Good day and thank you for standing by. Welcome to the Old Republic International First Quarter 2021 Earnings Conference Call. At Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Joe Calvarys with MWW Group. Thank you.
Please go ahead.
Thank you. Good afternoon, everyone, and thank you for joining us for the Old Republic conference call to discuss Q1 2021 results. This morning, we distributed a copy of the press release and posted a separate statistical supplement, which we assume you have seen and or otherwise have access to during the call. Both of the documents are available at Old Republic's website, which is www.oldrepublic.com. Please be advised This call may involve forward looking statements as discussed in the press release and statistical supplements dated April 22, 2021.
Risk associated with these statements can be found in the company's latest SEC filings. This afternoon's conference call will be led by Christ Fiddy, President and CEO of Old Republic International Corporation and several other senior executive members as planned for this meeting. At this time, like to turn the call over to Craig Smith. Please go ahead, sir.
Okay. Thank you, Joe. Well, good afternoon, Welcome again to Old Republic's Q1 2021 earnings call. With me today, we have our CFO, Carl Miller And we have Carolyn Monroe, the President of our Title Insurance Group. So we're here again with another great quarter That we're very happy with, exceptional performance in both general insurance and title insurance increased to $1,840,000,000 in the quarter, up 18%, with consolidated pretax operating income of $255,000,000 up 47 percent and a consolidated combined ratio that was 4.2 percentage points Lower for the quarter, coming in at a 90.9%.
In General Insurance, we saw a slight Growth in premium relative to the Q1 of 2020 when premiums were not yet impacted by the effects of the pandemic. And in title insurance, we grew premiums and fees by 40%, and That was on top of a record setting Q1 in 2020. So as demonstrated in these strong results, our Specialty strategy continues to produce growth and profitability and our diverse portfolio of specialty products in both general insurance And Title Insurance has again delivered value to our shareholders. So with that, I'll turn the discussion over to Carl to discuss some of the per share figures along with some added color on our investment portfolio. Then he'll turn things back to me to cover And that will follow by Carolyn, who will discuss title insurance.
And then, of course, we'll open up to Q and A. So, Karl, would you
go ahead
and take it from here?
Thank you, Craig, and good afternoon. This morning, we announced 1st quarter net income excluding all investment gains and losses of $206,000,000 or $0.59 per diluted share, which is a 47% increase compared to last year's Q1. Additionally, shareholders' equity rose to $6,450,000,000 and book value per share grew to 21 That's about a 5.1% increase for the quarter, inclusive of all regular dividends. So now let me briefly address a couple of key elements regarding Old Republic's Investment strategy during the Q1 of this year and at this point don't anticipate any material shifts in policy In the near term, the investment portfolio at March 31 consisted of approximately 72% that were directed towards highly rated bonds and short term investments With the remaining 28% allocated to large cap stocks that have a long history of paying and increasing their dividend distributions. The valuation of the equity portfolio improved by 367,000,000 During the final our Q1, excuse me, and ended March with an unrealized gain of 1,150,000,000 Net investment income actually decreased by 8.6% for the quarter As the impact of lower yields on new investment purchases more than offset a modest increase in the invested asset base.
The average maturity on the bond portfolio remains consistent at approximately 4 years And the average book yield declined slightly at the end of
the quarter
to 2.6%.
New money was invested at yields just below 2% during the quarter, putting downward pressure on net investment income That is likely to persist throughout the remainder of 2021. Turning now to the liability side of the balance sheet, Claim reserves grew to $10,800,000,000 at the end of March and were affected by lower paid loss trends due to the pandemic. All three statements recognize favorable claim reserve development for the quarter. And in total, the consolidated claim ratio is benefited by 1.8 percentage points for this year's Q1 by comparison to 0.8% a year ago. And then finally, with respect to our mortgage runoff operation, there's really nothing particularly noteworthy this quarter Other than to point out that we did in fact resume dividend payments following last year's temporary suspension of capital returns.
During this Q1, the business received approval from our regulators
and paid
a $25,000,000 dividend to our parent company. So at the end of March, our mortgage company's GAAP shareholders' equity totaled $435,000,000 So that is
the highlights.
