Old Republic International Corp (ORI) 2001 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Old Republic International (Company: Old Republic International Corporation; Ticker: ORI; URL: http://www.oldrepublic.com/) Corporation conference call.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero, on your touch-tone telephone. If anyone should disconnect and need to rejoin, please dial 1-888-413-4411. As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Ms. Leslie Loyet, of the Financial Relation Board Weber Shandwick. Ms. Loyet, you may begin.

Thank you.

Good afternoon and thank you all for joining us today for Old Republic's conference call to discuss fourth quarter and year end results. This morning we distributed a copy of the press release, and hopefully you've had a chance to review the results. If there is anyone on line who did not receive a copy, you may access it at www.oldrepublic.com, or contact Samir at 312-640-6771 and he will send you a copy immediately.

Before we begin, please be advised that this call may involve forward-looking statements, as discussed on the five page of the press release. Risks associated with this statement can be found in the company's latest SEC filings.

On line with us today from Old Republic is Al Zucaro, Chairman and Chief Executive Officer. We'll start with some brief remarks and then open the call up for questions. Al, if you're all set.

Yes, I am.

And thank you for -- to everyone for joining us for this quarterly update. And as we do each quarter, as Leslie just said, we'll -- I'll add a few -- I'll add a few comments to our press release to perhaps add a little more color to it. And then, of course, open it up to questions you may have.

I think the first paragraph of our press release says it all in that -- in that it provides a reasonably succinct summary of our earnings trends for the year that was just ended a month or so ago. In general, insurance, again, our biggest piece of business. The , if you will, among everyone that's listening today will remember that early on we thought we had a reasonable shot at registering a composite underwriting ratio ranging anywhere between 101 percent and 102 percent by the final quarter of 2001. And as each quarter came about, I'm sure you noticed that towards the third quarter of last year we had been at the 101 percent area. But then in the fourth quarter, we moved north of that, so that the -- we ended the year in the upper range of that expectation; namely, 102 percent.

While the fourth quarter was a mixed bag, as most of them are in terms of our various coverages -- and by that, I mean, of course, that some produced better results than expected and vice versa. One of them, namely, as we pointed out in the press release, a Canadian book of truck insurance, which has about a gross volume of some $35 million, literally skidded out of control -- no pun intended. This particular book has been slower to turn around than its counterpart in the US, which was a much bigger book at about $425 million. And in the past two years in particular, it has, in Canada, reflected much greater claim severity trends, which I must admit we have not -- we've been slow to -- to recognize.

So in retrospect, we just did not move as aggressively to fix this part of our general insurance book. The lack of improvement led us to take a much harder look towards year end at what we had been doing in this area. We asked for a couple of internal audits to be performed on pricing and risk selection and reserving. And the upshot was a significant boost in loss cost for 2001 and prior accident years.

In a nutshell, this little episode, if you will, cost us about two percentage points of combined ratio in the fourth quarter of last year. And maybe three-quarters of a point for the entire year's combined ratio. I think we've got this -- our arms around the issues involved there, and that the corrective measures that we have been taking -- admittedly somewhat slowly, plus in a much more accentuated fashion in the last couple of months -- should be such that they will limit any further meaningful damage from this particular source.

In all other regards, our generally insurance line is performing very much as expected. Earned premium growth came in at about 18 percent for the quarter and about 16-and-a-half percent for an increase of roughly $142 million for the year in its totality. Increasingly, as I said before, as we moved from quarter to quarter last year, volume growth has consisted of a continued application of rate increases in the teens for much of our business. So last year represented just about the third year where we've had significant rate increases on renewals.

And of course, last year, for the first time, we increasingly had greater opportunities to add to our roster of accounts; namely, a new business. And also, I might add, account retention rates in general insurance have been creeping back up. They're not yet to the 90 percent plus they were at back in the year 1999 or so, but they are certainly getting back into the 80s. So that now we no longer are having to fight a rear battle, so to speak, in terms of having to make up business losses through the combination of premium rate increases alone.

