ORI
#Good day everyone and welcome to Old Republic International third quarter 2015 earnings conference call.
(Operator Instructions) This conference is being recorded.
And would now like to turn the conference over to <UNK> <UNK>, with MWW Group.
Please go ahead, ma'am.
Thank you, operator.
Good afternoon everyone, and thank you for joining us for Old Republic's conference call to discuss third quarter 2015 results.
This morning we distributed a copy of the press release.
If there's anyone online who did not receive a copy, you can access it 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 dated October 22, 2015.
Risks associated with these statements can be found in the Company's latest SEC filings.
Participating in today's call we have <UNK> <UNK>, President of the Old Republic's General Insurance Group; <UNK> <UNK>, Chief Executive Officer of the Old Republic's Title Insurance Company; <UNK> <UNK>, Senior Vice President and Chief Financial Officer; and <UNK> <UNK>, Chairman and Chief Executive Officer.
At this time I'd like to turn the call over to <UNK> <UNK>.
Please go ahead, sir.
Thank you, Marilyn.
Welcome to everyone.
As always, we appreciate your interest.
And as we've done in the past, we'll cover matters specific to each of our key segments.
And we'll do this in the same order as the discussion of the segments takes place in the news release this morning.
So with that, I'll ask my friend here, <UNK> <UNK>, to address our General Insurance Business operations to date.
<UNK>.
Okay.
Thank you, <UNK>.
The General Insurance Group experienced 5.4% growth in net premiums earned compared to third quarter 2014.
For 2015 year-to-date, the increase was 6%.
We believe this growth rate should continue for the remainder of the year.
While our rate increases are moderating, we still expect organic growth and strong retention ratio to persist on our existing accounts.
We also anticipate continued reasonable growth of new business.
So in summary, most of our operations should experience modest top line growth for the foreseeable future.
Which, as always, will vary by type of coverage and our insurance products.
While we operate in several distinct specialty marketplaces, we are generally seeing rate levels continuing to moderate in what is always a very competitive environment.
Some of our operations are achieving low to mid-single digit rate increases.
While other parts of our business that have had less than acceptable underwriting results are achieving mid to high-single digit rate increases.
We're doing this in conjunction with necessary underwriting adjustments, and reorientation of the business mix from both coverages and geographical standpoints.
In all this, we continue to emphasize underwriting profitability at the expense of top line growth.
Particularly, with regards to parts of our construction book of business.
General Insurance Group's overall composite ratio improved from 100.2% for the third quarter last year to 96.5% for the third quarter this year.
Year-to-date, through the third quarter, the overall come composite ratio improved from 98.9% in 2014 to 96.9% this year.
<UNK>l of this improvement is coming from the claims ratio component.
The commercial auto claims ratio increased from 73.6% in last year's third quarter to 76.1% in third quarter of this year.
Year-to-date, the ratio was 77% versus 74.5% for 2014.
We're continuing to keep an eye on frequency and severity trends to gain the greatest assurance that our underwriting focus and rate adjustments are commensurate with these trends.
The workers' compensation claims ratio improved from 86.6% for the third quarter in 2014 to 77.6% in the same quarter this year.
Year-to-date, this ratio was 79.8% in 2015 versus 84.2% in 2014.
We expect this claims ratio for the coverage to keep trending favorably to more historic levels, in the mid-70%s for the foreseeable future.
As we indicated last quarter, underwriting performance of the general liability insurance coverage is much more volatile quarter-to-quarter, because of lower premium volume we write in it.
Claims severity, therefore, can create much more volatility on such a smaller book of business.
The claims ratio declined from 94.2% in last year's third quarter to 93.3% in the third quarter this year.
Year-to-date, through September of this year, the claims ratio improved from 85.6% to 76.1% for the same period of 2014.
The remaining insurance coverages we underwrite have continued to perform very well through the first nine months of this year.
Looking to the near term, we believe that each of our specialty operations will enhance their competitive positions within their respective niche.
The overall focus in each case remains on the production of favorable underwriting results.
And the achievement of the long-term objectives, outlined in the five year plan we established in 2012.
