MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS Quarters Ended March 31, 2022 and 2021 ($ in Millions, Except Share Data)
OVERVIEW
This management analysis of financial position and results of operations pertains to the consolidated accounts ofOld Republic International Corporation ("Old Republic ", "ORI", or "the Company"). The Company conducts its operations through a number of regulated insurance company subsidiaries organized into three major segments:General Insurance (property and liability insurance),Title Insurance and Republic Financial Indemnity Group ("RFIG") Run-off. A small life and accident insurance business, accounting for .1% of consolidated operating revenues for the quarter endedMarch 31, 2022 and .5% of consolidated assets as of that date, is included within the Corporate & Other caption of this report. The consolidated accounts are presented in conformity with theFinancial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC") of accounting principles generally accepted inthe United States of America ("GAAP"). As a publicly held company,Old Republic utilizes GAAP to comply with the financial reporting requirements of theSecurities and Exchange Commission ("SEC"). From time to time the FASB and theSEC issue various releases, many of which require additional financial statement disclosures and provide related application guidance. Recent guidance issued by the FASB is summarized further in the Notes to Consolidated Financial Statements where applicable. As a state regulated financial institution vested with the public interest, however, business of the Company's insurance subsidiaries is managed pursuant to the laws, regulations, and accounting practices of the various states in theU.S. and those of a small number of other jurisdictions outside theU.S. in which they operate. In comparison with GAAP, the statutory accounting practices reflect greater conservatism and comparability among insurers, and are intended to address the primary financial security interests of policyholders and their beneficiaries. Additionally, these practices also affect a significant number of important factors such as product pricing, risk bearing capacity and capital adequacy, the determination of Federal income taxes payable currently among ORI's tax-consolidated entities, and the upstreaming of dividends by insurance subsidiaries to the parent holding company. The major differences between these statutory financial accounting practices and GAAP are summarized in Note 1 to the consolidated financial statements included inOld Republic's 2021 Annual Report on Form 10-K. The insurance business is distinguished from most others in that the prices (premiums) charged for most products are set without knowing what the ultimate claim costs will be. We also can't know exactly when claims will be paid, which may be many years after a policy was issued or expired. This castsOld Republic as a risk-taking enterprise managed for the long run.Old Republic therefore conducts the business with a primary focus on achieving favorable underwriting results over cycles, and on maintaining a sound financial condition to support our subsidiaries' long-term obligations to policyholders and their beneficiaries. To achieve these objectives, adherence to insurance risk management principles is stressed, and asset diversification and quality are emphasized. In addition, management engages in an ongoing assessment of operating risks, such as cybersecurity risks, that could adversely affect the Company's business and reputation. In addition to income arising fromOld Republic's basic underwriting and related services functions, significant investment income is earned from invested funds generated by those functions and from capital resources. Investment management aims for stability of income from interest and dividends, protection of capital, and for sufficiency of liquidity to meet insurance underwriting and other obligations as they become payable in the future. Securities trading and the realization of capital gains are not primary objectives. The investment philosophy is therefore best characterized as emphasizing value, credit quality, and relatively long-term holding periods. The Company's ability to hold both fixed income and equity securities for long periods of time is enabled by the scheduling of maturities in contemplation of an appropriate matching of assets and liabilities, and by investments in large capitalization, highly liquid equity securities. In light of the above factors, the Company is managed for the long run and with little regard for quarterly or even annual reporting periods. These time frames are too short. Management believes results are best evaluated by looking at underwriting and overall operating performance trends over 10-year intervals. These likely include one or two economic and/or underwriting cycles. This provides enough time for these cycles to run their course, for underwriting and premium rate changes to appear in financial results, and for reserved claim costs to be quantified with greater certainty.
This management analysis should be read in conjunction with the consolidated
financial statements and the footnotes appended to them.
