Old Republic Reports Results For The First Quarter 2017

CHICAGO, April 27, 2017 /PRNewswire/ -- Old Republic International Corporation ORI today reported greater operating income for this year's first quarter. Excluding the RFIG run-off segment, these results were up 22.6 percent quarter-over-quarter. Title Insurance earnings in particular far outpaced last year's first quarter performance. A 47.7 percent earnings decline in the RFIG segment, however, drove consolidated pretax operating income to a smaller gain of 8.5 percent.

All of the year's operating earnings improvement emanated from more profitable consolidated underwriting and related services operations. Consolidated net income retreated, however, as lower gains were registered from discretionary sales of investment securities. The major components of consolidated results are summarized in the table below.

The preceding table shows both operating and net income to highlight the effects of realized investment gains or losses on period-to-period earnings comparisons. Management uses operating income, a non-GAAP financial measure, to evaluate and better explain operating performance, believing that the 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 recognition of realized investment gains or losses can be highly discretionary due to such factors as the timing of individual securities sales, the recording of estimated losses from write-downs of impaired securities, tax-planning considerations, and changes in investment management judgments regarding the direction of securities markets or the future prospects of individual investees or industry sectors. In recent years, asset management operations have to a large extent been oriented toward an enhancement of income from interest and dividends to counter a perniciously low yield environment. The strategy has led to a minimization of non-income producing or low-yielding securities. Proceeds from such securities' sales and maturities, as well as newly investable funds have largely been directed to purchases of higher yielding common shares of American companies with distinguished long-term records of earnings and dividend growth. More recently the Company has allotted greater investable funds to tax exempt issues which generally provide pretax yields lower than those of fully taxable corporate or U.S. Government fixed maturity securities but tend to generate better post-tax yields.

This year's 7.6 percent pretax operating income gain was substantially due to more profitable underwriting and related services operations. Net investment income growth slowed and interest charges on higher intra-system debt capital took a heavier toll on the bottom line.

Positive general insurance earned premiums trends were unevenly distributed among various insurance coverages and sources of business. Gains continued to be registered in commercial automobile (trucking), national accounts, home and auto warranty, and in a new underwriting facility established in early 2015. On the other hand, premium growth was constrained by low volume in a large account contractors book of business faced with a particularly competitive market place, and by reduced opportunities in the gas and oil energy services field.

The overall ratio of claim and related settlement costs to earned premiums was down year-over-year, and reflected a general downtrend exhibited in the past 24 months or so. In addition to estimates of current claim costs, however, the ratios for the respective quarters of 2017 and 2016 are inclusive of unfavorable developments of prior years' reserves of 1.4 and 0.3 percentage points. The expense ratio for both quarterly periods remained within its long-term range of 23 percent to 25 percent.

Quarterly and even annual claim provisions and the trends they display may not be particularly meaningful in Old Republic's liability insurance-oriented mix of business. Absent significant economic and insurance industry dislocations in the foreseeable future, it is anticipated that reported claim ratios can be expected to fall within targeted averages in the high 60 percent to low 70 percent range. The current mix of business should keep the expense ratio within a range of 23 percent and 25 percent.

The continuation of a generally positive mortgage rate environment and reasonably strong housing and commercial property markets were major factors in the 9.2 percent year-over-year gain in premiums and fees.

On the expense side of the ledger, claim costs were lower in the face of declining claims activity since the Great Recession years. Favorable developments of reserves established in prior years reduced the 2017 claim ratio by nearly 2.0 percentage points to the 2.1 percent level shown in the above table. The claim ratio for last year's first three months was unaffected by such developments. The operating expense ratio for the periods reported upon remained generally aligned with premiums and fees levels.

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Consistent with a run-off operating mode, a further decline of earned premiums was posted by the combined MI and CCI lines. MI investment income was also lower as reduced premium volume and on-going claim payments affected downward pressures on the invested asset base.

While the declining premium base led to an increase in the claim ratio for 2017, reported claim costs for MI were relatively flat in comparison to the first quarter of 2016. Reductions in the provision for current year losses emanating from the continuing decline in newly reported delinquencies and improving cure rates were offset by less favorable reserve development in 2017's first quarter compared to the previous year's quarter. In the latter regard, favorable developments of previously established claim reserves lowered claim ratios by 34.9 and 39.2 percentage points in the first three months of 2017 and 2016, respectively.

MI operating costs and expense ratio were negatively impacted in 2017's first quarter as a result of charges related to the partial termination of a facility lease.

Moderately improved CCI operating performance in this year's first three months resulted from the combination of the above-noted earned premium levels and reduced provisions for ongoing litigation costs.

In addition to all of the matters previously discussed, first quarter 2017 consolidated results were burdened by higher interest expense related to the greater debt level assumed last year. The 2016 proceeds from the new debt issue were invested in fixed maturity and equity securities.

Consolidated operating cash flow was additive to investable funds and operating needs in the amount of $146.1 and $125.9 for the first three months of 2017 and 2016, respectively. Excluding inherently negative operating cash flows in the MI and CCI run-off business, these amounts would be $193.1 and $152.8, respectively.

