Earnings Call Transcript - ORI Q4 2024

Operator, Operator

Hello and thank you for joining us. My name is Regina, and I will be your conference operator today. I would like to welcome everyone to the Old Republic International Fourth Quarter 2024 Earnings Conference Call. All lines have been muted to minimize background noise. After the speakers' remarks, there will be a question-and-answer session. I will now turn the conference over to Joe Calabrese with the Financial Relations Board. Please go ahead.

Joe Calabrese, Financial Relations Board

Thank you, Regina. Good afternoon, everyone. Thank you for joining us for the Old Republic Conference Call to discuss fourth quarter 2024 results. This morning, we distributed a copy of the press release and posted a separate financial supplement. Both of the documents are available on Old Republic's website at www.oldrepublic.com. Please be advised that this call may involve forward-looking statements as discussed in the press release and financial supplement dated January 23rd, 2025. Risks associated with these statements can be found in the company's latest SEC filings. Presenting on today's conference call will be Craig Smiddy, President and CEO; Frank Sodaro, Chief Financial Officer; and Carolyn Monroe, President and CEO of Old Republic National Title Insurance Group. Management will make some opening remarks and then we'll open the line for your questions. At this time, I'd like to turn the call over to Craig. Please go ahead, sir.

Craig Smiddy, President and CEO

Okay, thank you, Joe. Good afternoon and welcome again to Old Republic's fourth quarter and year-end 2024 earnings call. During the fourth quarter, we produced $285 million of consolidated pre-tax operating income, up from $237 million in 2023. Our consolidated combined ratio was 92.7%, and that compares to 93.3% in the fourth quarter of last year. As we noted in the release, we've renamed our general insurance segment to specialty insurance. We believe specialty more appropriately reflects our specialty P&C strategy with 17 underwriting subsidiaries focused on unique specialty niche markets. In specialty insurance, we grew net premiums earned by 13% in the fourth quarter and produced $228 million of pre-tax operating income, up from $195 million last year. The specialty insurance combined ratio was 91.8% in the quarter and that compares to 92% last year. Despite the continuation of higher mortgage interest rates and a tight real estate market, Title Insurance grew premiums and fees by 9% in the fourth quarter and produced $55 million of pre-tax operating income, up from $44 million last year. The title insurance combined ratio was 94.4% in the quarter and that compares to 95.5% last year. Our conservative reserving practices continue to produce both favorable prior year development in the Specialty Insurance and Title Insurance segments. Frank will talk a little bit more about that as we get to his remarks. Our balance sheet remains strong even as we return large amounts of capital to shareholders through both dividends and share repurchases. We declared a special dividend of $2 per share in the fourth quarter, which reduced our book value per share by that same $2 amount. While we continue to return excess capital to shareholders, we also continue to manage for the long run, investing in new specialty underwriting subsidiaries, technology, and talent. On that front, you may have seen earlier this month, we announced our latest new underwriting venture, Old Republic Cyber. I'll now turn the discussion over to Frank, and then Frank will turn things back to me to cover Specialty Insurance, followed by Carolyn, who will discuss Title Insurance, and then we'll open it up for our usual Q&A and conversation. So with that, Frank, I hand it over to you.

Frank Sodaro, Chief Financial Officer

Thank you, Craig, and good afternoon everyone. This morning we reported net operating income of $227 million for the quarter compared to $190 million last year. On a per share basis, comparable year-over-year results were $0.90 compared to $0.69 last year. Net investment income increased 10% and 16% in the quarter and year, respectively, driven by higher yields on the bond portfolio. Our average reinvestment rate on corporate bonds during the year was 4.8%, while the comparable book yield on corporate bonds disposed of was 3.5%. The total bond portfolio book yield now stands at 4.5% compared to 4% at the end of last year. During the quarter, the value of our total investment portfolio decreased by about $400 million. However, we ended the full year up over $100 million. Turning now to loss reserves, in the quarter, the consolidated loss ratios benefited from favorable development by 2.9 percentage points compared to 4.7 percentage points last year. As expected, the lower level in the quarter came primarily from Specialty Insurance and was consistent with the full year results. I'll now give some line of coverage details. Commercial auto and workers' comp continued to have strong favorable development, although lower than last year. Property also experienced strong favorable development and was higher than last year. The favorable development in these lines was partially offset by unfavorable development in general liability which was spread across multiple subsidiaries and accident years and in transactional risk, which is included within financial indemnity. This recent experience aided our decision to exit transactional risk which contributed less than $20 million of premium in 2024. We ended the quarter with a book value per share of $22.84, which inclusive of both the ordinary dividends and the $2 special dividend declared in the quarter equated to an increase of 11% for the year, resulting primarily from our strong operating earnings. In the quarter, we declared nearly $560 million of dividends and repurchased $174 million worth of our shares, bringing the total capital return this year to just over $1.7 billion. Since the end of the quarter, we repurchased another $25 million worth of shares, leaving us with about $205 million remaining in our current repurchase program. I'll now turn the call back over to Craig for discussion of Specialty Insurance.

