Q4 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 would like to welcome everyone to the old Republic International fourth quarter 2022 earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session.
He would 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 Chris.
Good afternoon, everyone and thank you for joining us the old Republic Conference call.
Discuss the company's fourth 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 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 Dot com.
Please be advised.
This call May involve forward looking statements as discussed in the press release and financial supplement dated January 'twenty six 'twenty twenty-three 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.
Several 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.
Okay, Joe Thank you very much and good afternoon, everyone and welcome again to over public.
With me today are Frank Sodaro, our CFO .
And Carolyn Monroe, our president of the title insurance business.
Well if some of you may have seen earlier. This week, we officially kicked off our recognition of the 100 year anniversary of old Republic and throughout the year, we plan on engaging with all of our stakeholders, including our shareholders associates customers distribution partners as we look to sell.
To break this milestone.
So oh I had another good quarter contributing to our strong performance for 2022 with general insurance producing significantly greater pre tax operating income in the quarter and for the year, while title insurance pre tax operating income was COO.
They are really less than the record setting 2021 results, mainly due to the effects of increasing mortgage interest rates.
Our reserve position remains healthy and all of our segments led by general insurance with very strong favorable prior year reserve development in the quarter and in the year.
Our balance sheet is in great shape, as we continue to efficiently manage our capital position.
And as the release indicates we returned a considerable amount of capital to shareholders during the quarter and the year through both dividends and share repurchases.
Consolidated net premium and fees earned for the quarter.
And the year were lower reflecting the lower year over year title insurance revenues.
General insurance net premiums earned increased by <unk> <unk>.
7% for the year, while title insurance net premium and fees earned decreased by 29% in the quarter and 13% for the year.
Our consolidated pre tax operating income was 300 million for the quarter and just over 1 billion for the year, while our consolidated combined ratio came in at a very profitable level of $89 six for the quarter and 91% for the year both general.
Insurance and title insurance produce sound profitable underwriting results as is reflected in their respective combined ratio.
Going into 2022, our expectation for title insurance was for considerably less revenue and operating income then the 2021 year and we remain of the view that headwinds will continue for title insurance in 2023.
Alright strong consolidated results once again reinforces the soundness of our long standing diversification strategy between P&C insurance and title insurance.
We believe produces steadier earnings and returns over time.
So I'll now turn the discussion over to Frank Frank I'll turn things back to me to cover General insurance, which will be followed by Caroline who will discuss the title insurance and then as usual, we'll open up the conversation for Q&A.
So with that Frank I handed to you.
Thank you Craig and good afternoon, everyone. This morning, we reported net operating income of $237 million for the quarter and $845 million for the year.
On a per share basis comparable year over year results were 80 cents versus <unk> 88 for the quarters.
And $2 79 versus $3 eight for the full years.
Both periods were down when compared to the record set last year, our consolidated earnings were strong by historical standards.
Shareholders equity ended the year at nearly $6 2 billion, resulting in book value per share of $21 five.
When adding back dividends book value increased just under 1% from the prior year and driven by our strong operating earnings offset by lower investment valuations.
The comparable increase for the quarter was 12, 5% due to higher investment valuations and our strong operating results.
Net investment income increased nearly 18% and 6% in the quarter and year respectively.
The increase for the quarter was driven primarily by higher yields while the year benefited from both higher yields and an increase in the level of investments.
During the quarter, we completed the rebalancing of our investment portfolio.
So for the year, we realized $375 million and net investment gains on sales of common stocks.
While offsetting those gains for tax purposes with sales of bonds, giving us realized investment gains of $62 million.
This effort leaves us with a comfortable portfolio mix of 80% and highly rated bonds and short term investments with the remaining 20% allocated to large cap dividend paying stocks.
The average maturity on the bond portfolio is four three years with a book yield of three 3% compared to a market yield of three 5%.
Even after reducing the stock portfolio by roughly $2 billion.
