Quarterly report pursuant to section 13 or 15(d) of the Security Exchange Act of 1934
for the quarterly period ended:
June 30, 2019
or
☐
Transition report pursuant to section 13 or 15(d) of the Security Exchange Act of 1934
Commission File Number:
001-10607
OLD REPUBLIC INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
36-2678171
(State or other jurisdiction of
(IRS Employer Identification No.)
incorporation or organization)
307 North Michigan Avenue
Chicago
Illinois
60601
(Address of principal executive office)
(Zip Code)
Registrant's telephone number, including area code: 312-346-8100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock / $1 par value
ORI
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes: ☒ No: ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes: ☒ No: ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).Yes: ☐ No: ☒
The number of shares of the Registrant's Common Stock outstanding at June 30, 2019 was
303,201,054
.
There are 54 pages in this report
OLD REPUBLIC INTERNATIONAL CORPORATION
Report on Form 10-Q / June 30, 2019
INDEX
PAGE NO.
PART I
FINANCIAL INFORMATION:
CONSOLIDATED BALANCE SHEETS
3
CONSOLIDATED STATEMENTS OF INCOME
4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
5
CONSOLIDATED STATEMENTS OF PREFERRED STOCK AND COMMON
SHAREHOLDERS' EQUITY
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8 - 19
MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS
20 - 50
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
51
CONTROLS AND PROCEDURES
51
PART II
OTHER INFORMATION:
ITEM 1 - LEGAL PROCEEDINGS
52
ITEM 1A - RISK FACTORS
52
ITEM 6 - EXHIBITS
52
SIGNATURE
53
EXHIBIT INDEX
54
2
Old Republic International Corporation and Subsidiaries
Equity securities (at fair value) (cost: $3,170.7 and $3,039.1)
3,894.6
3,380.9
Other investments
23.2
31.0
Total investments
13,888.6
12,994.6
Other Assets:
Cash
99.8
100.3
Accrued investment income
93.0
92.4
Accounts and notes receivable
1,736.1
1,499.4
Federal income tax recoverable: Current
—
16.8
Prepaid federal income taxes
129.8
129.8
Reinsurance balances and funds held
179.3
166.2
Reinsurance recoverable: Paid losses
78.4
55.9
Policy and claim reserves
3,719.8
3,428.6
Deferred policy acquisition costs
324.7
316.3
Sundry assets
737.6
526.3
Total Other Assets
7,099.0
6,332.4
Total Assets
$
20,987.7
$
19,327.1
Liabilities, Preferred Stock, and Common Shareholders' Equity
Liabilities:
Losses, claims, and settlement expenses
$
9,636.3
$
9,471.2
Unearned premiums
2,352.5
2,104.9
Other policyholders' benefits and funds
195.2
198.6
Total policy liabilities and accruals
12,184.1
11,774.8
Commissions, expenses, fees, and taxes
485.0
525.4
Reinsurance balances and funds
814.3
600.4
Federal income tax payable: Current
.3
—
Deferred
147.0
10.3
Debt
975.4
981.4
Sundry liabilities
487.3
288.3
Commitments and contingent liabilities
Total Liabilities
15,093.7
14,180.8
Preferred Stock (1)
—
—
Common Shareholders' Equity:
Common stock (1)
303.2
302.7
Additional paid-in capital
1,288.6
1,277.6
Retained earnings
4,326.7
3,849.8
Accumulated other comprehensive income (loss)
44.8
(210.0
)
Unallocated ESSOP shares (at cost)
(69.4
)
(73.9
)
Total Common Shareholders' Equity
5,893.9
5,146.2
Total Liabilities, Preferred Stock and Common Shareholders' Equity
$
20,987.7
$
19,327.1
________
(1)
At June 30, 2019and December 31, 2018, there were 75,000,000 shares of $0.01 par value preferred stock authorized, of which no shares were outstanding. As of the same dates, there were 500,000,000 shares of common stock, $1.00 par value, authorized, of which 303,201,054 and 302,714,502 were issued as of June 30, 2019and December 31, 2018, respectively. At June 30, 2019 and December 31, 2018, there were 100,000,000 shares of Class B Common Stock, $1.00 par value, authorized, of which no shares were issued.
See accompanying Notes to Consolidated Financial Statements.