And with that, I'm going to turn things back to Craig to dive into the General Insurance Group.
All right. Well, turning to general insurance. Net premiums written increased In the Q1, that followed increases in the 3rd and 4th quarters of last year. And we also saw net premiums earned start to increase again in the Q1. Compared to the Q1 of 2020, pre tax operating income rose by almost 28 the same time, we are pleased with the results of our results.
The overall combined ratio for the General Insurance Group improved The claim ratios reported were, of course, inclusive of favorable prior period development, which was 2.7 Net premiums written in commercial auto grew by 8% With positive effect from continued rate increases in the auto liability line And those were rate increases in the 15% range. And that comes along with a growing exposure in recent quarters as well. Our first quarter commercial auto claim ratio improved 73.8% Still lower than pre pandemic levels, but continues to be offset by higher severity due to greater speeds and Continued pressure on settlement value. Turning to workers' compensation. Net premiums written and earned were 15 Percent lower when compared to the Q1 of 2020, where premiums were not yet influenced by the effects of the pandemic.
Slight premium rate increases continued this quarter on the workers' compensation line. The workers' comp 1st quarter claim ratio came in at 56% compared to 71% in the Q1 of 2020. And non COVID related claim frequency remains lower than it was at pre pandemic levels. As we talked about in prior quarters, the impact of COVID-nineteen workers' compensation claims remains Insignificant with about 95% of the COVID-nineteen workers' comp claims coming from loss sensitive business And greater than 95% of the COVID claims continuing to be mild. And I can also As most of you know, we typically provide commercial auto, workers' comp and general liability together In our product offering and this combined claim ratio came in at 69.2% property line and our other coverage category, those claim ratios So in General Insurance, we continue with our strategy to enhance underwriting excellence Through better segmentation, improved risk selection, pricing precision, increased use of Analytics, along with our focus on providing lock sensitive programs.
We believe this strategy will continue to facilitate strong underwriting profitability, which we We believe it's even more important now in order to offset the declining investment income that we just spoke about. And the good news is the marketplace remains favorable for us to continue to obtain appropriate prices for our products, While maintaining high retention ratios. So I'll now turn the discussion over to Carolyn, Who along with the rest of her team and the Title Insurance Group continue to knock the cover off the ball. So, Carolyn, I'll turn it to you.
Thank you, Craig, and good afternoon, everyone. The Title Group is pleased to report record setting 1st quarter results for both operating revenue and operating profit. Our employees continue to effectively balance the challenges, although improving of in person commerce with the opportunities provided by the current U. S. Mortgage origination market.
Total premium and fee revenue for the quarter was just shy of $1,000,000,000 at $967,000,000 up approximately 40% from the comparable prior period. This was achieved with the contributions of both our agency and direct operations. For the quarter, agency premiums, which are typically Operating income of $103,000,000 for the quarter compared to $43,000,000 in last year's Q1, an increase of $60,000,000 or 139%. The combined ratio of 90.3% for the quarter represents around a 5% improvement over last year's Q1 combined ratio of 95.1%. Having begun the year with a solid foundation, we remain optimistic for the remainder of the year.
Mortgage rates are Expected to remain near historic lows throughout 2021, providing a catalyst for a continued robust real estate market. Although refinance transactions are projected to drop over 35%, this is in comparison to 20 twenty's As always, we will move forward with our guiding principles of integrity, managing for the long run, Financial strength, protection of our policyholders and the well-being of our employees and customers. With an added emphasis of appreciation for our employees, their dedication, ingenuity and positive attitude. And with that, I will turn the call back over to Craig.
All right, Carolyn. Congratulations again. Well, again, we're very pleased with this quarter's operating results. Our strategy of providing Specialty Insurance and Related Specialty Products to core industries served by General Insurance and Title Insurance Continues to produce strong results for our shareholders. So that concludes our prepared remarks, And we'll now open up the discussion to Q and A where I'll answer your question or I'll ask Carl or Caroline
Your first question comes from Matt Carletti from JMP.
Hey, thanks. Good afternoon.
