Earnings Call Transcript - ORI Q4 2021

Operator, Operator

Good afternoon. My name is David, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Old Republic International Fourth Quarter 2021 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. Thank you. Joe Calabrese with the Financial Relations Board, you may now begin your conference.

Joe Calabrese, Financial Relations Board

Thank you. Good afternoon, everyone, and thank you for joining us for the Old Republic conference call to discuss fourth quarter 2021 results. This morning, we distributed a copy of the press release and posted a separate statistical supplement, which we assume you have seen and otherwise have access to during the call. Both of the documents are available at Old Republic's website, which is www.oldrepublic.com. Please be advised this call may involve forward-looking statements as discussed in the press release and statistical supplements dated January 27, 2022. 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 Smiddy. Please go ahead, sir.

Craig Smiddy, President and CEO

Thank you, Joe. Good afternoon and best wishes to everyone in this new year. Welcome again to Old Republic's fourth quarter earnings call. With me today are Frank Sodaro, CFO; and Carolyn Monroe, President of our Title Insurance business. Well, we're very pleased to report that ORI produced another terrific quarter, as well as a third consecutive record setting year. Both our major segments, General Insurance and Title Insurance posted outstanding results. Net premiums and fees earned increased to $2 billion for the quarter and $8 billion for the year. That's up 19% over the prior year. At the same time, pre-tax operating income increased to $335 million for the quarter and $1.2 billion for the year, eclipsing the $1 billion mark for the first time and up over 40% over the prior year. The consolidated combined ratio improved to 88% for the quarter and 89.9% for the year, a 3.4 point improvement over the prior year. General Insurance net premiums earned increased by 5% over the prior year, and Title net premiums and fees earned increased by 34% over the prior year. So we think it's clear that our diverse portfolio of specialty products in both General Insurance and Title Insurance continue to deliver strong growth and exceptional profitability as demonstrated by these results. So I'll now turn the discussion over to Frank, and then Frank will turn things back to me to cover General Insurance, followed by Carolyn, who will discuss our Title Insurance business, and then we'll open up the conversation to Q&A. So Frank?

Frank Sodaro, CFO

Thank you, Craig, and good afternoon, everyone. This morning, we reported fourth quarter net income, excluding investment gains and losses, of $268 million, a 20% year-over-year increase. For the full year, this figure was $935 million, up 40%. On a per share basis, comparable year-over-year numbers were $0.88 versus $0.75 for the quarter, and $3.08 versus $2.24 for the full year. Improved results in the year were driven by substantial growth in underwriting profitability in the General Insurance and Title Insurance segments. And you're going to hear more about that a little later. Shareholders' equity ended at nearly $6.9 billion, resulting in book value per share of $22.76. When adding back dividends, book value increased just over 21% from the prior year end, driven by our strong operating earnings and higher investment valuations. Net investment income was relatively flat for the quarter and year as an increase in the level of investments and lower yields on new investment purchases affected both periods. The investment portfolio was comprised of approximately 68% in highly rated bonds and short-term investments, with the remaining 32% allocated to large cap dividend-paying stocks. The average maturity on the bond portfolio is 4.4 years with both book and market yields of just over 2.4%. The fair value of the equity portfolio increased by $460 million during the quarter and $750 million for the year. I'll now turn to claim reserve development. All three operating segments recognized favorable claim reserve development for all periods presented. In total, the consolidated claim ratio benefited by 4.6 and 2.7 percentage points for the quarter and year, respectively compared to 2.3 and 1.2 percentage points for the same periods a year ago. Shifting to our runoff mortgage operations. Premiums and risk in force continued to decline in line with our expectations. Claims costs this year reflect a significant reduction in newly reported defaults and higher cure rates on loans already in default in addition to lower claims severity resulting from increasing home values. The group paid another $25 million dividend to the parent, bringing the total to $100 million for the year. Subject to regulatory approval, we expect the 2022 dividend at or above this level. Total GAAP shareholders' equity for the mortgage companies ended the year at $360 million. So, to wrap up my remarks, this quarter capped a year of outstanding financial performance. We paid an annual dividend for the 80th straight year and have increased our dividend in each of the last 40 years. We paid a special dividend of $1.50. And over the last five years, we've returned $2.5 billion to shareholders. Our balance sheet is in excellent shape. We are well-capitalized and our businesses are positioned for continued profitable growth. I'll now turn the call back over to Craig for a discussion of General Insurance.

