ORI - Old Republic

[Cigarbutt]

^It seems that, mostly for regulatory reasons, mortgage guaranty insurers had to reinsure the risk in excess of 25% of total risk.

Learning machine was asking about total mortgage exposure so I gave the 10B answer.  Was it the right metric to use to evaluate risk? Probably not.  ;D

@CB -

I think you are referencing the coverage limitation provision (if not, can you clarify please). So the option is either pay 25% to the insured or pay full and take the title. I think 25% is a reasonable cap. I don't foresee the run-off portfolio to add any significant challenges. Older mortgages tend to be safer too.

My general view on ORI after looking over their financials is that they are a good underwriter. Their title insurance is absurdly profitable though it's very hard to grow (industry dynamics). The general insurance is doing pretty well too. What's unique about this one is that they are growing general insurance but also doing it in a responsible manner. I might buy some too.

ORI is 100% responsible for the management of legacy mortgage guaranty reserves but have to pay (net basis) about 25% of the funds going to the insureds. Their reinsurance arrangements look quite solid. i agree that residual exposure is small in that specific segment. After Q2 2020 and giving effect to the new reality of delinquencies, reserves were increased 21.0% and ended up at 119.9M vs 118.9M at end of Q4 2019. After taking a dividend of 37.5M in Q1 from the run-off sub, statutory capital was at 417.5M at the end of Q2 2020. So, that sub is likely still over-capitalized but it may take some additional time to be able to use that capital elsewhere. To have an idea of the potential mortgage guaranty losses, after the GFC (perhaps the mother of all stress test up to now for that segment), ORI reported net losses of about 2B over four years (2008-2011), compared to net risk exposure of about 20B. So, with a similar outcome, one could guess a loss of about 230M over four years (2.31B residual net risk left on the books at end of Q2 2020). So, this area appears safe. The bulk of residual mortgage guaranty business still comes from poor years (2006-7) but those mortgages that survived are likely more solid than typical mortgages, even if higher risk (year of origination, initial LTV, initial credit scores etc).

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This has been moved from a tertiary to a secondary watchlist. Thanks to Spekulatius. i thought (around 2008-2010) that this company would have been a nice fit with Fairfax (i think FFH even had a trailer position for a while).

[Spekulatius]

Sounds like some folks like what they see as well. It certainly helps to have more eyes on a stock to make sure nothing substantially is overlooked.

 

I went through the proxy statement a bit and noticed that the BOD is very old and probably would benefit from some fresh perspective. Overall, I didn’t find anything strange there. I like thet they have a stock ownership requirement of 6x base salary for the CEO and 4x for the president.

 

There also seems to be a provision that may allow activism:

The Company's proxy access by-law incorporates so-called "market" terms. More particularly, the provision allows a shareholder (or a group of up to 20 shareholders) that own at least 3% of the Company's Common Stock for at least three years to submit a number of nominees equal to 20% of the number of directors serving on the Board.

[Ronchong]

Sounds like some folks like what they see as well. It certainly helps to have more eyes on a stock to make sure nothing substantially is overlooked.

 

I went through the proxy statement a bit and noticed that the BOD is very old and probably would benefit from some fresh perspective. Overall, I didn’t find anything strange there. I like thet they have a stock ownership requirement of 6x base salary for the CEO and 4x for the president.

 

There also seems to be a provision that may allow activism:

The Company's proxy access by-law incorporates so-called "market" terms. More particularly, the provision allows a shareholder (or a group of up to 20 shareholders) that own at least 3% of the Company's Common Stock for at least three years to submit a number of nominees equal to 20% of the number of directors serving on the Board.

 

Thanks for the post Spekulatius! It's my first time hearing about title insurance so I'm just wondering, what made you choose ORI over FNF or FAF?

 

Sorry for the ignorance.

[Spekulatius]

Sounds like some folks like what they see as well. It certainly helps to have more eyes on a stock to make sure nothing substantially is overlooked.

 

I went through the proxy statement a bit and noticed that the BOD is very old and probably would benefit from some fresh perspective. Overall, I didn’t find anything strange there. I like thet they have a stock ownership requirement of 6x base salary for the CEO and 4x for the president.

 

There also seems to be a provision that may allow activism:

The Company's proxy access by-law incorporates so-called "market" terms. More particularly, the provision allows a shareholder (or a group of up to 20 shareholders) that own at least 3% of the Company's Common Stock for at least three years to submit a number of nominees equal to 20% of the number of directors serving on the Board.

 

Thanks for the post Spekulatius! It's my first time hearing about title insurance so I'm just wondering, what made you choose ORI over FNF or FAF?

 

Sorry for the ignorance.