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EXECUTIVE SUMMARY
Old Republic International Corporation reported the following consolidated results: OVERALL RESULTS Quarters Ended March 31, 2022 2021 % Change Pretax income (loss)$ 382.6 $ 630.6 Pretax investment gains (losses) 145.1 375.4 Pretax income (loss) excluding investment gains (losses)$ 237.5 $ 255.1 -6.9 % Net income (loss)$ 306.3 $ 502.1 Net of tax investment gains (losses) 114.5 295.7 Net income (loss) excluding investment gains (losses)$ 191.7 $ 206.3 -7.0 % PER DILUTED SHARE Quarters Ended March 31, 2022 2021 % Change Net income (loss)$ 1.00 $ 1.68 Net of tax investment gains (losses) .37 .99 Net income (loss) excluding investment gains (losses)$ .63 $ .69 -8.7 % SHAREHOLDERS' EQUITY March 31, Dec. 31, 2022 2021 % Change Total$ 6,750.1 $ 6,893.2 -2.1 % Per Common Share$ 22.23 $ 22.76 -2.3 %Old Republic International Corporation reported pretax income, excluding investment gains, of$237.5 for the quarter. The decline compared to the 2021 period, is within our expectations as increasing mortgage interest rates began to affectTitle Insurance results. BothGeneral Insurance andTitle Insurance produced solid underwriting results that drove a consolidated combined ratio of 91.9% for the quarter. Consolidated net premiums and fees earned was$1.9 billion for the quarter representing growth of 4.4% compared to the 2021 period.General Insurance net earned premiums grew by 6.0%, whileTitle Insurance growth in premium and fees was tempered by lower revenues within their direct operations. Net investment income increased slightly for the quarter, reflecting growth in the invested asset base, offset by lower investment yields earned. Book value per share was$22.23 as ofMarch 31, 2022 , reflecting interest rate driven unrealized losses in the fixed income portfolio, offset by operating earnings. With the addition of dividends declared during the quarter, this was a decrease of 1.3% over year-end 2021. 19 --------------------------------------------------------------------------------Old Republic's business is managed for the long run. In this context management's key objectives are to achieve highly profitable operating results over the long term, and to ensure balance sheet strength for the primary needs of the insurance subsidiaries' underwriting and related services business. In this view, the evaluation of periodic and long-term results excludes consideration of all investment gains (losses). Under Generally Accepted Accounting Principles (GAAP), however, net income, inclusive of investment gains (losses), is the measure of total profitability. In management's opinion, the focus on income excluding investment gains (losses), also described herein as segment pretax operating income (loss), provides a better way to analyze, evaluate, and establish accountability for the results of the insurance operations. The inclusion of realized investment gains (losses) in net income can mask trends in operating results, because such realizations are often highly discretionary. Similarly, the inclusion of unrealized investment gains (losses) in equity securities can further distort such operating results with significant period-to-period fluctuations. FINANCIAL HIGHLIGHTS Quarters Ended March 31, SUMMARY INCOME STATEMENTS: 2022 2021 % Change Revenues: Net premiums and fees earned$ 1,919.0 $ 1,838.9 4.4 % Net investment income 106.2 104.3 1.8 Other income 36.2 36.3 -0.1 Total operating revenues 2,061.5 1,979.6 4.1 Investment gains (losses): Realized from actual transactions 65.2 7.8 Unrealized from changes in fair value of equity securities 79.8 367.5 Total investment gains (losses) 145.1 375.4 Total revenues 2,206.6 2,355.0 Operating expenses: Claim costs 607.9 603.4 0.8 Sales and general expenses 1,199.0 1,110.3 8.0 Interest and other charges 16.9 10.6 59.0 Total operating expenses 1,823.9 1,724.4 5.8 % Pretax income (loss) 382.6 630.6 Income taxes (credits) 76.3 128.5 Net income (loss)$ 306.3 $ 502.1 COMMON STOCK STATISTICS: Components of net income (loss) per share: Basic net income (loss) excluding investment gains (losses)$ 0.63 $ 0.69 -8.7 % Net investment gains (losses): Realized from actual transactions 0.17 0.02 Unrealized from changes in fair value of equity securities 0.21 0.97 Basic net income (loss)$ 1.01 $ 1.68
Diluted net income (loss) excluding investment gains
(losses)
$ 0.63 $ 0.69 -8.7 % Net investment gains (losses): Realized from actual transactions 0.17 0.02 Unrealized from changes in fair value of equity securities 0.20 0.97 Diluted net income (loss)$ 1.00 $ 1.68 Cash dividends on common stock$ 0.23 $ 0.22 Book value per share$ 22.23 $ 21.59 3.0 % We believe the information presented in the following table highlights the most meaningful indicators of ORI's segmented and consolidated financial performance. The information underscores the performance of our underwriting operations, as well as our sound investment of the capital and underwriting cash flows from these operations. 20 --------------------------------------------------------------------------------