Craig Smiddy, President and CEO

Okay. Frank, thank you. For General Insurance, net premiums earned increased by 8% for this quarter and 5% for the year. We continue to achieve strong rate increases on most lines of coverage other than workers' compensation, while renewal retention ratios and new business production remain very strong. Pretax operating income rose by 33% for the quarter and 34% for the year, primarily coming from improved claim ratios. The overall combined ratio improved over 4 points for the quarter to 88%, and over 4 points for the year to 91%. Claim ratios reported were inclusive of favorable prior period development of 6.6 points for the quarter and 3.8 points for the year. Turning to commercial auto, specifically. Net premiums earned grew by 5% for the quarter and 8% for the year. The commercial auto claim ratio improved to 61% for the quarter and 71% for the year. Claim frequency that we saw was not quite back to pre-pandemic levels, while claim severity continued to increase, although we observed it was at a slower pace. Rate increases in auto liability are continuing in the low double-digit range. So we think we're staying ahead of overall frequency and severity trends, taking into consideration the rates that we continue to achieve. Now turning to workers' compensation. Net premiums earned were lower by 3% for the quarter and 10% for the year. The workers' comp claim ratio was 61% for the quarter and 59% for the year. Here, claim frequency is still slightly below pre-pandemic levels, while claim severity is slightly up. Rate decreases in workers' comp were very low, but we think our rate levels remain adequate, and we will continue to maintain the underwriting discipline that we have so far. Our aggregated commercial auto, workers' comp, and general liability claim ratio came in at 61% for the quarter and 66% for the year. That's an improvement of 5 points over the prior year. In financial indemnity, property, and other coverages, as we list them in the financial supplement, we continue to obtain strong rate increases and produce favorable claim ratios contributing to our improved overall claim ratio in General Insurance. These lines of coverage grew by 15% in 2021. Noteworthy, these lines are up over 40% since 2018, which reflects our efforts to diversify our lines of coverage and enhance our underwriting margins. So the underwriting excellence initiative that we talked about in prior quarters, which we began several years ago, is clearly paying off as we hone our focus on better segmentation, improved risk selection, pricing precision, and we think these efforts will continue to support adequate rate levels, high retention ratios, new business production, and ultimately, continued strong underwriting profitability. So that concludes my remarks for the General Insurance group, and I'll now turn the discussion over to Carolyn, who I know is anxious and eager to report on Title Insurance's outstanding quarter and year. Carolyn?

Carolyn Monroe, President of Title Insurance

Thank you, Craig. As reported this morning, the Title group posted an all-time high for quarterly underwriting revenue, while quarterly operating profits only trailed the record set of results reported in the second quarter of 2021. Total premium and fee revenue for the quarter of approximately $1.2 billion was up 15% from the prior year fourth quarter. Premium and fee revenue for the year surpassed the $4 billion mark for the first time ever, a 34% increase over full year 2020. Our pre-tax operating income of $137 million for the quarter compared to $132 million last year. Year-to-date, our pre-tax operating income of $515 million exceeds pre-tax operating income for the same period in 2020 by $171 million or approximately 50%. Full year 2021 results set an all-time record for the Title group. Commercial premiums were up 63% over fourth quarter 2020 and up 36% for full year 2021 over 2020. The quarterly and annual figures both represent all-time highs. Commercial premiums represented 18% of our total premiums in the fourth quarter and 15.6% for the full year 2021. While we have seen a decline in order counts over the second half of the year as a result of the slowdown in the refinance sector, purchase transactions, which generate a higher fee per file, remained healthy to close out the year. In our technology portfolio, Pavaso, the market leader in digital closings, will continue delivering improvements to help in the broader industry adoption. Recognizing the value of Pavaso's capabilities, we are integrating and leveraging those across our family of Title technology companies. This includes our secure portal ready to close within our settlement software RamQuest and EPN, our e-recording company. This will provide an end-to-end digital closing experience for the consumer. Last quarter, I introduced our new integration platform, Supermarket. With the goal to integrate with anything, it will service our agents with an interconnected platform of external partners and technologies that interact in exchange information throughout the entire business workflow. Supermarket is live with initial partners performing real-time requests with a road map of growth in place. Supermarket will, with a one-stop integration, provide access to a variety of technology services and products to our agent partners. While simultaneously delivering services to our agents, we are expanding on our internal use of technology. Building on the successful use of RPA, we are actively piloting machine learning with optical character recognition to automate and improve business processes. We began 2022 investing in our digital future, while continuing to make enhancements to our current environment. These investments will assist our agents and employees in the constantly evolving digital landscape. And I will now turn it back over to Craig.

