Old Republic standing solid
CEO Zucaro in the front line of the battle enveloping the American housing market
BY TED PINCUS / Chicago Tribune Oct 9, 2007
One ray of sunshine in the current credit crunch comes from a man who sits precisely where you wouldn't want to be these days -- as one of the major mortgage insurers.
Chicago's Al Zucaro is there, and he's been there before. "Believe me, this is no picnic," he tells me, "but it's no disaster either." Zucaro's company, Old Republic International (NYSE: ORI) is now the 36th largest public company in Chicago, one of the nation's largest property/casualty insurers and among the top five in the scary category of mortgage insurance. Those are the folks who stand behind the lenders who issue first mortgages on homes, ready to protect them against losses on defaults.
Thus today Zucaro is at the front lines of the struggle within the U.S. housing market. While operating revenues from his Mortgage Guaranty Division were up 9 percent for the first half of this year to $286 million (out of $1.9 billion in total six-month revenues), the division's profitability sagged 31 percent to $85 million and appears headed south. That's because, as one of the leading bellwethers of trouble in home defaults, the mortgage insurers are seeing mounting delinquencies and a 1.34 percent foreclosure rate, up from 1.05 percent last year.
For the first half, Zucaro experienced a mortgage guarantee claims ratio of 60.3 percent vs. 37.2 percent in last year's first half. His mortgage delinquency ratio has crept up to 4.36 percent from 4.08 last year. Still, the company has fearlessly written another $20.5 billion in new mortgage coverage this year vs. $12.7 billion last year.
There are numerous reasons why Zucaro is still sleeping well at night despite the headlines. "First," he says, "while we face tough times in that market for the next 18 months, it will not be nearly the storm faced in the '30s (Old Republic is 84 years old) when foreclosures were widespread, nor even in the '80s when inflation was high, California and the Oil Patch imploded, and insurer loss ratios soared to over 150 percent on mortgage guaranty. This time we're not likely to reach even 90 percent."
The second factor he says is that Old Republic has written very little sub-prime mortgage coverage. "However, we know that even our quality mortgages will suffer some collateral damage because whatever foreclosures we do have will meet a very soft market for home disposition."
Third and most important: Old Republic has a prodigious cushion. Mortgage insurance has averaged only 40 percent of its pretax income, with the balance derived from general liability insurance (48 percent), where it ranks third in the nation, and title insurance (12 percent) where it ranks fifth.
Moreover, it has a remarkably strong balance sheet, with assets of $12.7 billion and shareholder equity of $4.5 billion. Claim reserves total another hefty $5.7 billion. The rating agencies give it the highest marks and its title insurance group has held the industry's highest rating for 14 consecutive years.
All this has been by design, and isn't surprising when you realize that it was conceived by the accountant who formerly audited its books. Born in Grenoble, France, Zucaro, 68, became the audit partner of Coopers & Lybrand, Chicago, on the Old Republic account. Persuaded to join in 1976 as executive VP and CFO, he soon saw the need to diversify from credit life and disability underwriting and begin to tap emerging opportunities in property/casualty.
Becoming CEO in 1990, he began a transformation so aggressive that today not one of the former coverages is even offered by the company. While other insurers might have grown faster and flashier, few have done it more steadily or safely. Old Republic has been able to raise its cash dividend every year for 25 consecutive years, and Zucaro is confident the cushion will permit him to continue the pattern.
Wall Street seems to concur that the damage might be minor and temporary. The analyst consensus says earnings per share will fall from $1.94 last year to $1.73 this year, and perhaps be a bit weaker next year before recovering. Zucaro doesn't quarrel with this assessment. The best indicator is that investors are supporting the stock at the $19 level, down from the $23 high and up from the 52 week low of $11. Maybe the old tortoise has some speed in reserve.
Ted Pincus is an adjunct professor at DePaul and managing partner of Stevens Gould Pincus, merger and management consultants. |
