Old Republic International - Q1 2024

Transcript

Operator (participant)

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 first quarter 2024 earnings conference call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a Q&A session. If you would like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. At this time, I would like to turn the conference over to Joe Calabrese with the Financial Relations Board. Please go ahead.

Joe Calabrese (SVP of 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 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 25th, 2024. 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'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 pre-tax 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 pre-tax operating income, and that's a 14% increase year-over-year. The General Insurance combined ratio was 90.3 in the quarter.

Title Insurance, higher mortgage interest rates, and a slow real estate market presented us with some challenges, and that led to much lower pre-tax 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 remained 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'll 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 (SVP and 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's 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 runoff 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 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. So now I'll 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 pre-tax 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, 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. Here too, we continued to experience favorable prior-year loss development. Frequency for workers' compensation continues the years-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)

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 premium 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 first quarter of 2023. The nationwide expanded and transformed footprint of our commercial team, along with our commercial agency services group, positions us well for when 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 the modest uptick in our directly produced revenues, are positive signals as we head into the seasonally more active market period. Our pre-tax 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. As a reminder, the first quarter of last year's results were impacted by the recovery of a $17 million state sales tax assessment. Excluding this favorable impact, our expense ratio and pre-tax 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 drive and 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 e-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 and 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 to Q&A, and I'll either answer your questions or I'll ask Frank or Carolyn to respond.

Operator (participant)

Thank you. We will now begin the Q&A session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. We'll take our first question from Matt Carletti at Citizens JMP.

Matthew Carletti (Managing Director and Senior Analyst)

Hey, thanks. Good morning.

Craig Smiddy (President and CEO)

Hi, Matt.

Matthew Carletti (Managing Director and Senior Analyst)

I guess good afternoon now. I guess maybe just I'll start with title, where you kind of left off in the commentary and couldn't help but notice, and you noted how kind of the direct showed some growth, agency continued to shrink, but there's a lag there. Are you seeing a shift in the market where you would expect kind of agency to flatten out or return to growth, even despite kind of the stickiness of mortgage rates, and you're just seeing it first and direct, or is there something else going on there that kind of keeps those two acting a little different?

Craig Smiddy (President and CEO)

Carolyn, if you could perhaps embellish a little bit on the comment 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)

Sure. We always use our direct operations as kind of a bellwether for what's also going on with our agents because they're all out in the same market. And because the agents report their premiums to us on a lag of about three months, we feel like because our directs, the orders are starting to uptick, and also that our revenue has increased, we should see that from our agents, just the normal lag, we should see an uptick in agency business in the second quarter, about the same as we see it in the directs. Does that help?

Matthew Carletti (Managing Director and Senior Analyst)

Okay. And it does. And as you, I guess, follow up would be as you kind of, well, 8% was kind of the number, let's say, for Q1, for direct. Did it kind of build throughout the quarter? Was it a particular month that pulled it up, or just trying to get that a little bit more of the cadence of it?

Carolyn Monroe (President and CEO)

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

Matthew Carletti (Managing Director and Senior Analyst)

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

Craig Smiddy (President and CEO)

Frank, do you want to comment on that?

Frank Sodaro (SVP and CFO)

Sure. I'll give you. We'll start with some order of magnitude. The majority of our development this quarter was coming from workers' comp, and it's pretty widespread years. Commercial auto, then probably a fourth came from commercial auto. That's coming a lot from the—it's like our years that are coming out of our loss picks, and you're familiar how our held years. So it's those years that are developing favorably the most. And then GL is an offset about comparable, maybe a little bit more than the commercial auto was favorable. And that's kind of split into two buckets. About half of it is coming from very old years, just a few programs that have been around for a while. And then about the other half, coming from the years of about 2015 through 2021, it's kind of spread out.

I guess one of the things I'd like to say is this is a fairly small line for us, and it's written in a lot of our businesses, so it's kind of just scattered. There was no shock of adverse development that was material to any one of our businesses, but it's just a little scattered throughout. So hopefully, that gives you enough color.