So, on that note, I'll turn the meeting over to <UNK> <UNK> who will address our Title Group performance.
Thanks, <UNK>.
It's really good to be an 108-year-old title insurance Company and still be growing very nicely.
As we reported this morning, the Old Republic Title business broke an all time record for the second consecutive quarter.
The record stood from 2003 until it was broken in the second quarter this year.
In this year's third quarter, title insurance produced pretax operating income of $55 million.
That bested this year's second quarter record earnings of $47.7 million by about 15%.
We also exceeded 2014's third quarter pretax operating earnings of $28.2 million by about 95%.
Moreover, the Company set an all time quarterly record for premiums and fees of $566.7 million.
That's about 20.5% more than 2014's third quarter's results.
We're experiencing significant and roughly equal growth across both agency and direct sectors of our business.
Our market share continues to hover around 15%.
And the commercial title insurance portion continues to grow, at more than a 20% clip and is accounting for nearly 20% of our business.
Claims reserves established in the prior years continue to evolve favorably.
Claims ratio for the quarter and year-to-date periods compares very well with the ratio we experienced in 2014.
As you might expect, all of our operating ratios have improved.
The expense ratio dropped from 89.2% in 2014's third quarter to 85.9% in 2015.
And our operating margin in the third quarter improved from 5.9% to 9.6%.
Year-to-date, the improvement was from 4.5% to 7.8%.
These are very healthy margins for the title insurance business.
We believe that we're in a moderately robust housing market.
Last quarter, we explained how our earnings were especially significant relative to the mortgage markets of 10 to 12 years ago.
Mortgage originations in 2003, we'd set the old record before the last quarter, were about $4 trillion.
By contrast, 2015's mortgage origination market is probably going to weigh in at about $1.4 trillion.
We ask ourselves whether we could ever see another $4 trillion mortgage origination market and of course, our answer is yes.
Maybe not anytime soon, but we should see volumes trending upward for an extended period of time.
As the economy continues to improve, and credit issues quiet and the effect of some of the regulatory changes abates, we think there will be a real opportunity for continued growth in the title business.
And with this scenario, we fully expect to continue making a solid contribution to Old Republic's consolidated bottom line.
And at this point, I will turn the meeting over to <UNK> <UNK> for comments on the RFIG runoff segment.
Look at this RFIG runoff set of numbers.
In the latest quarter and year-to-date statistics that we show in the news release, it's obvious that we've continued to make some additional provisions for litigation exposures that continue to exist in those two buckets of business that we refer to as the RFIG book.
And we've made these additional provisions in both the MI and the CCI blocks of business.
And that's the main reason, as you can readily see, that the reduced bottom lines we show for both MI and CCI runoffs, are occurring in this most recent quarter and year-to-date period in both buckets.
With respect to the CCI litigation, the expense provisions this year have been somewhat less severe than they were in 2014.
<UNK>though, you may remember reading the material we've put out, that in the second quarter of 2014 we did settle a large claim.
Large litigation claim in the CCI area and that caused the provision for claim costs in that particular quarter to jump up.
We don't have that situation this year, and that's why it's as we say, it's a much less severe type of hit.
Nevertheless, the underwriting performance for the much smaller CCI block of business is not as favorable as the MI portion.
In both regards, however, we do continue to expect a final resolution of the litigated claims within the next several months.
Perhaps before year-end, in so far as MI in particular is concerned.
And, as we've said in past occasions, our expectation is that a final resolution of both sets of cases should not have a significant adverse effect on Old Republic's consolidated financial condition.
If we leave aside these litigation matters, these runoff books of business are nonetheless progressing pretty much as we anticipated.
As you may have heard us say over time, over the last number of years, we do think that the mortgage guarantee business will run itself off by 2022, 2023.
And we, as we have in the past, expect that the runoff will be favorable.
That we have every expectation that the book, the MI book, should produce some reasonably consistent additions to the existing capital structure.
And of course, the accumulating surplus in that business will continue to [enure] to the benefit of the Old Republic consolidated equity account over the runoff period.
