An Insurer That Stuck to Its Knitting

06/11/2008 12:00 am EST


George Putnam

Editor, The Turnaround Letter

George Putnam, editor of the Turnaround Letter, finds an insurer that stayed cautious while its competitors took on too much risk-and so should gain in the rebound.

Old Republic International (NYSE: ORI), with operations dating back to 1887, provides specialty insurance products and services. It has three main lines of business: general (property and liability) insurance, mortgage guaranty insurance, and title insurance. The latter two business lines are closely tied to the real estate markets. As a result, after years of fairly steady growth, revenues and earnings per share peaked in 2005 and have been erratic since then.

Old Republic represents an interesting, and lower risk, way to bet on a rebound in the real estate markets. Not only will mortgage guaranty and title insurance revenues pick up when real estate transactions bottom out and begin to increase again, but Old Republic stands to gain market share as some of its competitors face serious problems, particularly in the mortgage insurance sector.

To understand the carnage in the mortgage insurance industry, one need only look at the stocks of Old Republic's principal competitors in that segment. While Old Republic's stock is off 37% since the beginning of 2007, over that same period MGIC Investment is down 82%, PMI Group is down 89% and Radian is down 90%.

All of these companies, as well as some smaller competitors, have been severely weakened by their exposure to defaults in the subprime mortgage sector. (A mortgage insurer has to pay off when an insured borrower defaults.)

Old Republic has maintained conservative underwriting standards and stayed away from exotic new products. While it will not emerge from the subprime mess totally unscathed, the company is likely to fare much better than most of its competitors. Moreover, mortgage insurance is only one of three main lines of business for Old Republic.

It also has property insurance and title insurance to fall back on. Because the general insurance business is not directly tied to the real estate markets, it has continued to prosper even as the housing bubble has deflated. As a result, Old Republic posted a profit for 2007 while the other major mortgage insures reported large losses.

Old Republic has a strong balance sheet with almost no debt. Cash flow remains solid. The company just raised its dividend, and it now yields a generous 4.6%. In fact, Old Republic has paid dividends for 66 straight years.

When the residential real estate markets eventually recover, Old Republic will gain market share. This should push the stock up, not just to its previous levels in the mid-$20s, but well beyond. We recommend buying Old Republic up to 20. (It closed below $15 Tuesday-Editor.)

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