Old Republic International Corp (ORI) 2003 Q2 法說會逐字稿

Good afternoon, and welcome to the Old Republic International second quarter 2003 earnings call. At this time, all parties have been placed on a listen only modes, and the floor will be open for your question and comments following the presentation. It's now my pleasure to turn this call to your host Ms. Leslie Loyette from FRB.

Thank you for joining us to discuss second quarter 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 receive a copy you may access it at www.oldrepublic.com or you may call us at 312-640-6688 please be advised that at that call may involve forward-looking statements as discussed on the press release. Risks associated can be found in the latest SEC filings. Additionally, we wanted to let people know that the information statements made during this call are made as of the date of this call. Listeners to replay should understand that the passage of time by itself will diminish the quality of the statement. Also, the content of this call is the property of the company and replay can only be done with the consent of Old Republic International. With us is Al Zucaro, CEO. We'll start with brief remarks. Then we will open up for questions. Al, if you are all set.

Okay, thank you. And good afternoon to everyone. As always, we appreciate your joining us on this quarterly update on our company's business. I think that as we look at it from a management standpoint, I think there can be very little disagreement that our results for the first half of this year have continued to support the validity of the insurance coverage diversification and the industry focus strategy we followed for many years now. The anticipated slowdown in profit growth of our mortgage guaranty segment, which, as you know, has been our biggest single profit center for a couple, three years, that slowdown was more than offset by additional growth in our title insurance line, and continued improvement in the performance of our general insurance segment. Again, from our standpoint, these are truly among the best of times for the totality of our business. I think our press release, if I may say so, does a decent job of highlighting the key elements that are contributing to the results we're posting, and as we do each quarter, we'll take a few minutes now to embroider, if you will, on those particular elements.

In our largest business of general insurance, the top line is being driven by continued growth of premiums for most of the coverage, we underwrite. In most instances, the rise in premium rates that began in earnest in late 1999, early 2000, has become [attenuated] you waited, if you will, so that a significant portion of premium growth is now coming from a combination of greater market penetration, greater account retention rates, and some growth in the sales and employment figures on which our insured's premiums are based. Speaking of retention rates, some of those have followed old republic for a number of years may recall that one time early in the late, I should say, in the 1990s, are our retention rates in let's say our trucking business, had gone down to the 50% level.

Today they are well up in the 80s, you know, which is more typical of our experience. So there's been a sea change in our retention rates by virtue of the hard market in which we are still involved in general insurance. And I might say that with the exception of our General Aviation and our errors and omissions as well as directors and officers liability coverages, which are still as a group of coverages, experiencing rate increases in the 15% or even better range, most of our other coverages that are now commanding pricing improvements in the 5% to 8% area. So to the extent, as is the case now that you see our premium growth at the levels at which it is, again, as I say, that's very much indicative of both new business, greater penetration of certain markets, greater retention of accounts, as well as some growth in those accounts.

Speaking of our business in terms of its cost of goods sold or our loss ratio, as we call it, in our general insurance area, most of the coverages we underwrite are responding very nicely to the cumulative rate, as well as risk selection enhancements that have taken place in the past three years or so. The overall loss ratio has dropped on a fairly consistent basis each quarter, between 1999 and to date, and, again, if you look at our statistics, it was at a high of about 83 and a half percent. In 1999, and as I say, it's gradually dropped to the 69.1% that you see in this year's first half. And this has occurred, again, during a period when our net premiums earned in this business between 1999 to date has grown by some 60%.

Except for the worker's comp -- compensation line, which we've alluded to in several of the past conference calls, as well as our press releases and reports, and except for that line which has been in a difficult spot for the past four years, at least with respect to to our traditional risk transfer worker's comp as well as some inactive or previously cancelled pieces of business, most of our general insurance coverages are posting very acceptable loss ratios. As you see in the stats that are a part of this morning's press release, the paid loss ratio also dropped in both the second quarter and the first half of this year. You might note that the spread between the incurred loss ratio and the paid loss ratio is currently about 15 percentage points in the first half of this year compared to a little more than 11 points for all of 2002. In dollar terms, paid losses have been relatively flat this year compared to last year, so that the increase in the incurred losses stems almost exclusively from reserve additions.

