Old Republic International Corp (ORI) 2013 Q1 法說會逐字稿

Welcome to the Old Republic International first-quarter 2013 earnings conference call. Today's call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session, and instructions will be provided at that time for you to queue up for questions. And I'd now like to turn the conference over to Scott Eckstein with MWW Group. Please go ahead, sir.

Thank you, operator. Good afternoon, and thank you for joining us today for Old Republic's conference call to discuss first-quarter 2013 results. This morning, we distributed a copy of the press release. If there is 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 dated April 25, 2013. Risks associated with these statements can be found in the Company's latest SEC filings. Participating in today's call we have Al Zucaro, Chairman and Chief Executive Officer; Scott Rager, President and Chief Operating Officer of Old Republic, as well as our General Insurance Group; Rande Yeager; Chairman and Chief Executive Officer of our Title Insurance Operations; and Karl Mueller, Old Republic's Chief Financial Officer. At this time, I'd like to turn the call over to Al Zucaro for his opening remarks. Please go ahead, sir.

Thank you, Scott. And thank you to everyone for joining us. Today, as we've done recently, we'll address the release in the following sequence. We'll speak to the consolidated results a bit, then move on to the RFIG run-off business, and then on to general and title insurance. And then we'll make some commentary on the basic financial aspects of the report. At the end of these comments, we'll go to a question-and-answer session.

Of course the big headline in this year's first quarterly release is that we booked a consolidated profit for the first time in 10 consecutive quarters. And overall, the profitability was once again most affected by our general insurance segment, which has remained incidentally profitable throughout the past six years since the great recession took hold. But in this latest quarter, the overall profitability of the business was truly enhanced, and most significantly by a very strong growth in our title insurance business. And as you see in the release by a substantial drop in the claim costs attaching to the run-off mortgage guarantee segment.

Scott and Rande will speak to the basic factors in general and title insurance. And these factors are very positive, and they affected the general insurance business very positively. In the meantime, though, we'll just take -- I'll just take a few minutes to address what's happening in the combined run-off of the MI and CCI lines, which since the second quarter of last year, we've segmented in the so-called RFIG segment or corporate structure.

I think that the quickest way to gain an understanding of the RFIG run-off experienced in this year's first quarter is to take a look at the quarterly premium and claim-cost trends of the last couple of years. And quarter to quarter, premiums have been declining at an accelerating pace since we stopped writing new business around mid-year 2011 with respect to the MI line and sometimes in 2008 with regard to the CCI line. But as you can see, there was a slight uptick in premiums earned in the first quarter of this year, as well as the first quarter of 2013. And that's a slight uptick, as I say, in relation to the prior quarter, which would be the fourth quarter of the preceding year. But then there was a resumption of the declining premium trends in the last three quarters of both '11 and '12. And this declining earned premium pattern is to be expected when a book of business is in run-off and there is no new production coming in to dampen or even reverse the fall off in the top line.

Then when it comes to claim costs, which of course is the denominator in the calculation of the claim ratio, the normal pattern of the past couple of years at least, has been for this ratio to drop off in the first quarter of the year, in comparison, again, with the final quarter of the preceding year. And then for it to climb up to a higher level in the last three quarters of the year. So big picture-wise, there appears to be some seasonal aspect to these claim-emergence patterns on a quarter-to-quarter basis. But when their effect is married to the declining premium base, then the rise in that claim cost and claim ratio in the next three quarters of the year does create what you might think of as a double whammy, so to speak, in terms of the greater claim ratio for the last three quarters of the year.

The MI claim ratios we've been posting are very much, as always, reactive to the quarterly trends in claimed settlements and payments, trends in new defaults being reported by insured lenders, by the closing of previously reported claims without the payment for one reason or another. And the rates, of course, at which previously reported defaults are taken out of the pending claim inventory, because the default has cured itself for one reason or another. In this year's first quarter, our evaluation was that these four factors were trending positively, or at least not getting any worse than they had. And this had, in combination, all these four major factors, had a very beneficial effect on the claim-reserve level at which we closed the books at March 31.

