Old Republic International Corp (ORI) 2014 Q1 法說會逐字稿

Good day and welcome to the Old Republic International first quarter 2014 earnings conference call. Today's conference is being recorded. (Operator Instructions) I would like to remind everyone that this conference is being recorded and would now like to turn the conference over to Scott Eckstein with MWW Group. Please go ahead.

Thank you, operator. Good afternoon and thank you for joining us today for Old Republic's conference call to discuss first quarter 2014 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 24, 2014. 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; Mark Bilbrey, President of Old Republic Title Insurance Companies; and Karl Mueller, Senior Vice President and 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 good afternoon to everybody and we appreciate again your attendance on this update of ours. This afternoon, we'll follow the same pattern as we've taken in recent quarters and that is as Scott just mentioned, four of us will address the key factors that affected the results of this year's first quarter. Scott Rager will speak to our General Insurance business; and in Rande Yeager's absence from the office, Mark Bilbrey will do the honors with respect to our Title and Trust business; Karl Mueller then will take over and discuss the financial aspects of the business; and I'll say a few words initially and then at the end of this presentation. So without much more ado, I'll begin by first addressing the run-off business, which has had a large and positive impact on the most recent consolidated results of our Company.

So, if we look at Old Republic's operating earnings trends for the last four quarters, five quarters or so since year-end 2012, we can see that two elements really stand out. One is the continued emergence of our title business as a very powerful earnings contributor during the current up leg of the housing cycle. And secondly, the faster operational turnaround of the run-off mortgage guaranty business. Mark Bilbrey, of course, again will speak to the title part of this uptick in our earnings from those areas. So, I'll just make those comments right now about the mortgage guaranty business and what that turnaround implies for the foreseeable future. As we have disclosed over the past several years, this MI business has been in run-off operating mode and since 2012, we've operated it under the supervision of the North Carolina Department of Insurance, which is the main responsible regulator for this part of Old Republic's business.

The regulatory solvency of the business has been maintained throughout the run-off period and we've been able to do this with necessary and I must say very positive regulatory considerations, which have altogether assured a very stable business environment in which our mortgage guaranty insurance subsidiaries have been able to fairly engage in the settlement of all legitimate claims and other obligations. So, if we look by the way at the statistical exhibit that we've posted on our website this morning as we do each quarter, we can see that one of the mix elements which are driving the MI turnaround is the steady and fairly steep drop in the number of insured loans that are in various states of delinquency. For instance since year-end 2012, these have dropped by just about 38% cumulatively and on a quarterly basis, they have averaged about 9% for the last five quarters including this latest first quarter of the year.

And as we also note in the release, there are several of course other beneficial factors at play here and all of these are converging to drive down claim costs and thus provide fuel to the turnaround that we've been experiencing. Now while we've remained focused on the turnaround all this time, we've made a couple of attempts in the last two years in the spring of 2012 and again in the spring of 2013 to recapitalize the mortgage guaranty business through the Wall Street Capital Market so that hopefully the MI business could at once retain its fidelity to the run-off obligations and secondly, to possibly re-establish itself as an underwriter of new mortgage guaranty risks. Obviously for those of you who follow Old Republic, we announced in successive order that we were not successful in either attempt for reasons that we've given in past news releases and as well as in the published reports that we sent out as a publicly held Company.

So in any event without belaboring the points and the disclosures we've already made, let me just say this about the mortgage guaranty situation at this time. First of all, we feel reasonably comfortable that this run-off is going to play out just fine and it will do so to the end of enabling us to pay out most, if not the full amount, for all legitimate mortgage guaranty claims we settle. And secondly, we believe that we can do this by obtaining some necessary regulatory approvals to amend the existing run-off terms. This will require a couple of changes in the permitted regulatory financial accounting practices also in addition to our adding a reasonable amount of new capital in our flagship mortgage guaranty subsidiary. We truly believe that this additional capital should later become retrievable as the business runs its course.

And we think that in combination, all of this together with what we believe are well founded expectations, particularly at this time having gone through five consecutive quarterly improvements in the mortgage guaranty business, that our expectations are well founded for the continuation of a profitable run-off and that this should enable us to accomplish our main objective. And then, of course, that objective has been and is to exit the business with as complete and permanent a settlement of legacy obligations as possible. Now in this vein, let me reiterate a point we've made several times over the last couple of years and that is that Old Republic's long-term objectives for the business remain just as I have said. We think that the MI industry is a good one, that it can serve a useful societal purpose; but that Old Republic's involvement in it can no longer be.