Craig Smiddy, President and CEO

Okay, thanks, Frank. Specialty Insurance net written premiums were up 16% in the fourth quarter with strong renewal retention ratios, rate increases on most lines of coverage, new business growth, and an increasing premium production in our new specialty underwriting subsidiaries. Our E&S premiums grew by 21% in the quarter and 33% for the year. So we ended the year with $611 million of surplus lines direct written premium. As I mentioned in my opening remarks, in the fourth quarter, Specialty Insurance, pre-tax operating income was $228 million, while full year 2024 pre-tax operating income was $848 million, and the fourth quarter combined ratio was 91.8%, while the full year combined ratio was 92.2%. The full year combined ratio was 2 points higher than the full year 2023 combined ratio, which reflects the anticipated lower level of favorable prior year loss reserve development somewhat offset by an improvement in the 2024 current year loss ratio. Given these top-line and bottom-line results, we continue to grow at a strong clip and at a very profitable level within Specialty Insurance. Providing some more color and details, the loss ratio for the fourth quarter was 64.1%, including 2.4 percentage points of favorable prior year loss reserve development, and that compares to 65.1 last year that included 5.1 points of favorable development offset by an increase to the 2023 current year loss ratio in the fourth quarter of 2023. The expense ratio was 27.7 in the fourth quarter and that compares to 26.9 last year, while the full year expense ratio was 28.1, and that compares to 28.2 for the full year 2023. These results are right in line with expectations and those ratios are holding steady for us. Now turning to property catastrophic losses that impacted the industry as a result of the Los Angeles wildfires, first of course our thoughts remain with all of those in the disaster areas, which includes about 100 of our associates. You may recall we write less catastrophic exposed business than most of our peers. Currently we estimate our ultimate LA wildfire losses to be between $10 million and $15 million. To provide you with some details on commercial auto and workers' compensation, commercial auto net premiums written grew 15% in the fourth quarter while the loss ratio came in at 77.9% compared to 78.3% last year. The full year loss ratio was 72.4% compared to full year 2023 of 71.5%. Rate increases for commercial auto were approximately 10% and consistent with what we said in the last several quarters and really several years, those rate increases are commensurate with the loss trends that we're observing. Workers' compensation net premiums written were about 1% higher in the fourth quarter while the loss ratio came in at 35.5% compared to 42.6% last year. Obviously, a lot of favorable development both this year and last year. The full year loss ratio was 48% compared to the full year 2023 loss ratio of 41.4%. Loss frequency for work comp continues to decline, same story that we've seen for many years now. While the loss severity trend remains very stable. Given the higher wage trend within payroll, which again as a reminder is our rating base, that benefits us. And given the declining loss frequency trend, the stable loss severity trend, our rate decreases of about 4% allow us to remain at a competitive and adequate level with our current rates on workers' compensation. We expect solid growth and profitability in Specialty Insurance to continue into 2025, reflecting the success of our specialty strategy and our operational excellence initiatives. We also expect continued growth and contributions from our new specialty underwriting subsidiaries that we've talked about. I'll now turn the discussion over to Carolyn to report on Title Insurance.

