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spk01: If you would like to withdraw your question, press star 1 again. At this time, I would like to turn the conference over to Joe Calabrese with Financial Relations Board. Please go ahead.
spk02: Thank you. Good afternoon, everyone. Thank you for joining us for the Old Republic Conference Call, the third 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. All of the documents are available at Old Republic's website, which is www.oldrepublic.com. We advise that this call may involve forward-looking statements, as discussed in the press release and financial supplement dated October 26, 2023. Risks associated with these statements can be found in the company's latest SEC files. This afternoon's conference call will be led by Craig Schmitty, President and CEO of Old Republic International Corporation. and several other senior executive members as planned for this meeting. At this time, I would like to turn the call over to Craig. Please go ahead, sir. Okay.
spk05: Thank you, Joe. Well, good afternoon, everyone, and welcome again to Old Republic's third quarter earnings call. With me today is Frank Sedaro, our CFO of ORI, and Carolyn Monroe, our President and CEO of Title Insurance. Well, during the third quarter, general insurance continued to produce strong underwriting results, which drove a 28.6% increase in pre-tax operating income for the quarter and a 32.3% increase year-to-date. The decline we saw in title insurance pre-tax operating income continues to reflect what we're seeing from the effects of mortgage interest rates. However, our focus on specialization and diversification across title and P&C segments allowed us to produce $251 million of consolidated pre-tax operating income in the third quarter compared to $257 million in the third quarter of 22, alongside of a consolidated combined ratio of 91.9% for the quarter and 92.4% year to date. So our conservative reserving practices continue to produce favorable reserve development and we saw that in all three segments led by strong favorable reserve development in general insurance. Our balance sheet remains solid even as we continue to return capital to shareholders through both dividends and share repurchases. and as we continue to invest in the long term, including our September announcement of yet another new underwriting venture, Old Republic Accident and Health. So I'll now turn the discussion over to Frank, and then Frank will turn things back to me to go into some details on general insurance, followed by Carolyn, who will discuss some details on title insurance, And then we'll open up, as we always do, for conversation and Q&A. So, Frank, I hand it to you.
spk04: Thank you, Craig, and good afternoon, everyone. This morning we reported net operating income of $200 million for the third quarter compared to $206 million last year. On a per-share basis, comparable year-over-year results were $0.72 up from $0.68. Net investment income increased over 26% for the quarter, driven primarily by higher yields on the fixed income and short-term investment portfolios. Our average reinvestment rate on corporate bonds during the year was 5.3%, while the comparable book yield on bonds disposed of was just under 2.8%. The bond and short-term investment portfolios increased to 83% of the total with the remaining 17% allocated to large cap dividend paying stocks. We continue to evaluate this allocation in light of current interest rate environment. The quality of the bond portfolio remains high with 99% in investment grade securities with an average maturity of 4.3 years and an overall book yield of nearly 3.8% compared to 3.1% at the end of the third quarter last year. The valuation of our fixed income securities decreased by approximately $180 million during the quarter, driven by higher interest rates, while the value of the stock portfolio declined nearly $106 million, but ended the period in an unrealized gain position of just under $1.1 billion. Now moving to the other side of the balance sheet, Our strong reserve position once again led to all three operating segments recognizing favorable loss reserve development for all periods presented. The consolidated loss ratio benefited by 4.5 percentage points for the quarter compared to 3.4 points for the same period a year ago. The mortgage insurance group paid a $25 million dividend to the parent holding company in the quarter, bringing the year-to-date total to $85 million, with plans to return another $25 million in the fourth quarter, subject to regulatory approval. We ended the quarter with book value per share of $21.37. When adding back dividends, book value increased just under 5% from the prior year end, driven by our strong operating earnings partially offset by unrealized investment losses. In the quarter, we paid $68 million in dividends and repurchased nearly $125 million worth of our shares for a total of just over $190 million returned to shareholders. Since the end of the quarter, we repurchased another $52 million worth of shares, leaving us with about $90 million remaining in our current repurchase program. I'll now turn the call back over to Craig for discussion of general insurance. Okay. Thanks, Frank.