This portfolio still ended the year with unrealized gains of about $1 3 billion.
Now turning to reserve development.
All three operating segments recognized favorable loss reserve development for all periods presented in total the consolidated loss ratio benefited by seven four and three seven percentage points for the quarter and year, respectively, compared to $4 six and $2 seven percentage points.
For the same periods a year ago.
Prior year losses have come in lower than expected driving this level of favorable development.
While the mortgage insurance loss costs continued to be favorable the trends of lower newly reported defaults and higher cure rates on loans already in default are beginning to fall in line with pre COVID-19 levels as expected.
This group paid another $35 million dividend to the parent holding company in the quarter, bringing the total return to $140 million year to date.
In the quarter, we paid $67 million in dividends and repurchased over $175 million worth of our shares for a total of just over $240 million returned to shareholders.
We enter 2023 with $169 million remaining on our existing repurchase authorization, which we will continue to execute on opportunistic.
I will now turn the call back over to Craig for a discussion of general insurance.
Okay, Frank Thank you for that.
So for general insurance net premiums written increased by 1% in the quarter and 8% for the year.
Of note here premiums written in the quarter were affected by premium adjustments, including audit premiums and our expectation is for premiums to continue to grow at a pace more consistent with what you see in the overall 2020 to annual growth rate.
We continue to achieve rate increases on most lines of coverage with the exception of D&O and workers' compensation, our renewal retention ratios and new business production remains very strong.
Pre tax operating income.
Rose by 35% in the quarter and by 17% for the year to $690 million.
The loss ratio for the quarter was 57%, including 10 points of favorable loss reserve development, while the full year loss ratio was 62% compared to 65% in 2021.
Turning to the expense ratio for the year. It came in at 27, 4% compared to 26, 5% in 2021 with continued growth in lower loss ratio higher commission ratio lines of coverage, adding approximately one percentage.
Point of additional commission to the expense ratio for the year.
The combined ratio for the year was 89, 5% compared with 91, 3%.
2021.
Turning more specifically.
To a few of the significant lines of coverage.
Commercial auto net premiums written continue to grow at an 11% clip during the quarter. While net premiums earned grew 7% the loss ratio for the year was 66, 6% compared to $71.
5% in 'twenty one.
So while this line of coverage benefited from favorable prior year loss development in both periods auto liability loss severity continues at a high single digit level and auto physical damage loss severity continues at a low double digit level while loss frequency.
Our rate increases in this line of coverage are in the high single digit range, which implies that we continue to.
Cover overall loss frequency and severity trends. So we think our rate levels remain adequate relative to our target combined ratios for commercial auto.
Looking at workers compensation net premiums written came in lower for the quarter and relatively flat for the year affected by the premium audits I mentioned earlier and continued rate decreases.
Loss ratio improved to 46% for the year from 59% last year.
Here too this line of coverage benefited from favorable prior year loss development in both periods with loss severity slightly up and loss frequency continuing to trend favorably. So here too we think our rate levels remain adequate relative to our combined ratio.
<unk> targets.
We continue to follow loss frequency and severity trends very closely especially in this inflationary environment that we're in and we adjust for these inflationary trends that drive severity as appropriate.
We believe our specialty growth strategy and our operational excellence initiative should continue to produce solid growth in proper profitability for general insurance as we move forward.
So Caroline I'll now turn the discussion over to you to report on title insurance. Thank.
Thank you Craig the title group reported premium and fee revenue for the quarter of $836 million down 29% from fourth quarter 2021, our pre tax operating income of $45 million compared to $137 million in fourth quarter 2021.
Agency premiums were down, 27% and direct premiums and fees were down 39% compared to fourth quarter of 'twenty one.
Our combined ratio for fourth quarter of 'twenty, two of 96, 2% compared to fourth quarter of 2021 89, 4% combined ratio for the fourth quarter would have been 94, 1% without the state sales tax assessment as noted in the release, which we expect to recoup.
