Q1 2022 Old Republic International Corp Earnings Call
Good afternoon, My name is Chris and I'll be your conference operator today.
At this time I'd like to welcome everyone to the Old Republic International first quarter 2022 earnings Conference call.
All lines have been placed on mute to prevent any background noise. After.
After the Speakers' remarks, there'll be a question and answer session.
If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad.
To withdraw your question. Please press star one again.
Thank you Joe Calabrese with the financial Relations Board you may begin.
Thank you good afternoon, everyone and thank you for joining us for the Old Republic conference call to discuss first quarter 2022 results. This.
This morning, we distributed a copy of the press release and posted a separate financial supplement, which we assume you have seen <unk> 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 this call may involve forward looking statements as discussed in the press release and financial supplement dated April 28 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 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 to Craig Smiddy. Please go ahead Sir.
Yeah.
Thank you Joe.
Good afternoon, everyone and welcome again to old Republic first quarter earnings call with me today I have Frank scenario, the CFO of Oreille and Carolyn Monroe, the president of our title insurance business.
Well or I produced another highly profitable quarter in both general insurance and title insurance, even though we saw increases in mortgage interest rates began to influence our title insurance revenues and operating income.
And we certainly will provide.
Provide more insight on that is as we go through our prepared remarks.
Net premium and fees earned were $1 9 billion, while pre tax operating income was that.
'twenty.
$237 5 million.
And our consolidated combined ratio was a very profitable 91, 9%.
In General insurance net premiums earned increased by 6% and even though title insurance net premiums and fees earned increased by 3%, we're not expecting revenues to come in higher the remainder of 2022 quarters relative to their respective <unk>.
21 quarters.
We still expect both general insurance and title insurance to produce highly profitable underwriting results for the remainder of the year.
So we think our broadly diversified portfolio P&C entitled business is well positioned to continue to deliver long term profitable growth and with that I will now turn the discussion over to Frank.
Frank will then turn things back to me.
Provide more insights on our general insurance business will follow that by Caroline who will.
Discuss our title insurance business and then as always we'll open up the conversation to Q&A. So Frank.
Thank you Craig and good afternoon, everyone. This morning, we reported first quarter net income excluding investment gains and losses of 192 million a 7% decline from last year.
Per share basis comparable year over year income was 63.
Versus 69.
Oh down when compared to our record quarter and 2021 income was strong by historical standards.
Higher operating profit and the general insurance segment was more than offset by a decline in the title insurance segment, which you'll hear more about shortly.
Shareholders equity ended the quarter at $6 75 billion, resulting in book value per share of $22 23.
When adding back dividends book value decreased one 3% from the prior year end.
As the interest rate driven decline in the value of our bond portfolio was partially offset by our operating earnings and higher stock portfolio valuation.
Net investment income was up modestly for the quarter as an increase in the level of investments was partially offset by lower yields earned.
The investment portfolio was comprised of approximately 70% and highly rated bonds and short term investments with the remaining 30% allocated to large cap dividend paying stocks.
During the quarter, we rebalanced our portfolio by modestly reducing our stock holdings in increasing our bond holdings as reinvestment rates materially improved.
We realized $65 million of net investment gains on sales and reinvest it in bonds with an average yield of 284% and thats compared to a bond portfolio book yield of two 5% at the end of the quarter.
During the quarter, the total fair value of stocks increased by $165 million.
L bonds declined by $510 million due to rising interest rates.
The overall credit quality of our bond portfolio remains very strong with approximately 98% of the portfolio invested in investment grade securities.
Switching now to claim reserves all three operating segments recognize favorable favorable claim reserve development in total the consolidated claim ratio benefited by two four percentage points for the quarter compared to one eight percentage points for the same period a year ago.
Now wrapping up.
With our run off mortgage operations claimed.
Claim costs continued a favorable trend of lower newly reported defaults and higher cure rates on loans already in default.
The group paid a $35 million dividend to the parent holding company in the quarter and subject to regulatory approval. We expect to continue at that pace quarterly for the remainder of the year.
Total shareholders equity for the mortgage companies ended the quarter at $356 million.
