Old Republic International Q3 2023 Earnings Call Transcript

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Provided by Quartr
October 26, 2023

There are 8 speakers on the call.

Operator

Good afternoon. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Old Republic International Third Quarter 2023 Earnings Conference Call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise.

Operator

Call. After the speakers' remarks, there will be a question and answer session. Call. At this time, I would like to turn the conference over to Joe Calabrese with Financial Relations Board. Please go ahead.

Speaker 1

Quarter. Thank you. Good afternoon, everyone. Thank you for joining us for the Old Republic conference call

Speaker 2

to our

Speaker 1

Q3 2022 results. 3rd quarter. This morning, we distributed company to press release and posted a separate financial supplement, which we assume you have seen and or otherwise have access to during the call. All of the documents are available at Old Republic's website, which is www.oldrepublic .com. Be advised that this call may involve forward looking statements as discussed in the press release and financial supplement dated October 26, 2023.

Speaker 1

Risks associated with these statements can be found in the company's latest SEC filings. This afternoon's conference call call will be led by Craig Smitty, President and CEO of Old Republic International Corporation and several other senior executive members as planned for this meeting. 3rd. At this time,

Speaker 3

I would like to turn

Speaker 1

the call over to Craig. Please go ahead, sir.

Speaker 3

Okay. Thank you, Joe. Quarter. Good afternoon, everyone, and welcome again to Old Republic's 3rd quarter earnings call. With me today is Frank Sodaro, our CFO of ORI and Carolyn Monroe, our President and CEO of Title Insurance.

Speaker 3

Well, during the Q3, general insurance continued to produce strong underwriting results, which drove a 3rd 2018.6 percent increase in pre tax operating income for the quarter and a 32.3% increase year to date. The decline we saw in title insurance pretax operating income continues to Reflects what we're seeing from the effects of mortgage interest rates. However, our focus on specialization and diversification quarter. Across title and P and C segments allowed us to produce $251,000,000 of consolidated pre tax operating income In the Q3 compared to $257,000,000 in the Q3 of 2022 alongside of consolidated Combined ratio of 91.9 percent for the quarter 92.4% year to date. So our conservative reserving practices continue to produce favorable reserve development and we saw that in All three segments led by strong favorable reserve development in general insurance.

Speaker 3

Our balance sheet remains solid even as we continue to return capital to shareholders through both dividends and Share repurchases and as we continue to invest in the long term, including our September announcement of Yet another new underwriting venture Old Republic Accident and Health. So I'll now turn the discussion over to Frank and then Frank will turn things back to me to go into some details on general insurance Followed by Carolyn, who will discuss some details on title insurance and then we'll open up as we always do for conversation and quarter and Q and A. So Frank, I hand it to you.

Speaker 4

Thank you, Craig, and good afternoon, everyone. This morning, we reported net operating income of $200,000,000 for the 3rd quarter compared to $206,000,000 last year. On a per share basis, comparable year over year results 3rd quarter. Net investment income increased over 26% for the quarter, Driven primarily by higher yields on the fixed income and short term investment portfolios. Our average reinvestment rate And corporate bonds during the year was 5.3%, while the comparable book yield on bonds disposed of was just under 3rd quarter.

Speaker 4

The bond and short term investment portfolios increased to 83% of the total with the remaining 17% allocated to large cap dividend paying stocks. We continue to evaluate this allocation in light of current interest rate environment. The quality of the bond portfolio remains high With 99% in investment grade securities with an average maturity of 4.3 years and an overall book yield 3rd quarter of nearly 3.8% compared to 3.1% at the end of the Q3 last year. Evaluation of our fixed income securities decreased by approximately $180,000,000 during the quarter, Driven by higher interest rates, while the value of the stock portfolio declined nearly 106,000,000 But ended the period in an unrealized gain position of just under $1,100,000,000 Now moving to the other side of the balance sheet, 3rd quarter. Our strong reserve position once again led to all 3 operating segments recognizing favorable loss reserve development for all periods presented.

Speaker 4

3rd quarter. Consolidated loss ratio benefited by 4.5 percentage points for the quarter compared to 3.4 quarter. The Mortgage Insurance Group paid a $25,000,000 dividend to the parent holding company in the quarter, Bringing the year to date total to $85,000,000 with plans to return another $25,000,000 in the 4th quarter subject to regulatory approval. We ended the quarter with book value per share of $21.37 When adding back dividends, book value increased quarter just under 5% from the prior year end, driven by our strong operating earnings, partially offset by unrealized investment losses. In the quarter, we paid $68,000,000 in dividends and repurchased nearly $125,000,000 worth of our shares For a total of just over $190,000,000 returned to shareholders.