Matthew Carletti (Managing Director and Senior Analyst)

Yep. That's perfect. Yeah. Thank you very much for the color. That was very helpful.

Operator (participant)

We'll move next to Gregory Peters at Raymond James.

Gregory Peters (Managing Director)

Good afternoon, everyone.

Craig Smiddy (President and CEO)

Hi, Greg.

Gregory Peters (Managing Director)

For the first question, I'm going to focus on the top-line growth in your general insurance business. I think the results in commercial auto and workers' comp are pretty explanatory. I was looking at some of the smaller segments, and we're seeing some pretty good growth, property and general liability. Then I'm trying to triangulate, Greg, because you said you talked about the new business initiatives. Maybe some of those new business initiatives are inside some of these other segments, but I'm just curious about the growth we're seeing in some of those other segments.

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.

Gregory Peters (Managing Director)

Just a point of clarification on that, and thanks for the answer, Craig. Is it your expectation 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, 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.

Gregory Peters (Managing Director)

Okay. Fair enough. And just 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. Yeah, 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 as a fairly large bucket, but for us, 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.

Gregory Peters (Managing Director)

Excellent. Thanks for that clarification. So my other area, just giving some attention to the title business, the revenue is down again. I appreciate, Carolyn, your comments about the lag nature of that. You gave us some idea that the expense ratio was there were some anomalies going through that. Is your expectation for this year that the expense ratio for the title business, ex this anomaly that happened, is it going to be in the same range as it sort of was last year, or has your view on that changed?

Craig Smiddy (President and CEO)

Yeah, Carolyn, I think Greg's question, it's hard to know what's happening with interest rates and the real estate market, especially as we get further out toward the end of the year. But Greg, I think if we answer your question, and I'll let Carolyn do that, assuming that the business would be the revenues would be flat with last year, I think is probably the context in which we should answer that question, and I'll hand it to you, Carolyn.

Carolyn Monroe (President and CEO)

Yeah, that's correct. We are really trying to reach the same combined ratio that we did last year. It's just going to depend on the revenues. We've got our expenses in line, and so we don't feel like that we need the revenues to start coming back and at least be what they were last year. And we're kind of a glass-half-full kind of group, and with just sort of the trends we're seeing just right now at the beginning of the year, we really believe we can aim for what we did last year.

Gregory Peters (Managing Director)

Okay. Thank you very much for the answers.

Craig Smiddy (President and CEO)

Thanks, Greg.

Operator (participant)

As a reminder, if you have a question, please press star one. We'll go next to Paul Newsome at Piper Sandler.

Craig Smiddy (President and CEO)

Hello, Paul? Are you there?

Operator (participant)

Paul, you may have your line muted.

Paul Newsome (Managing Director)

Okay. How about this?

Operator (participant)

Yes, we can hear you.

Paul Newsome (Managing Director)

Hopefully, you can hear me. Sorry, guys. I wanted to talk a little bit about and maybe some context with the last quarter with the GL business. It looks like you had a little reserve negativity this quarter. Last quarter, if I recall, it wasn't GL. It was Commercial Auto, but now Commercial Auto has turned to be a good guy this quarter. Am I remembering that right? So is that a fair assessment? And I guess the thought is usually you don't have this sort of quarterly variation unless it's really small.

Craig Smiddy (President and CEO)

Yeah. Well, let me comment on that and refer back to our comments last quarter. So we were still having favorable reserve development on commercial auto throughout last year. I think what you're referring to that I spoke a little bit about on the last call was that at the end, after seeing the end-of-the-year results, we decided that we wanted to move our current accident-year loss ratio for commercial auto back to where it was in 2022. So it didn't deteriorate. Matter of fact, I think it was still just a few percentage points better.

But we went into the year thinking that it would be a little bit lower, and at the end of the year, we said, "We're going to go back," and for the whole year, because of our conservative nature, we said, "Let's set it to where it was back in 2022." So favorable development is not bouncing around by any stretch. We had favorable development for the last several years on commercial auto because of our conservative approach. And our conservative approach, again, was demonstrated that we got to the end of the accident year, and we said, "Let's uptick that accident-year loss ratio a little bit just to make sure we have that cushion we strive for." And so that's what happened last year. It wasn't anything unfavorable coming from prior years.