Excluding the impact of the Canadian book that I just mentioned, the company's loss ratio would have dropped, therefore, to about 74.6 percent in the fourth quarter of 2001. And this would compare favorably with the 75.6 percent last year. In a similar vein, we would have been at a loss ratio of 74.6 percent for all of 2001 versus 77.8 percent for the prior year.

I might also note that for the full year of 2001, it includes about 30 basis points or three-tenths of a percentage point, of loss ratio that stems from the precautionary reserves we set up in the third quarter of last year to cover any possible exposure we had to the September 11th happenings. And I might add that the development so far -- meaning actual claims that have been reported to us -- have not led to an invasion of that particular reserve provision. And we do not expect that do occur.

Finally, I want to -- I think I should say that we're posting these consistently improving loss trends on the basis of -- of a continuing strength in prior years' overall loss reserve developments. So that none of today's price improvement is going toward paying for yesterday's piper, if you will.

Operating cash flow in general insurance grew by about 65 percent last year to some $166 million. And, of course, this helped increase our general insurance invested asset base by almost five percent year over year. However, the greater decline of average yields -- and by that I mean average yields for us declined by about seven percent as the year progressed -- held investment income pretty much in check, as you can see from the stats that are attached to the press release. And all of this, therefore, points again to the fact that for this segment -- as well as our two other major segments -- substantially all of our bottom line growth last year came from the underwriting and related service sides of the business, as opposed to the combination of underwriting and investment income.

I think that this experience, incidentally, with a lack of help, if you will, from the investment account, is being shared by most underwriters in the US. And, therefore, sets apart the cyclical turn we're now enjoying from past turns in the industry cycle, when we've blessed with both an up-tick in underwriting results as well, as investment income.

So it's much harder today, I think, to create an upswing in the bottom line since we're having to rely solely -- for all intents and purposes -- on our underwriting fortunes as opposed to being helped to any significant degree so far, at least by investment income.

The drop in our investment yields for the portfolio was, of course, last year mirrored, if you will, by a reduction in mortgage rates, which led, as you know, to very significant activity in 2001 insofar as new and used home sales, as well as mortgage refinancings are concerned. And this particular factor in the -- in the housing area, led to record levels of premiums and fees and new insurance written and primary insurance enforce and operating cash flow for our mortgage guarantee insurance segment, which, as you know, currently accounts for more than 50 percent of Old Republic's bottom line. In mortgage guarantee, our claim costs were reasonably stable throughout the year, with a paid claim ratio of about 14 percent. And an incurred claim ratio that was slightly above 16 percent.

I think that what these two numbers point to is that default rates have increased by about 13 percent year over year, from 2.51 percent at year end to 2000 to compared to, let's see, 2.84 percent at December 31st, 2001. And in light of that, we're obviously assuming that little or no improvement in these rates is going to occur in the foreseeable future, and also that we're likely to experience a little improvement in the so-called cure rates. Meaning the percentage of claims in default that ultimately do not turn into an actual default.

We think that in the throws of the economic downturn we're in that these are properly conservative assumptions on our part. If, on the other hand -- as we expect -- economic conditions should improve faster than is currently anticipated in these assumptions, it should not be a surprise if we should experience some downward movement our existing claim reserves and mortgage guarantee. And as a consequent a lower or, at the least, a very stable loss ratio in the quarterly periods immediately ahead.

Let's see -- as I noted before, 2001 produced huge transaction volumes, which were driven by, again, significant refinancing activity in both our mortgage guarantee as well as our title insurance business. To give you an idea, with respect to mortgage guarantee in particular, we had some 45 percent of our volume coming from refinancings in last year's final quarter. And this compares to about 14 percent from this source in the same quarter of 2000.

So just the juxtaposition of those two numbers points to the impact that refinancing activity had on mortgage guarantee volume. And as a result of the greater business turnover that this causes, our persistency rates in mortgage guarantee last year dropped to about 69 percent in the final quarter of the year. And that's down from nearly 83 percent in the fourth quarter of 2000. So as a consequence, our direct primary insurance enforce grew by a much smaller percentage -- meaning about six percent -- to a total of $65.8 billion by yearend 2001. And that percentage, obviously, is much smaller than one might have expected given the much higher volume that we had relative to new primary insurance written.

