ORI 2026s provide P&C exposure with limited tail risk
admin | October 23, 2020
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Old Republic International (ORI) is a conservative, mid-sized P&C insurance company with a well-diversified business mix and limited tail risk. Based in Chicago, IL, the company maintains a national footprint, with a strong presence in the midwest, and an operating presence throughout the continental US. ORI’s core businesses are general insurance – consisting mostly of commercial auto and workers’ compensation – and a growing presence in mortgage insurance, which now ranks third nationally. The company’s business mix limits exposure to catastrophe loss, which is a primary source of earnings variability within the broader P&C subgroup.
Exhibit 1: ORI 2026s relative to P&C peers
Source: Bloomberg/TRACE g-spread indications, Amherst Pierpont Securities
ORI 3.875% 8/26/26 @ +102/10-year; G+92; 1.394%; $113.66
AIG 3.9 26 72/67 Baa1/BBB+
CNA 4½ 26 68/63 Baa2/A-
MMC 3¾ 26 67/62 Baa1/A-
WLTW 4.4 26 90/85 Baa3/BBB
Issuer: Old Republic International Corp (ORI)
Amount outstanding: $550 million
Insurance Financial Strength Rating: A1/A+
- The company has over $21 billion in total assets as of 2Q20, with an investment portfolio of just under $14 billion. ORI’s third quarter 2020 earnings reported adjusted EPS of $0.62, well ahead of the consensus estimate at $0.44, with operating revenue of $1.80 billion up 5.6% year-over-year.
- Mortgage insurance now accounts for almost 40% of non-runoff annual revenue for ORI, which is a relatively lower-risk business line within P&C. The segment has produced impressive returns wrapped around 10% for the past several years, and helps offset competitive pressures in some of their other core lines. The company’s combined ratio (all in costs versus underwriting revenue) has been extremely consistent in the 94-96% range over the past 5 years.
- The Company has made tremendous progress in reducing its run-off exposure and mitigating inconsistent performance. Run-off assets are down to $557 million, less than 3% of total P&C assets; this represents less than 1% of total revenue, down from over $3 billion (~23%) in 2009.
- ORI has capital adequacy levels at AAA/Aaa levels from S&P and Moody’s. Within P&C, capital and surplus reached $3.73 billion as of the second quarter of 2020. Total P&C liabilities are only about 234% of that figure. The total regulatory risk based capital ratio was 664% as of year-end 2019, which appears very conservative for the company’s operating profile. Management has also demonstrated a proven track record of shareholder policies, with consistently conservative dividend payouts versus the maintenance of a strong credit profile.
- ORI maintains a mostly conservative investment portfolio. Although concentration in equities is higher than many investment grade P&C peers, it is appropriate given the shorter liabilities commensurate with their operating mix. There do not appear to be any material concentrations in exotic or higher risk fixed income products. Well over half of all bond holdings are 1-to-5 year maturity, with less than 3.5% rated below NAIC 2. Total equity instruments were down modestly year-over-year to about 25% of total investments held as of the second quarter of 2020, but still remain somewhat high relative to the overall peer group.
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