Old Republic International Corp (ORI) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to today's Old Republic International first-quarter 2011 call. As a reminder today's call is being recorded. And at this time I would like to turn the call over to Ms. Leslie Loyet, with Financial Relations Board. Please go ahead, ma'am.

Thank you, good afternoon and thank you all for joining us today for Old Republic's conference call to discuss first-quarter 2011 results. This morning we distributed a copy of the press release and hopefully you've all had a chance to review it. If there is anyone online who did not receive a copy you may access it at Old Republic's website at www.oldrepublic.com.

Please be advised that this call may involve forward-looking statements as discussed in the press release dated April 28, 2011. Risks associated with these statements can be found in the Company's latest SEC filings. Joining us today from an Management are Al Zucaro, Chairman and Chief Executive Officer and Chris Nard, President. At this time I'd like to turn the call over to Al for his opening remarks. Please go ahead.

Okay, thank you. So once again, we appreciate your interest in joining us for this latest quarterly review of our business. As always we assume that you've had a chance to review the news release this morning so we don't need to repeat what's in it. Chris and I will therefore limit ourselves to some comments as we usually do to add a little more color to the release and then we'll open it up to the conversation -- to the questions that you may have. Once again, there is, has been for several quite a number of quarters now, there's been very little new to report for our business.

The biggest news was last quarter, in the fourth-quarter last year when we announced that we had closed our -- on the PMA merger. But as you can readily see in the release, our consolidated results for the first three months of this year were again unfortunately posted in red ink. But the damage so to speak, was about half as much as we sustained in the final quarter of last year. The summary table on page 2 of the release shows that our earnings difficulties are still very much concentrated in our mortgage guarantee line and in the smaller but related consumer credit indemnity coverage that we -- and have underwritten for many years in our general insurance segment.

While the remainder of our general and title insurance businesses are profitable, both still remain well below their long term potential. So let's see, if we focus first on general insurance, the underwriting ratio there was about the same quarter-over-quarter. The CCI line as we pointed out in the release is continuing to make the biggest difference from an underwriting standpoint. Its impact was a little worse in this years first-quarter when you compare that to last years first three months. But as we've reported for the past three quarters or so, claim payments in CCI -- the activity in claim payments has been affected by a quicker resolution of certain defaulted loans.

In the last six months or so, however, the reported CCI delinquencies and the number of claims awaiting validation have truly been trending down fairly consistently. So as we speak, this is also continuing and claim payment trends have fallen fairly steadily throughout the last six months or so. Nonetheless, we've been reluctant to take down reserve levels in CCI, so we're still looking for greater certainty, if you will, that the insured institutions are in fact now staying on top of timely and proper loan default submissions before we take any action to reduce reserves in that business. If we leave aside the CCI product, which is again currently inactive insofar as new production is concerned, the remainder of our general insurance business is performing reasonably well.

The statistics that you see in the exhibit that we posted on our website this morning show that the three largest coverage's of worker's compensation and commercial automobile, which is truck insurance, and general liability, continue to produce very acceptable claim ratios. The last three years as a matter of fact, X the CCI impact, these ratios have averaged about 67.9% almost 68% so that the 68.9% that we show in the first-quarter in the exhibit is very much in line with that. So if you add another say 24, 25 points of expenses to that ratio, you can readily see that the book of business in general insurance is generating about 5 points of underwriting margin and we think that that's a very good result.

The main issue therefore with our general insurance business continues to revolve around a fairly lethargic top-line. Market conditions as we see them, are not sufficiently positive for us to be more aggressive on the production front. We in fact, continue to believe that the American economy remains relatively weak and that sales and employment levels inparticular need to get quite a bit stronger and provide a greater -- and thus provide a greater uplift to premium production. We also think that there is more than sufficient commercial insurance capital availability in the marketplace to keep the lid on premium rates.

As we've indicated before, starting last quarter, PMA's addition to our book of business will and should provide a substantial boost say 22%, 25% to our pre-merger core business line in general insurance when you compare -- when we ultimately compare all of 2011 with 2010. So in our view, general insurance production is going to be again uplifted more as a result of an improvement in the American economy rather than any premium rate increases. And that would be particularly true again -- or particularly so, if interest rates should, as we expect them, increased to any significant degree in which event investment income should make up part of the slack.