The sum-total of Old Republic's segmented results is represented by the following major components of pretax consolidated income:

 

Old Republic's invested assets are managed in consideration of enterprise-wide risk management objectives. Most importantly, these are intended to ensure solid funding of the insurance subsidiaries' long-term obligations to policyholders and other beneficiaries, as well as the long-term stability of the subsidiaries' capital accounts. To this end, the investment portfolio contains no significant insurance risk-correlated asset exposures to real estate, mortgage-backed securities, collateralized debt obligations ("CDO's"), derivatives, hybrid securities, or illiquid private equity investments. Moreover, 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 March 31, 2017, the consolidated investment portfolio reflected an allocation of approximately 77 percent to fixed-maturity and short-term investments, and 23 percent to equities. Investments in high quality, dividend-paying equity securities have been singularly emphasized since 2013, and the 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 shown, these resulted mostly from net income, dividend payments to shareholders, and changes in the value of invested assets carried at fair value.

 

 

The insurance business is distinguished from most others in that the prices (premiums) charged for various insurance products are set without certainty of the ultimate benefit and claim costs that will emerge, often many years after issuance and expiration of a policy. Old Republic's business is therefore conducted with a primary focus on achieving favorable underwriting results over cycles, and on the maintenance of financial soundness in support of its insurance subsidiaries' long-term obligations to insurance beneficiaries.

In this light, the Company's affairs are managed for the long run and without significant regard to the arbitrary strictures of quarterly or even annual reporting periods that American industry must observe. In Old Republic's view, such short reporting time frames do not comport well with the long-term nature of much of its business. Management therefore believes that the Company's operating results and financial condition can best be evaluated by observing underwriting and overall operating performance trends over succeeding five- or preferably ten-year intervals. A ten-year period in particular can likely encompass at least one economic and/or underwriting cycle and thereby provide an appropriate time frame for such cycle to run its course, and for premium rate changes and reserved claim costs to be quantified and emerge in financial results with greater finality and effect.

Accompanying Financial Data and Other Information:

• Summary Financial Statements and Common Stock Statistics
• About Old Republic
• Safe Harbor Statement

Financial Supplement:

• A financial supplement to this news release is available on the Company's website: www.oldrepublic.com

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 $18.90 billion and common shareholders' equity of $4.59 billion, or $17.62 per share. Its current stock market valuation is approximately $5.32 billion, or $20.22 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 2016, the Company's total market return, with dividends reinvested, has grown at a compounded annual rate of 10.0 percent per share. For the same period, the total market return, with dividends reinvested, for the S&P 500 Index has grown at a 9.2 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 9.5 percent per share, and the regular cash dividend has grown at a 9.0 percent annual compound rate. According to the most recent edition of Mergent's Dividend Achievers, Old Republic is one of just 96 qualifying companies, out of thousands considered, that have posted at least 25 consecutive years of annual dividend growth.

Safe Harbor Statement

Historical data pertaining to the operating results, liquidity, and other performance indicators applicable to an insurance enterprise such as Old Republic are not necessarily indicative of results to be achieved in succeeding years. In addition to the factors cited below, the long-term nature of the insurance business, seasonal and annual patterns in premium production and incidence of claims, changes in yields obtained on invested assets, changes in government policies and free markets affecting inflation rates and general economic conditions, and changes in legal precedents or the application of law affecting the settlement of disputed and other claims can have a bearing on period-to-period comparisons and future operating results.

Some of the oral or written statements made in the Company's reports, press releases, and conference calls following earnings releases, can constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Of necessity, any such forward-looking statements involve assumptions, uncertainties, and risks that may affect the Company's future performance. With regard to Old Republic's General Insurance segment, its results can be affected, in particular, by the level of market competition, which is typically a function of available capital and expected returns on such capital among competitors, the levels of interest and inflation rates, and periodic changes in claim frequency and severity patterns caused by natural disasters, weather conditions, accidents, illnesses, work-related injuries, and unanticipated external events. Title Insurance and RFIG run-off results can be affected by similar factors, and by changes in national and regional housing demand and values, the availability and cost of mortgage loans, employment trends, and default rates on mortgage loans. Life and accident insurance earnings can be affected by the levels of employment and consumer spending, variations in mortality and health trends, and changes in policy lapsation rates. At the parent holding company level, operating earnings or losses are generally reflective of the amount of debt outstanding and its cost, interest income on temporary holdings of short-term investments, and period-to-period variations in the costs of administering the Company's widespread operations.

A more detailed listing and discussion of the risks and other factors which affect the Company's risk-taking insurance business are included in Part I, Item 1A - Risk Factors, of the Company's 2016 Form 10-K Annual Report and Part II, Item 1A - Risk Factors, of the Company's recent Form 10-Q filings to the Securities and Exchange Commission, which Items are specifically incorporated herein by reference.

Any forward-looking statements or commentaries speak only as of their dates. Old Republic undertakes no obligation to publicly update or revise any and all such comments, whether as a result of new information, future events or otherwise, and accordingly they may not be unduly relied upon.

For Old Republic's latest news releases and other corporate documents:
Please visit us at www.oldrepublic.com

Alternatively, please write or call:

Investor Relations
Old Republic International Corporation
307 North Michigan Avenue • Chicago, IL 60601
312-346-8100

 

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SOURCE Old Republic International Corporation