Old Republic International Corporation
Q2 2021 Earnings Call Transcript

Published: 22 Jul 2021

[Operator:]

Good day, thank you for standing by, and welcome to the Old Republic International Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Thank you. I would now like to hand the conference over to your speaker today, Mr. Joe Calabrese, the floor is yours.

[Joe Calabrese:]

Thank you. Good afternoon, everyone, and thank you for joining us for the Old Republic conference call to discuss second quarter 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.

[Craig Smiddy:]

Okay. Thank you, Joe. Well, good afternoon, everyone, and welcome again to Old Republic’s second quarter earnings call. With me today, we have our CFO, Frank Sodaro. Frank is joining us for the first time on this call following Karl Mueller’s retirement, but Frank has been working alongside Karl for several years, as Deputy CFO, so Frank welcome; and we also have Carolyn Monroe, the President of our Title Insurance Group. So I’ll kick things off here. ORI produced another terrific quarter with General Insurance and Title Insurance each posting exceptional results that drove the strong consolidated results that we posted. Compared to the second quarter of 2020, total net premium and fees increased to just under $2 billion, up almost 30%, pre-tax operating income increased to $275 million, and that’s up 80% and the consolidated combined ratio improved to 90.6%, a 5.5 percentage point improvement. Again, comparing to the second quarter of 2020, General Insurance saw growth return with net written premium increasing by 13% and in Title Insurance, we grew net premiums and fees earned by 57%. So our specialty strategy with our diverse portfolio of specialty products in both the General Insurance and Title Insurance groups continued deliver strong growth and strong profitability. So with that introduction, I’ll now turn the discussion over to Frank, to discuss some of the per share figures along with our investment portfolio, and then he’ll turn things back to me to cover General Insurance, and that’ll be followed by Carolyn, who will discuss Title Insurance, and then of course, we’ll open it up to Q&A after that. So Frank, I hand it over to you.

[Frank Sodaro:]

Thank you, Craig, and good afternoon, everyone. This morning we announced first quarter net income excluding all investment gains and losses of $221 million or $0.73 per share, the 78% increase compared to last year’s second quarter. For the first six months of this year net operating income was $427 million, which was up 61%. Results for both periods were driven by substantial growth and underwriting profitability within our General and Title Insurance segments, and you’ll hear more about that shortly.

[Craig Smiddy:]

Okay, Frank. Thank you. So turning to General Insurance. As I already noted, we saw growth return with net written premium increasing by 13% and net premiums earned increasing 6%. Compared to second quarter of 2020, pre-tax operating income rose by almost 45% primarily from our improved claim ratios. The overall combined ratio improved 4.4 percentage points from 98.4% to 94%. The claim ratios we reported were of course inclusive of favorable prior year development and that came in at 2.9 percentage points for the quarter.

[Carolyn Monroe:]

Thank you, Craig. As reported this morning the Title Group posted all-time second quarter and year-to-date highs for both underwriting revenue and operating profit. Total premium and fee revenue for the quarter of $1.1 billion was up nearly 57% from the prior year. This is a combination of strong contributions from both agency business, up 61% and our direct production channels up 44%. For the six-month year-to-date period premium and fee revenue has already surpassed the $2 billion mark, a 48.6% increase from the comparable period last year.

[Craig Smiddy:]

Okay, Carolyn. Thank you very much. Well, again, we’re very pleased with another quarter of exceptional operating result, and we’re also very pleased with our specialty strategy providing specialty insurance and products to core industry served by General Insurance and Title Insurance, which in turn produces value for our shareholders. So that concludes our prepared remarks, and we’ll now open up the discussion to Q&A, and I’ll either answer your question or I’ll ask Frank or Carolyn to respond.

[Operator:]

Your first question comes from the line of Greg Peters from Raymond James. Your line is now open.

[Greg Peters:]

Good afternoon team, Old Republic, and congratulations Frank on the promotion. You did a good job with your first conference call. So…

[Frank Sodaro:]

Thank you.