So again, leaving aside the litigation, I think we are looking at some reasonably favorable resolution of the runoff book.
So on this note, I'll give the reins to my colleague, <UNK> <UNK> here.
<UNK>, do you want to discuss the financials.
Yes, I do.
Thank you.
As we reported in this morning's news release, consolidated assets grew to $17.3 billion at quarter end.
While our shareholders equity account declined modestly to $3.8 billion or $14.95 per share.
The highlights of Old Republic's financial condition as of September 30th are as follows.
Our cash and invested assets remained more or less flat at $11.3 billion, by comparison to amounts reported at the end of June.
The table on page 5 of the release, however, shows that the cost basis of the investment portfolio actually increased by approximately $440 million during the first nine months of 2015.
This growth was offset by further declines in the fair value of the investment portfolio during the second and third quarters, in particular.
At September 30th, the portfolio was comprised of approximately 82% allocated to fixed maturity, and short-term investments with the remaining 18% directed towards equity securities.
Which is pretty consistent with the prior quarter end.
Investment income increased to $104 million during the quarter or by 21% by comparison to the same quarter in 2014.
For the first nine months of this year, investment income rose by nearly 14% to $289 million.
As mentioned in prior quarterly calls, this higher level of investment income is substantially due to the greater invested asset base accompanied by an increase in the overall portfolio yield.
Additionally, in the latest quarter, investment income benefited from a nonrecurring special dividend, attributable to one equity investment that added approximately $10 million to this source of revenue.
The credit quality of the fixed income portfolio remains at an overall A rating.
And the average life continues to be approximately five years.
Consolidated claim reserves remained largely unchanged at the end of September, by comparison to both the June and prior year-end balance sheets.
For the first nine months of 2015 and 2014, consolidated claim reserves have developed slightly favorable.
As we noted in this morning's release, the General Insurance Group experienced slightly unfavorable reserve development in the third quarter and first nine months of this year.
This added 1 percentage point to the reported claim ratio for both periods.
<UNK>though still unfavorable, the prior year claim development shows marked improvement, relative to the same periods in 2014.
And is trending closer towards the segment's long-term experience of recording adequate reserves at each period end.
Consistent with the past several quarters, the mortgage insurance group experienced favorable development of prior year reserves, as quantified on the top of page 4 of the news release.
And lastly, the Title Group reserves developed largely in line with prior estimates.
Shareholders equity at September 30th totaled $3.8 billion, or $14.95 per share as I mentioned earlier.
And that's a reduction of $0.21 per share for the quarter, and $0.20 per share for the first nine months of this year.
The reconciliation of book value per share located on page 6 of the release, shows that net operating income and realized gains in excess of the quarterly cash dividends paid to our common shareholders, continues to add to the book value per share of Old Republic.
The volatility in reported book value per share continues to be most significantly impacted by changes to the unrealized gains and losses in the investment portfolio particularly with respect to equity securities.
Finally, the capitalization ratio shown on the bottom of page 6 are essentially unchanged at the end of September, by comparison to the prior quarter and year-end.
So those are the highlights of our current financial condition, and I'll turn things back to <UNK> for any closing comments.
So there you have it in a nutshell.
The overall business is getting to the point where it's basically firing on all major cylinders, and it's regaining its customary stability.
With regard to our general insurance book of business, we're making substantial progress in redirecting a couple of blocks of business that have been the source of headaches for us for a while, as <UNK> indicated before.
And while this may be, this may cause I.
e.
the changes we're making may cause a bit of a slowdown in the top line growth, particularly, when it comes to the workers' compensation types of coverages in particular.
That the underwriting results should and are expected to improve significantly particularly on comp where, again, as <UNK> indicated, we have an objective of driving that loss ratio down to mid-70%s, where it has been more often than not, except for the last three or four years.
And I think we're going to succeed in that.
And, of course as we have in the past, we'll be doing this on the basis of unquestioned financial stability and solidity, as we have throughout the rest of Old Republic's business.
And finally, as we said, the clouds are parting over our business in the area of the runoff of the MI and CCI coverages.
