Old Republic International Corporation Q1 2023 Earnings Call
Ladies and gentlemen, thank you for standing by my name is Brent and I will be your conference operator today.
At this time I would like to welcome everyone to the old Republic International first quarter 'twenty, two 'twenty three 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 at that time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again press Star one. Thank you. It is now my pleasure to turn today's call over to Mr. Joe Calabrese with the financial Relations Board. Sir. Please go ahead.
Thank you.
Good afternoon, everyone and thank you for joining us for the Old Republic conference call to discuss first quarter 2023 results.
This morning, we distributed a copy of the press release and posted a separate financial supplement.
Should we assume you have seen and there are 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 that this call may involve forward looking statements as discussed in the press release and financial supplement dated April 27, 2000 Twenty's right.
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.
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's first quarter earnings call with me today is Frank Sodaro CFO of <unk>.
And Carolyn Monroe, President and CEO of our title insurance segment.
Well despite the headwinds in title insurance, we're off to a good start to 'twenty three.
With consolidated pre tax operating income of $223 million for the quarter General insurance produced significantly greater income while title insurance produced considerably less income due to the effects of higher mortgage interest rates.
Underwriting results of course are the cornerstone of how we create value. So we're pleased with our consolidated combined ratio of 92, 7%.
Consolidated net premiums and fees earned for the quarter were lower with general insurance, increasing 6% and title insurance or decreasing 42%.
Our conservative reserving practices are again, clearly visible with the favorable reserve development reported in all three segments led by general insurance.
And our balance sheet remains strong even as we continued to return capital to shareholders during the quarter through both dividends and share repurchases.
So I will now turn the discussion over to Frank and then 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 we'll open things up for conversation in Q&A.
So with that Frank.
Thank you Craig and good afternoon, everyone. This morning, we reported net operating income of 179 million for the quarter compared to $192 million last year on a per share basis comparable year over year results were 61 cents.
Versus 63 cents.
Considering the headwinds experienced by the title group are consolidating consolidated earnings were solid due to the strong operating results of the general insurance group.
Shareholders equity ended the quarter at over $6 3 billion, resulting in book value per share of $21 91.
When adding back dividends book value increased just over 5% from the prior year and driven by our operating earnings and higher investment portfolio valuations.
Net investment income increased nearly 30% in the quarter, driven primarily by higher yield which were most pronounced within the fixed income and short term investment portfolios.
The overall investment portfolio was comprised of approximately 80% and a 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 4%, which compares favorable to the book yield of two 5% at the end of the first quarter last year.
The valuation of the fixed income portfolio increased by over $175 million during the quarter, while the stock portfolio was relatively flat ending the period and an unrealized gain position of nearly $1 3 billion.
Now turning to reserve development.
All three operating segments recognize favorable loss reserve development in total the consolidated loss ratio benefited by four five percentage points for the quarter compared to 2.4 percentage points for the same period a year ago.
The mortgage insurance costs loss cost continued to be favorable with lower newly reported defaults and higher cure rates on those loans already in default the group paid a $25 million dividend to the parent holding company in the quarter.
And the plan is to return over 100 million this year subject to regulatory approval.
In the quarter, we paid $70 million in dividends and repurchased over $130 million worth of our shares.
For a total of just over $200 million returned to shareholders.
Since the end of the quarter, we repurchased another $35 million worth of shares completing our $450 million program.
I'll now turn the call back over to Craig for a discussion of general insurance.
Okay. Thanks, Frank.
Yeah in general insurance pre tax operating income rose by 36% to $193 million for the quarter and the combined ratio was at 89, 3% compared to 91, 6% in Q1 of 'twenty two.
Reflecting our underwriting discipline in our underwriting excellence efforts. So we commend all of our associates for this continued focus on discipline and excellence.
The loss ratio for the quarter was 61, 4%, including five five points of favorable reserve development and the expense ratio was 27, 9% consistent with a lower loss ratio higher commission ratio lineup coverage mix realm.
Tiv to a few years ago.
Our strong renewal retention ratios and new business production helped drive a five 5% increase in net premiums written and we also saw rate increases across most of our book with the exception of D.
N O and workers' compensation.
So turning to a few of these larger lines of coverage.