[Greg Peters:]

Hopefully, many more to come. Let’s just in order General Insurance, thank you for the color. I was wondering if you could give us, as we look at the growth. Can you give us a sense of where the growth is coming as an exposure? Is it new business, is it rate? Sort of give us, how is the balance of that working across the entire book? And then maybe, as you’re answering that question, Craig, include the discussion around retention.

[Craig Smiddy:]

Okay. I’d be happy to do that, Greg. So the answer to your question is that it is indeed coming from all three. Exposure is up particularly in workers’ comp, as people have returned to work, and we’ve seen our payroll numbers grow on our existing business. Other example of exposures of course is miles driven, and number of vehicles and fleets that are returning an increasing, so exposure growth is certainly one component. New business, absolutely. The folks here have been working very hard through exceptional constraints throughout the pandemic to continue to have relationships with the various distribution sources that we have relationships with and expand those and make sure that the flow of business opportunities have continued. So new business writing is a portion of it. And included in that would be some areas geographically, where we have expanded some of our businesses. And also, as I touched on earlier our product offering has also expanded, and so that contributes to new business, new business growth as well. And then, great. Obviously, my comments about comp being relatively flat that doesn’t help growth on the comp line. However, where we do get help, as I mentioned the tailwind on commercial auto liability in particular, we are still getting rates of 15%. On our D&O business, on our aviation business, I know, I’ve talked about those two areas in prior quarters, because we were getting significant rate. In those areas, the rate increases there are less robust than they were, but still around the 10% range for those lines, so that’s helpful. So it’s a combination of the three, Greg. And as far as retention is concerned our retention ratios across virtually all of our lines of coverages, all of our various specialty segments is extremely strong. We believe through our specialty offering that the specialty risk control, the specialty claim services, the specialty underwriting approach that we have really creates a stickiness and some greater pricing elasticity because of that and as such we enjoy very high retention ratios. And as my comments earlier indicated, the marketplace certainly can influence that as well, but in a disciplined – relatively disciplined marketplace that’s helpful to retention as well. So hopefully that answers your question, Greg.

[Greg Peters:]

Yes. That was great additional color. Appreciate it. Just one more question on the General Insurance before I pivot to Title. You did report favorable reserve development in the second quarter, and through the six months. Can you talk to us about where the sources? What years, what accident years where are the developments coming from just give us some additional perspective?

[Craig Smiddy:]

Well, I’ll kick it off, and then see if Frank has any follow-up. But it’s fair to say that the – there has been favorable development on workers’ compensation. And the other contributing factor is that we really have not seen any contributing unfavorable development of a significant nature from any other lines. So once you put it all together, it creates a pretty decent favorable development number on a aggregated basis. So I don’t know, Frank, if there’s anything you would add to that.

[Frank Sodaro:]

No, I mean that’s it for the quarter in a nutshell its $25 million of favorable in total. The year, as you would expect, it’s coming from older years predominantly 2012 to 2017 are the main years that it’s coming from. But workers’ comp is the lion’s share.

[Greg Peters:]

Got it. Thank you.

[Frank Sodaro:]

As you know, Greg, we’re very conservative when we set our loss ratio and very conservative about releasing favorable development. If we see unfavorable development we put it up immediately. If we see favorable development, we’re going to hold loss ratios to how we’re absolutely certain and on long tail lines, we’re holding those loss ratios from three to five years generally speaking, and that that continues to be our practice. And I’ll just add that as well to the mix of your question.

[Greg Peters:]

Yes. Thanks for reminding me about that. I appreciate it. I’ll pivot to the Title business and Carolyn what a phenomenal result. Congratulations. Obviously, it’s the tailwind of the housing boom that’s really helping you here. And if I was listening with interest about your comments around agency being up over 60% direct being up over 40% all really positive stats, but you really didn’t comment on what’s going on commercial versus non-commercial. And I was wondering maybe you could add some color. Just give us a sense of how your commercial book is growing during this period of time relative to the residential side?

