Old Republic International Corporation

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

Old Republic International Corporation is a Chicago-based holding company primarily engaged in the business of insurance underwriting and related services. It conducts its operations through a number of regulated insurance companies as well as subsidiaries in the United States.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Old Republic International Corporation (ORI) operates predominantly in the insurance industry, with the ultimate goal of generating long-term profitability and maintaining a robust capital position. It operates mainly in North America. Here’s a breakdown of its key activities:

  • General Insurance: This segment is involved in underwriting commercial auto, workers’ compensation, and general liability insurance, with a specific focus on providing coverage for small to medium sized businesses.
  • Title Insurance: The title insurance business primarily provides coverage of title to real property and real-estate related transactions. It relies heavily on an agency distribution network.
  • RFIG Run-off: This segment includes a mortgage insurance business acquired in 2011 that is now in runoff.

  • Corporate & Other: This segment includes all other activities such as corporate overhead, investment management activities, and a small life and accident insurance business.

  • Revenue Distribution:
    • Premiums: The company generates revenue from premiums across all of its business segments. These are the fees charged for insurance policies. Premiums earned in general insurance increased to $1,691.1 million for the quarter ended September 30, 2023, compared with $1,598.1 million for the same quarter the year prior. Premiums in title insurance increased to $173.2 million, a 10.1% increase year over year. RFIG premium’s run-off resulted in a decrease of 12.5% year over year.
    • Investment Income: Old Republic earns revenue from its investments, mainly in fixed-income securities, including government and corporate bonds. Net investment income is highly volatile and driven by the interest rate environment. However, the company has increased investment income for the recent quarters by investing in higher yield securities and leveraging their expertise in credit markets.
    • Other Revenue: This includes fees charged for services or products such as reinsurance and other investment related activities. They generally represent a small portion of the total revenue.
  • Margins and Profitability
  • General Insurance operations have an increased loss ratio in the most recent quarter due to increased claims and lower profitability.
  • Title insurance operations have maintained operating profitability, however with a lower combined ratio.
    • Management has been focused on reducing operating expenses and improving revenue growth in both General and Title insurance.

  • While RFIG (Run-off) continues to generate predictable cash flow and minimal losses from the legacy mortgage book, it is not a focus for future growth.

  • Competitive Landscape:
    • The insurance industry is highly competitive, with established players, smaller niche players and new market entrants. The competition primarily revolves around price, coverage, and brand reputation. The industry also experiences influence from external factors such as governmental regulation and customer sentiments.
    • The General insurance market, in which Old Republic operates, is highly competitive. The large number of players often use price and coverage as their primary tools, while also competing based on perceived quality and customer service.
    • The Title insurance market is dominated by a few large providers and many regional firms, with competition focusing on service, expertise, and price.
    • The mortgage market is competitive and heavily regulated with numerous players.
  • What makes the company different?
    • Diversified Insurance Operations: Old Republic has a wide range of insurance operations that includes multiple specialty segments, which offer a diversified revenue base and reduced dependence on any one industry.
    • Strong Risk Management: The company emphasizes managing risk, including pricing for risks appropriately and implementing policies to assess and mitigate risks.
    • History: Old Republic is one of the oldest and established insurance companies, with roots in the business dating back to 1929. Its strong track record offers credibility and a better level of safety for investors.
    • Capital Strength: Old Republic has maintained high quality investment grade rated securities with reasonable returns and liquidity, thus demonstrating financial stability.
    • Conservative Accounting practices: Old Republic adopts accounting practices that are generally accepted in the United States (GAAP) with adjustments made when new information is available, with the goal of being transparent to investors.

  • Recent Earnings Calls and News:

    • In the Q3 2024 earnings call the management team reiterated their commitment to improving profitability within all of their businesses and reducing operating expenses to achieve this goal.
    • Management is focused on growth opportunities in both the commercial and specialty segments, with emphasis on increasing premiums while maintaining an appropriate level of risk.
    • The company is exploring newer technology to better assess and price risk accurately. They are using data-based techniques to improve their business operations.

Moat Analysis:

Old Republic has a limited economic moat (2/5), primarily consisting of strong brand recognition and some scale advantages.