And on that score, I'm, again, happy to note that prior years reserves are still trending favorably for old republic in our general insurance business, as well as our other two major segments of mortgage guaranty and title insurance, and therefore, that fact is, in fact, precluding or the imposition of a penalty, if you will, on current year results. From production and operating expense standpoints in general insurance, the expense ratio, as you see, dipped below 25% this year. We haven't had this low a ratio since the early 1990s, and I think it pretty much reflects our ability to leverage our intrastruture costs to advantage in a rising volume environment that we've been experiencing for the past two or three years. Early on this year, we believe that 2003 general insurance underwriting results could come in within a range of 96% to 98% from a composite ratio standpoint, and looking at it on the strength of what we've been able to accomplish in the first half of this year, namely a composite ratio of some 94%, we feel reasonably confident that now that a 94% to 96% range can be probably a more likely outcome for 2003 in its totality.

As we said many times over the last three years in particular, a higher level of underwriting profitability as we are currently experiencing at Old Republic is an absolute necessity since we're not getting and based on everything we see, we're not likely to get any time soon any relief, any help from the investment line of the income statement. As you can see, the contribution from investment income has grown by just 2% this year, and this, in the face of an invested asset base which has continued to grow on the strength of very ample operating cash flow.

The downtrend in yields that are available on quality paper, which is what we try to limit ourselves to, continues to negate the full benefits of the greater asset base that we have. So, in total, general insurance book looks very good right now, and as I say, I think the much better underwriting results pretty much in the bag for the rest of this year. Turning to our mortgage guarantee business which as I said has for the past 2 or 3 years represented a little more than 50% of our bottom line, we did experience in this past quarter some slippage in pretax income. As you see from the numbers we've published, pretax operating income dropped by a little more than 2% and that was mostly the result of our higher claim ratio.

Top linewise, this last quarter basically mimicked the results that we published for the first three months of the year, with earned premium growth, as you see, exceeding about 8%. Other income, which, as you may know and recall, represents in our case mostly the fees we received for providing contract underwriting services, have been growing very nicely to offset in a nice way the costs that we have of providing those services to our customers. In combination with premiums and fees, you can do the addition there as well as I can, the combination of premium fees an mortgage guaranty was up 13% or so in the quarter, and a little more than 12% for the first half of this year. So those are good results in their totality in light of the Mortgage guarantee market we're in.

While premium growth of 8% or so in this segment does not seem to be a lot, it's quite significant, I think, when you consider that persistency in our business has dropped to be low 50% for the first time, the first time ever during the 30 years that we've been in the MI business. And this low persistency factor reflects the substantial impact, as it has for the last couple of years or so, a significant impact that high levels of refinancing activity have had on our inventory of insured mortgages. At this point in time, it seems that refinance activity has not yet run its course, and therefore, we can expect some further pressure on that insured loan inventory of ours. Again, as you see in the stats, the net risk in force statistics show that we're holding our own, and I might note that we are keeping, based on the information at our disposal, that we are keeping our market share in the neighborhood of 11%. Investment incomewise in this segment, there is no difference between what's happening here and what I refer to in the general insurance line.

While, again, in mortgage guaranty operating cash flow remains strongly positive, and it is, of course, additive to our invested asset base. The continued downward spiral in investment yields is taking a toll and keeping a lid on further growth of this very important part of our top line. As you can see in the press release, the slight downturn in our results of some 2%, as I mentioned before, comes strictly or substantially all of it comes from higher claims ratio. And the combination of higher paid losses and the greater delinquency rate which led to a larger number of loans falling into reserve demanding status, those two factors were the main drivers of the higher incurred loss costs that we posted for the quarter. Each of these elements, paid loss, delinquency rate and incurred losses have been, if you go back, have been on a fairly steady up trend since March of last year.

For instance, the delinquency rates have moved gradually from 2.84% at year end 2001, to 3.43% at the end of last year, and now to 3.5% at mid-year, 2003. And the same time intervals, the paid loss ratio has gone from 14.7% to 18.4% and now to 20.5% in the quarter just ended. I think that these trends are basically reflective, if you will, of the lack of job growth that has marked the latest recession of our [--] of the U.S. economy, as well as the economy's very slow and tentative pullout from that recession. And while these loss costs have been inching up, on the other hand, our recurring costs of producing business and managing the day-to-day operations of the company, have been trending down fairly consistently in the past 18 months.

