News Details

CHICAGO, Jan. 22, 2015 /PRNewswire/ -- Old Republic International Corporation (NYSE: ORI), today reported financial results for the fourth quarter and full-year 2014. Pretax operating income for both periods reflected much lower year-over-year general insurance earnings, and a continuation of profitability in the run-off mortgage guaranty ("MI") line. Losses in the consumer credit indemnity ("CCI") portion of this run-off business, however, offset much of the MI profitability. Title insurance operating income in 2014's fourth quarter gained significantly compared to results for the same period of 2013, while performance for the full year was eroded to some degree by transitory weaknesses in housing-related markets. Full-year consolidated net income encompassed all of these factors as well as relatively high levels of capital gains garnered from sales of investment securities. The following table shows Old Republic's segmented and consolidated results and related data.

The preceding table shows both operating and net income to highlight the effects of realized investment gain or loss recognition on period-to-period earnings comparisons. Management uses net operating income, a non-GAAP financial measure, to evaluate and better explain operating performance, believing that this measure enhances an understanding of Old Republic's core business results. Operating income, however, does not replace net income determined in accordance with GAAP as a measure of total profitability.

The timing of realized investment gain or loss recognition can be highly discretionary and arbitrary due to such factors as individual securities sales, recording of estimated losses from write-downs of impaired securities, tax-planning considerations, and changes in investment management judgments relative to the direction of securities markets or the future prospects of individual investees or industry sectors. Since 2013, asset management operations have in part been oriented toward an enhancement of income from interest and dividends. To a large extent, this strategy has led to sales of non-income producing or low-yielding securities. Proceeds from these sales have largely been reinvested in higher yielding common shares of American companies with distinguished long-term records of earnings and dividend growth.

General Insurance Results – The table below shows the major components of general insurance profitability.

Consolidated general insurance operations, exclusive of the CCI run-off line, produced much lower pretax operating income for 2014. Net premiums earned reflected slightly higher growth than the 8.1% gain registered for all of 2013. Continued benefits from rate improvements, higher policy retentions, and new business production accounted for 2014's greater premium revenues.

Income from insurance underwriting and related services, however, declined significantly in both the fourth quarter and full-year 2014 as claim costs remained under upward pressure for both workers' compensation and general liability policies. The combination of more costly claim settlements and a re-evaluation of prior years' established reserves led to significant increases in both reserve levels and claim costs incurred throughout 2014. As a consequence, Old Republic'sGeneral Insurance Group sustained unfavorable developments of prior years' reserves, a departure from its long history of reserve adequacy. For the fourth quarter and all of 2014, these adversities caused increases of 10.1 and 3.9 percentage points in the above noted claim ratios. By contrast, the claim ratio for 2013's fourth quarter was largely unaffected by adverse developments, while the entire year's claim ratio benefitted from a .9 percentage point reduction due to favorable developments of prior years' reserves.

The overall general insurance expense ratio for 2014 trended slightly down as operating leverage benefitted from the year's higher premium levels.

Net investment income gained from the combination of a higher invested asset base and the greater yields obtained from an increasingly greater commitment to high quality dividend-paying common stocks during the past two years

Title Insurance Results – Earnings were highly positive in Old Republic's title insurance business despite a fairly significant downturn in real estate and mortgage transactions that began in mid-year 2013. The following table reflects key operating trends evidencing these changed market conditions and related factors.

The decline in title insurance premiums and fees throughout 2014 was mainly caused by the significant drop in refinance transactions from higher levels reached in 2013. The impact of lower refinance activity was magnified by adverse weather conditions in the early part of 2014 which likely deterred consumer spending and purchases, and by a rise in mortgage interest rates beginning mid-year 2013.

Underwriting-wise, 2014's ratio of claim costs to premiums and fees was lower as claim frequency and severity continued to abate. For 2014 as a whole, and in the year's final quarter in particular, claim reserve provisions were lower and favorable development of prior years' reserves resulted in reducing the claim ratios shown in the table above.

Net investment income rose at a faster pace in 2014, as it benefitted from the combination of a greater invested asset base and higher yields obtained from a greater commitment to high quality dividend-paying common stocks.

RFIG Run-off Business Results – The table below reflects RFIG's comparative results before and after the combination of run-off MI and CCI coverages within the single run-off business segment established in 2012.

Consistent with a run-off operating mode, the MI and CCI lines posted further declines in earned premiums. Investment income also dropped by virtue of a pervasively low yield environment and a declining invested asset base. Downtrends in MI investment income were further accentuated as a greater proportion of investable assets had been allocated to short-term fixed income securities. This higher liquidity had been established to fund the July 2014 payment of approximately $657 for previously deferred claim settlements held in reserves and liquidated following regulatory approval. The payments, which had no income statement effect, resulted in a reduction of both invested assets and claim reserves. These payments had the further effect of lessening balance sheet reserve leverage and the financial significance of the MI subsidiaries within ORI's holding company system.

