Earnings Call Transcript - ORI Q1 2023

Operator, Operator

Ladies and gentlemen, thank you for standing by. My name is Brent, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Old Republic International First Quarter 2023 Earnings Conference Call. It is now my pleasure to turn today's call over to Mr. Joe Calabrese with the Financial Relations Board. Sir, please go ahead.

Joe Calabrese, Financial Relations Board

Thank you. Good afternoon, everyone. And thank you for joining us for the Old Republic conference call to discuss first quarter 2023 results. This morning, we distributed a copy of the press release and posted a separate financial supplement, which we assume you have seen and/or 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 that this call may involve forward-looking statements as discussed in the press release and financial supplement dated April 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. At this time, I would like to turn the call over to Craig Smiddy. Please go ahead, sir.

Craig Smiddy, President and CEO

Okay. Thank you, Joe, and good afternoon, everyone. And welcome again to Old Republic's first quarter earnings call. With me today is Frank Sodaro, CFO of ORI; and Carolyn Monroe, President and CEO of the Title Insurance segment. Well, despite the headwinds in Title Insurance, we're off to a good start to '23 with consolidated pretax operating income of $223 million for the quarter. General Insurance produced significantly greater income, while Title Insurance produced considerably less income due to the effects of higher mortgage interest rates. Underwriting results, of course, are the cornerstone of how we create value. So we're pleased with our consolidated combined ratio of 92.7%. Consolidated net premiums and fees earned for the quarter were lower, with General Insurance increasing 6% and Title Insurance decreasing 42%. Our conservative reserving practices are again, clearly visible with the favorable reserve development reported in all three segments led by General Insurance. And our balance sheet remains strong even as we continued to return capital to shareholders during the quarter through both dividends and share repurchases. So I will now turn the discussion over to Frank and then Frank will turn things back to me to cover General Insurance, which will be followed by Carolyn who will discuss Title Insurance. And then we'll open things up for conversation and Q&A. So with that, Frank.

Frank Sodaro, CFO

Thank you, Craig, and good afternoon, everyone. This morning, we reported net operating income of $179 million for the quarter compared to $192 million last year. On a per share basis, comparable year-over-year results were $0.61 versus $0.63. Considering the headwinds experienced by the Title Group, our consolidated earnings were solid due to the strong operating results of the General Insurance Group. Shareholders' equity ended the quarter at over $6.3 billion, resulting in book value per share of $21.91. When adding back dividends, book value increased just over 5% from the prior year end driven by our operating earnings and higher investment portfolio valuations. Net investment income increased nearly 30% in the quarter, driven primarily by higher yields, which were most pronounced within the fixed income and short term investment portfolios. The overall investment portfolio was comprised of approximately 80% in highly rated bonds and short term investments with the remaining 20% allocated to large cap dividend-paying stocks. The average maturity on the bond portfolio is 4.3 years with a book yield of 3.4%, which compares favorably to the book yield of 2.5% at the end of the first quarter last year. Valuation of the fixed income portfolio increased by over $175 million during the quarter while the stock portfolio was relatively flat, ending the period in an unrealized gain position of nearly $1.3 billion. Now turning to reserve development, all three operating segments recognized favorable loss reserve development. In total, the consolidated loss ratio benefited by 4.5 percentage points for the quarter compared to 2.4 percentage points for the same period a year ago. The mortgage insurance loss costs continued to be favorable with lower newly reported defaults and higher cure rates on those loans already in default. The group paid a $25 million dividend to the parent holding company in the quarter and the plan is to return over $100 million this year, subject to regulatory approval. In the quarter, we paid $70 million in dividends and repurchased over $130 million worth of our shares for a total of just over $200 million returned to shareholders. Since the end of the quarter, we repurchased another $35 million worth of shares, completing our $450 million program. I'll now turn the call back over to Craig for a discussion of General Insurance.