Hello, Matt. Hello. I got a few questions. Maybe Craig, can
I start with your general liability and workers' comp Color that you gave, I'm trying to help understand the exposure impacts from COVID? And so is it possible for you to even in rough numbers break apart The reduction we saw in premiums in the quarter, I mean, obviously, there's retention, there's new business production, there's pricing and then there's So how should we think about that in terms of the exposure piece versus the other items?
Sure. So if you look at workers' compensation Relative to the last few quarters, the exposures have begun To recover, so said differently, the decline in the 4th quarter Over the prior year was greater than the decline is this quarter over again The Q1 of 2020 when there wasn't any really reflection Of the impact from COVID. So we would expect that beginning in the second Premiums in 2020 that were in fact impacted, then The shift should be considerable. But
what we saw
in the Q1 was just simply a continuation With some improvement in exposure over where we were in the last three quarters of 2020. And with regard to rate, it's very slight. I think your Assumption can be just that there's a slight rate increase that we reported on in the 4th quarter And it was about the same in this quarter.
Great. And then my next question, I want to switch to title for a second. I think in the past, Maybe as recent as last quarter, I can't recall, you've touched on the idea of making the technology investments and along those lines. I was hoping you might be able on that a little bit just in terms of some of the which areas in particular, whether it's underwriting or more kind of interfacing with the agents and then what you might be planning on doing in the title business on the technology front?
Sure. Carolyn, would you please address that?
Sure. So it's we kind of have a 2 pronged approach. We're working on things that speed up processes that just so that we can provide better Just so that we can provide better service to our customers and our agents. And we're also working on things that will help our agents have better connectivity To things out there that start coming on the market so that They only have to like go to one place to be able to connect out to other technology that would benefit them. So we're sort of working on all of it if the truth are known.
I mean it's something you have to continually evolve around
And then last one, if I could, just a broader company question. Can you talk a little bit
just about capital and specifically,
are there tangible benefits Kind of having diversified businesses at Old Republic in terms of general insurance and title and I know MIs and Runoff, Or are they kind of on a standalone basis and you should think of it more of like independent under a holding company from a capital standpoint?
Well, Matt, I would point you to the Comments that we made in our March 31st Annual Report Letter. And In that letter, we talked about the fact that general insurance and title insurance are A large amount of synergies with regard to the specialized insurance Underwriting approach and products and services that title and general insurance both Focus on that are keys to our strategy and included In the enterprise risk management attributes of having general insurance and title insurance Together, as we point out in that letter, we believe the Businesses are countercyclical. There is there it's important to our tax planning strategies as well as Our capital management allocation and you may have seen the press release yesterday from And that's whereby they make similar comments when they affirmed The ratings in our general insurance group and increased the ratings in our title insurance group, pointing to the Strategic position and importance of title in our Old Republic International family and being integral to the overall organization With common branding and talent synergies as well. So I would just Leave it at that and tell you that all of those things we said in that March 31 letter How we believe the 2 businesses fit underneath The Old Republic International umbrella.
Great. Thank you for all the answers. Best of luck.
This question comes from Greg Peters from Raymond James.
Good afternoon. It's interesting you must have Switch locations because usually during the course of your comments, we get to hear Chicago's finest, the fire department Going back coming back from their lunch break. So, kudos to however you switched it to. This is the first time in a long time. I don't Remember hearing them in the background.
Well, now you've changed us, Greg. I'm sure they'll be coming by shortly. We're here in the same room.
It's like every year, Every time you do the calls, it's the timing. Listen, I wanted to sort of go at this differently. First to Carolyn. So I was interested by your comments about the outlook both And so I was wondering if you could give us some perspective. If I look at Just the 2020 premium and fees earned, which is about $3,300,000,000 how much of that was New business versus how much is refinanced.
And so when I put together the one's going to be down, one's going to be up, it sort of gives me A benchmark of what I should think the number should look like for 'twenty one?
Carla?
Sorry, Greg. I would say about 25 Percent of our business was refinanced in 2020.
Okay. And then just to reiterate, you said that the refinance can you give me the numbers you said in the prepared remarks, Which was going to be down, which was going to be up?
So they're projecting that refinance We'll be down about 35% over 2020 and that Purchases should be up around 16% over 2020.
