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spk02: Good afternoon. My name is David and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Old Republic International Fourth Quarter 2021 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'll be a question and answer session. If you'd like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star one once again. Thank you, Joe Calabrese. With the Financial Relations Board, you may begin your conference.
spk03: Thank you. Good afternoon, everyone, and thank you for joining us for the Old Republic Conference Call to discuss fourth 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. Please be advised this call may involve forward-looking statements as discussed in the press release and statistical supplements dated January 27, 2022. Risk associated with these statements can be found in the company's latest SEC filings. This afternoon's conference call will be led by Craig Schminney, President and CEO of Old Republic International Corporations. and several other senior executive members as planned for this meeting. At this time, I would like to turn the call over to Craig Smitty. Please go ahead, sir.
spk06: Thank you, Joe. Good afternoon and best wishes to everyone in this new year. Welcome again to Old Republic's fourth quarter earnings call. With me today are Frank Sedaro, CFO, and Carolyn Monroe, president of our title insurance business. Well, we're very pleased to report that ORI produced another terrific quarter, as well as a third consecutive record-setting year. Both our major segments, general insurance and title insurance, posted outstanding results. Net premiums and fees earned increased to $2 billion for the quarter and $8 billion for the year. That's up 19% over the prior year. At the same time, pre-tax operating income increased to $335 million for the quarter and $1.2 billion for the year, eclipsing the $1 billion mark for the first time and up over 40% over the prior year. The consolidated combined ratio improved to 88% for the quarter and 89.9% for the year, a 3.4 point improvement over the prior year. General insurance net premiums earned increased by 5% over the prior year and title net premiums and fees earned increased by 34% over the prior year. So we think it's clear that our diverse portfolio of specialty products in both general insurance and title insurance continue to deliver strong growth and exceptional profitability, as demonstrated by these results. So I'll now turn the discussion over to Frank, and then Frank will turn things back to me to cover general insurance, followed by Carolyn, who will discuss our title insurance business, and then we'll open up the conversation to Q&A. So Frank?
spk01: Thank you, Craig, and good afternoon, everyone. This morning, we reported fourth quarter net income, excluding investment gains and losses, of $268 million, a 20% year-over-year increase. For the full year, this figure was $935 million, up 40%. On a per-share basis, comparable year-over-year numbers were $0.88 versus $0.75 for the quarters and $3.08 versus $2.24 for the full years. Improved results in the year were driven by substantial growth and underwriting profitability in the general insurance and title insurance segments. And you're going to hear more about that a little later. Shareholder's equity ended at nearly $6.9 billion, resulting in book value per share of $22.76. When adding back dividends, book value increased just over 21% from the prior year end, driven by our strong operating earnings and higher investment valuations. Net investment income was relatively flat for the quarter and year, as an increase in the level of investments and lower yields on new investment purchases affected both periods. The investment portfolio was comprised of approximately 68% in highly rated bonds and short-term investments, with the remaining 32% allocated to large-cap dividend-paying stocks. The average maturity on the bond portfolio is 4.4 years with both book and market yields of just over 2.4%. The fair value of the equity portfolio increased by $460 million during the quarter and $750 million for the year. And I'll turn to claim reserve development. All three operating segments recognize favorable claim reserve development for all periods presented. In total, the consolidated claim ratio benefited by 4.6 and 2.7 percentage points for the quarter and year respectively, compared to 2.3 and 1.2 percentage points for the same periods a year ago. Shifting to our runoff mortgage operations, premiums and risk and force continued to decline in line with our expectations. Claim costs this year reflect a significant reduction in newly reported defaults and higher cure rates on loans already in default, in addition to lower claim severity resulting from increasing home values. The group paid another $25 million dividend to the parent, bringing the total to $100 million for the year. Subject to regulatory approval, we expect 2022 dividends at or above this level. Total GAAP shareholders' equity for the mortgage companies ended the year at $360 million. So to wrap up my remarks, this quarter capped a year of outstanding financial performance. We paid an annual dividend for the 80th straight year and have increased our dividends in each of the last 40 years. We paid a special dividend of $1.50, and over the last five years, we've returned $2.5 billion to shareholders. Our balance sheet is in excellent shape, We are well capitalized, and our businesses are positioned for continued profitable growth. And I'll turn the call back over to Craig for a discussion of general insurance.
