As a long-term investor with a growing portfolio I don't have a lot of time to analyze current holdings, so it is important for me to choose quality companies that I won't have to worry about. Old Republic International (NYSE:ORI) was my last addition for 2015 and was chosen to be the anchor in my portfolio, and anchor it has. During the early 2016 turmoil, ORI performed admirably and outperformed the S&P 500 by over 2%. Their performance for 2015 was great and in 2016 we can expect more growth.
In one of my previous articles I covered my decision to invest in ORI and gave a little background on the company. My decision was further reinforced with their 2015 performance and their outlook for the next two years. The business grew quite a bit in 2015 with total revenues rising almost $500M and all aspects of their business growing besides the RFIG-runoff business. General Insurance increased their net premium revenue by 5.8%, Title Insurance by a remarkable 16.3% and the RFIG shrank by 13.9%, which is to be expected given its run-off status. Overall net premium revenue grew by 7.7% over 2014 levels and came in at $5.2B. Operating income rose over all three segments, though, with RFIG nearly tripling their 2014 levels. The EPS increased by $.04 to $1.48, which of course safely covers our dividend.
For their General Insurance segment, many numbers were especially encouraging. They operate three major lines of coverage in this segment: commercial auto, workers compensation, and general liability. An important aspect of an insurance company is claims ratio, something ORI improved on in 2015. For general auto, we saw a moderate rise of 3.8% for their claims ratio, this was due mostly to more severe auto claims. Workers compensation saw a drop of 8.5% to 80.7% and general liability dropped an outstanding 11.4% to 76.8%, which is in the expected range. The management at ORI has been more conservative in their policy underwriting by going after quality over quantity and remain focused on improving this.
Their Title Insurance was the rockstar performer of the company. They have logged three consecutive record breaking quarters for this area. The most outstanding metric coming from this sector is the 68% increase in pre-tax income compared to last year! In total they brought in $166.8M for pre-tax income in 2015 and their operating revenue was $2.08B. They hold a great market share of around 15% and with a stable and growing housing market in the United States, this portion of their company is expected to continue to grow at a great clip in 2016 and 2017. Despite this great performance, Rande Yeager, the CEO of the title insurance company, stated during the conference call "While there's not a lot to be critical of in our 2015 results, we've certainly not achieved our full potential. There's more to do and we intend to get bigger and better and contribute even more to the very health of the ORI family." For an investor, this is incredibly encouraging. Even with the great year, he knows they can do better. From where I sit that is the sign of a great leader who is always mission-oriented and striving for more.
The RFIG run-off business did well for ORI despite ongoing litigation with Bank of America over the MI and CCI sectors. Despite these problems the segment turned in operating income of $29.4M, almost triple 2014 levels. The company expects the litigation concerning the MI portion of the business to close out very soon, with CCI hopefully following soon after. When the litigation is out of the way, it is unclear what ORI plans to do with the business. By holding it in runoff they kept the option of introducing it back into the overall scope of the greater company should there be a possibility of it returning to profitability. The management alluded to the possibility of it being brought back several times during the conference call and with the overall mortgage business improving and the loans being much safer and more regulated, it might make sense for ORI to begin exploring their options here.
One often undervalued aspect of their business is their investing. In 2015 alone they brought in $388M from their investments, a 12.5% increase over 2014. The company invests in many of the same companies you and I might. They benefited greatly to the tune of $10M as a result of the Kraft special dividend earlier in 2015. As they sit now, their investments yield about 4.5% based on their costs. Asked about their type of investments Rande Yeager said "They're quality stocks that you put in the lower drawer of the commode and you pretty much live with them. And that's why we have the kinds of good yields on that portfolio." As a long-term investor and one that isn't excited about having to sell out of a company, this is comforting to me.
A quick look into the dividend provides further comfort. In 2015 they paid out $.74. With their year-end EPS at $1.48 the dividend is well covered with a 50% payout ratio. They have a 37-year history of paying their dividend which lands them on the dividend aristocrat list. The dividend growth is nothing to get excited about, recently they've only been increasing it a penny a year, but on the other side of this, they haven't reduced it even when their earnings went negative during the recession. Seeing the business grow in a safe way it isn't out of the question for a larger increase shortly. Because of the dividend and the relatively tight trading range, I consider this more of a 4% yielding savings account for me and will add when the opportunity presents itself.
Old Republic International remains a safe investment with a safe dividend. For an investor needing safe and stable income, you get a relatively high yielding company. For a longer-term investor that doesn't need the income, this can be a compounding machine to provide wealth in 20-30 years with little worry. The book value per share for the year came in at $15.12, so even if the company imploded overnight, you would get $15.12, leaving little space for downside from the current price. With EPS estimates rising to $1.30 and $1.40 for 2016 and 2017 respectively, there is also moderate upside should ORI continue to trade in the P/E range of 14. Here, the company appears to be trading higher their historical valuation of 11. The company is actively working to get back to their 2005 level where they earned $2.39 a share and I feel they can do this in a safe and efficient manner by 2020. While it isn't likely that any fireworks will be coming from this company, there doesn't need to be, and ORI will remain a safe investment for all types of investors. I appreciate you reading the article and look forward to the discussion in the comments. As always I wish you all the best of luck.
Disclosure: I am/we are long ORI.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.