Q2 2023 Old Republic International Corporation Earnings Call
Hello, My name is Kristen I'll be your conference operator today.
At this time I'd like to welcome everyone to the Old Republic International second quarter 2023 earnings Conference call.
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After the Speakers' remarks, there'll be a question and answer session.
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Thank you Joe Calabrese with the financial Relations Board May begin.
Thank you.
Afternoon, everyone and thank you for joining us for the Old Republic conference call to discuss second quarter 2023 results.
Good morning, we distributed a copy of the press release posted a separate financial supplement.
Should we assume you have seen <unk> otherwise have access to during the call.
Both of the documents are available at old Republic's website, which is www dot old Republic Dot com.
Please be advised that this call may involve forward looking statements as discussed in the press release and financial supplement dated July 27 2023.
Risks associated with these statements can be found in the company's latest SEC filings.
This afternoon's conference call will be led by Craig Smiddy, President and CEO of Old Republic International Corporation, and several other senior executive members as planned for this meeting.
This time I'd like to turn the call over to Craig Smiddy. Please go ahead Sir.
Alright, Joe. Thank you good afternoon, and welcome again, everyone to old Republic.
Second quarter earnings call.
With me today is Frank Sodaro, our CFO , who I am.
And Carolyn Monroe, our president and CEO title insurance.
Well during the second quarter General insurance continued to produce strong underwriting results, which drove at 34% increase in pre tax operating income.
And despite continued challenges with mortgage interest rates.
Factoring the topline our title insurance pre tax operating income improved over the first quarter of the year.
Our focus on specialization and diversification across idle in P&C insurance.
Paid off in the second quarter, producing 227 million of consolidated pre tax operating income.
And on a year to date basis General insurance has produced 378 million a pre tax operating income while Idaho insurance has produced $52 million along side of <unk>.
Consolidated combined ratio of 92.6.
Our conservative reserving practices that we've spoken about our once again clearly visible with favorable reserve development reported in all three of our segments led by general insurance.
With our strong underwriting income and investment income results, we maintained our strong balance sheet, while at the same time continuing to return capital to shareholders during the quarter.
Through this through both dividends and share repurchases.
And we're also continuing to invest for the long run, including the April announcement of our newest underwriting business old Republic lawyers specialty insurers.
So I will now turn the discussion over to Frank.
Mike will then turn things back to me to cover General insurance.
Well, Paul that was Caroline and he'll discuss the title insurance and then well open up the conversation for Q&A. So.
With that I will turn it to you.
Thank you Craig and good afternoon, everyone. This morning, we reported net operating income of $180 million for the quarter compared to $210 million last year.
On a per share basis comparable year over year results were 62%.
Six nine.
For the first half of the year net operating profit was $359 million compared to $402 million last year.
The considerable headwinds experienced by the title group were largely offset by strong operating results for the general insurance group.
Net investment income increased by about 30% for both the quarter and year to date, driven primarily by higher yield on the fixed income and short term investment portfolios.
Put in perspective, our average reinvestment rate in corporate bonds. During 2023 with just over five 1%, while the book yield on similar bonds being disposed of.
Just under 3%.
The investment portfolio was held steady at approximately 80% and highly rated bonds and short term investments with the remaining 20% allocated to large cap dividend paying stock.
The quality of the bond portfolio remains high with 99% in investment grade Securities.
With an average maturity of four two years and an average overall book yield of three 5% compared to two 7% at the end of the second quarter last year.
The fixed income portfolio valuation decreased by approximately $125 million during the quarter, while the stock portfolio valuation was relatively flat ending the period in an unrealized gain position of over $1 2 billion.
Turning to loss reserves once again, all three operating segments recognized favorable loss reserve development for all periods presented.
The consolidated loss ratio benefited by four six percentage points for the quarter compared to one nine points for the same period a year ago year.
Year to date, the consolidated loss ratio benefited by four five percentage points compared to two one percentage points last year.
The mortgage insurance insurance group paid $35 million dividend to the parent holding company in the quarter and plans to return $110 million for the full year subject to regulatory approval.
