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Text: Both of the documents are available at Old Republic's website, which is www.
Risks associated with these statements can be found in the company's latest SEC filings.
In the past, Rande Yeager, our Title Group Chairman; and Mark Bilbrey, our Title Group CEO, have joined us on the call.
Appreciate having you join us for the discussion today.
As we work through the challenges resulting from COVID-19, we certainly want to send all of you, your families, friends and coworkers our very best wishes.
Although in most states, we're recognized as an essential industry and essential workers, currently more than 95% of our General insurance group and approximately 80% of our Title Insurance associates are working remotely.
The small number of associates we have in the offices are working to ensure that mail gets processed, checks get mailed and that our IT infrastructure remains vibrant to support all of those working remotely.
I'd also note that we're among the fortunate to be able to say that we have not furloughed any of our associates during this time.
So before handing things over to Karl, I'll offer a few initial comments regarding our first quarter.
As you saw in our release, Old Republic posted strong first quarter 2020 operating results relative to the first quarter of 2019 and these results were driven by an exceptionally strong quarter for our Title Insurance segment.
As noted in our release, COVID-19 had minimal effect on our first quarter results.
Our first quarter operating results, again, demonstrate that our strategic diversification between Title Insurance and General insurance works very well to produce consolidated revenue and earnings growth over time.
So at this point, I'll turn matters over to Karl to discuss our overall consolidated financial results.
I'll also ask him to address our small RFIG run-off segment.
After which, he'll turn things back to me to discuss the General Insurance segment.
Then Carolyn will discuss the Title Insurance segment.
I'll make a few closing comments and then finally, we'll open up the discussion to Q&A.
So with that, Karl, take us away.
Before commenting on the first quarter results, I'd like to add to Craig's earlier comments and recognize our accounting and financial reporting associates for their diligence and commitment during this period of turmoil resulting from the COVID-19 pandemic.
Despite the fact that most of our employees were working remotely, we were able to complete the financial close without significant disruption while at the same time, retaining the integrity of our internal control process.
Job well done by everyone.
Turning now to the quarterly results.
On a diluted per share basis, that equates to $0.47, which is an increase of 17.5% from the prior year.
However, the resulting disruption to the financial markets led to substantial declines in the fair value of our equity portfolio.
The pre-tax fair value decline of approximately $963 million was really the main contributing factor to the first quarter reported net loss and corresponding reduction in book value.
Consolidated net premiums and fees earned registered strong growth of a little over 10% to $1.5 billion.
The General Insurance group increased about 2.5%, and our Title group grew by almost 24%, as Carolyn will address in a few moments.
Net investment income grew nearly 2% to a due to a larger invested asset base and greater dividend income, which arises from the relatively higher-yielding equity portfolio and that was offset by slightly lower yields on the bond portfolio.
From an underwriting perspective, this quarter's consolidated combined ratio of 94.9%, marked about a 1.1 percentage point improvement over 2019.
The quarterly claims ratio trended lower, and the expense ratio ticked upwards slightly primarily due to a mix of business shift.
And then that shift was more toward the Title segment, which as you know, carries a lower loss and a higher expense ratio.
Consolidated claim reserves developed slightly favorable in both periods, reducing the reported claim ratio by 0.8 and 1.6 percentage points for the current and prior year quarters, respectively.
We experienced favorable prior year development on the reported claims ratios for each of our operating segments to varying degrees during the quarter.
Turning now to our financial condition.
Total cash and invested assets decreased to $13.5 billion at the end of March.
Driving this change was the combination of strong operating cash flow of $216 million offset by, as I mentioned earlier, the substantial unrealized market depreciation in both the equity as well as the fixed income portfolios.
As a reminder, the composition of our portfolio is approximately 76% allocated to bonds and short-term investments and 24% to equity securities.
Our equity portfolio consists of approximately $100 million that are predominantly large-cap, value-oriented, dividend-paying companies.
We manage the portfolio within our risk management framework, which does take into consideration expected price volatility.
