Old Republic International Corp (ORI) 2002 Q3 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to the Old Republic International third quarter earnings release conference call. At this time all participants have been placed on the listen-only mode, and the floor will be open for questions an comments following the presentation. It is my pleasure to turn the floor over to your host Leslie Loyet.

Thank you for joining us for Old Republic's conference call to discuss third quarter results.

This morning we distributed a copy of the press release and hopefully you had a chance to review results. If there is anyone online who hasn't received a copy, you may access it at www.Old Republic.com or you may call Samier Patel and he will send you a copy immediately.

Before we begin, please be advised that call may involve forward-looking statements as stated in the press release. Risks associated with these statements can be found in the SEC filings. We wanted to let people know that the information and statements made are made as of the date of the call. Listeners to any replay should understand the passage of time will diminish the quality of the statements. Also the content of the call is the property of the property and any replay or transmission can be done with consent of Old Republic International.

With that said I would like to introduce Al Zucaro, Chairman and Chief Executive Officer. We'll start with some brief remarks and then open it up for questions. If you are all set.

Yes. Good afternoon to everyone. Thank you from us as well for participating in this quarterly update.

As we said in this morning's press release, this is a good news release for us. It is the best quarter we have reported ever, if we leave aside the special tax credit we booked in the second quarter of this year. If you look at the segment statistics which appear on the last page of the release, you will see that each of our four businesses contributed to this new record and particularly general insurance provided the largest boost with a 10.7 million or nearly 30% increase in year over year pretax earnings in the third quarter of this year.

The earnings trends that are exhibited by each of our segments continue to be very much in line with the expectations we have cited in recent earnings reports as well as conference calls such as this one. With the only exception being that our title business continues to be produce superior results and exceed those expectations significantly.

Our general insurance business is meeting our objective of producing a moderate underwriting profit by achieving a composite underwriting ratio, which we had expected and is coming in between 98 and 100% for this year in its totality. For the latest quarter as you can see in the stats, we posted 98.6% combined ratio, and year to date the ratio stands at 99.1%, which is roughly 240 basis points below the 101.5 that we posted in the first nine months of last year. By and large, lost ratios are dropping for most of our property and liability. Insurance coverages, as they continue to respond to the cumulative positive repairs, if you will, as well as the re-underwriting that we have made in the last three years or so. The only major points of resistance in this regard relate solely to our reasonably large workers' compensation and much smaller general liability lines.

In workers' comp, it is being impacted by a continuation of higher claim frequencies as well as severity as well as some re-emerge you might expect coming out of a soft market. Re-emerge from the involuntary or, if you will, assigned risks times of market assessments. We had a poor quarter in the third quarter in our much smaller general liability line due to some adverse development on a couple of claims, nothing permanent there, but we did suffer a bit. But most of our other coverages posted very positive lost ratio trends. We are also keeping the lid on general expense for production and administrative purposes, and this is reflected in a year to date expense ratio that has dropped by about 80 basis points to 25.9% in the first nine months of this year.

This general insurance segment of ours is once again generating very generous cash flows. As a matter of fact, for the first nine months of this year, they grew by about 75% to almost 225 million while premiums earned as you see in the stats grew by a much smaller 17% in the same time frame. And this is basically reflective of a smaller rate of growth for paid claims, vis-a-vis the top line. For example, in the first nine months of 2000 our paid claim ratio was 24%. In 2001, same period, it dropped to 73%. And so far this year, through September, that ratio stands at 63%. So, we are -- you know, there is a greater amount of reserves being put on the books as the higher premium volume comes in. And in the meantime, paid claims as a percentage of that top line are declining very steadily, which is what we like to see.

As we have noted in the past and again in this morning's press release, the benefits of these growing cash flows however, continue to be dissipated by steadily lower investment yields, and thus it's negating our ability to also grow the investment income line in our business.

Finally, I always like to make a comment about our lost reserve picture, and our structure in this regard is holding up very well so that the current period overall results are not impacted by prior years adverse developments. So what you see there is pretty much the results for the current year unadulterated by the past to any significant degree.

