Q2 2022 Old Republic International Corp Earnings Call
Good afternoon, My name is Joanne and I'll be the conference operator today at.
At this time I would like to welcome everyone to the old Republic International second quarter 2022 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 would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question again press the star one.
I would now like to turn the call over to Joe Calabrese with the financial Relations Board. Sir you May begin your conference.
Thank you.
Good afternoon, everyone.
Thank you for joining us for the Old Republic conference call to discuss second quarter 2022 results.
Morning, we distributed a copy of the press release and posted a separate financial supplement, which we assume you have seen and are 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 financial supplement dated July 28 2022.
It's 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.
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 and good afternoon, everyone and welcome again to old Republic second quarter earnings call.
With me today I have priced at Arrow, our CFO of old Republic International and Carolyn Monroe, the president of our title insurance business.
Well old Republic produced another highly profitable quarter in both general insurance and title insurance, even though title insurance revenues and operating income were less than the record setting 2021 results due to the increasing mortgage rate environment.
Yeah.
Net premiums and fees earned were just below 2 billion, while pre tax operating income was 263 million.
And our consolidated combined ratio continues to come in at a strong level of just under 91% for the quarter.
In General insurance net premiums earned increased over the prior year by almost 9%.
And in line with what we expected title insurance premium and fees decreased by 7% from that prior record setting year.
Both general insurance and title insurance continue to produce excellent underwriting results reflected in those combined ratios and both are poised to continue to deliver strong profits throughout the remainder of the year.
So I'll now turn the discussion over to Frank.
And then he'll turn things back to me to cover General insurance, followed by Caroline who will discuss the title insurance and then we'll open it up to the Q&A.
So Frank.
Thank you Craig and good afternoon, everyone. This morning, we reported second quarter net income excluding investment gains and losses of $210 million, a 5% decline from last year.
On a per share basis comparable year over year income was 69.
Versus 73.
For the first half of this year operating profit was $402 million.
Decline of 6%.
Although both periods were down when compared to the record set last year operating profits were very strong by historical standards with considerably higher levels coming from general insurance.
Along with healthy levels of operating profit from title.
Shareholders equity ended the quarter at $6 4 billion, resulting in book value per share of just under $21.
When adding back dividends book value decreased by five 8% from the prior year end.
As a result of interest rates.
The effect of that on our bond portfolio and lower valuations in our stock portfolio, where.
We are partially were partially offset by the stronger operating earnings.
Net investment income was relatively flat for the quarter.
As an increase in the invested asset base was partially offset by slightly lower yields earn.
Given our current bond reinvestment rate of just over 4% versus a bond portfolio rate of two 7%.
We believe we are at an inflection point and expect higher overall yields on a comparative basis sometime in the next few quarters.
During the quarter, we continued to rebalance our portfolio by reducing our stockholdings and increasing our investment in bonds.
Benefiting from the materially higher reinvestment rates.
As a result of that process, we realized $53 million and net investment gains on sales.
And our investment portfolio ended the quarter with 74% in bonds and.
And short term investments and 26% in stocks.
During the quarter. The total fair value of bonds declined by $315 million, while stock decreased by 280 million. The overall credit quality of our bond portfolio remains strong with approximately 98% of the portfolio in investment grade Securities.
We are pleased with how well our stock portfolio has performed during this market downturn during the year, we significantly outperformed the S&P 500, as a result of our strategy to reduce volatility by investing in large cap dividend paying stocks, which ended the quarter and an unrealized gain position of over.
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Now switching to loss reserves, all three operating segments recognized favorable favorable loss reserve development in total the consolidated loss ratio benefited by one nine percentage points for the quarter compared to one eight percentage points for the same period a year ago.
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Mortgage insurance losses continued with a favorable trend of lower newly reported defaults and.
And higher cure rates on loans already in default the group paid another $35 million dividend to the parent holding company in the quarter, bringing the total to $70 million year to date.
Total shareholders equity for the mortgage companies ended the quarter at $325 million.
I will now turn the call back to Craig for a discussion of general insurance.
Okay. Thanks, Frank.
So for general insurance net premiums written increased by almost 12% and we continue to achieve rate increases on most lines of coverage with renewal Retentions remaining strong and new business production also coming in strong.