spk06: Okay, Frank, thank you. For general insurance, net premiums earned increased by 8% for this quarter and 5% for the year. We continue to achieve strong rate increases on most lines of coverage other than workers' compensation. while renewal retention ratios and new business production remain very strong. Pre-tax operating income rose by 33% for the quarter and 34% for the year, primarily coming from improved claim ratios. The overall combined ratio improved over four points for the quarter to 88%, and over four points for the year to 91%. Claim ratios reported were inclusive of favorable prior period development of 6.6 points for the quarter and 3.8 points for the year. Turning to commercial auto specifically, net premiums earned grew by 5% for the quarter and 8% for the year. The commercial auto claim ratio improved 61% for the quarter and 71% for the year. Claim frequency that we saw was not quite back to pre-pandemic levels, while claim severity continued to increase, although we observed that it was at a slower pace. Rate increases in auto liability are continuing in the low double-digit range. So we think we're staying ahead of overall frequency and severity trends, taking into consideration the rates that we continue to achieve. Now turning to workers' compensation, net premiums earned were lower by 3 percent for the quarter and 10 percent for the year. The workers' comp claim ratio was 61 percent for the quarter and 59 percent for the year. Here, claim frequency is still slightly below pre-pandemic levels, while claim severity is slightly up. Rate decreases in workers' comp were, for us, in the very low single-digit range, but we think our rate levels remain adequate, and we will continue to maintain the underwriting discipline that we have so far. Our aggregated Commercial auto, workers' comp, and general liability claim ratio came in at 61% for the quarter and 66% for the year. That's an improvement of five points over the prior year. In financial indemnity, property, and other coverages, as we list them in the financial supplement, we continue to obtain strong rate increases and produce favorable claim ratios, contributing to our improved overall claim ratio in general insurance. These lines of coverage grew by 15% in 2021, and noteworthy, these lines are up over 40% since 2018, which reflects our efforts to diversify our lines of coverage and enhance our underwriting margins. So the Underwriting Excellence Initiative that we've talked about in prior quarters, which we began several years ago, is clearly paying off as we hone our focus on better segmentation, improved risk selection, pricing precision. And we think these efforts will continue to support adequate rate levels, high retention ratios, new business production, and ultimately continued strong underwriting profitability. So that concludes my remarks for the General Insurance Group, and I'll now turn the discussion over to Carolyn, who I know is anxious and eager to report on Title Insurance's outstanding quarter and year. Carolyn?
spk00: Thank you, Craig. As reported this morning, the Title Group posted an all-time high for quarterly underwriting revenue. while quarterly operating profits only trailed the record-setting results reported in the second quarter of 2021. Total premium and fee revenue for the quarter of approximately $1.2 billion was up 15% from the prior year fourth quarter. Premium and fee revenue for the year surpassed the $4 billion mark for the first time ever, a 34% increase over full year 2020. Our pre-tax operating income of $137 million for the quarter compared to $132 million last year. Year-to-date, our pre-tax operating income of $515 million exceeds pre-tax operating income for the same period in 2020 by $171 million, or approximately 50%. Full year 2021 results set an all-time record for the title group. Commercial premiums were up 63% over fourth quarter 2020 and up 36% for full year 2021 over 2020. The quarterly and annual figures both represent all-time highs. Commercial premiums represented 18% of our total premiums in the fourth quarter and 15.6% for the full year 2021. While we have seen a decline in order counts over the second half of the year as a result of the slowdown in the refinance sector, purchase transactions, which generate a higher fee profile, remained healthy to close out the year. In our technology portfolio, Pavaso, the market leader in digital closings, will continue delivering improvements to help in the broader industry adoption. Recognizing the value of Pavaso's capabilities We are integrating and leveraging those across our family of title technology companies. This includes our secure portal ready to close within our settlement software RAM Quest and EPN, our e-recording company. This will provide an end-to-end digital closing experience for the consumer. Last quarter, I introduced our new integration platform, Supermarket, with a goal to integrate with anything It will service our agents with an interconnected platform of external partners and technologies that interact and exchange information throughout the entire business workflow. Supermarket is live with initial partners performing real-time requests with a roadmap of growth in place. Supermarket will, with a one-stop integration, provide access to a variety of technology services and products to our agent partners. While simultaneously delivering services to our agents, we are expanding on our internal use of technology. Building on the successful use of RPA, we are actively piloting machine learning with optical character recognition to automate and improve business processes. We begin 2022 investing in our digital future while continuing to make enhancements to our current environment. These investments will assist our agents and employees in the constantly evolving digital landscape. And I will now turn it back over to Craig.
