Q4 2021 Old Republic International Corp Earnings Call
Good afternoon, My name is David and I'll be your conference operator today at this time I'd like to welcome everyone to the old Republic International fourth quarter 'twenty 'twenty. One earnings Conference call. Today's conference is being recorded all lines have been placed on mute to prevent any background noise. After the speakers' remarks there.
A question and answer session, if you'd like to ask a question. During this time simply prestige Starkey followed by the number one on your telephone keypad, if you'd like to withdraw your question Press Star one once again, thank you Joe Calabrese with the financial Relations Board you May begin your conference.
Thank you.
Everyone and thank you for joining us for the Old Republic Conference call.
<unk> fourth quarter 2021 results.
This morning, 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 during the call.
Both of these documents are available at old Republic's website, which is W. W. W 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 27 2022.
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 .
The old Republic International Corporation.
Other senior executive members as planned for this meeting.
At this time I would like to turn the call over to Craig Smiddy. Please go ahead Sir.
Thank you Joe good.
Good afternoon, and best wishes to everyone in this new year.
Welcome again to old Republic's fourth quarter earnings call.
With me today, our French scenario, CFO , and Carolyn Monroe, President of our title insurance business.
Well, we're very pleased to report that or I produced another terrific quarter as well as a third consecutive record setting year.
Both are major segments general insurance and title insurance.
The outstanding results.
Net premiums and fees earned increased two 2 billion for the quarter and $8 billion for the year, that's up 19% over the prior year at the same time pre tax operating income increased to $335 million for the quarter.
$1 2 billion for the year eclipsing the 1 billion Mark for the first time and up over 40% over the prior year.
The consolidated combined ratio improved to 88% for the quarter and 89, 9% for the year of 3.4 point improvement over the prior year.
General insurance net premiums earned increased by 5% over the prior year and title net premiums and fees earned increased by 34% over the prior year.
So we think it's clear that our diverse portfolio of specialty products in both general insurance and title insurance continue to deliver strong growth and exceptional profitability as demonstrated by these results.
So I'll now turn the discussion over to Frank and then Frank will turn things back to me to cover General insurance, followed by Caroline who will discuss our title insurance business and then we will open up the conversation to Q&A.
Right.
Thank you Craig and good afternoon, everyone. This morning, we reported fourth quarter net income, excluding investment gains and losses of $268 million or 20% year over year increase for the full year. This figure was $935 million up 40%.
On a per share basis comparable year over year numbers or <unk> 88 versus <unk> 75 for the quarters.
And $3 eight versus $2 24 for the full years.
Improved results as a result in the year were driven by substantial growth and underwriting profitability in the general insurance and title insurance segments.
And youre going to hear more about that a little later.
Shareholders' equity ended at nearly $6 9 billion, resulting in book value per share of $22 76.
When adding back dividends book value increased just over 21% from the prior year and driven by our strong operating earnings and higher investment valuations.
Net investment income was relatively flat for the quarter and year as an increase in the level of investments in <unk> and.
And lower yields on new investment purchases affected both periods.
The investment.
Portfolio was comprised of approximately 68% and highly rated bonds and short term investments.
With the remaining 32% allocated to large cap dividend paying stocks.
The average maturity on the bond portfolio is four four years with both book and market yields of just over two 4%.
The fair value of the equity portfolio increased by $460 million during the quarter and $750 million for the year.
I'll now turn to claim reserve development.
All three operating segments recognize favorable claim reserve development for all periods presented in total the consolidated claim ratio benefited by $4 six.
Two seven percentage points for the quarter and year, respectively compared to two three and one two percentage points for the same periods a year ago.
Shifting to our run off mortgage operations <unk>.
Premiums in risk in force continued to decline in line with our expectations.
Claim costs this year reflect a significant reduction in newly reported defaults and higher cure rates on loans already in default. In addition to lower claim severity, resulting from increasing home values.
The group paid another $25 million dividend to the parent, bringing the total to $100 million for the year.
Subject to regulatory approval, we expect two.
<unk> 2022 dividends at or above this level.
Total GAAP shareholders' equity for the mortgage companies ended the year at $360 million.
So to wrap up my remarks, this quarter capped a year of outstanding financial performance, we paid an annual dividend for the eighth straight year and have increased our dividends in each of the last 40 years, we paid a special dividend of $1 50.
And over the last five years, we've returned $2 5 billion to shareholders.
Our balance sheet is in excellent shape, we are well capitalized and our businesses are positioned for continued profitable growth.