The resumed profitability of mortgage guaranty operations since 2013's second quarter has been largely due to much reduced claim provisions and resulting costs. Key factors driving this reduction relate mostly to the continued decline in reported delinquencies and higher rates at which previously reported defaults are cured or otherwise resolved without payment. The improved cure rates are a reflection of gradually improving trends in home prices, foreclosures, and real estate activity in general. Since year-end 2012, these factors have led to favorable developments of prior year-end claim reserves. For the fourth quarters of 2014 and 2013, favorable loss developments resulted in a lowering of claim ratios by 50.6 and 29.3 percentage points, respectively. For each full year, the related loss ratio reductions amounted to 69.3 and 88.2 percentage points, respectively. Changes in MI expense ratios for both 2014 periods reflect a continuing drop in earned premiums and charges taken relative to the MI subsidiaries' attempted recapitalization efforts which were terminated in the first quarter of 2014.

CCI results deteriorated significantly in 2014 as ongoing claim litigation costs burdened this portion of the RFIG run-off business. These costs rose materially in the second quarter of 2014 as greater net reserve provisions were required to cover the final settlement of a litigated case and, for all periods, the ongoing claim litigation with a major lending institution.

Corporate and Other Operations – The combination of a small life and accident insurance business and the net costs associated with the parent holding company and its internal services subsidiaries usually produce highly variable results. Earnings variations posted by the combination of these relatively minor elements of Old Republic's business stem from volatility inherent to the small scale of life and accident insurance operations, and net interest costs pertaining to external and intra-system financing arrangements. The interplay of these various operating elements is summarized in the following table:

Consolidated Results – The combination of all of the above factors and results is reflected in the following table and in the accompanying Summary Financial Statements and Common Stock Statistics.

Cash flow from consolidated operating activities resulted in a deficit of $181.2 for 2014 compared to positive cash flow of $686.7 in 2013. Excluding the negative cash flow produced by the RFIG run-off business, the remainder of Old Republic's operations posted positive cash flows of $702.8 and $757.5 in 2014 and 2013, respectively.

Cash, Invested Assets, and Shareholders' Equity – The table below reflects Old Republic's consolidated cash and invested assets as well as the shareholders' equity account at the dates shown:

Old Republic's invested assets are managed in consideration of enterprise-wide risk management objectives. Most importantly, these are intended to assure solid funding of insurance subsidiaries' long-term obligations to policyholders and other beneficiaries, and the necessary long-term stability of their capital accounts. As a result, the investment portfolio contains no significant insurance risk-correlated asset exposures to real estate, mortgage-backed securities, collateralized debt obligations ("CDO's"), derivatives, junk bonds, hybrid securities, or illiquid private equity investments. In a similar vein, the Company does not engage in hedging or securities lending transactions, nor does it invest in securities whose values are predicated on non-regulated financial instruments exhibiting amorphous or unfunded counter-party risk attributes.

As of December 31, 2014 the consolidated investment portfolio reflected a current allocation of approximately 82 percent to fixed-maturity securities and short-term investments, and 18 percent to equities. Exposure to high quality dividend-paying equity securities has been emphasized since 2013. Asset quality of the fixed maturity portfolio has remained at high levels.

Changes in shareholders' equity per share are reflected in the following table. As indicated, the changes resulted mostly from each year's net income or loss, dividend payments to shareholders, and changes in the value of invested assets carried at fair value.

Capitalization – During 2014, the Company raised $400 million through a public offering of 10-year notes. The following table shows the composition of Old Republic's capital structure inclusive of this capital raise.

Conference Call Information
Old Republic has scheduled a conference call at 3:00 p.m. ET (2:00 p.m. CT) today, to discuss its fourth quarter and full year 2014 performance and to review major operating trends and business developments. To access this call live in listen-only mode:

• Log on to the Company's website at www.oldrepublic.com 15 minutes before the call to download the necessary software, or, alternatively
• the call can also be accessed by phone at 888-417-8533.

Interested parties may also listen to a replay of the call through January 29, 2015 by dialing 877-870-5176, passcode 5631302, or by accessing it on Old Republic International's website through February 22, 2015.

About Old Republic
Chicago-based Old Republic International Corporation is one of the nation's 50 largest publicly held insurance organizations. Its most recent financial statements reflect consolidated assets of approximately $16.98 billion and common shareholders' equity of $3.92 billion, or $15.15 per share. Its current stock market valuation is approximately $3.68 billion, or $14.09 per share.

The Company is organized as an insurance holding company whose subsidiaries actively market, underwrite, and provide risk management services for a wide variety of coverages mostly in the general and title insurance fields. A long-term interest in mortgage guaranty and consumer credit indemnity lines has devolved to a run-off operating mode in recent years.

The nature of Old Republic's business requires that it be managed for the long run. For the 25 years ended in 2014, the Company's total market return, with dividends reinvested, has grown at a compounded annual rate of 11.0 percent per share. For the same period, the total market return, with dividends reinvested, for the S&P 500 Index has grown at a 9.6 percent annual compound rate. During those years, Old Republic's shareholders' equity account, inclusive of cash dividends, has risen at an average annual rate of 9.7 percent per share, and the regular cash dividend has grown at a 9.5 percent annual compound rate. According to the most recent edition of Mergent's Dividend Achievers, Old Republic is one of just 98 qualifying companies, out of thousands considered, that have posted at least 25 consecutive years of annual dividend growth.

Accompanying Financial Data:

• Summary Financial Statements and Common Stock Statistics
• Safe Harbor Statement

Financial Supplement
A financial supplement to this news release is available on the Company's website.