Shareholders equity ended the quarter at over $6 1 billion, resulting in book value per share of $21 78.
When adding back dividends book value increased five 7% from the prior year and driven by our strong operating earnings.
In the quarter, we paid $70 million in dividends and repurchased nearly 100 $220 million.
Our shares for a total of just under 290 million returned to shareholders.
Since the end of the quarter, we repurchased another $83 million worth of shares, leaving us with about $180 million remaining in our current repurchase program.
I'll now turn the call back to Craig for a discussion of general insurance.
Okay Frank.
So in the second quarter General insurance net written premiums were up 8% and pretax operating.
<unk> increased to $184 million and the combined ratio was at 92% compared to 92, 5% in the second quarter of 'twenty two.
So we continue to see our underwriting excellence efforts pay off and we think all we thank all of our associates for remain Lee remaining keenly focused on profitable growth.
The loss ratio for the quarter was 69%, including six points of favorable reserve development.
And the expense ratio was higher at 29, 3%, but this is in line with our line of coverage mix that over the last few years has trended towards lower loss ratio and higher Commission ratio line.
Both strong renewal retention ratios and new business growth have helped drive that 8%.
<unk> increase in net premiums written and we continue to achieve rate increases across our portfolio with the exception of D&O and workers compensation.
Turning more specifically to a few of our larger lines of coverage star.
Starting with commercial auto net premiums grew at a 13% clip while the loss ratio came in at 67, 5% compared to 66.
6% in the second quarter of 2002.
With favorable development in both of those periods.
Severity continues in the high single digit range and rate increases are commensurate with that trend.
So that implies that we continue to cover our loss cost trend in.
In commercial auto.
Moving to workers' compensation.
Net premiums written grew by 8% while the loss ratio came in at a low 37, 9% compared to 52, 3% in the second quarter of 2022, and obviously here too there is considerable favorable reserve development in both of them.
Those period.
Frequency continues to trend down per comp while severity trend is relatively stable. So here too we think our rate levels remain adequate for this line of coverage.
We expect solid growth and profitability in general insurance to continue throughout the rest of this year and we think this continues to reflect the success of our specialty growth focus and our operational excellence initiatives.
So I'll.
Now I'll turn the discussion over to Carolyn to report on title insurance Marilyn.
You Craig and good afternoon to title group reported premium and fee revenue for the quarter of $650 million down 37% from second quarter 2022.
Agency premiums were down 38% and direct premiums were down 32%, our pre tax operating income of $35 million compared to $110 million in the second quarter of 2020 to.
Our combined ratio of $96 nine compared to 90, 94% in the second quarter of 2022.
Our 2023 results compared to 2020 to reflect the economic headwinds continuing to affect the volume of transactions in our market. We continue working to manage costs in response to market revenue levels, while keeping our focus on longer term strategic initiatives, we have improved our combined ratio by two.
Four points during the first quarter of this year, which helped drive increased profitability. This overall improvement during the second quarter compared to this year's first quarter is a positive trend to build on.
Market conditions also adversely impacted our commercial business in the second quarter commercial premiums were down 37% over second quarter of 2022 and represented 22% of our premiums in both 2023 and 2022.
Year to date commercial premiums are down 31% over last year, while being mindful of market conditions. We continued to demonstrate our commitment to this segment with tools and resources to take advantage of the opportunities available over the last year, we've expanded and transformed our footprint nationwide and have been able.
To grow our market share in this segment.
We continue to provide industry, leading value added services and enable our agents the cornerstone of our strategic focus to concentrate on their core business and provide opportunities for efficiencies in their operations. While the first half of 2023 reflects the ongoing economic challenges in the real estate industry.
Three we are focused on streamlining operational efficiencies and developing innovative products and services to prepare for both the short term and long term market conditions.
And with that I'll turn it back to Craig.
Alright, Carolyn thank you.
So as a diversified specialty insurer, we remain pleased with our continued profitable growth in general insurance, which is helping to mitigate the lower revenue and profit levels and title insurance.
And while higher mortgage interest rates have helped our title insurance business.
Higher interest rates continue to produce significant growth in our investment income as Frank pointed out.
