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ORI - Old Republic


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This is a stodgy and relatively cheap diversified insurer. Trading at 0.74x. tangible book ($19.7) and  ~8.5x earnings. They pay a generous dividend, yielding 6%. They are different in terms of capital allocation than most other insurers that they don’t do buybacks, but rather pay dividends, which they pride themselves to increase every year.

 

ORI got into trouble during the GFC because they had an insurance sub underwriting mortgage insurance. That sub is now in run off and there is still ~400M in equity tied up,  it at some point this will be gone.

 

Before that, the stock was actually a good performer, with steady growth in book value and dividend. After the GFC, they recovered, but when COVID-19 happened, the stock slumped and never really recovered.

 

Concerns are low interest rates reducing investment income, which it shares with other insurance cos, but they do generate ~40% of their income with title insurance (#3 market share in the US), which isn’t affected at all by low interest rates and even benefit from falling rates (higher refinance activity).

 

I don’t really find a reason why it is as cheap as it is, it trades at a similar P/B than FFH, but in my opinion, is a much more straightforward value proposition with less risk. There is some embedded equity exposure (Just like FFH), but they just own a portfolio of dividend stocks a d don’t do anything fancy with it.

 

 

https://s2.q4cdn.com/382431122/files/doc_downloads/2019/2019-Annual-Review-Total-Returns-Comparison-(1).pdf

 

I own a decent position and recently added to it.

 

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Who runs their equity investment portfolio? Their top holdings have not exactly been winners:

https://whalewisdom.com/filer/old-republic-international-corp#tabholdings_tab_link

 

Albeit not overly concentrated in one name or another, but there is some sector concentration (energy for example).

 

Also, I'm gonna need to examine their bond holdings and maturities.

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I was trying to understand their mortgage insurance business which insures mortgages that are above lender LTV.  I'm assuming that business must be doing terrible right now, especially for any commercial mortgages and possibly even residential mortgages.

 

As Spekulatius mentions, that business is placed in run-off.  However, if equity reserved for that business doesn't cover the losses from mortgage insurance, what is Old Republic's liability in that case?  If your theory is that there is no liability, were you able to find legal documents backing that theory?

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I was trying to understand their mortgage insurance business which insures mortgages that are above lender LTV.  I'm assuming that business must be doing terrible right now, especially for any commercial mortgages and possibly even residential mortgages.

 

As Spekulatius mentions, that business is placed in run-off.  However, if equity reserved for that business doesn't cover the losses from mortgage insurance, what is Old Republic's liability in that case?  If your theory is that there is no liability, were you able to find legal documents backing that theory?

 

ORI goes into detail on their mortgage insurance runoff business. It is correct that it has now small underwriting losses in the last quarter ($4.9M) , but there only ~$440M in equity and $120M in reserves. So there isn’t much risk left and what is left is too small to matter.

https://s2.q4cdn.com/382431122/files/doc_presentations/09/ORI-Investor-Presentation-2nd-Qtr-2020.pdf

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wow! #3 title insurer at 0.75x / 8.5x.

 

title insurance should follow the Iowa model and is a complete racket.

https://www.curbed.com/2018/2/26/17017142/title-insurance-scam-government-takeover

 

as someone who has angrily shelled out $5K for title insurance on a closing day...can't beat em, join em.

 

Spek, a cursory glance of the financials, presentation, and your endorsement is good enough for me!

 

a little starter/diversifier is in order.

 

thanks!

 

 

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So looks like over ~2/3 of investments are fixed income, non-short term ($9.9B). Most of this corporate debt, some U.S. and Canadian gov't. Large chunk of it (~5.6B) 1-5 yr maturity, about $3B of 5-10 year maturity. Not huge sums, but not insignificant. Some duration/interest rate risk to the bond portfolio there, but overall not huge. A sudden spike in rates could hurt some tho given equity at $5.9B.

 

Equity portfolio meanwhile represents ~1/4 of investments.

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So looks like over ~2/3 of investments are fixed income, non-short term ($9.9B). Most of this corporate debt, some U.S. and Canadian gov't. Large chunk of it (~5.6B) 1-5 yr maturity, about $3B of 5-10 year maturity. Not huge sums, but not insignificant. Some duration/interest rate risk to the bond portfolio there, but overall not huge. A sudden spike in rates could hurt some tho given equity at $5.9B.

 

Equity portfolio meanwhile represents ~1/4 of investments.

 

rates going up should be the least of one's concerns, no?

 

is not the paltry yield on intermediate term investment grade corporate debentures the far greater problem? And rates and/or spreads going up would be the solution.

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So looks like over ~2/3 of investments are fixed income, non-short term ($9.9B). Most of this corporate debt, some U.S. and Canadian gov't. Large chunk of it (~5.6B) 1-5 yr maturity, about $3B of 5-10 year maturity. Not huge sums, but not insignificant. Some duration/interest rate risk to the bond portfolio there, but overall not huge. A sudden spike in rates could hurt some tho given equity at $5.9B.

 

Equity portfolio meanwhile represents ~1/4 of investments.