3
Old Republic International Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
($ in Millions, Except Share Data)
Quarters Ended
Six Months Ended
June 30,
June 30,
2019
2018
2019
2018
Revenues:
Net premiums earned
$
1,329.6
$
1,294.7
$
2,593.0
$
2,525.8
Title, escrow, and other fees
130.9
125.5
225.6
224.8
Total premiums and fees
1,460.5
1,420.2
2,818.6
2,750.6
Net investment income
113.0
106.9
225.1
212.7
Other income
34.1
30.1
64.5
60.7
Total operating revenues
1,607.7
1,557.3
3,108.3
3,024.2
Investment gains (losses):
Realized from actual transactions
12.5
32.0
24.9
47.5
Realized from impairments
(2.0
)
—
(2.0
)
—
Unrealized from changes in fair value of
equity securities
26.3
41.3
382.0
(110.6
)
Total realized and unrealized investment
gains (losses)
36.9
73.3
405.0
(63.1
)
Total revenues
1,644.7
1,630.7
3,513.4
2,961.1
Benefits, Claims and Expenses:
Benefits, claims and settlement expenses
629.9
601.0
1,228.4
1,191.2
Dividends to policyholders
5.3
6.3
12.9
10.1
Underwriting, acquisition, and other expenses
793.5
766.6
1,526.9
1,494.7
Interest and other charges
10.4
10.0
21.0
24.4
Total expenses
1,439.2
1,384.0
2,789.4
2,720.5
Income (loss) before income taxes (credits)
205.4
246.6
723.9
240.6
Income Taxes (Credits):
Current
30.6
35.4
74.3
61.4
Deferred
9.3
13.4
71.8
(22.7
)
Total
39.9
48.8
146.1
38.7
Net Income (Loss)
$
165.5
$
197.7
$
577.7
$
201.8
Net Income (Loss) Per Share:
Basic
$
.55
$
.66
$
1.93
$
.70
Diluted
$
.55
$
.66
$
1.92
$
.68
Average shares outstanding: Basic
299,418,182
299,738,944
299,341,472
289,117,369
Diluted
300,752,992
301,075,469
300,580,764
301,329,249
See accompanying Notes to Consolidated Financial Statements.
4
Old Republic International Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Unaudited)
($ in Millions)
Quarters Ended
Six Months Ended
June 30,
June 30,
2019
2018
2019
2018
Net Income (Loss) As Reported
$
165.5
$
197.7
$
577.7
$
201.8
Other comprehensive income (loss):
Unrealized gains (losses) on securities:
Unrealized gains (losses) before reclassifications,
not included in the statements of income
138.8
(62.9
)
313.2
(211.6
)
Amounts reclassified as realized investment (gains)
losses in the statements of income
2.4
(1.2
)
3.3
(1.7
)
Pretax unrealized gains (losses) on securities
141.2
(64.1
)
316.5
(213.3
)
Deferred income taxes (credits)
29.7
(13.5
)
66.7
(44.8
)
Net unrealized gains (losses) on securities, net of tax
111.4
(50.6
)
249.8
(168.4
)
Defined benefit pension plans:
Net pension adjustment before reclassifications
—
—
(2.6
)
—
Amounts reclassified as underwriting, acquisition,
and other expenses in the statements of income
1.0
.8
2.0
1.6
Net adjustment related to defined benefit
pension plans
1.0
.8
(.5
)
1.6
Deferred income taxes (credits)
.2
.1
(.1
)
.3
Net adjustment related to defined benefit pension
plans, net of tax
.8
.6
(.4
)
1.2
Foreign currency translation and other adjustments
3.1
(3.6
)
5.4
(7.3
)
Total other comprehensive income (loss)
115.4
(53.6
)
254.8
(174.6
)
Comprehensive Income (Loss)
$
280.9
$
144.1
$
832.6
$
27.2
See accompanying Notes to Consolidated Financial Statements.
