With all of the attention currently placed on Old Republic International's
mortgage guaranty segment, it might be easy to gloss over the improvement of its title insurance division.
Amid some of the negatives on the books for this year, Old Republic's title insurance segment, along with the general insurance segment, showed improvements and turned positive for the first time since 2007.
"When we look back at the title insurance business for the year, we would say we continue to be pleased that it seems to be making good progress in spite of what we would all say continues to be a somewhat choppy recovery in the housing finance business," said Chris Nard, president of Old Republic, during the fourth quarter 2011 investor conference call.
FOURTH QUARTER 2011 2010 % change
Net premiums and fees earned……..$372.1M…..$357.3M ………. 4.1%
Net investment income……………….$6.9M ……..$6.7M ………..3.8%
Claim costs………………………….$28.9M……....$30M………..-3.5%
Pretax operating income……………$18.3M……....$8.3M……...121.3%
Claim ratio…………………………….7.8%................8.4%
Expense ratio……………………….…88.8%……….89.6%
Composite ratio……………………….96.6%...............98%
FULL YEAR 2011 2010 % change
Net premiums and fees earned……..$1.362B…...$1.211B ………. 12.5%
Net investment income……………...$27.3M .…..$26.5M …………...3%
Claim costs…………………………$105.7M……$96.8M……….....9.1%
Pretax operating income………….…$36.2M……...$9.4M…….....284.5%
Claim ratio…………………………….7.8%..................8%
Expense ratio……………………….…91.2%………...93%
Composite ratio………………………. 99%...............101%
Old Republic chalked up the growth in premiums and fees to market share gains from title industry dislocations and consolidation during the past few years and greater levels of refinancing activity in more recent times. The 2011 claim ratios were slightly lower in relation to 2010 because claim frequency and severity abated, according to the company.
"Total premiums and fees continue to show some comparative growth in the business and were up about 4 percent over last year's fourth quarter," Nard said. "We would say that these gains continue to be attributable to the growth in market share that we have seen over the last few years. And with that respect, the estimated share for the third quarter of this year is up about a full percentage point from year end 2010."
Things weren't quite as positive companywide in 2011 as Old Republic once again experienced a net operating loss. The run-off mortgage guaranty business sustained record-high operating losses as incurred claim costs intensified greatly throughout 2011. These results still outweigh some of the better outcomes posted by the general and title insurance segments.
The year-end net-operating loss came in at $218 million compared to a loss of $40.6 million in 2010. The fourth quarter showed a loss of $27.7 million, which actually was 14.5 percent lower than the previous year's loss.
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General Insurance
Fourth quarter and full-year 2011 operating earnings were affected positively by much lower incurred claim costs, slightly lower production expenses, and the inclusion of PMA's accounts.
"The general insurance picture, we would say, has gotten increasingly rosier, as 2011 moved along," said Al Zucaro, chairman and chief executive officer of Old Republic. "And by rosier of course we are referring to the fact that the underwriting account, which is all the more important in this era of low investment yields, has gotten progressively better. Much of the improvement in General Insurance from an underwriting standpoint comes from a reasonably consistent downtrend in claims that have been incurred in our consumer credit indemnity line. And 2011 has been one of the lowest periods since 2008 or thereabouts."
Full-year 2011 inclusion of the PMA-related accounts resulted in approximate increases of $308.7 million in net premiums earned, $16.1 million in net investment income, $212 million in benefits and claim costs, and $34 million in pretax operating income.
Much of the gain stemmed from lower incurred claims in the consumer credit indemnity (CCI) line which has been in run-off operating mode since 2008. In this regard, CCI claims experience burdened the overall general insurance claim ratio by 0.6 and 6.2 percentage points in the fourth quarter of 2011 and 2010, and by 2.1 and 8.6 for the years then ended, respectively.
Mortgage Guaranty Results
The fourth quarter and year-end 2011 earnings report show pretax operating income losses of $163 million and $678 million, respectively. Claims costs rose by 17.3 percent and 29.2 percent, respectively. The claims ratio ended the year at 237.6 percent.
"Ongoing weakness from the downturn in overall mortgage originations, lower industry-wide penetration of the nation's current mortgage market, and the effects of more selective underwriting guidelines employed since late 2007 have been contributing factors," Old Republic stated in its report. "Together with premium refunds related to claim rescissions and the termination of pool insurance contracts which effectively ended subsequent periods' premium inflows, these factors led to a continued decline in earned premiums during the periods reported upon."
Net investment income dropped as a result of the lower invested asset base driven by the aggregate effect of higher claim disbursements, lower premium volume, termination of insured mortgage pools, and a low yield environment for quality securities to which the investment portfolio is directed.
The 2011 expense ratios reflect non-recurring charges covering employment severance and similar costs, and the elimination of previously deferred acquisition costs no longer deemed recoverable in future run-off periods.
"Old Republic certainly has long-term interests in this line of business, but as we have said in the past, any continuation of business in this segment would have to be coupled with significantly more clarity around the future of housing finance in the country, particularly with respect to the roles of Fannie and Freddie," Nard said. "And as we have talked about for the last several years, establishment of industry-wide risk management practices that we feel would allow for better management of the catastrophic risk that is so embedded in this type of financial guaranty. At this point in time, we would say that we see a little going on in the marketplace that would address those two concerns."
Cash, invested assets, and shareholders' equity
Consolidated cash flow from operating activities produced a deficit of $94.9 million for 2011 compared to a deficit of $282.2 million for 2010. Most of the year-over-year improvement stemmed from much higher operating cash flows in the general insurance segment.
The consolidated investment portfolio reflects a current allocation of approximately 80 percent to fixed-maturity securities and 6 percent to equities. The investment portfolio contains no significant direct insurance risk-correlated asset exposures to real estate, mortgage-backed securities, collateralized debt obligations, derivatives, junk bonds, hybrid securities or illiquid private equity investments.
Old Republic's equity investments at Dec. 30, 2011 include common stock holdings in MGIC Investment Corporation fair valued at $50.3 million. These securities were acquired in 2007 and 2008 as passive long-term investment additions to a core segment of Old Republic's business and were written down from their original cost through impairments recorded between 2008 and December2011.
For those interested in listening to the company's conference call concerning these results, click here for details.