But on the other hand, we were somewhat heavy-handed when it came to assumptions about claim frequencies. And in this area, our expectation is that a greater number of long-lingering defaults will be headed to foreclosure and require a payment down the road. So when we put all of that together, ie, the four favorable factors that I mentioned before and this last one, the four beneficial factors overwhelmed the last one and is the basic reason why you see the drop in the claim ratio to the lowest level, I might say, that we've seen for any one quarter within the last couple of three years. So at this juncture, we're assuming that the mortgage guarantee claim ratio will, once again this year, gravitate to a higher plateau as the year moves along. But we still and nonetheless expect that the full-year claim costs should come in well below the 2012 level from a dollar standpoint.

In the RFIG run-off section of this morning's earnings release, we also show some summary operating data for the CCI portion of the run-off segment. And here again, premium volume has generally been trending down, and claim ratios have been bouncing around quite a bit quarter to quarter. In the last three or four quarters or five quarters or so, claim emergence in CCI has been relatively unstable, as we've reached to different evaluations quarter to quarter with respect to the litigation expenses we faced. And on the other hand, we've also, again to use the same expression, been somewhat heavy-handed in reducing the expectations we've had about future salvage recoveries on claims previously settled.

This last factor, in our view, is effected by a great deal of judgment. And the judgment relates to the employment situation and what will happen to employment levels in this country, and the long-term impact that employment or unemployment has on borrowers' ability to make good on the debts that paid on their behalf through the CCI insurance program. Still, CCI defaults are coming down fairly steadily, so that the major factor that could derail the steady extinction of losses from this line would be some significantly adverse litigation outcome, which still, in our opinion, does not appear to be in the cards.

So in summary, the bottom line for the combined MI and CCI run-off is that it should become a much lesser burden than it has been insofar as Old Republic's consolidated results and financial condition are concerned. We still hold to the view that by 2014 to 2015, somewhere between those two years, that the two lines in combination could begin to throw off a modicum of profit instead of the losses they've produced since 2007. So even though we're more likely than not going to incur operating losses this year in those two businesses combined, we think that the hit to the bottom line, to the consolidated bottom line of Old Republic is going to be reduced from the level that we posted last year and the last number of years.

Having said that, let's now turn the discussion over to Scott and then Randy, who are going to be quite happy to speak to the much more positive aspects of our business. So you want to take over, Scott?

Sure. Thank you, Al. Good afternoon, everyone. The general insurance group had a pretty solid first quarter. Excluding the CCI results, the group's net premiums earned were up 9.3% to $600.2 million year over year. Growth was driven by construction, risk management, large accounts, and commercial auto. Of the roughly $50-million increase in premiums between first quarter of '12 and first quarter of '13, roughly half was in the workers'-compensation line. Here we're seeing rate improvements and a steady-to-increasing payroll base. All but two of our several operations delivered written premium growth year over year through the first quarter of 2013. Rising premiums are obviously caused by three principle considerations. We got improved rates, new business, and the organic growth from the existing book that you write. The extent to which each of those factors may foster growth for our various operation depends on their particular marketplace, in general, and the specific industries that they serve.

For the general insurance segment as a whole, we can fairly state that retention levels are at expected levels, and we are seeing opportunities for new business in virtually all of our markets. The Markets we serve are always competitive. Risk selection in the underwriting process thus becomes crucial to ensure profitable operations. But as specialty underwriters, we believe we have advantage over most in the industries in this respect. Most of these advantages have to do with our culture and dedication to the underwriting discipline for the long run.

Claim costs ticked up, with the claim ratio rising to 71.9% from 69.2% a year ago, again excluding the CCI results. This is not an unusual phenomenon in a growth environment, as new business generally takes a year or more to settle into more historical-loss ratio patterns for the book as a whole, nothing out of the ordinary. At this stage, we still expect to achieve our historic positive underwriting results on the total book of business as the year plays out. Offsetting the increase in the claims ratio, the expense ratio dropped a couple percentage points year over year to 24.5%. This was primarily due to the adoption of the new DAC accounting principle in 2012 that we had discussed previously with you. That was a non-reoccurring cost in 2013. The end result of the premium and claim trends is a composite ratio of 96.4% versus 95.7% a year ago. Pretax operating income is down from $80.5 million to $76 million, which closely aligns with the decline in the investment income for the quarter.