So I think the combination of a reasonably low paid loss ratio in mortgage guarantee insurance and an expense ratio which dropped to 27.5 percent last year for 29.6 percent roughly in the preceding year, led to some very strong operating cash flow contributions. As a matter of fact, cash flow last year in mortgage guarantee insurance reached the highest level we've ever had, at almost $239 million. So investment income-wise, we did a little better in this segment than we did in either general insurance or -- or title insurance, in that the addition to the invested asset base here was even more pronounced than it was in the two other segments. And as a result, our investment income year over year grew by 12 percent to roughly $63.5 million, as you see in the stats appended to the press release.

For those of you that follow developments in the mortgage insurance industry with more than a passing interest, you've probably noticed that the government agency that goes by the acronym of distributed towards the end of the year its final rules which, in part, set forth the capital and other standards that affect the relationship of mortgage insurers with the . We think it was a good news release in this regard, in that a cloud that had been resting over the mortgage insurance industries -- particularly those companies with less than a triple A financial rating -- that that cloud has been removed. We think that the -- the final rules that have come out will not place double A rated companies, such as our subsidiaries, at a serious disadvantage vis-à-vis the two triple A rated mortgage insurers in the country in our dealings with the . So that's a good news event for our mortgage guarantee business last year.

Turning to our title insurance and related services business, obviously that segment was the star attraction for 2001, and it got better and better as the year progressed. Last year's strong housing and refinance activity that I referred to, relative to our mortgage guarantee business, was also the yeast, if you will, that propelled our title business to record earnings for the final quarter, as well as the -- the entire year of 2001. The significant percentage increase that you see in title revenues was not matched on the combined claims and expense side. And this, of course, resulted in a substantial improvement in operating margins. And, as I've already noted and as you can see in the statistics, the net investment income was not a factor in the improved operating margins. Again, it all came from the underwriting and related services side of the business.

There have been no insurance litigation-wise. There have been no developments relative to the long-standing California title litigation that we've noted before. In the past week or so I might note, though, the court issued its final ruling after the better part of a year. And -- so that now we'll get busy with an appeal process as we had planned for some time.

We don't expect this process to be terribly expensive, and we continue to think that the cumulative charges on the order of some $45 million that we've provided over a two-and-a-half year period or so should cover fairly the exposures from this litigation. And as we've said before, I think it's likely that this appeal process will probably extend well into 2003. So it will take a while longer before we know one way or the other whether we've been correct in our assessment of our exposures. But we feel, as I say, very comfortable that what we've put up should serve us well.

So in total, the very good results that have been posted by our three major segments, as you see, produced operating income growth of about 14-and-a-half percent for 4Q 2001. And 20.8 percent in the -- in the fourth quarter and full year respectively.

You might note that the consolidated income tax rate on our operating earnings was basically flat, at about , 3.8 percent in 2001, as it was in the prior year. Also, note in the fourth quarter, in particular, net realized gains on investment transactions, which were much lower in last year's final quarter than they were in the same quarter of 2000 as we've explained, that's merely a reflection of our reaction to -- to markets. But year over year, as you can see, net realized gains were about -- were flat.

In last year's final quarter, we did generated substantial net gains on various equity holdings which were offset, to a large degree, by losses from sales or valuations of some fixed maturity holdings. I might note, also, some of you may have noticed that the tax rate applicable to net gains was higher than the normal 35 percent or so that typically applies -- as is the case to operating income. And this was due to the addition of state income taxes for some of the gains -- the gains we took in equity securities that were in non-insurance company holdings. As you know, insurance companies pay, typically, taxes instead of state income taxes; whereas non-insurance entities are saddled with both federal as well as state income taxes.