The value of our portfolio equity portfolio declined by approximately 24% during the quarter to an unrealized loss position of roughly $22 million at the end of March.
As of yesterday's close, the portfolio had rebounded to a $175 million unrealized gain.
Despite this significant downdraft in valuation at the end of March, we are still operating within our risk tolerance thresholds.
And consequently, we have not made, nor do we expect to make any material changes to our investment strategy.
Old Republic's book value per share decreased from $19.98 at the end of 2019 to $17.29 at the end of March.
As previously noted, the most significant contributor to this decline relates to the $2.53 per share reduction in the fair value of the equity portfolio.
Operating income of $0.47 was additive to the book value, and we returned capital to our shareholders in the form of the regular cash dividend, and that amounted to $0.21 per share or $0.84 on an annual basis.
And this year's annual dividend payout represents about a 5% increase over last year's regular cash dividend rate.
This year, 2020, marks the 79th year of paying uninterrupted regular cash dividends as well as consecutive years of increasing the dividend rate for the past 39 years.
We ended the quarter with $6.1 billion of total capitalization, low debt leverage ratios and adequate liquidity throughout the enterprise.
As highlighted in the release, we believe that our strong financial position will enable us to weather these challenging times.
So as Craig mentioned, let me now just briefly discuss our run-off mortgage insurance segment.
From a capital management perspective, we entered this year with the anticipation of beginning to withdraw excess capital from our mortgage guaranty run-off operation.
During the quarter, we did, in fact, obtain regulatory approval and received a $37.5 million extraordinary dividend from our two principal mortgage insurance companies.
Total statutory capital at the end of March continues to remain strong and registered $410 million.
The first quarter mortgage insurance results were not significantly affected by the COVID-19 pandemic, as Craig mentioned earlier.
The impact on unemployment levels in real estate markets, along with the mitigating effects of the government loaned forbearance programs are areas that we are monitoring closely.
By definition, a mortgage in forbearance is not considered to be in default.
Let's also keep in mind that this is a mature book of business.
We've not written a new policy since 2011.
A large percentage of the in-force file was written in 2009 and earlier years.
In addition, approximately 60% of the loans that are insured have previously been modified or refinanced under the government's home affordability programs, the HARP and HAMP programs.
So these factors, along with the rate at which the U.S. economy recovers, could affect future claims experience and potentially slow the return of capital from the run-off business, until there is greater clarity.
So that said, we continue to pursue all previously mentioned options in the interest of producing the most beneficial long-term outcome for all stakeholders.
With that, I'll now turn things back to Craig for discussion of the General Insurance group.
So as the release indicates and as we show in the financial supplement, compared to first quarter 2019, General Insurance saw quarter-over-quarter operating revenue increase by 2.9% and quarter-over-quarter operating income was up 1.7%.
Net premiums earned in commercial auto rose by 3.6% quarter-over-quarter, attributable to the positive effect of rate increases that we have continued to attain on the commercial auto line.
And in the first quarter, those rate increases remained in the high teens.
On the other hand, premiums were somewhat offset by a decline in the exposure base.
As can be seen in the financial supplement, workers' compensation experienced a 9% drop in net premiums earned quarter-over-quarter.
This is attributable to the negative effect of rate decreases that continued in the low single digits for us during the first quarter and also from a decline in the exposure base.
Thus far, the lower rate level that we have in the workers' compensation line continues to correspond with the lower claim frequency trends that we and the industry are seeing on that line.
Quarter-over-quarter, the General Insurance overall composite ratio rose slightly to 95.6%, up from 95.3%, and this was attributable to a slightly higher expense ratio.
The first quarter expense ratio came in at 25.8% compared to the first quarter of 2019 when it stood at 25.5%.
So turning to claim ratios.
Our first quarter commercial auto claim ratio came in at 77% compared with 79.1% in the same period of 2019.