Speaker 1

Since the

Speaker 4

end of the quarter, we repurchased another fifty 3rd quarter,000,000 worth of shares, leaving us with about 90,000,000 remaining in our current repurchase program.

Speaker 2

Quarter. I'll now turn the

Speaker 4

call back over to Craig for discussion of general insurance.

Speaker 3

Okay. Thanks, Frank. In the Q3, general insurance net written premiums were up a hefty 12% And pre tax operating income increased to $216,000,000 up from $168,000,000 in the Q3 of 2022. Our combined ratio was 89% compared to 3rd quarter. So, thanks all the hard work Our associates along with our underwriting excellence efforts, we continue to produce overall very profitable results.

Speaker 3

Quarter. The loss ratio for the quarter in general insurance was 60.4%, Which included 6 points of favorable reserve development and the expense ratio was higher at 28.6%, That's in line with our coverage line of coverage mix trending toward lower loss ratio, higher commission ratio lines over the last few years. We had strong renewal retention ratios and new business growth including New business produced through our new underwriting ventures that helped drive that 12% increase in net premiums written. And we're continuing to achieve rate increases across the portfolio with the exception of D and O In our financial lines and workers' compensation. So turning Specifically to our 2 largest lines of coverage.

Speaker 3

First, commercial auto net premiums written Group grew at a 19% clip, while the loss ratio came in at 66.3% compared to 64.8% in the Q3 of 2022. And in both of those periods, we had favorable loss development, quarter. Although there was somewhat less favorable development in the Q3 of this year 3rd compared to last year. Severity trends holding around 10% with frequency trend relatively stable And our rate increases are commensurate with these trends we're observing, which implies that we continue to cover our loss cost trends 3rd quarter. Workers' compensation net premiums written declined 6%, While the loss ratio came in at 33.2% compared to 35.8% in the Q3 of 2022 and here too both of these periods saw favorable reserve development.

Speaker 3

Frequency for workers' compensation continues to trend down, while severity trend is relatively stable. So we think our rate levels remain adequate even with rate decreases in the low to mid single digits. We overall expect solid growth and profitability in General Insurance to continue for the rest of the year and into 2024, we're quarter. So I'll turn it call. Now over to Carolyn to report on title insurance.

Speaker 3

Carolyn?

Speaker 5

Thank you, Craig. For the Q3, the title group reported premium and fee revenue of $684,000,000 quarter. This represents an improvement of around $35,000,000 from last quarter, but it was down 29% from Q3 of 2022. Our agency premiums were down 31% and direct premium and fees were down 22% from last year's Q3. And our pre tax operating income of $37,000,000 compared to $73,000,000 in the Q3 of 2022.

Speaker 5

We had a combined ratio of 96.7%, which compared to 93.7% in the Q3 of 2022. Quarter. As the challenging market continues, our approach is cost management with a long term view focused on our strategic initiatives. 3rd quarter. Since the end of 2022, interest rates have been the headline story in our market.

Speaker 5

Quarter. And as interest rates continue to rise, housing affordability dropped to its lowest level in more than 30 years. Quarter. This issue impacts the availability of existing homes for sale, pushing buyers towards new homes. Low levels of inventory will continue to affect 3rd quarter.

Speaker 5

The commercial market remains an important focus for us. Quarter. Our transformed nationwide footprint has allowed us to grow market share in this segment. Our commercial premiums in the 3rd quarter increased from last quarter, but were down 32% over Q3 of 2022. Commercial premiums represented 3rd quarter.

Speaker 5

22% of our earned premiums this quarter compared to 21% in the Q3 of 2022. The cornerstone of our business is our independent agents. 88% of our 2023 premiums came from independent agents. Over 60% of U. S.

Speaker 5

Title insurance premiums are written by independent agents. So our strategies utilize bundling of Technology Solutions to optimize the business processes of our agents and internal productivity, Resulting in better customer and employee engagement. We believe these strategies will position us to take advantage 3rd quarter. And with that, I will turn it back to Craig.

Speaker 3

Okay, Carolyn. Thank you. Well, we remain pleased with our profitable growth in general insurance, which is helping to Mitigate lower revenue and lower profit levels in title insurance. And we also remain pleased with our capital management efforts, 3rd quarter, including the $684,000,000 we've returned to shareholders through dividends and share repurchases in the first 9 months of this year. For the remainder of 'twenty three and into 'twenty four, we're optimistic for quarter.

Speaker 3

Continued profitable growth within general insurance as I commented on earlier. While we remain of the view that title insurance will continue to face 3rd. So that concludes Our prepared remarks and we'll now open up the discussion to Q and A and either I'll take your questions or ask Frank or Carolyn to respond.

