Earnings Call Transcript - ORI Q2 2025

Operator, Operator

Good afternoon, and welcome to Old Republic International's Second Quarter 2025 Earnings Conference Call. As a reminder, this conference call is being recorded. I would now like to turn the call over to Joe Calabrese at MWW. Thank you. Please go ahead.

Joe Calabrese, MWW

Thank you. Good afternoon, everyone, and thank you for joining us for the Old Republic conference call to discuss second quarter 2025 results. This morning, we distributed a copy of the press release and posted a separate financial supplement. Both of these 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 dated July 24, 2025. Assumptions, uncertainties and risks exist that may cause results to differ materially from those set forth in these forward-looking statements. For more information on these assumptions, uncertainties and risks, please refer to the forward-looking statements discussed in the press release and the company's other SEC filings and the risk factors discussed in the company's most recent Form 10-K and other recent SEC filings. We may also include references to net income, excluding net investment gains or net operating income, a non-GAAP financial measure in our remarks or in responses to questions. GAAP reconciliations are included in the press release. 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's 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 Richard Smiddy, President and CEO

All right. Joe, thank you very much, and good afternoon, everyone. Thank you for joining our call, and welcome again to our second quarter 2025 earnings discussion. Well, our story of strong growth and strong profitability continued through the second quarter of this year. During the second quarter, we produced $267.5 million of consolidated pretax operating income, up from $253.8 million in the second quarter of '24. Our consolidated combined ratio was 93.6 compared to 93.5 in the second quarter of last year. In the specialty insurance, we grew net premiums earned by 14.6% in the second quarter and produced $253.7 million of pretax operating income, which was up from $202.5 million in the second quarter last year. The specialty insurance combined ratio was 90.7 in the quarter, which compares to 92.4 in the second quarter of last year. In Title, despite the continuation of higher mortgage interest rates and a slow real estate market, the title insurance folks grew premiums and fees earned by 5.2% compared to the second quarter last year, and they produced $24.2 million of pretax operating income down from $46 million in the second quarter last year. And Title combined ratio was 99 in the quarter compared to 95.4 in the second quarter of last year. Of course, Carolyn will give us a little more insight into those figures. Our conservative reserving practices continue to produce favorable prior year loss reserve development in both Specialty Insurance and Title Insurance. Our balance sheet remains strong, and we continue to invest in our new specialty underwriting subsidiaries as well as in technology and talent. So with that as opening remarks, I'll now turn the discussion over to Frank. And Frank will then turn things back to me to cover Specialty Insurance, and then I'll turn things over to Carolyn to cover Title Insurance, and then we'll open it up to the Q&A part. So with that, I hand it to you, Frank.

Francis Joseph Sodaro, Chief Financial Officer

Thank you, Craig, and good afternoon, everyone. This morning, we reported net operating income of $209 million for the quarter compared to $202 million last year. On a per share basis, comparable year-over-year results were $0.83 compared to $0.76, a 9% increase. Net investment income increased 2.4% as a result of higher yields on the bond portfolio partially offset by a lower invested asset base from returning excess capital and included the $500 million paid as a special dividend during the first quarter of this year. Our average reinvestment rate on corporate bonds during the quarter was 5% compared to the average yield rolling off of about 4%. The total bond portfolio book yield now stands at 4.7% compared to 4.5% at the end of last year. Turning now to loss reserves. Both Specialty Insurance and Title Insurance recognized favorable development in the quarter leading to a benefit in the consolidated loss ratio of 2.1 percentage points compared to 2.2 points last year. Within Specialty Insurance, workers' compensation continued to have strong favorable development and accounted for the majority of the group's total favorable development. Commercial auto and property also had favorable development, while general liability had unfavorable development. However, the year-to-date impact was less than 0.005% on the Specialty Insurance loss ratio. We ended the quarter with book value per share of $25.14, which inclusive of the regular dividend equated to an increase of just over 12.6%, resulting primarily from our strong operating earnings and higher investment valuations. In the quarter, we paid $71 million in regular cash dividends. We did not repurchase any shares during the quarter. And our repurchases since the end of the quarter were not material, so that left us with just over $200 million remaining in our current repurchase program. I'll now turn the call back over to Craig for a discussion of Specialty Insurance.