<unk>.
While increasing mortgage rates refinance decline and a softening housing market impacted our residential activity our commercial activity remains strong in the fourth quarter with commercial premiums up 13% over fourth quarter 2021, and represented 26% of our total premiums compared to 18%.
In the fourth quarter of 'twenty, one commercial premiums reported for full year 2022 represented an all time high for the title group.
As we enter 2023, we'll continue with the focus on commercial opportunities during 2022, we transformed and aligned our commercial operations with an internal structure that allows us to leverage more tools resources and support to enhance our capacity to deliver in this sector.
With technology being an integral part to our business strategy, we will continue delivering on our digital future. While we are committed to delivery on our large technology projects and platforms as highlighted in prior calls. We are also equally committed to continual enhancements to our current technology portfolio.
The ability to electronically record with counties is an essential step in our digital end to end process vision.
2020 to our E recording company <unk> has had the fastest growing network of county connections of the major platforms. This growth in our network will give our offices and agents additional access to counties throughout the country for closing files electronically.
As we continue to work in a market facing headwinds will take advantage of the opportunity to refine evaluate and enhance our services to our customers with an emphasis on our growing portfolio of technology to deliver measurable benefits and success for the industry The company and our shareholders with that I will turn it back to Craig.
Yeah.
Thank you Carolyn.
Okay. So we think our diversification in specialty strategies produced another year of solid performance and profitable results as reflected in these consolidated figures.
And so that concludes our prepared remarks, and we'll now open up the discussion to Q&A World and I will answer your questions or I'll defer to Franco Carolyn to respond so with that can we please open up to Q&A.
Certainly.
As a reminder, please press star one if you would like to ask a question. Our first question is from Greg Peters with Raymond James Your line is open.
Good afternoon, everyone.
Hi, Greg.
Does it feel like life has returned to normal with the Chicago's finest returning from lunch hour.
During your prepared remarks.
We do that just for you Greg.
Right.
Okay. So let's.
In the prior year Reserve development.
It was clearly a surprise and maybe you can.
Give us some color on what years.
Where it's coming from men and.
And I know you did some comments on it but I was looking at the table in your press release and it's the one where you talk about the loss ratio excluding prior period loss Reserve development.
And looking at the annual numbers that getting cut off in the quarterly numbers, but the annual numbers have been trending down quite nicely.
And as you think about general insurance for 2003 and 'twenty four.
What's sort of your view of how this is going to look going forward.
Okay.
Greg.
Answer.
The latter part of your question.
First and then then I'll turn it to Frank to give a little more color around the reserve development that you mentioned.
I mentioned at the beginning of your question.
The loss ratio excluding prior period.
Loss Reserve development is.
As you say trending down.
And that is.
A result of a few things one is.
We've mentioned several quarters and our calls about the effects of the compounding rate increases and.
We continue down that path and as those rate increases continue to compound we have.
The ability to look at at the current year more favorably when we set the loss pick.
And then additionally, as we mentioned when I talked about the expense ratio.
We are writing more lines that have lower.
Loss ratios, but.
One point is the figure I gave one point of higher expense ratio.
Coming from Commission comes along with that so at the end of the day.
We might be seeing a couple of points of improvement in the loss ratio from the line of coverage mix.
And.
But there is some offset there with that.
We had higher expense ratio so those things together.
Or what is reflected here in this loss ratio excluding the prior period development. So now I'll, let Frank talk more about.
Where this favorable loss development is coming from.
So Greg yes, it's actually a fairly similar story for the quarter and year to date.
So the quarter had a $100 million of favorable development.
And the year was just under $200 million and the vast majority of this is coming from workers' comp and commercial auto and it's fairly evenly split as.
As far as the years, it's coming from in total all mostly all years, our favorable going all the way back to 2009 and the only exception that I would mention is for the year to date numbers, we had the public company D&O that developed unfavorably in that that affected.