Sources of Consolidated Income (Loss)
Quarters Ended
2022 2021 % Change A. Net premiums, fees, and other income: General insurance$ 910.9 $ 859.1 6.0 % Title insurance 998.9 967.7 3.2 Corporate & other 2.4 2.8 -13.3 Other income 36.2 36.3 -0.1 Subtotal 1,948.7 1,866.0 4.4 RFIG run-off 6.5 9.2 -29.0 Consolidated$ 1,955.2 $ 1,875.2 4.3 %
B. Underwriting and related services income (loss):
General insurance$ 76.3 $ 71.9 6.2 % Title insurance 70.2 93.8 -25.2 Corporate & other (6.1) (6.0) -0.4 Subtotal 140.4 159.7 -12.0 RFIG run-off 7.7 1.7 N/M Consolidated$ 148.2 $ 161.4 -8.2 % C. Consolidated underwriting ratio: Claim ratio: Current year 34.1 % 34.6 % Prior years (2.4) (1.8) Total 31.7 32.8 Expense ratio 60.2 58.1 Combined ratio 91.9 % 90.9 % D. Net investment income: General insurance$ 82.4 $ 84.8 -2.8 % Title insurance 11.3 10.5 7.6 Corporate & other 10.4 5.7 81.8 Subtotal 104.2 101.1 3.1 RFIG run-off 2.0 3.2 -36.2 Consolidated$ 106.2 $ 104.3 1.8 % E. Interest and other charges (credits): General insurance$ 16.3 $ 16.0 Title insurance 0.5 0.6 Corporate & other (a) - (5.9) Subtotal 16.9 10.6 RFIG run-off - - Consolidated$ 16.9 $ 10.6 59.0 % F. Segmented and consolidated pretax income (loss) excluding investment gains (losses)(B+D-E): General insurance$ 142.5 $ 140.8 1.2 % Title insurance 80.9 103.7 -21.9 Corporate & other 4.2 5.6 -24.6 Subtotal 227.7 250.1 -9.0 RFIG run-off 9.7 4.9 97.0 Consolidated 237.5 255.1 -6.9 % Income taxes (credits) on above (b) 45.7 48.8G. Net income (loss) excluding investment gains (losses) 191.7 206.3 -7.0 % H. Consolidated pretax investment gains (losses): Realized from actual transactions 65.2 7.8 Unrealized from changes in fair value of equity securities 79.8 367.5 Total 145.1 375.4 Income taxes (credits) on above 30.5 79.6 Net of tax investment gains (losses) 114.5 295.7 I. Net income (loss)$ 306.3 $ 502.1 J. Consolidated operating cash flow
(a) Includes consolidation/elimination entries. (b) The effective tax rates
applicable to pretax income excluding investment gains (losses) were 19.3% and
19.1% for the first quarter 2022 and 2021, respectively.
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General Insurance Segment Results
General Insurance
Summary Operating Results
Quarters Ended March 31,
2022 2021 % Change
Net premiums written $ 960.8 $ 871.2 10.3 %
Net premiums earned 910.9 859.1 6.0
Net investment income 82.4 84.8 -2.8
Other income 35.9 36.0 -0.2
Operating revenues 1,029.4 980.0 5.0
Claim costs 582.2 567.3 2.6
Sales and general expenses 288.3 255.8 12.7
Interest and other charges 16.3 16.0 2.0
Operating expenses 886.9 839.2 5.7
Segment pretax operating income (loss) $ 142.5 $ 140.8 1.2 %
Claim ratio 63.9 % 66.0 %
Expense ratio 27.7 25.6
Combined ratio 91.6 % 91.6 %
General Insurance net premiums earned increased 6.0% for the quarter, with
rising premiums in commercial auto, financial indemnity, and property lines of
coverage. Strong premium rate increases for most lines of coverage, other than
workers' compensation, high renewal retention ratios, and new business
production all contributed. Net investment income decreased slightly in the
quarter, reflecting lower investment yields earned, partially offset by growth
in the invested asset base.
The reported claim ratio for
inclusive of favorable reserve development from prior periods and a lower
current period claim provision, attributable to several years of premium rate
increases, underwriting actions, and a shift in the line of coverage mix.
The first quarter expense ratio was elevated compared to the same quarter last year, generally reflecting the shift in line of coverage mix, and an increase in employee costs, including the timing of certain benefit accruals. Investments in new products and geographies in recent years have diversified theGeneral Insurance business, resulting in shifts in the lines of coverage mix toward lines with higher expense ratios and lower current period claim ratios.
Together, these factors produced greater pretax operating income for the period
reported.
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
2017 71.8 % 0.7 % 71.1 %
2018 72.2 - 72.2
2019 71.8 0.4 71.4
2020 69.9 (0.8) 70.7
2021 64.8 % (3.8) % 68.6 %
1st Quarter 2021 66.0 % (2.7) % 68.7 %
1st Quarter 2022 63.9 % (3.2) % 67.1 %
Quarterly and annual claim ratios and trends may not be indicative of future
outcomes for a business with relatively long claim payment patterns. We target
combined ratios between 90% and 95%, and based on our historical line of
coverage mix, a claim ratio average in the high 60% to low 70% range, and an
expense ratio average of 25%. These components of the combined ratio will
continue to reflect the line of coverage mix.