Craig Richard Smiddy, President and CEO

All right. Thanks, Frank. So Specialty Insurance net written premiums were up 9% in the second quarter, and that came from strong renewal retention ratios, rate increases on most lines of coverage, solid new business writings, and an increasing level of premium production in our new specialty underwriting subsidiaries. We continue to expand our E&S presence with E&S direct written premiums up 12% so far this year. As mentioned in my opening remarks, in the second quarter, Specialty Insurance pretax operating income was $254 million, and the combined ratio was 90.7. The loss ratio for the second quarter was at 62.5, which included 2.9 percentage points of favorable prior year loss reserve development compared to 64.3 in the second quarter last year that included 2.5 points of favorable development. The expense ratio was in line with expectations, coming in at 28.2 in the second quarter compared to 28.1 in the second quarter last year. So given these top line and bottom line results, we continue on our journey of profitable growth within Specialty Insurance. Now to just dive into the details a little bit more on commercial auto and workers' compensation. Commercial auto, net premiums written grew 10% in the second quarter, while the loss ratio came in at 70.3 compared to 72.3 last year. Rate increases on commercial auto were approximately 14%, which will keep us ahead of the loss severity trend we're observing. Workers' compensation net premiums written were 2% lower in the second quarter, while the loss ratio came in at 48.5 compared to 50.7 last year. We saw rates stay relatively flat this quarter, while loss frequency trend continues to decline and loss severity trend remained stable. So here, given the higher wage trend within payroll, which is what we apply our rates to, and considering the declining loss frequency trend and stable loss severity trend, we think our rate levels for workers' compensation remain adequate. So going forward, we expect solid growth and profitability to continue in Specialty Insurance throughout the rest of this year, reflecting the success of our specialty strategy and our operational excellence initiatives. We also expect to continue to see growing contributions from our newer specialty underwriting subsidiaries. So that's a high-level summary for the Specialty Insurance Group, and I'll now turn the discussion over to Carolyn who will report on our Title Insurance Group. Carolyn?

Carolyn Jean Monroe, President and CEO, National Title Insurance Group

Thank you, Craig. Title Insurance reported premium and fee revenue for the quarter of $698 million. This represents an increase of 5% from the second quarter of last year. Although we are pleased with continued revenue improvement, we've seen very little change in the real estate and mortgage market conditions. Premium from our direct title operations were up 3% from the second quarter of 2024, our agency produced premiums were up 7% and made up 77% of our revenue during the quarter, up from 76% during the second quarter of last year. Commercial premiums increased this quarter and were 23% of our earned premiums compared to 21% in the second quarter of last year. Investment income was also up this quarter, nearly 12% compared to the second quarter of 2024. Our overall loss ratio increased to 2.9% this quarter compared to 2.3% in the second quarter of last year. Although prior policy years continued to develop favorably, the amount of favorable development in the second quarter of this year was less than the second quarter of 2024. Our pretax operating income this quarter was $24 million compared to $46 million in the second quarter of last year. Our expense ratio was 96.1% compared to 93.1% in the second quarter of 2024. Cost from the settlement of a legal matter was the primary driver of this increase. Our combined ratio increased to 99% this quarter compared to 95.4% in the second quarter of last year. During the quarter, we continued progressing with the advancement of digital transaction tools and solutions for our directs and our title agents through our strategic partnerships. We remain focused on the importance of providing our agents and employees with the innovative technological solutions required to maintain a competitive edge. These include our internal systems, such as our remittance, policy issuance and rate engines to work seamlessly with all the closing and production platforms. And I'll now turn it back to Craig.

Craig Richard Smiddy, President and CEO

Okay. Thanks, Carolyn. So profitable growth continues in Specialty Insurance. And in Title Insurance, we remain focused on profitability in a very challenging marketplace. As noted in the financial supplement, annualized operating return on beginning equity improved to an annualized rate of 14.6% compared to an annualized rate of 12.1% in the second quarter last year, which is reflective of our thoughtful management of capital. So that concludes our prepared remarks. And we'll now open up the discussion to Q&A where either I'll answer your questions or I'll ask Frank or Carolyn to help me out.

Operator, Operator

Our first question comes from Gregory Peters from Raymond James.

Charles Gregory Peters, Analyst

In your comments, Craig, you talked about retention across your Specialty Property Casualty business. Can you give us a little more detail about how retention is moving across different lines of business?

Craig Richard Smiddy, President and CEO

Sure, Greg. I'd be happy to provide that information. We analyze our renewal retention metrics by each line of business and across our 17 subsidiary companies. I can share that, irrespective of the specific line or subsidiary, we are seeing renewal retention rates exceeding 85% generally. We attribute this to our value proposition, which emphasizes service rather than price, along with our commitment to these market segments. We promote our specialized expertise in underwriting, customer service, risk control, and claims handling. In summary, we believe our renewal retention ratios are strong thanks to our value proposition and the long-term focus of our clients and distribution partners, avoiding those who primarily prioritize low prices. Thus, we see very solid renewal retention rates across all lines of business and subsidiaries.