[Carolyn Monroe:]

So our commercial premiums were up 19.4% for the second quarter, over second quarter of 2020. And they represented about 14% of our total premiums, but that’s really more of a result of how strong the residential market was. But we’re starting to see a little more of an uptick in commercial. We started seeing it towards the end of the second quarter, and we feel like going into the third quarter that will – we’ll see stronger commercial results. We have seen more, I would say mid-size and by mid-size, we mean $100 million up to $250 million in deals. We’re starting to see a lot more construction projects than we did during the pandemic, which is it makes sense, but we’re excited about seeing that. And we’re still seeing a lot of energy projects come our way.

[Greg Peters:]

And when I think about the mid-size, you said the $100 million and $200 million, is that sort of your sweet spot? Are you doing deals, larger than that or how should I?

[Carolyn Monroe:]

No. We’re doing deals larger than that. But the pandemic had slowed a lot of those deals down. And we’re starting to see a lot of investor, more investor activity getting excited and that’s where you see a lot of a – the more – the $100 million and up deals. But we have a couple of pretty large portfolio deals we’re working on right now, but we’re just seeing a lot more activity that and we’re excited about.

[Greg Peters:]

Got it. Well, I have other questions, but I realize there’s other people on the call. So I thank you for the answers and I’ll circle back if I have to. Thanks.

[Operator:]

Again, we have a follow-up question coming from the line of Greg Peters from Raymond James. Your line is now open.

[Greg Peters:]

Great. So, I’m trying to be mindful of others, but now I’m just going to fire away. Carolyn, when you spoke about the commercial being about 14% that was at the second quarter. Is it still 14% for the first half of 2021 too; Is that – or is that – I’m just trying to get my percentages right.

[Carolyn Monroe:]

Yes. It represented 14% of our overall business year-to-date.

[Greg Peters:]

Year-to-date. Perfect, thanks. And then the other thing I noticed, Carolyn, in the disclosure on – in the supplement was that the reserves to paid loss ratio has crept up again. It looks like at this point in time it’s as high as it’s ever been. Can you give us some views on what’s going on there?

[Carolyn Monroe:]

A lot of that I would say is because of the slowdown in paid activity because of the pandemic. Things – courts were closed that time – claims were slow to be processed by attorneys and the lawsuits couldn’t be filed, those types of things.

[Greg Peters:]

Got it. Okay. The last question I have for you is, I did notice that the – in your press release, on Page 8, where you give us segment composition of shareholders’ equity per share, that the RFIG run-off segment had a $1.50 of equity in it at year-end and through June, it’s come down to $1.40. I think you’ve talked about pulling some or upstreaming some of the capital from that subsidiary. Can you give us just sort of a status update of that? And that’s my last question.

[Craig Smiddy:]

Sure, Greg. Yes, we took $25 million out in the first quarter and did the same in the second quarter. So $50 million for the year, and we just anticipate that that’s probably the pace for this. No guarantees, but that’s the pace we’re expecting throughout the rest of this year. So shareholders’ equity there on a GAAP basis ended at $420 million.

[Greg Peters:]

Perfect. Thank you very much for the answers. Congratulations on the quarter guys, and girls, sorry.

[Craig Smiddy:]

Thank you very much, Greg.

[Greg Peters:]

Yes.

[Operator:]

You have no more questions at this time. I’ll turn the call back over to the presenters for closing remarks.

[Craig Smiddy:]

Okay. Well, thank you everyone who participated. We appreciate your interest. It’s obviously the middle of summer, and when you have a quarter like this there is tends to be less questions, the better it is. So again, thank you, everyone. Enjoy the rest of your summer, and we look forward to talking to you all next quarter. Thank you.

[Operator:]

This concludes this conference call. Thank you all for participating. You may now all disconnect.