spk06: Okay, Carolyn, and congratulations on a terrific quarter and terrific year. Well, again, we're very pleased with this third year of record-setting operating results. We think these results reflect success of our specialty strategy in general insurance and title insurance. enabling us to produce significant value for our shareholders. So this concludes our prepared remarks, and we'll now open up the discussion to Q&A, where I will answer your questions, or I'll ask Frank or Carolyn to respond.
spk02: Thank you. At this time, I'd like to remind everyone, in order to ask a question, press the star key, then the number one on your telephone keypad. We'll pause for a moment to compile the Q&A roster. We'll take our first question from Greg Peters with Raymond James.
spk04: Good afternoon, everyone. I guess for the general insurance component, I'm going to focus on prior year development and the expense ratio. First on prior year development, definitely a change if you look at the statistical supplement relative to the last several years. And I was wondering if you could give us more color on what's going, which accident years you're getting the favorable development from, and which lines and, you know, with the outlook there.
spk06: Hi, Greg. It's Craig here. I think I'll ask Frank to address that, and then I'll chime in if there's anything to add.
spk01: Okay, so the quarter and year have a very similar story. The favorable development is coming predominantly from 2010 through 2017. All those years are contributing to the favorable development. And the vast majority is coming through on workers' comp and commercial auto. So it's a similar story to last quarter, just a continuation of it.
spk04: Got it. And so just as a follow-up on that answer, I mean, one of the industry – themes that everyone's been hearing about is social inflation as it relates to jury verdicts and severity, especially in commercial auto. Uh, should I infer from this that maybe that you've finally achieved, you know, getting near rate adequacy in that line of business as it relates to your book?
spk06: I think that's, uh, a fair assumption, Greg. Um, Clearly, when we set our loss ratio picks for the year, we'll still be cautious and conservative. But all indications are that based on the favorable development that we're seeing in commercial auto liability in particular, that it seems the compounding double-digit rate increases that we've had for seven or eight years we've talked about I know every one of these quarterly calls and you're finally seeing all of the fruits of our labor come through in the compounding of those rate increases and as you know we're conservative about releasing reserves from prior years on longer tail lines we unlike a lot of our here appears we wait, generally speaking, five years on workers' compensation, three, four years on auto liability. So that conservative position is starting to play out. And we're seeing, again, very strong reserve levels in those prior years. And when we look back at them, I want to be clear too that given that some of those years still have to settle out, we take into consideration what's happening with social inflation and inflation in general. And when we look back at those years, we appreciate that that can still have some impacts on any claims that remain unsettled. So likewise, we take a conservative view
spk04: on those years and make sure that the reserves we have up are adequate in our mind got it thank you for the color there on the expense ratio uh just looking at the full year you know definitely running on what 90 basis points higher than the previous year and certainly but 150 base 160 basis points higher than your 10-year average obviously business specs can have an effect here you know like if you were skewing more towards surety or something like that. But how should we think about the expense ratio going forward?
spk06: Definitely, Greg, there are good reasons why that there is a change there, particularly in the fourth quarter. So let me have Frank try to fill in and then I can pick back up if there's anything for me to add.
spk01: And Greg, so you hit on some of it, and I'll focus on the quarter because there's an impact, obviously, on the year also from that. It's just more dramatic in the quarter. So there is a mixed change happening, and we've talked a little bit about that with workers' comp comprising a smaller part of the total, and that tends to have a lower commission rate, so therefore lower expense level. And the lines that we're adding, these other coverages, have slightly higher expense ratios. But then they are actually expected to have better underwriting margins. So there's a little bit of a trade-off there that we're seeing in the expense ratio. But another part of this, pretty much an equal part of this, is that we just had in the quarter an accumulation of some benefit plan true-ups and some miscellaneous charges that all happen to go the same way in the quarter. We don't expect those to recur. So those are, you see that more in the quarter, but it's also impacting the year.
