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Old Republic International Corporation Message Board

  • the_millionaire_next_door the_millionaire_next_door Jan 25, 2004 5:27 PM Flag

    Mortgage guaranty is riskiest branch

    This is all IMO, of course, but I think the 35% of ORI that is underwriting PMI is the riskiest part of their operations going forward. I am reading one of the gloom-and-doom books on the housing market and am led to believe that PMI providers are going to be harder hit than banks once default rates start to rise, be it from rising interest rates or falling interest rates (the latter hurts more because it means the economy is heading towards deflation).

    ORI's subsidiary RMIC has an 11% market share in PMI, putting them among the top 5 in the nation. These top 5 hold 70% of the market share and are insuring in excess of $530 billion. Combined shareholder equity for the top 5 insurers is $11 billion (numbers are from 2002 I believe).

    From what I can tell, MGIC, PMI, and Radian Group (RDN?) are far less diversified than ORI - they only do mortgage insurance.

    Two reasons why I like ORI (at least compared to the others) in spite of the potential danger:

    1) Mortgage guaranty is 35% of their business. Less would make me sleep a bit better right now, but oh well.

    2) Insiders hold more in ORI than any of the three I mention above. ORI insiders have 8%, PMI Group 3%, Radian < 1%, MGIC a mere .05%. This gives me some confidence that ORI's management is confident in how well they can withstand an increase in defaults.

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    • Good, relevant observations. I'd comment as follows:

      1. Regardless of the macro factors, underwriting is still underwriting. In other words, when you buy a stock you're buying management. Presumably this management recognizes the various macro risks up & down in their fields and uses them as incentive to further fence off appropriate guidelines in discrete underwriting decisions. Disclaimer: I am no expert in the field of mortgage insurance so I am making a presumption based on my general knowledge of ORI; alternative comments welcome.

      2. In most businesses I prefer focus as opposed to diversification, but not in insurance because of the potential for boom/bust rotations within the economy and because of the catastrophe factor. There's some element of this managed diversification in all 3 of the insurance stocks I like -- ORI, SIGI and (in life) JP. Plus they all have excellent, conservative investment management. Your comparison to the more concentrated stocks in real estate-related fields is on point.

      3. I'm desperately hoping the following is not taken as an indication of personal political leanings (which it's not), because that ruins message boards. Okay? The current macroeconomic outlook is heavily influenced by the U.S. presidential election. It's even more true than usual because of the strong possibility of another popular/electoral vote split -- either way. For example, I've read very good analyses that indicate that while are some reasonable scenarios where again Bush loses the popular vote and wins the electoral college, there are others where Bush actually wins the popular vote and loses the electoral vote. That's because of the way Bush is certain to roll up large majorities in many states but could lose a series of squeakers in the Midwest and Mid-South over economic anxiety. Thus, the incumbent administration is strongly incented to pursue pro-stimulative, weak-dollar policies to continue the manufacturing and agricultural recovery. That implies dead-on steady interest rates and has been my whole objection to the many brokerage firms braying about the inevitability of higher interest rates (in what I view as an attempt to get people to move from investment-grade debt securities to junk bonds).

      Of course it does appear that many imbalances may be building up in the economy for 2005 and beyond, and I'd like to hear from management of this and other financial services companies how they're preparing for the possibilities.

      P.S. I know you're not really a millionaire, and I know what "the millionaire next door" is a reference to. The set of attitudes and practices that this implies bode very well for your investing career, so congratulations.

    • Personally, I don't subscribe to the gloom and doom projections for the housing industry anyway. But, keep in mind that ORI is also the number five title insurer, but since half of it's earnings (not revenues) generally come from mortgage insurance it usually carries a PE (currently 11) virtually the same as PMI and Radian, rather than the lower PE (currently 5-6) of the title industry. Of course the other insurance segment would also carry a greater PE, apparently balancing out title. My point is that, if you do believe that pmi is higher risk, the price appears to compensate for that and still offers diversification not found in other pmi players.

    • the_millionaire_next_door the_millionaire_next_door Jan 25, 2004 5:33 PM Flag

      The book I have been reading is:

      The Coming Crash in the Housing Market - 10 things you can do now to protect your most valuable investment. by John R. Talbott

      Here's his Bio from the back cover:
      John R. Talbott is an economic consultant who has authored academic papers on economic growth and development and made presentations on the subject to the governments of Russia, Jordan, and Qatar. A visiting scholar at the Anderson School at UCLA, Talbott is also a former vice president in the investment banking division of Goldman, Sachs, and Company.

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