Old Republic International Corporation (ORI) Q4 2015 Earnings Report, Transcript and Summary

Good day everyone and welcome to Old Republic International Fourth Quarter and Year End Call. [Operator Instructions] This conference is being recorded. And I would like to turn the conference over to Marilynn Meek. Please go ahead.

Thank you, operator. Good afternoon everyone, and thank you for joining us for Old Republic's conference call to discuss fourth quarter and year end 2015 results. This morning we distributed a copy of the press release. If there's 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 and dated January 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's 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. Thank you very much. And again, welcome everyone to this discussion of our company’s business for the year just ended three weeks ago. Obviously in light of the discussions we’ve had in some of the prior years, we are happy to be here as bearers of good news for our shareholders and all of our company’s other important stakeholders. So, as was indicated and as we’ve done in the past, we’ll discuss our results in the same order as they are outlined in this morning’s news release. We’ll therefore start with Craig Smiddy who’ll speak to our General Insurance business and he will be followed by Rande Yeager for Title Insurance, myself for a few comments on our run-off business, Karl Mueller will add more color to our financial situation and then we’ll go on to closing comments and then the question and answer portion of today’s visit. So let’s get going, would you Craig Smiddy and your comments on general insurance.

Okay, thank you Al. Comparing fourth quarter 2015 with the same quarter for 2014 the General Insurance Group experienced 5.2% growth in net premiums earned. Comparing year end 2014 to year end 2015 the increase was 5.8%. While we experienced relatively consistent growth rate throughout 2015 we believe this level of growth will likely decline in 2016 as we maintain our underwriting discipline in an increasingly competitive market place. Generally speaking we still expect organic growth and strong retention ratios on most of our existing accounts along with a moderate amount of new business as we always point out however organic growth, retention ratios and new business will vary by line of coverage and insurance products. Similarly, because we operate in several distinct specialty markets we are seeing a variety of market place rate pressures. And despite these pressures all of our operations continue to ensure rate adequacy in order to achieve an underwriting profit and avoid adverse loss reserve development down the line, even if this means reducing the top line. So in this context, most of our operations are achieving low to mid single digit rate increases on lines of coverage where they are increasing loss costs. Additionally on segments of our business where we seek to improve the underwriting results we require necessary rate increases there too in conjunction with adjustments to our [indiscernible] criteria in order to reorient our business mix and better ensure an underwriting profit. We’re pleased with all of these efforts and they are gradually paying off, the General Insurance groups overall composite ratio improved from 106.5% in the fourth quarter of 2014 to 99.5% in the fourth quarter of 2015. This overall composite ratio improved from 100.8% at year end 2014 to 97.6% at year end 2015 with all of the improvement coming from the claims ratio component. Further breaking down these favorable composite ratio trends and the claim ratios for you, I’ll do this for our major lines of coverage namely commercial auto, workers’ compensation and general liability where we are seeing the following. On our commercial auto claims ratio it increased from 72.6% in the fourth quarter of 2014 to 80.3% in the fourth quarter of 2015. The year end 2015 auto claim ratio was 77.8% versus 74% at the end of 2014. We continue to monitor and respond to severity trends in this line and accordingly, this is an example of a line of coverage where we are achieving mid digit rate increases, to address the severity trends that we are seeing. The workers’ compensation claim ratio improved dramatically from 103.6% in the fourth quarter of 2014 to 83.4% in the fourth quarter of 2015. At year end 2015 this ratio was 80.7% versus 89.2% at year end 2014. As we have stated previously, as we put reserves strengthening behind us we expect the claim ratio for this coverage to keep trending favorably to more historic levels in the mid-70s. The general liability line of coverage continues to be volatile quarter-to-quarter, because of lower premium volume we write in this line. The claim ratio declined from 96.1% in the fourth third quarter of 2014 to 79.1% in the fourth quarter of 2015 and from 88.2% at year end 2014 to 76.8% at year end 2015. The remaining lines of coverage we underwrite continued to perform very well in 2015. So in 2016 each of our specialty operations will continue to enhance their competitive positions within their respective specialties and our overall focus remains on the production of the favorable underwriting results and the achievement of the long-term objectives we outlined in our five-year plan that we established back in 2012. So, on that positive note, I'm pleased to turn the meeting over to Rande Yeager who will address our Title Insurance Group’s performance.