I mean the simple reason for it is that we just do not have the kind and amount of capital that would be needed to at once re-establish the business as a viable competitor that can safely operate for the long term with adequate coverage of possible future catastrophic exposures similar to those that we've encountered and that the industry at large has encountered during the great recession years and the ones that have followed. So now that we've resolved this plan on ours, we still believe that nonetheless that sometime during the next couple of years as the run-off becomes as stabilized as we think it can be, that some appropriate acceptable external sources of capital can be brought to bear and reinvigorate what is still in our opinion and belief a very well organized and reputable business charter under the RMIC nameplate, which has been around for more than 35 years as I recall.

So, it would be a good thing to be able to recapitalize this thing down the road. We've got good staff in place, very knowledgeable people; and with the right amount of capital and the right pedigree of that capital, the business can be reinvigorated we believe. Now, I'll just say a few words while I'm speaking of run-off about the other part of the run-off, which is represented by the Consumer Credit Indemnity or CCI product line as we refer to it in short. Now, this run-off is proceeding apace and the dynamics that drive it are similar to those that affect the MI line. Loans in default continue to drop and all the legitimate claim settlements are being made at 100 cents on the dollar in that business.

Now, the lingering exposure that's driving up and continues to drive up from one quarter to another are claim costs and I must say they are being driven to a greater than anticipated level and that the costs are residing in the continuing litigation expenses we have relating to just one bank in particular, which we disclosed fully in our 10-K and 10-Q reports. We truly believe that cooler heads should ultimately prevail in this situation, which is really lawyered up and that's certainly keeping a bunch of lawyers at the feeding trough. So, we are looking forward to a time hopefully in the near future when we can in fact be rid of this run-off and go on to better and more useful things at Old Republic.

So, as we previously arranged, I'm going to now turn the mike over to Scott Rager here, one of my esteemed colleagues I must say, to speak to the General Insurance business and its prospects. So Scott, take it over.

Okay. Moving right along, I'll now address some key points about our General Insurance business. The first quarter 2014 numbers played out about as we had expected for the General Insurance Group in total. Gross written premiums were up by 10.2% over first quarter of 2013 while the net earned premiums grew by 9.4%. We earned premium growth emanating not only from moderate rate strengthening, but also new business and the organic growth of the book that's been in place throughout the cycle. Customer retention levels are steady in most operations. Obviously, the growth dynamics vary by specialty marketplace served by our respective operations, but the books are growing in line with our expectations.

We're making headway on market share in most operations, but the economy and the competitive environment in some specialty areas still pose some issues. For example, marketplaces with respect to professional liability and general aviation are saturated with participants and the rate environment for each remain challenging. We continue to grow these books slowly on a risk-by-risk basis and as a result, the underwriting results remain excellent. We are [seeing] risk selection standards or what we perceive as rate adequacy would give us more growth, but we'd be sacrificing the bottom line to grow the top, which is counter to our philosophy as an underwriting institution managed for the long run.

As for economic impacts, we're seeing increased payrolls in the energy and commercial construction fields growing on a more pronounced basis. Although we've experienced some revenue increases in our [total] book, it was not attributable to organic growth and that's unusual for us at this stage in the economic cycle and we believe this results more from the effect of severe winter weather that we incurred rather than a slowing economy. Industrywide, we see rate levels moderating. From an Old Republic General Insurance Group perspective, our various operations are experiencing flat-to-high single-digit rate increases depending on the marketplace served and our particular position in it.

From a claims cost perspective, the loss ratio edged up to 72.7%. On the other hand, the expense ratio moved down to 23.5%. In the aggregate, the composite ratio came down to 96.2% contrasted to last year's 96.4% at the end of the first quarter and 96.7% for the final quarter of 2013. Claim severity and medical cost still seem to be the main drivers in the upward tilt of our claim ratio trends. At this point in time though, we still see the year-end 2014 composite ratio ending near 2013 levels. Knowing what we know today, we still see the five-year growth objectives posted on our website as very achievable by the Old Republic General Insurance segment.

And now, I'll ask Mark Bilbrey to report on our title operations. Mark?

Thank you very much, Scott. Good afternoon, everyone. It's my pleasure to report on our title group. As reported this morning, our earnings were positive at $4.7 million. This happened in spite of a significant downturn in the real estate and the mortgage market's recent quarters. Mortgage Banker Association projected that the refinance business could be off by 70% to 75%. To counter that, we obviously need purchase money mortgage transactions to pick up the slack. Seasonally, we're challenged in the first quarter every year on the purchase money side of our business. It was never expected that sales of new and existing homes or commercial business would make up for the steep decline in refinance transactions. Mix in the weather, the interest rate increases, and a lingering uncertainty about the availability of credit compounded the problem.