So bottom-line wise, the release shows that PMA's contributions to the first-quarter results and all of that was very much in line with our expectations. There were no surprises in what happened to -- with that business post-merger. Let's see. With respect to general insurance earnings quality, again, we enjoy talking about the fact that prior years reserves have continued to develop favorably in this years first-quarter. General insurance operating cash flow has remained a positive but not sufficiently so as to increase the invested asset base, particularly when you consider the fact that we do take cash dividends out of our general insurance companies. So that the improvement in the positive aspects of cash flow does tend to not add measurable to invested assets and therefore, it's not helping when you consider the fact that we are operating still in a very low-yield environment in which we are managing investable funds. Let's see, Chris, why don't you pick up from there.

Sure. Thank you. Good afternoon, everybody. As you can see in our release, Old Republic's mortgage guarantee results in the first-quarter deteriorated from the same period last year. In looking at the comparison when you set aside the impacts of various captive commutations and pool insurance terminations that occurred in the first-quarter of 2010, the weakness then appears to have been in the claim payment trends, an increase obviously in the first-quarter of 2011. Changes in the reserve provisions related predominantly to our expectations for future recession activity and an expected decline in operating revenue. While the first-quarter comparisons were negative, pre-tax operating results did improve relative to the prior quarter.

On the production side of the business, trends including new insurance written and net-earned premium continue to be challenged. These items were down 8% and 16% respectively in the quarter-to-quarter comparison, although in the net earned premium line, they were roughly flat in comparison to the prior quarter. These trends have existed for a while and are largely as a result of several factors that we've seen. One obviously, the low level of housing activity we continue to see across the country, housing and mortgage activity. Continued run-off of our bulk book of business which is accelerated by the termination of several pool contracts throughout the year and refunded premiums related to the higher level of claim recession activity we've seen through this crisis. As we've mentioned in previous quarters though this trend is expected to decline throughout the year as those recessions become a smaller percentage of the total claim settlement population.

Net risk in force is effected by that same production environment. The levels of new production we're experiencing today are insufficient to offset the reduction of the risk in the portfolio that's been leaving due to refinancing activity or claims settlements throughout the period. We would continue to expect that these production trends will be challenged throughout 2011.

Let's look to the MI penetration rate. MI penetration rates while they remain at very low levels, we have begun to see a slight bounce back from the historic lows we experienced in 2009. We would estimate that the industry penetration rate has trended up slightly and is bouncing between that 5% and 6% level. That would compare to a range with a low of about 3% to nearly 15% and that range existed in that 2008 to 2010 time period. As far as our mortgage insurance business market share goes, that has trended down over the last few quarters and we would expect estimate the fourth-quarter of 2010 that share was about 7.5%.

With regards to the primary competitor of the mortgage insurance industry, the FHA. The FHA of late has been the primary constraint to growth in the MI penetration rate, but they have continued to make changes that we would anticipate will moderate their dominant market share over time. These changes have certainly enhanced the MI versus FHA rate comparison in several areas, particularly in the high FICO arena and we would imagine we'll support an overall improvement in the long run MI penetration rate. However, the ultimate impact of those changes certainly depend in part on the loan level pricing adjustments that we see on high LTV loans from the GSEs.

On the delinquency front we continue to see some improvement. Total delinquencies were down 31% and the traditional primary delinquents decline 25% when you compare the first-quarters of this year with the first-quarter of 2010. The decline in the delinquent inventory for the quarter is largely reflective of a long term trend that we've begun to see of the drop in the newly reported delinquents. That's been consistent for some time now.

Reductions in overall delinquents arising from the termination of pool contracts we've mentioned previously. Obviously from the increased paid claim levels we've seen and some slight improvements in the cure ratio trends. Also the HAMP program that we've talked about for a few quarters continues to generate some cures for the MI business but as that program tails off, obviously newly reported HAMP cures are down as expected. But we've been encouraged by some of the private modification programs that we've seen recently out of Fannie Mae and other large servicers.

