Old Republic Reports Results For The Third Quarter And First Nine Months Of 2019

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October 24, 2019 at 9:00 AM EDT

Old Republic Reports Results For The Third Quarter And First Nine Months Of 2019

CHICAGO, Oct. 24, 2019 /PRNewswire/ -- Old Republic International Corporation (NYSE: ORI) today reported the following consolidated results (a):




Quarters Ended September 30,


Nine Months Ended September 30,



2019


2018


% Change


2019


2018


% Change

Pretax income (loss)


$

252.4



$

335.1



-24.7

%


$

976.3



$

575.7



69.6

%

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


63.6



135.7



-53.1



468.7



72.6



N/M


Pretax income (loss) excluding investment gains (losses)


$

188.7



$

199.3



-5.3

%


$

507.6



$

503.0



0.9

%















Net income (loss)


$

202.8



$

275.2



-26.3

%


$

780.6



$

477.0



63.6

%

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


50.1



107.2



-53.2



369.9



57.4



N/M


Net income (loss) excluding investment gains (losses)


$

152.7



$

167.9



-9.1

%


$

410.6



$

419.6



-2.1

%

 

Consolidated pretax and net income, exclusive of all investment gains or (losses), for the third quarter and first nine months of 2019 were moderately lower to relatively flat vis-a-vis 2018. Continued growth in net investment income was not sufficient to offset weaker underwriting results in both periods. Overall 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 on pages 2 and 3.


FINANCIAL HIGHLIGHTS (a)




Quarters Ended September 30,


Nine Months Ended September 30,



SUMMARY INCOME STATEMENTS:

2019


2018


% Change


2019


2018


% Change



Revenues:














Net premiums and fees earned

$

1,561.7



$

1,504.8



3.8

%


$

4,380.4



$

4,255.5



2.9

%



Net investment income

112.7



108.7



3.6



337.8



321.5



5.1




Other income

32.9



30.4



8.3



97.4



91.1



6.9




Total operating revenues

1,707.3



1,644.0



3.9



4,815.7



4,668.2



3.2




Investment gains (losses):














Realized from actual transactions

6.3



7.3





31.3



54.8






Realized from impairments







(2.0)








Unrealized from changes in fair value of equity securities

57.3



128.4





439.3



17.7






Total investment gains (losses)

63.6



135.7





468.7



72.6






  Total revenues

1,771.0



1,779.7





5,284.4



4,740.9






Operating expenses:














Claim costs

663.7



619.4



7.2



1,905.1



1,820.8



4.6




Sales and general expenses

845.0



815.2



3.7



2,372.0



2,310.0



2.7




Interest and other charges

9.7



9.9



-2.0



30.8



34.3



-10.3




Total operating expenses

1,518.6



1,444.6



5.1

%


4,308.0



4,165.2



3.4

%



Pretax income (loss)

252.4



335.1





976.3



575.7






Income taxes (credits)

49.5



59.8





195.6



98.6






Net income (loss)

$

202.8



$

275.2





$

780.6



$

477.0


































COMMON STOCK STATISTICS:














Net income (loss) per share: Basic

$

0.68



$

0.92





$

2.60



$

1.63






                                                 Diluted

$

0.67



$

0.92





$

2.59



$

1.59






Components of net income (loss) per share:














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

$

0.51



$

0.56



-8.9

%


$

1.37



$

1.43



-4.2

%



Net investment gains (losses):














Realized from actual transactions and impairments

0.02



0.02





0.08



0.15






Unrealized from changes in fair value of equity securities

0.15



0.34





1.15



0.05






Basic net income (loss)

$

0.68



$

0.92





$

2.60



$

1.63






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

$

0.51



$

0.56



-8.9

%


$

1.36



$

1.40



-2.9

%



Net investment gains (losses):














Realized from actual transactions and impairments

0.01



0.02





0.08



0.14






Unrealized from changes in fair value of equity securities

0.15



0.34





1.15



0.05






Diluted net income (loss)

$

0.67



$

0.92





$

2.59



$

1.59






Cash dividends on common stock

$

1.2000



$

0.1950





$

1.6000



$

0.5850






Book value per share







$

19.31



$

17.76



8.7

%

















(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 basic 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 volatility in stock market valuations is most evident in its net of tax effect on net income for the third quarter and first nine 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 September 30,


