Q3 2022 Old Republic International Corp Earnings Call
Good afternoon, My name is Chris and I'll be your conference operator today.
This time I would like to welcome everyone to the old Republic International third 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 twist.
To withdraw your question. Please press star one again.
Thank you Joe Calabrese with the financial Relations Board you may begin.
Thank you.
Afternoon, everyone and thank you for joining us for the Old Republic conference call to discuss third quarter 'twenty 'twenty. Two results. This morning, we distributed the press release and posted a separate financial supplement, which we assume you have seen or 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 October 27 2022.
Where it's associated with these statements.
We found in the company's latest SEC filings.
This afternoon's conference call will be led by Craig Smiddy, President and CEO about Republic Corporation.
Old Republic International Corporation, and several other senior executives at this time I would like to turn the call over to Craig Smiddy. Please go ahead Sir.
Okay. Thank you Joe Good afternoon, everyone and welcome again to old Republic third quarter earnings call.
With me today I have French to narrow our CFO of IRI and Carolyn Monroe President of our title insurance business.
Well as you've seen in this morning's release or I had another strong quarter with general insurance producing significantly greater pre tax operating income while our title insurance business pre tax operating income was considerably less than the record setting 2021 results.
Due of course to the effects of the increasing mortgage interest rate environment.
Our reserve position remains very healthy and all three of our segments with a very high level of favorable reserve releases for general insurance in the quarter.
Our balance sheet remained strong.
We returned considerable amount of capital to shareholders during the quarter, which we'll talk about a little bit and we've reduced balance sheet volatility by reducing our exposure to equities by nearly $2 billion since the beginning of the year reinvesting in fixed income securities at yields.
Quite frankly, we haven't seen in over a decade.
Consolidated net premiums and fees earned were just below $2 billion for the quarter and just below 6 billion year to date.
Consolidated pre tax operating income was 258 million for the quarter and stands at $758 million year to date and our consolidated combined ratio came in at a healthy 91, 4% for both the quarter and the year to date periods.
Both general insurance and title insurance continued to produce excellent underwriting results as demonstrated in their respective combined ratios.
General insurance net premiums earned increased by over 7% for both the quarter and year to date periods.
In the third quarter title insurance net premiums and fees earned decreased by 15% alongside a decrease of 7% year to date.
As we've commented over the course of the last 12 months, our 2022 expectations for title insurance were considerably less than those expectations of the record setting 2021 year.
We think there's a downturn in title insurance and the continuing upturn in general insurance reinforces the benefits of our long standing diversification strategy anchored in the non correlated PNC and title insurance segments, which provides for a steadier earnings and shareholder.
Turns over the long run.
So with those opening comments I'll now turn the discussion over to Frank and then Frank go turn things back to me to cover General insurance, followed by Caroline who will discuss title insurance and then as always we'll open up the conversation to Q&A. So Frank do you want to take it from here.
Sure. Thanks.
Thank you Craig and good afternoon, everyone. This morning, we reported third quarter net income excluding investment gains and losses of $206 million compared to $240 million last year on a per share basis comparable year over year income was 68.
Versus 79.
For the first nine months of this year operating profit was $608 million compared to $668 million last year, although both periods were down when compared to the record set last year are.
Earnings were very strong by historical standards.
Book value per share ended the quarter at just under $19 when adding back dividends. This was a decrease of nine 4% from the prior year and as the declines in the values of our bond and stock portfolios were partially offset by our strong operating earnings.
Net investment income increased for the quarter as we have turned the corner and yields earned an experienced continued growth in our invested asset base.
Our current bond reinvestment rate was just under four 8% and our ending bond portfolio yield improved.
To three 1%.
During the quarter, we continued to rebalance our investment portfolio by reducing our stock holdings in increasing our investments in bonds.
As a result, we realized 181 million of net investment gains on sales of common stock. However, we also recognized $207 million of losses and bonds, we either sold or intend to sell as part of our tax planning efforts.
Our investment portfolio current currently stands at about 80% and bonds and short term investments and 20% in stocks a level with which we're comfortable given the more favorable interest rate environment.
During the quarter. The total fair value of bonds declined by 385 million, while stocks decreased by $170 million. The overall credit quality of our bond portfolio remains strong with approximately 98% of the portfolio in investment grade Securities.
Switching to loss reserves, all three operating segments recognize favorable loss reserve development in total the consolidated loss ratio benefited by three four percentage points for the quarter compared to two three percentage points for the same period, a year ago Hurricane Ian had a nominal effect.
On the current period loss costs.
Mortgage insurance loss cost continued with a favorable trend of lower newly reported defaults and higher cure rates on loans already in default the group paid another $35 million in dividends to the parent holding company in the quarter, bringing the total returns to $105 million year to date.