The ongoing issues we've talked about with foreclosure moratoriums and the various backlogs in states, they've had the anticipated impact on our business that we've discussed in prior quarters. What we've seen there is the extended time frame -- the resulting extended time frame that some loans spend in the advanced delinquency stages and it is also resulted in some choppy paid claims trends as those moratoriums clear the foreclosure system, at somewhat unpredictable timeframes. Moving to our risk to capital, you can see from the release that the ratio amongst our mortgage guarantee insurance group of companies remains over the 25 to 1 level and at the end of the first-quarter was at 31.6 to 1. Our flagship Company, Republic Mortgage Insurance Company is domiciled in North Carolina and operates today under a waiver from the North Carolina Department of Insurance. That waiver permits us to continue to write business in the flagship Company when the risk to capital ratio does exceed the 25 to 1 level. There are certainly several other states that have risk-to-capital ratio guidelines and in the event that one of those states with a similar requirement would choose to either not recognize the North Carolina waiver, we, like other MIs, have an agreement with the GSEs that would permit us to write business in a separately capitalized subsidiary in the event that one of the other states was not amendable to that waiver.

In summary, we continue to see improving trends in the newly reported delinquencies and certainly recognize potential for the increase in the MI penetration rate, but these positives continue to be offset by the slow recovery we're seeing in the job market. And what has been expected but continual decline in home prices and obviously lower recession levels as we've mentioned earlier. And we would expect these conditions will persist throughout the year and continue to contribute to what we would anticipate is a slow recovery in the mortgage guarantee business in 2011 and 2012.

Let me jump to a little bit more positive story in our housing business and review the quarter for our title insurance Company. Old Republic's title insurance business continues to build on the positive momentum we've seen over the last several quarters. In the first-quarter this year we posted a pre-tax operating profit of $2.6 million and that compares to a loss of $8.6 million in the same period of 2010, the first-quarter. Premium and fees in our title insurance business continue to show strong growth and were up 30% over last year's first-quarter.

These gains continue to reflect the growth in our market share which is resulted from the industry dislocations we've seen in the title business over the last few years, our joint venture with the Attorneys Title Fund in the state of Florida and the organic market share growth we've seen around the country. We would estimate that in the fourth-quarter which is the most recent numbers we have, our market share in the title insurance business was around 11.5%. The expense ratio for the first-quarter of 2011 was 93% which was down in comparison to the same quarter of 2010 when we posted an expense ratio of about 95.5%. Claim ratio was 7.8% for the first-quarter and was up just slightly in comparison to that same period of 2010 when it came in at about 7.4%.

We mentioned the impact of the foreclosure moratoriums when a referenced the mortgage insurance section, they've played out in the title insurance business as we has anticipated and discussed in the last quarters and we think that will continue and would not anticipate that those create significant exposure for our title insurance operation. So when we look back on the title business we think we're making good progress in stabilizing that business and we're opportunistic that we'll continue to stabilize throughout 2011 and on. With that I'll turn it back over to closing comments to Al.

Okay. So before we turn it to the questions you may have, we'll just confirm again that our balance sheet remains in very good shape. We've more or less completed revamping the PMA investment portfolio to align it with our system-wide approach and investment policies and to eliminate any existing asset and liability correlations that existed in that portfolio and again to align it with our own asset and liability requirements. Liquidity throughout our business remains very good other than -- except for the MI line and operations for this year should continue to produce positive operating cash flows.

From a -- from a profitability standpoint, we still think that mortgage insurance results are not likely to be written in black ink before late 2012 at the earliest. This period in-wait so to speak is needed we think, to allow housing supply and foreclosure activity to stabilize and for the mortgage lending industry, to be reconfigured as well. As for the mortgage guarantee insurance business model to be re-examined to better assure its long-term solidity and its positive contribution to housing finance, which it was intended to do for the long run. On the liability side, we're comfortable with the overall quality of our reserve structure and as a matter of fact in this years first-quarter, prior years aggregate reserves developed near breakeven so they did not impact to any significant degree the current year's results.