spk06: And Greg, I'll just wrap up by saying we have consistently stated, as we do in this quarter's release, that our target is for, in the general insurance group, for a 25% or below target. expense ratio, we recognize that we're above that, particularly with these items that Frank mentioned. And as we go along, we're not moving that target. If the mix continues to trend more towards these other lines that I talked about and that Frank talked about, primarily the financial indemnity lines, the property lines and the other coverage lines if we keep, as we said, we're deliberately growing those lines to diversify. And then you have a bit of a double impact because at the same time, as Frank stated, workers' compensation portion of the portfolio is decreasing and that had a lower commission ratio. So you have a bit of a double whammy there. If those trends continue in the mix, we may take a look at that target. But as of right now, it still remains our long-term target to hit that 25 or below. And as Frank said, fourth quarter is an anomaly and not a predictor of where we're going to be in 22.
spk04: Got it. Thank you. Pivot, Carolyn, on the title piece. You know, I don't want to diminish the outstanding results of 21, but, you know, we're always forward looking. And, you know, if I look at the direct orders open, the direct orders closed on a year over year basis, the numbers are trending down. Therefore, you know, it seems like 22 relative to 21 could be, you know, you know, there could be some erosion in your results. Not that, that an 89 combined ratio for the quarter or for the year is anything to sneeze at. But I'm just curious about your perspective on the 22 outlook relative to 21.
spk00: Well, the drop in orders is mainly because of the mix, the drop in the refi business. And, you know, purchase orders are a higher fee profile for us. And, you know, We recognize that we're still in a very hot real estate market, and while refi orders are down, the resale market is still really strong. You know, we feel good about the market right now. Commercial is still strong after a difficult 2020. But, you know, we also understand hot markets don't last forever, and any one thing can change them. You know, we're dependent on inventory, interest rates, a strong economy. And I feel like we're positioned that really no matter what happens, we'll be able to perform.
spk04: Okay. Just an observation, you know, is going through your financial supplement, you're, you know, for the runoff business, I know it's steeped in legacy, but you provide a lot of detail for business now that is only generating $32 million of annualized earned premium. And, you know, I think some of us would probably rather see more detail around, say, for example, your general insurance business rather than a couple extra pages about a runoff business that's become so small. That's, you know, just pointing out something that I'm sure you guys are well aware of. But anyways, thanks for your answers.
spk06: Thank you, Greg. And we appreciate your comment. And as you might have noticed in our... releases in our annual review and other public information. We've tried to give less real estate to the runoff business. And we have discussed those financial supplements. And we'll continue to take a look at it. So we note it. And we'll keep our eye on it. And we'll continue to de-emphasize that runoff business as we go along and give it less and less real estate.
spk03: Got it.
spk06: Yeah.
spk03: All right. Okay.
spk02: And as a reminder, ladies and gentlemen, press star one. If you'd like to ask a question next, we'll go to Matt Carletti with JMP securities.
spk05: Hey, thanks. Good afternoon. Good afternoon. Greg covered a lot of, Hey, hello. Greg covered a lot of ground there, so I think I only have really kind of one slash two title questions left. Specifically, I know you've given this to us, but I was hoping you could remind us of, say, for 2021, what the mix of the title book looks like, you know, resi-refi, resi-purchase, and then commercial.
spk00: So for 2021, for the full year, Our purchase represented 72% of our revenue. Refi was 28%. In the fourth quarter, it was closer to 75, 25. And then, you know, commercial, for the full year, it was about 15.6%. Got it. Great. And then just...
spk05: You know, just an observation question as you look at, you know, the past several weeks here, obviously mortgage rates have started to rise. How should we think about that? I mean, obviously, you talked a little bit about, you know, it has a negative impact on refi volumes. Have you seen, like in open orders or anything, a positive impact on purchases? There's been a lot of talk about kind of shaking some people off of the bench that been thinking about doing something and then realizing that now might be the time. Have you Have you observed any of that, or is that more in theory at this point in what happens?
spk00: Yeah, we have observed it. You know, once we got through the people finally got off vacation and started getting back into it, we really noticed it probably the last couple of weeks, the purchase business picking up for us.
spk05: Great. Very helpful. Thank you for the color and congrats on a nice quarter and year.
spk02: Thank you. Thank you, Matt. And that does conclude today's question and answer session. I'll turn it back over to management for any additional or closing remarks. Okay.
spk06: Well, as it seems to be the case, when we have a good quarter and a great year like this, there's not a lot of difficult or challenging questions for us. And right now we, as I stated earlier, feel very good about where Old Republic International sits with our two key businesses, general insurance and title insurance. And we look forward to another productive good year in 2022 and wish all of you the best. Thank you for your support and for listening to our conference call today. So thank you very much.
spk02: And this concludes today's conference call. You may now disconnect.
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