Old Republic International Corporation (NYSE:ORI) Q2 2023 Earnings Call Transcript

Old Republic International Corporation (NYSE:ORI) Q2 2023 Earnings Call Transcript July 27, 2023

Old Republic International Corporation beats earnings expectations. Reported EPS is $0.69, expectations were $0.56.

Operator: Hello. My name is Chris and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Old Republic International Second Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question-and-answer session. [Operator Instructions]. Thank you. Joe Calabrese with the Financial Relations Board, you may begin.

Joe Calabrese: Thank you. Good afternoon, everyone. And thank you for joining us for the Old Republic conference call to discuss second quarter 2023 results. This morning, we distributed a copy of the press release and posted a separate financial 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 that this call may involve forward-looking statements as discussed in the press release and financial supplement dated July 27, 2023. 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: All right, Joe. Thank you. Good afternoon, and welcome again everyone to Old Republic's second quarter earnings call. With me today is Frank Sodaro, our CFO of ORI, and Carolyn Monroe, our President and CEO of Title Insurance. Well, during the second quarter, General Insurance produced strong underwriting results, which drove its 34% increase in pretax operating income. And despite continued challenges with mortgage interest rates affecting the top line, our Title Insurance pretax operating income improved over the first quarter of the year. Our focus on specialization and diversification across Title and P&C Insurance paid off in the second quarter, producing $227 million of consolidated pretax operating income.

And on a year-to-date basis, General Insurance has produced $378 million of pretax operating income while Title Insurance produced $52 million, alongside of a consolidated combined ratio of 92.6. Our conservative reserving practices that we've spoken about are once again clearly visible with favorable reserve development reported in all three of our segments, led by General Insurance. With our strong underwriting income and investment income results, we maintained our strong balance sheet, while at the same time continuing to return capital to shareholders during the quarter and through - we did this through both dividends and share repurchases. And we're also continuing to invest for the long run including the April announcement of our newest underwriting business, Old Republic Lawyer Specialty Insurance.

So, I will now turn the discussion over to Frank. Frank will then turn things back to me to cover General Insurance. We'll follow that with Carolyn who will discuss Title Insurance and then we'll open up the conversation for Q&A. So with that, Frank, I will turn it to you.

Frank Sodaro: Thank you, Craig. And good afternoon, everyone. This morning, we reported net operating income of $180 million for the quarter compared to $210 million last year. On a per share basis, comparable year-over-year results were $0.62 versus $0.69. For the first half of the year, net operating profit was $359 million compared to $402 million last year. The considerable headwinds experienced by the Title Group were largely offset by strong operating results of the General Insurance group. Net investment income increased by about 30% for both the quarter and year-to-date, driven primarily by higher yields on the fixed income and short-term investment portfolios. To put in perspective, our average reinvestment rate on corporate bonds during 2023 was just over 5.1%, while the book yield on similar bonds being disposed of was just under 3%.

The investment portfolio has held steady at approximately 80% in highly rated bonds and short-term investments, with the remaining 20% allocated to large-cap dividend-paying stock. The quality of the bond portfolio remains high with 99% in investment grade securities, with an average maturity of 4.2 years and an average overall book yield of 3.5% compared to 2.7% at the end of the second quarter last year. The fixed income portfolio valuation decreased by approximately $125 million during the quarter, while the stock portfolio valuation was relatively flat, ending the period in an unrealized gain position of over $1.2 billion. Turning to loss reserves, once again, all three operating segments recognized favorable loss reserve development for all periods presented.

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The consolidated loss ratio benefited by 4.6 percentage points for the quarter compared to 1.9 points for the same period a year-ago. Year-to-date, the consolidated loss ratio benefited by 4.5 percentage points compared to 2.1 percentage points last year. The mortgage insurance group paid a $35 million dividend to the parent holding company in the quarter. We plan to return $110 million for the full year, subject to regulatory approval. Shareholders' equity ended the quarter at over $6.1 billion, resulting in book value per share of $21.78. When adding back dividends, book value increased 5.7% from the prior year end, driven by our strong operating earnings. In the quarter, we paid $70 million in dividends and repurchased nearly $220 million worth of our shares for a total of just under $290 million returned to shareholders.

Since we ended the quarter, we repurchased another $83 million worth of shares, leaving us with about $180 million remaining in our current repurchase program. Now, I'll turn the call back to Craig for a discussion of General Insurance.