Great, thank you, Craig. And of course I’m happy to report that the fourth quarter marked our third consecutive quarterly record for 2015. As reported this morning, the Title Group generated a pretax operating profit of $48.1 million. Last year we’d set the previous fourth quarter record coming in at $40.5 million. This year’s fourth quarter bested that mark by $7.6 million or almost 19%. It’s not hard to imagine when you have three record quarters, two of them all time records for any quarter, that a record here will currently gather and of course that happened in 2015. Pre-tax income was a $166.8 million compared to $99.5 million in 2014 and this obviously represents an increase of $67.3 million or almost 68%. Our previous full-year record of $129.8 million was set in 2003 and now we’ve exceeded it by $37 million or a bit over 28%. And we also established a new total operating revenue record of $2.08 billion in 2015 and this represents a second time in the past three years that we exceeded $2 billion. Third quarter market share came in at 15.1% and we expect similar share when the industry wide numbers are tallied for the year. Also, we set high water marks for agency direct and commercial services. Title segment’s expense ratio dropped to 89.2% in 2015 and our claims continued to develop favorably coming in at 3.4% for the fourth quarter and 4.9% for the year as a whole. In a reasonably good housing market we expect the claims ratio to stabilize right around this level. We also accomplished these very favorable results despite the fact that we experienced a hiccup that we predict in the fourth quarter relative to the CFPB's new mortgage disclosure rules. At the onset, rules which as you remember became effective in October, probably disrupted our business for about a two to four week period and things started to normalize and that new requirements certainly won’t decrease demand over the long run and we are confident that the real estate industry will become more efficient as it gain experience and consumer will also be better served. I can’t predict with any certainty that the 2016 – what the 2016 market is going to look like, but mortgage interest rates look relatively stable, housing demand is ticking upward and our commercial business continues to grow at a terrific pace. While there’s not lot to be critical of in our 2015 results we’ve certainly not achieved our full potential. There’s more to do and we intend to get bigger and better and contribute even more to the very health ORI family. And with that, I will turn it over to Al Zucaro

Okay, Rande. I’ll say a few words about our runoff, or RFIG business which played out pretty much as we expected, save again for the effect of lingering litigation exposures that we continue to deal with. We had been -- as you may recall from prior calls that we had been hopeful of resolving the lion’s share of these litigated matters by year end 2015, but that of course did not happen. As we’ve disclosed in most recent 10-K and 10-Q reports, we’ve got MI, mortgage guarantee as well CCI or consumer credit insurance disputes largely with the Bank of America and most critical its Countrywide acquisition of several years ago. As to the MI portion of the litigation with the Bank of America, however, we believe that its now at the final stages of everybody dotting the I’s and crossing continue and we’ve got very good confidence that it we will put this beyond us within established reserves as of year went 2015, so there should be no dollar surprise when we finally put our John Hancock’s to this litigation matter. On the other hand, the resolution of Bank of America litigation piece in the CCI runoffs, well, that’s proving itself to be much more daunting task and the underlying conduct that gave rise to our lawsuit against this giant financial institution is of a piece with the country-wide net a fraud and miss representations that led also Linux, multi-billion dollars elements with the multibillion dollars elements with the U.S. treasury and others most specifically into a grand degree in 2015 as I recall. But as we speak however we’re still hopeful of resolving differences with Bank of America in the new user to intermediates tem without having to incur greater costs that have posted, by both sides, with respect to cost of lawyers and what have you in the past several years. Otherwise, as I just indicated the runoff business is producing reasonably positive results and we think that business is going to come along on declining scale obviously as it tracks over the next several years. So, on this note, briefly looking at our RFIG runoff I’ll turn it over to my friend here, Karl Mueller.