I will now turn the call back over to Craig for a discussion of general insurance.
Okay.
So for general insurance net premiums written increased by 10%, while net premiums earned increased by 6%.
We continue to achieve strong rate increases on most lines of coverage other than workers' comp, while renewal retention ratios and new business production remains very strong.
Pre tax operating income rose to $142 5 million and the claim ratio was 64% and that compares to 66% for the first quarter 2021, while the expense ratio was higher at 27, 7%.
The overall combined ratio, though was perfectly steady at 91, 6%.
The claim ratio reported for the quarter was inclusive of favorable development from prior periods of 3.2 percentage points.
Turning to commercial auto net premiums written grew by 15% while net premiums earned grew by 4% and the claim ratio improved to 70%.
Claims frequency is still not quite back to pre pandemic levels and claims severity.
Continued to increase.
Although at a much lower trend than what we saw over the last five years or so.
Rate increases are continuing in the low double digits.
So we continue to think that we're staying ahead of overall frequency and severity trends in auto.
Looking at Workers' comp net premiums earned were lower by 1% while.
Net premiums written were lower by 3%.
And the claim ratio was 62, 5% here.
Here claim frequency continues to increase to pre pandemic levels.
And claims severity trends are slightly up.
Rate decreases and workers' comp continue in the very low single digit range and we think our rate levels remain adequate, though given that combination relative to our target combined ratios.
We continue to get strong rate increases and produce favorable claim ratios.
In our financial indemnity and property lines of coverage, which contributes to our lower overall claim ratio, but also elevates the overall expense ratio.
This is a reflection of our efforts to diversify our lines of coverage.
These lines of financial indemnity and property have grown by over 60% since 2018, while on the other hand, our workers compensation line has gone from about a third of our writings to about 20% of our writings over that same period.
So this combination of growth and lower claim ratio higher expense ratio lines and a decline in the higher claim ratio.
Lower expense ratio line of workers' comp contributes to the overall lower current period claim ratio and higher expense ratio.
Switching to the qualitative side of things you might have seen over.
The quarter couple of press releases, where we announced the formation of a new E&S company led by E&S industry veteran Ralph Saba.
And also some succession planning developments at two of our larger general insurance operations.
With Derek copper, taking the role of President and CEO at PMA, and John Sam truly moving into the executive chairman position there.
And great West with Steve Olsen, taking on the President and CEO role and Jim Jensen moving into the executive Chairman role there effective July one.
So general insurance growth strategy and underwriting excellence initiatives continue to produce solid growth and profitability.
With new business production high retention ratios and adequate rate levels all contributing.
With that Carolyn I think I'll turn the discussion over to you.
Report on title insurance.
Thank you Craig.
As reported this morning, the title group's total premium and fee revenue for the quarter was approximately $1 billion up 3% from the prior year first quarter, while our pre tax operating income of $81 million for the quarter compared to $104 million from the first quarter 2021, both figures.
We're consistent with our expectations.
A slight revenue increase versus system more significant decline in operating income is a function of our direct versus agency production channels.
First quarter 2022 agency revenue was 8% higher than first quarter 2021, while direct revenue was 12% lower than the prior period.
With the drop indirectly produced revenue, which have higher fixed expenses, along with a greater proportion of agency produce revenues that have that have a higher expense ratio our expense ratio increased accounting for the impact on operating income comparable revenue percentage changes for both.
Direct and agency has steadily decreased from their high level marks reached during the second quarter of 2021, albeit with a more pronounced impact for direct operations with agencies still aided by the approximate one quarter agency reporting lag.
In line with consensus mortgage projections, we experienced a significant drop in refinance activity in the first quarter of 2022 that is expected to continue throughout the remainder of the year.
Purchase order levels were roughly in line with the prior period and continued to benefit from strong housing prices. However, we recognize the change in interest rates may have an effect on purchase activity as we move through the remainder of 2022.
Based on our policy reporting tracking commercial premiums remain a bright spot and were up 50% over the first quarter of 2021 and trailed only the fourth quarter of 2021 as an all time high.
Commercial premiums represented 20% of total premiums in the first quarter versus 14% for the first quarter of 2021.