spk05: In the third quarter, general insurance net written premiums were up a hefty 12% and pre-tax operating income increased to $216 million, up from $168 million in the third quarter of 2022. Our combined ratio was 89% compared to 90% in the third quarter of 2022. So thanks to all the hard work of our associates along with our underwriting excellence efforts, we continue to produce overall very profitable results. The loss ratio for the quarter in general insurance was 60.4%, which included six points of favorable reserve development. And the expense ratio was higher at 28.6%, but that's in line with our line of coverage mix trending toward lower loss ratio, higher commission ratio lines over the last few years. We had strong renewal retention ratios and new business growth, including new business produced through our new underwriting ventures that helped drive that 12% increase in net premiums written. And we're continuing to achieve rate increases across the portfolio with the exception of DNO in our financial line and workers' compensation. So turning specifically to our two largest lines of coverage, first commercial lot of net premiums written grew at a 19% clip. while the loss ratio came in at 66.3% compared to 64.8% in the third quarter of 22. And in both of those periods, we had favorable loss development, although there was somewhat less favorable development in the third quarter of this year compared to last year. Severity trends holding around 10%. with frequency trends relatively stable, and our rate increases are commensurate with these trends we're observing, which implies that we continue to cover our lost cost trends on commercial auto. Workers' compensation net premiums written declined 6%, while the loss ratio came in at 33.2% compared to 35.8% in the third quarter of 22. And here, too, both of these periods saw favorable reserve development. Frequency for workers' compensation continues to trend down, while severity trend is relatively stable. So, we think our rate levels remain adequate, even with rate decreases in the low to mid single digits. We overall expect solid growth and profitability and general insurance to continue for the rest of the year and into 24 reflecting again our specialty strategy and our excellence initiatives. So I'll turn it now over to Carolyn to report on title insurance. Carolyn?
spk00: Thank you, Craig. For the third quarter, the title group reported premium and fee revenue of $684 million. This represents an improvement of around $35 million from last quarter, but it was down 29% from third quarter of 2022. Our agency premiums were down 31% and direct premium and fees were down 22% from last year's third quarter. and our pre-tax operating income of 37 million compared to 73 million in the third quarter of 2022. We had a combined ratio of 96.7 percent, which compared to 93.7 in the third quarter of 2022. As the challenging market continues, our approach is cost management with a long-term view focused on our strategic initiatives. This approach helped maintain an incremental improvement and our pre-tax operating income this quarter as compared to second quarter 2023 results. Since the end of 2022, interest rates have been the headline story in our market. And as interest rates continue to rise, housing affordability dropped to its lowest level in more than 30 years. This issue impacts the availability of existing homes for sale, pushing buyers towards new homes. Low levels of inventory will continue to affect the volume of transactions in our markets. The commercial market remains an important focus for us. Our transformed nationwide footprint has allowed us to grow market share in this segment. Our commercial premiums in the third quarter increased from last quarter, but we're down 32% over third quarter of 2022. Commercial premiums represented 22% of our earned premiums this quarter compared to 21% in the third quarter of 2022. The cornerstone of our business is our independent agents. 88% of our 2023 premiums came from independent agents. Over 60% of US title insurance premiums are written by independent agents. So our strategies utilize bundling of technology solutions to optimize the business processes of our agents and internal productivity, resulting in better customer and employee engagement. We believe these strategies will position us to take advantage of market opportunities in the future. And with that, I will turn it back to Craig.
spk05: Okay, Carolyn, thank you. Well, we remain pleased with our profitable growth in general insurance, which is helping mitigate the lower revenue and lower profit levels in title insurance. And we also remain pleased with our capital management efforts including the $684 million we've returned to shareholders through dividends and share repurchases in the first nine months of this year. For the remainder of 23 and into 24 we're optimistic for continue profitable growth within general insurance, as I commented on earlier, while we remain of the view that title insurance will continue to face mortgage interest rate and real estate market headwinds through 24. So that concludes our prepared remarks, and we'll now open up the discussion to Q&A, and either I'll take your questions or ask Frank or Carolyn to respond.