We also remain pleased with our recent and long term track record of capital stewardship and book value growth per share, including the $492 million returned to shareholders in the first half of this year through both dividends and share repurchases.
So for the remainder of 'twenty three we remain optimistic for continued profitable growth in general insurance.
We remain of the view that title insurance will continue to face headwinds.
As we noted and mentioned and discussed in the last few quarters. This is old Republic's 100 year anniversary, which we're celebrating under the banner of 100 years of excellence.
As part of this ongoing celebration, we will be ringing the opening bell on the New York Stock Exchange next month on August 20 <unk>.
So that concludes our prepared remarks, and we'll now open up the discussion to Q&A.
I'll try to answer your questions, our last Frankfurt Carolyn to respond.
As a reminder, if you would like to ask a question. Please press Star then one on your telephone keypad.
First question is from Greg Peters with Raymond James Your line is open.
Yes.
Well good afternoon, everyone.
100 years, it's pretty striking.
Striking achievement for the company so.
Yes.
Suddenly something for the record books.
Hey, looking.
Looking over the.
The statistics in the financial supplement.
I noticed that the paid loss ratio for general insurance as <unk>.
Up noticeably on a six month basis for 23 versus <unk> 22.
And I'm curious if you could provide some commentary about what's going on inside that.
Greg This is Craig sure.
This ratio is something that we look at over the long term and if you look at where we started back in 2018, you can see where in 2020 and 2021 and even into 2022, there were probably some.
Effects.
Of the the Covid.
Situation and how that may have affected settlements and court houses and the like.
And then as you move.
Onto into 'twenty three.
I'm not.
Drawing any sort of conclusion, there's a little bit of a.
Backlog, there, perhaps but its certainly in line with our our long term and then as we mentioned when we talked about our expense ratio.
Also.
<unk>.
The shorter tail lines of business in our portfolio today, and those tend to pay out a little bit quicker, which is why they're short tail and then of course, there is an inflationary environment as well that affect payout. So all of those things pulling all of those things together.
There isn't anything that I glean out of that.
The 59, 9% Youre seeing there.
The second.
Second quarter of 2003 compared to that longer term trend.
Fair enough.
Just.
Stuck out so I felt like I had to ask question. Another question on <unk>.
In general insurance would be just again focus on the six month results.
The loss ratio and I know you by the way I know you mentioned and talked a little bit about this in your comments, but.
The loss ratio for commercial auto.
It has trended up.
I guess in the context of what I think is going on inside with your rate actions I'm kind of surprised it's trending up I would've figured just stabilize but.
Maybe I'm missing something or this is just.
Our normal pattern.
I recognize it's still a lot better than it was a couple of years ago, but any comments there would be helpful.
Sure Greg welcome that question, so as I mentioned in my prepared remarks.
Both of those periods.
Include favorable reserve development.
And so what youre seeing here is not an indication on current accident year loss ratio, but what youre seeing here is.
A little bit higher of a level of favorable development in 'twenty two.
And while 23 still had favorable development, perhaps just not to the same degree. So this is not.
The rate increases that we're achieving and the trends that we think were.
<unk> seen our again.
Producing a profitable accident year loss ratio and the noise that you're seeing between these two periods.
Is reflective of.
Prior year favorable prior year development.
Fair enough my last question I always like to.
Ask a question on the title business too.
And Caroline I was.
Listening to your comments about the.
The weakness in the title the commercial business.
I guess.
Trying to understand when we see about the the downside risk and valuation marks in commercial real estate wondering how.
Do you think that might ripple through.
Old Republic in terms of loss ratio sort of sales really.
Little impact that you anticipate as a result of the.
The new models that are coming out of some areas of the commercial real estate portfolios.
Caroline I think you are in a perfect position with pharma Greg question on on that Okay. Yeah, I don't really think that the <unk>.
Valuations will have much impact on our our losses.
Preserves our loss ratios.
They are highly leveraged properties and you have to remember that when commercial done there.
So many.
<unk> involved and people involved looking at the properties looking at the deals that I don't I. Just don't think that's kind of just because the properties get the value that that will really affect our loss ratios.