5
Old Republic International Corporation and Subsidiaries
Consolidated Statements of Preferred Stock
and Common Shareholders' Equity (Unaudited)
($ in Millions)
Quarters Ended
Six Months Ended
June 30,
June 30,
2019
2018
2019
2018
Convertible Preferred Stock:
Balance, beginning and end of period
$
—
$
—
$
—
$
—
Common Stock:
Balance, beginning of period
$
302.9
$
302.1
$
302.7
$
269.2
Dividend reinvestment plan
—
—
—
—
Net issuance of shares under stock based compensation plans
.2
.2
.4
.9
Conversion of senior debentures
—
—
—
32.2
Balance, end of period
$
303.2
$
302.4
$
303.2
$
302.4
Additional Paid-in Capital:
Balance, beginning of period
$
1,284.1
$
1,267.9
$
1,277.6
$
815.2
Dividend reinvestment plan
.2
.2
.4
1.2
Net issuance of shares under stock based compensation plans
3.1
2.9
5.9
13.1
Conversion of senior debentures
—
—
—
438.1
Stock based compensation
.3
.4
3.2
3.2
ESSOP shares released
.7
.6
1.3
1.2
Balance, end of period
$
1,288.6
$
1,272.2
$
1,288.6
$
1,272.2
Retained Earnings:
Balance, beginning of period
$
4,220.8
$
3,658.1
$
3,849.8
$
3,206.9
Change in accounting principle
—
—
18.4
502.1
Balance, beginning of period, as adjusted
4,220.8
3,658.1
3,868.3
3,708.9
Net income (loss)
165.5
197.7
577.7
201.8
Dividends on common shares ($.20, $.195, $.40 and $.39 per
common share)
(59.7
)
(58.1
)
(119.4
)
(113.1
)
Balance, end of period
$
4,326.7
$
3,797.7
$
4,326.7
$
3,797.7
Accumulated Other Comprehensive Income (Loss):
Balance, beginning of period
$
(70.6
)
$
(148.9
)
$
(210.0
)
$
474.2
Change in accounting principle
—
—
—
(502.1
)
Balance, beginning of period, as adjusted
(70.6
)
(148.9
)
(210.0
)
(27.9
)
Net unrealized gains (losses) on securities, net of tax
111.4
(50.6
)
249.8
(168.4
)
Net adjustment related to defined benefit pension plans,
net of tax
.8
.6
(.4
)
1.2
Foreign currency translation and other adjustments
3.1
(3.6
)
5.4
(7.3
)
Balance, end of period
$
44.8
$
(202.6
)
$
44.8
$
(202.6
)
Unallocated ESSOP Shares:
Balance, beginning of period
$
(71.7
)
$
(30.6
)
$
(73.9
)
$
(32.4
)
ESSOP shares released
2.2
1.7
4.5
3.4
Purchase of unallocated ESSOP shares
—
(37.4
)
—
(37.4
)
Balance, end of period
$
(69.4
)
$
(66.4
)
$
(69.4
)
$
(66.4
)
See accompanying Notes to Consolidated Financial Statements.
6
Old Republic International Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
($ in Millions)
Six Months Ended
June 30,
2019
2018
Cash flows from operating activities:
Net income (loss)
$
577.7
$
201.8
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Deferred policy acquisition costs
(8.3
)
(14.8
)
Premiums and other receivables
(236.8
)
(210.4
)
Unpaid claims and related items
84.6
93.5
Unearned premiums and other policyholders' liabilities
33.3
70.9
Income taxes
87.1
(20.7
)
Reinsurance balances and funds
178.0
151.4
Realized investment (gains) losses from actual transactions and impairments
(22.9
)
(47.5
)
Unrealized investment (gains) losses from changes in fair value
of equity securities
(382.0
)
110.6
Accounts payable, accrued expenses and other
2.6
(47.4
)
Total
313.4
287.3
Cash flows from investing activities:
Fixed maturity securities:
Available for sale:
Maturities and early calls
298.7
473.8
Sales
303.5
181.5
Sales of:
Equity securities
208.7
278.6
Other - net
25.8
8.2
Purchases of:
Fixed maturity securities:
Available for sale
(689.6
)
(600.6
)
Equity securities
(313.1
)
(350.8
)
Other - net
(30.9
)
(23.6
)
Net decrease (increase) in short-term investments
1.5
152.8
Other - net
—
(.7
)
Total
(195.1
)
119.2
Cash flows from financing activities:
Issuance of common shares
6.9
9.7
Redemption of debentures and notes
(6.5
)
(4.7
)
Purchase of unallocated common shares by ESSOP
—
(37.4
)
Dividends on common shares (including a special dividend declared in
December 2017 and paid in January 2018 of $269.2)
(119.4
)
(382.3
)
Other - net
—
(9.8
)
Total
(118.8
)
(424.6
)
Increase (decrease) in cash
(.5
)
(18.0
)
Cash, beginning of period
100.3
125.9
Cash, end of period
$
99.8
$
107.9
Supplemental cash flow information:
Cash paid (received) during the period for: Interest
$
20.9
$
29.7
Income taxes
$
59.6
$
59.6
See accompanying Notes to Consolidated Financial Statements.