Nine Months Ended September 30,


2019


2018


% Change


2019


2018


% Change

A. Net premiums, fees, and other income:












  General insurance

$

870.2



$

841.5



3.4

%


$

2,551.9



$

2,441.3



4.5

%

  Title insurance

673.8



640.7



5.2



1,772.3



1,743.6



1.6


  Corporate and other

3.3



4.2



-21.9



10.2



11.2



-8.8


  Other income

32.9



30.4



8.3



97.4



91.1



6.9


Subtotal

1,580.3



1,517.0



4.2



4,431.9



4,287.4



3.4


  RFIG run-off business (c)

14.2



18.2



-21.6



45.8



59.2



-22.6


Consolidated

$

1,594.6



$

1,535.2



3.9

%


$

4,477.8



$

4,346.7



3.0

%













B. Underwriting and related












  services income (loss):












  General insurance

$

19.7



$

37.0



-46.7

%


$

74.6



$

78.0



-4.3

%

  Title insurance

63.3



58.7



7.9



126.1



132.6



-4.8


  Corporate and other

(0.3)



(4.0)



90.8



(10.9)



(17.4)



37.5


Subtotal

82.7



91.7



-9.8



189.9



193.2



-1.7


  RFIG run-off business (c)

3.0



8.7



-65.2



10.7



22.6



-52.8


Consolidated

$

85.7



$

100.5



-14.7

%


$

200.6



$

215.8



-7.0

%

C. Consolidated underwriting ratio:












  Claim ratio

42.5

%


41.2

%




43.5

%


42.8

%



  Expense ratio

51.9



51.9





51.7



51.9




Composite ratio

94.4

%


93.1

%




95.2

%


94.7

%















D. Net investment income:












  General insurance

$

88.7



$

86.1



3.0

%


$

265.8



$

253.8



4.7

%

  Title insurance

10.2



9.8



4.3



30.8



28.8



6.8


  Corporate and other

9.4



8.1



15.2



27.9



23.4



19.3


Subtotal

108.4



104.1



4.1



324.6



306.1



6.0


  RFIG run-off business

4.2



4.6



-7.1



13.2



15.4



-14.2


Consolidated

$

112.7



$

108.7



3.6

%


$

337.8



$

321.5



5.1

%

E. Interest and other charges:












  General insurance

$

17.7



$

18.0





$

54.6



$

52.7




  Title insurance

0.7



0.8





3.3



3.2




  Corporate and other (a)

(8.7)



(8.9)





(27.1)



(21.6)




Subtotal

9.7



9.9





30.8



34.3




  RFIG run-off business












Consolidated

$

9.7



$

9.9



-2.0

%


$

30.8



$

34.3



-10.3

%













F. Segmented and consolidated












  pretax income (loss) excluding












  investment gains (losses):












  General insurance

$

90.7



$

105.1



-13.7

%


$

285.8



$

279.1



2.4

%

  Title insurance

72.8



67.7



7.6



153.7



158.2



-2.8


  Corporate and other

17.7



13.1



35.2



44.2



27.6



60.3


Subtotal

181.4



185.9



-2.5



483.7



464.9



4.0


  RFIG run-off business (c)

7.3



13.3



-45.1



23.9



38.0



-37.2


Consolidated

188.7



199.3



-5.3

%


507.6



503.0



0.9

%

  Income taxes (credits) on above (b)

36.0



31.3





96.9



83.4




G. Net income (loss) excluding












  investment gains (losses)

152.7



167.9



-9.1

%


410.6



419.6



-2.1

%

H. Consolidated pretax investment












  gains (losses):












  Realized from actual transactions












 and impairments

6.3



7.3





29.3



54.8




  Unrealized from changes in












 fair value of equity securities

57.3



128.4





439.3



17.7




Total

63.6



135.7





468.7



72.6




  Income taxes (credits) on above

13.5



28.5





98.7



15.2




  Net of tax investment gains (losses)

50.1



107.2





369.9



57.4




 I. Net income (loss)

$

202.8



$

275.2





$

780.6



$

477.0




J. Consolidated operating cash flow







$

666.2



$

597.1




























(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 third quarter and first nine months of 2019, and 15.7% and 16.6% for the third quarter and first nine months of 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 September 30,