Fair enough. Thank you for the answers.
I'll, let others ask questions.
Thank you Greg.
The next question is from Paul Newsome with Piper Sandler Your line is open.
Good afternoon. Thank you Julie Hello, Thanks for the call.
The the shift towards.
Businesses with <unk>.
The loss ratio higher expense ratio is that effect.
Or should we expect.
Perspective as well.
I missed the very last part of your question, Paul I'm, sorry, it didn't come through yet.
In the general insurance business, Youre, seeing a mix change to higher.
Expense ratio lower loss ratio.
Right should we expect that mix change to continue prospectively.
Okay.
Okay got it thank you.
Well, it's a great question and.
Greg was just pointing to some things in our financial supplement and I might use.
Use that supplement to try to.
Paint a clear picture here and.
One of the things I would point out is that what's driving this is not just.
The new business, we're putting on into our portfolio that is is shorter tail business that tends to be high.
Yeah.
The commission ratio of business, but we also have.
The impact of Workers' comp. So if you look at workers compensation.
<unk> is one of the lowest commission ratio lines of coverage that we write and if you look at that line in the financial supplement and you just look at the net premiums earned you can see in 2018, we were over $1 billion.
Net premiums earned and then by the time, we get to 'twenty two.
We're at about $800 million so.
As were putting on to the portfolio.
Shorter tail business.
Very deliberate effort to.
Diversify our portfolio into other lines of coverage.
At the same time workers' compensation with low loss ratios was coming down as a matter of fact.
Workers' compensation back into 18 was about 31% of our portfolio.
And today that sits at 20% so.
You can see that the.
The effects of both of those things happening at the same time.
Or what has.
Driven.
A good portion of.
That expense ratio up while at the same time, you can look at our accident year combined ratios our loss ratios I should say on page four of the release and you can see since 2018 those loss ratios on an accident year basis.
Trended down from 72, 2%.
We ended.
The second quarter of 'twenty three at 66, 9%.
So.
That's a trade off that.
We're happy to make and then now to get to your part about going forward. So going forward, we mentioned that we continue to.
Place business into our portfolio from some of the new underwriting ventures that we've undertaken over Republican inland Marine old Republic, E&S over a public lawyer specialty insurance.
And those are lines that do have.
A bit higher.
Commission ratios now on the other hand as you noticed.
Workers compensation has started to grow again, and if you look at the numbers in the financial supplement.
You can see that that growth returning when you look at the net written premium for instance was 209.
And in the quarter compared to 192.
Eight.
The same quarter of 'twenty, two and we said that's growing at about 8% so.
At least we're growing in a lower commission ratio line again, so that will help mitigate this somewhat but at the same time, we are putting on to the books.
We're diverse lines of business that do carry lower loss ratios, but a bit higher commission ratios. So hopefully that answers your question.
No that was great lots of good details no doubt.
I wanted to move on to sort of the rate versus inflation conversation that we have with just about every company.
It sounds like your major businesses like commercial auto and workers comp.
You are raising rates.
What you see claims inflation is.
But you didn't I don't think you've commented on the rest of the businesses.
Overall do you think you're just sort of covering current levels of inflation or do you think you are still making progress towards expanding the underlying profit margins.
Right. So well this one is a bit tough.
Tougher because it really varies by line of coverage and I'll just comment on a few so.
Workers' compensation.
We're giving up a little bit of rate there, but the.
If you think about what drives the premium there it's payrolls.
And payrolls.
Our app.
Pretty substantially so we're getting more premium because of the higher payrolls, while at the same time medical inflation, which is the biggest component.
Of our Las payout is relatively stable.
Wage inflation, which is a smaller part of our workers' compensation payout is going to be generally commensurate with your payroll growth. So that's a one for one kind of a trade off there and you don't have the social kind of inflation that you have on in workers' comp that you see in auto or general liability. So just.
<unk>.
The payroll growth alone.
Is it should be accretive to profitability and loss ratios.
On workers comp and auto.
Again, we feel very good about our accident year loss ratio, we have multiple years of compounded rate increases built into our portfolio.