With pending fed interest rate increases and continued lack of available inventory. We are realistic knowing our 2022 results will not match the record setting revenue and pre tax operating income results experienced over the last two years.
New grounds away, we will manage to the market and align our expense structure accordingly, while still being mindful of the technology advances necessary for our direct operations and to continue to keep our title agent partners in the game.
We began 2022 continuing to invest in our digital future and.
An enhanced version of our easy jacket application, which is a core service and our portfolio of technologies that we offer to our agents will be launched this quarter easy jacket as an online system that produces a jacket for every title insurance policy issued by our agents for our Insureds.
This system with a modern interface enhanced functionality and an increased ability to configure changes and updates quickly will be integrated with every major closing software in the industry in parallel we will be using the concept of hyper automation and its benefits in our goal of an into an digital closing.
<unk>.
As we manage to a less robust market, we must gain efficiencies in our processes. This will come about from our platforms and technologies that allows elasticity to workloads and easy provisioning and de provisioning of resources with automation to meet current business needs and demands.
And I'll turn this back over to Craig.
Well. Thank you Carolyn I know I attended your annual meeting last week and you all are making great progress on the technology front and we know our title insurance team knows how to manage through how housing cycle, then that youre very well positioned with talent.
Technology and relationships so.
I appreciate all your efforts.
So we remain very pleased with our strong levels of profitability in both general insurance and title insurance and our diversified specialty strategy will continue to produce profitable results and significant value for our shareholders as we move forward.
So that concludes our prepared remarks, and we will now open up the discussion to Q&A, we're either I'll answer your question or I'll ask Frank our Carolyn to respond.
And at this time I would just like to remind everyone. If you'd like to ask a question. Please press Star then one on your telephone keypad.
Our first question is from Matt <unk> with GMP JMP excuse me your line is open.
Hey, Thanks, good afternoon.
Hello, Matt Hello.
Greg I heard you touch very briefly on kind of the formation of the E&S Company I was hoping you could give us a little more detail I mean, obviously, we all know that times are very good in the E&S markets, but more specifically I'm, hoping to get a feel for kind of how the lines of business you are approaching their might look similar or dissimilar to the kind of existing.
General insurance book at Old Republic.
Do you expect it to be a little more of a property contingent to that than we're used to with kind of legacy old Republic or will it still be heavily property casualty oriented.
Okay.
Most definitely be happy to answer that Matt. So our anticipated mix of premiums is going to be about 70% liability and 30% property so not not to stray from our current mix.
And we will exclusively be focusing on the non admitted segments, sometimes E&S can.
Have admitted and non admitted.
<unk>, but we will be using our old Republic Union non admitted company and we will be.
What will be different for us is that we will be targeting mostly the wholesale market and so that opens up a new distribution channel generally speaking.
Most of our focus today is retail although we do have some wholesale.
And.
More specifically, we will focus on small property.
Policies for commercial exposures, we don't have any intention of writing.
A significant amount of property exposures that include coastal.
Wind wildfire.
Sure.
Yes.
Generally cat exposure of any significance as I say well of course, we inherently will take on some some cat exposure, but its not going to be.
<unk>.
Cat.
Property focused initiative.
So.
I guess, maybe a little more color I could add is on the classes of business.
The targets will include commercial building owners small businesses of various types manufacturing retail exposure and some light hazard product exposure.
And no no no personal or professional lines.
Great.
That's very helpful.
They're very helpful. Okay, and then one just second question I think just a numbers one but just wanted to circle back on the commentary you had regarding kind of.
The movements in the expense ratio, so I'll make sure I'm hearing you right that.
The expense ratio has crept up over the past few quarters.
The loss ratio has crept down as well and that it sounds like most of that probably sticks and that's business mix.
Standing that right.
How the book has shifted over the past several quarters.
Yes, I think.
This quarter had a couple of contributing factors as we point out.
We did have some.
One time true ups in our.
Employee cost and benefits.
And on the other hand, we did hit an inflection point this quarter relative to the first quarter of 'twenty, one and that is.
Our commissions were a full percentage point higher driven by this combination.