Charles Gregory Peters, Analyst

Yes. The reason for the question is that there's been a lot of discussion in other calls about competitive pressures in certain regions. One notable trend in the first half of this year has been the rise in competition within the larger account segment. While this may be more relevant to your context, could you share some insights on how Old Republic Risk Management is performing, especially since it targets the larger corporate market?

Craig Richard Smiddy, President and CEO

Yes. Thanks for that question, Greg. And I agree with your comments. I think one of the things that does differentiate us even on property; we had a slight uptick in our overall property rate increase this quarter because the property we're writing is not the large account, catastrophic exposed types of properties. We're writing property that is often packaged along with the other lines of business. And yes, some of our property has catastrophic exposure and we buy catastrophic reinsurance to protect us on that. But we're not a big writer of property cat, where I think a lot of our peers have pretty decent sized portfolios. So we don't have that dynamic that others are experiencing. Overall, I think the competition that we're seeing elsewhere is nothing that I would say is a dramatic change from what we've seen earlier, again, back to our value proposition and the kind of clients that we're seeking. An example where perhaps we have seen competition and we've pulled back a little bit, as I've talked about the last few quarters, a public company D&O in our subsidiary that does write a fair amount of that business. We've been pulling back, and rate decreases on public D&O have looked like they're starting to flatten out; still a little negative, but we've been encouraging our underwriters there to maintain rate. If that means top line is down like it was last year on public D&O, that's perfectly fine. So we're not immune to the competition, but I think there are some differences in our business model as well as the lines of business that we're in. In risk management, just had a 40-year risk management client into our corporate headquarters here a couple of days ago and had a nice conversation with them. And on that business, as you know, Greg, it's all about service, and that's why that business is so sticky for us. We have 40-year relationships with many of the big clients. They retain a lot of their risk themselves. They're not looking to us for risk transfer. They're looking to us for service. They have large deductibles or they have captives that we see most of the premium back to. Again, it has to be a relationship, and we have very strong long-term relationships in our large account risk management business for sure, and we continue to add new clients based on a lot of discussion, as you know, from attending RIMs or other events among the risk managers of large companies. We have a top-tier reputation.

Charles Gregory Peters, Analyst

Thank you for the additional information. I have a question regarding the Title business. In the second quarter, there was an issue with Title Insurance rates in Texas, where a rate decrease is being implemented. I am curious about your views on this. Do you think it will extend to other states? How will it affect your operations? Additionally, how do you see the market responding to this change?

Craig Richard Smiddy, President and CEO

Carolyn, I'll start off. You and I had discussions about this. Every state is very different. Texas is unique in promulgating specific rates, and in other states, we file rates. Carolyn has been working closely with her team to take a very careful look at our rates to ensure we have adequate rates in every state. Our assessment thus far, Carolyn, you correct me if I'm wrong, but I think our assessment so far is that the promulgated rate in Texas is still an adequate rate, but I'll let you talk more about that, Carolyn?

Carolyn Jean Monroe, President and CEO, National Title Insurance Group

Yes, Greg, if I'm correct, the rate decrease is currently not in effect due to a challenge. The last information I have suggests that the challenge is still in the courts, and it seems they are seeking a more reasonable settlement than the original proposal. Therefore, that decrease has not been implemented yet. Generally, in states like Texas, New Mexico, and Florida, they evaluate historical data to determine if the rate is adequate. We also have significant input in this process, as do our state associations. I believe whatever we decide will adequately support the industry.

Operator, Operator

We'll go next to Paul Newsome from Piper Sandler.

Jon Paul Newsome, Analyst

I wanted to maybe revisit capital management. There's no stock repurchase in the last quarter. It sounds like to date, why not? And how do you think about your own capital position at the moment?

Craig Richard Smiddy, President and CEO

Sure, Paul. I'll be happy to talk about that. So as Frank mentioned in his opening comments, as a reminder, we had a $2 special dividend that we just paid in the first quarter, and that was on top of the large amount of share repurchases that we made last year and in the preceding few years. We closely look at both tools in our tool chest, special dividends as well as share repurchases. We're also very mindful of where the market price is relative to our book value when we make share repurchase decisions. The higher the market price to book, the less we're excited about share repurchases. And on the other hand, the lower the market price is to book, the more excited we get about share repurchases. To manage capital, we're cognizant of ROE, as I mentioned in my opening comments. We're very thoughtful about capital management, and while we think we carry probably more capital than some of our peers, we want to maintain a strong balance sheet and be prepared for the unforeseen, and we want to continue to invest in new opportunities. We're conservative in the amount of capital we carry, but we're also very cognizant of ROE, and we don't want to carry too much capital. That was primarily what led us to the decision to issue a special dividend in the first quarter because we were carrying far too much capital. So we'll use both tools, and we'll look at both options and take into consideration what has the best benefit to shareholders, and then we present that to our Board with a recommendation from management and proceed accordingly.

