Q3 2023 Old Republic International Corp Earnings Call
Good afternoon. My name is Audrey and I will be your conference operator today at this time I would like to welcome everyone to the old Republic International third quarter 2023 earnings Conference call Today's conference is being recorded.
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'd like to ask a question. During this time simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question Press Star one again.
At this time I would like to turn the conference over to Joe Calabrese with financial Relations Board. Please go ahead.
Thank you.
Good afternoon, everyone. Thank you for joining us for the Old Republic Conference call.
Third quarter 2020 results.
This morning, we distributed a copy of the press release and posted a separate financial supplement.
Which we assume you have seen and there are otherwise have access to during the call.
The documents are available at old Republic's website, which is W. W. W. <unk> got old Republic Dot com.
This call may involve forward looking statements.
The press release and financial supplement dated October 26 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.
At this time I would like to turn the call over to Craig. Please go ahead Sir.
Okay. Thank you Joe well good afternoon, everyone and welcome again to old Republic third quarter earnings call with me today is Frank <unk>, our CFO of <unk>, and Carolyn Monroe, our president and CEO of title insurance.
Well during the third quarter General insurance continued to produce strong underwriting results with which drove a.
28, 6% increase in pre tax operating income for the quarter and a 32, 3% increase year to date. The decline we saw in title insurance pre tax operating income continues.
It reflects what we're seeing from the effects.
Mortgage interest rates, however, our focus on specialization and diversification across tidal and TMT segment allowed us to produce $251 million of consolidated pre tax operating income in the third quarter compared to $257 million in the third quarter.
Of 22 alongside of our consolidated combined ratio of 91, 9% for the quarter.
And 92, 4% year to date.
So our conservative reserving practices continue to produce favorable reserve development and we saw that in all three segments led by strong favorable reserve development in.
General insurance.
Our balance sheet remain solid even as we continue to return capital to shareholders through both dividends and share repurchases and as we continue to invest in the long term, including our September announcement of yet another new underwriting venture old Republic accident and health.
So.
I'll now turn the discussion over to Frank and then Frank I'll turn things back to me to go into some details on general insurance, followed by Caroline who will discuss some details on title insurance.
And then we will open up as we always do for conversation in Q&A, So Frank I handed to you.
Thank you Craig and good afternoon, everyone. This morning, we reported net operating income of 200 million for the third quarter compared to $206 million last year on a per share basis comparable year over year results were <unk> 72.
Up from 68.
Net investment income increased over 26% for the quarter, driven primarily by higher yields on the fixed income and short term investment portfolios.
Our average reinvestment rate in corporate bonds. During the year was five 3%, while the comparable book yield on bonds disposal was just under two 8%.
The bond and short term investment portfolios improve.
283% of the total with the remaining 17% allocated to large cap dividend paying stocks.
We continue to evaluate this allocation in light of current interest rate environment.
The quality of the bond portfolio remains high with 99% in investment grade Securities with an average maturity of four three years and an overall book yield of nearly three 8% compared to three 1% at the end of the third quarter last year.
The valuation of our fixed income securities decreased by approximately $180 million during the quarter driven by higher interest rates, while the value of the stock portfolio declined nearly $106 million, but ended the period and an unrealized gain position of just under $1 1 billion.
Now moving to the other side of the balance sheet, our strong reserve position. Once again led to all three operating segments recognizing favorable loss reserve development for all periods presented.
The consolidated loss ratio benefited by four five percentage points for the quarter.
Appeared to three four points for the same period a year ago.
The mortgage insurance grew eight of $25 million dividend to the parent holding company in the quarter, bringing the year to date total to $85 million with plans to return another $25 million in the fourth quarter subject to regulatory approval.
We ended the quarter with book value per share of $21 37.
When adding back dividends book value increased just under 5% from the prior year and driven by our strong operating earnings partially offset by unrealized investment losses.
In the quarter, we paid $68 million in dividend and repurchased nearly $125 million worth of our shares.
For a total of just over $190 million returned to shareholders.
Since the end of the quarter, we repurchased another $52 million worth of shares.
This was about $90 million remaining in our current repurchase program.
I will turn the call back over to Craig for a discussion of general insurance.
Okay. Thanks, Frank.