 

ORI isn’t  a pure play title insurer - its just 40% of their business.

 

ORI is cheaper one some metrics - P/B. I think they might have more leeway to recover and they re not solely depend on refinance volumes like pure play FNF and FAF are.

 

I think FNF and FAF are good plays here and probably the way to play the refinance boom. Both seem to have higher margins in their title insurance business (double digit vs high single digits for ORI, if I remember correctly), so that’s another interesting tidbit that I don’t understand.

 

[Ronchong]

My bad, I thought the title insurance side of the business was the focus here. Guess I got too excited looking at the past few posts.

 

Yeap, I'm trying to think of plays for the upcoming refinancing boom as well. The low interest rate environment and the flight from urban would be massive for the financing volume. The market doesn't seem to think like that though so I don't know what I'm missing.

[Dalal.Holdings]

Earnings look tip top...

[thepupil]

Averaging up.

 

 

[thepupil]

approaching 0.95x.

 

Spekulatius and others, curious as to how you all are thinking about this company in relation to others / the portfolio. I see it as a relatively safe, 0.8x-->(1.2-1.4x) re-rating + positive carry "trade" (which may take 1-5 years), but then intend to keep a quasi-permanent position in small size. In 2018, this got to 1.4x. It's tough for me to see much beyond that, but also tough for me to think this should trade at book given the heavy title exposure and that division's very high ROE.

 

I have not trimmed and have only added since purchase. Just curious what other see as the upside/ceiling/whether people view this as a 5+ year hold or something else.

[Liberty]

Harris acquired Commerce Decisions from QinetiQ (U.K.)"

 

"a market leader providing software and consultancy services to enable some of the largest and most complex procurements around the world."

 

"Acquired by QinetiQ in 2008

£8.3m revenues

£10m purchase price"

 

"Founded in 2001

96% customer retention

240k individual users

Focus on complex procurement"

 

https://commercedecisions.com/

 

h/t @pearnick

[thepupil]

https://seekingalpha.com/news/3645794-old-republic-declares-1_00-special-dividend

 

$1 special divvy (5% of stock px, 6-7% of when Spek highlighted this bad boy).

 

 

[Dalal.Holdings]

https://seekingalpha.com/news/3645794-old-republic-declares-1_00-special-dividend

 

$1 special divvy (5% of stock px, 6-7% of when Spek highlighted this bad boy).

 

I likey.

[Spekulatius]

I just noticed the cash from the $1 special dividend in my brokerage accounts and noticed they also wrote a dividend letter explaining their thinking:

https://ir.oldrepublic.com/news/news-details/2021/Old-Republic-Special-Dividend-Letter-To-The-Shareholders/default.aspx

 

In short - it is all total return..

[Dalal.Holdings]

Thanks for the nice play. I'm out today

[thepupil]

http://www.digitaljournal.com/pr/5028725

Owl Creek ruffling feathers, wants ORI to: 

- spin off the title insurance to highlight it's a better business than the rest

- too many old white dudes on entrenched classified board. 

- more tax efficient to repurchase vs dividend 

 

myeh. 

 

 

 

Edited April 6, 2021 by thepupil

[Spekulatius]

1 hour ago, thepupil said:

http://www.digitaljournal.com/pr/5028725

Owl Creek ruffling feathers, wants ORI to: 

- spin off the title insurance to highlight it's a better business than the rest

- too many old white dudes on entrenched classified board. 

- more tax efficient to repurchase vs dividend 

 

myeh. 

 

 

 

Berkshire should buy them. This would solve almost all the problems.

 

 

Edited April 6, 2021 by Spekulatius

[thepupil]

+74% total return inclusive of divvies, + 62% in price, since september 20th. thanks again spek! I had already exited my own shares @ $22/3, but am trimming some family members' shares today. there's definitely still more upside, but it's different @ average of 5 yr P/B multiple than when bought it. 

+47% to S&P 500 and +13% to financials, to own a pretty safe/cheap/boring company. 

Edited April 26, 2021 by thepupil

[Spekulatius]

I am holding all my shares so far, it is one of my larger positions, but I also am pretty diversified. The stock performance exceeded my expectations, but I don't think the shares are expensive at this point and I don't really have any other comparable bets to move to, except maybe PNGAY (chinese insurer) which i am still toying around with.

I expect another special dividend at the end of this year, but perhaps not as high as the last one ($1/share). I am not too convinced that activist like Owl Creek are going to get much traction, although I do think if they would sell it off for parts (separate title from other insurance business), they could fetch $30/share pretty easily.

 

The feedback I received here after posting was pretty helpful in strengthening my conviction and make resulted in making this position larger than I would have done otherwise.