 

rates going up should be the least of one's concerns, no?

 

is not the paltry yield on intermediate term investment grade corporate debentures the far greater problem?

 

I'm just thinking out loud of what can go wrong. A sudden spike in inflation/rates would be bad for any intermediate/long term bond holder. A gradual rise would be much more favorable and in the long run better in terms of earnings yes. With the curve where it is, I wonder what the point is in holding anything beyond short duration fixed income.

 

Buffett has made clear how he views long duration fixed income in terms of risk/reward at current rates...

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I was trying to understand their mortgage insurance business which insures mortgages that are above lender LTV.  I'm assuming that business must be doing terrible right now, especially for any commercial mortgages and possibly even residential mortgages.

 

As Spekulatius mentions, that business is placed in run-off.  However, if equity reserved for that business doesn't cover the losses from mortgage insurance, what is Old Republic's liability in that case?  If your theory is that there is no liability, were you able to find legal documents backing that theory?

 

ORI goes into detail on their mortgage insurance runoff business. It is correct that it has now small underwriting losses in the last quarter ($4.9M) , but there only ~$440M in equity and $120M in reserves. So there isn’t much risk left and what is left is too small to matter.

https://s2.q4cdn.com/382431122/files/doc_presentations/09/ORI-Investor-Presentation-2nd-Qtr-2020.pdf

 

Thanks Spekulatius, I saw that, but interpreted that "equity" to mean how much of equity (funded by Old Republic) they are using to fund the risky mortgage insurance business.  In other words, I didn't interpret that equity as how much total mortgages they are guaranteeing.  For example, if they were guaranteeing $10 Billion of risky mortgages with that $440M equity, and they were liable for losses beyond that $440 M equity and $120M reserves, I'd want to be careful.  I was hoping to get information like total amount of mortgages they are insuring, split by asset type, FICO scores, LTV ranges, etc.  More importantly, I was hoping to see some ironclad writing that the maximum losses they will take on that is their $440M equity and $120M reserves, and nothing more, and that regulators are ok with that arrangement, and there is case law setting precedence that they won't be liable for more.  I didn't look very hard - maybe that information is available?

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Well, you got me. I’ve taken a position. Hope those ibuying companies with captive title insurance arms don’t capture the entire real estate market anytime soon.

 

Yes, I think long term secular pressures/potential disruption  on outsized title insurance return and the “Expensive for little growth” widows and orphan  equity portfolio are the risks here, rather than duration risk on their high quality liability matched, fixed income portfolio with a 4 year weighted average maturity.

 

I bought a little.

 

my title is insured by Old Republic, so this is me channeling Peter Lynch lol*

 

*though it actually isn't because the customer value proposition of title insurance is terrible.

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I like the title insurance side of the business.

 

However, for the record, I'm staying away until I know at least the total amount of mortgages they are guaranteeing. 

 

Because mortgage insurance is taken only when borrower goes above minimum LTV, these are risky mortgages to begin with.

 

Just a 10% loss on $10B of mortgage guarantees can wipe out the $440 million in equity and $120 million of reserves, and eat into the rest of the company if liability is not limited by regulators and case law.

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However, for the record, I'm staying away until I know at least the total amount of mortgages they are guaranteeing. 

Because mortgage insurance is taken only when borrower goes above minimum LTV, these are risky mortgages to begin with.

 

As of 2019, about 10B and they've been shedding it at a rate of about 3B/year. from 2014-2019 their exposure went 35, 28, 21, 16, 13, 10B +/-500M.

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However, for the record, I'm staying away until I know at least the total amount of mortgages they are guaranteeing. 

Because mortgage insurance is taken only when borrower goes above minimum LTV, these are risky mortgages to begin with.

 

As of 2019, about 10B and they've been shedding it at a rate of about 3B/year. from 2014-2019 their exposure went 35, 28, 21, 16, 13, 10B +/-500M.

 

There is ~480M in equity at risk in the sun, which is $1.6/ share. It is significant, but it won’t break the bank. I don’t think the holding company would be required to jump in. I believe the sub operated without equity in 2010-12 and wasn’t shut down.

 

There is some disclose in their last 10k around P44.

 

It is certainly cheap and some parts like Title insurance and, Automotive breakdown and Home protection (similar to FTDR) which insure small claims and are really more like a service business than insurance with tail risks.

 

 

The stock is little followed even though it was a stealth compounder prior to 2002 but then fell out of favor. So right now you are buying a decent business with low risk yielding 6% and a long track record a very low valuation. I like the odds that this works out.

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However, for the record, I'm staying away until I know at least the total amount of mortgages they are guaranteeing. 

Because mortgage insurance is taken only when borrower goes above minimum LTV, these are risky mortgages to begin with.

 

As of 2019, about 10B and they've been shedding it at a rate of about 3B/year. from 2014-2019 their exposure went 35, 28, 21, 16, 13, 10B +/-500M.

 

Source? I see a net risk in force in mortgage insurance of about $2.6B at EOY 2019 and $2.3B at end of Q2 2020. That puts risk-to-capital at < 5

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However, for the record, I'm staying away until I know at least the total amount of mortgages they are guaranteeing. 