Commercial auto net premiums written grew at a 6% clip the loss ratio was 73, 7% compared to 72% in Q1 of 'twenty two with favorable loss development in both of those periods.
Severity continues in the high single digit range and our rate increases are consistent with that trend implying that we continue to cover loss trends. So.
So with these rate increases we think our rate levels for commercial auto will enable us to achieve our combined ratio targets.
Turning to workers' compensation net premiums written came in 3% lower affected by rate decreases and about the same range.
The lower.
Loss ratio of 52, 5% compared to 62, 5% in Q1 of 'twenty to adhere to there was favorable reserve development in both of those periods.
Frequency for Workers' compensation continues to trend down approximately commensurate with the rate decrease levels that we're seeing so even with some rate decrease we think our rate levels here to will enable us to achieve our combined ratio targets.
So for general insurance, we expect solid growth and profitability to continue through 'twenty three are supported by our specialty growth strategy and our operational excellence initiatives.
Now I'll turn the discussion over to Carolyn to report on title.
Title insurance Carolyn.
Thank you Craig.
Hydro group reported premium and fee revenue for the quarter of $583 million down 42% from first quarter 2022 agency premiums were down 42% and direct premiums were down 41%.
Our pre tax operating income of $17 million compared to 81 million in the first quarter of 2022, while our combined ratio of 99, 3% compared to 92, 9% last year and as noted in the release, depending recovery of a fourth quarter state sales tax assessment.
Improved of quarters expense ratio by three points.
As we start adjusting to the normal seasonal real estate markets of which the first quarter has traditionally been the slowest to continue a rapid rise in interest rates, coupled with tight inventory certainly contributed to the softer market.
Based on our agency focused business model under current market conditions, we benefit from having a large portion of our overall expenses being variable in nature with our expense ratio highly correlated with our top line revenue.
<unk> portion of our expense ratio is largely personnel related we have and will continue to monitor all of our expenses and make the appropriate long term decisions that allow us to effectively manage our business. We do this keeping in mind, the cyclical nature of our industry and the appropriate balance needed in today's.
Our kit, while still ensuring we are prepared for and not at a disadvantage in the future. This aligns with our core value of managing for the long run and will allow us to continue our historical delivery of value to our agents our shareholders and our employees.
Turning to commercial premiums. Despite this being our second highest first quarter on record they were down 24% over first quarter 2022, and represented 25% of first quarter premiums compared to 20% in first quarter 2022.
As we started to experience a turn in the market last year, we realized that there would be increased pressure on our age at the cornerstone of our strategic focus we wanted to continue to provide industry, leading services that would enable them to focus on their core business and provide opportunities for efficiencies in their operations to that end.
We created our agency operations Department. This departments principal goal is to drive agency focused business priorities advance innovative initiatives and measure the effect and effectiveness of this strategy is deployed to enhance the company's connection in collaboration with its title agents along with this.
We continue our investment in technology services and products. We are excited about our newest production software horizon being launched out of Ram Quest one of our title Tech companies. It is a web based title and escrow production platform that will serve the agency community. In addition to our own direct operations.
Okay. Thank you Carolyn.
Well, we're a diversified specialty insurance company and that diversification served us well this quarter with continued profitable growth and general insurance, helping to mitigate the lower profits and title insurance.
And as Frank pointed out while higher mortgage interest rates worked against us on the top and Bottomline and title insurance higher interest rates helped produce significant growth in our investment income.
We remain pleased with our recent and long term track record of capital stewardship, and book value growth, including more than $200 million returned to shareholders in the first quarter through dividends and share repurchases as Frank mentioned, along with a 5% year to date growth in <unk>.
<unk> value per share.
For the remainder of 'twenty three we're optimistic for continued profitable growth within general insurance, where we recently announced our newest underwriting subsidiary old Republic lawyers specialty insurance, which follows last year's launch of old Republic, excess and surplus going into 'twenty.
Three our expectation for title insurance.
As for considerably less revenue and operating income and we remain of the view that the headwinds will continue as we proceed through 2023.
As I mentioned on this call last quarter 2023 is our 100 year anniversary, which we're celebrating under the banner of 100 years of excellence honoring our unique culture that has driven our outstanding results.
So that concludes our prepared remarks, and we will now open up the discussion to Q&A, where either I'll answer your question or I'll direct the question to Frank or Carolyn depending on who's best Thank you.
