Old Republic International Corporation (ORI)

Withdraw the Spin-Off of its RFIG Subsidiary's Stock to ORI Shareholders Conference Call

June 26, 2012 11:00 AM ET


Scott Eckstein - Financial Relations Board

Aldo Zucaro - Chairman of the Board, Chief Executive Officer

Christopher Nard - President, Chief Operating Officer; Chairman of Mortgage Guaranty


Stephen Mead – Anchor Capital

Darius Brawn – SAC Capital

Bill Laemmel – Divine Capital

John Deysher – Pinnacle

Karen Steffy [ph] with Newton Capital

Tom Reynolds - Perkins

Meher Voil [ph] – Davids & Kempler [ph]

Jim Ryan – Morningstar

Christopher Seifert – Kingston Capital

Anand Krishnan [ph] – Four Research [ph]

Liam Daltmon [ph] – Natahalla [ph]

Mike Pritchett - Pritchett Realty



Good day ladies and gentlemen, thank you for standing by and welcome to the Old Republic International Conference call. Today’s call is being recorded and at this time all participants are in a listen-only mode. (Operator Instructions).

I would now like to turn the conference over to Scott Eckstein of Financial Relations Board. Please go ahead sir.

Scott Eckstein

Thank you, operator. Good morning everyone and thank you for joining us today for Old Republic’s conference call to discuss the news release of June 22, 2012. This past Friday we distributed a copy of the press release. If there is anyone online who did not receive a copy you can access it at Old Republic’s website, which is www.oldrepublic.com. Please be advised this call may involve forward-looking statements as discussed in the press release dated June 22, 2012. Risks associated with these statements can be found in the company’s latest SEC filings.

Joining us today from management is Al Zucaro, Chairman and Chief Executive Officer. At this time I would like to turn the call over to Al Zucaro for his opening remarks. Please go ahead.

Aldo Zucaro

Thank you Scott and good morning to everyone. I have got Chris Nard here to provide commentary when we get to the question-and-answer period. In the mean time I will go over some initial remarks that may be a little long but I think it’s necessary that we provide appropriate background as to we got to where we are.

As most everyone who has followed Old Republic’s business knows our mortgage guarantee segment has spilled a lot of red ink in the past five-and-a-half years. And by way of background, between 1990s through the first five years of this century, our mortgage guarantee business gradually became the most profitable and largest bottom line contributor of Old Republic. In just the five-and-a-half years ending in June of this year, however, we will have lost almost $1.5 billion in this line. To put that in perspective, this loss amounts to 110% of the capital we had at year end 2006 just before the housing debacle took hold and it wipes out 80% of all the mortgage guarantee profits we booked between 1980 when we entered the business and year end 2006, along a 26-year period.

As we sit here, our best guess is that we will continue to experience operating loss as well into 2014. And by then, our total loss since 2007 will have been $1.7 billion versus the total accumulated profit of $1.8 billion booked in the first 26 years since the beginning of our MI journey so to speak.

Another way of looking at this is that we have just marked time in these last 33 years. And however we look at it, these are sovereign facts that bring into question the very rationale of the MI business model. Since our experience is basically mirrored by the rest of the mortgage guaranty industry as well as that of similar private and public sector financial guarantors in housing.

Between 2008 and early 2011, we added $155 million of new capital to the MI segment and this amounted to about a 13% addition to the capital base of $1.2 billion we had at year-end 2006. And we did this for two basic reasons. First, to maintain the minimum capital requirements of our mortgage guaranty company, so that we could write the better quality business that the marketplace allowed from late 2009 and forward. And second, to boost the particular account of one of our three MI insurance subsidiaries so that it could write new business and allow the other two companies to run off the legacy book.

So, with appropriate and necessary regulatory forbearance and market acceptance, we believe this strategy could have worked. But in August of last year, our key state insurance regulator in North Carolina advised that we were no longer permitted to write new business in our flagship MI company. So, the entire legacy book was placed into run-off, meaning that we would simply continue to collect renewal premiums and pay all legitimate claims. And then in January of this year, the North Carolina regulator placed our flagship carrier under its direct supervision and this meant that our MI operating practices generally would be subjected to its supervision pursuant to the order. And concurrent with the issuance of the supervision order, the insurance department established a so-called differing payment obligation plan that we require that all approved claims be paid in cash at the rate of 50%, and that the remaining 50% be capped in a reserve classified as part of the statutory capital of the MI insurance subsidiary.

Now, this second 50% portion was intended to be paid at a later date that’s allowing time for the run-off to produce more quantifiable, verifiable cash flow results during the run-off period. So, following the issuance of the order, the North Carolina department then organized an informal conference to which various lenders and other beneficiaries of our mortgage guaranty policies were invited to give their reactions and provide their thinking relative to the order and the related deferred payment obligation plan. At that meeting the view points of attendees was that the 50% front end cash payment portion of claims settlements was too low and that more could be paid. Since then, the North Carolina department has retained professional consultants to evaluate the implications and the possibilities inherent to the 50:50 plan so that it could perhaps document a possibly higher front end payment. We believe that the decision in this regards should be made in the next couple of months and of course as managers of the run-off will be guided accordingly.

Now, then as 2011 progressed we became increasingly convinced that on the basis of our standard forecasting model, the run-off could result in the payment of a 100 cents on the dollar for all valid claims by the end of a 10-year period. In the interim; however, the run-off would produce significant losses for at least 2012 and 2013 and would therefore require anywhere between 250 to $350 million of capital to just keep the business funded at minimum levels between year ends 2012 to 2014.

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