Because mortgage insurance is taken only when borrower goes above minimum LTV, these are risky mortgages to begin with.

 

As of 2019, about 10B and they've been shedding it at a rate of about 3B/year. from 2014-2019 their exposure went 35, 28, 21, 16, 13, 10B +/-500M.

 

Source? I see a net risk in force in mortgage insurance of about $2.6B at EOY 2019 and $2.3B at end of Q2 2020. That puts risk-to-capital at < 5

 

I see the same thing, 10-k, P.44.

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However, for the record, I'm staying away until I know at least the total amount of mortgages they are guaranteeing. 

Because mortgage insurance is taken only when borrower goes above minimum LTV, these are risky mortgages to begin with.

 

As of 2019, about 10B and they've been shedding it at a rate of about 3B/year. from 2014-2019 their exposure went 35, 28, 21, 16, 13, 10B +/-500M.

 

Source? I see a net risk in force in mortgage insurance of about $2.6B at EOY 2019 and $2.3B at end of Q2 2020. That puts risk-to-capital at < 5

 

I see the same thing, 10-k, P.44.

 

Spkeulatius and Dalal.Holdings, you are looking at (1) net risk in force, while lnofeisone is probably looking at (2) mortgage guaranty insurance in force on page 88.

 

Funny that I was just using $10B as an example, not realizing it will turn out to be an actual number :-).

 

Looks like #1 is net risk after reinsurance.  Next, I was trying to find how much reinsurance they have actually bought for the mortgage insurance business and the terms, e.g. whether the Old Republic sub has to cover the losses up to risk in force before reinsurance kicks in, but couldn't find that in the 10K easily.

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^It seems that, mostly for regulatory reasons, mortgage guaranty insurers had to reinsure the risk in excess of 25% of total risk. So the 'retained' or 'assumed' risk will be a small fraction of total risk. The net residual risk is at 2.6B, although the reserves booked based on this amount remain an estimate which could change, with proportional movements (up or down) corresponding to the 'ceded' risk, which is relevant to the reinsurer or to ORI if they need to assess recoverability of reinsurance recoverables.

i know this company from before and am taking another look. They had captive reinsurance agreements and i assume they switched (under regulatory supervision) to more tradiitonal reinsurance excess of loss agreements but this needs to be checked.

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I don’t think the holding company would be required to jump in. I believe the sub operated without equity in 2010-12 and wasn’t shut down.

 

Thanks Spekulatius, 2012 and 2013 10ks are very interesting indeed.  In 2012, the run-off business had negative equity of $-56.6 million, and in 2013, it was $-13.8 million.  Also, interesting that they consolidated the equity of the entire business to arrive at their net equity, which makes me think they covered some of the losses?  I didn't get the time to tie up all the loose ends here so far.

 

In the old 10ks, I also see special orders from North Carolina Department of Insurance in 2012, which forced them to start paying 60% of claims in cash and the remaining 40% of claims in Deferred Payment Obligations. 

 

I also see some lawsuits mentioned in the 10ks with their mortgage insurance business, although I couldn't easily find a lawsuit specifically on piercing the corporate veil of the sub to reach the parent.

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However, for the record, I'm staying away until I know at least the total amount of mortgages they are guaranteeing. 

Because mortgage insurance is taken only when borrower goes above minimum LTV, these are risky mortgages to begin with.

 

As of 2019, about 10B and they've been shedding it at a rate of about 3B/year. from 2014-2019 their exposure went 35, 28, 21, 16, 13, 10B +/-500M.

 

Source? I see a net risk in force in mortgage insurance of about $2.6B at EOY 2019 and $2.3B at end of Q2 2020. That puts risk-to-capital at < 5

 

I see the same thing, 10-k, P.44.

 

Spkeulatius and Dalal.Holdings, you are looking at (1) net risk in force, while lnofeisone is probably looking at (2) mortgage guaranty insurance in force on page 88.

 

Funny that I was just using $10B as an example, not realizing it will turn out to be an actual number :-).

 

Looks like #1 is net risk after reinsurance.  Next, I was trying to find how much reinsurance they have actually bought for the mortgage insurance business and the terms, e.g. whether the Old Republic sub has to cover the losses up to risk in force before reinsurance kicks in, but couldn't find that in the 10K easily.

 

Source being 10K.

Mortgage guaranty - the aggregate number of mortgages they are exposed to.

Net risk in force - what the company thinks they are exposed to. This number can be reduced through re-insurance or actuarial models. 

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Page 14: “Reinsured liabilities of...RFIG run off Group...are not material.“

 

Their risk in force is largely an estimate and seems to be based on FICO scores which sounds reasonable (620 and below as rated as highest risk).

 

Either way, the mortgage exposure should be completely gone by 2023 and the holding co has a liability shield from RFIG, so over analysis of this is probably moot

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2020 will probably be a big year for the mortgage sub. I'd imagine a lot of people will refinance given rates, which will pull mortgages off their guarantee.

 

But the claims will probably be more than expected this year once the deferrals run out.

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^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.

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