Our mortgage guarantee segment produced the major share of our bottom line was roughly at 52% contribution to consolidated results for the first nine months of the year. As is the case with the two other major segments of general title insurance the lion's share of mortgage insurance improved results stems from the freighter income from the basic underwriting and service side of the business. Operating cash flow, while very significant in mortgage guarantee insurance and being also additive to the invested base of that segment, is also not sufficient to override, as I say, the yields that we are and have been experiencing for some time now.

Production wise in mortgage guarantee insurance we have been very successful in participating to a greater extent than we have in the past with respect to so-called bulk business. And as we look at our success in this regard, we think that the major reason for this turn-around simply relates to competitors' rates rising to the higher levels we had been quoting and not been so very successful until the last couple of quarters or so. And I think that also reflects some of the negative results that have been booked by some of these competitors ,and there is -- appears to be obviously an awakening to the necessity of charging higher prices for that type of business.

At the end of this year's third quarter, the amount of insurance in force emanating from this bulk business amounted to something a little shy of 9% of total bulk and primary insurance in force. And this is up quite significantly from 3.9% at year-end 2001. So it gives you an idea of the amount of business we have been able to put on the books for first time from this source in the last couple of quarters. In the third quarter this year, earned premiums grew at a faster rate of 10.3%, and that compares to about 6% in the first quarter of this year, and just about what? 3% in the second quarter of 2002.

New prime reinsurance written was up 44% and about 46% in the first nine months of this year. Obviously high levels of mortgage refinance activity have been a major source of these large production figures. But, they, on the other hand have also caused average persistency to drop to about 62% so far on an average for each of the three quarters of 2002. And that compares with an average persistency rate of 72% for all of 2001. Still, year over year, our direct primary insurance in force has grown by about 13% through September of this year.

Our growth in mortgage guarantee profits has been experienced by virtue of a -- principally, I should say, from a relatively low loss ray show, which came in at 13.6% or there abouts in the third quarter of this year and 12.6% year to date. And these figures compare to about 15.5% in the third quarter of 2001 and 16.9% for the first nine months of last year.

As we noted in this morning's press release, actual claims experience is in mortgage guarantee is pointing toward lower severity, and this is translating into lower incurred loss provisions. On the other hand, the delinquency rate inched up a bit to about 2.9, 2.93% at the end of September of this year, and this in part added an upward tilt, if you will to the third quarter of 2002 loss ratio of 13.6%, which is up from about 11.6% in the second quarter of the year. So there is some inching up, and we think it is a reflection of this minor but still significant increase in the delinquency rate we are -- we have experienced in the latest quarter. Year to date paid loss trends have remained relatively stable.

They amounted to 15.4% in 2000, 13.2% in 2001 and 15.3% in 2002. So, you have got stable payouts on losses, you have got some increase in delinquencies, therefore leads to assumptions as to a greater number of claims to be paid in the future, and that's offset to some degree by lower average costs in terms of a lower severity as I say.

Moving along, the strength of our title insurance segment, as I have said before has been the source of a continuing and very pleasant surprise for us. As you know, the U.S. economy is experiencing some of the lowest mortgage rates we have seen in the past 40 years or so. And this has led to an avalanche of loans becoming ripe for refinancing. Earlier this year when we were putting -- finalizing our budgets for the year, we were of the mind that we had seen the strongest refinancing activity in the second half slough 200,1 and that there was very little chance of a reoccurrence this year. Well, obviously, as matters have turned out, we couldn't have been more off the mark. In this year's -- just to give you an idea here, in this year's third quarter, orders received and opened on our direct produce business, that is business we produce through our own storefronts, as opposed to agency business -- independent agency business, that those orders were almost 47% higher than the related numbers for the same period of 2001. These types of significant increases in opening -- and open orders explain, in large part, the superior results we have posted in this year's third quarter. And I might add, they also point to the probability of strong performance in this year's final quarter, given there is a time lag between the opening of an order and the finalization of the closing process and the ultimate related booking of the premiums and fees that ensue.