  • Intangible Assets:
    • While ORI has built a strong brand in its segment, it is not strong enough to generate pricing power, particularly in commoditized products like insurance. There are also other well established brands in the space. Therefore, the moat strength is not very high.
    • The regulatory environment and state licensure help the company have some protection from competition, however, they aren’t big enough to have a strong moat.
  • Switching Costs: * The switching costs for insurance is not that high because companies can and do change insurance from year to year. While it can sometimes be a hassle, it isn’t usually costly.
  • Cost advantages
    • The company has some scale advantages but is also facing strong competition and price pressures that will limit its cost advantage. They do not have access to any unique resources that would give them a significant edge on the market.
  • Network Effect:
    • No significant network effect is apparent for ORI’s businesses. It can be argued they do have large broker networks, but this does not create an unassailable moat.

Legitimate Risks to the Moat and Business Resilience:

  • Catastrophic Events: The insurance business is vulnerable to catastrophic events (such as earthquakes, hurricanes, or terrorist attacks) that could result in large claim pay-outs. This could negatively impact its profitability and financial position.
  • Interest Rate Risk: Since its investment portfolio is comprised of bonds, a change in interest rates could influence its returns. High interest rates could lead to lower net income and reduced profits.
  • Regulatory Risk: Changes in regulation such as increased capital requirements or limitations on insurance rates could negatively impact the company’s profitability.
  • Economic Downturn: Economic downturns could lead to less demand for insurance and increase risk of defaults on premiums.
  • Competitive Pressures: The insurance market is very competitive and new entrants constantly emerge. If new entrants have greater leverage, they can cause more price competition that may hurt overall profitability for ORI.
  • Inflation: Inflation could lead to increased cost for operations and an impact to the value of fixed investments.

While ORI is profitable, these risks could erode it’s moat and make the company less competitive in the long-run. They are also likely to reduce profitability in the short run as well.

Financial Analysis:

  • Profitability Trends: Old Republic has displayed a decline in both consolidated net income and net income excluding investment gains/losses in the past three quarters. These declines reflect a challenging economic environment, and the management is aiming to address this through cost-cutting measures and focus on core operating segments.
  • Income Statement: Old Republic had revenue of $2.04 billion in the latest quarter, up from $2.01 billion in the same quarter last year. However, net income dropped to $91.8 million, down from $125.5 million in the same quarter the year before. The difference came from an increase of loss and loss adjustment expenses in both insurance segments (General and Title). For the full fiscal year, net income was 506.4, compared to 999.6 in 2022 and 1,050.4 in 2021.
  • Balance Sheet: The company has total assets of $26.8 billion as of September 30, 2023, and maintains a strong level of cash, investments, and other securities. They are also focused on reducing debt and have a high degree of liquidity.

  • Cash Flow: The cash flow statement indicates that it continues to generate consistent cash flow from its operations. This provides the business with some degree of stability and financial flexibility.

  • Shareholder Returns: Old Republic has rewarded its shareholders through share buybacks and dividends. The company has continued its share buyback program, and has also maintained steady dividends over the years, making it an attractive investment for investors looking for returns.

  • Financial Metrics:
    • Interest Coverage Ratio (EBITDA / interest expenses): The company has an interest coverage of 12-13x. This is really good and it shows the company has no problems meeting its interest payments.
    • Debt to Equity: As at December 2023, Debt to Equity for ORI is 18.7%, suggesting the company utilizes very less leverage in its capital structure.
    • Liquidity Ratios: It has sufficient cash and short term investments to take care of current liabilities.

Understandability Analysis:

Old Republic’s business model is complex, since there are a number of moving pieces in a company providing insurance products. Understanding all the complex details and the impact of external factors such as the insurance markets and regulations on this company is not easy for a laymen, thus earning a 2 / 5 on the understandability scale.

  • Complexity of Business: Insurance is a difficult business and the company has a myriad of insurance product segments that makes it hard to understand the company holistically.
  • Accounting: Insurance companies use a variety of different and complex accounting methods, which makes understanding the financial performance a big challenge. The accounting may also be used by management to manipulate certain metrics.

Balance Sheet Health Rating: Old Republic has a healthy balance sheet (4/5) that can be sustained for the long term, they have a high level of liquidity, a good debt to equity and interest coverage ratio.

  • Liquidity: The company has adequate levels of cash and short-term investments to meet all the short-term financial obligations.
  • Leverage: The company has a very low debt to equity ratio, suggesting it is not excessively leveraged.
  • Coverage: They also have good interest coverage, giving them flexibility in its financial structure.
  • Solvency: The level of debt is small relative to their revenue generation and profits, suggesting solvency.
  • The quality of their assets is also high.