Carolyn Monroe, President and CEO, Old Republic National Title Insurance Group

Thank you, Craig. The Title Insurance Group reported premium and fee revenue for the quarter of $702 million. This represents an increase of 9% from the fourth quarter of 2023. Premium and fees produced in our direct operations represented 23% of revenue versus 21% in the fourth quarter of 2023. Directly produced premium fees were up 24% from the fourth quarter of last year, while agency-produced premiums were up 5%. As shown in our recently enhanced financial supplement, new open title orders in our direct operations were up 26% during the fourth quarter of 2024 compared to the fourth quarter of last year. Nearly a third of the new residential orders during the quarter were refinanced transactions, continuing the trend that we saw last quarter. The fourth quarter included some large commercial transactions from our direct operations, pushing up our average revenue per commercial order. Total agency and direct commercial premiums increased moderately for the quarter and represented approximately 23% of net premiums earned in the fourth quarter of 2024, as compared to 21% in 2023. Our pre-tax operating income of $55 million was an increase of 26% over the fourth quarter of last year, bringing our full year pre-tax operating income to $144 million. We're pleased to report that our combined ratio for the quarter was 94.4% compared to 95.5% during the fourth quarter of 2023. This is an improvement of over 1 percentage point driven by a combination of increased revenue and expense management. 2023 and 2024 were challenging years for the real estate market. During the year, we watched the market pretty much bounce along the bottom and prepared for things to turn. Our 2024 revenues improved slightly over 2023, as buyers became accustomed to higher prices. Slightly improving rates coupled with strong homeowner equity pushed up refinance activity and newly built homes are starting to ease our inventory levels. We start 2025 mindful of where the market has been and encouraged by improvements in the broader economy and the overall direction of order counts of our direct operations. Our agency operations continue to assist agents with growing their market coverage. We are refocused in our technology efforts on integrated solutions that enable our agents to seamlessly connect to our customer portal. This will make it easier to do business with us regardless of which closing software is being used by our title agent. There will be more to come throughout 2025 on these technology solutions. Thank you, and with that, I'll give it back to Craig.

Craig Smiddy, President and CEO

Okay, Carolyn, thanks. So profitable growth continued in specialty insurance in 2024, and we remain very optimistic for Specialty Insurance in 2025 and beyond. In Title Insurance, we've remained profitable and our optimism is increasing as revenue has shown modest growth over the last few quarters. Overall, our strong 2024 operating performance drove solid earnings per share, solid operating return on equity, and solid book value growth, which enabled us to return a record amount of capital to our shareholders in 2024. So that concludes our prepared remarks. And we'll now open up the discussion to Q&A, where I'll answer your questions, or I'll ask Frank or Carolyn to help me out.

Operator, Operator

Our first question will come from Gregory Peters with Raymond James. Please go ahead.

Gregory Peters, Analyst

Well, good afternoon, everyone.

Craig Smiddy, President and CEO

Hi, Greg.

Gregory Peters, Analyst

For the first question, I appreciate your comments on the general insurance business. While reviewing the supplement, I was particularly impressed by the year-over-year growth reported in general liability, home and auto warranty, and the property business for the full year. Could you break down those three segments or subsegments and explain the drivers behind the growth?

Craig Smiddy, President and CEO

Sure, Greg. Right. So indeed, a good amount of those premiums are coming from our new underwriting subsidiaries. When it comes to property, for instance, you have Inland Marine, one of our new underwriting subsidiaries is producing meaningful premiums. And as we noted in the footnote there, property includes our Inland Marine coverages. Our E&S operation is also producing significant premiums at this point, contributing to both property and general liability growth as well. On the home and auto warranty, actually home warranty is down a bit, as you might expect because of the real estate market, and a lot of those home warranty products are provided in conjunction with the sale of a new home. But on the auto warranty side, we've entered into several new auto warranty agreements and the auto warranty is producing some fairly significant growth there.

Gregory Peters, Analyst

Thanks. Thanks for that color. Just related to the Specialty Insurance segment, the biggest line of business for you by far and away is the commercial auto business. You talked about rate increases there. Maybe you could spend a minute and give us perspective on what you see going on from a competitive landscape perspective.

Craig Smiddy, President and CEO

Sure. I’d like to reiterate what we've been saying for several quarters and years. Since issues began to arise in 2018 and 2019, related to severity and abuse of the legal system, we have been diligent in monitoring severity trends in real-time and adjusting our rates accordingly. Since then, we have consistently received double-digit rate increases that align with the trends we have observed. We have managed to maintain favorable development compared to the industry, which has experienced unfavorable trends. The fact that we addressed these issues early and closely monitor them, along with our rate changes correlating with severity trends, has positively impacted us. We are confident that by staying aligned with observed trends, we will continue to generate profitable results. The industry's response has varied significantly. Over the past year, many competitors have faced unfavorable development and have responded in different ways, with many raising their rates substantially, which has created opportunities for us, as we've remained stable over the last five or six years. Regarding severity, some competitors still attribute their unfavorable development to it. However, this is not new to us. We identified severity issues back in 2018 and 2019 and acted quickly, implementing necessary corrections with rate increases reaching the high-teens at times. We have since been obtaining rate increases in the 10% range to stay aligned with the severity trends we are witnessing. We are very comfortable with our current position while others are still trying to adapt and understand the situation.

