Old Republic International (NYSE: ORI) is an insurance company offering mortgage, title, and general insurance. The company holds the 5th largest market share of the Title Insurance market. In 2007, the majority of company revenue and all of income came from Old Republic's General Insurance Group, which includes 15 diversified and uncorrelated types of insurance such as automobile, aviation, and home warranty. This diversification becomes particularly advantageous during times of economic and financial crisis.
Morningstar notes that historically, General Insurance had an operating profit of only 19%, whereas Title and Mortgage operations had operating profits of 38% and 63%, respectively. However, this changed in 2007 with the subprime lending that caused the title and mortgage segments to fall dramatically. Over 2007, both of these segments experienced losses and general insurance was the only segment to make a profit.
Unlike its main competitors, Old Republic has a diversified relationship between its different operating segments. Title Insurance competitors such as First American (FAF) and Fidelity National Financial (FNF) are more sensitive to changes in the volume of mortgage originations and refinances because it is their main source of revenues. Mortgage Insurance competitors such as MGIC Investment (MTG) and PMI Group (PMI) are more sensitive to changes in the amount of mortgage delinquencies, a particularly important fact in light of the Mortgage Market Meltdown. Old Republic is not wholly dependent on any of one source of insurance. Despite losses in 2007 in both Old Republic's Title Insurance and Mortgage Guaranty Segment, the company's earnings from its General Insurance Operations let the company turn an overall positive net income for 2007.
Old Republic reported a net loss of $48 million for Q3 of 2008. Management claims that this loss is due to mortgage related distress for both the company's Mortgage Guaranty and Title Insurance groups. Management expects this distress to continue into 2009, but said in a press release on October 23, 2008, that they are confident that earnings from their General Insurance Group will carry the company through the difficult economic times.
Old Republic's income in 2007 declined by 41% compared to 2006. Management claimed this was due to operating losses from both the Mortgage Guaranty and Title Insurance Segments. This loss from Mortgage related business was offset by a gain from investments recognized during 2007. Operating Income from the General Insurance group remained unaffected by the Sub-Prime Mortgage Crisis, letting Old Republic post a $272.4 million net income for 2007.
Automobile Extended Warranty Insurance: this type of policy covers repairs on individual automobiles after the manufacturer's warranty on the automobile expires.
Aviation: this type of policy covers damages to aircraft equipment and liability of damages to people or property. This coverage does not include commercial airlines.
Commercial Automobile Insurance: this type of policy covers damages to people and property by commercial vehicle operations. Old Republic mostly covers trucking with these policies.
Commercial Multi-Peril: this type of policy covers liabilities from action by owners and employees of a business.
Consumer Credit Indemnity: this type of policy insures against individuals or customers being unable to pay their loans.
Errors & Omissions: this type of policy insures against liability and legal costs arising from acting below professional standards. These policies do not cover any type of medical worker.
Directors & Officers: this type of policy insures against legal claims made, usually by shareholders, against the directors and officers of a company.
Fidelity: this insurance covers against losses to a company due to dishonest actions of employees.
Guaranteed Asset Protection: this type of policy covers the difference between an insurance company's liability and the total remaining loan balance on a borrowed vehicle.
Surety: this type of policy ensures completion of projects, such as construction projects.
General Liability: this type of policy insures against general liabilities such as negligence.
Home Warranty Insurance: this type of policy covers repairs and maintenance on certain products within homes, such as heating systems.
Inland Marine: this type of policy covers damages and losses of property that is being transported over land.
Travel Accident: this type of policy covers losses due to trip delays and cancellations.
Workers' Compensation: this type of policy covers losses of a company due to compensation payments that they are contractually required to make when one of its employees becomes disabled, injured, or dies.
These policies perform, for the most part, independent of one another. For an insurance company, that means the losses from one type of policy are uncorrelated with losses from another type of policy. For example, increased claims in Aviation policies do not change our expectations of claims under the Surety policies. With the exception of Surety and Workers' Compensation, performance in the General Insurance segment is uncorrelated with performance in the Mortgage Guaranty and Title Insurance segments. As evidenced in the 2007 earnings by segment, declining performance occurred for both the Mortgage Guaranty and Title Insurance segment, while General Insurance performance was unaffected. Income before taxes for General Insurance grew from $401.6 million in 2006 to $418.0 million in 2007. Over the same time period, Income before taxes declined from $228.4 to $-110.4 for the Mortgage Guaranty segment, and from $31.0 million to $-14.7 million for the Title Insurance segment.