spk01: Thank you. At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll take our first question from Greg Peters at Raymond James.
spk03: Good afternoon. Can you guys hear me?
spk07: Hi, Greg. We can hear you just fine.
spk03: Excellent. Well, congratulations on your quarter. I guess I had... a couple of questions for you. First of all, you know, from a written premium standpoint, it seems like things have accelerated a little bit in the third quarter relative to the rest of the year. Perhaps you can give us sort of a perspective on how the third quarter is really going to shape the cadence of what we should think about for next year. Specifically, you know, as we look at the strong top line results, I guess, General expectation is we'd expect growth to moderate into next year, but with pricing and exposure growth, maybe an expectation of elevated growth going through 24 might be reasonable. Any comments on that?
spk05: Sure, Greg. I'd be happy to comment. So the strong net written premium growth we saw in commercial auto is significant. somewhat of a reflection on the fact that it became very clear that our pricing for commercial auto was appropriate and that we could be competitive in that space at the pricing levels that we were at as long as we kept up with severity trends. So again, we saw not only the lift that we got from say 10% rate increases on commercial auto on average, but also a lift from some new business there as well. And we feel very good about where we sit with commercial auto and we had favorable development again on that line of business. We're very well positioned relative to the marketplace to continue to be competitive on commercial auto into 24. The other thing that I commented on, you know, we've had four out of six new underwriting ventures have been in recent years. more recent years, and they are starting to produce premium. And I anticipate that we will start to see some considerable lift from those new underwriting ventures as we get into 24 and 25 based on the pro formas that we have now. You know, on the other end of the spectrum is workers' comp. The rest of the year certainly it does not look like rate increases are going to be the case. I think rate decreases continue there. Again, while on the surface we don't like giving up rate and we do our very best to hold on to rate, the frequency trends continue to go down and consequently the marketplace is reducing rates. That creates a bit of drag on our net premiums written. And I would hope that as we get into 24 that at least it flattens out and we're not continuing to see rate decreases there. So fairly optimistic about top line as we move into 24. Our portfolio sits at a very good place profitability-wise. and it's not as though we're having to take uh underwriting actions reducing uh uh large portions or even small portions of our portfolio uh yeah we're in we're in a very good place and we're able to um grow the business um thank you thanks for that answer uh just as a follow-up on the workers comp i mean the loss ratios that you're reporting are clearly
spk03: reflecting the prior development. Can you give us a sense of where you're pegging the current accident or loss pick inside workers' comp?
spk05: Yeah, well, you know, we're holding it fairly consistent with where we've had it in the past. As a matter of fact, it might even be about a point higher So the current accident year on work comp is around 64. And that compares to around 63 last year. So we're being conservative there. We're not reducing the loss pick. We would expect that as we get into our planning sessions and set our picks for 24, we'll take a close look at what's happening with severity and frequency again and take both of those things into consideration along with anticipated rate changes in 24 when we look to reset that last bit.
spk03: Got it. Thanks for that answer. And then I just pivot real quickly to the title business. I know the expense ratios popped up as revenues have come in. Do you think we're sort of nearing the peak in terms of where the expense ratio is? And I know you commented a little bit on that in your prepared remarks, but is it expected that that's going to, you know, gradually come down over time?
spk05: Well, I'll start off and then I'll hand it over to Carolyn to give a little more detail. So, you know, we have been very consistent in what we've communicated the last several quarters on this call. And that is that we were anticipating that 23 would have a combined ratio of around 97. And we're still looking at that as where we likely think the year will end. And of course, I'm speaking about combined ratio because that's what we talked about previously. And of course, 95 points of that combined ratio are expense ratios. So as Carolyn mentioned in her comments, managing expenses and as is also very clear it's the top line has a heck of a lot to do with where we end up on those ratios and um so we're being uh cautious but Carolyn I'll turn it to you on more specifically to respond to um Greg's questions about where that expense ratio might be for the year and into next year?