Overall, we see an improving rate environment, an improving rate base, such as mileage driven for trucking operations and/or steady to growing payrolls in construction and energy-related industries. One quarter doesn't a year make, but thus far things are about on pace for where we thought we would be at this point in time. And now, I will turn the mic over to Rande Yeager for his comments with respect to the title business.

Great, thank you, Scott. And I am happy to report that the title Company continued its winning ways. We reported our best first-quarter performance since 2003, with a pre-tax profit of $21.5 million. That compares to $9.4 million last year. There were significant gains in both the agency and direct revenue fronts. Combined revenue was up $105 million, or 29.1% to over $467 million. Along with that, our expense ratio continues to show improvement. It dropped from 91.5% in 2012 to 89.5% in 2013. Our employees are working very hard to control both expenses and risk associated with the operations.

The claims ratio improved from 7.2% in the first quarter of '12 to 6.9% in 2013, all good. Early in 2013, all indicators point to improving results. I could comment on some of the areas in the country that are experiencing significant growth, but fortunately they all are. Unless something unexpected were to occur, like a large increase in mortgage interest rates not expected or a rapidly failing economy, with significant loss of jobs, I honestly believe that the best is yet to come for our title business. As we said earlier, I'll now hand the phone over to Karl Mueller to address consolidated highlights from a financial perspective.

Okay, thank you, Rande. This morning, we reported that Old Republic ended the first quarter with shareholder's equity of almost $3.7 billion, or $14.31 per share, which is up slightly from the $14.03 reported at the end of 2012. Of that total $0.28 per share increase, $0.03 emanated from operating earnings in excess of the quarterly dividends paid to our common shareholders, and the remaining $0.25 increase was generated predominantly by a rise in the fair value of our investment portfolio. Page 6 of the release shows the break down of the total book value per share between Old Republic's ongoing operations and those of the RFIG run-off segment. You'll note that the ongoing business operations contributed $14.58 to the total book value, and this was then offset by a negative book value of $0.27 per share, attributable to the RFIG run-off segment.

As was discussed in prior calls, we're required under GAAP accounting to recognize RFIG's losses, so long as we control that business. The effect of this accounting treatment is to further increase that segment's negative equity balance, which in turn reduces the consolidated book value. Therefore, our focus in recent periods is to grow the book value attributable to our ongoing operating segments, with the understanding that the RFIG negative equity will ultimately be restored to the total at some point in the future, n the event the business returns to cumulative profitability or Old Republic relinquishes control of the business in one fashion or another.

Turning then to the asset side of our balance sheet, we would just comment that it remains largely unchanged at the March year end -- our March quarter end from year-end 2012. Our investment portfolio grew modestly during the quarter. This resulted from the addition of positive operating cash flows and greater market value appreciation of the portfolio. Otherwise, the composition of the portfolio remains consistent with prior periods.

Moving to the right side of the balance sheet, overall, our claim reserves increased slightly from year-end, reflecting business growth in both our general and title insurance operations. During this year's first quarter, the year-end 2012 reserve balances, I would say developed slightly favorable on an overall basis. And then breaking that into the component pieces, similar to last year's first quarter, general insurance reserves have trended favorably. And title insurance reserves developed pretty much in line with year-end original reserve estimates. We should also note that the year-end reserves in the RFIG run-off segment have developed more favorably than in last year's first quarter, and for that matter, for the full year of 2012. This is largely the result of the factors already noted earlier in this call, including some seasonal trends in claim activity in addition to a greater number of cases that were closed without payment during the first quarter, beyond those levels that were anticipated in the year-end 2012 reserve estimates.

We ended the quarter with a debt-to-equity ratio of 15.5%, and a debt-to-total-capitalization ratio of 13.4%, both of which are substantially similar to year-end levels. We continue to believe that our balance sheet and cash flows to the parent Company could support additional debt leverage if the need were to arise in the future. And from a cash-flow perspective, this morning we reported consolidated operating cash flows of $143 million for the quarter, compared to $49 million in last year's first quarter. This improvement resulted from increased operating cash flows across all three of our operating segments. At the end of March, we had approximately $215 million of cash and highly liquid securities that were held either by the Old Republic Holding Company or one of its non-regulated subsidiaries.