Craig Smiddy, President and CEO

Okay. Thanks, Frank. In General Insurance, pretax operating income rose by 36% to $193 million for the quarter and the combined ratio was at 89.3% compared to 91.6% in Q1 of '22, reflecting our underwriting discipline and our underwriting excellence efforts. So we commend all of our associates for this continued focus on discipline and excellence. The loss ratio for the quarter was 61.4%, including 5.5 points of favorable reserve development and the expense ratio was 27.9%, consistent with a lower loss ratio and a higher commission ratio line of coverage mix relative to a few years ago. Strong renewal retention ratios and new business production helped drive a 5.5% increase in net premiums written, and we also saw rate increases across most of our book with the exception of D&O and workers' compensation. So turning to a few of these larger lines of coverage. Commercial auto, net premiums written grew at a 6% clip. The loss ratio was 73.7% compared to 70.2% in Q1 of '22, with favorable loss development in both of those periods. Severity continues in the high single-digit range and our rate increases are consistent with that trend, implying that we continue to cover loss trends. So with these rate increases, we think our rate levels for commercial auto will enable us to achieve our combined ratio targets. Turning to workers' compensation. Net premiums written came in 3% lower, affected by rate decreases in about the same range, lower loss ratio of 52.5% compared to 62.5% in Q1 of '22, and here, too, there was favorable reserve development in both of those periods. Frequency for workers' compensation continues to trend down approximately commensurate with the rate decrease levels that we're seeing. So even with some rate decrease, we think our rate levels here too will enable us to achieve our combined ratio targets. So for General Insurance, we expect solid growth and profitability to continue through '23 supported by our specialty growth strategy and our operational excellence initiatives. I'll now turn the discussion over to Carolyn to report on Title Insurance. Carolyn?

Carolyn Monroe, President and CEO of Title Insurance Segment

Thank you, Craig. The Title Group reported premium and fee revenue for the quarter of $583 million, down 42% from first quarter 2022. Agency premiums were down 42% and direct premiums were down 41%. Our pretax operating income of $17 million compared to $81 million in the first quarter of 2022 while a combined ratio of 99.3% compared to 92.9% last year. And as noted in the release, the pending recovery of a fourth quarter state sales tax assessment improved the quarter's expense ratio by 3 points. As we start adjusting to the normal seasonal real estate markets, of which the first quarter has traditionally been the slowest, the continual rapid rise in interest rates, coupled with tight inventory certainly contributed to the softer market. Based on our agency-focused business model, under current market conditions, we benefit from having a large portion of our overall expenses being variable in nature with our expense ratio highly correlated with our top line revenue. The fixed portion of our expense ratio is largely personnel related. We have and will continue to monitor all of our expenses and make the appropriate long-term decisions that allow us to effectively manage our business. We do this keeping in mind the cyclical nature of our industry and the appropriate balance needed in today's market, while still ensuring we are prepared for and not at a disadvantage in the future. This aligns with our core value of managing for the long run and will allow us to continue our historical delivery of value to our agents, our shareholders, and our employees. Turning to commercial premiums. Despite this being our second highest first quarter on record, they were down 24% over first quarter 2022 and represented 25% of first quarter premiums compared to 20% in first quarter 2022. As we started to experience a turn in the market last year, we realized that there would be increased pressure on our agents, the cornerstone of our strategic focus. We wanted to continue to provide industry-leading services that would enable them to focus on their core business and provide opportunities for efficiencies in their operations. To that end, we created our agency operations department. This department's principal goal is to drive agency focused business priorities, advanced innovative initiatives, and measure the effectiveness of the strategies deployed to enhance the company's connection in collaboration with its Title agents. Along with this, we continue our investment in technology, services, and products. We are excited about our newest production software, Horizon, being launched out of RamQuest, one of our Title tech companies. It is a web-based Title and escrow production platform that will serve the agency community in addition to our own direct operations. Managing for the long run means leading not only in the upcycles of the real estate market but the down as well. We're prepared to successfully do that with a strong experienced leadership team through retention and recruitment and a commitment to the continued long-term success of the Title Group. And I'll now turn it back to Craig.

