The Long and Short
Rate cuts should help Old Republic
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Any drop in interest rates next year should help the insurance and mortgage finance companies that underwrite title insurance. They gain from higher closings and more mortgage refinancing. As a top producer in that industry, Old Republic International (ORI: Baa2/BBB+) is among the names that should see further relief as the Fed continues on its path of cutting rates. With improving operating prospects, ORI bond spreads offer solid value relative to the broader P&C peer group in the intermediate to long-end of the curve.
The companies that hold the three biggest market shares in title insurance in the US are Fidelity National Financial (FNF: Baa2/BBB/BBB), First American Financial (FAF: Baa2/BBB-/BBB) and ORI. This industry has faced considerable pressure on top-line performance since the heady days of 2020 and 2021, as 10-year rates and 30-year mortgage rates gradually increased to their highest levels in 2023-2024 since before the Global Financial Crisis. That drastic shift in rates in a relative short period weighed considerably on refinancing activity and overall home closings. That has clouded prospects for companies that underwrite title insurance, including both residential and commercial real estate volumes. While mortgage rates still remain significantly high relative to most of the last decade, the implications of further rate relief could provide a considerable boost to the industry.
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, which consists mostly of commercial auto and workers’ compensation, and its growing presence in mortgage insurance, where it now ranks third nationally with a 15% share of the US market. The company is positioned as a more diversified P&C insurance operation than either FNF or FAF, generating about 52% of revenue through general insurance (primarily P&C with some Life operations) and about 47% through title insurance. ORI also had a mortgage insurance subsidiary that was in run-off that it sold to Arch Capital (ACGL: Baa3/BBB/BBB) in a deal that just closed in June of this year. ORI has also diversified into excess and surplus (E&S) insurance to further expand its product offerings.
Exhibit 1: ORI offers relative value to BBB-rated and higher peer group
Source: Santander US Capital Markets LLC, Bloomberg/TRACE G-spread indications
ORI’s business mix has limited exposure to catastrophe losses, which is a primary source of earnings variability within the broader P&C subgroup. Title Insurance now accounts for about half of all non-runoff annual revenue for ORI. We consider this a relatively low tail-risk business line within P&C, which helps offset some of the longer tail risk in their overall mix. The segment has produced impressive returns 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) for its general P&C insurance operations has been consistent in the low 90% range over the past several years and has remained below 100% for the past decade. The Company has made tremendous progress in reducing its run-off exposure and mitigating inconsistent performance. Run-off assets are down to less than less than 1% of total revenue; from over $3 bn (~23%) back in 2009.
ORI has capital adequacy levels at ‘AAA’ levels from S&P and Moody’s. Within P&C, statutory capital and surplus has been consistent and stood at $4.3 bn as of third quarter 2024. The total regulatory Risk Based Capital Ratio was 615% as of year-end 2023, which appears conservative enough for the company’s operating profile. Management has also demonstrated a consistent track record of shareholder policies, with conservative dividend and repurchase payouts versus the maintenance of a strong credit profile.
ORI maintains a mostly conservative investment portfolio; although concentration in equities is a little higher than many IG P&C peers at around 16% as of most recent quarter, it appears somewhat 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. Just under half of all bond holdings are 1-5 year maturity, with a only about 1.14% of bonds rated below NAIC 2.
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