Our debt level, as you may have noticed has grown substantially in the past two quarters. And last years final quarter we acquired some $130 million or so of debt through the PMA merger and in this years first-quarter we added another $550 million in the form of a seven year debt which we effected through the issuance of a 3.75% convertible debt in early March of this year. Our plans are to use these new funds to refinance to some advantage about $100 million or so of the debt that we assumed from the PMA companies and to add as much as $100 million of capital to one of our MI insurance subsidiaries as we had indicated over the last couple of years or so. And in order to keep its risk to capital ratios viably under control.

The remaining $335 million or thereabouts million or so of proceeds -- we'll keep that as a liquidity fund to potentially redeem next year the 2009 convertible debt that's currently outstanding, if that debt does not in fact convert to common stock. And if it should convert to common stock, then the current intention is to add this much greater liquidity fund to the capital needs of our general and title insurance business in particular to assure their continued growth over time. Let's see, having said this I guess we'll now turn it to your questions.

Thank you, (Operator Instructions) We'll take our first question from Bill Clark from KBW.

One of the other MI companies had talked about seeing an acceleration in claims received in April with some of the foreclosure issues being cleared out, at least to some extent. I wondered if you guys had seen any kind of similar trend emerge over the last several weeks?

Bill, I couldn't address what happened over the last several weeks. I just haven't seen that yet.

And in the general insurance business, considering it's kind of in the renewal season or has been recently, wonder if you could talk about any notable pricing impacts across any of your business lines from any type of renewal activity?

No, as we tried to say before, we just don't see it. Again, there's plenty of capacity out there in the loan tail lines and now all of these earthquakes and so forth they impact the property side of insurance and reinsurance I might say. But insofar as liability coverage is concerned there's plenty of capital and we just don't see, particularly with the lack of growth in the American economy which is you know putting a lid on premium -- on organic premium growth, we just don't see the makings of any significant rate changes in the business.

Okay, thank you very much.

We'll take our next question from Beth Malone from Wunderlich.

Hi. A couple of things. On the you know -- Chris, you often are talking about that cure rates and new delinquency rates are kind of a one of the bell weather calculations or estimates that you look for in an improving mortgage market and my understanding is both the cure and the new delinquency rates have been improving for almost a year now, but -- ?

Let's -- what we've seen is the newly reporteds have been going down consistently for an extended period of time. Cure rates a more recent phenomenon improvement.

Okay, not a year? Well I guess my question is if these things are improving, when do we actually see the benefit of that in the reported you know combined ratios that recorded in the mortgage insurance operation?

Well what's going to happen is the cure rates have to improve more than they have today so you've got to start getting the cure rates consistently above the newly reported delinquents. So today, you know we bounce around close to that from time to time in good quarters and it falls a little behind but cure rates still generally lag the newly reported delinquents even though the newly reported delinquents have been on a solid downward trend. Another thing you have to take into account is the impact of the declining recession rates that we look at each quarter and then obviously, looking to some leveling of these choppy pay claim numbers from quarter-to-quarter.

So again Beth, as Chris has said as we've said repeatedly over time, you've got so many variables and all of them have got to come together positively for you to see you know a benefit, a long range benefit in the loss ratio.

Okay, and then on the FHA changing their rate, when have you seen any impact on your business from actions by the FHA or does it take a much longer time?

It takes a longer period. I think their rates, I think they had an uptick in October and then a second uptick in mid-April of this year, I think just recently. And the other moving part there, Beth, is the Fannie, Freddie prices so I think the mid October rate increased from the FHA may in fact have been somewhat muted based on an increase in pricing from Fannie and Freddie so what we would need to materially improve penetration rates is you know less attractiveness in the FHA pricing scheme, but also some stability the GSE pricing.

Okay, and then along those lines, the Dodd-Frank Act has a proposal in it which would require -- which would encourage people to have 20% down which is something like 60% of the people who borrow for home, 60% have less than 20% down so it's a big part of the market. What do you all think of that proposal, the outlook on that occurring and what changes they might put into the proposal to make it more amenable to the mortgage insurance market?