Okay. Thank you, Al. This morning we’ve reported consolidated assets totaling $17.1 billion, which is largely unchanged compared to this year’s third quarter as well as the year end 2014. The shareholder equity account likewise remained relative flat at $3.8 billion at year end compared to third quarter of this year. However book value for share rose from the third quarter to end the year at $15.2 per share. So let me now summarize some of the key elements of our financial condition as of by year end 2015. First of all, cash and investment assets grew somewhat year-over-year to $11.5 billion. And the growth was driven primarily by addition to the cost basis of the investment portfolio, which approximated $560 million of the year. This increase was however partly offset by further declines in fair value measurements of the investment portfolio. At year end the portfolio composition is essentially unchanged from the end of third quarter with approximately 82% allocated to fixed maturity and short term investments with the remaining 18% directed towards equity, securities. The credit quality of the fixed income portfolio retains its overall A rating and the average life remains at approximately five years. Investment income increased to $99.7 million, up 9.4% comparison to last year’s fourth quarter. For the year investment income rose 12.5% to $388 million. Now there are several factors that drove this game in investment income. The main contributor was the greater invested asset base accompanied by year-over-year increase in the overall portfolio yield. Additionally as you may recall from comments made during the third quarter conference call, investment income for 2015 benefited from a non-recurring special dividend did add approximately $10 million to the total for the year. To add to that we’ll received another special dividend of approximately $3 million during the fourth quarter. Consolidated claim reserves remain largely unchanged year end, are comparison to the amount in the 2014 ending balance sheet. For all of 2015 consolidated claim reserves developed moderately favorable and contrast to the slight unfavorable development for all of 2014. As noted in this morning’s release the general insurance group by itself however experienced unfavorable reserve development during the fourth quarter and full year, which added three percentage points to the same ratio for the fourth quarter and 1.5 percentage points for the full year. Despite the lingering unfavorable development, the year-over-year improvement in prior year claim development provides evidence that the General Insurance Group is trending ever closer to its long term experience of reserve adequacy. Moving into the mortgage insurance group, they experienced continued favor development of prior year reserves as quantified at the top of the page four of this morning’s news release. And finally the title group results developed moderately redundant during the current year, benefiting loss ratio by 0.6 percentage points by comparison to 0.8 percentage points in the prior year. Shareholders’ equity at December 31st totaled $3.8 billion, as I mentioned earlier with $15.02 per share, a decrease of $0.13 per share for the year. The reconciliation of book value per share is shown on page 6 of the release. The table shows that net operating income in excess of the annual cash dividends that we paid to our common shareholders was additive to Old Republic’s book value. The continued volatility in reported book value emanates primarily from realized and unrealized gain and loss activity in the investment portfolio. The recognition of realized gains during the year totaled $0.23 per share but that was more than offset by the $0.96 per decline in the fair value of the investment portfolio, which occurred during the second half of the year in particular. Finally, the capitalization ratios shown at the table on the bottom of page 6 are relatively unchanged at year end 2015 by comparison to 2014. So those are the highlights of our financial condition, and I'll now turn the call back to Al for closing comments.

Okay. So, as we just heard, big picture wise, the reasonably good consolidated underwriting results and the stronger balance sheet in our view truly reflect the completion of our most successful operating year since the onset of the Great Recession. And as you see in the release this morning, we booked $540.5 million of pretax operating income in 2015 and of this amount, 72% came from investment income which Karl just spoke to and the rest 28% came from of course the most important part of our business, which is the underwriting and services and related services portions of it. Now by comparison, our best pretax operating income number was posted in 2005. That was a couple of years or so before the start of the Great Recession. And in that year, net investment income represented about 52% of the total pretax operating income. That means we have 48% instead of 28% of our pretax operating income coming from the most critical portion of our business. So, our near-term challenge is to get back to that 2005 performance level, which incidentally was highly influenced by the very strong underwriting contribution of what is now the run-off RFIG business. So if we leave aside the remaining litigation that we spoke to a few minutes ago and that it will come to a standstill, this run-off should ease itself into a fairly steady declining contribution to our company’s intermediate-term earnings stream. Looking ahead, we will likely find a new way, new place for it to operate under circumstances that best ensure its appropriate future without adding exposure to our company’s long-term business interests. As to the rest of our business, I think it faces reasonably good prospects. All we have to do is listen to what Craig said before and Rande, and that those prospects should be helpful in meeting our challenge of improving the bottom line, principally on the basis of the underwriting aspects of our business. As Rande noted, we sure have got the wind at our back in the Title Insurance business. We’ve got very good reputation for providing industry-leading services for doing things right by the uses of our products whether they will be agents, or retail buyers, or commercial buyers of it. And of course, strong financial underpinnings in Title Insurance in combination are going to assure the continued success and growth of this business segment for Old Republic. In General Insurance, again as Craig mentioned before, we worked hard in the last couple of years in particular to address pricing and claim reserving issues in some parts of our workers compensation in insurance in particular. And at this stage, we feel reasonably confident that most, if not all of this fixing up is behind us and that we should experience gradually improving underwriting results from both this workers’ comp coverage, as well as the many others that we provide in our fleet of General Insurance subsidiaries. So bottom line, when we shake all of these up, we feel very good of our prospects with 2016 and beyond. So this is a good news report again for 2015 and I think it will lead to improving results as we go forward. So as was stated initially, we will move this visit to the questions and answers that we will provide as they come. So operator, would you like to open the meeting to the questions?