In title insurance, our incurred loss ratios continue to follow the trends of paid losses. For the first nine months of 2001, the incurred title loss ratio was 4% compared to a paid loss ratio of 3.5%. For same period this year, the incurred ratio was 4.8% versus a paid loss ratio of 4.1%. So we can see while there is a little bit of an inching up, if you will, of our loss ratio in title insurance, it still remains at very low historical levels. Title profit margins as a result have been -- have stayed at relatively high levels; they improved a bit. This year, vis-a-vis, 2001 by virtue of a lower expense ratio that more than made up the slight increase and the loss ratio that I have just pointed to.

Looking at our overall financial condition balance sheet wise, we have increased our consolidated exposure to equites moderately. We think we have taken advantage of some better equity values out there. And -- but still, they represent less than 8% of our cash and invested asset base and somewhat less than 15% exposure to our shareholders' equity account.

So when we look at the results so far, again, we see no basis for changing the immediate outlook for our company's business specifically. We continue to think that our general insurance business is likely to produce positive underwriting results with a composite ratio falling within the range of 98 to 99% for 2002 in its totality. Premium revenue wise, I still think that the year over year growth trends through September of this year are likely to continue through year-end. Our current view for what it's worth is that commercial insurance rates will probably remain in an up-trend well into 2004. We think they will be driven by continued cost increases for reinsurance protection that most companies have to buy. We think they will be driven also by the need of many companies to address prior period loss costs which have proven themselves in excess of reserves previously provided. And also by the fact that in a low investment yield environment such as we are experiencing and are likely to experience for the foreseeable future, the underwriting account bears the major burden of growing profits and achieving sensible returns on equity.

For the reasons I gave before, I think that second half title insurance comparisons are going to be as positive as those of the first half of this year because there is, as we speak, no let up in refinancing activity and as I indicated, we are going to the fourth quarter, and to some degree into the first quarter of next year with quite a bit of orders on the shelves and those will large majority of those will reduce themselves to closed orders in the next several months. And finally as to mortgage guarantee, we think that 2002, again as a whole, will largely reflect the earnings pattern and profit margins established in the first nine months of this year. This means that this significant contribution should continue to be the largest single contributor to Old Republic's bottom line for foreseeable future.

As I said, our balance sheet is in great shape as we pointed out in the the heading to this morning's press release. Our September 30th balance sheet shows us crossing the $3 billion mark for the first time in the shareholders equity account. We take a lot of pride in the fact that this capital level has been built on the strength of high quality invested in other assets and as we keep saying, a claim reserves structure that is not likely to produce major surprises on the down side.

Our history for many years -- those of you that follow us know -- has been one of producing reserve, some element of reserve redundancy as opposed to deficiency, and that is the way we like to run our business. Given current stock market conditions, stock buyback programs being enacted as you know by many firms who view their stock as undervalued and while we also think that Old Republic's shares deserve a higher price, we continue to believe that we can employ our capital resources to advantage in our existing business in the interest of the long term shareholders and Old Republic. So therefore, at least at this juncture, we are not inclined to impart that capital through a stock buyback resumption any time soon.

One final word. Not much to report. There is a little blush in the -- blurb in the press release that our mortgage guarantee set up a 4.8 million reserve to address a long-standing class action lawsuit. There have been some recent -- at the end of September -- adverse development pertaining to one of our competitor, and it in fact forced us to take a look at our own situation and come up with a number that we think we can address our share of that litigation for. Based on all the facts we have right now.

And then finally with respect to our title insurance business again we have got a number of class and regulatory lawsuits that have been pending now for several years, and those are working their way through the appeals process and I believe we have indicated in the past, that is likely to come to a conclusion probably late spring midyear next year. Some of you may have noticed that substantial number of our competitors in the California market recently announced a settlement of similar issues, so time will tell. We think that we have got enough up in reserve to address our true exposure on that claim or series of claims.

That's the extent of my comments and as was indicated before, I guess we will open it up to questions as we normally do.

Thank you. The floor is now open for questions. You have a question or comment, please press 1 followed by 4. If you on a speakerphone, we ask that you pick up your hand set to minimize any background noise and if at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. The first question, Nancy Binacci from McDonald and Richmond.