Overall, we -- we remain very encouraged by our near-term prospects. In the property and liability business, I think the positive turn in the cycle we've been experiencing remains very firm. We continue to believe that the current general insurance cyclical turn favors well-capitalized and stable insurers such as ourselves. And, therefore, we -- I think we should be able to continue growing our general insurance top line at a reasonably fast pace, due to a more pronounced to quality and some pretty serious capacity reductions by many carriers. Which, as you know by reading the business press, are still some experiencing some significant pay-back situations for prior year's claim reserve deficiencies which are leading them, obviously, to tighten this on the business and, in fact, ensure themselves better opportunities for profitability. In so doing, more often than not, they will exit major portions of their business, and this is given us an opportunity to obtain some new business at what we think are decent prices.

In the business areas we're in, we don't see any significant impact from the additional capital that's come into the industry in the past five months or so. I read that some 20 billion of new money has been poured into the industry, primarily in Bermuda outfits. Our own re-insurance costs have risen for most of our outgoing treaties, just as we anticipated last year. And we think that the upward pricing adjustments we've been making in that area -- in general insurance -- are intended to and should cover these additional costs, without, therefore burdening our profitability on the net basis.

We think that as always, that our general insurance claim reserve structure remains very sound and is not likely to produce any invasion of future period's earnings. So then when we take all the elements that affect our general insurance business into account, I think we've got a real opportunity to -- to develop a break-even or slightly positive combined ratio in 2002.

On the mortgage guarantee side, we're expecting a higher rate of premium and related enforce growth as the refinancing wave of last year subsides, and as our -- as the US economy picks up steam again -- most likely, we think -- starting some time in the second half of this year.

As to, finally, title insurance, the results for the foreseeable future should be reasonably strong, but we do expect a slowdown from last year's rather torrid revenue pace, since refinancing activity should decline. Going into this year's first quarter, I might note that our open orders count in our direct business, i.e. the business we write through our own storefronts as opposed to agents', are about 80 percent higher than they were at the same time last year in -- in the year 2000 -- at the end of the fourth quarter of that year. So that first quarter 2002 results in title insurance should be very positive. So this year in title insurance, overall, we -- we do expect some slowdown. However, depending on what happens to the economy and to the job picture, it should be still a reasonably strong year we think.

In total, then, we continue to be very optimistic as the combination of our various insurance coverages should be -- I think should continue to be very complementary in the current business climate we're in. And I think that's the extent of the comments I wanted to make. So now, as we indicated before, we'll open up this -- this visit to -- to questions you might have.

Thank you, sir.

If you have a question at this time, please press the one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. If you are using a speaker phone, please lift the handset before asking a question. One moment.

Our first question comes from Jeffrey Dunn from Keefe, Bruyette & Woo. You may proceed.

Good afternoon, Al.

Hi Jeff, how are you?

Good, thanks. Could you just go into a little more detail of the comments you had about sort of your paid loss outlook on the business? Did I hear you correctly say that you thought you could still draw down on reserves?

Well, what I said is that we have assumed more or less a worse case situation in terms of rates, in particular. And, therefore, to the extent that the -- the economy is -- you know, picks up, particularly in the second half of the year, I would say that our reserves are more on the conservative -- more on the conservative side than they should be.

OK.

And, as I say, the paid loss ratio has remained relatively stable, and that's always a pretty good indicator that things are moving in the right direction.

OK. And based on what you saw in your title business -- acknowledging that the volumes are going to decline as you go into 2002 -- but reports in the industry has said there's a pretty good backlog.

Yes.

Do you think that could last into the second quarter, or will you really see it taper off after the first?

Well, I think it could last into the second quarter for the simple reason that we do have some 46-47 percent of our business coming through independent agency channels. And, as you know, there is a lag -- a reporting lag -- a greater reporting lag, if you will, there between the time that a business -- you know, an order goes on their books and the time it gets reported to you. So that alone should perpetuate, you know, some pretty positive comparisons still into the second quarter, I think.

OK. And this is the last question on line item. On your pre-tax income breakdown you have the other income line, which dropped to zero this quarter from two to three million. What happened there?

