Q4 2020 Old Republic International Corp Earnings Call

Yes.

Ladies and gentlemen, thank you for standing by and welcome to the Old Republic International fourth quarter 2020 earnings Conference call.

At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.

Ask a question during this session you will need to press star one on your telephone.

Please be advised that today's conference is being recorded.

If you require any further assistance please press star zero.

I would now like to hand, the conference over to your Speaker today, Joe Calabrese with M. W. W. P. R. Thank you. Please go ahead.

Thank you good afternoon, everyone and thank you for joining us for the Old Republic conference call to discuss fourth quarter 2020 results.

We distributed a copy of the press release and posted a separate statistical supplement, which we assume you have seen and or otherwise have access to join the call.

All of those documents are available at old Republic's website, which is www dot old Republic dotcom.

Please be advised that this call may involve forward looking statements as discussed in the press release and statistical supplement dated January 28, 2021 race.

Risks associated with these statements can be found on the company's latest SEC filings.

This afternoon's conference call will be led by Craig Smiddy, President and CEO of Old Republic International Corporation, and several other senior executive members as planned for this meeting.

At this time I'd like to turn the call over to Craig Smiddy. Please go ahead Sir.

Okay, well, thank you Joe and good afternoon, everyone again, and welcome to old Republic fourth quarter and full year 2020 earnings call.

With me today, we have our CFO, Carl Miller, and Carolyn Monroe, the president of our title insurance group.

So we're we're obviously very happy with the strong results, we posted for the fourth quarter and the full year with record setting performance on a consolidated basis as well as individually in the general insurance and title insurance groups.

Overall, a very pleasing quarter with 75 cents of operating income per share and ending book value per share of $20 75.

And our consolidated combined ratio of 93% for the quarter and 93, 3% for the full year.

Growth in net written premiums continued from the third quarter into the fourth quarter in general insurance.

Though the effects of the pandemic.

And slightly lower net earned premiums for the quarter and the year in general insurance.

On the other hand title insurance grew net premiums and fees earned by just over 30% for the quarter and 20% for the year.

Okay.

As demonstrated in the strong results.

Our diverse portfolio of specialty products combined with our exceptional customer service in general insurance and title insurance has again delivered value.

Our specialty strategy continues to contribute to our track record of more consistent growth and profitability over the long run.

So with these brief opening comments.

I think at this point I'll turn it over to Carl to review in greater detail, our overall consolidated financial results.

And then he'll turn things back to me to cover General insurance, followed by Caroline who will discuss the title insurance and then of course, we'll open up our discussion.

Q&A.

So Carl.

Thank you Craig and good day.

Afternoon.

This morning, we announced our fourth quarter net income.

Excluding all investment gains and losses of 75 cents per diluted share.

Which represents.

<unk> represents an increase of almost 60% by comparison to the final quarter a year ago.

For the full year net income again, excluding investment gains and losses rose nearly 22% to $2 24 per share.

Consolidated net premiums and fees earned increased.

<unk> increased by 13% per the fourth quarter and 8% per year.

As Craig mentioned this growth was driven mostly by our title operations.

Is it reported significant growth for both the final quarter of 2020 as well as for the full year.

This morning's release also disclosed that certain adjustments were made to previously reported title amounts to.

To conform to presentation that we adopted in the fourth quarter of 2020.

In effect these adjustments simply gross on the income statement as revenues and expenses were increased by the same amounts.

And consequently, there was no impact to either segment.

For consolidated pre tax operating income.

As Craig mentioned in his opening remarks general insurance net premiums earned were down slightly in 2020 compared to the same periods a year ago.

The run off mortgage business earned premiums fell 23% per year.

Pretty much in line with the decline in the outstanding amount total risk in force.

Net investment income decreased by almost 3% for the quarter.

And roughly two 6% for the year.

Basically following the same trends we have experienced throughout all of 2020.

As being primarily from the effect of lower yields on new investment purchases that.

More than offset the growth in the invested asset base.

With regard to underwriting performance, we achieved significantly lower combined ratios.