A couple of quick questions here. Congratulations on a good first quarter.

Um-hmm.

In terms of the issue of general insurance business, you talked a bit about workers' comp and G&L, could you give us a sense of what the loss ratios were on the lines in the quarter?

In workers' comp our loss ratios have not changed materially from a what they have been in the last couple of three years. They are in the 90% range, 89, 90%. In G&L, a much smaller line, you know, comp accounts for a much bigger part of our property and liability business. Something on the order of 16, 17%. Where as general liability accounts for no more than about three and a half, 4%. That loss ratio, let me take a look here. Was up to 81% year to date versus an average of roughly -- oh, 60% call, 65% for prior three years.

As you are look at the break down, are there any other lines where you have seen spike-ups in the loss ratio third quarter over second quarter third quarter over a year ago --

As I said -- as I think I said, the other lines, the trends in loss ratios and the other lines basically all are positive.

Okay. Yet yes you did definitely say that. And commenting about your projection going forward of 98 to 100 type of combined ratio, as you have put through significant rate increases for the last couple of years and the indication that you can do that, that we should still see a firming of rates into 04. Is there the potential that you should be able to get that been below the 98 or is that different?

I'm sure that is going to be one of our objectives as we put budgets and plans together for coming year. But as has happened this past quarter with a blip in our general liability, the problem with this business is that you can never be assured that you looked under all the rocks, you know. And so, yeah, generally speak, I would expect common sense tells you that given the cumulative effect of the rate increases we have posted and the hard market that we are likely to be in, that we should see some improvement. How much is a question mark right now.

What is your reserve redundancy in the general insurance book. I didn't hear you give the number.

On net it has been 3 to 4%.

Okay. So still a net range. And just quickly on the more damage insurance side as you have indicated, you increased the amount of bulk over this year versus last year. Where do you see that number going?

Well, an awful lot is going to depend, you know on the success we have in quoting and getting the business. I moon, if the first two quarters are any indication. We could go up to 12, 13% of total in force. But I think it is too early to tell.

And as you writing and pricing -- or underwriting that business, you using the same pricing parameters as you would in terms of profitability margins?

Yeah.

Thank you very much. Okay.

Our next question is coming from Michael Deion from Sandler O'Neill.

Hi, Mike.

My question also is on the mortgage guaranty side. And just wondering kind of furthering Nancy's question, in the event of a double dip recession hopefully we won't go into that, but how are you pricing your product to account for that, and any potential rise in delinquencies from that point?

We are assuming higher delinquencies and higher severity on that business. And we believe that we have been trying to figure out how much above our quote unquote normal pricing we need to be. In order to accommodate that. Unfortunately, our book is you know too Green right now. It is relatively new so we don't have as good a feel as the competitors who have been in the field for a while. You can tell from press releases coming out of the competitors that the loss ratios appear to have been -- appear to be emerging and to a higher territory that than was anticipated and that is why you are seeing or we are seeing them increase their rates and we feel good about the fact that they seem to be inching towards we thought we should be. That's the best answer I can give you.

Okay. Thank you. Just a quick follow-up on the general insurance side. Again is you pricing the policies and if investment yields stay where they are for another year or two, you know, how low can that combined ratio go. Are we talking about mid-90s, is that potentially?

Well, as I said in answer to Nancy's earlier question, you know, we are -- we thought -- and I think we have the opportunity to clock in between 98 and 99 for the current year. I think if I have any sense to where the numbers are heading when it comes to putting our budget together, I think we are going to tend to be more aggressive in our expectations and look for 96 to 97 tore the coming year. I think it is too early to tell. But that should be in the cards, absent any surprises.

Okay, great, thank you.

Um-hmm.

Thank you, our next question comes from Pat English from SSMI.

How are you?