We're trying to stay even with what we're seeing.
On severity and frequency is stable.
So therefore, our loss ratios on auto should be pretty solid.
Some of the specialty coverages like aviation for instance, we've seen.
Dramatic rate increases in that line of business that will and are definitely driving greater profitability and lower loss ratios on that line.
On D&O, we mentioned earlier.
The market is soft.
I think I mentioned this on the last call that.
There is increased competition in the D&O marketplace.
And a lot of that is because the last several years have had robust rate increases.
And that has coupled with lower security class action lawsuits over last year or so in the latest report out indicates that we're kind of holding steady with a lower security class action frequency. So <unk>.
You know, we're giving up rate, but that rate, we're giving up is more in line with inflation, which was part of your question, but more.
Relative to Securities class action lawsuit frequency, which is considerably down so.
Hopefully that helps.
Four different diverse example, there and which underscores my opening.
Comment that you really have to look at the lines of coverage and what's going on in that particular line of coverage.
No absolutely great. Thank you I appreciate the help.
Thank you we appreciate your support.
The next question is from Matt <unk> with JMP. Your line is open.
Hey, good afternoon good afternoon.
Okay.
Got a few questions maybe stick with general insurance to start.
The past two to three quarters are definitely seeing that.
The higher level of favorable development and then some.
In the quarters before that you pointed to.
Workers' comp and commercial auto is the drivers can you give any color around are there particular accident years that the majority has been coming from or has it been kind of pretty well spread over time.
Frank is in a good position.
Position to give you a little more color around that.
Hey, Matt Yeah, I mean, it's really spread out the analysis. We look at go back 10 years in almost every every year has favorable development coming from.
Going from it on an all lines basis.
The I'd say about two thirds of the development is coming from workers comp with another third coming from commercial auto but it is really it's widespread.
Okay very helpful and then maybe sticking with numbers just yet.
I noticed the kind of interest and other cost line stepped up a few million dollars. This quarter or is there something one time in there or is that something more tangible.
Yeah.
I will continue with this one also there is a there is a one time event in there.
Little more than half of that increase that we would not expect to.
To happen again, but the rest of it is just slightly elevated theres nothing nothing alarming there at a relatively small number.
Okay, Alright, perfect and then maybe last question if I can on title.
It sounds like this quarter.
The kind of headwinds in commercial down 37% were pretty commensurate with what youre seeing in residential has has that been the case in prior quarters I can't recall. If you gave the numbers are not because we think about maybe Q1 Q4.
It is kind of the commercial headwinds caught up to kind of the residential market or have they been commensurate for the past few quarters all along.
Carolyn.
Happy to start I think I think there is some catch up here I think in our my recollection of our prior quarters was that commercial was still coming in strong.
And this quarter, we saw it catch up to use your words.
As my initial reaction, but Carolyn again here too you're closer to the action. So I'll turn it to you.
You're right Craig This is the first quarter that it really caught up to residential but.
One thing you have to remember with us is that because so much of our revenue comes from our agents. We also have that lag of agency reporting. So that's probably that's why you see a lot of it this quarter as well.
That makes sense.
Fantastic. Thank you very much for the color I really appreciate it.
Thank you.
Thank you.
Again as a reminder, please press star one if you'd like to ask the question. The next question is from John <unk> with Dowling <unk> partners. Your line is open.
Hi, good afternoon.
Most of my questions were answered I just have maybe capital question.
And particularly in the run off so if I look at the contingency reserve the stack contingency reserve as of Q1. It was roughly a 110 million give or take.
Upstream $35 million of capital out of that add to the I'm. Assuming then a lot of that if not all was another.
Regulatory relief of the contingency reserve so that.
Ballpark is $75 million or so left.
How should I think about or how should we think about that coming down from this point forward.
I mean is 20 25 million a quarter over the next year or so.
The run rate, we should assume.
Hey, John This is Frank for this year.
I think thats a good estimate about 25, a quarter is the plan and it is subject to regulatory approval. So youre spot on we cannot just do what we have to get approval.
And we feel comfortable with that for the rest of the year.
