Earnings Call Transcript - ORI Q1 2024

Operator, Operator

Good afternoon. My name is Audra, and I will be your conference operator today. I would like to welcome everyone to the Old Republic International First Quarter 2024 Earnings Conference Call. Today's conference is being recorded. 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. Good afternoon, everyone and thank you for joining us for the Old Republic conference call to discuss first quarter 2024 results. This morning, we distributed a copy of the press release and posted a separate financial supplement. Both of these 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 25, 2024. Risks associated with these statements can be found in the company's latest SEC filing. 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'd like to turn the call over to Craig Smiddy. Please go ahead, sir.

Craig Smiddy, President and CEO

Okay. Joe, thank you. Good afternoon again, everyone, and welcome to Old Republic's First Quarter 2024 Earnings Call. With me today is Frank Sodaro, our CFO of ORI, and Carolyn Monroe, our President and CEO of our Title Insurance business. Well, during the first quarter of 2024, we produced $231.5 million of consolidated pretax operating income. That's up from $222.9 million in 2023 despite the challenges that we'll talk about that we're seeing in Title insurance. Our consolidated combined ratio was 94.3%, a bit higher than the 92.7% last year. And primarily, that's because of the higher combined ratio we're seeing in Title Insurance. General Insurance's strong underwriting results continued into 2024, producing $220 million of pretax operating income, and that's a 14% increase year-over-year. The General Insurance combined ratio was 90.3% in the quarter. In Title Insurance, higher mortgage interest rates and a slow real estate market presented us with some challenges, and that led to much lower pretax operating income of $2 million and a 102.5% combined ratio in the quarter. Our conservative reserving practices continued to produce favorable prior-year reserve development in both General Insurance and Title Insurance, and we'll talk about that a little bit more. Our balance sheet remains strong while we returned capital to shareholders through both dividends and share repurchases. Focused on the long term, we are investing in our new General Insurance underwriting subsidiaries as well as in technology, and that goes for both General Insurance and Title Insurance. So with those introductory comments, I will now turn the discussion over to Frank Sodaro, and then Frank will turn things back to me to cover General Insurance, followed by Carolyn, who will discuss Title Insurance. And then as usual, we'll open up the conversation for Q&A. So with that, Frank, I turn the discussion over to you.

Frank Sodaro, CFO

Thank you, Craig, and good afternoon, everyone. This morning, we reported net operating income of $185 million compared to $179 million last year. On a per share basis, net operating income was $0.67 in the quarter up nearly 10% from last year. Net investment income increased another 19% in the quarter, and that was driven by higher yields. Our average reinvestment rate on corporate bonds was 5%, while the comparable book yield on corporate bonds disposed of was 3.4%. Total bond portfolio book yield stands at 4.1% compared to 4% at the end of last year. Our investment portfolio mix remained consistent with last quarter. With regard to the bond portfolio, the quality also remained very high with 99% in investment-grade securities, and the average maturity was consistent at 4.3 years. During the quarter, the valuation of our bond portfolio decreased by approximately $100 million, driven by higher interest rates, while the value of our stock portfolio increased by about $185 million. Much of the increased value was realized in the quarter so we ended in an unrealized gain position consistent with last year-end of just over $1.1 billion. From a loss reserve perspective, General Insurance and Title both recognized favorable development in the quarter, leading to a benefit of 2.3 percentage points to the consolidated loss ratio. This compares to favorable development of 4.5 points last year. We are still expecting to close on the sale of our run-off mortgage insurance operation during the second quarter. Activity from this operation is immaterial to our consolidated results and due to the pending sale, no longer has an impact on our bottom line. We ended the quarter with a book value per share of $23.83, which inclusive of dividends equated to an increase of 3.4%, and that resulted from our strong operating earnings and higher investment valuations. In the quarter, we paid $72 million in dividends and repurchased $183 million worth of our shares for a total of just over $264 million returned to shareholders. Now since the end of the quarter, we repurchased another $146 million worth of shares, leaving us with about $840 million remaining in our current repurchase program. I'll now turn the call back over to Craig for a discussion of General Insurance.