That I mentioned so.
I gave in my prepared remarks, the statistics about.
Our growing book of.
Property business and financial Indemnity business.
And that that had increased by.
By 60% in three years, and then you have this compounding effect, where as most folks know workers' comp is a line that has a.
Pretty low commission ratio relative to other lines and that has gone from about 65% of our writings are down to as I said about 20%. So you combine your combined those dynamics.
And you do get.
Higher expense ratio, but for the for the one point in expense ratio.
Probably about two points in the current period.
Loss ratio claim ratio.
There is a benefit because of the lower <unk>.
Claim ratio for those those lines that we have been increasing.
Perfect very helpful that clarifies it for me.
Thank you very much for the answers and congrats on a nice start to the year.
Thank you very much Matt appreciate.
Again that is star one if you'd like to ask a question. Our next question is from Greg Peters with Raymond James Your line is open.
Good afternoon.
Hi, Greg.
Hey, So I just wanted to I know you spent some time talking about the new E&S business and then you talked about the growing property business.
So.
With the growth in property.
How has your approach to reinsurance purchases changed.
And do you have new reinsurance partners that are helping you out with the growth in property or is it same stable of existing partners that are participating alongside you in this in this endeavor.
That's a great insightful question Greg.
And so what I can tell you is that.
You may recall, our first remind everybody that on.
Another property focused initiative that we announced last year with the formation of yet another new company was our inland marine business.
So.
Youre right.
We have been growing in property through that initiative, our E&S initiative.
And through some other companies that.
Have been able to.
Property as companion products to our existing offerings. So all of that together our property exposure has gone up however, our focus on strategy as we discussed.
Our various annual reviews or proxy or 10-K, what have you.
Is that we want to continue to manage volatility we don't want to be a property cat writer.
And therefore, while we you probably noticed in our 10-K.
I think raised our overall retention a little bit on property.
Year to year.
Still very very low so that we manage the income statement and volatility and don't.
Create a capital type of event from writing property certainly.
Not even an income statement event.
So.
That remains our strategy remains our philosophy. So what does that mean from Orion <unk> perspective. It means we buy more property reinsurance than we did.
And.
That does mean, bringing more people to the table or increasing.
The amount of shares by our existing partners, but.
We buy per risk.
Property reinsurance at a very low retention.
And we buy a property cat cover at a very low retention with a.
Extensive high limit that puts us in a very comfortable position to.
To ensure we don't.
Move out the top of that cover <unk>.
A.
Catastrophic event.
Okay.
So that's really good.
Color.
I guess, if you could just take it one step further.
You mentioned in previous answer that you are.
You're not waking up and going into coastal areas staying away from let's call. It the typical cat exposures or even earthquake.
But or fire I didn't think I don't know if you said earthquake, but.
What would a typical loss look like in your property is your property book as currently constituted what is it typical loss look like.
Well, if I may let me first.
Clarify.
The comments that you just made Greg because we certainly do have coastal wind exposure.
And earthquake exposure in.
Straight line wind exposure in our portfolio. My earlier comments were specific to the new E&S initiative a lot of E&S initiatives. As you as you know are very heavy cat and that is not where we were going with the new E&S initiative.
<unk>.
As far as as losses that would be typical.
In a per risk situation.
A fire at a.
At a commercial building.
And.
Our.
Retention there.
Would be <unk>.
Under $5 million.
And.
And then in the event of a.
Cats, such as straight line straight line wind events.
Or a coastal wind storm events are.
We would have an aggregation of losses from various different companies within the family.
And those would all aggregate vertically, we all all of our <unk>.
Our property insurance is secured on a companywide basis, so that everything is combined and goes vertical.
So.
What I'm, saying there is each each individual company doesn't have its own retention Theres one group retention.
And.
I don't have the 10-K in front of me, but the.
On a cat event, our net retention would be I believe below $10 million.
Or thereabouts.
Excellent color. Thank you.
I'll pivot.
The title business.
And early well I guess, it's early in the month, maybe it happened at the end of last month.
The sequencing of this is.
I don't want to get hung up on it.
But Fannie Mae did come out with an announcement regarding.