The remaining 22.6% of 2007 Pre-Tax income came from $15.1 million and $70.3 million Pre-Tax Earnings from Corporate operations and Realized Investment Gains, respectively.
|Consolidated Claims and Benefits Ratio||43.3%||45.3%||60.2%|
|General Insurance Premiums and Fees (millions)||$1,805.2||$1,902.1||$2,155.1|
|Mortgage Guaranty Premiums and Fees (millions)||$429.5||$444.3||$518.2|
|Title Premiums and Fees (millions)||$1,081.8||$980.0||$850.7|
|Gross Insurance Reserves at End of Year (millions)||$4,939.8||$5,534.7||$6,231.1|
The following are operating metrics that describe measurements of performance specific to Old Republic's industry:
Changes in Government regulations over the past ten years have shown how they can affect the performance of Old Republic's policies. In 2001, the Federal Department of Labor changed their policy regarding claims dealing with the Black Lung Disease, a condition that coal miners are at risk for. Old Republic insures coal mining and related businesses for Workers' Compensation against Black Lung claims. The change in regulation made the standards to file a Black Lung claim more lenient, increasing the number of Workers' Compensation claims against Old Republic. While these regulations hurt Old Republic's performance, the company is partially insulated against these adverse change in regulation by "loss-sensitive" policies that increase premium revenues for Old Republic as claims against individual policies grow.
Also in 2001, the Federal Government passed legislation that forced primary insurance companies to offer insurance against certified acts of terrorism. The government has agreed to subsidize these terrorism policies through 2014, but Old Republic's management notes that this regulation exposes the company to significantly more risk.
Workers' Compensation insurance is subject to changes in interest rates. This coverage, which is second largest coverage offered by Old Republic, is payed out based on discounted future earnings of workers. Therefore, changes in interest rates affect the present value of claims that the company is liable to pay. Interest rate risk increases losses for both both Old Republic's Worker Compensation and Mortgage Guaranty coverages.
The Subprime lending policies and their associated turmoil have increased the amount of Mortgage Delinquencies among home owners. This increase in delinquencies has increased the claims losses in the Mortgage Guaranty Segment. Claims for 2007 were 119% of their associated premiums earned. The increased level of claims caused the Mortgage Guaranty Segment to report a loss for the first time in 19 years. Over the past three years, the Claims Ratio for the Mortgage Guaranty Group has increased 37.2% in 2005 to 42.8% in 2006 and to 118.8% in 2007. Old Republic's Management comments that claims were both more frequent and greater in severity.
The US housing slump has negatively affected earnings from both Old Republic's Mortgage Guaranty and Title Insurance Segments. Over the past two years in particular, the declines in housing sales have decreased the number of Title Insurance policies available for the entire industry. While Mortgage Guaranty Policies did not face the same decrease, their claims rate increased dramatically as noted in the previous trend. Old Republic's management notes that the company's Title Operations in the Western United States faced the worst impact of the declining housing market.
Low Interest Rates during the early 2000's encouraged refinancing of mortgages for both residential and commercial properties. As interest rates increased from 2005 to 2007, Title Insurance Premiums and Fees for Old Republic decreased from $1,081.8 million to $850.7 million.
Old Republic competes with insurers in each of the different segments in which it operates. The following are the largest insurers each of the segments.
Market Share data is not available for the General Insurance Group because of the many different varieties of General Insurance offered. Data for the Title Insurance market, however, indicates that Old Republic is the 5th largest Title Insurer by premiums earned.
|1||First American (FAF)||30.04%|
|2||Fidelity National Financial (FNF)||26.4%|
|3||LandAmerica Financial Group (LFG)||19.34%|
|4||Stewart Information Services (STC)||11.73%|
|5||Old Republic International (ORI)||5.48%|
The top four Title Insurers are all more narrowly focused on Title Insurance than Old Republic. Old Republic is the only of the the top five companies for which Title Insurance is not the main source of revenue for the company. All five companies also offer Escrow and Closing Fees for real estate transactions.