As discussed previously, the dividend-paying capacity from our regulated subsidiaries to the Holding Company is dictated by state regulation. For all of 2013, this capacity approximates $350 million. And over the past five years, the actual dividends that have been paid to the Old Republic Holding Company have averaged $185 million, or roughly 55% of the maximum that was available. The receipt of these dividends, along with interest income received on inner-Company debt we think provide the necessary resources to fund the Holding Company's obligations, which most significantly include interest on our outstanding debt and the regular cash-dividend payments that we make to our common shareholders. We continue to believe these sources of cash to the Holding Company are both sufficient and sustainable to meet our obligations for the foreseeable future.

Let me now turn the mic back to Al for closing comments.

Okay. Let's see, as Scott said a few minutes ago, in our business, a single quarter does not make a year. And this is particularly so in the long-term-oriented business that's always affected by a large dose of fortuitous events. Still, the results we've posted in the first three months of this year do provide a good foundation for the entire year. If you've had a chance to take a look at the management letter we posted on our website a week or so ago, and that's the letter that's part of our annual report to shareholders, you'll read that we have every expectation for this year being a strong turnaround year after five or six pretty miserable years in our business.

As we've suggested before, the run-off RFIG business has to become a much smaller burden as the MI and CCI claims activity dies down, if only because of a recovering housing sector, which will as they say, lift many boats and a better overall economy. And this same turnaround or improving housing sector is also providing fuel to our title business, which is entering the up-leg, so to speak, of the cycle. And it is doing so in the best and strongest financial position its ever been in. And with a very firm hold on a much greater market share than we've had ever. We spent quite a bit of money in the last number of years to build up that market share when the business was in the doldrums. And we think that that effort is going to pay very handsomely as we are going in the -- into the better part of the normal cycle, which affects title insurance.

As to our general insurance engine, it should operate with much higher horsepower, as the gradual price increases we've gotten over the past couple of years kick into the premium stream. And as you may know in the property and casualty business, which typically writes one-year policies, it takes a good 18 months between the time you get into a premium rate-increase situation for that to develop through on the earned premium cycle. That when this kicks in, the upward claim ratio pressures we've had, in some minds, most significantly of course the workers'-compensation line, that hose pressures should ease measurably and obviously provide benefits to the underwriting account. And let's face it, with low investment yields being a fact of life for the foreseeable future, underwriting profitability is the linchpin to the successful execution of the growth plans we have set for ourselves in title and general insurance.

As a long-term player in the business, our focus on disciplined underwriting, we believe, is going to be very much of a differentiating factor for us. So there you have it. We're coming to the end of this first quarter in a very optimistic mood and frame of mind. We think that as they say, that this year is going to be a good one and reflect a strong turnaround from where we've been from a consolidated standpoint for several years.

So now we'll, having reached this point, we'll turn the session over to the question-and-answer portion. And if you'll address your questions to me, I'll be the traffic cop, so to speak and in directing the answers to the four of us that are on this call.

Thank you. (Operator Instructions)We'll take our first question today from Jim Ryan with Morningstar Stock Analyst. Please go ahead.

I'll direct this to you, Al, but I think it will end up in Randy's hands.

Okay.

That was a pretty good increase in terms of the title premium and fees. And I was wondering, Rande, if you could talk a little bit more about that in terms of how much of that was a lag effect from the agency, maybe compared with your direct operations on a year-over-year basis, just something to get a better handle on a more apples-to-apple basis in terms of how the market is today?

So Rande, before you answer, Jim I take it you aren't going to allow me to be the track cop. Is that it?

No, you may if you'd like.

Go ahead, Rande.

Well Jim, you and I have talked about this a lot. But as you know, our business mix is about two-thirds agency to about one-third direct operations, so that two-thirds is a lag -- not mostly, but a lot of it from the fourth quarter. So we're seeing some carryover for sure from that. Direct operations, to give you an indication of what the future may bring, were up about 8% in terms of revenues. That's good as opposed to 20% plus that we were up in agency. Obviously, the market is good. We're seeing still a lot of refinance business. The lenders that I talk to, MBA projections aren't out yet, but the lenders you talk to say that their mix of business has dropped from about 70/30 re-fi to purchase money transactions, down to about 60/40, which is good. The MBA did report that the purchase money index was the highest in March that it has been since March of 2010 when they ended the home buyer credit program. So those are good indications.

