Old Republic International Corporation (ORI): Bireme Capital Opens New Position in Q3

Bireme Capital recently released its Q3 investor letter (you can download a copy here) in which the hedge fund discussed its investment thesis on Old Republic International Corporation (NYSE:ORI) and other companies. Bireme Capital opened a new position in the insurance provider during the third quarter. Here are the fund’s comments about Old Republic:

Old Republic provides several distinct types of insurance: title, worker’s compensation, commercial auto, and others. In their title insurance business, they are the third or fourth largest provider in an oligopoly market that is just starting to fully recover from the Great Recession.

The other insurance lines have consistently performed better than the overall insurance industry — generating large amounts of cash, or “float”, for Old Republic to invest at zero cost to the company. This money cannot be paid out to shareholders, as it must be held to (eventually) satisfy their insurance obligations, but Old Republic is allowed to harvest the investment income in the meantime. Old Republic has $12.8B of float, comprising cash, investment grade bonds, and equities, which generates over $300m per year of interest income.

Old Republic trades at about 1.1x book value or <13x earnings, a significant discount to the market and its peers. The book value multiple is particularly low since title insurance has lower capital requirements than other lines of insurance and generates high returns on equity. We think earnings in the title business should continue to improve as they have since 2009, with the excesses and mistakes of the real estate bubble continuing to fade into the background.

We can articulate a couple of reasons why this opportunity might exist. For one, Wall Street has largely ignored Old Republic, which has very limited sell-side research coverage. This is probably because management eschews one-on-one meetings with analysts and investors, preferring to do their talking solely on quarterly conference calls. There may also be some confusion around the company’s historical results, which appear extremely volatile due to the presence of a large mortgage guaranty insurance line prior to the financial crisis. With that business in run-off and generating a small amount of income, ORI ought to make consistent and growing profits going forward.

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Old Republic International Corporation (NYSE:ORI) is one of the largest shareholder-owned insurance businesses in America. The company provides insurance underwriting and related services through various subsidiaries.

Old Republic has a market cap of $5.5 billion, a price to earnings ratio of 15.40, a beta of 1.36, and a dividend yield of 3.64%. The company reported earnings per share of $0.09 for the third quarter, beating analysts’ consensus estimates of $0.03. It had revenue of $1.56 billion for the quarter, versus $1.52 billion as expected by analysts. Revenue was up 4.6% compared to $1.49 billion in the third quarter of 2016.

Shares of the insurance firm are up nearly 10% so far this year. Over the last 12-month trading period, the stock’s value has been increased by more than 14%.

Old Republic International Corporation (NYSE:ORI) is a kind of popular stock among the hedge funds tracked by Insider Monkey. There were 23 funds with positions in the company at the end of the second quarter.

Meanwhile, don’t miss reading Bireme Capital’s analysis on Twenty-First Century Fox, Express Scripts, and Humana.