Okay. And so if I sort of ballpark it, that means that Based on that outlook that the year for premiums and fees should be Stable or if not modestly positive, is that I can do the math separately, but that's sort of ballparking. Is that sort of the right guess
Yes. We're thinking that it should be stable. Yes. Yes.
Yes. Excellent. And then the expense ratio in the title improved in the quarter and I don't really want to get too hung up on 1 quarter's improvement over another quarter. But the annual trend is better and obviously there's volume There's a volume component to that, but you also went through some restatements. So talk to us about where you think the expense ratio, what
I would say that, it should stay about where it is right now. We don't like to do predictions, but based on what we're seeing right now, we think it should be And about the same ballpark as it is right now.
And can you just walk me through the restatement issue? I would just I know it was called out to me and I just if you
could just
walk me through what was going on there. Yes.
Greg, why don't we have Carl
Craig, this is an accounting policy change that the Prior practices date back several decades actually where for a portion of our business we were reporting Premiums and fees earned net of associated expenses. And it became Apparent, given the growth of the business that we really needed to create consistency in our accounting Practices. So at year end 2020, we made that change to all prior periods to make The comparison equivalent to the year end 2020 presentation. So it's basically a gross up of revenues And gross up of expense in this to the same dollar magnitude having no impact on pre tax Underwriting or operating income. So it had a relatively minor impact to the reported the combined ratio, 0.1 to 0.2.
So it's totally inconsequential and really doesn't Drive the numbers significantly. All periods are now presented on a comparable basis and You'll see slight changes as we go throughout the year on a quarterly basis.
Thanks for covering that call. I appreciate it. Let's go back to general insurance And I appreciate your comments around pricing. And I guess What I'm as I look at your results for the quarter, trying to understand, yes, premium was up a little bit. Is it all rate that's driving the premium higher?
Are you getting any unit count growth? It seems to me that at some point, you're going to the rate environment is going to become more stable. And Ultimately, in order to grow the business, we need unit count growth. And so I'm just trying to understand the balance between the 2 in your reported results.
Sure. So I know we've said this and not to continue to reiterate the point, but When you look at premiums this quarter in general insurance, You have to keep in mind that we're comparing those to Q1 of 'twenty where there were still Growth in those premiums and it was pre pandemic. So the premiums 21, but we stopped we but it bottomed out in the 3rd and 4th quarters and As the economy rebounds and reopens, that exposure units, particularly in workers' compensation, We'll increase fairly rapidly. And like I say, once we get out into the second, the 3rd and 4th quarters and we're comparing those to 2020 quarters, those premium levels, I would think will be greater, perhaps significantly greater. So We are seeing exposure return.
As I say, their workers' compensation exposures Bottomed out in the 3rd or 4th quarter. What we saw in auto exposures were a drop off In the Q2 of 2020 and then things have picked up in auto exposures In the rest of last year and again this quarter. So Exposures are definitely coming back. We would expect them to come back in a much more robust way as we Moved throughout the year and the economy continues to improve. So Right now, it's a mixed bag, Greg.
What you're seeing in that increase It's just the effects of coming off a reduced exposure base from 'twenty and rebuilding that exposure base As we go forward and then of course you're getting you're also getting lift from rate, but the exposure base Is going to have much more of a contribution the exposure base increase is going to have much more Of a contribution to top line as we go through 2021 after this Q1.
Got it. And Craig, I think I sent you an email And I think in the e mail, I was just raising a question from one of your investors around Your home warranty and auto warranty business. And I think now might be a good I obviously understand relative to the 3 main coverages, it's minor, but Thought it might be worthwhile to let you give us an update on Old Republic's Perspective on that business, why you think you're positioned to do well in that business relative to there's a start up to 1 or 2 startups that are trying to make waves in that space.
Sure. Sure. So in both of those Areas, the auto warranty and home warranty, we have continued to invest in technologies To improve our efficiencies and our customer service levels, both are very strong Profitable business businesses for us. And I would say that something that Which is we don't mass market, I'll call it, as you might see on Television or what have you where you see home warranty and auto warranty companies mass marketing and Using that as their distribution channel, our distribution channels For auto warranty and home warranty are really point of sale. The majority of our partners on Auto warranty, our dealerships and the various administrators that work with dealerships And that will always be an important distribution touch point with the customer at the point of sale.
