Old Republic International Corporation (ORI) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and thank you for joining us for this 96th Annual Meeting of Old Republic Shareholders. To get us started, I'm pleased to turn the floor over to Mr. Aldo Zucaro.

Okay. Well, thank you, and welcome, everyone. This is kind of exciting to do something new for our company, as it is happening with many companies in this country, to do this virtual meeting of our shareholders, the 96th annual meeting for our good Old Republic Company. And we have a number of shareholders attending via the web portal address that was shown on our website as well as in the proxy material that was sent out in late March of this year. And also, as we show on the web portal, there are -- there is a meeting agenda as well as the rules we're going to follow for everyone's convenience. So having said this, we'll now call the meeting to order. And you should know that there are several of my associates who will share in the duties of this annual meeting. And in order, these are John Heitkamp, who is our Senior Vice President and General Counsel as well as secretary of our company; Karl Mueller, our Senior Vice President and Chief Financial Officer; Charlie Boone, our Senior Vice President for Investment Management; Craig Smiddy, our President and Chief Executive Officer. And in addition to these, we have, as our guests, the KPMG -- 2 of the KPMG audit senior executives in the persons of audit partners, Clyde Pehl and Brad Gauntlett. And they're here, as they are every year at these meetings, to answer any appropriate question that our shareholders may have of our auditors and their relationship with Old Republic. In addition, there are several other Old Republic executives who help manage our North American insurance business, and we're happy that they're all there. And hopefully, there are many shareholders who would not normally attend in person but have taken this opportunity and the additional time they may have on their hands to attend this meeting. So now that we've taken care of these introductions, we'll start the meeting according to the agenda. And after we're through with the meeting, as has been indicated, we'll provide time for general questions. And in this regard, everyone should note that only authenticated shareholders may ask questions in the designated field on the web portal. And out of consideration for others, we would appreciate it if the questions are limited to just 1 question per shareholder. And after the question-and-answer period, we will, of course, officially adjourn the meeting. So having said all this -- all these introductions, we'll turn the meeting now over to our Counsel, John Heitkamp, who will speak to the basics of what we're about to do, again, in accord with our agenda. So, John, do take the microphone.

Thank you, Al. Broadridge Financial Solutions has given the company an affidavit, attesting to the mailing of the notice of this meeting, a list of the shareholders of the company as of the record date has been available for inspection by shareholders and is also available to authenticated shareholders on the web portal. The company has appointed inspectors of election to review the votes and tallies to be given. The chair has appointed Charlie Boone and Bill Dasso as inspectors of election. The polls have been open since the mailing of the company's proxy materials, and they'll stay open during this meeting. Any authenticated shareholder wishing to vote during the meeting may do so by following the instructions on the web portal. Copies of the minutes of the last meeting are available on the web portal, unless there are any corrections or discussions, a reading of the minutes will be waived.

All right, John. So now we'll take a moment to review last year's results and take a quick look at this year's first quarter report, which was published and which was issued in late April. And for this part of the meeting, we were going to have Craig Smiddy, as I said, our President and CEO, to take care of this part of the meeting. So Craig?