Craig Smiddy, President and CEO

Okay. Frank, thanks for that. General Insurance net written premiums were up 14% in the quarter with strong renewal retention ratios, rate increases on most lines of coverage, new business growth and premium production kicking in in our new underwriting subsidiaries. D&O and workers' compensation are the lines of coverage where we do continue to see rate decreases. And I'll talk a little bit more about that when I discuss workers' compensation. As mentioned in my opening remarks, General Insurance pretax operating income was $220 million, and the combined ratio was 90.3%. So we continue to grow at a very profitable level in General Insurance. The loss ratio for the quarter was $62.7 million, and that included 2.5 points of favorable reserve development. The expense ratio was steady at 27.6. Turning to our two largest lines of coverage, commercial auto net premiums written grew by more than 15% in the quarter, while the loss ratio came in at 71.9% compared to 73.7% last year, and we continue to experience favorable development from prior years in this line of coverage. Rate increases were in the 10% range, and that continues to be commensurate with the loss trend that we're observing. Workers' compensation net premiums written increased by 4.5% in the quarter, while the loss ratio came in at 47% compared to 52.5% last year. And here, too, we continue to experience favorable prior-year loss development. Frequency for workers' compensation continues the year's long trend downward, while the severity trend remains relatively stable. So, given the higher trend in payroll, which as a reminder, is our rating base, we think our rate levels remain adequate even with rate decreases of approximately 5% for workers' compensation. We expect solid growth and profitability in General Insurance to continue throughout 2024, reflecting the success of our specialty strategy, our excellence initiatives, and our new underwriting subsidiaries. So I'll now turn the discussion over to Carolyn to report on Title Insurance. Carolyn?

Carolyn Monroe, President and CEO of Title Insurance

Thank you, Craig. The Title Group reported premium and fee revenues for the quarter of $545 million. This represents a decrease of 6% from first quarter 2023. Directly produced premiums and fees were up 8% from first quarter 2023, while agency-produced premiums were down 10%. As a reminder, agency-produced business represents the bulk of our business and is generally reported on about a one quarter lag compared to direct business. Commercial premiums decreased 24% this quarter compared to the first quarter of 2023. Commercial premiums were 21% of our earned premiums this quarter compared to 25% in the first quarter of 2023. The nationwide expanded and transformed footprint of our commercial team, along with our commercial agency services group positions us well to win the market rebounds. While challenging market conditions and interest rate uncertainties persist as the second quarter begins, we believe the trends in our order counts, along with a modest uptick in our directly produced revenues are positive signals as we head into the seasonally more active market period. Our pretax operating income of $2 million compared to $17 million in first quarter 2023. Our combined ratio of 102.5% compared to 99.3% in the first quarter of 2023. And as a reminder, the first quarter of last year results were impacted by the recovery of a $17 million state sales tax assessment. Excluding this favorable impact, our expense ratio and pretax operating income for the quarter was roughly in line with the first quarter of 2023. We continue to diligently manage our expenses. However, our expense ratio remains elevated and reflects the nature of certain fixed costs decreasing at a slower pace than the drop in revenues. As we have been discussing on past calls, our leadership team is focused on executing our strategic plan and the driving need to stay on the leading edge of technology. Our strategic plan is built around our agents and our people. One of the cornerstones of the plan is a focus on innovation that enables the success of our agents. As we continue to emphasize, this includes streamlining the closing process through fully digital and hybrid closings executed on a single, secure collaborative platform and offering our agents a comprehensive approach to help address wire fraud and assist with payoff verification. We are also providing state-of-the-art cloud-based title production and transaction management solutions to modernize and streamline operations. We believe providing the best tools to our internal teams and agents will provide us with an advantage in this market when the market improves. One last item because we have received a few questions recently regarding proposals at the federal level that could change how Title Insurance is transacted. These include the use of attorney opinion letters in place of Title Insurance and changes to who pays for or even waivers for Title Insurance in certain transactions. We would characterize these developments as early stage and still subject to much debate and lobbying. But considering the recent press, we wanted to note that we are tracking these developments and at this time, do not anticipate any significant implications for our business. Thank you, and I'll now turn the call back to Craig.