I'll now turn the call back over to Craig for a discussion of general insurance.
Okay, Frank Thank you.
For General insurance net premiums earned increased by 8% for this quarter and 5% for the year. We continue to achieve strong rate increases on most lines of coverage other than workers' compensation.
While renewal retention ratios and new business production remained very strong.
Pre tax operating income rose by 33% for the quarter and 34% for the year, primarily coming from improved claim ratios.
The overall combined ratio improved over four points for the quarter to 88% and.
And over four points for the year to 91%.
Claim ratio as reported we are inclusive of favorable prior period development of six six points for the quarter and three eight points for the year.
Turning to commercial auto specifically.
Net premiums earned grew by 5% for the quarter and 8% for the year.
The commercial auto claim ratio improved to 61% for the quarter and 71% for the year.
Claim frequency that we saw was not quite back to pre pandemic levels. While claim severity continue to increase although we observed that it was at a slower pace.
Rate increases and auto liability are continuing in the low double digit range.
So we think we're staying ahead of overall frequency and severity trends taking into consideration the rates that we continue to achieve.
Now turning to workers' compensation net premiums earned were lower by 3% for the quarter.
And 10% for the year the workers comp claim ratio was 61% for the quarter and 59% for the year.
Here claim frequency is still slightly below pre pandemic levels, while claims severity of <unk>.
Slightly up.
Rate decreases in workers comp for us in the very low single digit range.
But we think our rate levels remain adequate and we will continue to maintain.
The underwriting discipline that.
That we have so far.
Our aggregated commercial auto workers' comp and general liability claim ratio came in at 61% for the quarter and 66% for the year.
That's an improvement of five points over the prior year.
And financial Indemnity property and other coverages as we list them in the financial supplement we continue to obtain strong rate increases and produced favorable claim ratios contributing to our improved overall claim ratio in general insurance.
These lines of coverage grew by 15% in 2021 and noteworthy these lines are up over 40% since 2018, which reflects our efforts to diversify our lines of coverage and enhance our underwriting margins.
So the underwriting excellence initiative that we've talked about in prior quarters, which we began several years ago is clearly paying off as we hone our focus on better segmentation improved risk selection pricing precision.
And we think these efforts will continue to support adequate rate levels high retention ratios and new business production and then ultimately continued strong underwriting profitability.
So that.
Concludes my remarks for the General insurance group and I will now turn the discussion over to Carolyn who I know is anxious and eager to report on title insurance is outstanding quarter end and year Caroline.
Thank you Craig.
We reported this morning, the title group posted an all time high for quarterly underwriting revenue, while quarterly operating profits early trailed the record set of results reported in the second quarter of 2021.
Total premium and fee revenue for the quarter of approximately $1 2 billion was up 15% from the prior year fourth quarter premium and fee revenue for the year surpassed the $4 billion Mark for the first time ever at 34% increase over full year 2020.
Our pre tax operating income of 137 million for the quarter compared to $132 million last year year to date, our pre tax operating income at $515 million exceeds pretax operating income for the same period in 2020, <unk> hundred $71 million.
Approximately 50% full year 2020 and brand results set an all time record for the title group.
Commercial premiums were up 63% over fourth quarter, 2020, and up 36% for full year 2021 over 2022.
The quarterly and annual figures both represent all time highs commercial premiums represented 18% of our total premiums in the fourth quarter and 15, 6% for the full year 2021.
Well, we have seen a decline in order counts over the second half of the year as a result of the slowdown in the refinance sector purchase transactions, which generate a higher fee profile remained healthy to close out the year.
And our technology portfolio per bus so the market leader in digital closings will continue delivering improvements to help in the broader industry adoption.
Recognizing the value of <unk> capabilities, we are integrating and leveraging those across our family of titled Technology companies. This includes our secure portal ready to close within our settlement software Ram Quest and EP in R. E. Recording company. This will provide an end to end.
Digital closing experience for the consumer.
Last quarter I introduced our new integration platform supermarket.
With a goal to.
To integrate with anything it will service our agents with an interconnected platform of external partners and technologies that interact and exchange information throughout the entire business workflow supermarket is live with initial partners performing real time request with a roadmap of growth in place.
Supermarket will with a one stop integration provide access to a variety of technology services and products to our agent partners.
While simultaneously delivering services to our agents, we are expanding on our internal use of technology building on the successful use of <unk>. We are actively piloting machine learning with optical character recognition to automate and improve business processes.