A new form of acceptance the attorney title opinion letter.
In lieu of a traditional title insurance policy for transaction So Cara.
Carolyn.
Maybe Craig.
Whoever you want to have answer on this maybe you can give us your perspective.
On that nuanced and new approach by Fannie Mae and what it might mean to your.
Traditional title business.
Sure.
Greg.
Start and then hand it off to.
To Carolyn So we are we're all very much aware of this.
Development and Carolyn I have.
Talk about it in great detail just to make sure we were.
In lock step and staying on top of things and generally speaking, we don't expect it to have any material impact on our business.
We're we think that there may be some conflicts with attorneys providing opinions.
In meeting all of Fannie Mae's requirements and the various state laws relating to.
Two.
Title insurance, which could be challenged on a state by state basis.
And lastly, I'll just add.
That in our opinion.
Turning opinions.
As opposed to title insurance appear to be lacking.
They don't address all the risks.
<unk>.
So that those are the reasons why we think.
That theres really not a material impact Carolyn did I get all that right and do you have anything that you think you want to add to that.
No you pretty much covered it a couple of years ago, Freddie Mac came out with.
This same.
Opinion letter.
And it just never gained any traction.
When they came out with this as well.
No.
Most people really understand that title premiums are really heavily weighted to lost elimination and that's really what are the biggest reasons you get a title policy.
But we'll monitor it.
And kind of followed the discussions I'm sure our trade Association will as well for us.
Yeah.
Yes.
Thanks, Thanks for the color on that I appreciate it I.
I guess.
Just the other follow on to your comments about.
Perhaps a.
More cautious view on the outlook for title.
Eight of the.
The rising mortgage rate environment.
How would you how would you suggest.
We forecast that is it should we just.
Should we just.
No.
A guess on this or do you have any.
Let's just take like earned premium.
Premiums earned for title insurance for 2022.
What's the what's the new range under the current environment. If there is such a thing I don't know if you guys want to give that but there is if you go back over history I mean.
Even the last five years.
The results in your title business have been.
Growing substantially and have been phenomenal and just trying to understand where we're where bases in this environment. It would be any color you can help us with on that would be helpful. And that's my last question.
Thank you. Thank you Greg here to Carolyn maybe I'll just kick it off because once again. This is another topic, you and I have discussed in great detail and.
So I'll just lead it off by saying that it's a very understandable question, one we're asking ourselves of course and.
With regard to refinancing activity I think the way we're looking at refinancing activity right now is that it's dried up and we don't expect that to rebound so to.
To the extent that refinancing activity.
Was.
Contributing to our results in 2020 , one we don't think.
Refinancing activity is going to be any kind of a significant contributor this year.
When it comes to new purchase.
Originations so far as Carolyn said in her comments.
It still looks pretty good there.
There is a.
Tight housing market with strong demand interest rates relatively speaking are still.
At historic historic lows or thereabouts.
Even though they are considerably more than they were the last few years. So.
Youre right Greg.
We did.
Indicate we are cautious about where things are going with.
New purchase originations.
And it's hard for us to know as we sit here in the first quarter it looks pretty steady.
So Caroline.
If you could.
Fill in and certainly if I said anything.
Different correct me no those are correct. The only thing I would add is.
With our mix of business and and having a strong.
Business with attorney agents that.
You know refis were really never our bread and butter and they've been great. The last couple of years, but if.
If you go back to like 2019, and before those weren't things that we dependent strongly on because of who our agents are and when I look at orders and.
You try to read everything you can and I just read a recent economists that is kind of predicting.
And it's the same thing I've watched with our orders in our direct operations, we seem to be trending back to.
As I said, the 2019 levels, which you know there isn't those were pretty good years back then going back to 2019 and 2018.
Yes.
Without just saying a number that's kind of how we're looking at it inside the operation.
Got it alright, thank you very much for the answers.
Thank you Greg.
Again, as a reminder, star one to ask a question. Our next question is from Boris <unk> with Crawford investment Your line is open.
Hi, good afternoon.
Hello aboard.
Okay.
Just had a couple of questions one on titles so.