Very good. Yourself? Good. Al, I wondered if you could get in the guessing game a bit and if rates stay roughly where they are right now, mortgage rates, how long would you anticipate the re-fi cycle lasting and I got a second question to that? Good Lord, our estimation process has been so bad in that regard, you know. We still can't believe that there is there is that much stuff out there being refinanced. Certainly, I can only look to the next couple of quarters. Just looking at the stuff that is in the pipeline, and don't forget the numbers I quoted in terms of open orders relate to our direct business because that is the only one we have a real handle on. The stuff that we write through agents, you know, which in our case is about 55%, you know, that stuff lags by 90 days. So you know, there is no question that our fourth quarter in title insurance is locked in. And it is, you know, given the leg particularly on the agent produced business, I think there is a good chance we should have a strong first quarter. And I don't see, you know, rates coming down or I mean, going up any time soon.

At managing the title business as the cycle rolls over is obviously delicate.

Right.

Is that something you think you might get out in front of a little bit this time around?

The only thing that we have done I think with reasonable success in the last seven, eight years is that in fact re-jiggered the sources of our business to emphasize the independently produced business which as I say represents some 55% nowadays, and that is up from 45%, seven or eight years ago, so that insulates us somewhat in a downturn because we don't have with respect to the 55% portion of the business, we don't have as much of the you know, none variable or fixed costs so we are only talking about the other 45% and there it is treacherous. And the history shows that we and the rest of the industry tend to move oh slower when it comes to hopping off people and costs and we should probably do.

Great, thanks.

Um-hmm.

Our next question from Greg Peters of Raymond James.

Good afternoon.

Good afternoon, Greg.

From a big picture standpoint, Al, I'm somewhat puzzled by the 13% or so top line growth net premium growth in general insurance. 13%, did you say?

Yes. It seems that many of our peers are reporting or set to report substantially higher greats of growth and by example AIG came out this morning and their written premium was up 60%. And I thought I just lob in the question as to why given what I perceive to be a very high quality balance sheet why you are not able or willing to grow your business faster and what is presumed to be one of the best underwriting markets that we have had in the last 15 years.

Well, first of all, obviously the example you cite indicates that they can walk on water and we can't, and secondly I think I take issue with your 13% because year to date on general insurance as I see in our numbers were up 17% not 13%.

I think I was using the quarter, the third quarter numbers.

Third quarter versus third quarter of last year?

Yeah.

And I'm just doing math -- 331 versus 294. Would that -- doesn't that imply about a 17, 18% increase too? But is the written the leading indicator or the earned the lagging?

No, I think earned in our case because of the amount of business that we do on the retro basis, Greg, as you recall is the better indicator of our premium flow.

Well, just by example --

I'm not going to argue with you that there is no question that we are, you know, showing less of a growth now. I think particularly with the example that you citing, one of the big differences with respect to that company and Old Republic is that they tend to have much larger, much larger retentions than we do. For example, take our aviation business. We probably have net premiums on that book of business of maybe -- let me guess here, $25 million this year out of a total book of 135 million. So that shows that we are using you know reinsurance to a larger degree by virtue of the lower retentions we have. So our gross volume is you know going up and believe me, I just saw those numbers in terms of reports to reinsurers, they are going up a lot more significantly than the net.

I see.

And that is a reflex, as I say, of the amount of risk management that we do and the fact that we have lower retentions in a company such as AIG.

No doubt that retentions were up, but I think they cited a 25% increase in new business. So -- and St. Paul by proxy you know, that is a messed up situation, but I think they were up 28% in their core. I'm just looking at these other numbers.

Would you have posed the question to me and you know what my answer has been and it will be the same thing right now. Yeah, this is a great market, but by the same token, it is not like picking cherries or shooting fish in a barrel either.

Indeed. The risk management business, you also talked about the risk transferred, can you give us an update on risk management in terms of new accounts, growth of that business? Because that is not something that we can easily pick apart in your income statement.

The only thing I can say is that we are doing very well and it is inching up towards -- have gone down 22 to 23% of our total gross volume and it is inching up over 30% or so. And we are having more good opportunities to quote and get business because there is still a contraction, a and I'm sure you hear through grapevine as to where that is happening, contraction in that part of the business. So I think we are sitting pretty there in terms of being able to generate a lot more.