2018 in 2019.
Just as a follow up to your answer Frank you said all years.
My impression that.
Old Republic's approach to reserving.
Was sort of a locked box approach for the first three to five years, depending on the coverage has that changed.
Greg.
I'll be happy to answer that it has not changed.
Our approach to.
Those loss picks and taking an approach whereby we are.
Cautious about recognizing good news.
And on the other hand, we're very quick to recognize what looks to be bad news all of that is exactly as it's always been and.
Your recollection is spot on when it comes to workers' compensation.
Five years is generally what we believe is necessary to really understand where those.
Losses are coming in and on.
Auto liability.
Think it takes at least three years.
On that line of coverage to really have an idea of where it might come in however.
Theres only.
So much.
Strange we can have.
If.
Indications are that reserves are very redundant.
We do have some requirements to do perhaps recognize those and in those cases.
There could be an exception, but our reserving approach is.
Is identical to what it has always been.
So just to clarify on that Craig was there an exception to the fourth quarter release.
Or was that just the normalized approach that you have.
We.
We did see in the fourth quarter, where.
Workers' compensation and auto liability, we're coming out the very top end of the of the ranges.
So there was some adjustments to those to those lines, but as Frank said the majority of it is from yours going back all the way to 2009, but what where and when we're in a position where we.
We have we have.
To report.
Our earnings then.
And we're at the top end of the actuarial ranges.
Then sometimes we're forced to so perhaps.
Recognize things a bit earlier than we would want to.
It makes sense.
Thanks for the color on.
And information on that.
Yes.
So I don't clog time, I'll, just ask one other question and COO.
Carolina I'll pivot to you.
You know obviously, there's headwinds this year than last year or.
To a degree.
Can you just.
It looks like the expense ratio for the fourth quarter was running a little bit higher than probably where you want it to be can you just sort of revisit.
Revisit how you plan to manage expenses as the volatility of revenues sort of ebbs and flows with what's going on in the mortgage market.
Sure.
We kind of started.
As we got to the end of the fourth quarter. Realizing what the next year is going to be like and we've adjusted.
We feel like where we need to within our operations, but.
One of the things about US is our focus on agency and.
There is a lot of expenses that just adjust themselves with that business model.
But we have a.
Greg we have people that have managed through these cycles before they managed through the great recession and I just kind of have faith in our management to be watching this week they have a COO.
All every week to talk about it we're just we're watching and cutting out everything that we need to do.
We're getting back to 2018 in 2019 look like and that's how we're starting to manage our operation again.
Got it makes sense thanks for the answers.
Again as a reminder, please press star one if you'd like to ask a question. The next question is from Matt <unk> with.
JMP Securities Your line is open.
Hey, Thanks, good afternoon.
Good afternoon, how are you.
Oh good yourself.
Good thank you.
I'll start with a follow up on title.
And I think you've covered a lot of what I wanted to ask there, but maybe the question is.
We've seen kind of in.
The.
Public domain, just everybody seeing mortgage rates pull back a bit from their highs seems like mortgage applications. In recent weeks have come up a little bit are you guys seeing some follow through or some stabilization in kind of title volumes as we as we in the recent months at least that we might not see in the recent quarters.
Net debt that really hasnt hit yet.
When that changes in the rates and the originations it takes a little while for it to start hitting the.
The title companies.
So.
I'm going to say that we don't feel like we're going to see.
Any kind of a change until probably the second quarter. That's when we'll start we're sort of in that first quarter cycle that we used to always be in where people. They kind of do a little bit they sit back they wait and see what's going to happen and then they really start getting serious and we start seeing movement again in the second quarter.
Okay.
Okay that makes sense that's helpful.
And then just wanted to circle back to general insurance some of the reserve discussion there I was just.
Hoping you can maybe even dig dig a little deeper and specifically kind of what are some of the things driving the development I mean by that is this medical loss costs have come in better than expected.