Sure. I don't want to parse words but I'm not sure that it encourages or discourages anything. It's simply in its draft release said that if the borrower had less than 20% down, then the lender might have to hold additional capital on that loan. We would say here at Old Republic we're supportive of anything that encourages reasonable high LTV lending. There's a long comment period to go on what you're referencing falls under what's called the Qualified Residential Mortgage Language. There's a long comment period to go before we set in stone what the capital requirements, vis-a-vis the down payment are on those loans. So we're actively as a trade group trying to encourage regulators in that vicinity to make that model a little more supportive of the MI business or at least get us on par with the FHA execution. So the comment period has got a while to run, Beth and they've got to absorb those inputs and then it takes about a year after the end of the comment period before anything would take effect.

Okay, and then a question on the CCI or the consumer credit. It sounds like, should we assume that that business pretty much mirrors the mortgage insurance business in terms of you know, it's period of recovery or can we expect that CCI will have less of a negative impact on the combined ratio of the general insurance operation over time?

Well, you know, right now, Beth unlike the mortgage guarantee business which is you know admittedly producing a low volume of new insurance, the CCI product is not producing anything new, right? It's fundamentally on a temporary run-off basis, pending the occurrence of two things. First, that we finish you know, re-drafting the policies and reestablishing a new rate structure for that business to reflect the bad experience, underwriting experience we've had. And two, for there to be demand by the lending community for coverage of you know home equity or what have you, types of loans, and of course that's not happening by any stretch of the imagination. So until those two things happen, what you're going to see with us is one, a continued decline in the premium volume since -- as loans are repaid or as we pay claims or what have you, it inherently is on the downtrend and secondly with the improving economy and so forth, you should start seeing an improvement in the loss ratio. But truly that business has shown, unlike any past period that it has been very much aligned with the trends and patterns of the first mortgage business.

Okay and then finally, you mentioned that you're not really seeing evidence of improved pricing in the general insurance but are you seeing increased demand because there's a lot of information suggesting that trucking -- demand for trucking is certainly improving?

Yes, absolutely. Wherever you have, whatever industries we're involved in okay, that are improving in terms of garnering more sales or garnering more traffic in the case of trucking and so forth, yes, you are -- we are getting some organic growth there. But that's not by any stretch of the imagination due to any positive change in rates. Now here and there, in some parts of the country, in the workers compensation area, we are getting some modicum of rate improvements, particularly on pieces of business that are -- that are loss sensitive where in fact we are enabled to increase the customers cost by virtue of the experience, of the negative experience that individual customers may have produced. But in the big picture basis, we just don't see let's say, anything like well, you may not have been around but like we experienced back in the late 1980s when the whole market you know grew by leaps and bounds primarily on the strength of both an improving economy on the one hand as well as substantial positive rate changes, we just don't see that right now.

Okay, thank you.

(Operator Instructions) We'll take our next question from Stephen Mead from Anchor Capital Advisors.

Can you talk a little bit more about the PMA merger and also I know that they were using the reinsurance balance recoveries in terms of the year-over-year increase that you incurred or what was on the balance sheet. But as far as PMA's business, how was its business in the quarter in terms of relative to last year and then also from an underwriting standpoint for the reinsurance side, are there any things that you will do along those areas?

Yes, well relative to the first-quarter of, I'm going from memory, Steve but relative to the first-quarter of 2010, I'm going to say that the totality of the PMA business that we've booked this quarter produced about the same results. And as we say, yes, as I believe we said on the first page, the bottom of the first page of the release, it produced about a $7 million post-tax bottom-line. That Company is capable and was capable on absolutely unusual matters, was capable of producing you know $25 million, $30 million worth of honest to goodness profitability. So we think that that's going to continue based on everything we know.

The only change so far that we have made, not that we expect very many changes except perhaps some greater focus on some areas of strength that PMA has, the only major change from the merger date forward has been the fact that we did increase our retentions. As you may know, our retentions in workers comp, let's say at Old Republic are in about $2.5 million to $3 million range whereas PMA's retentions were you know much lower than that, $0.5 million or thereabouts as I recall. So that's having a positive effect on the top-line from the standpoint that we are retaining more of the business than was the case when PMA was operating on its own. And maybe that's what -- that was the thrust of your question, when you referred to reinsurance.

