Old Republic (ORI) Tops Q2 EPS by 3c

Old Republic (NYSE: ORI) reported Q2 EPS of $0.42, $0.03 better than the analyst estimate of $0.39. Revenue for the quarter came in at $1.62 billion versus the consensus estimate of $1.65 billion.

his year's second quarter and first half pretax and net income, exclusive of all investment gains and (losses) were affected primarily by relatively stable results within the General Insurance segment, greater profitability in the Title Insurance segment, and increased claim costs in the RFIG Run-off business. In combination, the business produced a 96.0% consolidated combined ratio for the second quarter of 2020, up slightly from 95.2% registered in the second quarter of 2019. For the six months ended June 30, 2020, the combined ratio was 95.4%, essentially unchanged from the same period of 2019. Total and per share net income continue to be significantly impacted by changes in the fair value of equity securities.

The COVID-19 pandemic and the associated governmental responses had a widespread impact on the U.S. economy beginning in the final weeks of the first quarter and continuing throughout the second quarter. Old Republic's response to the pandemic resulted in significant operational changes, including a transition to remote working for a majority of its approximately 9,000 associates. The pandemic's impact on employment levels, businesses and other economic activities contributed to a reduction in premium and fee revenues in the General Insurance segment, while the Title Insurance segment continued to see strong growth in premium and fee revenues, and the RFIG Run-off business saw an increase in claim costs due to higher reported delinquencies.

Although the COVID-19 pandemic and the associated governmental responses caused substantial disruptions to financial markets in the final weeks of this year's first quarter, improved market performance had a significant positive impact on the second quarter's financial results. The resulting increase in the fair value of the Company's common stock and fixed-maturity investment portfolios contributed to the second quarter's recovery in book value per share reported as of June 30, 2020 of $19.68 as compared to $17.29 at March 31, 2020.

The economic impacts from the COVID-19 pandemic could affect future premium and fee revenues in the General Insurance and Title Insurance segments, and conversely underwriting expense ratios could rise. In the RFIG Run-off business, future claims experience could depend upon the continued, mitigating effects of loan forbearance programs mandated by the Federal government, and the rate at which employment levels recover. These outcomes notwithstanding, management firmly believes that the Company's strong financial condition will enable it to weather these challenges, and most importantly allow its insurance subsidiaries to meet their obligations to customers, policyholders and their beneficiaries.

Old Republic's business is necessarily managed for the long run. In this context management's key objectives are to achieve a continuous, long-term improvement in operating results, 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 and (losses). Under Generally Accepted Accounting Principles ("GAAP"), however, net income (loss), which includes all specifically defined realized and unrealized investment gains and (losses), is the measure of total profitability.

In management's opinion, the focus on income (loss) excluding all investment gains and losses provides a better way to realistically analyze, evaluate, and establish accountability for the results and benefits that arise from the basic operations of the business. The inclusion of realized investment gains and (losses) in income (loss) can mask the reality and trends in the fundamental operating results of the insurance business. That is because their realization is, more often than not, highly discretionary. It is usually affected by such randomly occurring factors as the timing of individual securities sales, tax-planning considerations, and modifications of investment management judgments about the direction of securities markets or the prospects of individual investees or industry sectors. Moreover, the inclusion of unrealized investment gains and (losses) in equity securities can further distort such operating results and trends therein and thus lead to even greater period-to-period fluctuations in reported net income (loss). The impact of the continuous volatility in stock market valuations is most evident in its net of tax effect on net income (loss) for the periods reported upon.

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