7
OLD REPUBLIC INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
($ in Millions, Except Share Data)
1. Accounting Policies and Basis of Presentation:
The accompanying consolidated financial statements have been prepared in conformity with the Financial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC") of accounting principles generally accepted in the United States of America ("GAAP"). These interim financial statements should be read in conjunction with these notes and those included in the Company's 2018 Annual Report on Form 10-K incorporated herein by reference.
Pertinent accounting and disclosure pronouncements issued from time to time by the FASB are adopted by the Company as they become effective. Recent ones are discussed below.
a) Effective January 1, 2019, the Company adopted FASB guidance on lease accounting which requires balance sheet recognition of all leases with a term greater than 12 months. The Company's adoption of this guidance is discussed in Note 7.
b) Effective January 1, 2018, the Company adopted FASB guidance on the recognition and measurement of financial instruments. See Note 3.
c) Effective January 1, 2018, the Company adopted the FASB's comprehensive revenue recognition standard which applies to contracts with customers, except for those that fall within the scope of other standards, such as insurance contracts. The Company’s adoption of this standard did not have an effect on its insurance contract revenues, and based on its evaluation of certain less significant revenue streams generated from contracts with customers, did not have a material impact on the consolidated financial statements taken as a whole.
d) In June 2016, the FASB issued guidance on accounting for credit losses on financial instruments which will be effective in 2020. The guidance will require immediate recognition of expected credit losses for certain financial instruments including (1) reinsurance recoverables, (2) held to maturity securities and (3) accounts and notes receivable. Additionally, the guidance modifies the impairment model for available for sale fixed maturity securities. The Company is currently evaluating the guidance to determine the potential impact of its adoption on its consolidated financial statements.
The financial accounting and reporting process relies on estimates and on the exercise of judgment. In the opinion of management all adjustments consisting only of normal recurring accruals necessary for a fair presentation of interim periods' results and financial position have been recorded. Amounts shown in the consolidated financial statements and applicable notes are stated (except as otherwise indicated and as to share data) in millions, which amounts may not add to totals shown due to truncation. Necessary reclassifications are made in prior periods' financial statements whenever appropriate to conform to the most current presentation.
2. Common Share Data:
Earnings Per Share - Consolidated basic earnings per share excludes the dilutive effect of common stock equivalents and is computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares actually outstanding for the quarterly and year-to-date periods. Diluted earnings per share are similarly calculated with the inclusion of dilutive common stock equivalents. The following table provides a reconciliation of net income (loss) and the number of shares used in basic and diluted earnings per share calculations.
8
Quarters Ended
Six Months Ended
June 30,
June 30,
2019
2018
2019
2018
Numerator:
Net income (loss)
$
165.5
$
197.7
$
577.7
$
201.8
Numerator for basic earnings per share -
income (loss) available to common stockholders
165.5
197.7
577.7
201.8
Adjustment for interest expense incurred on
assumed conversion of convertible notes
—
—
—
3.1
Numerator for diluted earnings per share -
income (loss) available to common stockholders
after assumed conversion of convertible notes
$
165.5
$
197.7
$
577.7
$
204.9
Denominator:
Denominator for basic earnings per share -
weighted-average shares (a)
299,418,182
299,738,944
299,341,472
289,117,369
Effect of dilutive securities - stock based
compensation awards
1,334,810
1,336,525
1,239,292
1,385,141
Effect of dilutive securities - convertible notes
—
—
—
10,826,739
Denominator for diluted earnings per share -
adjusted weighted-average shares
and assumed conversion of convertible notes (a)
300,752,992
301,075,469
300,580,764
301,329,249
Earnings per share: Basic
$
.55
$
.66
$
1.93
$
.70
Diluted
$
.55
$
.66
$
1.92
$
.68
Anti-dilutive common stock equivalents
excluded from earnings per share computations:
Stock based compensation awards
1,163,250
1,539,500
3,268,875
1,539,500
Convertible senior notes
—
—
—
—
Total
1,163,250
1,539,500
3,268,875
1,539,500
__________
(a) In calculating earnings per share, pertinent accounting rules require that common shares owned by the Company's Employee Savings and Stock Ownership Plan that are not yet allocated to participants in the plan be excluded from the calculation. Such shares are issued and outstanding, and have the same voting and other rights applicable to all common shares.