Is that going to move beyond the 30% in the near term or is the 30% target --

No, it has the potential to move beyond that. Thanks a lot, Al. Yes, sir.

Our next question from Jeffrey Dunn.

Looking at the expense line of the GI segment, done a good job of containing costs. What additional leverage do you have going forward? Are we at a run rate at this point?

General insurance general expenses may have another half a point depending on what has happened to the top line.

And then I got to press you on this again. On the incurred loss line in the mi business, if I did the math right based on the 153 paid loss ratio looks like you might have continue to release reserves. I understand the severity continues to come down, but given the uptick in delinquencies and the aggressive writing in the bulk market. Would we not want you to err on the side of caution and building reserves, especially seeing what happened after some of your competitors have been in the market longer and need to turn around and start building reserves to back that up?

Okay. Fair question. Take severity first. It depends where you start and we think we are severity assumptions have been on the higher end of the range based on the information we have with respect to competitors. And I think you had raised similar questions in the past and I think we said, I have a vivid recollection of saying as a matter of fact in the fourth quarter of last year and fourth quarter of this year that we were going into the year anticipating a much higher ratio of delinquencies than we were getting and still are getting and therefore we had been -- we had our foot on the brake pedal when it came to those assumptions and so you're correct that in light of one coming off a what we considered to be a high level of severity assumptions and to a lower than anticipated level of delinquencies that there has been a greater release of reserves, that is not however at the expense of leaving ourselves exposed on the bulk insurance business that you refer to. There we are reserving that piece of the business separately from the rest and we are using as loss assumptions in the business, the loss assumptions that entered into our pricing models.

Okay just as follow-up. Are you participating more in the prime or sub-prime area of the bulk market, what type of risk adjusted hurdle return are you aiming for in your pricing?

I don't have the distinct numbers versus prime and sub-prime, but basically I can say to you the amount of sub-prime in our book is very small.

Okay okay. Thanks, Al.

Um-hmm.

Your next question is coming from John Hahnen of Durks and Company.

How are you? Congratulations on another quarter. I think everyone has asked my questions but I would just point out that you said at the end of the second quarter that you had lines of 50 million and if you still had that you would be well up over 20% so I would say just keep doing what you doing and keep producing good results.

Okay. All right.

Thank you, Al. Yes, sir.

Your next question from Michael Peterson.

Hi. Good to hear from you.

I have two questions one is a detail and one bigger. The bigger one first. Where can leverage get to in the general insurance segment and however you measure it, I'm measuring premiums to equity but I'm guessing you have retained a good amount of what you have made. Where can that get to?

Well, the way we measure leverage at Old Republic, particularly being since we are a insurance oriented company is by looking at both the gross as well as the net ratio of loss reserves to capital and surplus. And there we have some room to grow. We think we are currently at about as I recall the numbers, I don't have the latest ones in front of me, but we are currently at about 125, 130 and I think we can safely grow that to 175. So we have room to grow there. And it can happen pretty quickly, even you know, if you consider that according to some any way, we are not growing as fast as we could. Nonetheless you know, the amount of reserves is bound to increase significantly given the fact as I indicated in my earlier comments that paid loss ratios are on the way down. Here, I just looked -- I have got a number here on -- yeah, I said 125. We are actually at 114 at the end of June. On that ratio. So we have quite a bit of leverage left.

Okay.

Thank you. And the second part related to the mortgage segment, this is the first time I think you have disclosed insurance in force in a while. I wondered if you could, two parts to this one, can you tell me where that was if the numbers at first quarter and second quarter, try get an idea how you grow in this quarter and second since none of your competitors are growing, some are shrinking in that, I'm trying to understand is that -- would it be fair to say that is due to some of them pulling back from the pull can market at the same time that you have just come into it, or you have a sense for why your numbers would be so much different from theirs?

Well, there is no question that because of the greater success that we have had in 2 q and 3 Q that that has been instrumental to the higher increase in our end force. Use to them, I try to answer the second part of your question by suggesting earlier that we sense that they have been increasing their rates and that is the reason why we are all of a sudden successful because we are able to get business that it would have otherwise gotten.