Workers' comp or is it more wage related or just kind of what are the underlying drivers.
I know it's across a lot of accident years, but what are some of the underlying drivers that are pushing it.
Okay.
Yes, Matt I'd be happy to talk about that.
In this case.
It's probably the same answer for both.
Auto liability and for workers' compensation and that his.
Loss frequency.
As I mentioned in my comments.
Loss frequency.
<unk> ended up being lower than than I think we anticipated.
And.
Several of those years.
And.
Therefore, there was.
Some benefit and then as I mentioned in my response to Greg.
You have compounded rate.
Rate increases and.
When you.
When those earned through.
You are trying to follow what's happening with losses.
And you look back in.
In some cases, we had more rate then.
Would have been necessary from.
The loss cost trend.
In severity and frequency so.
It's a combination of those things but.
Clearly on commercial auto severity is while five six years ago.
Spike was was tremendous and it has leveled out.
In that upper single digit level for the last few years.
And.
Our rate increases are.
Are keeping up with that at this point so.
Severity is.
Still an issue on auto liability and.
Workers' compensation as I also mentioned in my comments.
There is a little bit of severity, but nowhere near to the degree you might see.
With respect to say general inflation or even general medical inflation.
Because with workers compensation you have.
A lot of constraints around managed care and and constraints around.
Schedules that are in place in the various states for four.
Billing so.
<unk>.
The workers' comp medical inflation trend is.
Is not again as great.
There is there is a little bit of severity there thats emerging but here too its a frequency story that has gone on for what better than a decade, now and comp where as technology improves then.
And.
Safety.
Sure.
In particular benefits from that technology, and Theres less workplace accidents frequency comes down so.
Back to our frequency story.
Comp as well.
Great. Thank you very much for the color is very helpful.
Thank you Matt.
The next question is from Paul Newsome with Piper Sandler Your line is open.
Hi, Paul Good morning. Thanks, Thanks for letting me ask the question.
I was hoping.
She asked kind of a big picture question on title.
Just kind of refresh and talk about how.
Your business today.
The same with different than it was in.
Sure.
2014.
Some financial questions.
We wouldn't see some of the same.
Revenue changes related to hotels.
And <unk> as well as why wouldn't be seasonally assume operating leverage.
We use those two teams.
Our benchmark.
So Paul just to just to be clear comparing back to the financial crisis years 789.
Yes, as well as I'm looking at your slide presentation. It looks like we had to refund bump I think to routine.
We will also affect well.
Right so.
Right and Purion contrast, this degrees.
Caroline I, if you don't mind.
Give a my initial thoughts and then let you.
Fill in.
So with respect to refi.
That well has dried up.
Considerably.
At this point of where we're at with mortgage interest rates. So.
What you are seeing come through in our numbers.
And you would see that in our order count our order count is.
<unk> lead down that order count includes Refis and as I say, they have essentially dried up.
At this point.
Comparing back to the financial crisis, if I understood.
Some of your question.
When we look at the loss loss ratios and what we're seeing today, we're in a very different environment.
With respect to loss ratios because.
Back in the financial crisis period, with all of the issues around.
Mortgages and how those mortgages were underwritten or perhaps maybe not underwritten very well.
Everyone was looking to find.
Any outlet they could to try to have some kind of recovery and there was some.
That resulted in some pressure on on our title business, but.
As I think most of us know in this.
The current environment and over the last.
Many years.
Mortgage.
Underwriting has been tightened substantially.
And.
Therefore, some of those knock on effects, we were seeing back in that in that in the financial crisis years, we don't expect to come through.
So Caroline I would please feel free to add.
Add to whatever I said or.
Modify what I've said in fill in if you could.
No I think you've covered it well the only thing I'll add is that.
One of the things that we really follow or the NBA and the Fannie Mae forecasting and they give us.
Trends of what's happened with Refis and Theres, nothing showing that that we're going to bounce back with Refis like we did after those years right now.
