Old Republic International Corp (ORI) 2016 Q1 法說會逐字稿

Good day and welcome to the Old Republic International First Quarter 2016 Earnings Conference. 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 given at that time for you to queue up for questions. I would like to remind everyone that this conference is being recorded and would now like to turn the conference over to Ms. Marilynn Meek with MWW Group. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining us for Old Republic Conference Call to discuss first quarter 2016 results. This morning, we distributed a copy of the press release and posted a separate statistical exhibit which we assume you have seen and/or otherwise have accessed to during the call. Both documents are available 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 and statistical exhibit dated April 28, 2016. Risks associated with these statements can be found in the Company's latest SEC filings. Participating in today's call, we have Karl Mueller, Senior Vice President and Chief Financial Officer; Craig Smiddy, President of the Old Republic's General Insurance Group; Rande Yeager, Chief Executive Officer of the Old Republic Title Insurance Company; and Al Zucaro, Chairman and Chief Executive Officer.

At this time, I'd like to turn the call over to Al Zucaro. Please go ahead, sir.

Okay. Well, thank you, Marilynn, and good day to everyone on this call. As was just said, we have our regular cast on the floor, Old Republic senior executives here today and they will participate as necessary and answer questions that are related to this morning's earnings release. And with this first quarter's call, we thought we would do something a little different by limiting ourselves to just a few remarks that highlight what we consider to be the most important points in the release and then open it up to the question-and-answer period as was just said. In doing this, we are assuming of course that to everyone that are listening that has read the release or alternatively can see it on your computer screen as we speak or otherwise can go back to it after the call. So here goes starting with the results for the General Insurance Group in the most recent quarter, those were somewhat below par for the reasons that given on the page 2 of the release. Title insurance on the other hand performed quite a bit better than we anticipated, particularly in light of the fact that new mortgage disclosure requirements have been slowing down the closing process throughout the country, but judging from the results that we have posted, this obviously seems to have been largely avoided by both our agency and direct operations people in a very nice way, I might say.

The RFIG runoff as we state on page 4 of the release, that performed up to par in so far as the MI portion is concerned, but it did unfortunately underperform, however, in regard to the much smaller CCI line; and in this latter case, we're still dealing with litigation costs that are still sapping the vitality that remains in this line and that's vitality that will be useful to us to achieve a successful runoff in it, which we believe we can accomplish. There isn't much to report in regard to our corporate operations and the very small life and accident line that's part of this aggregated component of our business. So overall, the consolidated results as you can see in the second table on page 5 of the news release, it benefited a great deal, a whole lot from better underwriting and service performance for the combined general and title insurance businesses as well as from an appreciable increase in investment income, again for the reasons that we've given in several sections of the release as to the investment income, in particular. Net income wise, we produced a very good bottom line, as the management of our portfolio delivered much greater realized investment gains this year in comparison with those that were secured in the first quarter of 2015. Looking quickly at the balance sheet of our Company, it continues to be as sturdy as ever. As you can see on the first table on page 6 of the release, the shareholders account edged up about 6.5% on a per-share basis for the first three months of this year. And again, as you may see there readily, about 30% of this overall rise came from earnings, net of the first quarter's cash dividend. But most of the rest, it came from unrealized gains stemming from securities markets-driven fair value improvements in the bond and mostly the common stock portfolio. So, there, you have it, as short and sweet as we can make it, and even though quarterly earnings as we like and repeat do not move very much in a business such as ours that's managed over relatively long cycles, it does help all around when we can start the year on a positive note. And for this first quarter, that note is holding in the generally positive tone and the cadence of the last three years' playbook and of course that playbook is all about we gaining and surpassing the earnings and book value growth momentum that we had before the onset of the Great Recession. And I think the results for the last three calendar years and now for the first quarter underline that objective and our full expectation that we will regain that momentum. So, on that note and as we said at the beginning of this call, we will now turn the meetings to the Q&A portion to address any questions you may have. So let's do that.

Thank you. (Operator Instructions) Greg Peters, Raymond James.

Good afternoon, usual cast of characters.

You're good.

I wanted to ask just a big-picture question around risk management. Clearly, there's been some other participants in the market like AIG that have been having some financial challenges and I'm wondering if you can speak to your ability to grow that business with new account growth, not only last year, but the prospects for the outlook for this year.

Well, as you know, Greg, we have a big chunk of our business. Historically, we've had a large section, particularly of the workers' comp line and it bounces around, but over time, it's been anywhere between 45% and as much as 60% of our comp business. A lesser percentage of the trucking business and a lesser percentage of the general liability business that has been written on some sort of a loss sensitive or alternative market approach as we refer to it in the industry. And that business has stuck to us through thick and thin. We've got a great history throughout our system of keeping that business -- we're always typically looking at 90% retention rates and it's been a wonderful, service-oriented and risk-taking business for us with major US financial services and industrial corporations. We do our own stick as you know in our business. We don't pay much attention to the competition because we don't know typically what makes them tick and so we only have our service capabilities and our knowledge and our good name and brand to deal with. And each year, we have had very good results in increasing that business, whether it is in the general financial services or general industry, trucking or other parts of our business in each of our major operations. So, it's all good. It helps us achieve very good results. And we like the -- obviously the partnership approach that's achieved through that type of underwriting process in our company.