Again as Craig touched upon earlier this year's fourth quarter consolidated combined ratio improve.

Improved by five percentage points from a year ago.

For the year, we realized a two percentage point reduction.

These improvements resulted from better underwriting performance in both our general as well as title insurance operations.

As purely on Craig.

<unk> in greater detail momentarily.

Underwriting results for all three segments also reflect favorable reserve development.

In both 2020 periods in total.

Consolidated claim ratio benefited by two three percentage points for the quarter.

On one three points for the full year.

At year end the composition of the investment portfolio remained essentially unchanged.

Approximately 74% of the portfolio is invested in highly rated bonds and short term investments.

Less than 3% on the bond portfolio is invested in below investment grade securities.

The remaining 26% of the overall portfolio is dedicated to large cap equity securities typically those companies that have a long history of paying and.

Regularly increasing dividends to shareholders.

The valuation of the equity portfolio improved by $373 million during the final quarter of 2020.

And ended the year with an unrealized gain of $785 million.

For the foreseeable future we.

We do not anticipate making any material changes to our investment strategy.

We ended 2020 with a book value per share, reaching $20 75.

Which represents a 13, 1% increase.

When you include all regular.

And special dividends per year.

And then finally with respect to our MRI runoff operations.

Would simply point out that its operating results are consistently becoming.

And even smaller contributor to the consolidated total.

As an example, the net premiums earned represents represented in 2020 just <unk>.

7% of the consolidated total.

Modest one 2% of pretax income.

For the entire year.

Total delinquencies.

Trended down by.

Roughly six 5% during the quarter.

Although they remain elevated compared to year end 2019 levels.

The proportion of total delinquent loans reported to us as being in forbearance.

Kris from 47% at the end of September 229% at year end.

We continue to closely monitor the claim experience for this population.

And reserve for this group of loans separately.

Looking forward just given the declining revenue base.

And the increased level of uncertainty surrounding loss costs attributable to these.

These loans in forbearance, we would expect there to be some.

Near term, how do I see lumpiness in quarter to quarter operating results.

From a capital perspective, the mortgage companies GAAP basis shareholders' equity.

Had accumulated to $445 million at December 31.

Our objectives with respect to the future of the.

Runoff.

Are summarized in the recent letter to shareholders that was dated January six.

So I think that about covers it let me now turn things back to Craig for a discussion of general insurance.

Okay, well, we've already commented on the net premiums written increasing in the third and fourth quarter, while net premiums earned reflect the effects of the pandemic coming in slightly lower for the quarter.

<unk> in the year.

Compared to.

2019, fourth quarter and year and pre tax operating income rose by almost 60% in the quarter and 19% in the year, resulting primarily from our improved claim ratios.

The overall combined ratio improved from 98, 8% to 92, 7% quarter over quarter and from 97, five to 95 and a half year over year.

The claim ratios reported were inclusive of prior year favorable development of one eight percentage points in the quarter and <unk> eight percentage points for the year.

Compared to the 2019 fourth quarter net premiums earned in commercial auto.

Grew by almost 6% while net premiums written grew by nearly 8%.

This growth in commercial auto reflects.

Restoration of our exposure base, along with the positive effect rate increases, which.

Are currently in the low double digits for commercial auto.

Our fourth quarter commercial auto claim ratio improved from 82, 3%.

Impaired to 91, 3% in the fourth quarter of 2019.

And we think this shows that our work on this line of coverage is paying off as we continue with rate increases enhanced risk selection to bring that claim ratio down to our target in the low seventies.

Claim frequency on commercial auto is still not at pre pandemic levels.

But this lower frequency is being offset by higher severity that continues do too.

Greater speeds with less congested roads and highways and the continued social inflation influences on settlements.

Moving to workers' compensation.

Compared to the 2019 fourth quarter workers comp net premiums earned and written fell 20% while for the full year net premiums earned and written declined by roughly 13%.

These lower premium levels, mostly reflect the reduced exposure base as payrolls have not recovered.

And.