Nine Months Ended September 30,


2019


2018


% Change


2019


2018


% Change

Net premiums earned

$

870.2



$

841.5



3.4

%


$

2,551.9



$

2,441.3



4.5

%

Net investment income

88.7



86.1



3.0



265.8



253.8



4.7


Other income

32.7



30.2



8.4



97.0



90.5



7.1


Operating revenues

991.7



957.8



3.5



2,914.7



2,785.7



4.6


Claim costs

634.8



595.0



6.7



1,821.9



1,739.3



4.8


Sales and general expenses

248.4



239.6



3.7



752.2



714.5



5.3


Interest and other charges

17.7



18.0



-2.1



54.6



52.7



3.7


Operating expenses

900.9



852.7



5.7



2,628.9



2,506.6



4.9


Segment pretax operating income (loss) (a)

$

90.7



$

105.1



-13.7

%


$

285.8



$

279.1



2.4

%













Claim ratio

72.9

%


70.7

%




71.4

%


71.2

%



Expense ratio

24.8



24.9





25.7



25.6




Composite ratio

97.7

%


95.6

%




97.1

%


96.8

%



__________________

(a) 

In connection with the combined run-off mortgage guaranty ("MI") and consumer credit indemnity ("CCI"), $0.2 and $0.7 of pretax operating income for the third quarter and first nine months of 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 the third quarter 2019 and all future periods.

 

General insurance underwriting/service profitability, gauged by the composite underwriting ratios, declined in the latest quarter, and was relatively stable for the first nine months of 2019. Revenue-wise earned premiums edged up in low single digits in both of these periods. With few exceptions, premiums grew for most types of coverages and markets served. The largest contributions stemmed 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, 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 addition.

As the above table shows, the consolidated general insurance ratio of claim costs to net premiums earned remained relatively stable for the first nine months of 2019. As such, it continues to reflect the past several years' fairly consistent downtrends and the effects of claim development portrayed 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.






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

%


3rd Quarter 2018


70.7

%




(1.0)

%




71.7

%


3rd Quarter 2019


72.9

%




(0.5)

%




73.4

%


1st Nine Months 2018


71.2

%




0.3

%




70.9

%


1st Nine Months 2019


71.4

%




(0.4)

%




71.8

%


 

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 currently anticipates 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 is expected to reflect an expense ratio ranging between 23% and 25%, and a resulting composite underwriting ratio ranging 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 September 30,


Nine Months Ended September 30,


2019


2018


% Change


2019


2018


% Change

Net premiums and fees earned

$

673.8



$

640.7



5.2

%


$

1,772.3



$

1,743.6



1.6

%

Net investment income

10.2



9.8



4.3



30.8



28.8



6.8


Other income

0.1



0.1



1.0



0.5



0.6



-18.7


Operating revenues

684.3



650.8



5.1



1,803.7



1,773.1



1.7


Claim costs

20.7



15.1



37.3



53.3



45.0



18.4


Sales and general expenses

589.9



567.1



4.0



1,593.3



1,566.6



1.7


Interest and other charges

0.7



0.8



-9.0



3.3



3.2



1.3


Operating expenses

611.4



583.1



4.9



1,650.0



1,614.9



2.2


Segment pretax operating income (loss)

$

72.8



$

67.7



7.6

%


$

153.7



$

158.2



-2.8

%













Claim ratio

3.1

%


2.4

%




3.0

%


2.6

%



Expense ratio

87.5



88.5





89.9



89.8




Composite ratio

90.6

%


90.9

%




92.9

%


92.4

%



 

2019 year-over-year comparisons of revenues from title premiums and fees reflect a continued 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

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

%


3rd Quarter 2018


2.4

%




(1.8)

%




4.2

%


3rd Quarter 2019


3.1

%




(1.0)

%




4.1

%


1st Nine Months 2018


2.6

%




(1.5)

%




4.1

%


1st Nine 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 (a)


Quarters Ended September 30,


Nine Months Ended September 30,


2019


2018


% Change


2019


2018


% Change

A. Mortgage Insurance (MI)












Net premiums earned

$

14.2



$

17.8



-20.0

%


$

45.5



$

58.0



-21.7

%

Net investment income

4.2



4.3



-2.5



12.9



14.7



-12.1


Claim costs

7.6



5.5



37.9



24.1



23.3



3.4


MI pretax operating income (loss)

