The strong fourth quarter results for Old Republic International's title insurance business should carry across to the three pure-play title insurers when they report, a Keefe, Bruyette & Woods research note said.
For the fourth quarter, Old Republic’s title insurance business had pretax operating income of $132.1 million and operating revenue of $1.05 billion, compared with $103.1 million and $799.6 million respectively in
Those numbers represent the best fourth quarter ever for the title segment, said Carolyn Monroe, president of the title insurance group, during Old Republic's fourth quarter earning's call.
“This record setting performance was driven by a robust real estate market, supported by a continued low interest rate environment, resulting in an increase in home sales and refinance activity,” Monroe said.
Of particular interest to KBW Analyst Bose George was the quarter-to-quarter decline of just 20 basis points in Old Republic's pretax operating margin to 12.7%.
That was "a markedly stronger trend than the roughly 300-400 bp sequential decline that we have built into our title insurer estimates for the fourth quarter," said George. KBW analyzes Old Republic's three largest competitors in title underwriting: Fidelity National Financial, First American and Stewart Information Services.
"All else equal, for our covered title insurers, we estimate there is 5% to 11% upside to our fourth quarter earnings per share estimates for every 100 bp of better margin than we are currently modeling," George said.
For example, George is expecting a 321 bp quarter-to-quarter decline in pretax operating margin for Fidelity National Financial in 4Q, with a current EPS estimate of $1.33. But if the decline is just 221 bps, Fidelity is likely to earn $0.07 per share more, or $1.40.
At First American, if the decline in the pretax operating margin is 202 bps instead of the projected 302 bps, the EPS could increase by $0.12 to $1.71 per share from the current estimate of $1.59.
But the biggest change could occur at Stewart Information Services, where George had forecast a 401 bps decline in pretax operating margin. But at a 100 bps narrower drop, Stewart's EPS should rise by $0.18 from the current $1.61.
Old Republic had 149,626 direct orders opened in the fourth quarter, down from 181,465 in the third quarter but up from 109,913 one year prior. The company closed 139,010 direct orders in the fourth quarter, compared with 143,523 in the third quarter and 100,536 in the fourth quarter of 2019.
The current year has
"So we remain very optimistic about 2021 and we'll just hold on and really see what happens," Monroe said. "It's just so hard to predict, but all indications are this will be a strong year for us."
Old Republic's runoff mortgage insurance business made $1.8 million in the fourth quarter, down from $6.4 million. The unit had lower net earned premiums as its book of business continues to decline and is not replaced.
In addition, MI claim costs for the quarter of $8.4 million (up 3.3% over one year prior) are reflective of Old Republic needing to take greater reserve provisions as consumers do not make their mortgage payment as scheduled (even though the borrower may be in forbearance, the insured mortgage is still added to the
For the quarter, Old Republic had net income of $519.7 million, up from $275.8 million in the fourth quarter of 2019, as the 71% gain in title insurance pretax income was joined with a near 60% year-over-year increase in pretax income in the general insurance segment.