In the third quarter General insurance net written premiums were up a healthy 12% and pretax operating income increased to $216 million up from $168 million in the third quarter of 2022.
Our combined ratio was 89% compared to <unk>.
<unk>, 90% in the third quarter of 2022.
So thanks, all the hard work of our associates, along with our underwriting excellence efforts, we continued to produce overall very profitable results.
The loss ratio for the quarter and general insurance was 60.
4%, which included six points of favorable reserve development.
The expense ratio was higher at 28, 6%, but that's in line with our coverage line of coverage mix trending towards lower loss ratio higher Commission ratio line over the last few years.
We had strong renewal retention ratio with a new business growth, including new business produced through our new underwriting ventures that helped drive that 12% increase.
Net premiums written.
And we're continuing to achieve rate increases across the portfolio with the exception of D&O.
In our financial lines and workers' compensation.
So turning specifically to our two largest lines of coverage first commercial auto net premiums written grew at a 19% clip while the loss ratio came in at 66, 3% compared to 64, 8%.
In the third quarter of 'twenty, two and in both of those periods, we had favorable loss development. Although there was somewhat less favorable development in the third quarter of this year compared to last year.
Severity trends holding around 10% with frequency trend relatively stable.
And our rate increases are commensurate with these trends, we're observing which implies that we continue to cover our loss cost trends.
Commercial auto.
Workers compensation net premiums written declined 6%, while the loss ratio came in at 33, 2% compared to 35, 8% in the third quarter of 'twenty to adhere to both of these periods.
Favorable reserve development.
Frequency for Workers' compensation continues to trend down.
While severity trend is relatively stable. So we think our rate levels remain adequate even with rate decreases in the low to mid single digits.
We overall expect solid growth and profitability in general insurance to continue through the rest of the year and then into 'twenty, four reflecting again, our specialty strategy and our excellence initiatives.
So I'll turn it now over to Carolyn to report on title insurance Carolyn.
Thank you Craig.
The third quarter, the title group reported premium and fee revenue of $684 million.
This represents an increase.
Movement of around $35 million from last quarter, but it was down 29% from third quarter of 2022, our agency premiums were down 31% indirect premium and fees were down 22% from last year's third quarter.
And our pre tax operating income of $37 million compared to $73 million in the third quarter of 2022.
We had a combined ratio of 96, 7%, which compared to 93 seven in the third quarter of 2022.
The challenging market continues our approach is cost management with a long term view focused on our strategic initiatives. This approach helped maintain an incremental improvement in our pre tax operating income this quarter as compared to second quarter 2023 results.
Since the end of 2022 interest rates have been the headline story in our market and as interest rates continued to rise housing affordability dropped to its lowest level in more than 30 years. This issue impacts the availability of existing homes for sale pushing buyers towards new homes low levels of.
Inventory will continue to affect the volume of transactions in our markets.
The commercial market remains an important focus for us our transform nationwide footprint has allowed us to grow market share in this segment, our commercial premiums in the third quarter, an increase from last quarter, but were down 32% over third quarter of 2022 commercial premiums represented.
22% of our earned premiums this quarter compared to 21% in the third quarter of 2022.
The cornerstone of our business as our independent agents.
88% of our 'twenty two 'twenty three premiums came from independent agents.
Over 60% of U S title insurance premiums are written by independent agents. So our strategies utilized bundling of technology solutions to optimize the business processes of our agents and internal productivity, resulting in better customer and employee engagement. We believe these strategies.
We will position us to take advantage of market opportunities in the future and with that I will turn it back to Craig.
Okay, Karen Thank you.
We remain pleased with our profitable growth and general insurance, which is helping to mitigate the lower revenue and lower profit levels and title insurance.
And we also remain pleased with our capital management efforts, including the $684 million, we've returned to shareholders through dividends and share repurchases in the first nine months of this year.
For the remainder of $23 <unk> to 'twenty four we're optimistic for continued profitable growth within general insurance as I commented on earlier, while we remain of the view that title insurance will continue to face.
Mortgage interest rate in real estate market headwinds through 'twenty four.
So that concludes our prepared remarks, and we'll now open up the discussion to Q&A in either I'll take your questions or at Frankfurt Carolyn to respond.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Our first question from Greg Peters at Raymond James.