Craig Smiddy, President and CEO

Okay. Thank you, Carolyn. Well, we're a diversified specialty insurance company and that diversification served us well this quarter with continued profitable growth and General Insurance helping to mitigate the lower profits in Title Insurance. And as Frank pointed out, while higher mortgage interest rates worked against us on the top and bottom line in Title Insurance, higher interest rates help produce significant growth in our investment income. We remain pleased with our recent and long-term track record of capital stewardship and book value growth, including more than $200 million returned to shareholders in the first quarter through dividends and share repurchases, as Frank mentioned, along with the 5% year-to-date growth in book value per share. For the remainder of '23, we're optimistic for continued profitable growth within General Insurance where we recently announced our newest underwriting subsidiary, Old Republic Lawyer Specialty Insurance, which follows last year's launch of Old Republic Excess and Surplus. Going into '23, our expectation for Title Insurance was for considerably less revenue and operating income. And we remain of the view that headwinds will continue as we proceed through 2023. As I mentioned on this call last quarter, 2023 is our 100-year anniversary, which we're celebrating under the banner of 100 years of excellence, honoring our unique culture that has driven our outstanding results. So that concludes our prepared remarks and we will now open up the discussion to Q&A where either I'll answer your question or I'll direct the question to Frank or Carolyn depending on who's best. Thank you.

Matt Carletti, Analyst

For my first question, I was hoping to just circle back to Carolyn's discussion on Title and kind of maybe start with the environment. We spoke a little, I think it was last quarter, about your expectations for the year, and correct me if I'm wrong. But I think you referenced some of the normal seasonality we can see where Q1 is typically a slow quarter and tend to see a little bit of recovery in Q2, but obviously, what we're going through has continued headwinds. I mean how should we think about kind of that progression? Have you seen anything in, say, the last few weeks in April that see any headwinds lightening up? Should we expect to see some seasonable sequential recovery in revenues or is it still pretty stiff headwinds?

Craig Smiddy, President and CEO

Carolyn, I think you’re best to answer that. We know a few of the industry reports that we follow seem to indicate some optimism for the remainder of the year relative to 2022. But Carolyn, I'll let you speak more specifically to what you're seeing.

Carolyn Monroe, President and CEO of Title Insurance Segment

I think when we reported last quarter, we had hoped that when we got into the second quarter, we'd see more improvement than we're seeing now. The challenges are just consumer confidence, just the uncertainty surrounding the mortgage rates. And in looking at the MBA and Fannie Mae forecast, they are forecasting as we get towards the end of the year and then on into 2024 some improvement. I just don't feel like we're going to see a lot of improvement in the second quarter like we had hoped just so much of it is just we've got tight inventory in a lot of markets. And people right now don't have a sense of why should they move, and that's just kind of what we're getting out in the field right now.

Matt Carletti, Analyst

And then maybe if I take that kind of one step further, if we assume that's the case. And you had $583 million of earned premium Q1. So I mean just pick some numbers here. But if the business with size such that maybe the remainder of the year is, call it, even $600 million to $700 million a quarter or something like that, some small improvement. I know you've talked some about some expense saving measures you've taken and rightsizing of the business. What sort of expense ratio do you think you can kind of run the business on or the business is set to run at, at that ballpark kind of volume size?

Carolyn Monroe, President and CEO of Title Insurance Segment

Well, we're kind of targeting a combined ratio for the rest of the year between 96% and 97% range.

Matt Carletti, Analyst

And shifting topics, one last question. Craig, I guess I'll turn it back to you and you can direct elsewhere if needed. I caught the commentary in the release about the kind of the share buyback authorization now being complete with the purchases made post quarter. Can you just update us on capital management thoughts? Would it be reasonable to assume the Board might re-up an authorization or is there something else, thinner excess capital levels, optimism on growth, other uses of capital that might make that not be the case?

Craig Smiddy, President and CEO

So every quarter, we review with our Board, our position on adequate liquidity along with our capital position. And when we are in a position where we believe we have excess capital and we don't have another opportunity to reinvest in the business then we will make a recommendation and the Board will take into consideration the alternatives for returning capital to shareholders. And when that is done, it is always done with consideration given to the possibility of special dividends and the possibility of a share buyback. So as we head into this next Board meeting, we are in a very strong capital position and a very sufficient liquidity position. And we will, as we do every quarter, have that discussion with them.