Craig Smiddy, President and CEO

Thank you, Carolyn. So we enter 2024 with a continuation of profitable growth in General Insurance, mitigating the lower revenue and profit levels in Title Insurance. And for the rest of 2024, we remain optimistic for General Insurance, while we remain of the view that Title Insurance will continue to face mortgage, interest rate, and real estate marketplace challenges. So that concludes our prepared remarks, and we'll now open up the discussion and Q&A, and I'll either answer your questions or I'll ask Frank or Carolyn to respond.

Matthew Carletti, Analyst

I'll start by referencing your comments about the growth in the direct segment while the agency segment continues to decline, although there seems to be a lag. Are you observing a shift in the market that might lead to the agency segment stabilizing or potentially growing again, despite the persistent high mortgage rates? Or is there another factor causing these two segments to behave differently?

Craig Smiddy, President and CEO

Carolyn, if you could perhaps embellish a little bit on the comments you made earlier about what we're observing there in our order count as well as in our direct operations?

Carolyn Monroe, President and CEO of Title Insurance

Sure. We always consider our direct operations as an indicator of the trends impacting our agents since they operate in the same market. The agents report their premiums to us with a three-month delay. Given that our direct orders are beginning to increase and our revenue has also risen, we expect to see a corresponding increase in agency business in the second quarter, similar to what we observe in our direct operations. Does that clarify things?

Matthew Carletti, Analyst

And it does. A follow-up question would be regarding the 8% figure for Q1 in direct. Did that number increase throughout the quarter? Was there a specific month that contributed to the rise, or can you provide more details on the overall trend?

Carolyn Monroe, President and CEO of Title Insurance

Yes. Yes, it definitely would build throughout the quarter. January was pretty quiet month, and as every month progressed, and we're seeing sort of the same trend in April.

Matthew Carletti, Analyst

Okay. Wonderful. And then my other question is on General Insurance, just the favorable development in the results. You noted that it was a favorable comp, favorable commercial auto, offset by a little bit of adverse in general liability. Can you put numbers on those or at least orders of magnitude? And then just particularly on the GL, just the particular accident years or was pretty well spread out?

Frank Sodaro, CFO

Sure. I'll provide some context. Most of our development this quarter came from workers' compensation, which is widespread. Commercial auto accounted for about the fourth largest development. This came largely from the years that are coming out of our loss picks. The years that are developing most favorably are those. On the other hand, general liability had a comparable but slightly more favorable outcome than commercial auto. This can be divided into two segments. About half of it is coming from very old years, specifically from a few long-standing programs. The other half originates from accident years between 2015 and 2021. It's spread out over these years. I want to emphasize that this is a relatively small line for us, and it is present across various segments of our business. There were no significant adverse developments affecting any one of our businesses, but it's a bit scattered throughout. I hope this provides enough clarity.

Gregory Peters, Analyst

For the first question, I will focus on the top line growth in your General Insurance business. The results in commercial auto and workers' comp are quite clear. However, I noticed some good growth in property and general liability in smaller segments. I'm trying to understand, Craig, since you mentioned the new business initiatives, whether some of those initiatives are impacting these other segments. I'm curious about the growth we're witnessing in these areas.

Craig Smiddy, President and CEO

Sure, Greg. Well, your inclination is right. As a reminder, we have four relatively new underwriting subsidiaries: Old Republic Inland Marine, Old Republic E&S, Old Republic Lawyers Professional, and then lastly, Old Republic A&H. And you're right, we're starting to see premiums come through at a fairly decent clip with Inland marine business and E&S business. And as you point out, a lot of that business is in the property bucket on the supplement and the general liability bucket on the supplement. So it's safe to say that those new underwriting subsidiaries are contributing to what you're seeing there. And on the other hand, none of those four new underwriting subsidiaries are writing workers' compensation. So nothing there is attributable to those entities.