Although I would comment that premium rates are now slightly up for workers' comp, thereby no longer contributing to the reduction in premiums.

Workers' compensation fourth quarter claim ratio.

Came in at 51, 7% compared to 57, 4% in the fourth quarter of 2019.

Aside from the COVID-19 related claims claim frequency here is also still lower than pre pandemic levels.

COVID-19 workers' compensation claims.

<unk> to behave exactly as we have discussed in each of our earnings calls that followed.

The first second and third quarter with 95% of the COVID-19 work comp claims coming from loss sensitive business such as large deductibles.

And 95% of the COVID-19 claims.

Continue to be mild in nature with very low claim payments.

And.

Less than 1% of all claims are are severe or fatal.

So we continue to remain confident with our 2020 accident year loss ratio selection for workers' comp again, taking into consideration the lower frequencies, the low loss sensitive nature of our business and the high proportion of mild cases for COVID-19.

<unk> claims.

We typically provide commercial auto workers compensation and general liability combined and combined fourth quarter claim ratio came in at 71% compared to 78, 1% in last year's fourth quarter.

We also saw improvement in the financial indemnity and property claim ratios, while we did see some deterioration in the claim ratio for the other coverages category.

So our strategy in general insurance to enhance underwriting excellence through better segmentation.

Improved selection increased use of analytics, along with our continued focus on providing loss sensitive programs.

Should enable us to sustain greater underwriting profitability over the long term and I'll point out this is necessarily so because given the declining investment income situation. It's imperative that we continue to focus on.

Improved.

Claim ratios combined ratios and margins.

Additionally, I will just add that the marketplace is favorable for us to continue to obtain appropriate prices for our products.

On average overall, we're seeing.

Double digit rate increases.

On our business at this point in time.

So ill.

Ill turn the discussion over to you Caroline for your comments on the title insurance group and again.

I congratulate you on your team who continue to execute at an extremely high level.

Thank you Craig.

As reported this morning, the title group posted record setting fourth quarter and year to date results to wrap up on outstanding and demanding last 12 months.

We continue to be extremely proud and grateful to all our employees as they remained focused on positive and dealing with the daily challenges both professionally and personally in these unprecedented times.

Our accomplishments were achieved with the unwavering commitment of our employees and the support of our testimony I'm on.

Honored to be reporting our results on behalf of all of our dedicated and hard working employees.

All time fourth quarter and year to date highs were set for both underwriting revenue and operating profit.

Total premium and fee revenue.

<unk>, 31% per the quarter and 20% year to date.

Our pre tax operating income of $132 million per the quarter compared to $77 million in last year's fourth quarter, an increase of $55 million or 71%.

Full year pre tax operating income of 344 million compares to $231 million for the prior year, an increase of $113 million or 49%.

For the full year, our 2020 combined ratio of 97% compares favorably to the 93% reported for full year 2019 results.

This record setting performance was driven by our robust real estate market supported by a continued low interest rate environment, resulting in an increase in home sales and refinance activity.

Technology continues to be a cornerstone for advancement in our industry as our company has moved forward with titled Technology. We have employed the use of a robotic process automation platform typically referred to as <unk> and the deployment of bots throughout key processes in the cash.

We are piloting and soon we'll be implementing a title automation engine to increase the speed in our servicing of refinance orders.

This automated technology gives us the ability to produce a title more efficiently with a utilization of multiple.

Data sources through our algorithms and rules based decision engines, while keeping the product integrity intact.

Well, we continue to embrace advancements in technology title related and otherwise we are dedicated to analyzing the breadth of service improvement.

The application of our technological progressions we.

We remain mindful of the needs of our customers and will continue to provide connective solutions for all of them.

As we start a new year, our guiding principles of integrity managing for the long run financial strength protection of our policyholders and the wellbeing of our employees and customers will always be at the forefront.

Of all that we do.

And with that I'll turn it back over to Craig.

Okay.

Thank you Caroline.

So again.

All of US here at Old Republic are very pleased with this quarter and this year's operating results.