Our numbers were also impacted by the fact that as an agency-centric company, our premiums are reported on a three to four month lag, which added to this. Our overall premiums and fees were down 14.5% year-over-year. Our long-term strategic emphasis on the agency side of the title business has allowed us to maintain a degree of profitability in a very weak market. While we see a slow but improving real estate market for the near term, we are excited about the long-term prospects of our business. There's certainly a great deal of pent-up demand for homes. New home buyers, historically low interest rates, and the moderation of rising home prices should allow us for a steadily improving housing and mortgage market for our title services.

Our commercial businesses remained strong. We had a lot going on with our technology units that should enable our business units, both agency and direct, to compete better than ever than we have before. Our market share continues to increase, rising to 15.1% in quarter [four] of 2014 versus 13.5% in quarter four of 2013. Year-over-year, Old Republic's title market share rose from 13.5% in 2013 to 14.9% in 2014. Our managers have made some hard decisions on expense management in the past few months, especially in those units that were most affected by the decline in our refinance activity.

At the same time, we continue to emphasize strong financial and underwriting controls to minimize the risk inherent to the title business. We will not cut back on our commitment to assuring the long-term security of our Company. Our refinance activity is likely to remain slow throughout 2014. We are witnessing recovery signs in the purchase market. We continue to be proud of the Old Republic Title Group's progress and optimistic about our prospects going forward.

Thank you very much and I now would like to turn it over to Mr. Karl Mueller.

Okay. As Al stated in his opening remarks, I will comment briefly on Old Republic's financial condition as of March 31. This morning's news release reported that consolidated assets grew to $16.8 billion, which is up slightly from year-end 2013. The cash and invested asset balance of $11.3 billion continues to reflect modest growth resulting I would say predominantly from the investment of the positive operating cash flows that we reported. The fair value of the bond portfolio increased slightly from right at 102.8% of book value at year-end to 103.6% at the end of March. I would add that the realized gains from the sales of equity securities that were recognized through net income had the offsetting effect of reducing the amount of unrealized investment gains at the end of March.

Essentially we took investment gains that were previously unrealized and converted them into realized gains as reported in the first quarter. Consequently, the overall decline in the value of net realized investment gains resulted in a $0.21 per share reduction in book value. I would note, however, that this was more than offset by the $0.48 per share net realized gains that were recognized in the quarter. Investment income continued its upward trend as new investments are I'd say on average being made and market yields generally higher than those applicable to bonds that were sold or matured. In addition, investment income benefited from the shift in the equity portfolio into higher yielding common stocks and equity funds during the quarter. This should also be moderately additive to investment income in upcoming periods.

Claim costs in both years' quarterly results reflect the continuation of favorable development of the prior year-end consolidated loss reserves. Similar to last year's first quarter; our General Insurance Group reserves have trended slightly favorable, the Title Insurance reserves have developed pretty much in line with original estimates, and the RFIG run-off segment reserves developed most favorably due I would say to all of the factors that we listed in this morning's release. As of March 31, the debt-to-equity ratio stood at 14.6% and the debt-to-total capital ratio was 12.8%. Both of these ratios have consistently trended downward over the past several quarters due to mass maturities of outstanding debt as well as growth in the shareholders' equity account.

Shareholders' equity at the end of March was $3.86 billion or $14.97 per share, which is a $0.33 per share increase from year-end 2013. Our operating earnings per share in excess of the shareholder dividend added $0.09 to the book value for the quarter and on top of that, investment activity added another $0.27 per share as already it was noted. And finally, we continue to maintain sufficient liquidity at the ORI parent company through a combination of cash and readily available liquid securities to meet our foreseeable operating needs and that would include the anticipated capital contribution to our mortgage run-off operation.

So with that, those are the highlights of our current financial situation and I'll turn this call back to Al for closing remarks.

Okay. Well, there you have it. We look forward to our General Insurance business for the rest of the year to percolate, so to speak, and we expect a gradual drop in the claims ratio as the year wears on. I think we've got our arms around most of whatever claims issues have developed over the last several years so that should start to look good as the year wears on as I say. Our title business is, as Mark said just now, going to look good. And again, it's a long-term business and a single quarter does not necessarily indicate where the entire year is going to be, but it stands to reason that at this time in this cycle, this year looks like it's not going to be as much of a bond burner year as 2013 was; but nonetheless, should be a good year.

