ORI - Old Republic International

[redwood]

Book value :14.74

Stock price:8.11

Dividend Yield: 8.75%

 

The holding company has General insurance, Mortgage guaranty and Title insurance.  Mortgage unit is out of business(in runoff), and it is incorporated by itself.  It can go under without impacting other units.  The performance in general insurance and title insurance have been improving and the cash flow from those units are used to pay for dividend.

 

http://www.oldrepublic.com/2011_ar_10k_proxy.pdf

http://www.oldrepublic.com/financial_supp_stat_exhibit_032112.pdf

 

for the future on dividend(from last conference call)

 

Aldo Zucaro

Again, the conclusion of my earlier remarks, I indicated that we recommended that our shareholders, whoever is interested to go to the Old Republic website and look at the schedules that were appended to our March 21st news release that dealt with the separation of the RFIG business from the rest of the company. And there you will see in the schedules both portrayals of historical numbers showing how RFIG has fitted historically within the Old Republic and as importantly to your question about the dividend paying ability or liquidity of the holding company level, there is a schedule, I think it is scheduled as I recall, lets append it there. That shows what the historical sources of dividend up-streaming to the Old Republic parent has been and when you look at that, you will see that historically most of the money that has been up-streamed to ORI parent has come from our general insurance business. So, what you have to factor in your thinking process and to a lesser degree the title business. So, given the fact that the mortgage guarantee business is not going to be a provider of that liquidity, then you are looking at general insurance and title insurance and you have to make a decision as a shareholder, but we say to you that we have every expectation that our general insurance business is going to continue to perform well that our title business which has been affected by the housing industry issues is on the mend and is going to be a good business for us going forward and a profit making business. So, in combination those two anchors in Old Republic’s fleet of insurance companies should provide sufficient comfort that our mortgage guaranteed business issues aside that the rest of Old Republic is as sound as it can be.

 

John Deysher – Pinnacle

 

Okay, so you don’t think there is a possibility that some of these regulators will attempt to say you cannot continue that dividend while there are deficits in the capital account of RFIG.

 

Aldo Zucaro

 

Because each of our insurance company’s whether they be general insurance, title or mortgage guarantee or whatever each of our insurance company is primarily governed by the regulations of their state of domicile. And we’ve got, I don’t know seven or eight different states that have a safe. So, therefore when we look at up-streaming of dividends and planning of that to the holding company level, every year as well as every quarter I may say we look at each company’s ability to in fact upstream dividends, in the course we could be taken to account what that company’s leverage is from the business standpoint, what it’s potential is for growing the business and therefore requiring more capital we take all those things into account and then we go by the rules. There are specific rules that apply under each of the state’s regulations as to how much in any period of time can be up-streamed to the holding company without regulatory approval and that is what we do here at Old Republic and what every insurance holding company does regularly.

 

You assess it company by company and there is no opportunity for anyone to say well that the dividends from one company have got to be directed (inaudible)

 

John Deysher – Pinnacle

 

Okay, that is the key point isn’t it? The regulators cannot take that?

 

Aldo Zucaro

 

Correct.

 

 

[Evolveus]

ORI is an interesting study in market psychology.  Eventhough they have decided not to spin off the mortgage business, actual risk hasn’t changed, but pereception of risk has.  The future cash flows have not changed either, therefore intrinsic value should not have changed.

 

The Chairman of the Board & Chief Executive Officer,  Aldo Zucaro bought shares last month between $9 and $10 per share, obviously not assuming the market would react like it did.  In the conference call he repeats over and over that the economics of the business have not changed.

[redwood]

correct, the remaining good business has $14.7 per share book value.  Title and general insurance business produced $1.1 net income last year.  General Insurance which owns 85% of the shareholders' capital had decent historical combined ratio as well.

 

2007 91.3%

 

2008 93.1%

 

2009 95.6%

 

2010 94.7%

 

2011 94.4%

 

The title insurance which is 12.5% of the company has been increasing its market share from 5% to 13.2% during this down turn.

 

Pretax operating income in both business has improved as well.

          General    Title

2007  $418.0      (14.7)

 

2009  $200.1      2.1

 

2011  $304.3      36.2

 

 

[Guest Schwab711]

This will be short for now. ORI is a well-run, US-based general and title insurance company. Title insurance comprises 30%-35% of premiums and I'm a big fan of title insurance. ORI has had the same CEO since 1990 and it seems like he has done relatively well, all things considered. The major hiccup for ORI was the entry into mortgage insurance during the run-up to the Great Recession. It was extremely bad timing and took 5-7 years to work through the problems it caused. I think now is interesting because that part of the book is almost gone and has been replaced by growth in title insurance (which gets safer by the year and should be a big money maker). Just about all of ORI's growth over the years has been organic, which I really like.

