Old Republic International Earnings Call Nuggets: Expense Catch-Ups and Earned Premium Drops
Old Republic International (NYSE:ORI) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.
Geoffrey Dunn – Dowling & Partners: If you could, I got two questions for you, one, in the Title segment, another strong result, but with revenues up we did see the margin slip sequentially was that just like an agency direct business mix issue or was there any kind of catch-up recall on comp or other expense catch-up at the fourth quarter?
Aldo C. Zucaro – Chairman and CEO: I think you have little bit of all of those, Geoff. We had some litigation cost that we try to address in the quarter, actually we addressed them in most of the three quarters of last year, then as I recall. So, we had some beefing up of general expense types of reserving. But nothing that is of such a significance, Geoff, that it would have changed the pattern of earnings that you see it’s still strong earnings pattern. And as Rande said before, we feel good about what looks like a strong year in 2013.
Geoffrey Dunn – Dowling & Partners: on the GI side, you have two questions; one can you give any color as to any kind of cat impact on the commercial auto line this quarter? And then two, as you think about the loss cost pressures on workers’ comp are your options basically just to weigh this out and let the top line take care of it or is there any incentive to maybe think about shifting mix a little bit to help that even out the results we go into ’13, ’14.
Scott Eckstein – IR: The first question was, was there any cat exposure with respect to the commercial auto book. Is that right, nothing material on that issue.
Aldo C. Zucaro – Chairman and CEO: As well as other…
Scott Eckstein – IR: Yeah, as well as the other areas of our operation as well. There is any cat exposures relative to Sandy or some of the storms that hit the Midwest in the fourth quarter of last year would have been purely de minimis. The next question was what we intent to do with respect to workers’ compensation as well, first of all, I would point out this that, obviously your results in workers compensation are based on two basic elements from an underwriting perspective. It’s risk selection and rates. Risk selection from the standpoint of who are you picking in what industries, where do you want your emphasis, where do you want your nation to be? In that respect, we haven’t really changed our overall book with respect risk selection for the foreseeable past. Just maintained we tend to netting do, what we do well, we try to identify for those industries that we’ve got experience with and stick there to accentuate our specialty aspects. On the rate side, I think the workers compensation issue is merely a question of medical inflation increasing between the mid and high-single digit ratios rates for the past several years, and workers compensation rates over that same (inter) amount of time being relatively stable. I think it’s purely a situation where you look at what’s out there, what you predict on the horizon with respect to inflationary costs and go out and get what you believe is an adequate rate for that particular exposure.
Aldo C. Zucaro – Chairman and CEO: I would add also, as you recall Scott and I think we may have mentioned this in either the second quarter or third quarter discussion that we had after the earnings release, that we did have some like case reserves go south on us, and that whenever that happens in an insurance company, it tends to drive what we set up in terms of what’s referred to as an IBNR, right because you become perhaps a little over – a little more cautious, and I think that factor had an impact on what happened to the loss ratio in the comp area too. I think it was a reaction throughout the year, right, Karl. I mean…
Karl W. Mueller – SVP and CFO: That’s right. It’s true.
Aldo C. Zucaro – Chairman and CEO: Throughout the year that we reacted to mostly to some case reserves on some big ticket items that went south on us as they say, as well as some – we suspect, in parts of our business, we’ve accelerated the payment of claims ever so slightly, and whenever you do that, also it has an impact on your trends and those in turn will drive the IBNR as I said. So, I think it bears a repeating that, that was an issue that – those were issues, I should say, that were particularly important last year in terms of our reaction to the overall reserve level. Having said that, then the question is well, are you going to see some more of this stuff and we think that we’ve got our arms pretty much around the reserve structure particularly in the comp area and that if anything goes boom in the night, this year, it should not be as big of a noise, I don’t think. Would you agree with that Scott?
Scott Eckstein – IR: I would agree that it would be muffled. Yes so on an ongoing basis, its purely a question getting adequate rates and as Al indicated tweaking the experience that we’ve had previously in terms of the reserves from having anticipated some increased costs going forward based on what inflationary trends we are seeing.