Charles Peters, Analyst

Just a point of clarification on that, and thanks for the answer, Craig. Is it your expectation that that growth of those businesses is going to be accelerating as we move through the year? Or is it just steady-state opportunistic or maybe it's a combination of both?

Craig Smiddy, President and CEO

I would say accelerating is the clear answer. We're in a ramp-up mode in all of those entities. And Inland Marine produced premium last year and produced a profit last year on that underwriting. They are still in a ramp-up mode, but perhaps the incline is a little less than it would be on E&S. E&S has a steeper incline, and they too produced premium last year, but there's a very decent E&S market out there. And our production efforts have been greatly enhanced even in the first quarter and as we move into the second quarter with new distribution partners. So that will continue to accelerate. And then as our Lawyers business and A&H business comes in line there, they were the last two, and they're in the very early stages. And therefore, their ramp-up will be fairly steep as we go out through the rest of 2024.

Charles Peters, Analyst

Okay. Fair enough. And just a clarification because Inland Marine is a pretty big bucket, lawyers can be a pretty big bucket, A&H. These are very specific targeted niches inside those categories, correct?

Craig Smiddy, President and CEO

They are indeed, Greg, and thank you for pointing that out. Yes, the Inland Marine that we are writing is very targeted with regard to class, geography, size of business, and very specialty focused on certain niches within that fairly large bucket of Inland Marine. And you mentioned Lawyers Professional, there too, that's in the marketplace is a fairly large bucket; but for us, it is a fairly tight bucket. It is relationships that we are developing with state bar associations, where they sponsor the business. And most of the business is very sticky for those associations and tends to be smaller accounts with a low number of lawyers within each of those insurance policies. So it's small lawyers through state bar associations on a state-by-state basis, so very targeted.

Charles Peters, Analyst

Excellent. I want to discuss the Title business. The revenue has declined again. I appreciate your comments about the lagging nature of that. You mentioned that there were some anomalies affecting the expense ratio. For this year, do you expect the expense ratio for the Title business, excluding this anomaly, to be in the same range as last year, or has your perspective on that changed?

Craig Smiddy, President and CEO

Yes, Carolyn, I believe with Greg's question, it's challenging to predict the trends in interest rates and the real estate market, particularly as we approach the end of the year. However, if we consider your question in the context of the business maintaining flat revenues compared to last year, I think that's the framework we should use to address it. I'll pass it over to you, Carolyn.

Carolyn Monroe, President and CEO of Title Insurance

Yes, that's right. We are aiming to reach the same combined ratio as last year. The outcome will depend on the revenues. We have managed our expenses effectively. Therefore, we need the revenues to begin to return, ideally to last year's levels. We tend to maintain a positive outlook, and based on the early trends we're observing, we truly believe we can achieve what we accomplished last year.

Paul Newsome, Analyst

Hello, Paul. Are you there?

Jon Paul Newsome, Analyst

I would like to discuss some context regarding the last quarter for the GL business. This quarter seems to show some negative reserve trends. If I remember correctly, last quarter the challenge was not with GL but with commercial auto, which has performed well this quarter. Is that an accurate reflection? Additionally, do you think that's a reasonable evaluation? Typically, we see quarterly fluctuations, unless they are minimal.

