Old Republic Reports Results For The Second Quarter And First Half 2020

News Release

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July 23, 2020 at 9:00 AM EDT

Old Republic Reports Results For The Second Quarter And First Half 2020

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






OVERALL RESULTS








Quarters Ended June 30,


Six Months Ended June 30,



2020


2019


% Change


2020


2019


% Change

Pretax income (loss)


$

499.1



$

205.4





$

(270.8)



$

723.9




Pretax investment gains (losses)


346.7



36.9





(597.4)



405.0




Pretax income (loss) excluding investment gains (losses)


$

152.4



$

168.4



-9.5

%


$

326.6



$

318.9



2.4

%














Net income (loss)


$

397.7



$

165.5





$

(207.0)



$

577.7




Net of tax investment gains (losses)


273.8



29.1





(471.7)



319.8




Net income (loss) excluding investment gains (losses)


$

123.8



$

136.3



-9.2

%


$

264.6



$

257.9



2.6

%














PER DILUTED SHARE
















Quarters Ended June 30,


Six Months Ended June 30,



2020


2019


% Change


2020


2019


% Change

Net income (loss)


$

1.34



$

.55





$

(.69)



$

1.92




Net of tax investment gains (losses)


.92



.10





(1.58)



1.06




Net income (loss) excluding investment gains (losses)


$

.42



$

.45



-6.7

%


$

.89



$

.86



3.5

%














SHAREHOLDERS' EQUITY






















June 30,


Dec. 31,











2020


2019


% Change

Shareholders' equity: Total








$

5,858.9



$

6,000.1



-2.4

%

Per Common Share








$

19.68



$

19.98



-1.5

%




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

This year's second quarter and first half pretax and net income, exclusive of all investment gains and (losses) were affected primarily by relatively stable results within the General Insurance segment, greater profitability in the Title Insurance segment, and increased claim costs in the RFIG Run-off business. In combination, the business produced a 96.0% consolidated combined ratio for the second quarter of 2020, up slightly from 95.2% registered in the second quarter of 2019. For the six months ended June 30, 2020, the combined ratio was 95.4%, essentially unchanged from the same period of 2019. Total and per share net income continue to be significantly impacted by changes in the fair value of equity securities.

The COVID-19 pandemic and the associated governmental responses had a widespread impact on the U.S. economy beginning in the final weeks of the first quarter and continuing throughout the second quarter. Old Republic's response to the pandemic resulted in significant operational changes, including a transition to remote working for a majority of its approximately 9,000 associates. The pandemic's impact on employment levels, businesses and other economic activities contributed to a reduction in premium and fee revenues in the General Insurance segment, while the Title Insurance segment continued to see strong growth in premium and fee revenues, and the RFIG Run-off business saw an increase in claim costs due to higher reported delinquencies.

Although the COVID-19 pandemic and the associated governmental responses caused substantial disruptions to financial markets in the final weeks of this year's first quarter, improved market performance had a significant positive impact on the second quarter's financial results. The resulting increase in the fair value of the Company's common stock and fixed-maturity investment portfolios contributed to the second quarter's recovery in book value per share reported as of June 30, 2020 of $19.68 as compared to $17.29 at March 31, 2020.

The economic impacts from the COVID-19 pandemic could affect future premium and fee revenues in the General Insurance and Title Insurance segments, and conversely underwriting expense ratios could rise. In the RFIG Run-off business, future claims experience could depend upon the continued, mitigating effects of loan forbearance programs mandated by the Federal government, and the rate at which employment levels recover. These outcomes notwithstanding, management firmly believes that the Company's strong financial condition will enable it to weather these challenges, and most importantly allow its insurance subsidiaries to meet their obligations to customers, policyholders and their beneficiaries.

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 and (losses). Under Generally Accepted Accounting Principles ("GAAP"), however, net income (loss), which includes all specifically defined realized and unrealized investment gains and (losses), is the measure of total profitability.

In management's opinion, the focus on income (loss) excluding all investment gains and losses 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. The inclusion of realized investment gains and (losses) in income (loss) can mask the reality and trends in the fundamental operating results of the insurance business. That is because their realization is, more often than not, highly discretionary. It is 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 and (losses) in equity securities can further distort such operating results and trends therein and thus lead to even greater period-to-period fluctuations in reported net income (loss). The impact of the continuous volatility in stock market valuations is most evident in its net of tax effect on net income (loss) for the periods reported upon.