Yes. We had more income at the holding company level investment income-wise, you know, and that's a reflection of both cash flow, you know, differences among the quarters, as well as some pickup on some notes that we had not assumed some accruals on, and that came through for us. So we -- there was a catch up -- a little bit of a catch up there.

OK, great. Thank you.

Our next question comes from Nancy Benacci from McDonald Investments. You may proceed.

Thank you. Good afternoon, Al.

Hi, Nancy.

A couple of questions. On the general insurance side, you indicated if you took the Canadian business out you'd be at -- that was about two points, which would...

For the quarter.

For the quarter, right. Which would put you at about a . And as we look at where we were in the third quarter -- third quarter alone at about a , it still seems like that's picking up a little bit.

A little bit.

The other thing is volume on the general insurance sides seem to be lower -- although certainly up quite a bit -- in the fourth quarter if you looked at where we were for all the quarters throughout '01. And if you could comment about both of those items. And then, lastly, on the conference call last time, you indicated you thought you could get to sort of a combined, and then when you were at the investor meetings you indicated possibly this year in '02 -- a combined. And, if I heard you correctly just a few minutes ago, I think you indicated more sort of break even a little bit better. And just wondering if there's anything that has changed in terms of your feeling how those rate increases are coming through or kicking up or just some of those items.

Yes. Well, of course, you know, I know my own comments each quarter always colored by the most recent events. And, of course, you know, I feel kind of burned by having seen what happened to that small block of Canadian business, you know, as to how things can sour pretty quickly while you can discover that perhaps you have not had your -- your foot on the brake pedal to the fullest extent that you thought you did. So I think if you sense that, you know, our expectations are somewhat lower on the claim ratio side, I think it's a reflection of those current events more so than anything else. Because I feel very comfortable with everything I know about in our business in terms of our ability to continue getting some, you know, double-digit rates of increase in the teens in our business. I think the business -- the new business we're putting on the books has all the elements of -- of solidity attached to it.

Our volume in the -- did slow down a bit. As always, Nancy, as I'm sure you remember, we've also noted in the past that some of our business which is retro rated, that the impact of those retrospective adjustments sometimes can either delay or accelerate the recognition of premiums, depending on what happens to -- to losses. Meaning if losses on particular accounts go up, you know, then you'll -- you'll book some additional earned premiums as an offset and vice versa. And I think to some degree that happened to us in the fourth quarter, that the amount of premium adjustments that came through was somewhat less than the case for most of -- of the -- of the early part of the year.

In terms of my expectations, I think on the combined ratio side I think, again, you're sensing probably that perhaps I'm a little, you know, the basis point below where I was before by suggesting, you know, break even or . But, again, I think that's just the tension of the moment, more so than any change in the overall direction of the business.

Well that's certainly a fair comment, but along those lines, as you found the problem that developed on the trucking piece in Canada, have you gone back and sort of -- I guess a way to put it -- all your other lines? And if you take a look at where your reserves are at the end of the year, can you give us a feel as to where redundancy for the overall book would be right now?

Well I think, you know, we're still back at that, you know, three, four percent area that we've been alluding to, you know, consistently. I think we've got those levels of redundancies down the road.

OK. And then just lastly, and I'll let somebody else ask questions, as you look at putting through double-digit rate increases on your line, are you starting to see -- are you seeing any resistance at all or anybody starting to come in and undercut at this point?

Not so far. No, no. Not in the markets we're in. And, of course, you know, trucking got, you know, hit pretty badly in the down cycle. And, therefore, it's more apt to sustain rate increases. And the rest of our business, as I say, I think you've some significant pullbacks by some carriers. And, you know, there's a tendency sometimes to throw out the baby with the bath water. And I think that's what's providing us with some very good opportunities to pick up some good sized accounts at what we consider to be great prices.

Perfect. Thanks very much.

Our next question comes from Bill Laemmel from May Davis Group. You may proceed.

.

Hi, Bill, how are you?