Pre tax operating income also rose by almost 12% to $138 million and the loss ratio reported for the quarter was 65% compared to the 68%. We saw in the second quarter of of 'twenty, One and of course. This included favorable development, which came in at one nine.
Nine percentage points in the quarter.
The expense ratio came in at 27% with growth in lower loss ratio higher expense ratio lines continuing to contribute about one additional point to our expense ratio relative to our historical line of coverage mix the.
The overall combined ratio was 92 and a half points compared to 94% in the second quarter of last year.
Turning to some line of coverage specifics starting with commercial auto net premiums and commercial auto grew by 10%. While net premiums earned grew by six 5% and the loss ratio improved to 66% from 75% we saw in the second.
Quarter last year.
Claim frequency appears to be working its way back to pre pandemic levels in auto, but we're still not there yet.
Our estimation.
Claim severity continues to increase but nowhere near the pace, we saw in previous years.
Our rate increases continue in auto in the high single digit range, which implies that we continue to stay ahead of our overall frequency and severity trends.
Looking at workers compensation line of coverage net premiums written rebounded in the quarter and grew by 9% while net premiums earned increased by nearly 7% and the loss ratio improved to 52% from 60% in the second quarter last year.
Sure.
Here claim frequency appears to be returning to pre pandemic levels as well and claims severity trends are slightly up.
Rate decreases and workers' comp continue in the low single digit range, but as we've stated in prior quarters, we still feel comfortable that our rate levels remain adequate relative to our combined ratio targets for this line of coverage.
And then the financial Indemnity line of coverage more specifically the public company D&O component of that we experienced unfavorable loss development during the quarter stemming from some large security class action claims in accident years 2018 and <unk>.
2019.
Additionally, in the same line of coverage. It appears new market entrants are driving down rates. So we're no longer seeing the very hefty rate increases we saw in 2019, 2020 one and.
There is considerable pressure on rates as we go forward.
Those rate increases on public company D&O in our opinion more necessary as evidenced by the security class action activity. We saw this quarter. So we're keeping a very close eye on.
The public company D&O line, and we will exercise underwriting discipline and our underwriters won't write accounts that aren't priced adequately it's that simple.
As always we follow loss trends very closely.
What we do.
We will continue to adjust our rates for inflationary trends that ultimately drive the severity trends.
That includes both general inflation and social inflation.
We will also keep a close eye on reserve levels relative to our observations and expectations surrounding inflation and adjust our reserves accordingly.
So overall general insurance growth strategy and underwriting excellence initiatives continue to produce solid growth and profitability with new business production high retention ratios generally increasing rate levels all contributing to those results.
So I'll now turn the discussion over to Carolyn who will report on what's happening in our title insurance segment Carolyn.
Thank you Craig.
The title group reported premium and fee revenue for the quarter of just over $1 billion down 7% from prior year second quarter, our pre tax operating income of $110 million compared to $139 million in second quarter 2021, a decrease of 21, 1%.
Agency premiums were down 46 million or five 4% over second quarter, 2021, and direct premiums and fees were down 33 million or 12, 9% our.
Our commercial activity remained strong this quarter with commercial premiums at 45% over second quarter 2021, and made up 22% of our premium total this quarter.
Our expense ratio for the second quarter of 2022 was 87, 6% compared to 85, 4% in second quarter of 2021.
This increase is primarily driven by the decrease noted indirectly produced revenue, which have higher fixed expenses, along with a greater proportion of agency produced revenues net adds a higher expense ratio.
Agency commissions were down five 8% for the quarter roughly in line with the decrease in agency premiums.
We believe that continuing with our strategic focus on serving our agents, which accounted for 79% of our revenue this quarter creates a sustainable competitive advantage.
The expense structure associated with this model has a relatively high degree of variable expenses, which will enable us to navigate current market conditions.
All other expenses were down by 2% in second quarter 2022 over second quarter 2021 with personnel expenses comprising almost half of that decrease we will continue to manage and align our expense structure. Accordingly, as rising interest rates are expected to soften commercial.
As well as residential markets, while we are reporting decreases in revenue and pre tax operating income for this quarter. It is important to keep in perspective that these comparisons are to a year that saw record setting demand for housing and investments in the real estate market.