And then finally, I think our mortgage guaranty business run-off in particular is going to continue on the same wavelength and we do expect it to be a positive contributor to overall earnings this year. We are looking forward to hearings that will be announced shortly to be sponsored by the North Carolina Department of Insurance whereby a revised plan of action will be submitted for all interested parties to see and the plan will describe what it is that we propose to do to accelerate the payment of previously deferred claim obligations. To the end, in fact together with our additional capital to be injected into the business does raise the flagship company's capital to more than adequate solvency levels. So, we are looking to all of that as positive developments for the rest of this year.

I guess that's about it. So as was initially indicated, we'll now do what we normally do, which is to turn this meeting over to any questions that you may have and we'll do our level best to address those questions.

(Operator Instructions) Christine Worley, JMP securities.

Couple of numbers questions. First in General Insurance on the loss ratio side, I know that picked up a little bit versus the first quarter of 2013 and I was wondering if there are specific lines that were driving that?

Actually Christine, the loss ratio of first quarter 2013 was 96.4% and the composite ratio for first quarter this year was 96.2% so it was a tad bit below.

She's asking about the loss ratio.

On the loss ratio side specifically not the composite.

Yes, it ticked up. As has been the situation in the past few years, the workers' compensation as you can see from the supplemental materials we provided ticked up a bit over first quarter, but it [shed] down from third quarter and fourth quarter in 2013 and we hope to continue that trend downward. We continue with the loss ratios in development quarterly and make those adjustments on loss provisions as appropriate. But as you know, our objective with respect to that particular line of business is to get it down somewhere in the low 70%s where it has been. But that's workers' compensation too.

If you look at the totality of the three lines; which is the commercial, automobile, and workers' comp, and general liability; which is the way we look at it from an underwriting standpoint total account basis. You're looking compared to 2013 at 78.0% versus 78.0% for the first quarter of this year. So, things are moving along. As I tried to say before, Christine, we've had a tough time particularly in the comp line for at least two years now. And again as I said, I think we finally have got our arms around this thing, I think it's going to bob up and down and weave a little bit, but I think you're going to start seeing improvements in comp as the year wears on and as some of the corrective actions that we've taken in the last couple of years as well as rate increases which have permeated the business that we should begin to see improvement there.

Okay, great. In the workers' comp line specifically on the loss ratio side, was there any prior year development and if so, could you quantify it?

Christine, as I stated in my comments, the General Insurance Group overall developed slightly favorable. When you take it by the pieces, I think you would not be surprised that we took a little heat in workers' comp in GI and that was offset by favorable developments on the other lines. It's pretty consistent with where we've been over the past several quarters.

But again, and correct me if I'm wrong on this, Karl; over time our General Insurance business has typically for all lines combined produced a 2% to 3% reserve redundancy year-over-year. And in the last couple of years, that has really been impacted fairly steadily all this time down to the part where today we have maybe three-tenths, two-tenths, four-tenths of a point of redundancy as opposed to 200 basis points or 300 basis points of redundancy. Is that right, Karl?

That's correct.

But that's been a gradual evolving thing over the last two years in particular as I say and that's where our focus is on and that's where I think you're going to start seeing a resumption of those longer trends in loss reserve development.

Okay, great. And then on the Title Insurance side, I know you attributed I mean a part of the weaker volume in the first quarter to adverse weather. Is that something that now to date in the second quarter you've seen sort of pick up a bit as we've gotten past some of the weather troubles?

Mark, do you want to take that?

Yes, I'd be glad to, Al. Thank you. Christine, this is Mark. You're exactly right with the weather trends going back in. While the weather was incredibly challenging in January, February specifically, it's improved greatly. The other thing is inventory in some areas where we have some areas that we were not as impacted directly by the storms and the weather of the winter. There's just really in some areas not enough supply and there's a pent-up demand for that. So, we're seeing very favorable order trends right now so I think hopefully that is past.

But again, Mark, because we've got so much of our business on the agency side production wise that it's going to take yet another quarter if not a little longer, right, for that pipeline to get refilled and in fact hit the books, right?

That's correct, Al. We have a typically 90 days around the number lag as that corner gets turned. And we already have results and comments from our agent community that that corner is being turned for them and so we're anticipating that to turn in within I'd say probably three to four months according to them.