Jon Paul Newsome, Analyst

Second question, maybe a little more commentary on the investment outlook, obviously, a combination of cash flow and new money yields. Where do you think the longer-term trend here is for investment?

Craig Richard Smiddy, President and CEO

Well, I'd be happy to start it off. I think Frank might have addressed it in our opening comments. But if you compare where our new money rates are coming in on our fixed income portfolio, vis-a-vis our average yield on our portfolio, that's getting pretty tight. So I think that there can't be a big expectation that's going to improve dramatically. Incrementally, maybe there still might be a little room comparing those differences between new money and our existing yield, but no big dramatic. Frank, please feel free to correct me if you disagree or have anything to add.

Francis Joseph Sodaro, Chief Financial Officer

No. I would just say the biggest component now is, as we've returned so much capital, our base is so much lower. From a yield perspective, that's right. It's tightening up. I would expect there to be improvements all things being equal, but no longer would I expect that 10% to 15% higher than we had; somewhere around the mid-single digits is probably what I would say all things being equal.

Operator, Operator

The next question will come from Evan Tindell of Bireme Capital.

Evan Tindell, Analyst

My question is on the Specialty returning segment. I mean you guys have been posting combined ratios around 90, 91 consistently. You guide to 90 to 95 over the full cycle. I'm wondering, has anything fundamentally changed in terms of the mix of your business or how well you guys are executing that might allow you to tighten or lower that range in terms of guidance on the combined ratio for the full cycle? Or do you guys still expect that to go back up to 95 at some point?

Craig Richard Smiddy, President and CEO

Right. Well, let me first mention a comment that I made earlier about the composition of our portfolio and the fact that we're not writing large catastrophic property business per se, vis-a-vis our peers. We have some of that exposure, but when you write a large amount of catastrophic property, you can post some pretty decent combined ratios in good quarters and then some fairly awful combined ratios in quarters where there is a catastrophic event. I think our combined ratio, given our casualty-focused business, is going to be in that range of 90 to 95. We have written a little bit more property and short-tail business, as you can tell in the supplement. The growth rate in property has been a little stronger as we improve our footprint with our inland marine new specialty subsidiary; our new E&S specialty subsidiary. They're able to write property alongside other coverages, so we've grown it, but it's still not a huge area for us. Given our predominantly casualty-focused business and conservative loss reserving approaches, that 90 to 95 is still a good target and one that, if you were to parse out the property catastrophic portions of our competitors' combined ratio and strip out the other drivers of lower combined ratio lines of business, I think that's a pretty respectable target, and difficult to achieve a much lower target on the lines we write, particularly given the proportions of our lines of business.

Evan Tindell, Analyst

Okay. Great. One other question. Obviously, AI is the talk of the town in various industries. I'm curious how you guys are playing with or implementing AI at this point? Do you think it can make the underwriting process more efficient or help you guys cut costs or otherwise impact your business over the next 3 to 5 years?

Craig Richard Smiddy, President and CEO

Sure. I'd be happy to discuss that. We are very much involved as an executive team here and with our subsidiary companies at exploring all the AI tools that are available and the ones that we might want to consider building ourselves. We just announced that we hired an AI leader at the corporate holding company level that can help lead our AI efforts. It's hard to talk about AI without mentioning data analytics because you really need the data analytics to go hand-in-hand with the AI to put the AI to work for you. As I commented in my opening remarks, we're making investments in technology to retire our legacy IT debt; that's the first step. You've got to have data analytics and then, in turn, leverage what's available in AI, and you've got to have modern technology in place. We are investing in technology to retire our legacy IT debt. We're investing in data analytics here too. A couple of years ago, at the corporate level, we hired a data and analytics expert that works with our subsidiary companies on data analytics, and we've built out that team so that we have that data and analytics available. Steve Cross and his team can sit on top of that data perspective from AI. We think of it as an executive team in two ways: for the most part, AI will help you make better decisions or help you be more efficient. We have numerous AI projects we're exploring; several are helping us right now with better decision-making and efficiencies. We have numerous in the pipeline and we're building the data and analytics for that to sit on top of, and that data and analytics will sit on top of modern IT technology — the investment is ongoing.