Okay. Thank you for the color there, Aldo. When I was going through the press release, you spoke of the uptrend in the claims ratio, I think it was on page 2 of your leases related to the general Insurance results. It looks like at least on a quarter-over-quarter basis, the claims ratio improved a little bit, but I was struck by your commentary later on that page 2 where you talked about reverting back to a long-term average of the high 60s, low 70s. As you think about targeting that type of result, when do you think you might be able to get there? Are we still a couple of years away or do you think it's a lot closer than that?

Well, the comment was made in the context of the quarter-to-quarter and year-to-year changes in our loss ratio for years starting (inaudible) to date. And as I'm sure you have in your files, you can see that there is a substantial and gradual increase in the ratio through 2014 and then it became a little more attenuated in 2015 and then it's about the same level as you see in 2016. What we mean by reaching back to the high 60s, low 70s which would be in the area of let's say 68% to 71%, 72%, okay, that range, that's a range. Again, if you go back to our loan underwriting history in the General Insurance business, that's a range that we have achieved fairly regularly with a few bumps here and there that were usually overcome prior to 2012. So, that's what we mean by the last paragraph in the general insurance section of the release.

And just, Al, when we think about the numbers going forward, is there a sort of a timeframe you have in mind in terms of when you're going to be able to get back to those historical long-term averages?

Yes. I think within the next 18 months, we should be there, 18 months, 24 months. It's a gradual process. I mean we can't predict as you know in our business what loss ratios are going to be quarter-to-quarter let alone year-to-year, so that's why we look at trends more so than anything and when we look at trends, we don't look at trends in the loss ratio by itself. We also look at trends in the underwriting quality of the business, changes in that quality and we look at trends in the pricing situation for each of our businesses, and the composite of that is what leads us to feel pretty good that we're going to gradually evolve towards those loan growth better or lower loss ratios.

Perfect. Perfect, thank you for the color in that area. And just two other quick questions and then I'll re-queue. First, you did mention in your comments the litigation issue, and I know in previous quarterly conference calls, you've spoken about the potential for some settlement and it seems to continually delay. Can you give us an update on that?

Yes. I think, I hope I'm not telling tales out of school, but I believe that we're finished with the litigation or the substantial litigation we had in the mortgage guarantee business. So I think as I understand it in our 10Q, you will see that there is either an elimination of the reference to that litigation or else some attenuation of it to the extent that it's been in the final stages of settlement and it will be resolved within our reserve structure. So that will not come back to haunt us going forward. So the only litigation -- we have two pieces of litigation, the largest one of which being the Bank of America and its Countrywide acquisition, which as you know has been a source of -- as they say in New York, a source of (inaudible) for Bank of America and Countrywide. And that's a slow, slow boat to China and we will get it done. It's just a matter that because of the monies involved and the aberration that's been created over all these years of legal battles that it's harder for it to come to conclusion, but we'll get it done. I don't think that we're going to see any significant upward adjustment in our estimate of what it's going to take to resolve that situation. Having said all of that, I hope I will not be quote, but that's the best I can say right now.

So as it looks like today in the 10-Q that's going to come out, you're going to have the removal of the language with no financial impact that is a subsequent event to the end of the quarter, is that correct? This is all in the context --?

With respect to the RMIC litigation?

Yes, that's was correct.

(inaudible) that litigation with Bank of America, RMIC [will give] guarantee and then the CCI. Mortgage guarantee is what I was speaking to, CCI is still in limbo.

Got it. Thank you. Thank you for the clarification. And then, just the final question and I'd be remiss if I didn't throw something in Randy's direction, but Randy, perhaps you could give us an update on your perspective of the Title backlog. There seems to be a lot of mixed signals on the economy these days and perhaps it has caused you to have a changed perspective on origination volumes for 2016 and the outlook for the business, but perhaps you could just give us some color there. And again, that will be my last question.

Right. Thanks, Greg. Yes, I have every reason to believe that the mortgage origination numbers will actually increase over our original estimates. The [NBA] just released their [news] figures last week and the refinance volume rose 41% at [Bankrate and we've] bought $585 million from [414] or something like that. And so, ours is at 45% in I said purchase money transactions should be up about 10%. So, now, looking at that, that signals a stronger year than we had in 2015. And so looking at it in terms of that perspective and the fact that Al and I were talking about this morning and while we don't have what we would call a robust economy or the one that's growing quickly, rapidly but at a good pace, we've at least had a soft growth economy (inaudible) all that's good that signal a lot of good things for the mortgage industry and I also read that just within the last couple of days that [lens] are increasing while the affordability of homes are going down, which means that we might get some of those first-time homebuyers into the market that we needed for a long time (inaudible) while I was cautiously optimistic at the beginning of the year, I'm beginning to remove the cost back in the part of optimism and we will really look forward to a pretty good year [going forward].

