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Old Republic International Corporation Message Board

  • ori.investor ori.investor Jul 27, 2012 9:44 PM Flag

    Reason to buy

    I understand that people want to look for hidden liabilities and be careful that they aren't overlooking something. But I think it's pretty straight forward - the subsidiaries with the issues are isolated from the rest of the company and they can't bring down the corporation - and their losses can't stop the dividend from being paid.

    I admit that the momemtum is down, and there are many, many companies that will be better investments in the near term than a stock that is dead in the water, paying a 9% dividend.

    But I wouldn't be looking for problems that don't exist. ORI had more than enough earnings in the non-MI divisions to pay the dividend in 2008 and 2009, when the financial system was imploding. I know there are no sure things, but IMO the dividend is secure.

    For patient, long-term investors, this is exactly what you want - investors are shunning the stock, so the valuation is cheap and the dividend yield is high. It's a clunky industry that's been around for centuries, so no one cares about it. But the longer it takes to turn around and the dividend stays high, all the better.

    FWIW, this stock tripled in 2000, when the tech bubble was bursting, after property casualty companies had been in a 2 year bear market. No one talked about it then and no one will talk about it when it enters its next bull run. This company is invisible to hot stock investors. But it can make you a lot of money.

    I highly recommend this Jeremy Siegel book to grasp the strategy of buying out-of-favor dividend paying stocks, and how it works long term: "The Future for Investors: Why the Tried and the True Triumph Over the Bold and the New (2005)."

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    • a nice soliloquy but would u mind presenting some facts like what the capital and surplus is for each of the subs in question? Why do you call them hidden liabilities when they are real? Do you really think they can shirk their legal claim liabilities by saying "oops, we already paid that"

    • The only part that I dont agree with is whether the CCI related subs are really walled off and cant further erode capital or dividend paying capacity. If we take their word for it on MI, then that takes are of one portion. But my main sticking point is CCI related.

      I know they have said they wont put more capital into RFIG, but I dont believe any claim has been main about CCI subs being walled off and no erosion of capital. Also, about the legal reserve being enough, etc. So there is still exposore there, unless those subs are something that they could just throw away like the MI.

      • 1 Reply to kevinf1_99
      • Kevin, Ok, I'm slow at times. I see your point now. Yes, you are correct, if there's a CCI lawsuit, I do believe the corporate entity is on the hook. At least when the spinoff was announced, that was the case.

        It's Miller time (red wine time) so I'm not really into doing DD at the moment. Plus Al talks so slowly that it might take me several hours to find it even if I was in the mood to listen to his comments on past conf calls on the spinoff.

        Are you saying there is a current lawsuit or a potential lawsuit? Bank of America has sued on the MI payments. But is there another lawsuit on top of that against CCI? And if so, how much is it for?

    • which means, if we take them at their word, that it has to do with the BOA suit....i saw they had a judgement against them where ORI was trying to compel discovery on every loan in the pool which was shot down by the judge.....interesting.....

    • agree - I assume it is BOA. I will say, from a BV standpoint, I believe it is still a somewhat compelling value even if you chop off an extra $400M for CCI exposure and of course assuming MI only goes to zero. Of course, writing off the intercompany exposure though (200M).

      I do wonder why they havent reserved the intercompany exposure? Seems even if run-off could be positive, it doesnt mean loans would be paid back.

    • most levered financials are trading a decent discounts to tangible so btw 7 and 8 would be a 60-70% discount to our adjusted BV....not that out of line with others...there are REITs and MLPs etc. out there with much less leverage and simple business models that yield ~10% + have growth prospects. Of course they too have risk, like concentration, but their balance sheets are much easier to get your arms around. If there is no growth then not sure 9% cuts it given annual vol of 25-30%?

      The inter company is not written down because it is baked into their assessment of +tive eventual run-off and I guess is a good sign indicating they believe that NC will not put MI into receivership (neither do I)

      Ultimately, if you close your eyes and hold your nose, you do okay here I think...but plan on holding it for a long, long time and be able to take the gyrations....

    • I don't really think of this as leveraged - net debt to EV of about 14% - I think you'll have a hard time finding a less leveraged REIT. I guess there is a certain amount of 'event' risk here, although I think it's exagerated. But no denying it's been a big time dog so far. At this point if it just trades flat for a few years, I'd be ok with the 9% yield.

    • future claims are debt with a knock u can't use debt to would be like not including deposits as a source of funding for a bank...they earn a spread just like a bank and then lever it up

    • fair enough, but even on that basis with $3.8 billion equity against $12.4 bil in liab and $16 bil assets (as of Q1, think ratios improved somewhat in Q2), not especially leveraged relative to other financials. If you can fine a REIT or MLP paying 9% with similar metrics would be interested. The Mortgage REITs are more leveraged (9x asset to equity avg for agency MREIT).

      I do follow one REIT, CWH, which yields more than 10% here with less leverage, but I think the dividend is less sustainable than at ORI. ORI only pays out about 70% - 80% on average of income dividended up to parent -- REIT coverage tends to be much thinner, with 90% of taxable income payable as dividends by law - MLP coverage also tends to be thin.

    • Just coming back to this...I know what you are saying about the eventual run-off projections being positive, but the more conservative route would be to reserve the debt. That is partly what worries me...if they are too rosy here (and then potentially in other places). Particularly when you see the language from the Spin-off filing, indicating the inability to make payments as coming due. Of course, I take it that the models show that the ultimate run-off scenario is that they would be positive +200M minimum. I dont think reserving this would have any impact in the market, since it seems priced for RFIG to be zero (or less).

      "We are indebted to Old Republic in the amount of $180 million and we do not have, nor is it likely that we will have in the future, the ability to service this debt, and as a result we may have difficulty raising additional capital in the future.

      RFIG is a holding company that transacts business through its operating subsidiaries. Our primary assets are the capital stock of these operating subsidiaries. Thus, our ability to service the indebtedness owed to Old Republic under the $180 million face amount Series A Variable Rate Senior Debenture No. 5 due December 31, 2038 (the “Senior Debenture”) that we issued to Old Republic on March 14, 2012 in exchange for certain existing notes and the extension of an additional $5 million loan, depends upon the surplus and earnings of our subsidiaries and their ability to pay dividends to the holding company. Our subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to make payment on RFIG’s debts or to make any funds available for that purpose. Given the restrictions in the Order on payments or other transfers of funds by RMIC, our flagship mortgage guaranty insurer, we do not expect that any funds will be available to RFIG from RMIC, nor do we expect any of our other subsidiaries to pay dividends to us in order to satisfy holding company obligations. Accordingly, we do not expect that we will be able to make interest payments when due under the Senior Debenture. While the Senior Debenture does not contain provisions giving the holder the right to accelerate the principal balance due in the event of a failure to make payments of interest or principal when due, our inability to make payments when due under the Senior Debenture could have a material adverse effect on our ability to raise capital through either the sale of debt or equity securities."

    • I think everyone want to know HOW MANY SHARES YOU OWN - LONG? If you cannot answer that one question, why should anyone care what you say. NEGATIVE, NEGATIVE, NEGATIVE. All you are doing is pushing the Stock Value down. So tell us all, ARE YOU SHORT OR LONG?

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