Thank you. [Operator Instructions] And we will go first to Greg Peters at Raymond James. Please go ahead.

Good afternoon, everyone and congratulations on your quarter and year.

Good. Happy -- when you are happy, Greg.

Well, I’m happy too [indiscernible] but in my role I have to nitpick. So here I go. So relating to the adverse reserve development in General Insurance, Karl, perhaps you can provide some color regarding which accident years are the problematic ones and what lines of business you are experiencing this development in?

Well. Greg, as Al mentioned, the adverse development has been predominantly focused in our workers’ compensation line of business for a couple of our operations in particular. And I would say that the more recent accident years seem to be holding up pretty well. They have had the benefit of some of the rate actions that Craig spoke to earlier. So, we are really looking at accident years and I would say 2012 and prior predominantly, and I will leave it at that.

Okay. And Craig, on the commercial auto results where you are reporting some deterioration I suppose. Is this a case where the accident frequency that we are hearing about in personal lines is bleeding over to the commercial auto side, or is there some other issue at play?

Right. Well, as we spoke about the last few quarters, we’ve been keeping a close eye on frequency and severity. And frankly most of what we are seeing is really coming from severity. So, we continue to monitor that and as I stated, we are making sure that our rates are recognizing that increase in severity trends. But as you have heard from many carriers in the industry, they are seeing a similar result on commercial auto and for us it’s been primarily the severity piece of it.

I see. If I just look at General Insurance in its entirety, I believe you have a long-term operating margin target of say 15% to 20% for the General Insurance piece and by my math it looks like you are just under 12% for 2015. So, I guess my question is given the market conditions, which Craig you outlined has been pretty intensely competitive. Do you think it’s possible that you could get to this objective sometime between 2016 and ’17, or because of conditions do you think you have to reduce your expectations?

Well, I think this, Greg, we think that we’ve got reserving challenges under our belt and as Karl mentioned, we have about 3 percentage points [of adverse] [ph]...

Yes.

If you eliminate -- if you just eliminate that, Greg, it gets you pretty close or a long way towards that underwriting margin. And then we’ve got fantastic amounts of cash flows running through the business and those are being invested as we have indicated to a large degree in equities of very high quality companies, which even in this lousy stock market are still persevering and paying their cash dividends consistently. And so far as bonds are concerned, we are doing pretty well there in the 5 to 10 year horizon without diminishing the validity of our asset and liability matching process. So, we think that the combination of just a better reserving going into the future and some increase in investment income. Together, we are doing a better job admittedly on the underwriting side, which means pricing and risk selection. We probably are going to see a much more stable top line but it’s going to be a better quality topline. So the combination of those three elements, Greg is what we think is going to lead us to get to or close to those underwriting margin, those operating margins. So, we are not backing off of that and we still think that by 2017, as you know we set ourselves a five-year plan at the end of 2012 when we reach a good capital allocation process at Old Republic. And we think that we can reach as we like to call it the top of the mountain, which means reaching our earnings that were achieved in 2005, 2006 before the U.S. economy imploded through the Great Recession.

Right.

Those are objectives and I think they are very achievable, together of course with a much stronger Title Insurance business then we started back in 2012 with.

Indeed. I feel like I have to log in with my obligatory run-off question. AIG has been obviously in the forefront of the press with announcements of changes that they are making at their company, including a spinning off United Guaranty and I’m wondering how that fits into your calculus as it relates to your mortgage insurance operations if at all? And then secondly, I’m not trying to get too granular here but it seems like maybe you are pushing back the expectation for resolution on the outstanding litigation for some period of time. I’m just trying to read through the -- what your comments are and so any follow-up on that would be helpful?