spk00: Yeah, I think that where we are is, you know, pretty consistent with where we think it will stay. You know, we were able to, although slightly, I mean, we did improve our combined ratio from the second quarter to the third quarter. And I just think that's just because of, you know, some of the things that we had been doing throughout the year. And I just expect it to stay right around this for at least the rest of this year on into 2024.
spk03: Got it. All right. Well, thank you for the detail. We appreciate your questions, Greg.
spk05: Thank you.
spk01: And as a reminder, if you would like to ask a question, please press star 1. We'll go next to Paul Newsom at Piper Sandler. Mr. Newsome, your line is open. Please go ahead.
spk07: Good afternoon. Thanks for the call. Hopefully you can hear me.
spk05: Hi, Paul. We can hear you just fine. Thank you.
spk07: I've had some bad luck last day. So I'm glad I got through. So I had a couple of title questions. One to ask, if the change in the... If we're seeing anything that affects the mix between title insurance sold through independent agents versus title through the direct channel. And I was just curious if that has, you know, the downturn has had any effect on sort of where customers go. And does that change your positioning in the title business as you see those changes? If at all.
spk05: Carolyn, I'll just... chime in real briefly and then turn it to you. But our observations on direct and independent are based, of course, on our portfolio. And just to give you a sense, our direct operations are mostly West Coast, California. So the real estate market there has had more headwind than we've seen in other places in the country. So for us, we have a view of direct business that is mostly California-centric. And then, of course, the rest of our view is nationwide. But Carolyn, I'll turn it to you now to... comment on what you think about any shifts in direct and agency and where things are.
spk00: Sure. You know, we've tracked for years. We're able to look at numbers of how much business is written by independent agents compared to directly owned operations. And at least for the last 10 years, it has stayed in the 60, low 60%. There just hasn't been much shift, and I don't see it changing because really direct and agency is also like a lot of market driven. On the East Coast, you see mainly independent agents, and in some of the bigger states, it's about a 50-50 split. As long as we are able to keep our independent agents in business, I don't see that changing much.
spk07: That makes sense. Does it matter, you know, we've seen this shift within the housing business to new, sales of new homes versus old homes, resisting homes. Does that make any difference to you as a title insurer from a marketing perspective? Go ahead, Karen.
spk00: No, I mean, it's just for an agent, they market to someone different. They're marketing to a builder rather than to a real estate client, that type of thing. And it just depends on what market you're in. whether an underwriter or a direct operation has a relationship with a builder. You know, our business is always relationship-driven, so it's really just about who has the relationship with a builder and who has the relationship with a realtor.
spk07: Great. And then it sounds like they're coming for me. A question about reserves, perhaps, because I always want to put Frank in the hot seat. You know, a lot of the companies today and recently are reporting issues with accident years sort of in the casualty reserves for accidents years of 2016 to 2019. Obviously, you folks have had a great track record overall. I'm just curious if In some of your books, you're seeing some of that, or is that some of the differentiation amongst your book versus others that are seeing these problems in various casualty lines in those years?
spk05: Yeah, and the years where you say others are experiencing problems with unfavorable development are... In accident years, did you say 16 to 19, Paul?
spk07: Yeah, they're sort of all the pre-pandemic years. It seems to be where the sources of some problems are for a lot of companies.
spk05: Yeah, well, I think we are very different, certainly on commercial auto. You know, we have been very successful at identifying trends early, responding quickly, and that started... well before the pandemic five six seven eight years ago and and um achieving the necessary rate to offset those trends we were seeing so while uh i know i've observed in the marketplace some of uh the our competitors that um are experiencing unfavorable development on commercial auto in those years that is not the case for us um we're actually We have favorable development. And on general liability, it's a little bit different. We are seeing some unfavorable development on general liability. And we're, just like we did on auto, we're responding to that. And some of the general liability growth in premium you're seeing is because of increases in rates on general liability to respond to any social inflation severity trend that's leaking from auto into general liability.
spk07: Great. Always appreciate the help. Thanks a lot.