At this time I would like to remind everyone in order to ask a question press star followed by the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Oh.
Your first question comes from the line of Matt <unk> with JMP Securities. Your line is open.
Hey, Thanks, good afternoon.
Good afternoon, Matt.
Perfect for my first question I was hoping to just circle back good parallel discussion on on title.
Maybe start with the environment.
We spoke a little I think it was last quarter about your expectations for the year.
Correct me, if I'm wrong, but I think you referenced some of the normal seasonality. We can see where Q1 is typically a slow quarter and tend to see a little bit of recovery in Q2.
But obviously, what we're going through has continued headwinds.
I mean, how should we think about that progression have you seen anything in the.
In the last few weeks in April that.
See any headwinds lightening up should we expect to see some seasonable sequential recovery in revenues or or is it still pretty pretty stiff headwinds.
Caroline I think you're best to answer that we know a few of the industry reports that we follow.
The indicate some optimism for.
The remainder of the year relative to 2022, but Carolyn I'll, let you speak more specifically to what you're saying.
Sure.
I think when we reported last quarter, we had hope that.
When we got into the second quarter, we'd see.
More improvement than than we're seeing now it you know the challenges or just.
You know consumer confidence just the uncertainties surrounding the mortgage rates.
And in looking at the NBA and in Fannie May forecast.
It's they are forecasting as we get towards the end of the year and then on into 2024.
So some improvement I, just don't feel like we're going to see a lot of improvement in the second quarter like we had hoped.
It's just so much of it is just we've got tight inventory and a lot of markets and people right now don't have a sense of why should they move.
That's just kind of what we're getting out in the field right now.
That makes sense and then maybe if I.
Take that kind of one step further if we assume that's the case and you had.
$583 million of earned premium Q1 so.
I mean, just take some numbers here, but if the business with size such that maybe the remainder of the year. It's call. It even six to 700, a quarter or something like that some small improvement.
What what.
I know you've talked some about some expense saving measures you've taken in right sizing of the business what sort of expense ratio do you think you can kind of run the business side of the business is set to run at.
At that ballpark kind of volume size.
You know for the rest of the year between 96% 97% range.
Okay very helpful.
And shifting topics one last question, Craig I guess I'll turn it back to you and you can direct elsewhere if needed.
Kind of the share buyback authorization now being complete with the purchases made post quarter.
Can you just update us on capital management thoughts would it be reasonable to assume the board might re up an authorization or is there.
Something else center excess capital levels optimism on growth other uses of capital that that might make that not be the case.
Sure Matt so.
Every every quarter, we review with our board.
Our position on adequate liquidity, along with our capital position.
And when we are in a position, where we believe we have excess capital.
And we don't have.
Another opportunity to reinvest in the business.
Then we will make a recommendation.
And the board will take into consideration the alternatives for returning capital to shareholders and when when that is done it is.
<unk> always done.
With consideration given to the possibility of special dividends and the possibility of a share buyback so as.
As we head into the.
The snacks Board meeting, we are in a position and a very strong capital position.
And they are very sufficient liquidity position and we will as we do every quarter have that discussion with them.
Great very helpful. I appreciate the color.
Yeah.
Your next question comes from the line of Greg Peters with Raymond James Your line is open.
Well good afternoon, everyone and I guess I'm, a little bit relieved that we haven't heard the fire trucks run by.
Dom Michigan Avenue yet.
But with the with that said Ah.
Can we can we.
Pivot to the general insurance business.
I guess two areas of questions would be you know the prior year Reserve development, and then clearly you've already talked a little bit about this but this favorable trend that really began to.
The back half of last year seems to be continuing.
At least through the first quarter, which is it seems like maybe you're you're taking some reserves out of our lowering some case reserve assumptions on some of the more recent years.
Results and then and then secondly.
You know aside from reserves just when you look across the.
The different business slides, which ones do you think are going to generate say the most growth over the next and be the most impactful I should also add.
Over the next two years.
Okay.
So we will address your reserve question first and then we'll talk about where we're.
Expecting continued growth so.
With regard to.
Our strong reserve position, a nice problem to have for sure.
We are we had favorable reserve development coming from.
Most years.
And.
For workers compensation.
Those years were.