22
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Title Insurance Segment Results
Title Insurance
Summary Operating Results
Quarters
Ended
2022 2021 % Change Net premiums and fees earned$ 998.9 $ 967.7 3.2 % Net investment income 11.3 10.5 7.6 Other income 0.2 0.2 -5.9 Operating revenues 1,010.5 978.4 3.3 Claim costs 29.3 29.2 0.3 Sales and general expenses 899.6 844.8 6.5 Interest and other charges 0.5 0.6 -16.0 Operating expenses 929.5 874.7 6.3 Segment pretax operating income (loss)$ 80.9 $ 103.7 -21.9 % Claim ratio 2.9 % 3.0 % Expense ratio 90.0 87.3 Combined ratio 92.9 % 90.3 %Title Insurance net premiums and fees earned grew by 3.2% in the quarter. Agency revenues continued to increase over the prior period although at a lower rate than in recent quarters. Revenue from direct production channels declined in the quarter, and we expect both directly produced and agency produced revenues to be lower throughout the year when compared to prior year periods. Increases in mortgage interest rates significantly reduced refinance activity in the quarter and likely will for the remainder of the year. Purchase order levels were in line with the prior period and continue to benefit from strong housing prices. Ongoing increases in mortgage interest rates may affect purchase activity through the remainder of the year. Net investment income increased slightly in the quarter, reflecting growth in the invested asset base, offset by lower investment yields earned.Title Insurance's claim ratios were relatively flat for the quarter. The first quarter expense ratio was elevated compared to the same quarter last year, generally reflecting the combination of lower directly produced revenues that carry higher fixed expenses, along with a greater proportion of agency produced revenues that have a higher overall expense ratio.
Together, these factors produced lower pretax operating income for the period
reported.
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
2017 0.8 % (3.0) % 3.8 %
2018 1.9 (1.8) 3.7
2019 2.5 (1.2) 3.7
2020 2.3 (1.3) 3.6
2021 2.6 % (1.0) % 3.6 %
1st Quarter 2021 3.0 % (0.6) % 3.6 %
1st Quarter 2022 2.9 % (0.6) % 3.5 %
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RFIG Run-off Segment Results
RFIG Run-off
Summary Operating Results
Quarters
Ended
2022 2021 % ChangeMortgage Insurance (MI) Net premiums earned$ 6.5 $ 9.2 -29.0 % Net investment income 2.0 3.2 -36.2 Claim costs (4.2) 4.3 N/M MI pretax operating income (loss)$ 9.7 $ 4.9 97.0 % Claim ratio -64.8 % 46.5 % Expense ratio 46.8 34.5 Combined ratio -18.0 % 81.0 % Pretax operating results of RFIG Run-off reflect the continuing drop in net earned premiums in line with the declining risk in force, and significantly lower claim costs compared to the 2021 period. Net investment income decreased in the quarter, reflecting a declining invested asset base, and lower investment yields earned. Extraordinary dividends of$35.0 million were paid to the parent company during the quarter. Claim costs reflect significantly fewer newly reported delinquencies along with improving trends in cure rates, influenced by a relatively strong economy and real estate market.
Together, these factors produced significantly greater pretax operating income
for the period reported.
The following table shows recent annual and interim periods’ claim ratios and
the effects of claim development trends:
Effect of Prior Periods'
(Favorable)/ Claim Ratio Excluding
Reported Unfavorable Claim Prior Periods' Claim
Claim Ratio Reserves Development Reserves Development
2017 57.6 % (38.3) % 95.9 %
2018 43.2 (27.0) 70.2
2019 55.0 (12.5) 67.5
2020 81.7 (26.5) 108.2
2021 (5.3) % (67.5) % 62.2 %
1st Quarter 2021 46.5 % (13.5) % 60.0 %
1st Quarter 2022 (64.8) % (131.1) % 66.3 %
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Corporate & Other Operating Results
Corporate & Other
Summary Operating Results
Quarters Ended
2022 2021 % Change Net life and accident premiums earned$ 2.4 $ 2.8 -13.3 % Net investment income 10.4 5.7 81.8 Other operating income - - - Operating revenues 12.9 8.5 50.8 Claim costs 0.6 2.4 -75.0 Insurance expenses 0.9 0.8 8.7 Corporate, interest and other expenses - net 7.1 (0.3) N/M Operating expenses 8.6 2.9 196.8 Corporate & other pretax operating income (loss)$ 4.2 $ 5.6 -24.6 % This segment includes a small life and accident insurance business and the net costs associated with the parent holding company and several internal corporate services subsidiaries. The segment tends to produce highly variable results stemming from volatility inherent from the lack of scale. Interest expense increased related to the issuance of$650 million of debt late in the second quarter of 2021, partially offset by net investment income from a higher level of investments.