spk01: We'll take our next question. Thank you, Paul. We'll take our next question from Evan Tyndall at Bereem Capital.
spk06: Hi. Thanks for taking my call. My question has to do with interest rates and competition in really all lines of insurance that involve flows. So I just generally think you can obviously get much higher yields on insurance flows these days. Do you guys expect various lines to become more competitive over the next few years in terms of pricing? And relatedly, do you guys still think that 90 to 95 combined ratio in the general insurance business is a good sort of range? Because you guys have been at 90 for a few years now. Or do you think you guys could start to push into the 80s? Thank you.
spk05: Sure. Be happy to address both of those. And actually, I think your questions are related. In my 37-year career, I've experienced hard and soft markets, some of them that have been driven by the issue of underwriting float and investment income that was given too much attention relative to underwriting income. So I understand your question. I think where we sit in this cycle, there is far greater concern in the marketplace about social inflation, about general inflation, the need to continue with rate and rate increases that are commensurate with those trends that I don't believe and certainly we here are not adjusting our target combined ratios because we're achieving greater levels of investment income. We think that it is important to continue to target combined ratios between 90% and 95%, depending on the line of business. And we say between 90% and 95% because there is a little bit of difference if it's shorter tail or if you're receiving investment income on the longer tail business. So you can write it to a few points higher combined ratio. But generally speaking about competitiveness in the marketplace, I think there's far greater concerns that outweigh the potential advantages of greater investment income. Of course, you could always have new entrants that come in and are disruptive and underpriced business, but generally speaking, the PNC marketplace is remaining very disciplined and more concerned about achieving appropriate levels of rate relative to inflationary trends. And so therefore, like I say, I think the second part of your question was related because that involves where do we set target combined ratios? And I can tell you that our target combined ratios will not change as we go into planning for the 2024 year. And we'll still be targeting combined ratios in the low 90s. uh to 95 it's uh will we be able to move into the into the 80s and target something in the 80s i think that is um very difficult to do because again there is some pressure that will inevitably come in the marketplace from uh the greater investment income and typically when there's greater investment income combined ratios go up So being able to drive that down in general insurance much further is unlikely. And then you also have to remember that a good portion of that is coming from favorable development. And as we said on the earnings call last couple of quarters, the current level of favorable development that we're experiencing is not sustainable enough. over the long-term six points is extremely robust. We try to err on the side of having favorable development, ideally in the 2% range, but right now that overall calendar year combined ratio is reflective of some very strong favorable development that won't continue. We're going to continue to target the combined ratios that we currently are targeting on an accident year basis.
spk06: Okay, great. Thanks. And one other question. Do you guys have an internal forecast for when you think autonomous vehicles might start to impact the commercial auto market? insurance market, or do you guys think it's so far off that it's not worth worrying about right now?
spk05: Well, we certainly keep an eye on it. We don't have any type of internal forecast, but we think it's a long ways off before the public gets comfortable with autonomous driving. And for us, you really have to think about long-haul trucking and commercial vehicles, because that's the majority of our commercial auto exposure. We don't have the personal lines commercial exposure. Ours is commercial, not personal lines. When it comes to commercial, the idea of an 80,000-pound truck running down a highway without a driver is probably a long way off before the public is going to accept that kind of catastrophic potential. And then if you look at the other commercial auto business that we write across our companies, it's commercial auto business that's transporting workers and goods and And those vehicles will always have drivers because they are the workers that we're insuring. So for us, the autonomous question is not perhaps as relevant as it may be if you're a personal auto carrier because, again, I think it's a long way off for the type of exposures that we underwrite. Okay, thanks.
spk01: And that does conclude the question and answer session. I would like to turn the conference back over to management for any closing remarks.
spk05: Okay, well, we, again, appreciate everyone that has joined the call and listened in and those that have asked questions. We are appreciative of that as well and appreciative of the support. And we feel good about the third quarter and Looking forward to reporting to you on our fourth quarter results and until then, thank you very much and have a good day.
spk01: And that does conclude today's conference call. Thank you for your participation. You may now disconnect.
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