Yours that were prior to our to the period that we traditionally like to hold which for workers compensation as the last five years on <unk>.
Commercial auto or our reserve position is extremely strong.
And there.
There are two most of that development came from prior years, but.
There was a little bit of favorable reserve.
In the more recent years, where we traditionally like to hold those but as we discussed Greg last quarter.
A very nice problem to have but if.
<unk> has become too excessive it creates other issues, but like I say for the most part it's in those older years commercial auto is coming in so favorably that there is a little bit from the more recent years.
On the other.
The second question more about about growth.
As I.
And Tenda too.
Underscore again are we've added two new companies in the last Ah.
Year end.
One of those companies is riding E&S business, they're not focused on property cat business there.
Focused more on main mainstream E&S business with limited cat exposure, so that that will help our <unk>.
Grow our general liability.
<unk> lines.
There and with regard to the newest entity, we probably won't see premiums.
Premiums come through till the latter part of the year, but that will help drive our professional lines cover.
Listed under the financial Indemnity section.
On the other hand, the home and auto warranty, we expect to to.
Turn around a bit as we go forward so as we try to.
Indicate in some of our communications.
We're trying to become more diversified by line of coverage mix. We think we've demonstrated that pretty clearly over the last four five years and some of these newer entities.
We have I have started to have yet.
To really contribute and.
The lines that we're not looking to grow disproportionately to the overall portfolio would include commercial auto and workers' compensation, where we're heavy.
Workers compensation as you know has trended down and.
We don't expect that.
To grow commercial auto while the other hand is growing just.
Purely if you just look at the rate that we continue to get on that so there's a possibility that commercial auto could could continue to grow through rate. Although we're not doing anything strategically to try to grow that line of business.
Thank you for that thorough response.
I guess my second question, you know I'll pivot to the title business.
I certainly can appreciate that the.
Our business mix today is a lot different than it was say the last time.
<unk> financial crisis.
With definitely more skewing towards more commercial oriented exposures, but.
If I do look at the last time, the economies under stress, which would've been the GSC I did note that the loss ratios the claim ratio entitled did.
Start to inch up and I'm, just wondering if there's anything in the system.
You see that might cause some gradual uplift in your assumptions around loss ratios entitled.
Greg I'll I'll be happy to start the discussion and then again hand, it off to Carolyn who's closer to the action.
But.
With regard to what we saw in the financial crisis, So seven O 809.
As you know mortgages were underwater and.
It was the case that.
Consumers.
Attorneys, we're looking for every possible outlet.
Which included.
Some pressure on on title insurance this time around.
We don't believe that the mortgages.
In the marketplace are.
Under water to the degree that they were during that period, and I think thats somewhat evidenced.
Yes.
What we're seeing on our on our mortgage runoff business that Frank.
<unk> commented on we're.
We're not seeing anything there that is concerning in fact, it's still very favorable.
Our even though that is the case, we're not relying on that end.
Our CFO at at title, Chris Leazer, along with Carolyn.
And Frank Sodaro, and myself have specific Lee.
Focused in on your question to make sure are we seeing anything in the way of losses that would that would seem to indicate that things might be warming up a bit.
Because of what we're seeing in the housing market in particular.
And.
We have not yet seen that so Carolyn I'll turn it to you to add any color commentary or more specifics.
Yes, I think that.
The equity that Craig spoke to is one of the most important but.
The other thing to emphasize is just the difference in the lending practices back then and now.
When we had the financial crisis that was really about them.
Loans being made to either people that didn't really exist.
Getting that had alone and that just has really changed and we just start.
We're not we haven't seen that since the financial crisis. So I agree I just.
I don't I don't think we're going to see the same type of losses like we did then.
Yeah, well I just.
Related to that you know, there's a lot of rhetoric in the press around commercial.
And specifically office properties, whether that that.
Portion of the market is going into a recession, if you will.
Maybe you could.
Address that as it relates to title and then step back and then talk about how you.
Our investment portfolio is positioned relative to some of the stressors that we might see in the marketplace, whether its exposure to banks or commercial real estate et cetera. That's my last question.
Greg.
If you don't mind I'll take the very first part of the commercial title space, then ask Carolyn <unk>.
I'm in with anything she has to add and then after that we will have Frank comment on the investment portfolio. So the only thing.