$

7.3



$

13.2



-44.8

%


$

22.8



$

37.9



-39.8

%













Claim ratio

53.6

%


31.1

%




53.0

%


40.2

%



Expense ratio

25.1



19.1





25.2



19.9




Composite ratio

78.7

%


50.2

%




78.2

%


60.1

%















B. Consumer Credit Indemnity (CCI) (a)












CCI pretax operating income (loss)

$



$





$

1.0



$

0.1
















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












Segment pretax operating income (loss)

$

7.3



$

13.3



-45.1

%


$

23.9



$

38.0



-37.2

%













__________________

(a) 

Segment pretax operating income (loss) includes amounts attributable to the Company's consumer credit indemnity run-off business of $ - and $1.0  for the third quarter and first nine months of 2019, respectively; these amounts were $ - and $0.1 for the third quarter and first nine months of 2018, respectively. Results for the CCI coverages are expected to be immaterial in the remaining run-off periods; effective July 1, 2019, these results are being classified in the General Insurance Segment for the third quarter 2019 and all future periods.

 

Pretax operating results of the run-off MI 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.

As indicated in the far right column of the following table, MI claim ratios have generally continued to decline, 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

2014


48.8

%




(69.3)

%




118.1

%


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

%


3rd Quarter 2018


31.1

%




(10.4)

%




41.5

%


3rd Quarter 2019


53.6

%




(14.2)

%




67.8

%


1st Nine Months 2018


40.2

%




(25.7)

%




65.9

%


1st Nine Months 2019


53.0

%




(9.6)

%




62.6

%


 

 


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 September 30,


Nine Months Ended September 30,



2019


2018


% Change


2019


2018


% Change

Net life and accident premiums earned


$

3.3



$

4.2



-21.9

%


$

10.2



$

11.2



-8.8

%

Net investment income


9.4



8.1



15.2



27.9



23.4



19.3


Operating revenues


12.7



12.4



2.2



38.1



34.6



10.1


Claim costs


0.5



3.5



-84.5



6.3



12.6



-49.5


Insurance expenses


0.9



1.3



-28.7



3.5



3.7



-7.6


Corporate, interest and other expenses - net


(6.5)



(5.6)



-16.8



(15.9)



(9.3)



-70.4


Operating expenses


(5.0)



(0.6)



N/M



(6.1)



7.0



-187.3


Corporate and other pretax operating income (loss)


$

17.7



$

13.1



35.2

%


$

44.2



$

27.6



60.3

%

 

 


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




September 30,


December 31,


September 30,


2019


2018


2018

Assets:






Cash and fixed maturity securities

$

10,291.4



$

9,683.0



$

9,817.2


Equity securities

3,770.6



3,380.9



3,474.3


Other invested assets

117.7



123.4



128.5


Cash and invested assets

14,179.7



13,187.4



13,420.1


Accounts and premiums receivable

1,687.5



1,499.4



1,643.0


Federal income tax recoverable: Current

0.5



16.8




Prepaid federal income taxes

138.5



129.8



114.3


Reinsurance balances recoverable

3,923.7



3,484.5



3,637.2


Deferred policy acquisition costs

333.0



316.3



316.6


Sundry assets

918.6



692.6



670.8


Total assets

$

21,181.8



$

19,327.1



$

19,802.3








Liabilities and Shareholders' Equity:






Policy liabilities

$

2,602.0



$

2,303.5



$

2,450.5


Claim reserves

9,817.4



9,471.2



9,482.9


Federal income tax payable: Current





3.7


                                              Deferred

171.3



10.3



54.7


Reinsurance balances and funds

759.9



600.4



703.2


Debt

973.7



981.4



981.1


Sundry liabilities

1,063.3



813.7



814.7


Total liabilities

15,387.9



14,180.8



14,491.1


Shareholders' equity

5,793.9



5,146.2



5,311.2


Total liabilities and shareholders' equity

$

21,181.8



$

19,327.1



$

19,802.3


 

 


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



Sept. 30,


Dec. 31,


Sept. 30,


Sept. '19/


Sept. '19/



2019


2018


2018


Dec. '18


Sept. '18

Cash and invested assets:











Available for sale fixed maturity securities, cash











   and other invested assets, carried at fair value

$

9,381.6



$

8,761.7



$

8,895.2



7.1

%


5.5

%


Equity securities, carried at fair value

3,770.6



3,380.9



3,474.3



11.5



8.5



Held to maturity, carried at amortized cost

1,027.5



1,044.8



1,050.5



-1.7



-2.2