Okay. Thanks. And then final question. Are you disclosing roughly how much capital you've earmarked to contribute to the MI subsidiaries?

We should be able to do that, Christine, in the next couple of weeks. As I tried to say before, we're in the process of setting a date. I believe that a hearing date will be set for June 11 in Raleigh, North Carolina. And in anticipation of attending that hearing, we will be submitting a revised plan which will reflect all the changes that need to be made in order to accelerate that payment obligation set of claims. And it is at that time and in the context of that plan that we will put some number down on what is required by way of a capital injection.

Okay. And that's something --.

As we've said and as I think Karl intimated before, all of that money is going to be well within our means of disbursing without having to borrow or do anything like that.

And that's something will you release it in a press release or is that something we'll likely have to wait until the second quarter to hear?

It will be released when we issue this plan. Okay. That should take place I mean within a week or so.

I think it's within a couple or three weeks at the outset.

Okay. At the outset, a couple or three weeks Karl said.

Okay, great. Thank you very much.

John Deysher, Pinnacle.

Al, I have a question on your comment that I think --.

John, can you speak a little louder?

Sure. Can you hear me now?

Yes, very good.

Okay, great. I believe you said in the next couple of years, you're going to be looking for external sources of capital to recapitalize or reinvigorate the business because I think you feel it has good prospects going forward. And I was just curious does the capital source have to be external, does it have to come from outside of Old Republic?

Well, John, let me just at least restate what I intended to say and what I believe I did say. One, Old Republic is committed to exit the mortgage guaranty business because the amount of capital that would be required to reinvigorate that business is much higher than we have the ability to generate internally and given our capital allocation model, we can no longer envision having that amount of capital dedicated to that one line of insurance. We have also said that another issue for us being long-term players in the business is that we've not been able to get our arms around the potential (technical difficulty) -- I'm sorry. We have not been able to get our arms around the issue of potential catastrophic events, which have to be provided for currently.

And as we understand it from just reading the press and what's going on in the government's quarters in terms of its attending to the needs and the continuity of Fannie Mae and Freddie Mac, that's an issue that needs to be addressed as to how you provide for that potential. So [not] being able to address both of those issues concurrently, we say there's no place in it for us. That does not however mean that we are going to be looking to raise capital ourselves. What I believe I've said or should have said is that our intent is to run-off the business to maximize the amount of deferred payment obligations that can be paid out hopefully at 100 cents on the dollar or as close to it as we can get and then let the business stabilize itself for the next couple of years. And at that point, sometimes during that interim period, somebody with the right capital pedigree can come up with sufficient money to re-establish that company as a viable competitor in the industry. That's what I believe I said and should have said.

Okay. I understand what you're saying, but I'm just suggesting that as shareholders, we would be interested in the possibility of contributing capital to the Company via a rights offering or some other way because we agree. We think the RMIC business has a good future going forward and I think for us to flat out say we're going to exit the business in a couple of years is perhaps a little bit shortsighted. And I want to be on record saying that I feel strongly that at the appropriate time if you need capital, you should come to your significant shareholders and outside shareholders and see how they feel about this.

Correct and we will take that into consideration obviously, but first things first. The first thing we need to do is to meet our key objective and which is to satisfy as best and as fully as possible obligations on the legacy claims. First things first. Once we've done that, then we sit back, take a look at what's happened, and we will deal with it accordingly in the best interest of our shareholders. And I submit to you, John, and all of the shareholders that what we are doing from a capital injection standpoint is in fact in the best interest of shareholders. Because as I said again, I think that the business can turn around sufficiently that we can retrieve that money and use that capital elsewhere in the system. But we have not given up on the idea of allowing RMIC to be resurrected, it deserves to get back in the business one way or the other with the right amount of capital and the right pedigree for that capital. Those two things must be in place, the right amount and the right stewardship.

Fine. As long as you'll consider outside shareholders at the appropriate time.

We will.

Thank you.

And there are no further questions at this time, I will turn the conference back over to management for any additional or closing remarks.

Okay. Well, we don't have any other comments. We appreciate the questions and hopefully we provided ample responses to them. Having said that, we'll look forward to the next announcement and I suspect the next announcement will be confirmation by us of an agreement with the North Carolina Insurance Department to in fact establish a proper date for hearing relative to the changes in the run-off plan for our mortgage guaranty business. And as Karl said before, that should occur in the next couple of weeks or so. Okay. Having said that, we bid you a good afternoon. Thank you again for attending.

This does conclude today's conference. Thank you for your participation.