And similarly on our home warranty business, Distribution is key there as well. Even though as I say, we're investing in technology to improve The efficiency at which we manage that business, price the business and how we distribute The product, but the our focus is there too at point of sale with realtors. Realtors are key to that and it's another example of where there are synergies with our Title business where a key focus of their distribution is on real estate Agents as well. And in home warranty, that is the focus. And Here too, I don't believe that's going away and we'll all point of sale will always be important.
However, In both auto warranty and in home warranty, we're also looking at expanding our distribution, Not necessarily to the math marketing ways of Some of the competitors that we all see when we watch television, but through other strategic relationships, Making sure that we expand our distribution approaches as well. So hopefully that answers your question, Greg.
That was great color. Thanks. I guess And I know you talked about this upfront, Karl, about the and Craig, about the no real change in Your approach to the investment portfolio, one of the questions that pops up from time to time is The equity exposure you have and I know you guys are long term And strategic and all that, I'm just curious based on the market returns in equities and If you're wondering if this risk reward is still there in the near term, even though you might have long term Confidence in some of those investments. Just curious how you're thinking about those variables in the context of what we're watching in the
Greg, this is Carl. Let me take a crack at answering the question Craig can fill in if necessary. But our objective really hasn't changed with To the equity portfolio, as we've stated on a few occasions, our that key objective is To provide yield enhancement to the portfolio overall above and beyond The yields that we can earn on the fixed maturity portfolio and we have selectively chosen A portfolio of something a little less than 100 secondurities in companies that have a very long history of paying And steadily increasing their dividend payout ratios. So it's an opportunity for us to invest and enhance Investment income to a large extent with what we believe to be manageable risk. We do perform a number of stress tests at the company level overall as well as for each of our Subsidiaries that hold equity securities to ensure that under stress situations, our capital base is not significantly Greater degree of volatility at the net income line item, but that's why our focus in explaining the results tends to focus
Your next question comes from John Haney from Dowling and Partners.
Hi, good afternoon. I just had maybe 1 or 2 quick number follow-up questions. On mortgage insurance, you said that the upstream dividend was $25,000,000 Is that correct?
That is correct.
So that's on a stat surplus base of 100 and call it 120 at year end 'twenty. So were you able to release some of the contingency reserve in that?
We were.
Am I thinking about that correctly?
You are. Yes. The number I
I mentioned earlier in
my comments was the GAAP shareholders' equity. The statutory capital, which would include the contingency reserve is In that same neighborhood, dollars 4.30 some odd million. I don't have the exact number at my fingertips.
No, that's fine. But then presumably your so I'm just looking back, that's a dividend than generally can over the past 4 or 5 years. I mean, there's been a little bit coming up. So I would assume then Is the risk in force running off a little bit quicker or are you getting state approvable to take down a contingency reserve faster?
Well, the
I'm sorry, think about the risk enforced runoff actually.
Yes. Well, first of all, just to clarify, we have not, until the Q1 of last year, received any dividends from our mortgage insurance companies Several years, as far back as I can remember. So we started last year and in the Q1, We received state approval to pay $37,500,000 before further return to capital were But secondly, your question regarding risk in force, We do include statistics in the financial supplements on Page 6 that has a multi And you can see that the runoff is about 25% of any given year and that continues through the Q1 of this year. Since year end, there was about a 7.1% decline and annualized, it's 25%. But it's in that neighborhood and it's been pretty consistent year after year.
Got it. So I can use that what's happened as a proxy to kind of just model this out going forward for the risk in force?
I would think so.
Okay. Thank you. And then the other one question I had in title, Approximately, I mean, how big is the commercial book of business in there? I remember somewhere around 18%
Right. For the Q1 of this year, it accounted for about 14.2% of our total premiums.
Is that roughly in line with what it is on an annualized basis?
No, that's down. It's down about 10%.
Got it. So It's actually 20% to 25% of the portfolio is how we should think about commercial.
