Q3 2021 Old Republic International Corp Earnings Call

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Yeah.

Good afternoon. My name is Emma and I will be your conference operator today at this time I would like to welcome everyone to the old Republic International third quarter earnings Conference call.

All lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If he would like to withdraw your question again Press Star one. Thank you Joe Calabrese with the financial Relations Board you May now begin your conference.

Okay.

Good afternoon, everyone and thank you for joining us for the Old Republic conference call to discuss third quarter 2021 results.

This morning, we distributed a copy of the press release and posted a separate statistical supplement, which we assume you've seen and there are other otherwise have access to during the call.

Both of the documents are available at old Republic's website, which is www dot old Republic Dot com.

Please be advised that this call may involve forward looking statements as discussed in the press release and statistical supplements dated October 28 2021.

Risks associated with these statements can be found in 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. Thank you Joe well good afternoon, everyone and welcome again to over Republic third quarter earnings call with me today, we have our CFO Frank Sodaro, and we also have Carolyn Monroe, the president of our title insurance group.

Well, our hard work is paying off and we're very pleased to again report that or I produced another terrific quarter with general insurance and title insurance each posting exceptional results that drove the strong record setting consolidated results that you saw.

Sure.

Compared to the third quarter of 'twenty total net premium and fees earned increased to just over $2 billion up almost 19%.

At the same time, our pre tax operating income increased to just under 300 million up almost 32%.

The consolidated combined ratio improved to 89, 8%.

That's a 2.5 percentage point improvement.

Still comparing to the third quarter of 2000 General insurance net written premium increased by four 3% and entitlement insurance, we saw net premiums and fees earned increased by over 33%.

So our diverse portfolio of specialty products in both general insurance and title insurance continue.

Continue to deliver growth and profitability.

And with that I will now turn the discussion over to Frank to discuss some of the per share figures, our investment portfolio and briefly touch upon our run off mortgage business then.

Then he'll turn things back to me to cover of General insurance, followed by Caroline who will discuss title insurance and we will follow those discussions by opening up to Q&A.

So Frank take it away.

Thank you Craig and good afternoon, everyone. This morning, we reported a 32% year over year increase in third quarter net income, excluding investment gains and losses of $240 million or <unk> 79 per share for the first nine months of this year. This figure was $668 million up nearly 50%.

Results for both periods were driven by substantial growth and underwriting profitability within our general and title insurance segments, which youll hear more about shortly.

Shareholders' equity ended at $6 3 billion, resulting in book value per share of just under $21, adding.

Adding back dividends, including the $1 50 special dividend paid in the quarter book value increased 11% from year end 2020, driven by our strong earnings.

Net investment income increased for the quarter, However was down slightly year to date the.

The increased investment base inclusive of proceeds from last quarter's debt issuance.

And lower yields on new investment purchases affected both periods.

The investment portfolio consisted of approximately 71% and highly rated bonds and short term investments with.

With the remaining 29% allocated to large cap dividend paying stocks.

The average maturity on the bond portfolio was approximately four five years.

With both book and market yields of about two 5%.

The fair value of the equity portfolio did decrease by about $200 million during the quarter due to normal market fluctuations. However, we ended the period with unrealized gains on these investments of nearly $1 1 billion.

I'll now turn to claim reserves, which ended the period at just under 11 5 billion.

All three operating segments recognized favorable claim reserve development for all periods presented in total the consolidated claim ratio benefited.

By two 3% and two percentage points for this year's third quarter and first nine months, respectively compared to one four and nine percentage points for the same period a year ago.

Finally premiums in risk in force of our run off mortgage operations continued to decline in line with our expectations, while generating a modest operating profit.

Claim cost claim costs reflect a significant reduction in newly reported defaults compared to 2020 and lower claims severity, resulting from increasing home values.

The group paid another $25 million dividend apparent, bringing the total to $75 million for the year and we expect to pay another $25 million dividend in the fourth quarter, but that will be subject to regulatory approval.

Total GAAP shareholders' equity for the mortgage companies ended the quarter at just under $400 million.

I'll now turn the call back to Craig for a discussion of general insurance.

Okay Frank Thanks.