Okay, Al. Good afternoon, everyone. My comments will generally follow the Annual Meeting of Shareholder slides that were posted on the Old Republic International website this morning in case any shareholders care to follow along, but not necessary if you so choose. So I'll start with pointing out that Old Republic has a long track record of recognizing the importance of all stakeholders, which we depict in what we have coined the Old Republic lodestar. And looking at the lodestar and starting clockwise, we recognize, first, our capital providers, our shareholders and debt holders. And capital is the life blood of a financial institution and the source and continuity of our enterprise. Moving clockwise, we also recognize our people, the intellectual capital providers. They put the financial capital to efficient use. And continuing on, we recognize our customers, our policyholders and buyers of our services. Without them, obviously, there are no revenues. And finally, we recognize our community. As an insurance holding company, we're vested with the public interest and always have that in mind. The Old Republic enterprise is a specialty commercial lines underwriter and national provider of title insurance to the residential and commercial market. It's interesting to note, we're a member of the Fortune 500 listing of America's largest corporations, and we're one of America's 50 largest shareholder-owned insurance businesses. ORI has been listed on the New York Stock Exchange since 1990 and publicly listed since 1967. ORI has provided its shareholders with an average annual total market return of 11% per share for the last 20 years. We've also provided shareholders with 79 years of cash dividends without interruption, and our annual cash dividend has been raised for each of the past 39 years. We're 1 of just 111 companies that have posted at least 25 consecutive years of annual dividend growth according to Mergent's Dividend Achievers. And we have paid $1.2 billion of dividends to shareholders in just the last 3 years. Moving on and talking about our formula for success. Our formula includes our strong and straightforward balance sheet. It also includes our status as a diverse specialty insurer that provides niche products and services to our customers. We provide differentiated customer experience through our decentralized structure that we operate within. Our unique business model as a specialty commercial lines insurer and a title insurer produces lower volatility consolidated underwriting results. And that enables, really, our long history of returning capital to shareholders through dividends. A little more specific regarding our Title Insurance Group and our General Insurance Group. In 2019, our Title Insurance Group produced 38% of Old Republic's operating revenues, $2.5 billion, which, in turn, contributed 34% of ORI's 2019 pretax operating income. Our Title Group has a track record of producing combined ratios in the low 90s. And another important difference between our Title Group and our General Insurance Group is that our Title Group is less capital intensive, whereas our General Insurance Group is -- requires more capital. So again, a nice unique balance between the 2 groups. In our Title Group, they are the third largest title insurer in the country. And 1 thing that is unique amongst the largest players in the title business is that our nonowned agency business makes up 73% of our total business, whereas our direct operations make up 27%. So our model is a more variable cost model when compared to our competitors. Now moving to the General Insurance Group and providing a little bit more specifics there as well. The General Insurance Group in 2019 produced 60% of ORI's operating revenues, which came in at $3.9 billion, which, in turn, contributed 54% of ORI's 2019 pretax operating income. The General Insurance Group has a track record of combined ratios in the mid-90s. And of note, the General Insurance Group in the last 41 to 50 years has produced combined ratios below industry combined ratios, a remarkable track record. We have, as I talked about earlier, deep expertise in core niches that's differentiated by the customer service that we provide for those niches. And again, together, we think the unique combination of our title insurance business and general insurance business offers our shareholders differentiation, diversification and an attractive ROE profile. And now turning to ORI financial highlights for 2019. Our total operating revenues in 2019 were $6.6 billion. Our combined ratio was 95.1%. Our operating income per share was $1.84. And we ended 2019 with cash and invested assets of $14.5 billion, shareholders' equity of $6 billion, and book value per share of $19.98. And in 2019, the dividend per share were $1.80. So in comparison to the prior years, a story of profitable and continuing growth. Turning now to our first quarter 2020 financial highlights. We posted a very strong operating results for the first quarter. Our earnings per share on an operating basis was $0.47, which was a 17.5% increase from the $0.40 we posted in the first quarter of 2019. Our net premiums and fees earned were $1.5 billion, which was a 10% increase over first quarter 2019. Our combined ratio was 94.9%, an improvement over 2019, where we were at 96% combined ratio. And we ended the first quarter with a book value per share of $17.29. That's down 13.5% from year-end '19, driven by our equity portfolio mark-to-market on our unrealized gains. But with the market recovery that we have seen since March 31, similarly, we have recaptured some of those unrealized gains. So that's a quick summary of how we ended '19 and how we ended the first quarter. So I'll now turn to our balance sheet and our capital management. Our prudent capital management has enabled us to return the $1.2 billion dividends to shareholders in the last 3 years that I referenced earlier. We have a very low debt leverage ratio at 16% with no maturities until 2024. And our investment portfolio is very high-quality and very liquid investment made up of stocks and bonds with no so-called alternative investments. We've also been able to release some runoff capital, and that runoff business capital today sits at $410 million on a statutory equity basis. Finally, our balance sheet is of very high quality with limited goodwill and intangibles of only 3% of our capital. So concluding, since becoming a publicly listed company in 1967, ORI's average annual total market return was 12.2%. And if you compare this to the S&P 500, the average annual total return was 10.3%. So overall, we -- as I said, we feel very good about the progress we made in 2019, and we feel good about our operating results in the first quarter of 2020. And as we always say, we're about managing for the long run, and I think that the last comment that I made regarding the total market return demonstrates that long run value that we provide to our shareholders. So with that, Al, I would turn matters back into your hand.

Okay. Well, very good, Craig. And I'm sure there will be a few more questions at the end of this meeting, and we'll be able to address them without fault. So I guess at this point, we'll turn the meeting back to you, John Heitkamp, to continue with the agenda as we have it.

Very good. So at this point, let's have a report on the number of shares represented at this meeting.

Okay. This is Charlie Boone. The unofficial voting report shows approximately 270,094,052 shares that are present in person or by proxy. This represents almost 89% of the shares authorized to vote. The official quorum and voting results will be certified by the inspector shortly after the meeting.

Very good. A quorum is present, and the meeting is therefore properly convened. So let's move on. The governance and nominating committee and the Board of Directors have recommended the following nominees as Class 3 directors to serve until the 2023 Annual Shareholders Meeting: Charles J. Kovaleski, Craig R. Smiddy, Arnold L. Steiner. Fredricka Taubitz, Aldo C. Zucaro. Neither the governance and nominating committee or the Board of Directors has received any information that any other nominations are to be made today. Since there are no additional nominees, I declare the nominations closed. Unless there is any discussion, the inspectors will report on the election of directors.