I'll wrap up my remarks with a discussion about the capital we have returned since we last spoke.
We paid $375 million in dividends, which included a $1 per share special dividend.
In addition up through yesterday, we repurchased about another $225 million worth of our shares this puts us about halfway through our repurchase authorization, which we will continue to execute on opportunistically.
I'll now turn the call back over to Craig for a discussion of general insurance.
Okay Frank Thanks.
So for general insurance net premiums written increased by almost 10% in the quarter and we continue to achieve rate increases on many lines of coverage with renewal retention ratios.
New business production, both remaining very strong.
Pre tax operating income for us rose by 15% to $168 million and the loss ratio for the quarter was 63% compared to 65% in the third quarter of last year.
That's inclusive of four seven percentage points of favorable development this quarter for the general insurance group.
The expense ratio was 27% with continued growth in lower loss ratio higher commission ratio lines of coverage driving approximately one percentage point of additional commission within that expense ratio.
The combined ratio was a strong 90% compared to 91% in the third quarter of 'twenty one.
So now I'll turn to specifically commercial auto net premiums written grew by 10% while net premiums earned grew by 7% and the loss ratio improved to 64% from 73% in the third quarter last year.
Loss frequency for auto remains below pre pandemic levels, while auto liability severity continues to increase.
At the same high single digit pace that we've seen over the last year or so.
On auto physical damage severity is increasing at mid double digit rates.
So we're seeing greater severity on the auto physical damage side.
Our rate increases are in the high single digit range, which implies that we continue to cover overall frequency and severity trends.
So we think our rate levels. This line remain adequate relative to the targets we've set for combined ratios.
Looking now at workers compensation net premiums written there continued to rebound growing 11%, while net premiums earned grew 7%.
And the loss ratio improved to.
236% from 59%.
In the third quarter last year.
Loss frequency for work comp continues to trend favorably while severity is slightly up.
Rate decreases and workers' comp continue in the low single digit range for us. So here too we think our rate levels remain adequate relative to our target combined ratios.
And financial indemnity more specifically.
The D&O line of coverage, we saw unfavorable loss development stemming from large security class action claims occurring in accident years 2018 in 2019.
And we're no longer seeing the robust rate increases we saw in policy for 2019 2020 in 'twenty, one as new D&O market entrants are driving down rates.
So we continue to keep a very close eye on the D&O lineup coverage and we'll exercise underwriting discipline declining accounts that are priced adequately while aggressively managing our attachment points and limits on public company D&O.
More generally while we continue to follow a loss frequency and severity trends very closely and adjust our rates for inflationary trends that drive severity, including both general inflation and social inflation.
And we also continue to keep a close eye on case, an IV in our reserves relative to these trends and adjust accordingly.
So we believe our growth strategy and operational excellence.
Initiatives in general insurance will continue to produce solid growth and profitability with new business production high renewal retention ratios and generally increasing rate levels all contributing.
So I'll now turn the discussion over to you Caroline to report on title insurance.
Thank you Craig.
Tighter group reported premium and fee revenue for the quarter of $968 million down 15% from prior year third quarter, our pre tax operating income of $73 million compared to $136 million in third quarter 2021 agency premiums were down one <unk>.
<unk> 3 million or 12% over third quarter, 2021, and direct premiums and fees were down $71 million or 28%.
Increasing mortgage interest rates impacted third quarter and year to date comparisons most notably with a steep decline in refinance activity that has continued throughout the year.
While purchase activity has also dropped off it has been to a much lesser extent temporary and the overall impact commercial activity remains strong this quarter with commercial premiums at 29% over third quarter 2021, and made up 21% of our premium total for this quarter.
Our combined ratio for third quarter, 2022 was 93, 7% compared to 89% in third quarter 2021. This increase was primarily driven by the decreased noted indirectly produced revenue, which have higher fixed expenses.
Agency commissions were down 12, 6% for the quarter roughly in line with the decrease in agency premiums all other expenses were down by five 2% in third quarter 2022 over third quarter 'twenty one with.
With personnel expenses, representing the vast majority of this decrease we believe that continuing with our strategic focus on serving our agents, which accounts for 81% 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 is beneficial as we continue to navigate current market conditions.
We will continue to deliver on our technology roadmap and digital business plan with a focus on optimization by looking for improvements in productivity and existing revenue with better customer engagement with an automated shouldn't focus.
This balances between improvements in our current business portfolio and workflow, while preparing for future changes and transformations.
An important achievement at Ram Quest are closing software entity is the upcoming launch of horizon, our new web based and modern title and escrow platform.