There's no favorable development in one quarter, unfavorable development in another quarter. It was simply taking at the end of the year, we took a little bit more conservative approach than we started the year with on commercial auto, but it was still a loss ratio that was a bit lower than it was in the year before. So that's what happened. And therefore, when we saw favorable commercial auto come through again this first quarter, that was within our expectations.

Paul Newsome (Managing Director)

Onto the GL, I get it. It's not a big part of the business. One of the investors I spoke to again was quite concerned that it may be sort of a relatively fast-growing part of the business, and growth is always bad, right, from our perspective. Is that really fair to say? Because I don't think of you as a GL company, and like you said, it's sort of spread out over a lot of different businesses. And is this a priority, or is it just sort of happening sort of organically because of what's going on in the rest of the business?

Craig Smiddy (President and CEO)

I understand the question, Paul. What I would tell you is that the growth you're seeing in GL, I'll tie back to the comments that I gave to Greg when he asked about that growth. The majority of that is coming from our E&S operation, which is focused on very small policies with very low-hazard, general liability type of exposure. The other piece I would add is that where we saw the unfavorable development in GL, even though, as you point out, it's a small line for us. If you look at the supplement and you look at the General Liability Loss Ratio and you go back those five years that we show there, it's been between 78% and as low as 56%.

The 74% that we saw this quarter is really almost smack-dab in the middle of those last five years. So it's nothing for us that jumps out. We expect volatility in that line, and where we did take some unfavorable development was from business that has a very different complexion than the business we're writing in the new Old Republic E&S. Those older years are business that looks nothing like the business that we're writing in today and that we're adding.

Paul Newsome (Managing Director)

Great. And maybe I can squeeze one title question in. The biggest sort of pushback I get on title is concern that, essentially, Title Insurance is eliminated for refinancing. And any sense of 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, or it just depends. Any thoughts on that?

Craig Smiddy (President and CEO)

Yeah. I'll kick off, Carolyn, and then you can take it from there. Carolyn, in her opening remarks, touched on, and we touched really on, three different things that have emerged at the federal level. As Carolyn said, we really don't see it materially affecting our business. I think, as you all know, we are very straightforward, and we tell it like it is. If we were concerned that it was going to have an impact, we would tell you that. But we have looked at all of those issues very closely as a team, working with American Land Title Association on their views.

And at the end of the day, because of different reasons for depending on which one of these things you're talking about, it may change who pays for something, whether it's the borrower or the lender, but we don't see it materially impacting the business. Because at the end of the day, in order for a lender to sell a mortgage in the secondary market, they're going to need Title Insurance. And Carolyn, I'll turn it to you to add more color if you can.

Carolyn Monroe (President and CEO)

Sure. And the other thing behind this is no one wants to turn the GSEs into insurance companies, and that's what happens if they don't get Title Insurance. It's the same with any lender. So that's why we'll follow this. And our trade association has been diligent about telling the title story, but Title Insurance is really about preventive. And we do all the work to make sure there isn't a claim, and we just feel like that more education on this should help. Because this all goes back to affordability, and Title Insurance isn't really what's stopping the affordability right now in homes. So the last thing you want to do is turn a lender or the GSEs into a Title Insurance company, and I just don't see that happening.

Now, the flip side is refinances are not a large part of Old Republic's business. We have a lot of attorney agents, so while we're concerned, it's always something that we would be able to deal with should it happen.

Paul Newsome (Managing Director)

Great. Thank you. Appreciate the help.

Craig Smiddy (President and CEO)

Thank you, Paul.

Operator (participant)

That does conclude our Q&A session. I will now turn the conference back over to management for closing remarks.

Craig Smiddy (President and CEO)

Okay. Well, we've started 2024, and we feel we have good momentum in general insurance. 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. We think there's pent-up demand, and as Carolyn pointed out, initial indications could be positive. 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 (participant)

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