Yes. Super quarter, thanks a lot. Now I've never seen -- you know, I follow the industry, the combined ratio, and then I follow the one for Old Republic. And I've never seen a bigger spread than what we have right now. I don't know, I'm sort of thinking that, you know, the industry's around minus 20 and you're minus two. And I don't think that we've seen anything like that.

Well I think you -- you know, as you read the press, Bill, there are some big hits in major companies, as you know, from -- all the way from September 11 to Enron now, bonds -- which, you know, incidentally, are being called into question as to the advisability of companies to issue, in fact, financial guarantees that may masquerade as bonds. And, of course, you have some significant reserve redundancy -- deficiencies moving through current year earnings. And I think that the combination of those three factors is what's causing these pretty horrific results.

And we've been, you know, lucky and fortunate not to have been hit by September 11th to any significant degree, and we're -- as I just said to Nancy, you know, our reserves are holding up very nicely. And, therefore, they're not impacting -- except this little blip that we had in Canada -- are not impacting our current year results. And we've been also lucky not to get involved with some of these terrible investments such as Enron.

When did the -- could I assume that toward the end of this year, like in December, that a great -- the first round of rate increases, you know, triggered by 9/11, started to go into -- into place?

Well we -- we -- if you recall from our past discussions, we started to assume in mid year, way before September 11th, that there was going to be some significant shrinkage of reinsurance capacity and some pretty stiff reaction to the results that were experiencing. I mean, I'm sure you remember general really hitting the fan with , and the same. So we started to anticipate that. And I think as we've said, and as many others have said, I think September 11th just accentuated that.

So we -- we started to -- to factor into higher price increase in general insurance, you know, mid year last year, in anticipation that we would get hit. And, sure enough, we did.

Well, it just seems to me that this -- we've never had this before. We started -- you started adjusting rates upward in fourth quarter of '99, and -- and ordinarily that -- those adjustments would run through 2001. So you got down into at least a zone of comfort minus two. And then all of a sudden the industries fell out of step, and it just seems to me that there's two rounds of rate increases involved here. And I've never seen a double round before, and it lasts all the way through 2003.

Oh, I think so.

Yes.

I agree with that.

OK. So -- now, of course, this is -- these are like having those big 300 pound linemen out running ahead of you. And I just wondered if it's a time when you could go into some other businesses? Like you always run these little shoe boxes of businesses, and I just wondered if those cards?

Well, right now -- not that you don't look -- but we're still satisfied that we've got a plate full now. We've got great opportunities in the markets we're in and we just want to stick to what we've got right now. And, hopefully, what we know best -- again, you know, using Canada as an example, you know, even sometimes with the stuff that you feel comfortable with you find yourself getting into trouble. So, no, we're going to stick to what we know best and we think we've got ample opportunities to grow that book of business and pick up some market share right there and then, as opposed to screwing around with anything that we may not be very familiar with.

I do think -- not to throw cold water on this situation -- but, you know, for us and the rest of the industry, the difference this time around -- unless, you know, we have a significant pickup in yields in the foreseeable future -- is that we're all having to, you know, to -- to our fortunes, so to speak, to improved underwriting results alone, as opposed to the combination of underwriting and investment income. I mean, I don't think people realize the extent to which yields have fallen and the impact that fall has had on both new as well as reinvested assets.

OK. Well, possibly this better underwriting that you have there, we could get a few more pennies in the dividend.

Always hope for that.

OK.

All right.

Thank you.

Yes, sir.

Again, ladies and gentlemen, if you have a question, please press the one key on your touch-tone telephone. Our next question comes from Ira Zuckerman from Nutmeg Securities. You may proceed.

Same old, same old, as they say. Can you give us an idea of how much your reinsurance costs have gone up, and have you done any restructuring of the contracts?

Reinsurance costs for us were up about 32, 33 percent in total. And -- and that's for our core treaties, which cover substantially all of our and worker's comp coverages.

And in terms of restructuring, we did not have significant changes in our retention rates, but we did not buy as much coverage as we were buying. We were buying a lot of what we might call -- what we refer to as sleep insurance. You know, upper layers coverage -- let's say, you know, $50 million and above. And those became either totally unavailable in the industry, or if they were available, particularly from some of the new reinsurance capacity that's come on stream, we're at such exorbitant prices that it wasn't worth the sleep insurance.