Okay, and then just year-over-year comparisons. What was the CCI business in terms of revenue -- in terms of premium, how much was it down year-over-year ?

Well, I don't mean to evade the question, Steve but one of the things that affects that business is that historically, some 40% or 45% of it has been retro-rated meaning on an account by account basis, the premiums, we've had the ability on accounts which let's say have produced bad results, to increase premiums. So therefore, depending on what the loss ratios are on individual accounts in any one period, it does have an effect on the top-line, but Chris, do you have that sheet of paper there that shows what the -- ?

Yes, year-to-date in -- for all of 2010, just to give you an idea, for the full year, we had premiums earned of about $88 million. And of that, roughly $18 million okay, was retro-adjustments. This year-to-date, first-quarter, we've got about something short of $21 million of which $6.5 million or thereabout is retro-rated adjustments. So if you assume the same level of retro-adjustments for the rest of the year which I think is not necessarily a good assumption given the fact that the retros operate on a account by account basis and nobody knows where individual accounts end up on the quarter-to-quarter or year-to-year basis. But if you just take the $20 million you know that would imply about $80 million of earned premiums this year which would be about 10% less than last year. My gut for what it's worth, is that we're probably going to end up the year with some $65 million to $70 million of earned premiums, because again, quite a bit of that business just as it's occurring in the mortgage guarantee business is logging off and as loans get repaid or we pay claims and therefore, the in force -- the risk in force on which the premiums are based you know goes down. So I think that's the best I can give you in answer to your

And then same thing, in terms of 2012, it would shrink again?

Well, yes, unless we were, unless the market should change significantly in terms of both demand for the coverage on the one hand as well as acceptability or acceptance by the market of what we have in mind as to what the rate structure should be going forward. I think it's going to take a while yet for lending institutions to need, now maybe the smaller banks in particular might require the coverage sooner than the larger lenders, but we think it's going to take about the same amount of time as the mortgage guarantee to you know, to fix itself from a volume standpoint, in particular.

If I could just from an educational, the FHA rates, I know they've been raised but what are your rates today or the business that you're doing versus say the business that goes to the FHA? How does the rates compare and what do rates have to get to make -- ?

Well, as I referred to earlier, you got to think about the total borrower execution so that is you know the mortgage insurance rate, the cost of the conventional financing from the GSE combined with the -- against the FHA execution. I think the best way to think about it, because it varies by every product, attribute, FICO score, LTV, I mean, it would be impossible to cover, but I think it's safe to say with these recent changes, generally the mortgage insurance execution is a more attractive execution on high FICO score loans so when you get over that 720 bucket. I think in the last adjustment, the MI execution was better in the high LTVs but predominantly in the 90% LTV space. I think when you look at this adjustment, the MI execution is attractive across all LTVs as long as the borrower has a very attractive FICO score profile.

Okay. Thanks.

We do have a follow-up question from Beth Malone.

Okay, thank you. Yes, one more thing on. I know you don't generally talk about specific competitors but could you talk about, some color on maybe what AIG was doing in the market in the first-quarter relative to the market share on the general insurance side? Did you see a change or has it had any impact in your pricing or marketing?

Well, as you anticipated, Beth, we don't have any comments on that.

How about in general? Are there any large competitors that are behaving differently?

Well, I think in all fairness, if you look at individual companies, you know the large ones against which we compete typically, if you look at their top-line, that's going to indicate what the heck they're doing. Anybody that's growing fast and furious in this market, you know if I were in your shoes I'd be suspect.

Okay, alright well thank you.

(Operator Instructions) And it appears we have no further questions. I'd like to turn the call back over to Mr. Al Zucaro for final comments.

Okay, thank you and again we thank and appreciate everyone's participation in this quarterly visit and as always we look forward to a repeat next quarter and many quarters going forward. On that note you all have a good day. Bye.

Once again, ladies and gentlemen, that concludes today's conference. If you are interested listening to the replay, the phone number is 877-870-5176 using the passcode 2876635. Again, that number is 877-870-5176 then using the passcode 2876635. Have a good day.