FINANCIAL HIGHLIGHTS




Quarters Ended June 30,


Six Months Ended June 30,



SUMMARY INCOME STATEMENTS:

2020


2019


% Change


2020


2019


% Change



Revenues:














Net premiums and fees earned

$

1,483.1



$

1,460.5



1.5

%


$

2,979.9



$

2,818.6



5.7

%



Net investment income

108.7



113.0



-3.8



222.9



225.1



-1.0




Other income

32.0



34.1



-6.0



66.7



64.5



3.5




Total operating revenues

1,623.9



1,607.7



1.0



3,269.6



3,108.3



5.2




Investment gains (losses):














Realized from actual transactions

(7.3)



12.5





11.2



24.9






Realized from impairments



(2.0)







(2.0)






Unrealized from changes in fair value of equity securities

354.0



26.3





(608.7)



382.0






Total investment gains (losses)

346.7



36.9





(597.4)



405.0






  Total revenues

1,970.6



1,644.7





2,672.2



3,513.4






Operating expenses:














Claim costs

624.1



635.3



-1.8



1,246.7



1,241.4



0.4




Sales and general expenses

836.9



793.5



5.5



1,673.8



1,526.9



9.6




Interest and other charges

10.4



10.4



0.5



22.3



21.0



6.2




Total operating expenses

1,471.5



1,439.2



2.2

%


2,943.0



2,789.4



5.5

%



Pretax income (loss)

499.1



205.4





(270.8)



723.9






Income taxes (credits)

101.4



39.9





(63.7)



146.1






Net income (loss)

$

397.7



$

165.5





$

(207.0)



$

577.7


































COMMON STOCK STATISTICS:














Components of net income (loss) per share:














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

$

0.42



$

0.45



-6.7

%


$

0.89



$

0.86



3.5

%



Net investment gains (losses):














Realized from actual transactions and impairments

(0.02)



0.03





0.03



0.06






Unrealized from changes in fair value of equity securities

0.94



0.07





(1.61)



1.01






Basic net income (loss)

$

1.34



$

0.55





$

(0.69)



$

1.93






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

$

0.42



$

0.45



-6.7

%


$

0.89



$

0.86



3.5

%



Net investment gains (losses):














Realized from actual transactions and impairments

(0.02)



0.03





0.03



0.06






Unrealized from changes in fair value of equity securities

0.94



0.07





(1.61)



1.00






Diluted net income (loss)

$

1.34



$

0.55





$

(0.69)



$

1.92






Cash dividends on common stock

$

0.21



$

0.20





$

0.42



$

0.40






Book value per share







$

19.68



$

19.68



%






























Management believes the information in sections A to G and J of the table on the following page 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 inherent volatility of securities markets and their above-noted impact on reported net income (loss).


Major Segmented and Consolidated


Elements of Income (Loss)


Quarters Ended June 30,


Six Months Ended June 30,


2020


2019


% Change


2020


2019


% Change

A. Net premiums, fees, and other income:












 General insurance

$

818.0



$

850.1



-3.8

%


$

1,670.8



$

1,681.6



-0.6

%

 Title insurance

650.4



591.6



9.9



1,278.6



1,098.5



16.4


 Corporate and other

2.9



3.4



-13.7



6.1



6.9



-11.4


 Other income

32.0



34.1



-6.0



66.7



64.5



3.5


Subtotal

1,503.5



1,479.3



1.6



3,022.4



2,851.6



6.0


 RFIG run-off business (c)

11.6



15.3



-24.1



24.3



31.5



-23.1


Consolidated

$

1,515.1



$

1,494.7



1.4

%


$

3,046.7



$

2,883.2



5.7

%













B. Underwriting and related












 services income (loss):












  General insurance

$

13.3



$

16.0



-17.1

%


$

50.8



$

54.9



-7.4

%

  Title insurance

55.7



51.1



8.8



89.0



62.8



41.8


  Corporate and other

(5.9)



(5.3)



-11.4



(8.9)



(10.5)



15.3


 Subtotal

63.0



61.9



1.9



130.9



107.1



22.2


  RFIG run-off business (c)

(8.9)



3.9



N/M


(4.9)