Our strategy that offers numerous specialty insurance and related products to core industries served by general insurance entitled Insurance continues to produce superior more consistent results.

And going forward, we will of course continue with our focus on underwriting excellence and profitability.

So that concludes our prepared remarks, and we'll now open up the discussion to Q&A.

As a reminder to ask a question you will need to press star one on your telephone.

All your question press, the pound or hash key please standby, while we compile the Q&A roster.

Your first question comes from Greg Peters with Raymond James Your line is open.

Yeah.

Good afternoon.

Team old Republic.

I'd like to ask.

A couple of questions on the General insurance and then also a question on title.

First of all on the general insurance business.

First of all if I'm not mistaken you said Craig.

There was a low double digit rate increases in.

In commercial auto in the fourth quarter.

And that seems to be somewhat of a moderation from what I think we've been hearing which had been more mid to high teens. Before is there has there been some sort of moderation of your.

Right in commercial auto or on the other lines.

Well I think your observation is is somewhat accurate Greg I would.

I would point out that over the course of the last few years.

It's ebb and flow a little bit.

Yes.

Some.

We will see low double digits in other quarters, we will see did.

Increases in the in the teens.

And it has moved around over the last couple of years. So.

I am not reading anything specifically into what we're seeing thus far I would say, it's pretty much a continuation.

What we've seen in quarter to quarter, youre going to see a little bit.

Of up and down.

But bottom line is were still getting very strong strong rate increases.

Excellent now just stepping back Big picture day.

Net premium written number.

So in 2000, it was almost similar or identical to what you reported in 2019.

When we think about 'twenty one.

What do you think about how the net premium written and net earned will look like when we reflect back on 'twenty, one versus 'twenty won't be growing will be stagnant, while it would be down a little bit.

What's your gut reaction based on what Youre seeing today.

Yes, well first I would I would point out that we.

We're showing net premiums written.

And we felt that that was important.

At the start of the pandemic just to give a grading greater insight into leading indicator on on where things would eventually had so the fact that we've seen growth in.

And premiums written would indicate that.

Growth in premiums earned is around the corner.

More specifically where.

We've seen the biggest decline in premiums is workers compensation and I would tell you that.

From a policy count standpoint, we are not.

Seeing that level of decline on whatsoever, our policy retention ratios are very consistent with the past so it really is.

Exposure issue and therefore, I would think that as the economy recovers as employment levels recover as vaccinations.

Occur that will see a rebound in workers compensation.

In 2021 similar to the rebound we're already seeing on commercial auto where it's.

Practically back to pre pandemic levels.

Got it.

Thanks for those answers I'll, just pivot Caroline to the title operations.

Clearly a phenomenal result from the quarter on for the year.

And.

When we think about how are you going to replicate that in 'twenty one.

Some of the conditions still exist the low interest rate environment.

On the housing market.

What's your view on the outlook for 'twenty, one versus 'twenty do you think you can grow both revenue and earnings are you hoping for.

To achieve status quo or keep it flat with 20 year.

20 year results or.

Give us some perspective on how youre looking at your business for the year.

Well, we believe that as a result of the pandemic 2020 was a pretty extraordinary year for our industry.

And the outlook is still very good I mean, if you've followed zillow at all and what they say about the housing market.

Still being strong.

For 2021.

Sure.

We started the year out.

Strong.

Yes.

Refinance is expect that activity is expected to drop.

So we remain very optimistic about 2021 and.

Well just hold on and really see what happens is it's just so hard to predict but all indications are that this will be a strong year for us.

And the follow up question is in your comments Caroline you talked about some of the ongoing technology initiatives that you are.

Utilizing to enhance the performance of your segments are these most of these things developed internally are these done on partnerships with outside vendors and could you give some perspective on that.

Yes, so we.

We do what we can internally, but we also recognize that.

Title insurance company and so if we can partner.

Instead of having to reinvent we definitely look at that as well, it's really all about what is most efficient and cost effective force, but we're fortunate to have a technology group that understands how to.

The best process to go through for Us.

Got it well I'll, let others ask questions. Thank you.