The unofficial vote for each of the 5 nominees slated for election shows that each such director has received a sufficient number of votes cast to be reelected.

Since the nominees slated for election have each received the plurality of the votes cast, they have been elected as Class 3 directors and will serve a 3-year term of office until the 2023 Annual Shareholder Meeting. The audit committee and the Board of Directors have recommended the ratification of the selection of KPMG LLP as the company's independent registered public accounting firm for 2020. Unless there is any discussion, the vote on this matter will be reported.

The unofficial tally of votes on this proposal shows approximately 99% of the shares voted to approve this selection.

Therefore, the selection of KPMG as the company's independent registered public accounting firm for 2020 is ratified. The Board of Directors has recommended that the shareholders approved the compensation policies, practices and procedures for the company's executive officers for 2019, as described in the compensation discussion and analysis sections of the company's proxy statement. Unless there is any discussion, the vote on this matter will now be reported.

The unofficial tally of votes on this proposal shows that approximately 94% of the shares voted to approve this resolution.

Consequently, the compensation policies, practices and procedures for the company's executive officer for 2019 is approved.

Well, very good. I think that concludes all the voting if I -- as I look at our agenda here. So we'll now proceed with opening up this meeting to any questions that any of the shareholders that are authorized to raise questions may have. And so we'll turn the meeting over to you, Aaron Jacoby, who is doing the accumulation of these questions, and we'll proceed accordingly.

Thank you, Mr. Zucaro. Our first question asks, is Old Republic's dividend safe?

Well, the answer to that question is related to the comments that we have made repeatedly in our annual report, annual review of publications and, of course, reiterated by Craig Smiddy before. We have a long history of paying dividends consistently. And as, again, Craig Smiddy reported, we have increased that dividend for somewhat 39 years now or something like that. Our view has always been that we try to produce a better-than-average total return for our shareholders, with the return being calculated as the combination of the dividend yield on our stock as well as the appreciation on it year-to-year and, over time, with the appreciation, as everyone knows, being basically driven by the securities market reactions and expectations as to our earnings progress, the enhancement of our book value to the shareholders as well as the dividend yield. Those are the 3 major factors, as everyone knows, that drive stock prices over the long run, particularly for financial institutions as our company -- like our company. So we calculate our dividends over a 5-year moving average, focused, in particular, on operating earnings and averaging realized gains, but, of course, not taking into account unrealized gains or losses since those are not transaction-based results in our income statement. So we think it's all good. We -- the 79 years that we're -- we're very proud of having accomplished that over 79 years and through for successive generations of managers at Old Republic.

Thank you very much. The next question asks, does Old Republic write business interruption insurance? And if so, what is our exposure?

Okay. Craig, why don't you take that one?

Sure. I'd be happy to. Yes, we do write business interruption as part of our property offering. It is almost always the case that if you offer property coverage, that you do include with that business interruption. However, as I mentioned during our first quarter earnings call, when it comes to business interruption, our policies include a -- an exclusion for viruses -- business interruption due to viruses, and that exclusion is present on more than 99% of our policies. So we, along with most in the industry, believe that those virus exclusions will stand. And therefore, our exposure from a business interruption standpoint to COVID-19 is very minimal, if anything.

Thank you. The next question asks whether Old Republic has any liquidity issues.

Again, as Craig mentioned in his review a few minutes ago, we take a great deal of pride in having managed our investment portfolio in a very conservative, straightforward basis over the years. Our practice, long-standing practice, again, is to make sure that we are -- that the maturities of our bond portfolio are well aligned with the expected maturities of our obligations. And those obligations, as you know, in the insurance context are reflected in the values attributed to our liabilities for claim as well as unearned premium reserves, which either turn into claims or are returnable to our policyholders in the event of a cancellation of a policy. So given that, our -- and if you look at our annual review, annual report, you'll see that the maturities and the durations are around 5 years or so, as I recall, and those are categorically much shorter on an average than the maturity spectrum of our liabilities. So that's why we take a great deal of comfort in having a larger -- nowadays, a larger than usual amount of our investments dedicated to equity securities because our key obligations are well covered by, as Craig said, and as I will repeat, by very high-quality, straightforward debt securities that provide a good balance to -- for the dividend yields we get on the common stock portfolio.

Thank you. The next question asks whether the Board has considered the adoption of a majority vote standard.

With respect to all of our governance policies, the position we've taken over the years is that they are reflective of long-held policies, which have worked extremely well for us as a company, which is managed for the long run. So governance, in fact, is attached to the nature of our business as a long-term business which -- and, therefore, the intent is to provide great stability over cycles and over the life of the corporation in the management of its business. So -- such that, as I say, it remains a very stable business that's there to protect the interest of all stakeholders, whether they be shareholders, debt holders, policyholders, certainly, the purchases of our insurance products or services, and, of course, the -- our extremely well-qualified, intellectual capital providers that make it all work. And all of that is wrapped into the concept of a company that, as Craig repeated when he was speaking about the lodestar, which is our guide in what we do and how we manage the company. Makes us a company that's vested with a public interest, and we adhere to that in all matters of governance as well as business operations.