The other question is, have you done any stock repurchase and any plans to do some?

No, we have not. We stopped in June of last year and we still have, you know, more than $100 million available to us if we want to -- to re-ignite that program. But, right now, it does not look as if that's in the cards, because we think we can -- as we've indicated before, Ira, put our capital to work to advantage for the shareholders.

OK. Thank, Al.

Yes, sir.

Our next question comes from Greg Peters from Raymond James. You may proceed.

Good afternoon, Al.

Hi, Greg.

Could you give us a sense if you got any -- if there were any increased opportunities in the risk management business following 9-11? And, also, you did -- you did mention the business in one of your answers, and I know you have a small operation. Maybe you could talk about what's going on there as well.

The answer on the first question is that we continue to have significant opportunities in risk management. There is definitely a to quality there. A lot of companies, you know, which have been playing in this risk management area and had been offering two and three year deals, you know, with some guarantees attached to it -- you know, cost guarantees -- those deals have come unraveled. And obviously as that happens, the insurance buyers are looking elsewhere because they cannot possibly get the same kind of advantageous deals with the same companies or those companies are pulling back. You've got a couple of significant players that have pulled back in the risk management alternative market area. So the combination of all those factors is what's offering us continued opportunities to write more business and we are.

With respect , you know, we -- we've got about a $35 million book of business, but it is small. It's a paper mill -- what I call a paper mill type of operation. In fact, it's small bonds and we do some contractor business, but it's -- you know, building contractors -- but it's, again, on the small scale. And, therefore, we're not involved to any degree with the issuance of bonds, that as I said before, masquerade -- you know, that are financial guarantees masquerading as . And those are the types of bonds, as well as bonds on major contractors that have been blowing up and effecting the industry negatively.

In the nit-picking category, one of the things that's been covered by many of the rating agencies lately is asbestos.

Yes.

And I know you have a small asbestos reserve on your -- on your books. Can you give us a sense of, I guess, the popular ratio survival? Where your survival ratio is at the end of the year?

I don't have those numbers. I have them as -- as of mid year was the last time we did a study. I don't suspect that they will have changed materially. And as I recall the number, , it was around ten and a half years net survival ratio. As you've said, and as we've said, Old Republic has not had, fortunately, too many over the many years that we're involved.

We're exposed to asbestos. Our exposure to asbestos comes mostly through some reinsurance arrangements in which we had participated until the early 1980s and which have been dormant since. But we get nicked as those -- some of that stuff runs off. We do, I suspect, have some exposure to the ongoing problem now of the -- of the, you know, plaintiff's dipping into the service providers, the installers and so forth. And we do have some activity taking place there. We do -- as it occurs, we do attempt to set the proper reserves on all those claims as well as the costs of potentially fighting them in court.

But, again, you know, given the types of industries that we've been in at Old Republic and the subsidiaries over many years, again, we don't have the kind of major exposure that you would expect to see, you know, with the major commercial underwriters.

Thank you.

Our next question comes from Stephen Petersen from Cochran Colonial Securities. You may proceed.

Good afternoon.

Hi, Stephen, how are you?

Good, good. One quick technical question. You had given us the persistency rate in mortgage and I had missed that.

OK.

And the second question is, it looks like you guys are still going gangbusters in mortgages as far as your loss ratio. But some of your competitors have seen some of -- a little bit of an recently. And I was wondering if you might -- at the risk of asking you about your competitors -- have an explanation for that? Is it -- is it a difference in the book or...

OK. First question, on the persistency rate, it dipped down to I believe -- what, 63 percent 67 -- one of those numbers. Hold on a second here. I just want to be sure. I have a schedule here and -- yes, 68.7.

Sixty-eight point seven?

Yes, at the end of the fourth quarter 2001. And that compares to 82.8 at the end of the fourth quarter of 2000. And it went, you know, progressively down, as you might suspect. You know, given what was happening to the -- to the refinancings.