Yeah.

Thank you Greg.

As a reminder, it is star one on your telephone keypad to ask a question.

To ask a question.

Your next question comes from Matt <unk> with JMP. Your line is open.

Hey, Thanks, good afternoon.

Good afternoon, Matt.

Just had a quick question.

On the.

I guess, both both the accident year improvement as well as the favorable development in the quarter can you give a little bit more color, there where their particular lines driving that.

As it relates to the PPD, where it was there.

Come from certain lines of business more than others.

Which accident years did it relate to just if you could peel back the onion.

Thanks.

Sure sure on the.

I'll speak first to.

The current <unk>.

Excellent year and.

Ill tell you that.

Mix of business is always going to have some impact on that and so for instance to the extent that you might be writing more property.

Or are you writing business.

Our business mix that has.

A lower loss ratio.

That will have an impact on it but.

As we have said quarter after quarter.

There is no question whatsoever that we are.

Very focused on underwriting excellence.

Pricing our business such that we will achieve lower.

Loss ratios and we see that coming through in the prior years.

And.

As I also commented on earlier, we have two are.

Our investment income is coming down as yields continue to decline and as we reinvest at lower yields there's no choice, except to improve that claim ratio and lower that combined ratio.

As far as as.

The development is concerned.

We have said for many many years quarter after quarter that.

Our history, our long history has been that we aim to have slight redundancy as opposed to slight deficiency and that we were working very hard to make sure.

That we were getting back to that track record and part of that is recognizing bad news very quickly and being very slow to recognize good news.

Yes.

Especially on on longer tailed lines of business. So.

So it's fair to say that.

Our long tail lines of business workers comp.

Is has performed very well in <unk>.

Prior accident years.

Whereas we're as Karl I think mentioned, there's still a little bit of headwind from prior accident years on commercial auto.

Okay, Great and then maybe just more high level philosophical.

To that point.

How do you.

Growth in the current environment, let's say 2020.

A lot of mixed signals.

In the data I can imagine between what's going on at a court levels with Corp closed for a while but I think slowly reopening but by no means back to normal.

Right down to kind of some things being observed in workers' comp.

How do you how do you approach kind of the.

The murkier picture.

In 2020 on all open accident years.

You kind of go through your process of what's recognized versus not recognized.

Yes.

Yeah, well we would.

I agree with you. It is it is a little murky with so many different variables in flux.

Question.

I would say that with respect to <unk>.

Verity and social inflation.

Our expectation is that that is not going to go away.

So therefore.

And I'll talk more specifically on.

Commercial auto.

We are not taking any comfort in the temporary nature of some short term frequency reduction because right now we're seeing all of that frequency reduction being offset with severity.

Increases so while anecdotally, we hear from our claim department that there seems to be a.

Greater incentive by plaintiff attorneys to go ahead income to the table and settle claims there is still a over riding.

Propensity for claims to be settling higher because of the social dynamic.

Social inflation dynamic.

So.

So there too we are not taking any comfort in short term frequency. We think severity is going to continue and therefore.

We.

Firmly believe.

The rate increases that we're getting.

On commercial auto must continue and that might tie back to Greg's earlier question.

And by no means do we think that.

We're now in good shape on commercial auto and I speak that I think even.

Where the industry standard I think there is.

A recognition that.

Double digit rate increases are necessary.

From the from what we see at this point in time.

Great. That's very helpful. Thank you for the color.

Thank you Matt.

Your next question comes from Ryan <unk> with Guggenheim. Your line is open.

Okay.

Hi.

Great another great quarter I wanted to ask since you've provided.

Operating margin objective.

Round tend to between 10% to 12%.

Our two consecutive quarters thats exceeding that enough to consider revising that upward I guess I wanted to get your thoughts on especially the.

How well title is doing in the discussion on the title automation, how that might impact that guidance going forward are that objected.

Well.

As you know the operating margin of course includes.

What we might have in the way.

Investment income as well as as underwriting margin and we're going to.

Spect to see.