Craig Smiddy, President and CEO

Let me address that by referencing our comments from the previous quarter. We experienced favorable reserve development in commercial auto throughout last year. I believe you are referring to what I mentioned in the last call about the end-of-year results. We decided to revert our current accident year loss ratio for commercial auto to where it stood in 2022, as it did not decline. In fact, it was slightly better by a few percentage points. Initially, we thought it would be somewhat lower, but by the end of the year, we opted to maintain the level from the previous year. Our conservative nature led us to make this decision to ensure we have a buffer. We've had favorable development in commercial auto over the past several years due to this prudent approach. At the end of the accident year, we slightly adjusted our loss ratio to provide that cushion we aim for. Therefore, last year, we didn't encounter any unfavorable surprises from prior years, nor were there fluctuations between quarters. We simply adopted a more conservative stance for the end of the year in commercial auto while still achieving a loss ratio that was lower than the year before. Consequently, when we observed continued favorable developments in commercial auto this first quarter, it aligned with our expectations.

Jon Paul Newsome, Analyst

And on to the GL, I get it's not a big part of the business. One of the investors I spoke to is quite concerned maybe sort of a relatively fast-growing part of the business and growth has always been from our perspective. Is that really fair to say? Because they don't think of you as a GL company and I think you said it's sort of spread in a lot of different businesses. And is this a priority? Or is it just sort of happening organically because what's going to be in the business?

Craig Smiddy, President and CEO

I understand your question, Paul. What I want to convey is that the growth in GL is largely tied to my earlier comments to Greg regarding that growth. Most of it is coming from our E&S operation, which focuses on very small policies with low-hazard general liability exposure. Additionally, regarding the unfavorable development in GL, despite it being a small line for us, if you look at the supplement and assess the general liability loss ratio over the last five years, it has ranged between 78% and as low as 56%. The 74% we reported this quarter is essentially right in the middle of that range, so it’s not concerning for us. We anticipate some volatility in that line. The unfavorable development we experienced came from older business that differs significantly from what we are currently writing in the new Old Republic E&S, which does not resemble the older years of business we are moving away from.

Jon Paul Newsome, Analyst

Great. And maybe I can squeeze one Title question. The biggest sort of pushback I get on Title is considering that essentially Title Insurance is eliminated for refinancing. And any sense of like what that would do to your business? And I don't know if the majority of what you do is not refinancing or is refinancing just depends. Any thoughts on that?

Craig Smiddy, President and CEO

Yes. I'll begin, and then Carolyn can follow up. Carolyn mentioned three key points that have come up at the federal level, and as she pointed out, we do not anticipate any significant impact on our business. We pride ourselves on being transparent, and if we believed there would be an impact, we would inform you. Our team has examined these issues closely, collaborating with the American Land Title Association to understand their perspectives. Ultimately, while the discussions may affect who is responsible for certain costs—whether it falls on the borrower or the lender—we do not foresee a substantial impact on our operations. This is largely because lenders will continue to require Title Insurance to sell mortgages in the secondary market. Carolyn, please feel free to elaborate.

Carolyn Monroe, President and CEO of Title Insurance

Sure. No one wants to transform the GSEs into insurance companies, which is what would occur without Title Insurance. This applies to any lender as well. That's why we are monitoring this closely, and our trade association has been proactive in advocating the importance of Title Insurance. It serves a preventive purpose, as we handle all the necessary work to avoid claims. We believe that increased education on this topic will be beneficial, considering that affordability is a major concern, and Title Insurance is not the current barrier to affordable housing. The last thing we want is for lenders or the GSEs to become Title Insurance companies, and I really don't think that's going to happen. On the other hand, refinancers make up a small portion of Old Republic's business. We work primarily with attorney agents, so while we are aware of the situation, we are equipped to manage it if it arises.

Craig Smiddy, President and CEO

Okay. Well, we've started 2024, and we feel we have good momentum in General Insurance. And even though we're cautious about Title because we don't have any way to predict interest rates and real estate markets in the long term, we're hopefully optimistic that things will turn where you think there's pent-up demand. And as Carolyn pointed out, initial indications could be positive. So we thank you all for your interest and your support and look forward to talking to you again after our second quarter. Thank you very much.

Operator, Operator

That does conclude today's conference call, and thank you for your participation. You may now disconnect.