Thank you. The next submitted question begins by noting that there's been growth in the size of passive mutual funds ownership of U.S. corporation and asks if we see this growing ownership as a positive or a negative development. And also, if there is the potential for conflicts of interest if such large shareholders might also manage company retirement plans.

Well, our answer to that is -- has always been and continues to be that we are a publicly traded company listed on the New York Stock Exchange for many years now. And anybody is free to buy and sell and hold our stock as they wish within and do so in context of operating and acting in concert with the securities laws of this country. As to the impact that a major institutional shareholders of one manner or another may have on us, we leave that to them. They are the ones who have to search their minds and their business approaches to determine whether they are operating in the proper and sole interest of their customers.

Thank you. The next question asks whether the auditors and the company could comment about 3 former KPMG auditors, including 2 suspensions over test cheating.

Clyde Pehl, our senior partner on the account with KPMG, that falls in your bailiwick.

Sure, Al. I'll take that. The SEC orders that were mentioned, this was an article, I believe, last week, bar certain individuals from practicing before the SEC, and that's an expected outcome of the SEC investigation that the firm settled last year in June. Those orders against those individuals do not represent a new matter or reflect any new activity involving our firm or our regulators. These individuals named in the orders were separated from KPMG and have not worked for the firm in over a year, and we believe we have productive relationships with our regulators and our other stakeholders and are focused on quality and excellence in everything we do to serve our clients and to protect the capital markets.

Thank you. The next question asks, will the shift in the investment portfolio continue towards equities away from bonds? And if so, at what point will it end?

Well, we have some pretty stringent guideposts, guidelines in how we invest our investable assets. And what you see currently, the current state in terms of the division between fixed maturity or bonds and notes, investments versus our common stock is pretty much within our guidelines, as I say. And as far as we can see right now, it is likely to remain within context of those guidelines. So said another way is that we're satisfied with the current relationship. But you -- I'm sure everyone appreciates that this is something that we viewed by operating management on the one hand as well as our Board of Directors periodically. And the determination is made from time to time to either step up or step back from those distributions between fixed maturities and common stocks.

And our next question asks whether Old Republic employees are working. And are they being provided with personal protective equipment?

Okay. Craig, do you want to take that?

Sure. I'd be happy to. I'm happy to report that our workforce of more than 9,000 employees has been extremely productive throughout this whole COVID-19 situation. Beginning in late March, we instituted our contingent plans that enabled more than 95% of those employees to work from home. And so that's why I say we've maintained productivity. And for the most part, everything has really gone off without a hitch. It is necessary for some essential folks to be in the office to do things like make sure our buildings are secure, make sure we're getting checks mailed out, making sure our IT infrastructure is maintained and especially at a time when that infrastructure is being heavily utilized on a remote basis. So there are folks that do need to go into the office for those things. And when they do go into the office, we have, indeed, very strict guidelines about social distancing and wearing face masks and other personal protection steps that are in place at all of our entities. And I would just add that now as the country is discussing steps to open back up the economy where we don't want to be in a reactive mode, we already have our team of senior executives that has put in place our work-from-home policies and our employee policies. Hard at work determining exactly what it will look like for us as we reintegrate back into the offices. So we're in the process of preparing for that eventuality as well.

Okay. And our last question asks whether we have any plans for a new business group to replace the one-off mortgage operation.

Well, as -- again, as we have indicated time and again since we made the decision to place our financial indemnity businesses in the form of mortgage guarantee as well as consumer credit indemnity on a so-called operations runoff, we are comfortable with the situation we have now with that runoff. And we are -- again, as Craig mentioned when he was discussing the results of our business, we are very, very comfortable with latching our -- tying our kite, I should say, to those 2 key businesses of general insurance and title insurance. We've got lots of room to grow in both of those businesses in particular, insofar as we're concerned, from an organic growth standpoint and from the standpoint of -- also from time to time, taking a look at new businesses we could start or smaller businesses we could buy to fill in the parts of the geography or the parts of the product -- the products we are offering. So in combination and given the size of our capital and its permanency, we feel comfortable with staying where we are and growing both the title and the general insurance businesses organically with a modicum of growth opportunities taken through start-ups or small acquisitions.

Okay. And that concludes the question session.

Okay. Well, very good. We appreciate all the questions. Always do. It's great to interact with our shareholders once a year. And periodically, we meet with some of them in order to keep the discourse going. And having said that with facts, we appreciate the -- your attendance, and we'll now bring the meeting to adjournment. So look forward to being together again at least a year from now. You all have a good day.