Evan Tindell, Analyst

And actually, maybe one more if there's time. On the Title Insurance business, do you guys think you need to see mortgage rates fall before you start to see combined ratios getting back into the 96, 95 or below range? Or do you think you can improve margins kind of in the current housing environment?

Craig Richard Smiddy, President and CEO

I'll kick it off, Carolyn, and then let you add what you think. We are not satisfied with a combined ratio in Title above 95. We realize that in a tight market like we're in now, with high interest rates, a very slow real estate market, we're going to be at the top end of that range. Carolyn and I have had many discussions; we're working very hard to bring our combined ratio down, assuming the same environment that exists today. We should be performing at a 95 combined ratio. There are things we're doing to look at where we're spending money. An example of that is our decision to discontinue our focus on providing a closing platform because there are other partners and vendors that can provide very good closing platforms that our technology works well with. That's an example of us looking to ensure we're being as efficient as possible. Our hope for this year was that we would get below that 95 mark. Carolyn still has aspirations to bring that down. We had the litigation expense we talked about earlier that drove up our combined ratio a couple of points this quarter. Last year, we finished at 97. This year, it could be in that range, but our aspiration is to get it below 95. Carolyn, is there anything you would add to that?

Carolyn Jean Monroe, President and CEO, National Title Insurance Group

No, just that absent any kind of an increase in the market, we just continue to look inward to see what we could be doing at a more efficient level to help us save money. We never stop doing that. Given that we understand this market might be what we have for a while, we have to think about what we can do differently. So we're looking at that every day. We don't just depend on the market to get better; we depend on what we're doing as well.

Operator, Operator

And we will take a follow-up from Gregory Peters from Raymond James.

Charles Gregory Peters, Analyst

Real quick, if we go to the supplement on Page 2, I wanted to just give us what's going on inside the small line home and auto warranty. That seems to be growing quite nicely. And then the other question I have is just on the new business initiatives. Cyber, I think, is one of those initiatives, and I’m not hearing great things about the pricing conditions in that market, so maybe you could talk about those two areas.

Craig Richard Smiddy, President and CEO

Sure, Greg. I'd be happy to talk about both of those. So on home and auto warranty, the majority of the growth that you see there is really all the growth that you see there is auto warranty. We have entered into several new relationships with key partners, and we expect to continue to have the auto warranty business grow. The home warranty business is not growing; it's very dependent on the real estate cycle. Those warranties that we write are typically sold in conjunction with a property purchase, a new home purchase. The real estate market's interest rates have not helped our home warranty subsidiary growth, but that will change just like entitled; we know things will turn at some point. That's why we're diversified. Even in home and auto warranty; that's why, okay, let's focus on building some new relationships that can help us grow our auto warranty business. So that's what's going on there. Regarding cyber, one of our new subsidiaries is cyber indeed. I've met with that team, and one of the things I said to them is that given they're a start-up, the way we handle start-ups is there's no incentive to put premiums on the books. In the short term, we will just say, listen, that's going to be fixed for three years because we know it’s going to take time to grow. We don't want them to grow too fast. We don't want them to grow into a market that's too competitive. We want to give them time; we focus our definition of success on 10 years out. When we look back, we want to know how it looks, not just the first three years. Everything we hear from that team is that rates have come down over the last couple of years, but there is a consensus that rates are at least flattening out. I read this morning from others that there are indications of greater pricing discipline and greater underwriting discipline in the cyber arena. The discussion we've had with our cyber team is to focus on building out their team. We know they will be in an expense load for the next couple of years; we want them to take their time, build it right and wait for the market to turn for them to be certain there is price adequacy in the marketplace. The timing feels pretty good to us because if they wanted to write a lot of cyber today, they could; they’re building it out. We don't expect to write premiums until probably the beginning of next year. We will go slow, but we'll be ready. There's no incentive for them to put any premiums on the books until the timing is right, and in the meantime, they're just focused on building out that operation, and they have their sleeves rolled up and working day and night to get it built so that when the market is right, we'll be there for it.

Operator, Operator

At this time, there appear to be no further questions. I'd like to hand the call back to management for any additional or closing remarks.

Craig Richard Smiddy, President and CEO

Okay. We appreciate all the questions and engagement. Sometimes our August conference call is a little slower given people are on vacations and enjoying summer. So we wish everyone the best. Enjoy the rest of your summer. Again, appreciate your interest in Old Republic, and we'll be back next quarter to let you know how things are going. Thank you very much.

Operator, Operator

And everyone, that does conclude today's conference. We would like to thank you all for your participation today. You may now disconnect.