So then essentially that would take the total to $110 million for the year sorry.
Yeah.
Essentially you would exhaust the contingency reserve and science.
And then the book of business would just run off over.
Whatever the period is another five to seven or so years.
The remaining equity.
I think that's right.
Hadn't focused on.
Exactly that contingency reserve is coming on out dollar for dollar or dividend. So I just wanted to follow up on that but.
But that the timeline youre getting your it feels about right to me.
Yes.
I agree.
I agree with Frank.
<unk>.
The amount.
The amount of dividend that we would expect next year I would say is less will be less than this year, but on the other hand, I wouldn't say it would be zero.
You gave him the trend.
You can kind of follow the trend.
The dividends that we upstream to the parent company over the last year or two.
Get a feel on how that has tracked.
So and maybe more broadly done.
That all makes sense to me.
Have you been able to release some of the excess capital there.
Basically sort of Frontload some of the relief and dividend it up.
How should we think more broadly about capital management going forward.
Returned quite a bit mortgages help the title results being a capital light business.
Have you been able to move capital up and out there.
The market is sort of shifting the growth is more P&C side, maybe heavier lines of business.
From a capital perspective.
You take all that together how are you thinking about your capital return over the next 24 25, maybe beyond.
Well.
Capital Management, and then more specifically return of capital to shareholders is a matter that we review with the board every quarter.
And.
I think the biggest generator of any excess capital.
<unk> has been really the retained earnings coming from the General insurance group.
And.
If you look at that trend in those combined ratios in the amount of income that the general insurance group continues to contribute.
Then it would suggest that we will continue to build capital and need to continue to look at.
Every quarter how much.
The capital, we have and whether we have excess capital discuss that with the board and then.
Secondary discussion in which way do we return that capital to shareholders. If we're not putting it to work in and new businesses and we are I mentioned some of the new businesses that are starting to produce business as well as.
The newest in April and we're in discussions regarding another business or two to.
Get into so first order of business is putting that capital to work in a way that we can maximize return to shareholders through us.
Investing that capital in the business and then the second order of business that we still deem that we have the excess capital then.
Discuss that with the board and the best way to return it.
Great.
Sure.
I appreciate the answers.
Thank you.
Thank you. Thank you John I appreciate your participation.
The next question is from Ryan <unk> with Guggenheim. Your line is open.
Hello kind of echoing Greg's comments.
Hello, Congratulations on the 100 year anniversary and the ringing of the Bill next month.
And then similar to Johns questioning you have.
Three of the past four August you have declared a special dividend with the off year being declared in mid December .
I guess when you determine when you are evaluating your excess capital levels and from our end, we're trying to determine the likelihood of another special dividend.
Target certain thresholds when determining that amount that you will not.
Go under for example, any commentary would be helpful.
Sure so.
Well first thing I would just say is that the timing of those dividends I wouldnt read anything into that as I just mentioned in the earlier response, we review our capital levels.
With our board every quarter.
And.
There is there is not a particular quarter.
Thereby we focus on.
Making a decision about returning capital we ask ourselves that question every quarter. So that's the first thing I would say the second thing I would say is as we.
We point out in the release and have discussed over the last few years, we have.
Introduced share repurchases.
In addition.
As an additional tool in our capital management strategy. So over last couple of years, we've returned a considerable amount of capital through share repurchases.
And therefore any of that capital that we return through share repurchases. Obviously is not available to be returned by a special dividend. So we have.
Introduced.
That again as a tool in our in our capital management Toolbox and we'll continue to.
With the board discussed returning capital every quarter.
And we know that we have tools to do that if we if we deem we have excess capital those tools being flat.
Special still special dividend as well as.
Additional share repurchase authorization.
Okay.
I appreciate your input.
We have no further questions at this time I will turn it back to management for any closing remarks.
Okay well.
Thank you all very much for participating.
And.
We hope that you enjoy your summer and.
And we will look forward to talking to you all again next quarter end.
Cited to report our ongoing progress throughout the year. So thank you very much and have a good day.
This concludes today's conference call you may now disconnect. Thank you.
Okay.
[music].