The Long and Short
Revisiting Old Republic long bonds for value in P&C
This material is a Marketing Communication and does not constitute Independent Investment Research.
The insurance sector turned in the worst excess returns in the investment grade corporate bond index in February as concerns about private credit took center stage. And while investor concerns over the past few weeks mainly gravitated to the life and insurance brokers subgroups, P&C insurers were dragged wider with the broader sector as well. This has created attractive valuation among some P&C insurers with limited exposure to private credit. At current spread levels, Old Republic International (ORI: Baa2/BBB+) bonds offer solid value relative to the broader P&C peer group in the intermediate to long end of the curve.
Rising Treasury yields in response to recent geopolitical events erased about half the rally in the 10-year that took place through February. Still, mortgage rates remain more attractively positioned for insurance and mortgage finance companies that underwrite title insurance than they had been throughout most of the past year. Title insurance providers gain from higher closings and more mortgage refinancing. As a Top 3 producer in that industry, ORI is among the names that should see further relief with additional rate momentum over the intermediate term but still maintains a more diverse operating mix than either FNF or FAF.
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 intermittent 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 and 2024 since before the Global Financial Crisis. That drastic shift in rates in a relatively short period weighed considerably on refinancing activity and overall home closings. Higher rates over the past few years have 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.
Exhibit 1. P&C credit curve (BBB ratings or higher) – ORI bonds attractively valued
Source: Santander US Capital Markets LLC, Bloomberg/TRACE YAS price indications only
ORI is a conservative, mid-sized P&C insurance company with a well-diversified business mix and manageable tail risk. Based in Chicago, 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 66% of revenue through general insurance (primarily P&C with some life operations) and about 33% 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 2024. ORI has also diversified into excess and surplus (E&S) insurance to further expand its product offerings.
ORI’s business mix helps limit exposure to catastrophe losses, which is a primary source of earnings variability within the broader P&C subgroup. Title Insurance now accounts for a large percentage 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, catastrophe loss 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 a negligible portion of total revenue down from over $3 billion or around 23% back in 2009.
ORI is very well capitalized for its ratings category. Within P&C, statutory capital and surplus has been consistent and stood at over $4 billion for the past five years. The total regulatory Risk Based Capital Ratio was 554% as of year-end 2024, 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 15%, 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 only about 1.27% of bonds rated below NAIC 2. Perhaps most importantly within the context of current market concerns, ORI does not appear to have a materially large exposure to private credit. Within its largest operating subsidiary, statutory financials indicate that only 13.5% of its roughly $8.8 billion bond portfolio is privately placed. That figure includes bonds privately placed via 144a. Therefore, the real exposure to private credit for ORI’s investment holdings likely falls within the single digit range of total bonds held and an even smaller percentage of total invested assets. As far as credit quality, privately placed bonds rated below NAIC 2 are limited to just 2%.
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