We began 2022 investing in our digital future, while continuing to make enhancements to our current environment.
These investments will assist our agents and employees and the constantly evolving digital landscape and I will now turn it back over to Craig.
Yeah.
Okay, Carolyn and congratulations on a terrific quarter and terrific year.
Well again, we're very pleased with this third year of record setting operating results. We think these results reflect success of our specialty strategy in general insurance and title insurer, enabling us to produce significant value.
For our shareholders.
So this concludes our prepared remarks, and we'll now open up the discussion to Q&A, where I will answer your questions or I'll ask Frank our Carolyn to respond.
Thank you at this time I'd like to remind everyone in order to ask a question press. The Star Key then the number one on your telephone keypad will pause for a moment to compile the Q&A roster. We will take our first question from Greg Peters with Raymond James.
Good afternoon, everyone.
I guess for the general insurance component.
Focus on prior year development in the expense ratio.
First on prior year development definitely.
A change if you look at the statistical supplement relative to the last several years.
And I was wondering if you could give us more color on whats going which accident years, youre getting the favorable development from and which lines and.
What's the outlook there.
Hi, Greg.
Craig here I think I'll ask Frank to to address that and then I'll chime in if there's anything to add.
Okay. So for.
For the quarter in Europe have a very similar story.
The favorable developments coming predominantly from 2010 through 2017, all those years are are contributing to the favorable development and the vast majority is coming through on workers' comp and commercial auto.
So it's a similar story to last quarter and just a continuation of it.
Got it and so just as a follow up on that answer I mean, one of the one of the.
Industry themes that everyone's been hearing about is social inflation as it relates to jury verdicts and severity, especially commercial auto.
Should I infer from this that maybe that you've finally achieved getting near rate adequacy in that line of business as it relates to your book.
I think thats, a fair assumption Greg.
Clearly when we when we set our loss ratio picks for the year will still be cautious and conservative, but all indications are that based on the favorable development that we're seeing.
<unk>.
Commercial auto liability in particular that.
It seems the count pounding double digit rate increases that we've had for seven or eight years, we've talked about I know every one of these quarterly calls.
You're finally seeing all of the fruits of our labor come through in the compounding of those rate increases and.
And as you know we are conservative about releasing reserves from prior years.
Longer tail lines, we unlike a lot of our peer peers.
We wait generally speaking five years on workers' compensation three four years on auto liability. So.
That conservative.
<unk> position is starting to play out and we're seeing again.
Very strong reserve levels.
In those prior years and when we look back at them.
I want to be clear to that given that some of those years still have to settle out we take into consideration what's happening with Soc.
Social inflation and.
And inflation in general and when we look back though use years. We appreciate that that can have still have some impact on any claims that remain unsettled. So we like likewise, we take a conservative view on those years and make sure that the reserves we have up.
Our adequate in our mind.
Got it. Thank you for the color there on the expense ratio just looking at the full year definitely running.
What 90 basis points higher than the previous year, and certainly with a 150 basis of 160 basis points higher than your 10 year average.
Obviously business mix can have an effect here.
We're skewing more towards surety or something like that but.
How should we think about the expense ratio going forward.
That definitely.
Greg there are.
Good reasons why.
There is a change there, particularly in the fourth quarter. So let me have Frank try to fill in and then I can pick back up if theres anything for me to add.
And Greg So you hit on some of it and I'll I'll focus on the quarter because that there.
There is an impact obviously on the year also from that it's just more dramatic in the quarter.
So there is a mix change happening and we've talked a little bit about that with workers comp make comprising a smaller part of the total.
And that tends to have a lower commission rate. So therefore lower expense level and the lines that we're adding these other coverages have slightly higher expense ratios.
But then they are actually expected to have that our underwriting margins. So there is a little bit of a tradeoff there that we're seeing in the expense ratio, but another part of this.
Pretty much an equal part of this is that we just had in the quarter an accumulation of some benefit plan benefit plan true ups and some miscellaneous charges that all happen to go the same way in the in the quarter. We don't expect those to recur. So those are you see that more in the quarter, but it's also impacting the year.
And Greg I'll just add.
Ill, just wrap up by saying.
We have <unk>.
Consistently stated as we do in this quarter's release that our target is.
As for in the General insurance group for a 25% or below expense ratio, we recognize that we're above that.
Particularly with these items that Frank mentioned and as we go along we're not moving that target.
If the mix continues to.