 

Even better, the CEO seems like a sensible fella who stays away from OTC derivatives and other garbage with tail-risk (maybe scarred from mortgage insurance?). They have roughly 62% of their shareholder equity invested in equity securities as of 9/30/2016, which is almost 10% greater than MKL and the highest I know of. The CEO has hinted that they have an above-average allocation to O&G names, so their bond MTM values may hold up better than I think. If you make reasonable estimates of their B/S since the last report then the should be trading near 1.0x TBV (currently $17.13/share). They pay a tax rate of roughly 33%, well above the average insurance companies they compete with.

 

ROE is currently ~10%/year since 2013. I think will tick up slightly in the next few years and there are a few potential tailwinds that may materialize over the next year or so.

[DooDiligence]

Underwriting profits & apparently trying to price rationally.

 

I like the focus on general & title (let the bottom feeders fight for life...)

 

You mentioned equity in O & G & the CEO says they're putting cash in larger, more stable earnings & div improvers ((their own stated comparisons to S & P performance for the past 10 years have been pretty bad (as per 2015 Annual Review) & I was wondering if they changed portfolio managers?)) ((do they manage in house or with outside advisors?))

 

It'd be nice to know what's in their book...

 

Didn't Prem Watsa own this around the 2008 crisis?

 

Looks interesting...

[ValueIdeaLog]

I haven't paid as much attention to ORI, but I'm also a fan of title insurance. I just wrote up the investment case for STC on my blog. They seem to have more upside and catalysts in place. If you're going to be in title insurance, why pick ORI?

 

ORI probably pays a higher tax rate than other insurers but it looks pretty similar to the other title insurers. 3/4 of their title business is also lower margin agency revenues vs. a 50/50 mix for the other players.They have a very similar earnings multiple as FAF, but don't have a margin profile that's as attractive as FAF's.

 

I know ORI has significant insurance exposure outside of title, but I'm hesitant to compare it to other insurance businesses because title insurance is so different.

[no_free_lunch]

ValueIdeaLog,

 

I quite enjoyed your post on STC.  You lay out the thesis for title insurance very nicely.  I just wonder about STC as an investment given how shareholders have been treated historically.  A;so, isn't some of the upside already priced in?

[ValueIdeaLog]

Thanks! The Morris family has controlled the company for 5 generations, but now activists control the board. I'd say there's definitely some improvement priced in. Based on peer multiples it seems to me the company is getting credit for about ~6.5% pre-tax margins when they are currently only at a 3.9% pre-tax margin.

[Guest Schwab711]

I haven't paid as much attention to ORI, but I'm also a fan of title insurance. I just wrote up the investment case for STC on my blog. They seem to have more upside and catalysts in place. If you're going to be in title insurance, why pick ORI?

 

ORI probably pays a higher tax rate than other insurers but it looks pretty similar to the other title insurers. 3/4 of their title business is also lower margin agency revenues vs. a 50/50 mix for the other players.They have a very similar earnings multiple as FAF, but don't have a margin profile that's as attractive as FAF's.

 

I know ORI has significant insurance exposure outside of title, but I'm hesitant to compare it to other insurance businesses because title insurance is so different.

 

Nice blog post. You basically highlighted the reasons I ended up focusing on ORI.

 

STC's management made them uninvestable for myself. I'm not good at recognizing turnaround candidates. They certainly have potential if they can turnaround operations.

 

I wasn't that impressed with FAF's allocation choices but I thought they had a good business. I like FAF's information businesses a lot.

 

Fidelity is expensive relative to ORI and FAF, even if you consider their advantages in scale.

 

Ultimately, I really liked ORI's portfolio allocation and I thought they would do well as long as they remained positioned as such. I'm not sure I'd consider ORI a punchcard investment but I like them for the moment.

 

Berkshire should really be in the title insurance business. They could do so much better than the current competitors. I think the current management teams would be the only obstacle to BRK purchasing any of the big 4.

[kartoz10]

FWIW Berkshire is already in the title insurance business. HomeService's own a number of agents across the country.

 

http://www.homeservices.com/settlement-services.aspx