Okay.
Good afternoon can you guys hear me.
Hi, Greg we can hear you just fine.
<unk>.
Well.
Congratulations on your quarter.
I had.
A couple of questions for you first of all.
A written premium standpoint, it seems like things have accelerated a little bit in the third quarter relative to the rest of the year, perhaps you can give us sort of a perspective on.
<unk>.
How the third quarter is really going to shape the cadence of what we should think about for next year specifically.
As we look at the strong topline results I guess general expectation as we can.
Expect growth to moderate into next year, but with pricing and exposure growth maybe.
An expectation of elevated growth going through 'twenty four it might be reasonable any comments on that.
Sure, Greg I'd be happy to comment so.
The strong.
Net written premium growth, we saw in commercial auto.
Is is somewhat of a reflection on the fact that it became very clear that.
At our pricing for.
For commercial auto was.
Appropriate and that we could be competitive in that space at the pricing levels that we were at as long as we kept up with severity trend. So.
Again, we saw not only the lift that we got from say, 10% rate increases on commercial auto on average, but also a lift from some new business there as well.
Yes.
I would.
We feel very good about.
We fit with commercial auto and we had favorable development again on that line of business. So we're very well positioned relative to the marketplace to continue to be competitive.
Commercial auto and into 24 of.
The other thing that I commented on.
Had.
Four out of six new.
Underwriting ventures that have been in.
Recent years more recent years and they are starting to produce.
Premium.
And I anticipate that we will.
Start to see some considerable lift from those new underwriting ventures, as we get into 'twenty, four and 'twenty five based on the pro forma is that we have now.
<unk>.
On the other end of the spectrum is workers' comp I think.
The rest of the year certainly.
It does not look like rate increases are going to be the case I think.
Rate decreases continue there again were.
On the surface, we don't like giving up rate and we do our very best to hold on to rate.
The the frequency trends continue to go down and consequently.
The marketplaces is reducing rates, so that creates a bit of drag on our net premiums written.
And.
I would hope that as we get into 'twenty for that at least it flattens out and we're not continuing to see.
Rate decreases there so a fairly optimistic about topline as as we move into <unk>.
24, our portfolio sits at a very good place profitability wise.
And it's not as though we're having to take.
Underwriting actions reducing.
Large portions or even small portions of our portfolio.
Yes.
We're in a very good place and we're able to grow the business.
Thanks, and thanks for that answer just as a follow up on the workers comp I mean, the loss ratios that you're reporting are clearly, reflecting the prior year or prior.
Prior year development.
Can you give us a sense of where you are pegging the current accident year loss pick with inside workers' comp.
Yes, well, we're holding it fairly consistent with.
Where we had it in the past.
As a matter of fact, it might even be about a point higher so the current accident year.
On work comp is around 64.
And that compares to around 63 last year, So we're being conservative there we're not reducing the.
The loss pick.
And.
We would expect that as we get into our planning sessions and set our fixed for.
For 'twenty four we will take a close look at what's happening with severity.
And.
Frequency again and take both of those things into consideration.
Along with anticipated rate changes in 24, when we when we look to reset that last bit.
Got it.
Thanks for that answer and then I'll, just pivot real quickly to the title business.
I know the expense ratios popped up as revenues come in.
Do you think we're sort of nearing the peak in terms of where the expense ratio is and I know you commented a little bit on it in your prepared remarks, but.
Is it expected that that's going to.
Gradually come down overtime.
Well I'll start off and then I'll I'll handle a hand, it over to Carolyn to give a little more detail.
We have been very consistent in what we've communicated the last several quarters.
This call and.
And that is that we were anticipating.
That 23 wood.
Have a combined ratio.
97% and.
We're still looking at that as as where we likely think the year will land and of course.
I'm speaking about combined ratio because thats, what we talk about talked about previously and of course 95 points of that combined ratio our expense ratio. So.
As Caroline mentioned in her comments were managing expenses and.
Is also very clear it's the top line has a heck of a lot to do with where we ended up on those ratios.
And.
So we're being.
Cost shifts, but carolyn.
Turn it to you on more specifically to respond to.
Greg's questions about where that expense ratio Mike Mike.
For the year and into next year.
Yes.