7.6



-164.0


 Consolidated

$

54.1



$

65.8



-17.8

%


$

126.0



$

114.8



9.8

%

C. Consolidated underwriting ratio:












  Claim ratio

42.1

%


43.5

%




41.8

%


44.0

%



  Expense ratio

53.9



51.7





53.6



51.6




 Combined ratio

96.0

%


95.2

%




95.4

%


95.6

%















D. Net investment income:












  General insurance

$

87.7



$

88.8



-1.2

%


$

178.3



$

177.1



0.7

%

  Title insurance

10.3



10.2



0.8



21.1



20.5



3.0


  Corporate and other

6.6



9.5



-29.9



15.0



18.5



-18.9


 Subtotal

104.7



108.6



-3.6



214.5



216.2



-0.8


  RFIG run-off business

3.9



4.3



-9.9



8.3



8.9



-6.8


 Consolidated

$

108.7



$

113.0



-3.8

%


$

222.9



$

225.1



-1.0

%

E. Interest and other charges (credits):












  General insurance

$

15.8



$

18.2





$

33.8



$

36.9




  Title insurance

0.6



1.2





1.4



2.5




  Corporate and other (a)

(6.0)



(9.0)





(12.9)



(18.4)




 Subtotal

10.4



10.3





22.3



21.0




  RFIG run-off business












 Consolidated

$

10.4



$

10.4



0.5

%


$

22.3



$

21.0



6.2

%













F. Segmented and consolidated












 pretax income (loss) excluding












 investment gains (losses)(B+D-E):












  General insurance

$

85.2



$

86.7



-1.8

%


$

195.3



$

195.0



0.1

%

  Title insurance

65.4



60.2



8.6



108.7



80.8



34.6


  Corporate and other

6.7



13.2



-48.8



19.0



26.4



-28.0


 Subtotal

157.4



160.1



-1.7



323.1



302.3



6.9


  RFIG run-off business (c)

(4.9)



8.2



-160.1



3.4



16.5



-79.3


 Consolidated

152.4



168.4



-9.5

%


326.6



318.9



2.4

%

 Income taxes (credits) on above (b)

28.5



32.1





61.9



60.9




G. Net income (loss) excluding












 investment gains (losses)

123.8



136.3



-9.2

%


264.6



257.9



2.6

%

H. Consolidated pretax investment












 gains (losses):












  Realized from actual transactions












 and impairments

(7.3)



10.5





11.2



22.9




  Unrealized from changes in












 fair value of equity securities

354.0



26.3





(608.7)



382.0




 Total

346.7



36.9





(597.4)



405.0




 Income taxes (credits) on above

72.8



7.7





(125.7)



85.1




 Net of tax investment gains (losses)

273.8



29.1





(471.7)



319.8




 I. Net income (loss)

$

397.7



$

165.5





$

(207.0)



$

577.7




J. Consolidated operating cash flow

$

221.9



$

177.2





$

438.3



$

313.4

















(a) Includes consolidation/elimination entries. (b) The effective tax rate applicable to pretax income excluding investment gains and (losses) were 18.8% and 19.0% for the second quarter and first half of 2020, respectively, and 19.1% for both the second quarter and first half of 2019. (c) See Note (a) in RFIG Run-off Results on page (6).

 

General Insurance Segment Results


General Insurance Summary Operating Results


Quarters Ended June 30,


Six Months Ended June 30,


2020


2019


% Change


2020


2019


% Change

Net premiums written

$

792.7



$

873.3



-9.2

%


$

1,653.5



$

1,716.1



-3.6

%

Net premiums earned

818.0



850.1



-3.8



1,670.8



1,681.6



-0.6


Net investment income

87.7



88.8



-1.2



178.3



177.1



0.7


Other income

31.8



33.9



-6.2



66.4



64.2



3.4


Operating revenues

937.6



972.9



-3.6



1,915.6



1,923.0



-0.4


Claim costs

587.4



606.7



-3.2



1,182.9



1,187.1



-0.4


Sales and general expenses

249.0



261.2



-4.7



503.5



503.8



-0.1


Interest and other charges

15.8



18.2



-12.8



33.8



36.9



-8.3


Operating expenses

852.4



886.2



-3.8



1,720.3



1,727.9



-0.4


Segment pretax operating income (loss)