So in general insurance net written and net earned premiums each increased by just under 5%.

We continue to achieve strong rate increases on most lines of coverage other than workers' comp.

Compared to the third quarter of 2020 pre tax operating income rose almost 33% and Thats primarily from improved claim ratios.

The overall combined ratio improved four two percentage points from 95, 5% to 91, 3%.

The claim ratios, we reported were of course inclusive of favorable.

Prior period development.

That came in at three two percentage points in the quarter.

Net premiums written in commercial auto grew by five 4%.

Our third quarter commercial auto claim ratio improved to 73, 1% compared to 84% in the third quarter of last year.

Claims frequency is not quite back to pre pandemic levels, but it is higher than 2020.

Severity trends continue to increase although at a slightly lower pace than what we had seen in previous years.

Rate increases in auto liability are continuing in the 15% range.

So we think we're staying ahead of the overall loss trends that we're seeing but we also recognize that we still need to achieve a lower claim ratio for auto.

Turning to workers' comp net premiums written were lower by about 1% compared to the third quarter of 2020, somewhat reflecting our ongoing underwriting discipline to maintain rate levels.

The workers comp third quarter claim ratio came in at 59% compared to 54, 1% in the third quarter of 2020.

Claim frequencies now just slightly below pre pandemic levels, while severity is slightly up.

Lee driven by indemnity severity.

So for Workers' comp, we think our rate levels are adequate and we will continue to maintain our underwriting discipline as we move forward with this line.

Our aggregated commercial auto workers' comp and general liability claim ratio came in at 65, 9% compared to 72% in last year's third quarter.

In financial Indemnity property and other coverages, we continue to experience phase.

Favorable steady claim ratios and strong rate increases all contributing to the improved combined ratio, we're seeing in general insurance.

So we continue with our underwriting excellence initiative that focuses on better segmentation improved risk selection and pricing precision.

Your line items kind of drove that the most and what youre seeing there that drove it and.

And kind of a similar question on the current accident year ratio was quite good and what youre seeing there that that has you're bringing that down I mean from the supplement it looks like you know while small general liability moved a lot. So it seems like some of that's there but.

Any more color you can provide would be great.

Yeah.

Sure I'll I'll address the latter first and then I'll ask Frank to maybe comment on the favorable development.

On the.

Accident year.

Loss ratio that we have that is reflective of.

Years of compounding rate increases and also reflective of the line of business mix.

So.

As you see in the release the third quarter of 'twenty, one we had a.

A claim ratio of 68% excluding prior year development, which is an improvement.

From the third quarter of 'twenty, but.

Less of an improvement if you look at the full year of 'twenty, where we were at 77 so.

Nothing dramatic there.

Again reflective of the rate increases that we've been achieving in some lines quite extraordinary rate increases.

As well as a line of business mix changes Frank could you comment briefly on the developments that we are seeing sure yes.

Yes, so for the quarter.

Most of that favorable development is coming from the years of 2015 through 18.

And most of the development coming through for general Insurance's on Workers' comp, although our major lines workers' comp commercial auto and GL all had favorable development in the quarter.

Year to date, it's pretty much the same same story on.

The majority of our development is coming from workers' comp.

Yeah.

Great very helpful. And then my other question I, just wanted to shift to title and hope that maybe you can help us just trying to get a feel for just how things earned through.

I caught the commentary on.

I guess not to read too deep into kind of the order flow in terms of.

Because there is a difference between obviously refi and purchase transactions.

But just trying to get an understanding of the adds that slows down.

The timing and pattern by which that might hit the earned premium numbers for.

For the title business I mean, do you feel like where we're at.

Kind of peak volume levels or are there reasons that you believe that we can.

Stay in this general area for a while.

Caroline would you like to respond to that.

Sure.

No.

I think we've we feel like we.

Pete definitely in the <unk> sector all of that.

The last couple of years in service.

It's really hard to predict any of this but.

Their purchase.

I don't think repeat they feel like they're staying strong.

No.

Yeah.

Even if the interest rates climb slide.

Slightly.

It's.

We just don't feel like it's going to affect.

The purchase volumes that much.