Our reported second quarter results for both revenue and pre tax operating income ranked fifth in terms of all time highs trailing only the fourth quarter of 2020, and the second third and fourth quarter of 2021.
The accomplishments of our employees and agents continued to be significant and drive positive results to the company.
While strong underwriting support is paramount in our value add to our agents. We also recognize the importance of technology and we will continue to offer an advance or.
Portfolio of technology services and solutions.
This includes but is not limited to the recently launched enhanced easy jacket application that I spoke about on our last earnings call.
And in progress project to enhance the stars linked portal that allows agents quick access to documents and applications also continuing to invest in and enhance the integration platform supermarket that will allow our agents a standardized connection to an ecosystem of applications they need.
Including our closing software platforms ramp question need closing R. E recording service provider EPS, which allows for an electronic document recording with the counties and also our digital signing solution of ourselves.
We remain committed to combining old republics title solid business practices procedures and expertise in the industry with our growing portfolio of technology to deliver measurable benefits of success for the industry company and our shareholders.
Thank you and I'll now turn it back to Craig.
Okay Carolyn thank you very much.
So we remain very pleased with our strong levels of profitability in both general insurance and title insurance.
And our diversified specialty strategy should continue to produce stable profitable results and value for our shareholders.
So this concludes our prepared remarks, and we'll now open up the discussion to Q&A, where I'll answer your questions or I'll ask Bryan for Carolyn to respond.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad well pause for just a moment chicken part of the Q&A roster.
Our first question comes from the line of Greg Peters with Raymond James Sir and as open.
Good afternoon, everyone you know through the years, some things never change in the.
Chicago's finest seem like Theyre coming back from lunch, because I can hear the sirens in the background.
Good afternoon, Greg.
Craig I think it's been.
Decades, that's been going on it's kind of ironic.
Hey.
So you know all I realize there's other people that are going to ask a question. So I'm going to just I mean.
Let's start with the general insurance business and.
Thank you just a financial indemnity thing, but the.
The growth is pretty stunning for your company to generate 10% <unk>.
Top line growth.
And <unk>.
And then in particular worker's comp which is.
10%.
<unk>, which as you know.
A dirty word in the investment community right now because the presumption of of it being a soft market. So.
Give us some perspective on where youre getting the growth is it where is it new business as unit counts and tell me what your perspective is about that new business you're writing.
Sure Greg.
Be happy too. So I think one thing to start is is keeping perspective on where we were at a few years ago pre pandemic work comp and if you look back.
You could refer to the financial supplement as well and you can see that.
We had a.
Really reduced our premiums quite significantly over the course of the years.
In the supplement if you look at your 17 through 21, so as we reported during the quarters at the beginning of the pandemic and through <unk>.
Through last year.
Premiums were coming down and exposure growth was coming down and we've seen a rebound there. So we're really getting a lift from exposure growth.
Within our existing policies and adding.
Adding new business.
At the same time trying to hold as much rate as we can so.
We would not be growing that line. If we didn't think it was at a profitable level and.
You can see the reported combined ratios of course are very strong but include favorable development as you know, but even on a.
Current accident year basis, we feel very good about where those.
Loss ratios are projected to come in at.
Given our target combined ratios for that line of business. So.
Hopefully that provides provides some of the.
Color on the history that I think is necessary when thinking about that that bump up in comp and comparing it to those prior years.
Yeah. The other thing that is.
The other thing that's probably worth commenting on as it relates to general insurance is just this whole concept of what.
The right inflation factor is to use in your loss pick assumptions.
We've observed and I know you have as well.
Companies that have already reported raising.
Rob I think raised our loss picks Cincinnati was out with some some issues and I'm just curious from your perspective for your book of business, how youre thinking about those inflation factors.
Definitely and I know.
Some of our peers, including those you mentioned.
Talk about.
A very general inflation factor.
We don't really talk about it in a general fashion because you're really.
Need to look at the severity and the frequency.
By line of coverage in our opinion, so for instance on comp.
You look at what's happening with the frequency first and then you take a look at the severity and their medical inflation is not running anywhere near general general inflation.
And.
The decreases that are still happening and rates on comp.
They have happened over many years because of the the frequency so.
I don't like to generalize when we're talking about what kind of.
Ah severity.
Trend or that we're building in or inflationary trend it really depends on the line now on the other side of the coin. If you look at our auto physical damage, it's quite the opposite story, where.