Craig Smiddy, President and CEO

Okay. Carolyn, and congratulations on a terrific quarter and a terrific year. Well, again, we're very pleased with this third year of record-setting operating results. We think these results reflect the success of our specialty strategy in General Insurance and Title Insurance, enabling us to produce significant value for our shareholders. So, this concludes our prepared remarks and we'll now open up the discussion to Q&A where I will answer your questions or I'll ask Frank or Carolyn to respond.

Operator, Operator

We'll take our first question from Greg Peters with Raymond James.

Greg Peters, Analyst

Good afternoon, everyone. I guess for the General Insurance component, I'm going to focus on prior year development and the expense ratio. First, on prior year development, definitely a change if you look at the statistical supplement relative to the last several years. And I was wondering if you could give us more color on what's going, which accident years you're getting the favorable development from and which lines and with the outlook there?

Craig Smiddy, President and CEO

Hi Greg, it's Craig here. I think I'll ask Frank to address that and then I'll chime in if there's anything to add.

Frank Sodaro, CFO

Okay. So, the quarter in Europe have a very similar story. The favorable development is coming predominantly from 2010 through 2017. All those years are contributing to the favorable development. And the vast majority is coming through on workers' comp and commercial auto. So it's a similar story to last quarter and just a continuation of it.

Greg Peters, Analyst

Got it. And so just as a follow-up on that answer. I mean, one of the industry themes that everyone's been hearing about is social inflation as it relates to jury verdicts in severity, especially in commercial auto. Should I infer from this that maybe that you've finally achieved getting near rate adequacy in that line of business as it relates to your book?

Craig Smiddy, President and CEO

I believe that's a reasonable assumption, Greg. When we determine our loss ratio estimates for the year, we will maintain a cautious and conservative approach. However, all signs point to positive developments, especially in commercial auto liability. The ongoing double-digit rate increases we have experienced for the past seven to eight years are beginning to show the positive impact of our efforts. We are careful about releasing reserves from prior years and longer tail lines, and unlike many of our competitors, we typically wait five years on workers' compensation and three to four years on auto liability. This conservative strategy is proving effective, as we observe strong reserve levels from those previous years. It is important to note that some of those years are still pending resolution, and we consider the effects of social inflation and general inflation. As we review those years, we recognize that unsettled claims may still be affected. Therefore, we adopt a conservative perspective for those years, ensuring that our reserves are sufficient in our view.

Greg Peters, Analyst

Got it. Thank you for the color there. On the expense ratio, just looking at the full year, definitely running, what, 90 basis points higher than the previous year and certainly, about 160 basis points higher than your 10-year average, obviously, business mix can have an effect here, like if you were skewing more towards surety or something like that. But how should we think about the expense ratio going forward?

Craig Smiddy, President and CEO

Definitely, Greg, there are good reasons why that there is a change there, particularly in the fourth quarter. So let me have Frank try to fill in, and then I can pick back up if there's anything for me to add.

Frank Sodaro, CFO

Greg, you touched on some important points. I want to focus on the quarter because it clearly has an impact on the year as well, though it’s more pronounced in the quarter. We are experiencing a change in our mix. We’ve mentioned that workers' compensation is becoming a smaller proportion of our total, which tends to come with a lower commission rate and therefore lower expense levels. Meanwhile, the new coverages we are introducing have slightly higher expense ratios, but are anticipated to offer better underwriting margins. This creates a bit of a trade-off in the expense ratio. Additionally, during this quarter, we encountered a build-up of benefit plan adjustments and some miscellaneous charges that coincidentally all fell in the same period. We don’t expect these issues to happen again, so while they are more pronounced this quarter, they are also affecting the yearly figures.

Greg Peters, Analyst

Got it.

