



18.5



15.2



21.5


Operating revenues


12.9



10.4



23.3



25.4



22.1



14.6


Claim costs


3.1



5.5



-44.0



5.8



9.0



-35.7


Insurance expenses


1.2



1.0



15.5



2.5



2.4



4.4


Corporate, interest and other expenses - net


(4.6)



(4.0)



-13.9



(9.4)



(3.7)



-150.7


Operating expenses


(0.2)



2.5



-111.5



(1.0)



7.7



-113.9


Corporate and other pretax operating income (loss)


$

13.2



$

7.9



66.5

%


$

26.4



$

14.4



83.0

%



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








June 30,


December 31,


June 30,


2019


2018


2018

Assets:






Cash and fixed maturity securities

$

10,070.5



$

9,683.0



$

9,675.6


Equity securities

3,894.6



3,380.9



3,271.4


Other invested assets

116.3



123.4



124.9


Cash and invested assets

14,081.6



13,187.4



13,072.0


Accounts and premiums receivable

1,736.1



1,499.4



1,680.2


Federal income tax recoverable: Current



16.8




Prepaid federal income taxes

129.8



129.8



114.3


Reinsurance balances recoverable

3,798.2



3,484.5



3,630.2


Sundry assets

1,241.8



1,008.9



957.3


Total

$

20,987.7



$

19,327.1



$

19,454.2


Liabilities and Shareholders' Equity:






Policy liabilities

$

2,547.8



$

2,303.5



$

2,432.9


Claim reserves

9,636.3



9,471.2



9,392.5


Federal income tax payable: Current

0.3





8.0


                                              Deferred

147.0



10.3



33.7


Debt

975.4



981.4



974.4


Sundry liabilities

1,786.7



1,414.2



1,508.9


Shareholders' equity

5,893.9



5,146.2



5,103.4


Total

$

20,987.7



$

19,327.1



$

19,454.2




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



June 30,


Dec. 31,


June 30,


June '19/


June '19/



2019


2018


2018


Dec. '18


June '18

Cash and invested assets:











Available for sale fixed maturity securities, cash











   and other invested assets, carried at fair value

$

9,153.5



$

8,761.7



$

8,744.3



4.5

%


4.7

%


Equity securities, carried at fair value

3,894.6



3,380.9



3,271.4



15.2



19.0



Held to maturity, carried at amortized cost

1,033.3



1,044.8



1,056.2



-1.1



-2.2



Total per balance sheet

$

14,081.6



$

13,187.4



$

13,072.0



6.8

%


7.7

%


Total at cost for all

$

13,148.2



$

12,950.6



$

12,643.1



1.5

%


4.0

%













Shareholders' equity: Total

$

5,893.9



$

5,146.2



$

5,103.4



14.5

%


15.5

%



Per common share

$

19.68



$

17.23



$

17.08



14.2

%


15.2

%












Composition of shareholders' equity per share:











Equity before items below

$

17.63



$

17.04



$

16.37



3.5

%


7.7

%


Unrealized investment gains (losses) and other












accumulated comprehensive income (loss)

2.05



0.19



0.71









Total

$

19.68



$

17.23



$