Gregory Peters, Analyst

Makes sense. That's good color. I guess for the last question. Ordinarily Carolyn, I have one for Carolyn, but actually I'm going to change course and ask Frank a little bit about the investment portfolio. And I know with the yields having gone up in the last couple of years, I know there was a pivot a little bit away from the equity investment side, but it seems like that's kind of stabilized. So from a big picture perspective, just where are we with new money yields versus where the portfolio yield is? Have you done anything with duration? And what's your updated view on the balance between fixed income and equities?

Frank Sodaro, Chief Financial Officer

All right, Greg. I could dig into that a little bit. So I'll start with your last question. Where we're at now, which is about 84% in fixed and 16% in equities, we're pretty comfortable at that level, and we're poised to go either way up and down if we have to, depending on the opportunities that are out there, but we are comfortable with where we're at. As far as new money, for the year, we were reinvesting at about 4.8% on corporate bonds. The portfolio yield right now is at 4.5%, that fixed income portfolio. So there's some room to go up, but that's definitely slowing down. As far as duration and credit quality and all that, we have not made material changes in that area. So it is a pretty steady state, I would say, poised to move where opportunities are available.

Craig Smiddy, President and CEO

Yes, Greg, I would just add to that, that although we look at duration and we have some flexibility in our investment portfolio, we do try to match our liabilities so that the duration reflects our anticipated payment on those liabilities. We follow that principle, and that leaves us some flexibility. But as Frank said, generally our duration is consistent with what we believe we need to do relative to our anticipated liabilities.

Gregory Peters, Analyst

Makes sense. Thank you.

Operator, Operator

We'll take our next question from Paul Newsome with Piper Sandler. Please go ahead.

Paul Newsome, Analyst

Good afternoon.

Craig Smiddy, President and CEO

Hi, Paul.

Paul Newsome, Analyst

I wanted to ask some capital management questions. And maybe just sort of review and see if there's any changes in how you are thinking about your current capital position given special dividends and dividends in the buybacks that you've done so far. And maybe you could talk a little bit about the trade-off of capital usage, particularly looking at dividend versus stock repurchases. What's your thinking in that at the moment?

Craig Smiddy, President and CEO

Sure, Paul. I'm happy to talk about that. One of the nice things that we had to deal with, if you want to call it a problem, is that as much as we've been returning to shareholders over the last three or four years, we continue to refill the coffers, if you will, with very strong earnings and retained earnings. While we've tried to eliminate excess capital, we keep creating excess capital. We made a decision in the fourth quarter with the Board that we would issue the $2 special dividend as a way to return capital more quickly in a single shot, so to speak, and get us to a level that is more consistent with an appropriate capital level. At the same time, we retained our ability to continue to repurchase shares. As Frank noted, we have about $200 million still on that current share repurchase authorization. As we said at the beginning of our share repurchase programs, we are sensitive to price. When we look at repurchasing shares, we will assess our trading position relative to our peers and where we observe values. We accelerate or temper our share repurchases depending on where we might be trading, and we remain opportunistic in that regard. Those factors will all come into play next time we sit with our Board to review our capital position and the best, most efficient way to return capital to shareholders.

Paul Newsome, Analyst

Is there a particular model that dominates how you consider what is excessive capital or not excess capital at the moment?

Craig Smiddy, President and CEO

Yes. I wouldn't say there's a particular model. We look at many different dimensions and measures when we analyze capital. We look at liquidity, and if we believe we have substantial liquidity alongside strong capital, we check various leverage metrics. We review our RBC ratios and have conversations with our rating agencies. There is a lot of quantitative and qualitative analysis when assessing our capital position. Right now, even with the special dividend and share repurchases, all of our conversations suggest that we have sufficient capital and some cushion beyond that.

Paul Newsome, Analyst

Thank you. Appreciate the help as always.

Craig Smiddy, President and CEO

Thank you, Paul.

Operator, Operator

We have no further questions at this time. I'll hand the call back to management for any concluding remarks.

Craig Smiddy, President and CEO

Okay. Well, we here at Old Republic feel very good about the fourth quarter. We feel very good about 2024 and what we've been able to deliver to all of our stakeholders and our shareholders. We remain quite optimistic when we look out at 2025, given the various initiatives we have underway and where we sit today. Again, we wish you all well in 2025 and look forward to seeing you next quarter, and we'll continue to report on our progress. Thank you all very much and have a great day.

Operator, Operator

Everyone, that will conclude today's call. Thank you all for joining, and you may now disconnect.