Right. Okay. And I can follow-up with the numbers if you don't have them.

As I was talking I was looking for them, but I think we are going to have to give them to you later on.

Okay, that is fine. Thank you very much.

Your next question is coming from Jim Rosenberger from Rose Stein Investments.

I have got a couple of things. A smaller item, your conservatism in investment has been proven over the years, but I'm curious where w whether you have experienced any write downs or in danger of having any impairments in fixed income portfolio?

We have had some, Jim, back in the fourth quarter. We wrote down some a couple of equities as I recall. We wrote down, we had some Kmart bonds. We had a bit of frontier you know, which was acquired by -- global crossing, you know, the old history telephone stuff. That was written down. Currently, we have a couple of you know, major telecommunications investments and namely lucent and Nortel, which we have not done anything about. We have a luxury at Old Republic of being able to spread our portfolio around, so we don't have any single investment that accounts for a big part of the portfolio. I guess bottom line is we have not had significant need to pose significant write downs of either equity or debt security so far. Our bond portfolio is still at a single AA rating.

Let me switch gears if I can. Your expense ratio on the mortgage insurance continues to be under control, a and I'm curious with all the refinancing that is going on, when we get to the end of that period, should there be an opportunity to reduce that ratio even more?

I think to a large degree it is affected by the amount of contract underwriting that we provide, you know. As do others in my companies as you know. And obviously if that dries up, you know, then that expense gets lopped off. It is not part of our fixed cost structure. So, you know, we have had a general down trend in our MI expense ratio. I think that the down trend was a brother gated somewhat in this last quarter because of the I tem that I pointed to, the legal expense reserve of 4.8, if you eliminate that number, you will see that our expense ratio is coming down a notch at a time.

No, I applaud what you have been doing on expenses. What I was trying to get at was that you are having to write a lot of businesss to stay in place because of having to replace businesses that is leaving through refinancing and doesn't that art ferblly increase your expense ratio? Night depends. Your expense structure, not to get into details on bulk business, let's say is different than the traditional MI business so depends the kind of business you writing. And certainly when you writing business through contract underwriting, you know, features, your tend to have you know, higher expense ratio there.

Okay. Okay?

Yeah, and then one last thing. If you could just comment generally in your indicators in real estate markets where you participating, is anything flashing warning signals for you?

Well, you know, you always have Florida and you know California that you worry about. But right now, we are just not, you know, seeing any red lights. We see maybe a few amber lights here and there, but nothing significant. We think, you know that the employment picture is the most critical for our business, and that is not the greatest, but it is not that bad either.

Thanks a lot, Al.

Um-hmm.

Thank you, our next question coming from Stefan Peterson of Cochran and Corona.

How are you?

Good afternoon. My question has been answered. Congratulations on a terrific quarter, thank you.

All right.

Thank you. Our next question from Margot Canne of William Harris Investment Management.

Good afternoon. I don't think you covered this. If you did, I apologize. Can you detail bit, you indicated that some of your competitors have to settle the California suits. Can you give us a sense of why -- what those settlements have looked like for those of us who are not familiar and is the reason that you had the additional expenses the 4.8 million, will that help cover the settlement that you expect to reach in the spring? The 4.8 as you know is in the mortgage guarantee business, right?

Right. And obviously you know what we have done there has we have put our best foot forward as to what we think our exposure is relative to defense costs as well as indemnity that we may be responsible for. That litigation looks like may not -- could get settled before year-end, but we will find out quickly to our falloff if we are off the mark in setting the reserve. Respect to the title insurance litigation. That goes back to roughly midyear 1996. We were for lack of better expression, the Guinea pig relative to those issues that have now been settled by the other title companies. The title companies you know settled after in fact we -- the judge came out with his orders relative to our own litigation which is now under appeal. As I indicated before, that is likely to be heard by the a Pellate court in California around midyear next year over the years we have posted reserves of paid amounts roughly I think up to a total of reserves in payments of some 47 million. And we think therefore that all the costs attendant to that litigation and the title business are behind us. Based on you know, all the best information we have.