3. Investments:
The Company classifies its fixed maturity securities as those it either (1) has the positive intent and ability to hold until maturity, (2) has available for sale or (3) has the intention of trading.
Fixed maturity securities classified as "available for sale" are reported at fair value with changes in such values, net of deferred income taxes, reflected directly in shareholders' equity. Fixed maturity securities classified as "held to maturity" are carried at amortized cost. Equity securities are reported at fair value with changes in such values reflected as unrealized investment gains (losses) in the consolidated statements of income. Fair values for fixed maturity securities and equity securities are based on quoted market prices or estimates using values obtained from recognized independent pricing services.
The status and fair value changes of each of the fixed maturity investments are reviewed at least once per quarter during the year, and estimates of other-than-temporary impairments ("OTTI") in the portfolio's value are evaluated and established at each quarterly balance sheet date. In reviewing investments for OTTI, the Company, in addition to a security's market price history, considers the totality of such factors as the issuer's operating results, financial condition and liquidity, its ability to access capital markets, credit rating trends, most current audited financial statements, industry and securities markets conditions, and analyst expectations to reach its conclusions. Sudden fair value declines caused by such adverse developments as newly emerged or imminent bankruptcy filings, issuer default on significant obligations, or reports of financial accounting developments that bring into question the validity of the issuer's previously reported earnings or financial condition, are recognized as realized losses as soon as credible publicly available information emerges to confirm such developments. In the event the Company's estimate of OTTI is insufficient at any point in time, future periods' net income (loss) would be adversely affected by the recognition of additional impairment losses, but its financial position would not necessarily be affected adversely inasmuch as such losses, or a portion of them, could have been recognized previously as unrealized losses directly in shareholders' equity. The Company recognized $2.0 of OTTI adjustments for the quarter and six months ended June 30, 2019 and no OTTI adjustments for the same periods of 2018.
9
The amortized cost and estimated fair values by type and contractual maturity of fixed maturity securities are shown in the following tables. Expected maturities will differ from contractual maturities since borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Fixed Maturity Securities by Type:
June 30, 2019:
Available for sale:
U.S. & Canadian Governments
$
1,569.4
$
34.6
$
.7
$
1,603.3
Corporate
6,802.0
186.1
7.8
6,980.2
$
8,371.5
$
220.7
$
8.6
$
8,583.6
Held to maturity:
Tax-exempt
$
1,033.3
$
28.2
$
.2
$
1,061.3
December 31, 2018:
Available for sale:
U.S. & Canadian Governments
$
1,535.3
$
5.7
$
16.5
$
1,524.4
Corporate
6,749.6
31.4
122.7
6,658.3
$
8,285.0
$
37.1
$
139.2
$
8,182.8
Held to maturity:
Tax-exempt
$
1,044.8
$
3.5
$
13.7
$
1,034.5
Amortized
Cost
Estimated
Fair
Value
Fixed Maturity Securities Stratified by Contractual Maturity at June 30, 2019:
Available for sale:
Due in one year or less
$
729.9
$
732.8
Due after one year through five years
4,757.3
4,850.2
Due after five years through ten years
2,839.0
2,951.5
Due after ten years
45.1
48.9
$
8,371.5
$
8,583.6
Held to maturity:
Due in one year or less
$
—
$
—
Due after one year through five years
260.5
264.3
Due after five years through ten years
772.7
797.0
Due after ten years
—
—
$
1,033.3
$
1,061.3
The following tables reflect the Company's gross unrealized losses and fair value, aggregated by category and length of time that individual available for sale and held to maturity fixed maturity securities have been in an unrealized loss position.