I think we talked on the last call that this could be the year where we could see the purchase money transactions overtake refinances as a percentage of mortgage origination, so and that's good for us. We sell owner and loan policies in that market. We do more closings, get more fees, so all of that's good. It's all good for our agents. It helps stabilize the market, and there's still -- I don't think refinances are going to fall off the table either. We're going to see a lot more refinance. There's a whole other wave of refinances I think that will occur because of new buyers, younger buyers primarily who had little money to put down, saw property values decline. They were doing loan-to-value ratios in the 90/10, 95/5 area, having to buy PMI. Now with some of the appreciation, I think what we're seeing is that there is enough equity in these houses in some of the markets to actually eliminate the PMI charge. And so there's a whole bunch of people waiting out there for the home prices to climb a little bit higher, and you're going to see more refinances. So I don't think that's a dead market yet. A lot of people are predicting its death, but I would disagree.

Great. So I guess what you're saying is year-over-year first quarter, it's really more like 8%, but okay, that's good. Do you see anything going on in commercial?

Yes, our commercial business again, we support our agents in the commercial arena, but we also have direct operations. Our commercial business has been really good. We're seeing more high-liability -- much higher liability deals, and I can't really give you an average, but let's just say if it was four to five this type last year, the average liability might be 10 to 15. S it's -- there are bigger amounts being generated on each order. So commercial business is doing really well.

Terrific, and Al, back to you. If on the reserve development, particularly with the respect to workers' comp, how did that fare in the quarter?

Well Jim as I mentioned in my comments, the general insurance group did develop slightly favorable, both in this year's first quarter as well as last year. I don't know that I have in front of me the break down by line, but the workers' comp line is one that's been under pressure lately, and I would surmise that development was less favorable than the book of business overall.

Great. Thank you for the answers, and wish you best of luck for the rest of the year.

We'll take the next question from Stephen Charest with Divine Capital.

Thank you for those good numbers. You touched on this, and I'm sorry I had to jump off the call real quick. So just to clarify on the reserving, which had been a little bit more aggressive the past few quarters, are you anticipating continued easing back on the more aggressive reserving?

Are you asking, Steve about general insurance or title, or mortgage guarantee?

I'm sorry, on the general.

On the general.

specifically for the workers comp.

Karl, go ahead.

I guess I'm not sure I'm following your question. You are referring to the development or the reserve setting process itself?

The reserve setting process.

Well as I think we've said previously, we look at the development each and every quarter, and paid particular attention to the paid loss develop and make judgments and set our reserves accordingly on a quarterly basis. The workers'-comp line is an area that's been under pressure, and we continue to pay particularly close attention to that. And it's altogether possible we'll continue to show a little strengthening there. But other than that, the book of business is performing well in line with our expectations.

There are no other questions, Oh, I'm sorry someone did just pop in the queue. We'll go to Alex Barns with Dowling & Partners. Please go ahead.

It's Geoff Dunn. I guess Travelers mentioned on its call of a reserve adjustment related to its workers'-comp line due to some changes in the New York laws. Wondering if -- how that affects you and if you've addressed that yet?

Well we have very little business in New York as such, and I don't think we're familiar at the table here with what Travelers said and what Travelers has got. I suspect it has a somewhat different business than we do, and it's not our business is not as oriented to the East Coast as its business, most more likely is. So I don't think that if I understand the comment that that should have much of a bearing on what we have to deal with when it comes to workers' comp.

And there are no other questions, so I'll turn the conference back over to management for any additional or closing remarks.

Well we don't have anything else to say. We've outlined the key points that affected the first quarter. And as always, we appreciate the participation by everyone and look forward to our next visit three months or so from now. On that note, you all have a good afternoon.

Thank you very much. That does conclude our conference for today. I'd like to thank everyone for your participation, and you may now disconnect.