Craig Smiddy: Okay, Frank. Thanks. So, in the second quarter, General Insurance net written premiums were up 8% and pretax operating income increased to $184 million. And the combined ratio was at 90.2% compared to 92.5% in the second quarter of 2022. So, we continue to see our underwriting excellence efforts payoff, and we thank all of our associates for remaining keenly focused on profitable growth. The loss ratio for the quarter was 60.9%, including six points of favorable reserve development, and the expense ratio was higher at 29.3%, but this is in line with our line of coverage mix that over the last few years has trended towards lower loss ratio and higher commission ratio line. Both strong renewal retention ratios and new business growth have helped drive that 8% increase in net premiums written and we continue to achieve rate increases across our portfolio, with the exception of D&O and workers' compensation.

Turning more specifically to a few of our larger lines of coverage, starting with commercial auto, net premiums grew at a 13% clip, while the loss ratio came in at 67.5% compared to 66.6% in the second quarter of 2022 with favorable development in both of those periods. Severity continues in the high single-digit range and rate increases are commensurate with that trend. So that implies that we continue to cover our loss cost trend in commercial auto. Moving to workers' compensation. Net premiums written grew by 8%, while the loss ratio came in at a low 37.9% compared to 52.3% in the second quarter of 2022. And obviously, here too, there's considerable favorable reserve development in both of those periods. Frequency continues to trend down for comps, while severity trend is relatively stable.

So here too, we think our rate levels remain adequate for this line of coverage. We expect solid growth in profitability in General Insurance to continue throughout the rest of this year and we think this continues to reflect the success of our specialty growth focus and our operational excellence initiatives. So, I'll now turn the discussion over to Carolyn to report on Title Insurance. Carolyn?

Carolyn Monroe: Thank you, Craig. And good afternoon. The Title Group reported premium and fee revenue for the quarter of $650 million, down 37% from second quarter 2022. Agency premiums were down 38% and direct premiums were down 32%. Our pretax operating income of $35 million compared to a $110 million in the second quarter of 2022. Our combined ratio of 96.9% compared to 90.4% in the second quarter of 2022. Our 2023 results compared to 2022 reflect the economic headwinds continuing to affect the volume of transactions in our market. We continue working to manage costs in response to market revenue levels, while keeping a focus on longer-term strategic initiatives. We have improved our combined ratio by 2.4 points from the first quarter of this year, which helped drive increased profitability.

This overall improvement during the second quarter compared to this year's first quarter is a positive trend to build on. Market conditions also adversely impacted our commercial business. In the second quarter, commercial premiums were down 37% over second quarter of 2022 and represented 22% of our premiums in both 2023 and 2022. Year-to-date commercial premiums are down 31% over last year. While being mindful of market conditions, we continue to demonstrate our commitment to this segment with tools and resources to take advantage of the opportunities available. Over the last year, we have expanded and transformed our footprint nationwide and have been able to grow our market share in this segment. We continue to provide industry leading value-added services that enable our agents, the cornerstone of our strategic focus to concentrate on their core business and provide opportunities for efficiencies in their operations.

While the first half of 2023 reflects the ongoing economic challenges in the real estate industry, we are focused on streamlining operational efficiencies and developing innovative products and services to - prepare for both the short-term and long-term market conditions. Thank you. And with that, I'll turn it back to Craig.

Craig Smiddy: All right, Carolyn. Thank you. So, as a diversified specialty insurer, we remain pleased with our continued profitable growth in General Insurance, which is helping to mitigate the lower revenue and profit levels in Title Insurance. And while higher mortgage interest rates haven't helped our Title Insurance business, the higher interest rates continue to produce significant growth in our investment income, as Frank pointed out. We also remain pleased with our recent and long-term track record of capital stewardship and book value growth per share, including the $492 million returned to shareholders in the first half of this year through both dividends and share repurchases. So, for the remainder of 2023, we remain optimistic for continued profitable growth in General Insurance, while we remain of the view that Title Insurance will continue to face headwinds.

As we noted and mentioned and discussed in the last few quarters, this is Old Republic's 100-year anniversary, which we're celebrating under the banner of 100 Years of Excellence. And as part of this ongoing celebration, we will be ringing the opening bell on the New York Stock Exchange next month on August 22nd. So that concludes our prepared remarks and we'll now open up the discussion to Q&A and I'll try to answer your questions, or I'll ask Frank or Carolyn to respond.

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