I think that where we are is.
Pretty consistent with where we think it will stay.
We're able to although slightly I mean, we did improve our combined ratio from the second quarter to the third quarter and I just think that's just because of some.
Some of the things that we've been doing throughout the year and I just expect it to stay right around this.
At least the rest of this year on into 2024.
Got it alright, well, thank you for the detail.
We appreciate your questions Greg Thank you.
And as a reminder, if you would like to ask a question. Please press star one well go next to Paul Newsome of Piper Sandler.
Mr. Newsome. Your line is open. Please go ahead.
Yes.
Good afternoon. Thanks for the call hopefully you can hear me.
Hi, Paul we can hear you just fine thank you.
I've had some bad luck last day.
I'm glad I got through.
So in a couple of titled questions One.
Wanted to ask.
Yeah.
The change in the <unk>.
Additionally, if were seeing anything that affects the mix between.
Title insurance sold through independent agents versus total through the direct channel.
And I was just curious if that hasnt.
The downturn has had any effect.
Sort of where customers go.
And does that change your positioning in the title business as you see those changes.
If at all.
Carolyn I'll I'll, just chime in real briefly and then turn it to you but.
Our observations on on direct and independent are.
Based of course on our portfolio.
Just to give you a sense our direct operations.
Mostly.
West Coast, California, So the real estate market there has.
More headwind.
Then we have seen in other places in the country so for us.
We have a view a direct business that is mostly California centric and then of course, the rest of our view is Nathan.
Nationwide, but Carolyn I'll turn it to you now.
Comment on what you think about any shifts in.
Direct and agency.
Where things are.
Sure.
We've tracked for years.
We're able to look at numbers of how much business is written by independent agents compared to directly owned operations.
And at least for the last 10 years. It has stayed in the 60 low 60% there just hasnt been much shift and I don't.
I don't see it changing because really.
Direct and agency as is.
Also like a lot of market driven on the east coast.
You see mainly independent agents.
And.
Some of the bigger states, it's about a 50 50 split so.
As long as we are able to keep our independent agents and business I don't I don't see that changing much.
That makes sense doesn't matter you've seen this shift within that.
The housing business.
Sales of new homes versus old homes.
Existing homes does that make any difference to you is it tied leisure and from a marketing perspective.
Go ahead Karen.
No I mean, it's just.
For an agent.
They market to someone different.
They are marketing to a builder rather than to a real estate client that type of thing and.
Just depends on what market, you're in whether an underwriter or and a direct operation hasnt relationship with the builder.
Our business is always relationship driven so it's really just about who has the relationship with the builder.
And who has the relationship with the realtor.
Great.
And then.
It sounds like your commentary.
A question about <unk>.
<unk> perhaps.
In the hot seat.
Sure.
A lot of the companies are today, and recently, a reporting issues with accident years or casually.
Reserves, if reactions from sort of 2016 to 2019, obviously you folks have had a great track record overall I'm just curious.
And some of your books Youre seeing some of that or is that some of the differentiation.
Amongst your book versus others that.
There is some of these problems.
In various casualty lines in those years.
Yes, and the years, where you say others are experiencing.
Problems with unfavorable development.
Or an accident years did you say, 16% to 19, Paul Yes, theres sort of all the pre pandemic years.
Seems to be where the sources some problems are for a lot of companies.
Yes, well I think we are very different certainly on commercial auto.
We have been.
Ben.
Very.
Successful at identifying trends early responding quickly and that started well before the pandemic 5678 years ago and.
Achieving the necessary rate to offset those trends we were seeing so while I know I've observed in the marketplace some of them.
The our competitors.
Our experiencing unfavorable development on commercial auto in those years that is not the case for us.
We're actually we have favorable development.
And on general liability, it's a little bit different.
We are seeing some unfavorable development on general liability.
And.
We're just like we did on auto we're responding to that and some.
The general liability.
Growth in premium Youre seeing is because of increases in rates on on general liability to respond to any social inflation severity trend that leaking from auto into general liability.
We can always appreciate the help thanks a lot.
We will take our next thank you Paul.
We'll take our next question from Evan Tindell, It at Marine capital.
Hi, Thanks for taking my call.
My question has to do with interest rates.
Competition.