Right. The Q1 of 2020, it was about 22.4%. Overall, it's generally around Probably $18,000,000 to $20,000,000 on an annualized basis.
Got it. Perfect. That's it for me. Thank you.
Thanks a lot, John.
Your next question comes from Boris Kudson from Crawford Investment Counsel.
Hey, guys. I have a couple of questions. 1 on the general insurance side, Specifically, the commercial auto, the improvement in the claims ratio was great after many years of kind of Issues there, but I guess the question is, are you still getting a frequency benefit from kind of lower driving overall and how sustainable this improvement is, I guess, is the question.
Yes. Very good question. There is A frequency benefit that continues. It's not as great as it was in some of the prior periods In 2020, but it is a lower frequency, I would say in the low right now it's about say a 10% frequency reduction. I think at the height last year, we saw about a 20% frequency reduction.
And then As I mentioned in my earlier comments, severity is still an issue. And unfortunately, the severity is offsetting the benefits of frequency. So the reason that we're continuing to get rate increases in the 15% range We would expect frequency to return to a more normal level And severity, we're not counting on any change in that trend. So we have to get that 10% to 15% rate increase to address the ongoing Severity issues. So the last thing I would just say is, yes, The claim ratio has improved.
And I know quarter after quarter, we were Talking about how hard we were working to try to get that down from the peak claim ratios of 2019 2020. And all of the things that we were doing, I think, are starting to show up, but I would just point out this that when it comes to Both our loss ratio pick and when it comes to recognizing favorable development, We have a very patient approach. We're very slow to recognize favorable development On a longer tail line of business like auto liability and therefore That reduction that you see in the claim ratio is not one that's coming from A reduction of the current year claim ratio or even the last few year claim ratios. To the extent that there is some frequency benefit last year and continuing into this It will be a while before we would recognize that in our results.
Got you. And then another question for you, Greg. In your annual letter that you referred to in the annual report, you mentioned that the Stock price performance was, I think you said, incongruent with strong operating performance. So I guess the question is why not have a buyback program in place or a situation like this when your stock trades below book value and Seemingly not reflecting the strong fundamentals of the business.
Right. So the interim growing comment is certainly How we felt last year, I think our stock was not alone. Majority of others in the insurance and the broader financial sectors, value stocks, In particular, dividend paying value stocks were not treated very timely last year. So as we said, With those strong results, you would expect commensurate changes in your price. And That didn't happen last year, but it was I think more of a result of broader market forces At work.
And with regard to the question on buyback, We also had in addition to that 2020 annual report letter that you just mentioned, We also issued a letter that's available on our website on January 6. And in that letter, we tried to lay out for our shareholders Our thought process on capital management and I would refer you perhaps Back to that letter and
I think that I guess that letter didn't really address buybacks versus dividends. You guys outlined why you paid a special dividend, which no one is arguing about in terms of you having capital To do that, but wouldn't it have been better to do a buyback as opposed to you could have been immediately accretive to book value and earnings as opposed to Pay another special dividend.
Yes. We're aware that Some of our shareholders have raised that question and The matter is the subject matter currently before our Board and The Board is going to address that issue at its upcoming May meeting, after which time We expect that they'll provide a written response to that question.
Okay. Thank you.
Your next question comes from Brian Niemeyuk from BBB.
Just a quick one. I noticed Almost all of your other miscellaneous debt was extinguished or matured this quarter, so I wanted to ask about that. And then have you provided a long term guidance range for your debt Small balance of debt, a bank issued note that matured in the Q1 of this year. So that's What's driving the decline since year end? Yes, we do set parameters for ourselves, what we refer to as our metrics.
And generally speaking, the range That we try to operate within is 10% to 25% debt to equity or debt to capitalization ratio. And we're well within that and trending towards the lower end currently.
At this time, I will turn the call back over to management for closing remarks.
Okay. Well, we appreciate Thanks, the interest by everyone. Appreciate the dialogue and the questions. And Again, we are thrilled with the operating results that we Put forth for year end 2020 and then the continuation of extremely strong operating results In this Q1 of 2021. So thank you all for your participation and we look forward to talking to you