Well, as to you, the latest point if that’s what it sounded like, that’s not the case. I was only speaking in terms of having had hopes of resolving both the MI and the CCI litigation, before or by year-end or so and I think that’s what we said when we were on the road earlier late last year. I think both ligation pieces, certainly the MI, is going to be resolved anytime, sometime soon. The CCI with Bank of America, that maybe a little more treacherous but everybody is going to come to the table and reason with each other and we will resolve it. So, I don’t mean to -- that it’s going to be pushed back. I see your first question, we’ve said very consistently that we either are going to keep RMIC and CCI in run-off and we think that the run-offs are going to be successful or else we are going to do that and a combination of finding a better place, a better set of circumstances for RMIC to perhaps rejuvenate itself. But either way, we are going to -- the main thing for us is to make sure that we honor our legitimate obligations for those businesses and the rest will take care of itself. I think you spoke about AIG and its issues with the mortgage guaranty and other parts of its business. We are not AIG by any stretch of the imagination and what they do is not necessarily indicative of solutions that would apply to Old Republic.

Perfect. Thank you for your answers.

Yes, sir.

[Operator Instructions] We will go next to David Lapierre at Loomis Sayles. Please go ahead.

Hi. Thanks for the call and congratulations on the quarter and the year. Just a quick one on the reserve add and General Insurance. Is the fourth quarter normally when you would just kind of take a deeper look at the reserves and kind of try to set up for the following year?

No. No, David. We go through the same process every quarter when we close the financials and this quarter was no different. So the 3% deficiency was just slightly above read anything into that. Nothing out of the ordinary.

Okay. Great. And is there any other notable seasonality in the General Insurance business either on the top line or claims areas or anything?

Now generally speaking, there isn’t. Of course with auto liability, you have storms and things that affect travel and that sort of thing. But generally we are not seeing any kind of seasonality in most of our lines of business.

Okay. Great. Thanks a lot.

And we will go next to Stephen Mead at Anchor Capital Advisors.

Yes. Hi, Al.

Hello, Steve. How you doing?

Good. I just want to kind of get a little clarification on the run-off business and the claims increase in the CCI business fourth quarter versus fourth quarter, the $27.2 million versus $15.6 million. And in terms of expectation for CCI as a run-off business in of itself where does it stand and what are they key drivers and you refer to the ligation? But I was just wondering in terms of just on an ongoing basis where we are with that business?

Well. Starting with the top line that business is experiencing the same kind of trends, patterns as the mortgage guaranty business is experiencing meaning that it’s a run-off book on a slowly, gradually declining in force meaning loans that remain in force, pending they are being paid off in one fashion or another. You’ve got an improving economy, which affects payrolls and it affects housing values. So those -- that those two elements affect both MI and CCI positively. We think that the lynchpin in both lines by the way, if you look at our calls second quarter and third quarter in MI, you saw a jump in the claim ratio and that was driven by the litigation exposure. When it comes to CCI, we don’t have the same patterns even though hardly enough, the litigation is with the same bank namely Bank of America. The issues are somewhat, have been somewhat different between the two books of business and quite frankly what we do as Karl again said in answer to the immediately preceding question, we do look at our situation with the lawyers every quarter and we assess which way the wind is blowing and we react to legal bills that we get which are pretty daunting. And we make judgments as to how much reserve we’ve got up and how likely is it that those could be insufficient on the basis of both indemnity exposures, as well as legal or allocated loss expense exposures as we call them in our business that we have. So if you look at the patterns as I say, quarter-by-quarter for the last two or three years on MI and CCI, you will see those claim costs bouncing around by virtue of the effect of this quarterly review process, which assesses the exposure we have in both areas of ligation. Does that cover it, Karl?

Yes.

I hope that answers your questions, Steve.

Yes. But is it fair to say in terms of the two pieces of business, they are very separate pieces of business and in terms of kind of a final resolution for Old Republic, you could resolve one versus and still be dealing with the other. And looking at the mortgage insurance business is it fair to say that we are closer to a kind of final solution or resolution, or you are not dealing with that business anymore?

We and I believe and still believe that we should not come to any kind of conclusion about a final resolution if there is such a thing on either parts of the business unless we got this litigation out of the way. We’ve got to get rid of this, okay. And so one step at a time. Get rid of litigation, make sure that that’s out of the way and then when we are looking at a normal ongoing run-off business then we will take look at what the various options that we have. Okay.

