Old Republic International Corporation (ORI) is an insurance holding company which has seen several years worth of profits wiped out by the housing crisis. The culprit is the company's mortgage insurance subsidiary, which has and is racking up massive losses. The Old Republic share value has declined by 60% since 2007 and yet the company has increased the dividend amount each year. Recent news has put the dividend payment streak on the line.
Old Republic owns 27 different insurance companies, doing business in 50 states and Canada. The different companies sell a wide range of insurance types property, liability, title, home warranty insurance, auto warranty and GAP insurance and surety and fidelity bonds. In the 1990's and through 2005, the mortgage insurance sold to protect mortgage lenders became Old Republic's most profitable business line. When the housing crisis hit and claims increased for the mortgage insurance business, the losses mounted rapidly. Old Republic CEO Aldo Zucaro noted in on a recent conference call, that the losses on mortgage insurance over the last five years had wiped out 80% of the mortgage insurance profits earned in the 26 years through 2006 and 110% of the capital reserves for the product line set aside at the end of 2006.
In an attempt to preserve any future potential from the mortgage insurance business, that business was packaged together with the company's similar Consumer Credit Indemnity business into a new company called the Republic Financial Indemnity Group - RFIG. The plan was to spin off RFIG with a partial leveraged buyout, let the new company take the losses from the business and eventually return to profitability through the writing of new mortgage insurance business. The spin-off attempt was withdrawn and the North Carolina insurance division has put Old Republic's Mortgage Guaranty subsidiary under direct supervision.
With failure to spin-off the mortgage and consumer credit insurance businesses, Old Republic has put these lines into a run-off mode. Claims will be paid - or not - out of premiums received from existing business. These business lines will still produce accounting losses, but Old Republic will put no more capital into the businesses. As separate companies, the mortgage insurance and consumer credit insurance companies will be allowed to reach some form of termination as businesses.
The point of all of this discussion concerning Old Republic's mortgage insurance woes is that the company has separated the problem business from the rest of the insurance lines sold by subsidiary companies and, going forward, financial results and the ongoing dividend payments will be dependent on the business still being actively managed. The different insurance companies owned by Old Republic pay dividends up to the holding company and that revenue provides the cash flow to pay dividends.
Old Republic has paid a higher annual dividend for 44 consecutive years. As the losses mounted from the mortgage insurance line, the annual dividend continued to grow. From a 60 cent annual rate in 2006 to the current 71 cents per year. The rate was increased by a quarter of a cent per quarter to start out 2012. The current dividend yield is 8.5%.
The rest of Old Republic's businesses outside of the mortgage insurance generate about 20 cents per share quarterly in earnings. With the Mortgage Guaranty Group business separated out from the rest of the company, the current dividend rate should be secure. During the conference call discussing the unwinding of the spin-off, CEO Zucaro was adamant the mortgage insurance problems would not be an issue for the rest of Old Republic as an ongoing business.
From its current situation, it appears that Old Republic will be able to maintain the current dividend level. On the other side, there does not appear to be much of an engine for earnings and dividend growth. This stock should be viewed as a speculative play with a goal of earning the nice dividend and - if the market starts to view the company as stable - the share price could increase by 25% to 30% up to the $11 to $12 range. If the dividend rate is reduced, bail out and look for better opportunities.