Craig Smiddy, President and CEO

And Greg, I'll conclude by stating that we have consistently communicated, as we did in this quarter's release, that our goal for the General Insurance group is to maintain an expense ratio of 25% or below. We acknowledge that we are currently above that, especially due to the factors mentioned by Frank. Moving forward, we do not plan to adjust that target. If the mix continues to shift toward the other lines I mentioned and that Frank discussed, mainly the financial indemnity lines, property lines, and other coverage lines, we will continue to deliberately grow those areas for diversification. Additionally, as Frank noted, the workers' compensation segment of our portfolio is shrinking, and it historically had a lower commission ratio, creating a significant impact. If these trends in the mix persist, we may reconsider that target. However, for now, it remains our long-term objective to achieve an expense ratio of 25% or less. As Frank pointed out, the fourth quarter should be viewed as an anomaly and not as an indicator of our performance in 2022.

Greg Peters, Analyst

Thank you. Carolyn, regarding the Title segment, I don’t want to overlook the excellent results from 2021, but we are always looking ahead. When I assess the year-over-year statistics for direct orders open and closed, I see a downward trend. This suggests that 2022 might show some decline compared to 2021, although an 89 combined ratio for the quarter or year is still commendable. I'm interested in your thoughts on the 2022 outlook in relation to 2021.

Carolyn Monroe, President of Title Insurance

Well, the drop in orders is mainly because of the mix, the drop in the refi business. And purchase orders are a higher fee profile for us. And we recognize that we're still in a very hot real estate market. And while refi orders are down, the resale market is still really strong. We feel good about the market right now. Commercial is still strong after a difficult 2020. But we also understand hot markets don't last forever and any one thing can change them. We're dependent on inventory, interest rates, and a strong economy. And I feel like we're positioned though that really no matter what happens, we'll be able to perform.

Greg Peters, Analyst

I wanted to share an observation regarding your financial supplement. For the runoff business, which is rooted in legacy, you provide considerable detail even though it only generates $32 million in annualized earned premium. Many of us would prefer to see more information on your General Insurance business instead of additional pages dedicated to a runoff operation that has diminished significantly. Just something to consider, which I'm sure you are already aware of. Thank you for your responses.

Craig Smiddy, President and CEO

Thank you, Greg. And we appreciate your comment. And as you might have noticed in our releases, in our annual review and other public information, we've tried to give less real estate to the runoff business, and we have discussed those financial supplements. And we'll continue to take a look at it. So, we note it and we'll keep our eye on it and we'll continue to deemphasize that runoff business as we go along and give it less and less real estate in near time.

Greg Peters, Analyst

Yes. Got it. Yes. right.

Operator, Operator

Thank you. Next, we'll go to Matt Carletti with JMP Securities.

Matt Carletti, Analyst

Hey thanks. Good afternoon.

Craig Smiddy, President and CEO

Hello Matt.

Matt Carletti, Analyst

Greg covered a lot of ground there, so I think I only have one last question. Specifically, I was hoping you could remind us of the mix of the title book for 2021, including residential refinancing, residential purchases, and commercial.

Carolyn Monroe, President of Title Insurance

So for 2021, for the full year, our purchase represented 72% of our revenue, refi was 28%. In the fourth quarter, it was closer to 75%-25%. And then commercial is, for the full year, it was about 15.6%.

Matt Carletti, Analyst

Got it. Great. And then, just an observation question, as you look at the past several weeks here, obviously, mortgage rates have started to rise. How should we think about that? I mean, obviously, you talked a little bit about, it has a negative impact on refi volumes. Have you seen like an open orders or anything, a positive impact on purchases? There's been a lot of talk about kind of shaking some people off of the bench that have been thinking about doing something and then realizing that now might be the time. Have you observed any of that, or is that more in theory at this point and what happens?

Carolyn Monroe, President of Title Insurance

Yes, we have noticed it. Once people returned from vacation and got back to work, we've really seen an uptick in the purchase business over the last couple of weeks.

Matt Carletti, Analyst

Great. Very helpful. Thank you for the color and congrats on a nice quarter and year.

Carolyn Monroe, President of Title Insurance

Thank you.

Craig Smiddy, President and CEO

Thank you, Matt.

Operator, Operator

And that does conclude today's question-and-answer session. I'll turn it back over to management for any additional or closing remarks.

Craig Smiddy, President and CEO

Okay. Well, as it seems to be the case, when we have a good quarter and a great year like this, there's not a lot of difficult or challenging questions for us. And right now, we, as I stated earlier, feel very good about where Old Republic International sits with our two key businesses, General Insurance and Title Insurance, and we look forward to another productive good year in 2022. I wish all of you the best, and thank you for your support and for listening to our conference call today. So thank you very much.

Operator, Operator

And this concludes today's conference call. You may now disconnect.