$

85.2



$

86.7



-1.8

%


$

195.3



$

195.0



0.1

%













Claim ratio

71.8

%


71.4

%




70.8

%


70.6

%



Expense ratio

26.6



26.7





26.2



26.1




Combined ratio

98.4

%


98.1

%




97.0

%


96.7

%







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 net premiums earned constricted by 3.8% in the second quarter and remained relatively flat for the year-to-date period. The economic impacts of the COVID-19 pandemic and tightened underwriting standards contributed to the downward premium trend, somewhat mitigated by the cumulative effects of recent years' and ongoing premium rate increases for certain insurance products. Premium trends primarily reflect decreases in workers' compensation partially offset by continued increases in executive indemnity coverages. Net investment income decreased by 1.2% for the quarter while remaining relatively flat for the year-to-date period. The impact of continued moderate growth in the invested asset base was more than offset by lower investment yields.

As the above table shows, the consolidated General Insurance claim ratio for the second quarter and first six months of 2020 were relatively consistent with the comparable prior year periods. Similarly, expense ratios for 2020 remained essentially unchanged from the comparable 2019 periods and are generally reflective of ongoing coverage mix dynamics and the variability of sales and general expenses among such coverages.

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


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

%


2nd Quarter 2019


71.4

%




0.5

%




70.9

%


2nd Quarter 2020


71.8

%




0.1

%




71.7

%


1st Six Months 2019


70.6

%




(0.4)

%




71.0

%


1st Six Months 2020


70.8

%




(0.3)

%




71.1

%


Quarterly and annual claim ratios and trends may not be particularly meaningful indicators of future outcomes for a liability-oriented coverage mix and its relatively long claim payment patterns. Management's long-term targets, assuming the current coverage mix, are for annually reported claim ratio averages in the high 60% to low 70% range and expense ratio averages of 25% or below, resulting in a combined ratio ranging between 90% and 95%.

Title Insurance Segment Results


Title Insurance Summary Operating Results



Quarters Ended June 30,


Six Months Ended June 30,


2020


2019


% Change


2020


2019


% Change

Net premiums and fees earned

$

650.4



$

591.6



9.9

%


$

1,278.6



$

1,098.5



16.4

%

Net investment income

10.3



10.2



0.8



21.1



20.5



3.0


Other income

0.2



0.1



22.4



0.3



0.3



19.9


Operating revenues

661.0



602.0



9.8



1,300.1



1,119.4



16.2


Claim costs

17.7



18.1



-2.0



39.3



32.5



20.6


Sales and general expenses

577.2



522.4



10.5



1,150.6



1,003.4



14.7


Interest and other charges

0.6



1.2



-49.6



1.4



2.5



-42.5


Operating expenses

595.5



541.8



9.9



1,191.4



1,038.5



14.7


Segment pretax operating income (loss)

$

65.4



$

60.2



8.6

%


$

108.7



$

80.8



34.6

%













Claim ratio

2.7

%


3.1

%




3.1

%


3.0

%



Expense ratio

88.7



88.3





90.0



91.3




Combined ratio

91.4

%


91.4

%




93.1

%


94.3

%



Title Insurance operating revenues were up nearly 10% in the second quarter and 16.2% for the year-to-date period. Year-over-year comparisons of revenues from title premiums and fees are indicative of the continuation of a low interest rate environment resulting in a favorable real estate market through the second quarter of 2020. Net investment income was relatively flat for the quarter and increased by 3.0% for year-to-date period, reflecting a moderately growing invested asset base offset by lower investment yields.

As the above table shows, the Title Insurance claim ratio trended lower for the second quarter reflecting an increase in favorable development of prior years' claim reserves estimates. Underwriting expenses remained generally aligned with revenues from premiums and fees for all periods presented. Together, these factors produced significantly greater pretax operating income for 2020's second quarter and year-to-date period.