The the inflationary trends, we're seeing there that that ultimately end up in the severity trends are really high right now with.
Labor increases parts increases used vehicle price.
Increases.
The list goes on so on auto physical damage or.
The trends, we're seeing there are probably double digit.
So you really have to look at it bye bye.
Our line of coverage in our opinion and.
With regard to your point about current accident year loss ratios there.
When we when we look at those pics.
It's all it all depends on what kind of rate, we're getting and as I commented on auto where we believe that we're actually getting rate that implies we're ahead of the inflationary trends, including social inflation that we're seeing.
Still on auto there would be no reason to go back and adjust our auto accident year loss picks for this year.
Because we're getting rate that is.
Our view ahead of ahead of the trends that we're seeing so again it would depend on line of coverage, we will look at what we're seeing.
And if if those inflationary severity trends are coming in with more than we're getting in rate. We got we have to go back and look at things, but we're doing our very best to on all lines of coverage to reinforce with all of our underwriters.
The necessity.
Getting rates that is at least commensurate with trend and preferably some cushion to allow us to absorb the unexpected.
Yeah.
Thorough answer I appreciate it.
I'm going to pivot to the title segment.
My final question.
And.
There is.
A lot of headlines about.
The.
The fact that there is very little activity happening in the marketplace today as a result of the higher rates.
And you're clearly still produced a strong result, I assume some of that's the lagging nature of your business and I look at the direct orders Carolyn I think they were down second quarter to second quarter, 2004% or so.
When when things settle out in your judgment.
What kind of revenue base do you think is normal.
We have to take.
We have to set aside what happened last year and maybe the last couple of years.
What's the right level of revenue to think about how this business looks once things settle out.
Carolyn.
Sure.
I think if we if we try to go back in.
When we've been trying to do planning trying to take out the last two years, we start with a baseline of what we saw in 2019 and then you factor in.
Theres been home price increases and since our revenue is always based on our sales price.
Premiums are based on we take that into consideration. So we just look at that as a baseline for us and.
Even this quarter was I think we were at 60 something percent ahead of 2019 so.
We're seeing somewhat of a slowdown but.
What we're reading about is and exactly what we're seeing out in our agents in and in our offices. So I think some of that could take a little longer to catch up with sales.
Prices are still holding strong and even though.
Interest rates are going up there they are still not.
So bad debt that people aren't still wanting to buy homes. So it's slowed but it has slowed based on some really great years and it hasnt slowed when we look at what happened in 2019, and that's really as we're trying to manage what we're looking at.
And so so if I look at just trying to take it a step further the 24% down in direct orders.
<unk>.
If that's a leading indicator is that fair to say that.
Revenue might be down 24% in the third quarter or.
I hate to I'm not trying to get you to pin you down on a quarterly number just.
Directionally it feels like it's.
Things are going to accelerate.
Slowdown as we move through the year and just based on your answer.
Confusing because you're saying, we're not necessarily seeing it yet so just a clarification on that.
That would be a bit.
Well.
The 24% it seems.
I'd like a high percentage.
Going forward, but it's.
Greg It's just the real estate is just really a hard market to predict.
And I honestly coming into this year I don't know that I would've thought we were going to do as well as we did in the second quarter, just with everything we're reading and I think that's what I'm basing my comment on is that based on what we were reading at the beginning of the year and seen all the NBA.
MBA reports.
I honestly thought second quarter would not have been as good as it was so that's why it's all it's just it's just rough to predict.
Yes.
Our commercial.
The 82% of our commercial business comes from our agents and and that business is up so it's.
That's helped US along this last quarter as well.
Got it alright, well thanks for the color I appreciate it.
Sure.
Again, if you would like to ask a question Chris Star then the number one on your telephone keypad.
There are no further questions at this time, Mr. <unk> I turn the call back over to you.
Okay, well, we thank everyone very much for participating.
We will continue to.
Work hard here to keep on top of things as the macroeconomic environment continues to change and.
We as I said earlier have every expectation that we will continue to produce very strong profitability in both general insurance and title insurance as the year continues. So we look forward to seeing you next quarter and again appreciate your interest in participating.
Patient.
This concludes today's conference call you may now disconnect.
Okay.
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