Operator

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

Speaker 1

Good afternoon. Can you guys hear me?

Speaker 3

Hi, Greg. We can hear you just fine.

Speaker 6

Excellent. Well, congratulations on your quarter. Call. I guess I had a couple of questions for you. First of all, from a written premium standpoint, it seems like quarter.

Speaker 6

Things have accelerated a little bit in the Q3 relative to the rest of the year. Perhaps you can give us sort of a perspective on how the Q3 is really going to shape the cadence of what we should think about for next year. Specifically, 3rd. As we look at the strong top line results, I guess general expectation is we'd expect growth to moderate into next year, but With pricing and exposure growth maybe an expectation to elevated growth going through 2024 might be reasonable. Any comments on that?

Speaker 3

Quarter. Sure, Greg. I'd be happy to comment. So the strong Net written premium growth we saw in commercial auto is somewhat of a reflection on the fact that It became very clear that our pricing for commercial auto was appropriate and that we could be competitive in that space that the pricing levels That we were at as long as we kept up with severity trend. So Again, we saw not only the lift that we got from say 10% rate increases commercial auto on average, but also a lift from some new business there as well.

Speaker 3

And I would we feel very good about where we sit with commercial auto and we had Favorable development again on that line of business. So we're very well positioned relative to the marketplace to continue to Be competitive on commercial auto into 2024. The other thing that I commented on, we had

Speaker 2

4 out of 6

Speaker 3

new underwriting ventures have been in 3rd. More recent years and they are starting to produce premium And I anticipate that we will start to see some considerable lift from those new underwriting ventures as we 30/24/25 based on the pro formas that we have now. On the other end of the spectrum is workers' comp. I think the rest of the year certainly it does not look like Rate increases are going to be the case. I think rate decreases continue there.

Speaker 3

Again, we're While on the surface, we don't like giving up rate and we do our very best to hold on to rate, the frequency Trends continue to go down and consequently, the marketplace is reducing rates. So That creates a bit of drag on our net premiums written. And I would hope that as we get into 2024 That at least it flattens out and we're not continuing to see rate decreases there. So quarter. Fairly optimistic about top line as we move into 2024.

Speaker 3

Our portfolio It's at a very good place profitability wise and it's not as though we're having to take underwriting actions reducing Large portions or even small portions of our portfolio. We're in a very good place and We're able to grow the business.

Speaker 6

Thanks for that answer. Just as a follow-up on the workers' comp, I mean the loss ratios So you're reporting are clearly reflecting the prior year development. What can you give us a sense of where you're pegging the current

Speaker 3

Yes. Well, we're holding it Fairly consistent with where we had it in the past. As a matter of fact, it might even be about a point higher. So the current accident year On work comp is around 64 and that compares to around 63 quarter last year. So we're being conservative there.

Speaker 3

We're not reducing the loss pick And we would expect that as we get into our planning sessions and set our fix 3rd quarter. We'll take a close look at what's happening with severity and frequency Again and take both of those things into consideration along with anticipated rate changes in 2024 when we look

Speaker 6

quarter. Got it. Thanks for that answer. And then I just pivot real quickly to the title business. I know the expense ratio has popped up as revenues have come in.

Speaker 6

Do you think we're sort of quarter. Nearing the peak in terms of where the expense ratio is and I know you commented a little bit on like in your prepared remarks, but

Speaker 1

is it then 3rd.

Speaker 3

Well, I'll start off and then I'll quarter. I hand it over to Carolyn to give a little more details. So we have been Very consistent in what we've communicated the last several quarters on this call And that is that we were anticipating that 23 would Have a combined ratio around 97 and quarter. We're still looking at that as where we likely think the year will end. And of course, I'm speaking about combined ratio because that's what we talked about previously and of course 95 points of that 3rd.

Speaker 3

Combined ratio or expense ratio. So as Carolyn mentioned in her comments, we're managing expenses And as is also very clear, the top line has a heck of a lot to do with where we end up on those ratios. And so we're being cautious, but Carolyn, I'll turn it to you on More specifically to respond to Greg's questions about where that expense ratio 3rd Mike, for the year and into next year.

Speaker 5

Yes. I think that where we are is 3rd Pretty consistent with where we think it will stay. We were able to, although slightly, I mean, we did 3rd quarter. And I just think that's just because of Some of the things that we have been doing throughout the year. And I just expect it to stay right around this for quarter.

Speaker 5

At least the rest of this year on into 2024.

Speaker 6

Got it. All right. Well, thank you for the detail.

Speaker 3

Quarter. We appreciate your questions, Greg. Thank you.