Geoffrey Dunn – Dowling & Partners: So maybe not as much pressure as we saw in ’12, but it’s difficult to get adequate rates so not coming quickly back either?
Aldo C. Zucaro – Chairman and CEO: I don’t need to tell you Jeff that the earnings process from the time that you institute rate increases or positive changes in your underwriting selection process and the time when that started to flow through the income statement, right you are looking at an 18 month period. And basically that’s where we have been the last 18 months. Inching up rates, tweaking and as Scott puts it here on the underwriting side so you are going to start seeing some positive results from that in 2013.
Earned Premium Drops
James Ryan – Morningstar: Just to kind of continue a little bit on the worker’s comp the one question I had it does show that the earned premium on a sequential basis dropped off quite a bit is that due to price increases, I am kind of look at and seeing that it jumped in the third quarter and then came back in the fourth, was there something seasonal?
Aldo C. Zucaro – Chairman and CEO: I think what one of the big drivers Jim for us as you know having followed Old Republic for a while is that we do have quite a bit of what we refer to as risk management alternative market type of business in the comp and the automobile trucking liability area. And whenever you’ve got that, it’s tough on a quarter-to-quarter basis to monitor what’s happening to your earned premium line, because that is a very reactive type of business. As the claim cost go up on a particular customer you are going to get more premium or as the claim costs goes down on a particular customer, when you typically you adjust those rates on a cumulative basis, once a year you have these blips that can take place in your – in the topline, which is what you are seeing there. So, we would say that that’s the main reason why from quarter-to-quarter you get these small variations in the comp and I might say in the EL area to a smaller degree. But it’s mostly the comp business that is affected by these retro-rated or self-adjusting types of products. Correct me if I’m wrong Karl, but we have quite a bit of a retro-adjustment booked in the 3Q that we did not have in the fourth quarter.
Karl W. Mueller – SVP and CFO: You are remembering, correctly.
Aldo C. Zucaro – Chairman and CEO: So, therefore just one-time, I forget what it was, but I think it was in the teens, Jim, that you had in the 3Q, that you don’t have in the 4Q and that’s simply a reflection, as I say, of adjusting based on the experience of either a few customers or a lot of customers.
James Ryan – Morningstar: At some point in time these interest rates are going to start rising a little bit which probably would cut off the refinance market. What are you seeing in terms of the resale market hopefully coming back to replace it. I mean it probably would be difficult to replace that amount of volume, but on the other hand the rates are higher. So, Rande if you could just kind of give and idea looking into 2013, what your thoughts are on that?
Rande K. Yeager – Chairman and CEO, Old Republic Title Insurance Companies: The MBA’s latest predictions for mortgage originations are about $1.4 trillion for ’13 as opposed to $1.7 trillion that we had. The refinance market was about 70% of those originations and you are right, as rates increase, as the business sort of runs out you are going to see a decrease in that business. Probably, hopefully the economy continues to improve and we create jobs. As that happens, you probably see those rates edge up, but I don’t think you will see anything until the second half of the year. At that point when the refinances start to slow, I think this maybe the year when the purchase money transactions start to catch-up with the refinance transactions and that of course is good for us. On a refinance transaction, we only issue a loan policy, on a purchase money transaction we issue a owners policy and a loan policy, so there is quite a bit more money there for our works. So, I don’t see ’13 being the year and we’re going to have an issue. I don’t see anything on the horizon that should affect the business during this next year to a great extent event though originations probably will be down.
James Ryan – Morningstar: On the commercial side just on downtown Chicago here. We’ve got two new developments for the first time in like five, six years office buildings. Do you anticipate that any other places. Is there something that you think might come back for 2013?
Rande K. Yeager – Chairman and CEO, Old Republic Title Insurance Companies: We’ve seen increases in almost every major market have very good year in commercial business. Our approach is sort of bifurcated. We do have direct operations. We support our agents and their efforts to do commercial business and that business has really shown an increase over this past year. I think low interest rates. Number of factors have made that market pretty attractive, so I think Chicago certainly should have been a factor of that, but certainly we are seeing a lot of business on both coast New York and California as well.