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Buy Old Republic for Safety of Principal

- By Jonathan Poland

Old Republic International Corp. (ORI) is an insurance company. The majority of its revenue (50%) and most of its pretax earnings (80%) come from its property and casualty business. While the new accounting rule changes are adversely affecting its short-term results, long-term the company remains a slow growth opportunity.

Warren Buffett (Trades, Portfolio) predicted the new accounting rule would negatively impact Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B), while at the same time has sought to shine a light on the insurer's operating results and book value. The new Financial Accounting Standards Board rule requires companies to book unrealized investment gains and losses in equity securities to be included in income. It's a horrible rule, but that's besides the point. It's going to make certain financial companies' key numbers look inconsistent some years, so non-GAAP numbers will be a key part of reporting.

Buffett's letter included several descriptive predictions for the impact of this rule:

  • It will severely distort Berkshire's net income figures and very often mislead commentators and investors.
  • It will produce some truly wild and capricious swings in the GAAP bottom line.
  • It will swamp the truly important numbers that describe operating performance.
  • For analytical purposes, Berkshire's "bottom-line" will be useless.

As for Old Republic, it posted solid operating results in late January. Fourth-quarter Non-GAAP earnings were 45 per share on revenue of $1.59 billion, up 1.3% year over year. Though two major hurricanes made landfall in the U.S. during the latter half of 2018 (Florence and Michael), the storms didn't hurt Old Republic's results. Earnings per share was down slightly from the prior period, but still put the company on track to earn north of $2 per share this year and pay out 3.82% in dividends.


With the unrealized loss on the change in fair value of equity securities in the fourth quarter, Old Republic recorded a net loss of $106.5 million. Excluding the unrealized loss ($311.6 million), the company had $205.1 million in net income. This should not be a hard one for investors to wrap their heads around. Unrealized losses are just that, on paper with no money coming off the books. Take that figure out and you get the true performance.

In the last decade, Old Republic has steadily grown its top line from $3.2 billion to $6.4 billion, while its bottom line numbers have been less consistent, producing losses in three of the 10 years since 2009. However, it looks as though the company (at least over the past five years) is putting its ducks in a row to produce solid long-term gains.

Insurers across the board are dealing with the new accounting rule, so there may be choppy waters throughout 2019, giving smart investors plenty of buying opportunities. Old Republic's main business, property and casualty, does have fundamental challenges thanks to climate change, but while the weather patterns will fluctuate more than the stock markets, its market value should continue to rise.

Disclosure: I am not long or short any stocks mentioned in this article.

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This article first appeared on GuruFocus.