We see this as a key piece of our technology delivery strategies for our agents as well as our own internal modernization programs higher direct operations.
A recent addition to our integration platform supermarket is a verification service that will help combat wire fraud, which is an ever present focus in the industry.
We will continue with the addition of value added services to our agents utilizing our title and escrow platforms as well as our internal operations.
We remain committed to combining old Republic title solid business practices procedures and expertise in the industry with our growing portfolio of technology to deliver measurable benefits and success for the industry company and our shareholders. Thank you and I'll now turn it back over to Craig.
Okay Carolyn thank you very much.
While we think we had a good quarter with strong levels of profitability in both general insurance and title insurance.
While our diversification in specialty strategies should continue to produce stable profitable results going forward and long term value for our shareholders.
So that 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 Frank or Carolyn.
To respond.
So while we will open up to Q&A.
Thank you as a reminder, if you would like to ask a question. Please press Star then one on your telephone keypad.
First question is from Matt <unk> with JMP. Your line is open.
Hey, Thanks, good afternoon.
Yes.
Hello, Matt afternoon.
Hello, how are you doing.
I have a couple of questions. One just a numbers question and one a little higher level on the numbers question as I look at it.
Page three of your supplement that shows the the loss ratios by.
The major coverage lines.
There was pretty.
Pretty good uptick in the quarter in general liabilities can you just give a little bit of color there on on what might be driving that.
Sure Matt.
Over the quarters, we see that loss ratio.
Move.
Rather significantly.
In some quarters.
Because.
As you can tell by that the level of premium that we don't have the scale that we have in some of the other.
Lines like commercial auto and workers comp so I know in many quarters I've I've commented that.
That loss ratio is volatile.
We did look at it and tried to.
Identify anything in particular and and there isn't anything specific.
Specifically that I could point, you to except to say that it's a small line of coverage for us and has a more volatile loss ratio, but over once you look if you look back over the years.
It evens out.
Okay perfect.
And then just circling back on.
You guys touched a little bit on some of the.
Kind of a titled Tech I'm looking at your slide deck.
And you mentioned Grand Quest.
I was hoping you could give.
It gives a little color on that.
<unk> also which seems to be more.
Standing at right kind of customer facing and kind of making a better experience for customers in the title process with <unk>.
Digital and hybrid closings.
My understanding that right and if that is so.
Is that rolled out across your entire footprint is in its early stages kind of maybe just a little bit of color on where that stands.
Yes.
Caroline I know you are very passionate about what we're doing in the way of.
Of technology.
In our title business and specifically.
The platforms that Matt referenced so do you want to comment on that please sure.
<unk> is our would be more of a customer focused chasing platform.
It.
<unk> is generally used by our lenders.
<unk> has been around and it's ready to use.
Any time any of our lenders are real to your customers want to use it all of our agents have access to it.
It it does provide a much better closing experience for the end user for that the buyer the seller, but it all has to be initiated to the lender because it's all their documents that would come through that would allow.
Signing through that platform and so while <unk> is there in its ready <unk> also got a lot of use stirring the refinance boom because the lenders control that transaction, 100% and so that's where we saw a really uptick.
It used in that platform, but it's still lenders and controlling the whole.
Closing the the whole process, then only pieces of it can be used so.
We're ready.
We just continue to wait for the industry to be ready to.
To just totally go with the closing.
Great. Thank you very much for the color and congrats on a nice quarter.
Thank you Matthew.
Again as a reminder, that is star one to ask a question. Our next question is from Greg Peters with Raymond James Your line is open.
Good afternoon, everyone.
I guess that at all.
Hey.
I'd like to start off with a couple questions on your general insurance operations.
And I think a good place to start might be the expense ratio and Craig I know you've commented on this in the past.
As it relates to changing business mix et cetera, but if we look at the nine month results, let's take away the quarter number youre still.
Running about 140 basis points higher in terms of your expense ratio on a year over year basis. So I was hoping maybe you could sort of bridge the gap because that looks like it's more than just business mix. It looks like there are some other issues. There. So maybe you can help fill in the blanks there.
Yes, well.
As I indicated in my opening comments Greg.
If there is about one point of that is the additional commission.
That is being driven by the line of.
Business mix relative to the first nine months of 'twenty one.
The majority of the the majority of it is that.
And then there is other expenses as well.
Of course that that are <unk>.
Slightly higher.
The comment that I would make is we've been pretty consistent that our target combined ratios are between 90, and 95% and I know, we we continue to say that our target is 25% for the expense ratio.
But thats based upon the historical lineup coverage mix and.
We were somewhat hesitant to want to change that expense ratio target. If this wasn't going to be more of a permanent thing and as we continue to move through the quarters that line of business mix is is starting to.