Operator

Star 1. We'll go next to Paul Newsome at Piper Sandler. 3rd. Mr. Newsome, your line is open.

Operator

Please go ahead.

Speaker 2

Good afternoon. Thanks for the call. Hopefully, you can hear me.

Speaker 3

I call, we can hear you just fine. Thank you.

Speaker 2

I've had some bad luck last day. So I'm glad I got through. So I had a couple of title questions. I wanted to ask, if the change in the If there's really if we're seeing anything that affects the mix between title insurance sold through independent agents versus title through quarter. The direct channel.

Speaker 2

And I was just curious if that has the downturn has had any effect On sort of where customers go and does that change your positioning in the title business as you see those changes,

Speaker 1

Yes, at all.

Speaker 3

Carolyn, I'll just chime in real briefly and then turn it to you. But Our observations on direct and independent are based of course on our portfolio. And quarter. Just to give you a sense, our direct operations are mostly West Coast California. So the real estate market there has had More headwind than we've seen in other places in the country.

Speaker 3

So for us, quarter. We have a view of direct business that is mostly California centric. And then of course, the rest of our view is nationwide. But Carolyn, I'll turn it to you now to Comment on what you think about any shifts in direct and agency and where things are?

Speaker 5

Sure. We've been we've tracked for years, we're able to look at numbers of how much business is written by independent agents compared to directly owned operations. And at least for the last 3rd consecutive quarter. It has stayed in the 60%, low 60%. There just hasn't been much shift.

Speaker 5

And I don't see it changing because really, directing agency is also Like a lot of market driven on the East Coast, you see mainly independent agents. And in some of the bigger states, it's about a fifty-fifty split. So As long as we are able to keep our independent agents in business, I don't see that changing much.

Speaker 2

That makes sense. Does it matter we've seen this shift within the housing business to Sales of new homes versus old homes, existing homes, does that make any difference to you as a title insurer from a marketing perspective?

Speaker 3

Go ahead, Karen.

Speaker 5

No. I mean, it's just For an agent, they market to someone different. They're marketing to a builder Rather than to a real estate client, that type of thing. And it just depends on what market you're in, quarter. Whether an underwriter or a direct operation has a relationship with a builder, it's all 3rd quarter.

Speaker 5

Our business is always relationship driven. So it's really just about who has the relationship with the builder and who has the relationship with a realtor.

Speaker 2

Great. And then 3rd. A question about reserves perhaps because I always want to put Frank in the hot seat. A lot of the companies are today and recently are reporting issues with accident years sort of in the casualty Reserves for Action Research of 2016 to 2019. Obviously, you folks have had a great track record Overall, I'm just curious if in some of your books you're seeing some of that or is that some of the differentiation class.

Speaker 2

Amongst your book versus others that they're seeing these models in

Speaker 3

Yes. And the years where You say others are experiencing problems with unfavorable development. In accident years, did you say 2016 to 2019, Paul?

Speaker 2

Yes. They're sort of all the pre pandemic years Seems to be where the source of some problems are for a lot of companies.

Speaker 3

Yes. Well, I think we are very different Certainly on commercial auto. We have been Very successful at identifying trends early, responding quickly and that started Well before the pandemic 5, 6, 7, 8 years ago and achieving the necessary rate to offset those trends we were quarter. So while I know I've observed in the marketplace some of our competitors That are experiencing unfavorable development on commercial auto in those years. That is not the case for us.

Speaker 3

We're actually we have favorable development. And on general liability, It's a little bit different. We are seeing some unfavorable development on general liability And we're just like we did on auto, we're responding to that. And some of the general liability Growth in premium you're seeing is because of increases in rates on general liability to respond to

Speaker 2

We always appreciate the help. Thanks a lot.

Speaker 1

Thank you, Paul.

Operator

We'll take our next question from Evan Tindle at Vereen Capital.

Speaker 4

Hi. Thanks for taking my call.

Speaker 7

My question has to do with interest rates and competition in really all lines of Insurance that involves flows. So I'm just generally like you can obviously get much higher yield time. On insurance flow these days, do you guys expect various lines to become more competitive over the next few years in terms of pricing? And relatedly, do you guys still think that 90% to 95% combined The other one in the general insurance business is a good sort of range because you guys have been at 90 for a few years now or do you think you guys could start to push into

Speaker 1

the 80s?

Speaker 3

Thank you. Sure. Be happy to address both of those. And actually, I think your questions are related. In my 37 year career, I've experienced hard and soft markets, some of them That are have been driven by the issue of underwriting float and Investment income that was given too much attention relative to underwriting income.