And really all lines of insurance that involves both flows.
I would just generally.
So you can obviously get much higher yield on <unk>.
Insurance closing thank you.
As expected.
Various lines to become will become more competitive over the next few years in terms of pricing.
And Relatedly you.
I still think that 90% to 95 combined ratio a lot in the general insurance business is a good sort of range. Because you guys have been at 91 three years now or do you think you guys can start to push into the into the Asia. Thank you.
Sure be happy to.
Both of those and actually I think your questions.
<unk> are related.
And my <unk>.
37 year career, I've experienced hard and soft markets some of them.
That are have been driven by the issue of.
Underwriting float.
Investment income that was given.
Too much.
Attention relative to underwriting income so I understand your question I think where we sit in this cycle there is.
Far greater concern in the marketplace about social inflation about general inflation and the need to continue with with right.
And rate increases that are commensurate with those trends.
I don't believe and certainly we hear are not adjusting our target combined ratios, because we're achieving greater levels of investment income.
We think that is important to continue to target to.
And bind ratios between 90 and 95% depending on the line of business.
And we say between 90 and 95% because there is a little bit of difference if it's shorter tail or if youre receiving investment income on the longer tail business. So you can write it to a.
A few points higher combined ratio, but generally speaking about competitiveness in the marketplace.
I think there is far greater concerns that outweigh.
Oh.
The potential advantages of greater investment income of course.
You can always have new entrants entrants that come in and are disruptive in and under priced business, but generally speaking the P&C marketplace is remaining very disciplined and more concerned about achieving appropriate levels of rate relative to inflationary trends.
And so therefore like I say I think the second part of your question was related because.
That involves where do we set target combined ratios and I can tell you that our target combined ratios will not change as we go into planning for the 2024 year and will still be targeting combined ratios.
In the low nineties.
To 95.
Yes.
Will we be able to move into the into the 80% target something in the eighties I think that is.
Very difficult to do because again there is some pressure that will inevitably come in the marketplace from.
The greater investment income and typically when Theres greater investment income combined ratios go up so being able to drive that down in general insurance.
Much further is unlikely and then you also have to remember that a good portion of that is coming from favorable development and as we said on the earnings call last last couple of quarters.
The current level of favorable development that we're experiencing is not sustainable over the long term six points.
Is extremely robust.
Try to err on the side of having favorable development.
Ideally in the 2% range.
But right now that that overall calendar year combined ratio is reflective of some very strong favorable development that wont continue so.
We're going to continue to target.
Target.
<unk>.
Combined ratios that we're that we currently are targeting on on an accident year basis.
Okay, great. Thanks.
One other question you guys have an internal forecast for when you think.
Autonomous vehicles might start to impact.
The commercial auto insurance.
Insurance market or do you guys think it's so far offset if not.
It's not worth worrying about right now.
Well, we certainly keep an eye on it.
We don't have any type of internal forecast.
But.
We think it's.
A long ways off before the.
The public gets comfortable with autonomous driving and for us.
You really have to.
Think about long haul trucking and commercial vehicles.
And.
Because thats the majority of our commercial auto exposure, we don't have the personal lines commercial or commercial.
Exposure.
Ours ours is commercial not personal lines. So.
When it comes to commercial the idea of.
An 80000 pound truck running down a highway.
Without a driver is probably a long way off before public the public is going to accept that kind of.
Catastrophic potential and and then if you look at the other commercial auto business that we write across our companies.
It's commercial auto business, that's transporting workers in goods and.
And those vehicles will always have.
Drivers because they are the workers that were ensuring so for us.
Economists question is not perhaps as a relevant as relevant as it may be if you are a personal auto carrier because again I think it's a long way off.
For the type of exposures that we underwrite.
Okay. Thanks.
And that does conclude the question and answer session I would like to turn the conference back over to management for any closing remarks.
Okay well.
Again I appreciate everyone that has joined.
Joining the call and listening in and those that have asked questions. We are appreciative of that as well and appreciative of the support and we feel good about the third quarter and looking forward to reporting.
To you on our fourth quarter results and.
Until then.
Thank you very much and have a good day.
And that does conclude today's conference call. Thank you for your participation you may now disconnect.
Okay.
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Sure.
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Yes.
Okay.