Less margin coming from investment income more margin coming from underwriting income going forward.

And.

To the extent that.

There continues to be.

Pressure on <unk>.

<unk> income, we will always take a step back and look at those margins and make sure that they they get us to where we where we need to be but.

At this point in time, we remain comfortable with where those are at recognizing that more margin needs to come from underwriting as opposed to investment income.

Okay. Thanks.

Yeah.

Your next question comes from Nicholas cars on with Franklin Templeton. Your line is open.

Hi, good afternoon, and thanks for taking my questions.

Hello net.

First on capital management, we understand and support the prioritization of organic growth and recognise older Publix impressive historical dividend track record in recent special dividends. However wanted to get your latest view on whether share repurchases could be additive to the company's capital return toolkit anecdotally, we've observed that a much larger and well respected insurance company.

That has historically refrain from repurchases along some of that ground is now buying back stock above book value.

Process seems especially timely in the context of the widened down of the runoff segment, which is currently tying up to close to close to $450 million of equity hypothetically a buyback could be accretive to both book value and high single digit accretive to earnings per share I understand all of this isn't available for today, maybe repurchases could per produced some flexibility on the timing of future capital.

On a return as well can you help us understand financially and perhaps philosophically why share repurchases arent in old Republic capital management framework at this point.

Sure.

While net.

First I certainly wouldn't want to get ahead of the board in the letter that we provided to all shareholders on <unk>.

January six.

And.

I won't reiterate that letter, but I thought at least.

We tried to provide as much insight into our process as possible and reassure shareholders that there is a tremendous amount of rigor around our capital management.

<unk>.

And.

When we evaluate capital and capital management at the board level.

And the management level, we certainly take into consideration all aspects of capital management, including.

Buybacks as well as cash dividends and.

Again I won't.

Try to.

Reiterate what is what has been said in that letter.

But I think.

It speaks for itself.

And.

And therefore on a go forward basis.

We will.

Use that same rigor and the same process.

Two.

Look at all aspects of capital management in all alternatives.

I would point out.

I'm not sure if I.

If I heard all of your question regarding.

Any excess capital.

Relative to what we have on our mortgage.

Operation, but in that in that same letter I reference.

We do talk about that capital that is in that operation.

And.

That capital.

<unk> will eventually become available or.

Other otherwise.

Over the course of time as we say on our letter.

It will be freed up so that capital is not immediately available.

It is currently in our.

Our mortgage runoff business.

And.

Certainly the regulators from the state of North Carolina would be involved in any decisions to free up that capital.

Okay, Thanks, and as a second question.

We wanted to acknowledge some of the steps taken to improve corporate governance over the past year, including and not limited to the adopted proxy access provision as well as the return to.

Hosting quarterly conference call. Following earnings reports, however, old Republic continues to lag peers with respect to several elements of our corporate governance best practices, including maintaining a staggered board with plurality voting and a rights plan.

Like many of your shareholders believe that businesses should be run for the long term. We also don't do these policies that are necessary to support that objective and the fact that they may be destroying public market value.

This issue is something that you would evaluate it and can we expect to see further improvements on material corporate net corporate governance issues going forward.

Alright.

Well Matt.

Nick.

I think.

We're well aware of the concerns that you have raised and.

We're just just like other issues our board is.

Also very much aware of these issues that you've raised and we constantly evaluate.

The issues and.

And make decisions that we think are in the best interest of all shareholders. So.

Again, this is a ever evolving process something we.

Continuously revisit and.

Analyzed.

Collectively.

Okay. Thanks.

Okay.

There are no further questions at this time I will now turn the call back over to management for closing remarks.

Okay, well again.

We appreciate everyone's interest and support and.

All of us at Old Republic.

We have.

Delivered exceptional value.

As is evidenced in our fourth quarter and full year 2020 results.

And.

We wish everyone the very best as we.

Hopefully emerge from the pandemic and we're able to move on to greener pastures as we move further into 2021, so again thanks.

Thank you all very much for your interest and your time.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

[music].

Okay.

Yes.

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