Thank you for the color.

(Operator Instructions) Adam Liebhoff, Loomis, Sayles.

Good afternoon, guys. How are you?

Good. Thank you.

My one question, I think it's just for Rande, I wonder whether there is any way for you to quantify or maybe give some color around the impact that the CFPB's increased disclosure rules had on the title business and I think I'm looking for something in terms of timing as well as maybe cost of closing?

Yes, I hate to quantify it to really exactly, but I can tell you that yes, it definitely slowed the process and as very fine lender you'll [hear] two weeks up to a month generally speaking so that process a lot of things which should signal a much quarter first quarter than at least our Company experienced and so we are quite satisfied with the results of the title company based on what we have seen happening since last October. So that was really good signal for us in the 50 years in keeping people from buying loans or trying to make it easier for them to acquire homes and make the lending practice more transparent and what is happening in that will be up to the consumer. All I can tell you is that we are working hard to adjust the [renewals] as an industry and we were prepared for it and I think we're able to take advantage of a situation [if we turned out] we've had and I won't say it's turning to positive because things have slowed, but I don't see it greatly impacting our business. So I said, the CFPB is trying to do their job and the lenders are trying to do their job to deal with the new requirements and disclosures and like all the issues that are out there they have to deal with.

I think has that sort of impacted the close rate at all, thinking about the delays and the increased level of disclosure? And if not, is it just sort of a tale of deferred activity versus activity being absent?

Yes, it's not curtailing deals that we did and I think we absorbed that that's for a period into the closing process. In other words, let's just say it was (inaudible) closing down for two weeks, but after we have that two week period in the last October, November, beginning of December, things now are just proceeding at a little bit slower pace, but it's not -- and this our Company's perspective, it's not slowing our business at all or causing us to see much of an impact. Best part is -- I'd have to say that we're dealing with it and I don't see it being a continuing problem for our Company.

Christine Worley, JMP Securities.

Thank you. I have a question on the loss ratio on the workers compensation line. It looks like it took a pretty decent step down both from where it's been running for the past couple of years, and especially versus 1Q last year. Can you just talk about what's driving that and if there is any favorable development in that number?

Craig, you want to take that?

Sure. Christine, I think as we mentioned in some of the prior calls, we were taking some reserve strengthening over the course of the last few years and we expected that to moderate this year and it has. So I wouldn't say there is favorable development in that number, but certainly the degree reserve strengthening has gone according to our expectations and we haven't seen that to the degree this quarter.

Greg Peters, Raymond James.

Thank you for letting me have a follow-up question. I wanted to circle back to the commentary that appears in page 2 of your press release, as it specifically relates to the pricing and declining volume in your construction book of business. I was wondering if you could provide us some color on how large that book of business is and what the rate of price decreases that you're seeing in the marketplace and how much is the business down in the first quarter?

Craig, do you want to address that? And I can --.

Sure. I'd be happy to do that. Yes, Greg, I think the majority of the decline is coming as we've stated here from the large account business. As you know, we have construction within several portions of our General Insurance Group. But it's really the large account construction where we're seeing very competitive rate environment, even though some competitors have indicated they're exiting the business or tightening the screws, it seems that there are a lot of other competitors that are very aggressive in that large account space right now. So as I mentioned last quarter, we're maintaining our underwriting discipline, we will not chase underpriced business. And as such, we have seen the business decline somewhat in the large account space. As far as a top line percentage, I would say, in the area of 15% to 20%.

And just as a follow-up, when you speak about large account construction business, that's not to be confused with the risk management portion of your business for workers' comp and some commercial auto, correct?

That's right. Even though in construction, we do write large deductible business that we would consider loss sensitive, and to a degree, risk management business. The risk management business that we write within our other segments is not as effective there. We're very far removed from the risk and it is the client that is taking the majority of that risk. So it is not that business where we're seeing the challenges.

You might mention, Craig, the size of the accounts generally, the range of accounts that we categorize as large, mostly risk transfer business.

Yes. The large construction accounts that we write are in the area of $250,000 premium to excess of $1 million of premium. And on a large deductible basis, given that the client is retaining a lot of that risk, the premiums are less than that.

Is -- just as a follow-up, Craig, are the Aon GRIP's program or the Willis' WillPLACE or the Marsh MarketConnect programs, are they helping you to generate any incremental premium?

Let me address that. As you know (inaudible) followed us for a long time, Greg. You know, we always view ourselves as living in glass houses, and therefore we don't like to throw stones and therefore we don't address competitor specific questions.

And that appears that we have no further questions in the telephone queue at this time. I'd like to turn the conference back over to today's presenters for any additional or closing remarks.

Well, thank you very much. It was very good visiting with you all and look forward to our next calls and next years (inaudible) and hopefully they will be as positive as we expect them to be. So you all have a good day.

And this concludes today's call. Thank you for your participation and you may now disconnect.