Greg Peters, Analyst

And I guess I'm a little bit relieved that we haven't heard the fire trucks run by on Michigan Avenue yet. But with that said, can we pivot to the General Insurance business. I guess two areas of questions would be the prior year reserve development and clearly, you've already talked a little bit about this, but this favorable trend that really began the back half of last year seems to be continuing at least through the first quarter, which is it seems like maybe you're taking some reserves out of or lowering some case reserve assumptions on some of the more recent year's reserves? And then secondly, aside from reserves, just when you look across the different business lines, which ones do you think are going to generate, say, the most growth over the next and be the most impactful I should also add over the next two years?

Craig Smiddy, President and CEO

We will start by addressing your question about reserves and then discuss our expectations for continued growth. Concerning our strong reserve position, we view it as a positive situation. We experienced favorable reserve development across most years. For workers' compensation, the beneficial developments came primarily from years earlier than the five-year period we typically focus on. In commercial auto, our reserve position remains very robust, with most of the positive development also stemming from prior years, though we did see some favorable development from more recent years as well. As we mentioned last quarter, while it’s great to have excess reserves, if they become too high, it can lead to complications. However, the majority of our favorable developments relate to older years, with commercial auto also benefiting slightly from recent data. Regarding growth, we have added two new companies in the past year, one of which specializes in E&S business rather than property catastrophe, focusing more on Main Street E&S with limited catastrophe risk. This will support growth in our general liability and property lines. Although we likely won't see premiums from the newest entity until later this year, it will enhance our professional lines in the financial indemnity area. Additionally, we anticipate a turnaround in the home and auto warranty sector as we move forward. Our communications have highlighted our aim of diversifying our coverage lines, a goal we believe we have showcased successfully over the past four to five years, although some of the newer entities have yet to contribute significantly. We do not plan to aggressively grow commercial auto and workers' compensation, where we currently hold substantial positions. Workers' compensation has been on a downward trend, and as long as frequency remains low, we do not foresee growth. In contrast, commercial auto is growing based on the rates we are receiving, but we are not strategically seeking to expand that line of business.

Greg Peters, Analyst

I guess my second question, I'll pivot to the Title business. I certainly can appreciate that the business mix today is a lot different than it was, say, the last time in the great financial crisis with definitely more skewing to more commercial oriented exposures. But if I do look at the last time the economies is under stress, which would have been the GFC, I did note that the loss ratios, the loss ratio in title did start to inch up. And I'm just wondering if there's anything in the system that you see that might cause some gradual uplift in your assumptions around loss ratios in Title?

Craig Smiddy, President and CEO

Greg, I'll be happy to start the discussion and then again hand it off to Carolyn, who's closer to the action. But with regard to what we saw in the financial crisis, '07, '08, '09, as you know, mortgages were underwater and it was the case that consumers' attorneys were looking for every possible outlet, which included some pressure on Title Insurance. This time around we don't believe that the mortgages in the marketplace are underwater to the degree that they were during that period. And I think that's somewhat evidenced as what we're seeing on our mortgage runoff business that Frank commented on. We're not seeing anything there that is concerning; in fact, it's still very favorable. So even though that is the case, we're not relying on that. And our CFO at Title, Chris Leeser, along with Carolyn, Frank Sodaro, and myself have specifically focused in on your question to make sure, are we seeing anything in the way of losses that would seem to indicate that things might be warming up a bit because of what we're seeing in the housing market, in particular. And we have not yet seen that. So Carolyn, I'll turn it to you to add any color, commentary, or more specifics.

Carolyn Monroe, President and CEO of Title Insurance Segment

I believe the equity Craig mentioned is very significant. Additionally, it's important to highlight the differences in lending practices then and now. During the financial crisis, loans were often given to individuals who either didn't exist or were not creditworthy, and that situation has markedly changed. Since the financial crisis, we haven't encountered such issues. Therefore, I agree that we are unlikely to experience the same level of losses as we did in the past.