You know, it went from, as I say, 82.8 down to 80.6 to 76.2 to 73 and then to 68.7, as I say. And that -- we look at the similar statistics that are posted by the other, you know, publicly held companies that publish those numbers. And the same pattern as applied there, even though our persistency seems to be somewhat better. As I look at these stats here, the average for the publicly held companies looks like it's about -- oh, 63 or so for the fourth quarter. Whereas our, as I said, is almost 69.

In terms of the claim ratio, as I indicate -- try to indicate in my comments, we do -- we have kept our reserves up. And, therefore, we've not had, you know, to -- to put them up and, therefore, impact potentially negatively the loss ratio. But I think from what we can tell, the loss ratio for some of the other companies is probably driven by their greater interest in the so-called bulk insurance market.

I think those -- and that's a business we've so far stayed away from, because we have felt kind of skittish about the pricing. But we sense that, you know, the loss ratios tend to be higher on that business. And I think that's what's driving those competing companies' loss ratio to a level that is somewhat higher than is the case with us.

OK, terrific. Thank you very much.

Yes, sir.

Our next question is a follow-up from Nancy Benacci. You may proceed.

Al, just a couple of things. Under some of your specialty lines -- aviation, home and auto warranty, some of those -- any unusual experience either positive or negative that you can share?

On the -- on the aviation business, you know, that business has been growing like gangbusters and has been producing very good results. And we expect it to be, as I've indicated in the past, a better than a $100 million book of business this year for us. So it's come, you know, a long way in the last two or three years from being about a 25, $30 million book of business. It's grown very fast and we'll continue to grow it as long as we feel we're getting proper pricing.

BENACCI: And you're seeing good loss ratio numbers coming out of that book?

Absolutely, yes.

OK.

And with respect to home and auto warranties, the auto warranties is progressing very nicely; combined ratios are very acceptable. We had a bit of -- funny you should ask -- we had a bit of hiccup in our -- in our home warranty business, which we've been expanding pretty dramatically in the last couple of years nationally. And whenever you do that, you know, you have more of a risk of not pricing product properly and not being able to serve it as well as you could when you were in a much more limited geographic area. And that loss ratio went up for us last year some and reduced profitability to some degree.

And that's what I meant before, earlier in my comments, when I said, you know, that some businesses did better than others. But you put it all together and we still had very good results other than, again, that Canadian book.

OK. And then I just wanted to just clarify on the mortgage insurance side. I think you indicated that if you're looking for a better second half of '02, if we look at where the composite ratio ended in the third -- fourth quarter, which was flattish with the third and certainly a good number here based on where we are in the cycle. Sort of worse case, where could you see the composite ratio sort of tapping out at based on where we've seen it in previous times?

Well, as you may recall, you know, we have said in some of our comments, you know, that depending on what happens to the economy, you know, that loss ratio could go to the 25 percent level, you know, from roughly 14 or 15 percent, where we are now. Is it in the cards? I don't think so. Particularly given the strong, you know, reserves that we have up. And we do believe that this economy is probably already pulling out, you know, of its -- of the doldrums and should look a lot better by this time next -- you know, next year.

Good. Perfect. And then just one last item on the litigation. You indicated that there had some -- been some action this past week or so...

In the title business, yes.

Right. Could you clarify a little bit more of what that decision has been?

Well, it just means that the judge, you know, came out with a final number and said, "This is it fellows, and pay up." And, both sides, you know -- our side and the other side said, "No." One side said, "We don't want the money because we're going to appeal." And we said, "We're not going to pay because we're going to appeal."

And could you tell us what that number was?

The number was around .

OK, great. Thanks very much, Al.

Yes.

It appears there are no more questions, if you would like to continue with any closing remarks. Sir, if you would like to continue with any closing remarks.

Well I don't have any other comments. I appreciate, as always, very much the interest of everyone who listened in and participated in this conference call. And we'll look forward to our next visit in three months or so. So you all have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may now disconnect. Good day.