Old Republic International Corporation (ORI) Earnings & Analysis

Latest quarter

Old Republic reported third-quarter revenue of $2.6 billion, up from $2.4 billion a year earlier. As the consensus counts it, revenue was $2.5 billion, matching the rounded $2.5 billion estimate; the consensus comparison showed revenue 0.54% above expectations. Adjusted earnings per share were $0.73, below the $0.77 consensus estimate. Diluted earnings per share fell to $0.99 from $1.11 a year earlier.

CEO Craig Smiddy said specialty insurance net premiums earned rose 9.7% from the prior-year quarter, while title net premiums and fees earned increased 7.3%. He attributed specialty premium growth in part to the first inclusion of ECM and growth in auto warranty. CFO Frank Sodaro said net operating income fell to $181 million from $197 million.

Old Republic’s operating margin declined to 11.7% from 15.5%. For the preceding second quarter, the company reported free cash flow of $199.7 million, compared with $133.8 million a year earlier.

Adjusted EPS is the figure the consensus estimates, not the GAAP EPS above.

What management said on the call

Craig Smiddy said competition remained active across specialty insurance, with conditions varying by coverage. The CEO said legal system abuse continued to put pressure on the severity of liability losses. In commercial auto, he said rate increases were in the mid-teens and above the company’s view of observed and anticipated loss trends, while retention remained near 80%.

Smiddy said specialty net premiums written rose 10.5% in the quarter, including ECM and growth in auto warranty. Excluding ECM and the auto warranty write-up portion, he said premiums written rose 4.4%. He described auto warranty as a source of growth and diversification, with performance tied more to administrator partnerships and their programs than to the property and casualty underwriting cycle.

CFO Frank Sodaro said the consolidated combined ratio benefited less from favorable prior-year reserve development than a year earlier. He said commercial auto development was favorable, while general liability and financial indemnity had elevated unfavorable development. Asked about a $20 million credit charge, Smiddy said one program had a collateral deficit and the company had recognized what it believed to be the ultimate loss, assuming no recoveries beyond collateral held.

Sodaro said net investment income rose 1.5% in the quarter, aided by a larger investment base and, to a lesser extent, higher bond yields. He said corporate bonds acquired during the quarter had an average rate of 5.4%, versus about 4.4% for bonds rolling off.

In title insurance, Carolyn Monroe said agency revenue rose 9% from the prior-year quarter, while direct operations revenue was flat. Smiddy said higher mortgage rates created uncertainty about transaction volumes and that geographic differences made direct business an unreliable leading indicator of residential activity. Monroe said the rollout of a new operating system would continue through the end of next year.

In response to questions about the specialty combined ratio, Smiddy said the company would work to remain within its target range as the market softens. He cautioned that lower premium volume could raise the ratio through expenses.

Guidance

Smiddy expects auto warranty growth to continue and ECM to contribute to revenue and earnings in subsequent quarters. He said the removal of ECM’s quota-share arrangement would also add to revenue and earnings.