And we think, again, that the long overdue settlements of the litigation that's been a very sticky point for us for several years.
That we think that those settlements are imminent, and should be out of the way in the next several months.
So on that note, we'll be happy to address any questions that we may have left unanswered, either in the news release or in these brief planned comments of ours.
Thank you.
(Operator Instructions).
Your first question will come from <UNK> <UNK> with Raymond James.
Good afternoon, everyone.
Hi, <UNK>.
Hello, <UNK>.
Couple questions.
On the reserve side, I know asbestos environmental is a low ---+ has a low percentage of your total reserves, minor, immaterial, frankly.
But, we did see Travelers come out in the third quarter with an addition to their reserves.
Maybe you could just give us an update on your perspective as it relates to Old Republic.
Then, just piggyback that into just an update through the third quarter results on the case reserves, and some of the other lines of business where you've had some challenges recently.
Namely the workers' comp area.
Well, I'll start by speaking to the A&E reserve question, <UNK>.
And that is as you properly said, that's not been a high visibility type of issue for us for years.
And a lot of it stems from the fact that we've typically, particularly in those earlier years before the rules of the game were changed in A&E, that we were typically issuing policies for $1 million or a couple of million bucks.
So that when we got hit on any of these claims we tended to be ---+ they tended to be relatively innocuous.
We did have a book of business that we wrote back in the early 1980s for a couple of years through an MGA operation, and that's a book of business we've regretted writing for quite a while now.
But that's been the main, or a main source of whatever issues we have with A&E.
The long and the short of it, if you look at the 10-K reports that we put out every year, you'll see that it's been trending down in terms of the overall reserve exposure we have there.
So again, it's not an issue for us.
It may be for large companies as you mentioned, with Travelers and so forth.
Which were at the center of the general liability area.
And they were issuing some significant policy sizes, and that's the main reason, obviously why they still may be feeling some heat from that area.
As to general reserves, <UNK>, do you want to address that part of the question as to what's happening there.
Well, <UNK>, is your question specific to case reserves or just the overall reserve development.
I was thinking about the case side of the equation, but maybe you could broaden the response to case and IB&R.
Well, I think as we've mentioned on prior calls, there are a couple books of business that we have had our challenges getting our arms around.
And we've dedicated significant management time and attention and effort in addressing those issues.
And have, we think, put in policies and procedures and have the right people looking at the right issues to make certain that we're setting appropriate case reserves in any given period.
Such that we get to the ultimate estimate of our obligation as quickly as possible.
So, that's been the source of some of the development we've had in prior quarters.
We think we're getting our arms around that.
And as a consequence, I think that's being reflected in the lower prior development numbers that we reported this morning.
Okay.
Thanks for those answers.
Just two cleanup questions, one on the title and the other on the runoff business.
On the title business, the loss ratio, the claims ratio, definitely for the first nine months is trending better than it did a year ago.
Is that reflecting in part the growth of the commercial side of the equation that's causing that downward improvement.
Or, is there some other broader macro issue that's causing that improvement in the loss ratio.
And then just to the RFIG runoff business, <UNK>, if you could just ---+ as I look to the third quarter result, and you talk about the increased litigation.
I'm just trying to think about what this business will look like post settlement, both from a loss and an expense ratio standpoint.
And so any guidance there would be helpful.
Okay.
Well, <UNK>, do you want to address the trends in the loss ratio for the title business.
Sure.
Those are good observations, <UNK>.
On the commercial business, certainly has an effect on the long-term loss history that the Company will have.
As that business grows, it certainly helps the loss development on a trending basis.
As you know, in the title business we have about a 20 year tail.
So, it takes some time to show up in terms of the actual numbers.
But we've grown that business so much, by about a couple hundred million dollars on an annual basis over the last five, six years.
So that certainly, is having an effect but it will have even more effect down the road as it continues to grow.
And then the other factor I think has a bigger effect, at least right now, on the loss development.
Is the quality of loans that we've experienced since kind of the go-go years of mortgage originations.