Okay.
And the only other thing.
I would just add Paul more specific to our portfolio.
Is is.
We are different.
And then our two larger competitors in this space and that about 80% of our business comes through independent agents. So.
We essentially have a variable cost model where.
And downturns.
We don't have the level of fixed.
Overhead to absorb.
Given that our that the independent agents.
Our bearing that and.
So thats an important thing to keep in mind and then the only other thing relative to those earlier time periods you spoke about.
Is is what we've done in commercial specifically at old Republic, and Carolyn touched on.
Where we're at with commercial in her comments and that has been a focus of ours. We've intentionally tried to expand our footprint in that space over the last.
Several years five or more years, then and that is <unk>.
<unk> some dividends as Caroline pointed out in her comments, where we set a record on the amount of commercial transactions, which helped offset some of the residential.
Headwinds that were that were facing.
Great. Thank you I appreciate the help.
Thank you we appreciate your interest.
Again, Thats star one to ask a question.
The next question is from Greg Peters with Raymond James Your line is open.
Yes, so I thought I'd sneak in with a follow up.
<unk>.
Yeah.
Obviously, it's topical.
Where other companies are commenting on their reinsurance renewals.
And you really haven't commented on that and one of the other things Thats popped up with some of the other carriers.
They were hearing that.
The reinsurance commission rates have come in a little bit in certain instances. So just curious about your experience with through January renewals.
And what.
Or what your view is on that.
Sure Greg would be happy to talk about that so our property reinsurance renewal is July 1st renewal.
So.
Hopefully things will settle down a bit by than most I think most of our peers in the industry probably have a January <unk> and as we all observed things look very very tough.
So as we go in to that July renewal, our expectation is that.
Rachel will be higher on our catastrophic cover.
And.
That we need to be prepared for that now and and B.
Cognizant of what additional costs, we need to absorb in the.
Pricing that we charge for our product on the front end so we're.
Doing that already.
The other thing is we anticipate that we might have to take a bit of higher retention.
On our business on our property business Cat business.
As you know manage that to a very low retention.
Relative to our peers and that's why.
One of the reasons, we don't write a.
Large amount of property as you know relative to our peers and for the property we do right.
<unk>.
By a significant amount of reinsurance at a relatively lower attachment so that we don't introduce.
Balance sheet volatility with writing property like.
Some of our peers do with respect to.
Our casualty renewals.
It really depends if you're on our workers' compensation.
Our reinsurance renewals.
Everything was very steady.
And on.
On the other hand on our umbrella liability renewals as you would expect with severity increasing and.
The <unk>.
Judicial.
Muses that we're observing with litigation financing and jury verdicts.
You can expect that.
The umbrella.
Business.
That we write we will have to increase commensurately with the the reinsurance pricing that we're seeing there which is which is.
Increased.
And then.
Then you also have other lines like.
D&O, we're in the process of that renewal.
And.
Here too it's.
Line of coverage specific whereby you had security class action.
Frequency in 2017, and 18 and 19.
With was.
Record setting and that came through in losses for the industry, but then security class action.
Litigation has trended down.
Significantly since 19, so it will depend a lot on how reinsurers look at that but when you talk about umbrella liability or when you talk about.
A specific line of coverage like D&O, where there is a ceding commission.
It is.
So accurate to say that in addition to reinsurers looking for rate they may try to get that rate by reducing seeding commission as well.
Got it.
You very much for the thorough answer.
Thank you Greg.
There are no further questions at this time I will turn it over to management for any closing remarks.
Okay, well. Thank you everyone for your interest and the analysts for their questions.
Much appreciate it and as I said at the beginning of our discussion today, we're looking forward to celebrating old Republic's 100 year anniversary with with all of you and.
And we hope that 2023 will be as successful of a year for us as as the last.
Several years have been so thank you very much and we will talk with you all again next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
[music].