Trend more towards these other lines of that I talked about.
And that Frank talked about primarily the financial indemnity lines the prop.
Property lines and the other coverage lines. If we keep as we said we are deliberately growing those lines to diversify.
And then you have a bit of a double impact because at the same time.
As Frank stated workers' compensation pool.
The portfolio is decreasing and that had a lower.
The commission ratio so.
I have a bit of a.
<unk>.
Double whammy there and.
If if that if those trends continue and the mix we may take a look at that target, but as of right now.
It still remains our long term target to hit that 25 or below and as Frank said fourth quarter is.
Emily and not a predictor of where we're going to be in 'twenty two.
Got it.
Thank you pivot.
Pivot Carolyn on the title piece.
I don't want to diminish the outstanding results for 'twenty, one, but we're always forward looking.
And if I look at the direct orders opened the direct orders closed on a year over year basis. The numbers are trending down therefore, it seems like 'twenty two relative to 'twenty one could be.
No.
There could be some erosion in your results not that debt and 89 combined ratio for the quarter or for the year is anything to sneeze at but.
I'm just curious about your perspective on the <unk>.
<unk> thousand two outlook relative to 'twenty one.
Well the drop in orders is.
Mainly because of the mix the drop in the refi business.
Purchase orders.
Higher fee profile for us and.
We recognize that we're still in a very hot real estate market and while refi refi orders are down.
For the resale market is still really strong we feel good about the market right now commercial is still strong after a difficult 2020.
But we also understand hot markets don't last forever and any one thing can change them.
We're dependent on inventory interest rates, a strong economy and I feel like we're positioned now that really no matter what happens we'll be able to perform.
Okay.
Just an observation.
Going through your financial supplement.
You are.
The run off business I know, it's steeped in legacy, but you provide a lot of detail for business now that has us only generating $32 million of annualized earned premium.
And.
I think I think some of us would probably rather see more detail around say for example, your general insurance business rather than a couple of extra pages about a run off business, it's become so small.
Just pointing out something that I'm sure you guys are well aware of but anyway. Thanks for your answers.
Thank you Greg.
We appreciate your comment.
And as you might have noticed in our.
Releases in our annual review and other public information, we've tried to give less real estate to the run off business and we have discussed those financial supplements.
We will continue to take a look at it so.
We noted and.
We will keep our eye on it.
And we will continue to deemphasize that run off business as we go along and give it less and less real estate.
Got an airtime.
Alright.
Okay, and as a reminder, ladies and gentlemen press star one if you'd like to ask a question.
Next we'll go to Matt <unk> with JMP Securities.
Hey, Thanks, good afternoon.
Good afternoon, Hello, Greg covered a lot of Hey, Hello.
Greg covered a lot of ground there. So I think I only have really had kind of one last two title questions left.
I guess the specific I was hoping I know you've given this to US I was hoping you could remind us of.
Let's say for 2021, what the mix of the title book looks like.
<unk> refi resin purchase and then commercial.
So for 2021 for the full year.
Our purchase represented 72% of our revenue refi was 28% in the fourth quarter it was closer to <unk>.
70 525.
Okay.
Then commercial.
For the full year it was about 15, 6%.
Got it great and then just.
Just an observation question as you look at the past several weeks here.
Obviously mortgage rates started to rise.
How should we think about that I mean, obviously, you talked a little bit about it has a negative impact on refi volumes have you seen I can open orders there anything a positive impact on purchases has been a lot of talk about kind of shaking some people off of the bench that <unk> been thinking about doing something in unrealized realizing that now might be the time.
Have you have you observed any of that or is that more in theory at this point move to Athens.
We have observed it.
Once we got through the.
People finally got off vacation and.
Started getting back into it we've really noticed that.
Probably the last couple of weeks that purchase business picking up.
For us.
Great very helpful. Thank you for the color and congrats on a nice quarter and year.
Thank you thank you Matt.
And that does conclude today's question and answer session I will turn it back over to management for any additional or closing remarks.
Okay, well as as it seems to be the case.
When we have a.
A good quarter and a great year like this there's not a lot of difficult.
They're challenging questions for us and.
Right now we as I stated earlier feel very good about where old Republic international fits with our key our two key businesses general insurance and title insurance.
And we look forward to another <unk>.
Productive good year end 2022, and wish all of you the best and thank you for your support and for listening to our conference call. Today. So thank you very much.
And this concludes today's conference call you may now disconnect.
Okay.
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