So I think what you're seeing is a better quality of loan with even less risk to the Title Company than we've ever seen before.
I think that's probably the major factor right now.
I expect the loss ratio to look continually better.
Okay.
And <UNK>.
I think that's right.
Because particularly in a good economy, in an improving housing markets, history shows that loss costs tend to come down.
Whereas when housing and mortgage lending sour as they did during the great recession years, you always expect the loss ratio to go up.
With respect to the runoff business, I'll say this again.
That the MI business ---+ if you track, as I'm sure you do, <UNK>, and others do.
If you track the trend in our earned premiums, quarter to quarter, you'll see a general decline of $9 million, $10 million per quarter in terms of earning premiums.
By the same token, if you track the actual loss ratio that we've been booking, it's not inconceivable, during this runoff period for MI, that we could end up with loss ratios in the 40%s or 50%s.
Because all the bad, most of the bad claims, have gone through the system now.
So that we now get more into a regular type of market and therefore, a regular type of loss or claim emergence.
From a cost standpoint, I think we can operate that business at a 9% to 12% expense ratio.
So, you put those two elements together, albeit on a declining earned premium base and that's why we say through 2022, 2023 when the business should be basically fully off the books that will show some continuing, though declining profitability.
With respect to the CCI, again, that's a much smaller book of business.
And, again, the only difference, a major difference between that book of business and the mortgage guarantee business is that we do have some potential recoveries on prior paid losses by virtue of salvage and subrogation recoveries.
And we just don't know the level of it at any point in time.
But it's there and that should help the bottom line contribution of that business.
And there again, I think we can run that business off at a 9% to 10% expense ratio.
So again, once we get rid of this litigation, this thing should not ---+ should be a non-event for us and if anything, particularly with respect to MI, we should ---+ you should see an amplification of the capital bucket by virtue of the earnings we would expect to produce.
As you saw this morning, MGIC reported its earnings.
And even though there you've got a different story, in that it's still very much actively engaged in the business.
But the trends there are the same, in terms of what's happening to their claim cost and so forth.
So we're getting into a much more normalized market which should have a beneficial effect on MI companies, whether they're actively engaged or not.
Okay.
Thank you, <UNK>.
Great answers and congratulations on the quarter.
Okay.
Thank you.
And from Dowling & Partners, we'll go to <UNK> <UNK>.
I had a question on commercial auto.
There's been a mixed experience across the industry.
Recently, we've seen some big corporations like FedEx talk about increased frequency, more driving, more goods.
And I was just curious if what you are seeing in frequency and severity is trending up at all.
I'll try to address that.
I think I did touch on that slightly in saying that when it comes to our commercial auto lines, we're definitely focused on the frequency and severity trends.
And we're making sure that our rate increases, particularly on that line, are commensurate with those trends that we're seeing.
But it is fair to say that there are a lot of issues in the external environment that are driving some frequency and severity: distracted driving, construction, less experienced drivers, so on and so forth.
So, there are factors that are out there.
We're keeping an eye on them overall.
We feel that the rate increases that we are getting on that line are keeping pace with those trends.
Is this the line where you are getting the largest rate increase versus general workers' comp or others.
No, not necessarily.
As I mentioned, where we are getting the largest rate increases are on the areas of the portfolio where we have experienced some underwriting difficulties particularly on the workers' compensation and some segments of workers' compensation.
So, that would probably be the areas where it's the greatest.
But I would say perhaps a close second would be on the commercial auto business.
But again, because of the nature of those lines, as I'm sure you are fully aware, <UNK>.
It's a lot ---+ we're able to fix rate issues or risk selection a lot quicker on the automobile liability side, the trucking side of the business.
And we are on comp because on comp one of the additional elements we have to deal with is the constant catch-up with inflationary cost pressures on the medical portion of that business.
So that's why as <UNK> just said, that's where we're getting the largest case ---+ largest price increases.
If I look at the trend of your workers' comp loss ratios, it was a very good improvement this quarter.
And when I put that against the 1 point of adverse development overall, I guess it was a little bit more in general insurance but, is there at all favorable development in any of these lines.