Okay. Sorry. You right. I had the two issues confused. The title and -- and then also, can you remind us what you were saying in general liability had a particularly poor quarter, was there any particular area that suffered there?

No, I think I addressed it by saying we had a couple of claims that went south that were surprised and as a matter of fact, one item in particular that I'm familiar with, you know, that we are going to be appealing. But we thought the better part was to put up some money for something where we could. You know, what you get reversals in court, you know, reality sets in a little better and I think that is what you are seeing there. So it is a blip supposed to the beginning of a new trend.

And it was across a couple completely unrelated areas?

Yes, a couple of claims.

Okay. Thank you.

Thank you. Your question come from Bill Lambel from Old Republic.

Very good. Super quarter. You guys are doing good work.

So far so good. Could always be better, Bill. As Greg says instead of drawing by 17% we could be growing at 25%.

No. You doing great. But could you just give us a sort of idea of what is going on with Fannie Mae in the markets.

In terms of --

A lot is going on with them.

Trying to encroach further into the market, trying to out-compete the competitors. Well, I think everything has been quiet on that front so far. You know, we don't -- both as a company and industry, we don't let our guard down. But I think Fannie in particular has had its own issues to deal with, a and it has left us alone so far.

Okay. I just noticed that the revenues were flat and I just wondered what chunk of the market they go after next.

Um-hmm.

Anything with relative to mortgage guaranty insurance?

With respect to Fannie Mae?

No, the mortgage guaranty company.

I'm sorry, I'm not with you, Bill.

Well, one of the companies in the mortgage guaranty business is Mortgage Guaranty, right?

Yes.

I'm wondering if there is anything relative to you competitive in the market to them.

Well the only thing we are aware of is what is published by them and as I understand it, they have got a filing out there with the commission, the SEC to the effect that sometimes next year they expect to not be a player relative to some parts of their reinsurance to cap business. So superficially that would indicate that they don't want to seat it as much as they have been seating. So then I think you can reach your own conclusions as to what that could portend for them or the rest of the industry.

Right. Thank you.

Yes, sir.

As a reminder if you have a question or comment, please press 1 followed by 4 on your touch tone phones at this time. We have a follow-up question coming from Nancy from McDonald investments.

I just wanted to clarify you indicated the delinquency rate was 293 for quarter, and if I am looking at my records correctly you were at 267 at the June quarter.

264.

Okay, 264. So based on what you have been looking out for the year is 293 in the range where you thought it would have come in and as we look out, the most important question for the rest of the year going forward you expect that to be ticking up based on what we have seen happen so far?

Well, again, Nancy, going back to the beginning of the year when we were looking at 2.84% being the delinquency rate at year-end 2001 and as I said before and I know I have said on the other occasions, we went into 2002 thinking that the delinquency rate would be higher than 284 and it was in fact lower in the first two quarters of this year, namely at 257 in 1 Q and 267 in 2 Q so this is the first time in 293. So from what it is worth from a judgmental standpoint, 293 is not significantly different from 284 so if it went to 3% or 3.10% that would probably put us where we thought we would be any way.

So more unusual that it was as low as it was for the June quarter than it is now?

You got it.

And just back to Greg's issue, the issue he raised before. As we are thinking about the growth in your general insurance premiums going forward, we should concentrate more on earned numbers as opposed to the written, is that a fair statement?

That has always been the case with Old Republic, right.

And then the $50 million of business that you mentioned in the first half of the year, is there anything in the third quarter that -- of significance that you non-renewed?

No.

Okay, thank you.

Yes.

As a reminder, for any further questions or comments please press 1 followed by 4 on your touch tone phones at this time. There appears to be no further questions or comments at this time.

Okay. Well, I don't have any further comments. Again, I appreciate everyone tuning in so to speak and I hope we have addressed your questions in reasonable fashion, and therefore look forward to the next opportunity to visit with you all. So on that basis, I bid you good afternoon.

Good afternoon, ladies and gentlemen. This does conclude this morning -- this afternoon's conference. You may disconnect your lines at this time and have a wonderful day.