Show us that it's going to stick. So we'll have to look at that more more closely in the next few quarters and consider.
What we want to say about that expense ratio, but again the majority of it is.
Indeed, one point.
Additional commission expense because of line of business mix.
Okay.
And then.
I guess the other question it speaks to.
Reserves and what's going on on an underlying basis, but.
Loss ratio continues to trend down versus.
What any five or 10 year average might look like.
And your reserve development prior year development.
Trending up so these look to be good trends.
Can you.
Talk to some of the underlying movements in those two components and.
Is it conceivable that the paid loss ratio continues to track down or are we hitting an inflection point, where it sort of levels out at this point.
Okay.
Well.
Would say that.
We don't really know whether we're at an inflection point.
As you asked it's conceivable that it continues to trend down certainly.
What we're seeing in the way of our.
Our reserves in total <unk>.
Including IV NR.
We can see that.
Those loss ratios continue to trend down so it would make sense.
At both the paid loss ratio and the overall loss ratio trends, including IV and R.
Are both trending down commensurately so.
I think that.
This is probably representative of all of the work we've done through our operational excellence initiatives or pricing initiatives underwriting initiatives and.
And of course, the compounding of the rate increases that we've had year over year, it's not surprising to us that that R.
Our paid loss ratios are coming down.
Our accident year.
Current accident year loss ratios are coming down.
And our reported <unk>.
Loss ratios, including development are coming down so frankly it would.
Would all be exactly what we were trying to achieve which is improving how we priced the business improving underwriting selection claims risk control distribution production at all.
Paying dividends as far as we're concerned.
Yes, it does look like that.
Maybe pivot to the balance sheet and.
Thank you I understand what's going on with the sale of your equity portfolio.
Going into or part of the equity portfolio and reinvesting in bonds, but maybe you could.
<unk> provide more color on.
Where do you think.
The relative percentages of your portfolio are going to balance out at considering what's what's available to you in the marketplace today and what I'm thinking about is just you know.
What's what do you see the mix of equities versus bonds in the near term considering all the moving parts that youre looking at.
Yes.
Bond initially and then let Frank.
Get into the details a little bit more but we were comfortable with that 80 20 mix that Frank referenced.
80%, 80%.
Fixed income and 20% equities and.
Even after we sold as I mentioned approximately $2 billion of equity this year.
And.
By the way, we didn't sell those those equities that at Lowe's.
We actually.
<unk> told them.
With a very nice window within the high so.
After selling those and getting to that 20% level. We're comfortable there we don't have anything underway to try to reduce that further but we will always continue to take a look at what what kind of yields are we earn.
<unk> on those equities because as we said when we when we became.
Overweight in equities. The reason we were doing that several years ago. We said was because we could invest in a blue chip equity.
That was paying.
Yield on that stock that was 100 or 200 basis points higher than we could achieve if we invested in that same blue chip.
Bob.
So we have to keep ourselves intellectually honest here and as things flip the other direction, we will look at what kind of yield we're achieving on those equities.
And.
If if we can.
Instead invest in the bonds and achieve a rate of 567% return on bonds well that could.
Could <unk>.
Result in us.
Taking another look at it but we don't have any initiative underway to reduce that holding further and we're fine holding what we what we have now as long as it's achieving that investment income.
Outcome that was really at the beginning of our strategy when we.
<unk> two.
Again invest in equities in a in a bigger way several years ago.
So frankly I think the as.
You didn't leave too much to add but I will just put a number around so 11% of the stocks. We sold were within their 52% to 52 week high So we're pretty happy with that as far as.
The sales of the bond portfolio as a tax planning.
We found a sweet spot on a little bit of a longer end of the maturity curve, there and we're basically replacing to the point, where we're staying about where we were on our maturity. Our average maturity has been hovering around 4.4 years, and we've kind of replace to that so.
Just a little extra color for you.
We're 98% investment grade so that.
Very high quality portfolio.
Great.
For all the color.
Congratulations on the quarter.
Thank you Greg.
We have no further questions at this time I'll turn it over to management for any closing remarks.
Okay, well. Thank you everyone for your interest and for the conversation this afternoon.
As we said we are we think we had.
We had another successful quarter and we know that we have headwinds when it comes to real estate markets and in the interest rate environment, but.
Those were expected headwinds and we're planning accordingly.
And likewise, we have.
Some very favorable things happening in the general insurance group as those trends in <unk>.
Loss ratio combined ratio.
Yes.
Income continue to improve.
Improve and are at very strong levels. So.
Thank you all again and we will see you again next quarter.
Have a good afternoon.
Ladies and.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
[music].
Yes.
Okay.
Yes.