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

%


2nd Quarter 2019


3.1

%




(0.9)

%




4.0

%


2nd Quarter 2020


2.7

%




(1.2)

%




3.9

%


1st Six Months 2019


3.0

%




(1.0)

%




4.0

%


1st Six Months 2020


3.1

%




(0.8)

%




3.9

%


 

RFIG Run-off Segment Results


RFIG Run-off Summary Operating Results (a)



Quarters Ended June 30,


Six Months Ended June 30,


2020


2019


% Change


2020


2019


% Change

A. Mortgage Insurance (MI)












Net premiums earned

$

11.6



$

15.1



-23.1

%


$

24.3



$

31.2



-22.2

%

Net investment income

3.9



4.3



-8.8



8.3



8.6



-4.0


Claim costs

16.8



6.9



144.3



21.6



16.4



31.4


MI pretax operating income (loss)

$

(4.9)



$

8.4



-158.7

%


$

3.4



$

15.5



-77.9

%













Claim ratio

144.5

%


45.5

%




89.1

%


52.8

%



Expense ratio

32.1



27.2





31.1



25.3




Combined ratio

176.6

%


72.7

%




120.2

%


78.1

%















B. Consumer Credit Indemnity (CCI) (a)












CCI pretax operating income (loss)

$



$

(0.1)





$



$

1.0
















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












Segment pretax operating income (loss)

$

(4.9)



$

8.2



-160.1

%


$

3.4



$

16.5



-79.3

%





















(a)

RFIG Run-off pretax operating income (loss) includes amounts attributable to the Company's consumer credit indemnity run-off business of $ - for both the second quarter and first six months of 2020 and $(0.1) and $1.0 for the second quarter and first half of 2019, 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 RFIG Run-off reflect the expected, continuing drop in net earned premiums from declining risk in force and higher incurred claim costs due to a significant increase in the number of reported delinquencies in this year's second quarter. Investment income declined primarily as a result of a smaller invested asset base and a lower investment yield.

As shown in the accompanying tables, current period claim ratios reflect the aforementioned increase in reported delinquencies driven primarily by the economic impacts of the COVID-19 pandemic and the effect of loan forbearance programs mandated by the Federal government under the Coronavirus Aid, Relief, and Economic Security Act.

As indicated in the far right column of the following table, RFIG Run-off claim ratios had experienced a fairly consistent decline for the past several annual periods presented 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

%


2nd Quarter 2019


45.5

%




(4.7)

%




50.2

%


2nd Quarter 2020


144.5

%




21.0

%




123.5

%


1st Six Months 2019


52.8

%




(7.4)

%




60.2

%


1st Six Months 2020


89.1

%




2.5

%




86.6

%


 

Corporate and Other Operating Results



Corporate and Other Summary Operating Results





Quarters Ended June 30,


Six Months Ended June 30,



2020


2019


% Change


2020


2019


% Change

Net life and accident premiums earned


$

2.9



$

3.4



-13.7

%


$

6.1



$

6.9



-11.4

%

Net investment income


6.6



9.5



-29.9



15.0



18.5



-18.9


Other operating income













Operating revenues


9.6



12.9



-25.6



21.1



25.4



-16.8


Claim costs


2.0



3.1



-35.5



2.8



5.8



-50.4


Insurance expenses


1.0



1.2



-12.5



2.3



2.5



-6.4


Corporate, interest and other expenses - net


(0.2)



(4.6)



94.9



(3.1)



(9.4)



66.1


Operating expenses


2.8



(0.2)



N/M


2.0



(1.0)



N/M

Corporate and other pretax operating income (loss)


$

6.7



$

13.2



-48.8

%


$

19.0



$

26.4



-28.0

%

This segment includes 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. The segment tends to produce highly variable results stemming 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.

Summary Consolidated Balance Sheet


June 30,


December 31,


June 30,


2020


2019


2019

Assets:






Cash and fixed maturity securities

$

10,769.0



$

10,381.5



$

10,070.5


Equity securities

3,560.1



4,030.5



3,894.6


Other invested assets

112.6



115.4



116.3


Cash and invested assets

14,441.8



14,527.4



14,081.6


Accounts and premiums receivable

1,771.9



1,466.7



1,736.1


Federal income tax recoverable: Current

15.8



5.7




Prepaid federal income taxes





129.8


Reinsurance balances recoverable

4,130.7



3,823.9



3,798.2


Deferred policy acquisition costs

319.5



325.4



324.7


Sundry assets

970.3



927.0



917.0


Total assets

$

21,650.3



$

21,076.3



$

20,987.7








Liabilities and Shareholders' Equity:






Policy liabilities

$

2,607.3



$

2,419.2



$

2,547.8


Claim reserves

10,230.9



9,929.5



9,636.3


Federal income tax payable: Current





0.3


                                              Deferred

43.7



112.2