Speaker 3

So I understand your question. I think where we sit in this cycle, there is far greater concern in the marketplace About social inflation, about general inflation, the need to continue with rate rate increases that are commensurate with those trends that I don't believe and certainly we here We are not adjusting our target combined ratios because we're achieving greater levels of investment income. We think that it is important to continue to target Combined ratios between 90% 95% depending on the line of business. And we We say between 90% and 95% because there is a little bit of difference if it's shorter tail or if you're receiving investment income on the longer tail business. So you can write it to a few points higher combined ratio.

Speaker 3

But generally speaking about competitiveness in the marketplace, I think there's far greater concerns that outweigh the Potential Advantages of Greater Investment Income. Of course, you could always have new entrants Entrance that come in and are disruptive and underpriced business. But generally speaking, the P and C marketplace Is remaining very disciplined and more concerned about achieving appropriate levels of rate relative to inflationary trends. And so therefore, like I say, I think the second part of your question was related because that involves where do we set target combined ratios and I can tell you that our target combined ratios will not change as we go into planning For the 2024 year and we'll still be targeting combined ratios in the low 90s Yes, to 95. It's, will we be able to move Into the 80s and target something in the 80s.

Speaker 3

I think that is very difficult to do because quarter. Again, there is some pressure that will inevitably come in the marketplace from the greater investment income. And Typically, when there's greater investment income, combined ratios go up. So being able to drive that down in general insurance Much further is unlikely. And then you also have to remember that a good portion of that 3rd is coming from favorable development.

Speaker 3

And as we said on the earnings call last couple of quarters, The current level of favorable development that we're experiencing is not sustainable over quarter. The long term 6 points is extremely robust. We try to on the side of having favorable development, Ideally in the 2% range, but right now that overall calendar year Combined ratio is reflective of some very strong favorable development that won't continue. So We're going to continue to target and the combined ratios that we currently

Speaker 7

quarter. For when you think autonomous vehicles might start to impact The commercial auto insurance market or do you guys think it's so far off that it's not worth worrying about right now?

Speaker 3

Quarter. Well, we certainly keep an eye on it. We don't have any type of internal forecast, But we think it's a long ways off Before the public gets comfortable with autonomous driving and for us, You really have to think about long haul trucking and commercial vehicles And because that's the majority of our commercial auto exposure, we don't have the personal lines commercial

Speaker 1

exposure.

Speaker 3

Ours is commercial, not personal lines. So When it comes to commercial, the idea of an 80,000 pound truck running down a highway Without a driver is probably a long way off before the public is going to accept that kind of Catastrophic Potential. And then if you look at the other commercial auto business that we write across our companies, It's commercial auto business that's transporting workers and goods and those vehicles will always have Drivers because they are the workers that we're insuring. So for us, the autonomous question is not Perhaps as relevant as it may be if you're a personal auto carrier because again, I think it's a long way off for the type of exposures that we underwrite.

Speaker 4

Okay. Thanks.

Speaker 1

3rd quarter.

Operator

And that does conclude the question and answer session. I would like to turn the conference back over to management for any closing remarks.

Speaker 3

Okay. Well, we again appreciate everyone that has joined the call and listened in And those that have asked questions, we are appreciative of that as well and appreciative of the support. Quarter. And we feel good about the Q3 and looking forward to reporting to you on our 4th quarter results. And Until then, thank you very much and have a good day.

Operator

Quarter. And that does conclude today's conference call. Thank you for your participation. You may now disconnect.

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Key Takeaways

  • General insurance continued to produce strong underwriting results in Q3, with 12% net written premium growth, pretax operating income of $216 M (vs. $168 M) and a combined ratio of 89%, including 6 points of favorable reserve development.
  • Title insurance faced headwinds from higher mortgage rates, leading to $684 M in premium and fee revenue (down 29% YoY) and pretax operating income of $37 M (vs. $73 M), with a combined ratio of 96.7%; management is emphasizing cost management and strategic independent agent partnerships.
  • Consolidated pretax operating income was $251 M in Q3 (vs. $257 M), with a consolidated combined ratio of 91.9% (92.4% YTD), driven by favorable reserve development across all three segments, especially in general insurance.
  • Net investment income increased over 26% in Q3 as average reinvestment yields rose to 5.3%; the bond and short-term portfolio now makes up 83% of total investments, with 99% in investment-grade securities and a 4.3-year average maturity at a 3.8% book yield.
  • Strong capital deployment continued, returning $190 M to shareholders in Q3 through $68 M of dividends and $125 M of share repurchases, and repurchasing an additional $53 M post-quarter, with $90 M remaining in the current buyback program.
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Earnings Conference Call
Old Republic International Q3 2023
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