Probably out. In terms of the swing on the ligation side, where does Old Republic sit in terms of if things go in our favor what you could hope for versus if things don’t go in your favor, what would be the impact? And I guess you can’t really speak to that, can you or can you?

No. That’s right. You got it.

Okay. All right. I’ll do just the general insurance if I could. On the workers comp, I just notice that in terms of the net premiums quarter-over-quarter they declined this year versus large year. So on an annualized basis, the workers comp was up. And you’re getting a better result from an underwriting standpoint, but we do we stand in terms of the base of business in workers’ comp, And sort of the outlook for 2016 in terms of -- is that most it will be a more difficult year-over-year comparison like, is it relates to premiums?

Well, as I pointed out earlier, our focus is on underwriting profitability and making sure that we’re achieving the appropriate price and getting the approximate rate. And f that doesn’t happen then we’re willing to shrink and I think what you’ve pointed out here is precisely an example on that where if rates are inadequate we’re not going to change core business. So, the improvement even in the claim ratio also as we’ve discussed is really coming from that the reserve strengthening if any going forward. So, but our bottom line focus is making sure that the business we’re putting on the books today doesn’t produced adverse development in the long run and that’s the business we’re putting on the book today is alternately going to produce an underwriting profit, is that been keeps dial a big, so bet it, but that’s is a clear amount that well understood by all of our subsidy operations.

Okay. All right. And then, one last question now just on the -- your approach to the investment portfolio. You’re providing sort of details in terms of what the equities are generating and current income or yield at this point and what your sort of generation you talk about, so the quality companies with good dividends and that kind of that .But what is that portfolio throwing off in terms yields at that is point.

Well, at the end of the year that portfolio was generating about a 4.5% yield based upon the cost of those securities.

Large part of the stock portfolio even though we keep adding to it, a large part of that portfolio, Steve was acquired back in what 2000? This is 2016. 2000 the other 2013 and all of 2014 when we had some we had some very good opportunities to buy quality names at yield of 4% or better and that’s why as Karl just indicated. As he also indicated in this comments, and as you might expect any portfolio like that. We do have our share of oil stocks, the Exxon and so forth admittedly and surely quality companies, but nonetheless from a market valuation standpoint. We’ve taken some hit from an unrealized valuation standpoint. But these companies are typical been selected from, the dividend achieved is list that flood around Wall Street and they are good quality stocks. Their quality stocks that you put in the lower drawer of the commode and you pretty much live with them. And that’s why have the kinds of good yields on that portfolio. Whenever we adding significantly to it because we’re reaching our limit in terms of the balance sheet management of our investment portfolio, but we’ll sell here and we’ll buy here, but basically you should expect us to see us maintain the portfolio pretty much where is at now.

Thanks.

And we’ll go next to Adam Liebhoff of Loomis, Sayles.

Afternoon guys. Howe are you?

Good.

If I could focus on title and so maybe this questions for Rande, it looks to me like your guys has finished the year at around 8% plus or minus and I understand that origination fairly well depressed at this point, but given that some of your larger competitors are higher on the margin side, where to you think that can ultimately go. And then staying on title if you could give us some color perhaps on the mix of business and I’m thinking new purchase versus refi and the let me vivid there for now?

Rande, do you want to handle that.

Yes. thanks gentlemen, couple of things, I think when you look at margins you really got to look at statutory results and really see what you’re generating in terms of margin off of title premiums as opposed to lot of ancillary service that are credited. We have some too, but I think the fair way to kind of do a quick comparison just look at statutory instead of GAAP results, if you can get to that level you can kind of determine something, first we all our corporate expenses within our results. So, there’s some apples and oranges that’s even though we’re on the same, you got to kind of look at, but I think the important question is where do you think we can go and there is certainly room. We’ve concentrate lot on our commercial side of the business; we were about 20% for the year in the fourth quarter which is traditionally a strong for commercial business we were up about 30%. There’s a very margin in the commercial side of our business , it’s very laboring terms of as far as intellectual; resources is concern, but its where we can really make an impact and that business has been growing just leaps and bounds. So, when I look at margin, the commercial is certainly a strong area that we currently trading on and also we’re seen more of purchase money kind of market as oppose to refinance as you might well imagine. And you there’s a better margin on that. So, and as far as looking at those margins I really think there is room for growth, claims have certainly stabilized and develop favorably since the recession years when we apply it and we take pretty conscious approach to looking at our claims. We’re pretty conservatively reserve. But realistic in terms model actually share so. I think there is certainly room, margins increase by 2%, 3%, 4% and our business would be pretty substantial, but we’re working on those areas that are really going to, I think he answer that margin.