Or is workers' comp being affected by something going the other direction.
Yes, most of our issues on loss development have been in the comp area.
Once in a while, we get hit on general liability because of issues that again <UNK> alluded to before with respect to fortuitous events which can affect adversely, pretty quickly, a small book of business.
But no, when it comes to loss reserve developments the issue for us has been comp, comp and comp.
The auto line ---+
Just looking at the actual loss ratio in the quarter, though, I mean it is a lot better.
I don't know how much it's better than anything in the recent past.
And what was it that enabled it to come down that quickly.
Well, we don't think it came down that quickly.
But anyway, go back ---+ if you go back to our results for the last ---+ what would you I say, <UNK> ---+ the last 24 months through year-end 2014, particularly in the second half of last year.
If you look at those quarterly results, you will see that we disclosed very consciously and consecutively each quarter the hit that we were getting on the loss ratio by virtue of adverse loss developments.
And that was much more accentuated in the final quarter of last year when the thing really (technical difficulties).
Okay.
And I believe we said at the end of the ---+ during the second quarter conference call, we said that one of the reasons we felt more comfortable about the reserve developments fixing themselves, and therefore the loss ratio gradually getting better, was that we had hit ourselves pretty good with respect to prior year's reserves in that second half of last year.
And therefore, that is the main element for the loss ratio being driven down as consecutively as you see it now in the first, second, and now the third quarter of this year.
And I believe, <UNK>, you were at the recent road show and you know we said at that time ---+ we said the same thing at that time.
Right, that we did not expect the remainder of this year, which when we were there would have been the second half of this year to look anything as bad as it did for last year for that very reason.
So it's all fitting if you put it all in there.
I guess we can express it as much more adverse development last year and less of that this year.
And otherwise the underlying loss ratio is similar, improving.
Well, again, as <UNK> says, our objectives, and we believe we have the basis for doing that by virtue of the rate increases that we've been putting through as well as the selection of risks that we are doing.
Again as <UNK> said, we are cutting back on some parts of the business.
You mentioned specifically, some construction types of areas where the combination of those three elements: underwriting selection, pricing, and being more careful about where we are writing ---+ running the business and writing the business, that we aim to get that loss ratio down to the mid-teens which is where it should be from a long-term perspective on comp.
Mid-70s.
Mid 70%s, I'm sorry.
Mid-70s.
I knew what you meant.
Wishful thinking.
Thank you very much for those answers.
At this time we have one question remaining in the queue.
(Operator Instructions).
We'll take our next question from <UNK> Worely with JMP Securities.
Thank you.
Just one sort of numbers cleanup question.
In the title line how ---+ was any of the top line strength that we saw in the quarter related to a lot of mortgage volume being pushed through before the CFPB's new mortgage disclosure rule went into effect at the beginning of October.
<UNK>.
Sure.
I can answer that.
We did see a bump just like the week before.
And I think that was the matter of processing under the old rule as opposed to anything that occurred after October 3rd.
But the rest of the quarter really was an increase in purchase money transactions.
We had some we call them little boomlets in the refinance business because interest rates were going up and down and people thought it might be the last chance to pick up a very low interest rated mortgage.
So commercial business was real high and of course that's not affected by CFPB.
So, I think, yes there was a little bit.
We saw a little bit of a slowdown the week after the CFPB introduced the rules.
But I don't think it was a great deal of the business.
It's a wait and see as to how it will affect it in this quarter when you'll really see the effect of what the rule may have done.
Okay.
But it sounds like generally not necessarily anything that was more loaded into the third quarter that would have happened in the fourth quarter.
I mean, any slowdown we see will just be general sort of cyclicality of housing market in the fourth quarter.
Yep, you got the seasonality of ---+ yes, the mortgage market, right.
Okay.
Perfect.
Thank you very much.
It appears there are no further questions at this time.
Mr.
<UNK> <UNK>, I'd like to turn the conference back to you for any additional or closing remarks.
January.
Of 2016, which is right around the corner.
On that note, we'll bid you good afternoon.
