Old Republic International (ORI) recently delivered a big earnings beat, driven by solid revenue growth and improving underwriting performance. Consensus estimates have soared for both this year and next year after the report, sending the stock to a Zacks Rank #1 (Strong Buy).
The valuation picture looks very reasonable for Old Republic too with shares trading at less than 13x forward earnings and just 1.4x tangible book value. It also pays a dividend that yields a juicy 4.1%.
Old Republic International is a holding company engaged in the single business of insurance underwriting and related services. It operates through subsidiaries organized into three major segments:
- General Insurance Group (property and liability insurance, primarily commercial lines; 59% of total revenue),
- Title Insurance Group (34% of total revenue), and
- the Republic Financial Indemnity Group (mortgage guaranty (“MI”) and consumer credit indemnity (“CCI”)) Run-off Business (5% of total revenue)
Like most insurance companies, a significant portion of earnings for Old Republic comes from investment income on the float. Look for this to rise along with interest rates as Old Republic will be able to invest new money and reinvest at higher yields. While it’s true that the value of its current fixed income holdings will decline when rates rise, its portfolio duration is relatively short at 4.3 years, so it is not very susceptible to rising interest rates.
Third Quarter Results
Old Republic reported better-than-expected third quarter results on October 22. Adjusted earnings per share came in at $0.35, beating the Zacks Consensus Estimate of $0.29. It was a 40% increase over the same quarter last year.
Operating revenues rose 10% to $1.504 billion, which was also ahead of the consensus. Revenues rose in both the General Insurance and Title Insurance segments.
Underwriting profits were higher too. The combined ratio (claim ratio + expense ratio) improved from 100.2% to 96.5% in the General Insurance segment and from 95.3% to 91.5% in Title Insurance. Overall, ORI’s combined ratio improved from 98.1% to 96.2% as the claim ratio fell from 51.4% to 47.9%. This was due in part to improvement in its workers’ compensation business, which saw its claims ratio decline from 86.6% to 77.6%.
Estimates Rising
Following strong Q3 results, analysts revised their estimates significantly higher for both 2015 and 2016, sending the stock to a Zacks Rank #1 (Strong Buy).
The 2015 consensus estimate is now $1.25, up from $1.20 before the report. The 2016 consensus has increased from $1.20 to $1.45 over the same period. Based on current estimates, analysts are projecting 16% EPS growth next year.
Attractive Dividend
Old Republic also pays a dividend that yields a juicy 4.1%. It has increased its dividend at a 3.1% compound annual growth rate over the last 10 years. Old Republic is expected to pay out approximately 59% of earnings this year in the form of dividends.
Reasonable Valuation
The valuation picture looks very reasonable for Old Republic too. Shares trade at less than 13x 12-month forward earnings, a discount to its 10-year median of 16x. And its price to tangible book ratio is just 1.4.
The Bottom Line
Given its reasonable valuation, juicy yield, strong earnings momentum and the potential tailwind from higher interest rates, Old Republic offers investors attractive total return potential.
Todd Bunton, CFA is a Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor and Surprise Trader services.
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