And.

Because of our mix of agency and direct we will have.

We will have a lag with that.

Our revenue coming from our agents.

About a quarter or so we'll be able to stay strong in the fourth quarter and I think on into the first part of the year.

Great. Thank you very much for the color and congrats on the nice quarter.

Thank you Matt we appreciate your questions.

Okay.

Again, I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.

Your next question comes from the line of Greg Peters with Raymond James and Associates. Your line is on mute it.

Hi, This is Alex Bolton, calling in on behalf of Greg Peters.

I was wondering if you could touch on renewal retention within Gi.

Any numbers around that.

Great.

Okay.

Could you repeat your question I'm, sorry, it broke up a little bit.

Yes, if you could touch on.

Renewal retention with N G I.

Sure sure.

So as you see.

I'll start with.

Commercial auto.

And.

You can see there if we're obtaining 15% rate increases, but the premium.

Is only growing.

By about 5% that.

There there is some leakage in retention, we still have very high retention ratios.

In the mid eighties.

But we are very focused on disciplined underwriting and achieving.

The appropriate rates and right now we think the appropriate rate increase that we need on <unk>.

Auto liability is 15% range of course that isn't across the board, but on average.

And we have to we have to do that because as we indicated severity.

Still increasing frequency is coming back and we still are working to drive down our auto loss ratio. So.

We're not afraid to let some business blowout if if.

If we can achieve what we believe to be adequate rate.

<unk>.

Workers' compensation similar story, but a few different dynamics.

And the marketplace on workers comp.

Rates have been generally declining year after year.

We have been doing our very best to hold our rates.

That we have.

Generally speaking quarter to quarter, we've been either plus or minus a point or two in rate on workers' compensation. So as I mentioned in my prepared remarks.

Here too if we don't think we can achieve adequate rate we have.

<unk> business.

Though but.

Overall, we think our our portfolio is.

Is priced adequately at this point on comp to achieve our target loss ratios.

On our other lines of business.

Similar story, where.

Yes.

Pricing discipline in the marketplace may not be quite as robust as it should be we think some of the social inflation.

Dynamics are working its way into GL and therefore, we believe we need GL rate increases and right now.

Achieving rate increases in the high single digits.

And again, we think those are necessary and if we're not able to.

Achieve those were.

Again.

Willing to let the top line drop off a bit.

All of our other business I would say.

Sure.

That we our retention ratios are extremely strong and that even as on lines of business, where we're getting substantial rate increases on for instance, aviation still getting rate increases in the mid teens D&O still getting rate in.

Increases in the mid teens as examples and <unk>.

Extremely high retention ratios, even at those kind of rate levels.

Okay, Great and then.

Yes.

<unk>.

I guess talking to your customers I guess what.

Their perspective on the labor market and.

The struggles that they may have with hiring.

And even with yourself.

Yeah.

Oh.

How are you handling the label Labor market situation, then maybe wage inflation.

Yeah.

Right so.

Just speak to what we're seeing in the way of.

What it means to our financials and as I mentioned in my earlier comment where we are seeing some increase in severity.

On Workers' comp is on the indemnity side and that's being driven.

Mostly by wages as.

As far as our customers are concerned.

The newly coined phrase out there the great resignation with people, leaving the labor force, including early retirements and.

That is certainly in the short term, placing pressure on compensation costs and employee retention.

With the strong demand and lower supply throughout the labor market. So when you look at for instance, our trucking business.

So all of those dynamics are at work there and and.

Our customers are struggling to get people in place that they need to to drive trucks, and they're having to pay them more and and.

So it is this dynamic is alive and well.

And for Us.

Here in running our business, we're seeing the same thing we're seeing many of our competitors.

Offering extremely robust.

Implementation packages and trying to.

Lower away some of our folks so we're seeing the pressure ourselves without any question. There is a dynamic out there again, where there is.

Strong demand and lower supply throughout the labor market.

I guess any.

Expectation I know you don't give guidance, but impact on.

On expenses.

Okay.

Yeah.

We're very disciplined in our approach.

And we're focused on the long term as you well know.

So.

There certainly will be pressure somewhat on.

On labor costs.