Greg Peters, Analyst

Well, related to that, there's a lot of discussion in the press about commercial and specifically office properties, and whether that segment of the market is facing a recession. Could you address that in relation to title? Then, please provide an overview of how your investment portfolio is positioned concerning some of the potential stresses we might encounter in the marketplace, including exposure to banks or commercial real estate. That's my last question.

Craig Smiddy, President and CEO

I'll start by discussing the commercial title space, then I'll ask Carolyn to add her thoughts. After that, Frank will comment on the investment portfolio. What we've noticed is that while we recognize the pressures affecting commercial properties, there is a potential opportunity for us. If this pressure leads to transactions involving the turnover of commercial properties, it could be beneficial for us. Even though property owners may be in a tough situation and need to sell, any activity in the market is favorable for us. We cannot definitively say this is happening right now, but we remain hopeful that the pressures on commercial properties will lead to more transactions. Carolyn, I'll now turn it to you, and then Frank will provide his input.

Carolyn Monroe, President and CEO of Title Insurance Segment

Greg, we're noticing similar trends particularly with office properties. However, on a positive note, there is still activity in the hospitality and energy sectors. Currently, we are not experiencing significant pressure in other sectors, with most concerns being focused on the office sector. Although there has been a slight slowdown in industrial, many other areas within our local commercial market have remained more stable than we expected. Outside of the office sector, we haven't encountered as much negativity.

Frank Sodaro, CFO

And from an investment portfolio perspective, it's a very easy answer. We just have insignificant exposure to commercial real estate and to the regional banks that have been in the news. This is a clean portfolio. Just to remind you, it's over 98% investment-grade and high-quality stock. So there's not much of a story there in that regard.

Andrew Lambrecht, Analyst

I'm just wondering if there are any strategic areas you'd like to be in that you're not already in? And then sort of how you think about it from an M&A perspective versus doing it yourselves like you guys did with lawyer specialty?

Craig Smiddy, President and CEO

I appreciate the question. We are always considering the possibility of mergers and acquisitions. As I discussed earlier regarding our capital plans, our primary focus is to redeploy that capital back into the business first. If opportunities don’t arise, we will then consider returning capital to our shareholders in some way. We are very open to the right M&A opportunities. As I mentioned in my earlier comments, we define ourselves as specialists, focusing deeply on areas where we excel in underwriting, pricing, marketing, risk control, and claims. The first criterion for any M&A deal we pursue is that it must be in a specialty area. We are heavily involved in workers' compensation and commercial auto, but we’re less interested in acquisitions in those areas as we aim to diversify. We do encounter opportunities in more generalized businesses, and we try to evaluate whether there is a specialty aspect within those portfolios, which can sometimes be challenging to identify. Additionally, we might face competition from a specialty book managed by an MGA that would be a good fit, but we're also competing with other brokers and carriers who may offer terms we believe would be detrimental to our shareholders. Therefore, we avoid acquisitions that would significantly dilute shareholder value. We are open to finding the right specialty opportunities within our General Insurance operations. On the Title side, we’ve made several small agency acquisitions recently and are currently in discussions for more. We proceed cautiously here as well, remaining loyal to our independent Title agent network to prevent conflicts in the same geographical areas. We assess title agency acquisitions carefully to ensure they align with our agency distribution strategy. We have been successful with some small acquisitions and are eager to explore further opportunities. I want to emphasize again that our top priority is to reinvest capital back into the business, whether through investments like the E&S business we are currently pursuing, our recently announced lawyers' professional investment, or agency acquisitions, before considering returning capital.

Operator, Operator

There are no further questions at this time. I will now turn the call back over to management for closing remarks.

Craig Smiddy, President and CEO

Okay. Well, thank you very much. We appreciate all of you that are listening, either on the telephone or online, and we feel good about the start to the year. We'll see how things go as we progress. And again, we appreciate all of your support and we will hopefully see some of you as we continue to celebrate our 100 years of excellence here at Old Republic. Have a great rest of the afternoon, and thank you again.

Operator, Operator

Ladies and gentlemen, thank you for participating. This concludes today's conference call. You may now disconnect.