Is there a way to quantify the impact of house price appreciation kind of title premiums.
I don't know if the case Shiller index was up something like 20% for.
For example, how does that translate into.
I don't know your premiums or maybe is there some sort of beta to that.
You could.
That's it.
It's a fair and good question Caroline if you could respond to that with realm.
Relative to purchase originations.
So our premiums are are tied to house prices, so and and so as prices. Appreciate then of course our premiums.
<unk> will go up as well.
<unk>.
Yes, it varies state by state.
Is that helpful.
Well I mean, yes, it's understandable that they would go up but is there.
Say, 20% appreciation in house prices would it automatically sort of rate led to 20% higher premiums.
The same house.
That went up in price some somebody bought a 20% higher.
Yes no.
Could never do it that way.
Yes.
Title premiums are done and escalation.
There's never just a straight percentage.
Every state is different and they have different brackets. Some of it will go up by 10000. They go to a higher premium we'd actually almost have to go state by state to try to figure out what percentage increase would be.
Gotcha.
Okay.
And another.
Another question, just kind of circling back I think last year, there was a conversation with the board potentially considering a share buyback program.
But at some point I was just wondering were wondering where that stands at this point.
Yes.
Okay.
Sure be happy to to talk about that so as you know are here.
History has been one of returning excess capital to shareholders through special dividends primarily.
What we said publicly over the last year or so is that the board.
As we.
Willing to consider an <unk>.
Has considered in each case that we have excess capital the potential of returning that capital via a special dividend or via a share repurchase authorization, so a share repurchase authorization.
As.
Always on the table and every time that we.
Get together with the board and management.
Updates to the board with their views on our capital position and if we have if we believe we are in an excess capital position.
Discuss.
The alternatives of putting that capital to.
To use which is our first choice.
Or returning it to shareholders, either via a special dividend or share repurchase and and the various different.
Financial implications of both of those options so.
We look at both when we have excess capital.
Okay. Thank you.
If I may sneak 111 more.
In terms of your investment portfolio, you said, you shifted a little bit away from equities.
I think a lot of insurance companies like in recent years kind of pushed into alternatives private investments or anything like that and realize some significant gains.
I don't know if thats the right time to think about those sort of things, but are there any plans to kind of diversify between or at least are you guys thinking about.
Diversifying.
Okay.
Into other asset classes.
Okay.
Sure sure. Thanks, Thanks for the question so.
First off just to provide a little more color around.
Our reduction somewhat in the quarter of our equities and.
We were getting to a point, where we have had so much appreciation in our equities that it made sense to.
It takes some of that off the table, we manage very closely various enterprise risk management metrics to make sure we don't get too out of balance between equities.
And fixed income and given as I say, our appreciation that we've enjoyed over the last several years in our equities portfolio. We thought it was prudent to two <unk>.
Take some of that off the table with regard to.
Other alternative investments.
I'd say thats not on the table.
We have been we've had a long.
Stable consistent history of.
Being conservative.
Yes.
Investing in alternative types.
Of investments as a matter of fact, even.
In this release.
On page eight we reiterate every quarter that's.
The things that we don't do in that first paragraph under the statistics and we say those same things again in our annual various annual communications our annual review.
Our 10-K, our proxy statement, we're very conservative.
And we're even very conservative with our equity investments investments investing in less than a 100 blue chip type of dividend dividend paying.
Equities so.
Yes that would that would not be on the table.
Got it thank you for your answers.
Thank you.
We have no further questions at this time I'll turn the call over to management for any closing remarks.
Well, we appreciate the interest the questions.
As we said.
We feel very good about the strong profitability in both general insurance entitled Insurance, and we're we feel very confident about those.
Levels of profitability, particularly if you look at the strong combined ratios as we move through the year. So.
Our focus remains on.
Sure.
What we can control, we can't control interest rates can't control housing markets, but we can control how we manage expenses we can control.
Our.
Focus on profitability, both in in general insurance and title and that's exactly what I think we've demonstrated this quarter and what we will continue to demonstrate throughout the rest of the year strong profitability. So thank you very much and look forward to talking to you all next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[music].
Okay.
[music].
Sure.