But.

Wouldn't expect that to impact our overall expense ratio in a dramatic way, but on the other hand, we're cognizant that there is a added headwind out there that hasn't been there for many years.

Okay and then.

On the title insurance.

I'm not sure Caroline if you gave.

The breakout between refi and purchase transaction, but.

I guess is there any data that you can provide that would show that.

Maybe there's new purchases from people.

People refinancing and buying additional homes.

Okay.

No I mean, I think we have any data that shows that they are refinancing and buying additional homes.

Sure.

We don't we don't have data that follows that.

Yeah.

Sure I understand your question right Yeah, Yeah, no I appreciate that and then.

And then maybe finally just on.

The board changes.

Maybe if you can provide.

Some color around decision, making on <unk>.

Reducing the board and.

The new chairman.

Sure well.

We remain very committed to board refreshment and.

We've.

Outline.

In our letter to shareholders.

Of August 13th some of the things that we've taken we've added several new board members we've had retirements.

And.

We're in discussions with potential new board members.

So and we've also stated.

We ideally would like to have the board.

At.

11.

In the long term so.

I would say that we're on track doing the right thing.

And.

With regard to.

Spencer Leroy coming onto the board.

Sensor has very deep history of our company. He was our general counsel before he was on the board. He is now an independent member of the board and.

Spencer and I have worked very closely together for many years. So we expect that.

That too.

Work out very very well.

<unk>.

So I would say all things.

Considered with regard to the board.

Things are on track and and.

Heading in the right direction.

Great well I appreciate all the answers and congrats on the quarter.

Thank you very much thanks for your questions.

Your next question comes from the line of Boris <unk> with Crawford investment.

Your line is on mute.

Thanks, Good afternoon guys.

A question on investment income.

It was positive this quarter.

Which I think.

Somewhat contrasts prior commentary, but it's going to be on somewhat of a downward trajectory. So I was just kind of thinking is thats kind of a turning point.

And should we expect maybe small positive increases going forward or this is just a step up from a higher asset base.

It's going to start trailing back down again.

Hi, Boris this is Frank Sodaro, so the quarter had some favorable base happening there because of the debt issuance we did.

Now. We then subsequently made a special dividend payment, which will bring that back in line. So I would not expect.

Investment income to continue to trail off.

Okay I.

Appreciate it.

Andrew.

One more quick question on the title segment.

Expense ratio.

<expletive>.

Declining, but higher premiums, but what would be kind of a more of a sustainable expense ratio in the long run so that segment.

Okay.

Well I would I would think that where are we.

We should be able to maintain where we are right now.

<unk>.

It's always going to be based on.

On the volume higher volume with our rig count.

Okay.

Yes.

But I mean, historically, it's been probably closer.

Okay.

Maybe.

And the night low Ninety's maybe.

Right.

So.

Yes.

So right now I mean, we're at.

I think it's about 89 right now.

Yes, it was 86.

This quarter.

The expense ratio.

Yes, yes 86.

Good morning.

The.

And I think if you look back at nine months ended.

2020, we were.

At 89.

As Carolyn says I think.

I don't have the the other years in front of it.

Front of me, but as Carolyn says.

Thank you.

Depending upon the volume and how much volume, we're able to continue with.

If we even if volume stays relatively flat with the new purchases driving more revenue into into the equation.

Staying around the 86, mark would be reasonable however, if volumes fall off and.

And.

Back to where they were a few years ago, we would expect that to emerge.

Maybe in the low nineties.

Okay got it.

Thanks.

Yes.

Again, I would just like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile any last minute questions.

Okay.

At this time there are no further questions Mr. <unk> I turn the call back over to you.

Okay.

Okay, well again, thank you to everyone on the call for participating and listening in.

We will keep up the hard work to keep delivering value to our shareholders.

All of our stakeholders and.

Things continue to move along as we have said in a very favorable direction.

And we look forward to reporting.

Next on on how things look for.

For the next quarter end.

Hopefully we will be reporting yet again similar positive results. So thank you all very much and we wish you all a good afternoon.

Okay.

This concludes today's conference call. Thank you for attending you may now disconnect.

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