Okay. And then maybe one for Al, you kind of touched on this when you’re talking about the investment portfolio with regard to energy exposure. Maybe you could talk about, I imagine its moderate, but across the different lines maybe you could talk about client exposure to the energy complex?

Policy holder closure bid.

Yes.

Yes, we’ve got what would you say, most of our energy exposure does in our subsidiary and that’s a pretty much of a middle market energy servicing type of exposure and I would say that the premium on a direct basis for that business is built over that $50 million or so.

That sounds great.

So it’s not a great big exposure. The only other area where we have some energy exposure is in our so called risk management business where we address the insurance leads of major corporations and services or manufacturing or what have you. And then we have a couple of accounts that are energy related. But again, those accounts tend to be large companies as I say with security balance sheets we retain quite a bit of the lower layer and insurance exposure for the loan account so that we are not overview or significantly exposed to any degree to what might happen to them, we of course we are happy. So I would say that you know when you come down right down towards the biggest exposure right now we have in energy is the unrealized loss that we have on some of our major holdings of Exxon, Conoco and Chevron and what is two or three other BP and Royal Shell, those are the five major oil companies in which we have equity holdings. And then we’ve got a couple of servicing companies like [Indiscernible] National Oil wells, yes. So we’ve got the ability to hold on to those securities. We don’t have to sell them until and unless we are ready to be sold. So the bottom line answer to your question is yes, we’ve got energy exposure but it’s not significant at the overall scheme of things.

Okay, sounds good. Thanks for the time gentlemen.

Sure.

And at this time we have one question remaining in the queue. [Operator Instructions] And we’ll take our next question from Greg Peters at Raymond James.

Just wanted to come back with two clean up questions for purposes of modeling. And I’m sorry if I missed it in your answer Rande. But I know you spoke about the growth in the commercial side and I was wondering if you could talk or speak to the origination in non commercial residential side and what your outlook is for that business near term? And then the other clean up question for that’s for Karl where I think you said there was 10 million of special dividends and 3 million in the fourth quarter. Am I to presume that fell through the investment income line of general insurance?

Okay, I’ll answer that and then Rande you can take your question. Yes, those all flow through net investment income and I simply highlighted them because they were unusual in nature, it will not be recurring and certainly we’ll have an influence on the trends where you see net investment income.

One was the craft merger and what was the other three big ones? [Indiscernible] Okay $10 million was the craft merger that took place in the second or third quarter of last year.

Thank you.

Did I answer it…?

Thanks, Rande.

Great. Everybody talks about kind of a suppressed residential market right now six [ph] for December and sales were actually up 8% over the year in December or previous year. So interest rates are down. I don’t see that we are going to see a significant increase in residential rates, mortgage interest rates and as a result of that, there is -- going to continue to be demand. I don’t know if the stock market has a whole lot of play on whether people are buying houses and they are specially first time buyers and we really need to get into the market place to make an impact on what happens residentially. Refinanced business runs and sort of a tide and when people can get equity out of the house, yes they will refinance their house and so there’s a whole market that’s actually generated through the appreciation we’ll say probably so. We are seeing that, so I don’t think it’s doing room for the refinanced business, but I think we are going to see a much more substantial increase in residential sale business. And builders are going to do better, I think the lack of building during the recession years and slow recovery in that, that segment of the business is really going to add to what we are going to be able to generate on the resale side of the business. So I think, long run everything looks really good for the residential side. Commercial I just read where they are predicting increases through 2018, so commercials were really solid and I think residential is going to be a slow growth back to maybe not the levels of course that we saw in 2003 through 2005, but certainly better than what we’ve seen over the past five, six, seven years.

Thank you for the color.

Yes.

And it appears there are no further questions at this time. Mr. Zucaro, I like to turn the conference back to you for any additional and closing remark sir.

Okay. Well thank you. Again, we appreciate very much everybody’s interest and we’ll look forward to our next visit which will probably take place after the second quarter results this year and look forward to it. On that note, you’ll have a good afternoon. Bye.