As demonstrated by our continuing level of rate increases for this line, along with our reduction in exposure from our risk selection efforts, we continue to work very hard to bring this claim ratio back into line with our target in the low 70s.
Turning to workers' compensation.
The first quarter claim ratio came in at 71% compared to 70.7% in the first quarter of 2019, and we continue to remain very pleased with this result, obviously.
For commercial auto, workers' comp and GL combined, given that we typically provide these coverages together to an account, we like to also look at that combined results, and the quarter-over-quarter claim ratio for those three combined was flat at 74.1%.
Still looking at the financial supplement, you can see that the remainder of our claim ratios are very much in line with our target.
And of course, all of the claim ratios we report are inclusive of favorable and unfavorable prior year claim development.
And in the latest quarter, we saw favorable development of 7/10 of one percentage point.
So for General Insurance, as I mentioned earlier, the remaining quarters of 2020 could prove challenging from a top line perspective, but we will continue to seek the appropriate price that we need for our products.
And we'll continue to focus on the long-term when it comes to managing our expense ratios.
So on that note, I'll now turn the discussion over to Carolyn for her comments on Title Insurance.
While these have really been challenging times, the employees in the Title division have embraced this challenge and are working through the chaos in order to continue business and serve our customers.
Despite the COVID-19 pandemic, residential and commercial sales and refinances continue to fund and transactions need to close.
Amidst this, we are ever mindful of the safety and well-being of our employees and customers.
Access into our offices is generally restricted to employees only, which has really caused us to be very creative in carrying out our business.
Our direct operations and our Title agents have conducted drive through closings, set up tents outside of offices, provided single-use pens for signing documents, all while continuing to practice social distancing My heartfelt appreciation goes out to all of our employees and our Title agents on their creativity and most importantly, the positive and really collegial attitude that we hear about on our daily calls with the leadership team in our Title group.
The COVID-19 disruptions have led to a variety of emergency state orders that impact our business.
Many motorization statutes have been amended in order to comply with distancing requirements and to create avenues through which closing transactions may continue.
Based on these orders, our Title technology company Pavaso, which was originally designed for electronic closings and law legislation, was able to pivot and adjust its technology to allow our agents and offices to continue conducting closings through a secure platform, which allows for adherence to social distancing restrictions.
This platform provides an essential notary function that allows for the entire notarization of documents to be completed remotely.
Between the ingenuity of our offices and agents and the supportive technology like Pavaso, we have been able to keep pace in our current environment.
The Title group kicked off the first quarter of 2020 on a record pace.
The market experienced near record lows on mortgage rates.
All-time first quarter highs were set in terms of both direct and independent agency revenue and operating profitability.
For the first quarter, total premium and fee revenue was $628.1 million, which was an increase of nearly 24% over the first quarter of 2019.
Agency premiums were up around 21% and direct operating revenue approximately 31%.
In terms of operating profitability, the Title group reported pre-tax operating income of $43.3 million for the quarter compared to $20.5 million in the first quarter of 2019, an increase of 110.6%.
We ended the first quarter with some of the highest open order counts in the history of our company.
We continue to adjust to doing business while operating under the various state shelter in place orders and social distancing requirements.
We are mindful of the challenges ahead for our organization and our nation in general.
Our firm belief is that with the continued unwavering commitment of our employees and the support of our Title agents, we will be more than ready for these challenges.
We will rely on the same guiding principles of integrity, managing for the long run, financial strength, protection of our policyholders and the well-being of our employees and customers that have served us well over the last 100-plus years.
So again, our first quarter operating results indicate that our business continues to perform very well.
We continue to focus on underwriting excellence during these challenging times.
And our capital position remains very strong with significant dry powder to weather the macroeconomic disruptions and to be well positioned when the economy eventually rebounds.
I'll also note that our MD&A discussion in our upcoming 10-Q will provide additional more detailed disclosure around the risk factors associated with COVID-19.

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old republic international- impact on u.s. economic activity from covid-19 and the associated governmental responses occurred in the final weeks of q1.

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