In both this last quarter, as well as the first half of this year, the mortgage guaranty expense ratio fell below 26% for the first time in a long time. You would have to go back to the early 90s to see expense ratios of below this 26% mark. We've been pursuing many opportunities to streamline our underwriting processes and get better mileage out of our contract underwriting operations and that's having a beneficial effect on the expense side of the income statement. Well, as the saying goes, a quarter does not a year make, still, we expect that refinance activity will continue at a high level for the foreseeable future and that's going to continue to temper the growth in our premium revenues as well as our inventory of insured mortgages.

In a similar vein, though, our expectations of some continued upward pressure on the delinquency ratio until such time as the employment picture, again regains some greater vitality than they've had, that those factors should keep claim ratios at somewhat higher levels than they've been in recent times. But in this last regard, I think, again, as I indicated for our general insurance business, in this regard, I think our claim reserve position in mortgage guaranty insurance remains very strong, and it is strong because of the conservative bent to the assumptions we use relative to such factors as cure rates for loans and various stages of default, as well as the assumptions we make as to average ultimate costs of individual claims.

So, again, we -- we've got a very sturdy reserve position in the mortgage guaranty business, and while -- and that's going to help [attenuating], again, the growth an the claims ratio, which we think is going to be there. Our title business continued to be the star performer among our three major segments. It contributed the highest percentage ever of our company's pretax earnings in this last quarter, this last quarter, I should say, makes it the tenth consecutive quarterly period of a rise in earnings for this part of our business. The key statistics that are included in the press release, I think, go a long way toward explaining the riches we're gaining in this segment. Direct orders, as you see, direct orders that were opened were up nearly 72% year over year in this second quarter of this year, and in a similar fashion, these direct orders were up 57% for the first half of this year visa vie the same period of last year.

Year to date,the equivalent percentages were 62 and 41% for opened and closed orders. And while our claim ratio has continued, it's a very moderate uptrend, and we've been expecting it for a while. You may recall those of you that follow our company, that we've suggested that in more normal rate on a go forward basis for our title businesses is probably in the range of 6 to 7% and I think we're headed over that ever so gradually. Nevertheless, the higher less factor this year was more than offset by a continued drop, as you can see, in the expense ratio, so that the composite ratio for this part of our business was still down very nicely quarter over quarter from 91.5% last year to 88.6% in the second quarter of 2003, and it had about what, 150 basis point drop in the first half of this year, relative to the same period of last year.

I think what all of this means is that we're taking full advantage of the current opportunities we have to get our share of the much higher industry wide transaction volume which as is the case for mortgage guaranty insurance, is being driven by, still, a strong housing market and substantial refinance activity like we've never seen before. It also means that we're able here also to leverage our internal costs structure to achieve lower production and operating expenses. All of these positive elements in our title business are combining to produce much operating [--] much higher operating cash flows and these, as is the case in the other parts of our business are add also additive to our invested asset base and in the case of title, did help to produce a moderate increase in investment income for both the quarter as well as the year to date period.

In combination, then, these three biggest segments of our business which account for just about 98 to 97-1/2% or so of our consolidated operating revenues, produced record-breaking quarterly and year to date results, substantially all of this growth came from the underwriting side of the business in as much as I've said, net investment income has been growing very slowly, and in totality, accounted for a little less than 8% of the first half growth in earnings of about $60 million that we have posted. The consolidated expense ratio, which is all of the expenses of all of the segments combined related to the premium revenues and fees of those segments combined, again, was about 47.7% in the first half, versus 47.1% in the same period last year. So it was a touch higher, but the slight increase is due totally and is driven by the much greater contribution of our title business, which, as you know, has a higher expense component than most of the other lines of insurance that we're involved in.

On the other hand, the consolidated claims ratio, the claims of all of our segments related to the premiums of all of those segments combined, was down to 37.9% this year in the first half, and that compares to about 40.4% for the same period of last year. So in this case, the drop in the claim ratio and benefit ratio is being effected mostly by the [--] by roughly what, a 4.2 percentage point drop in the loss ratio of our general insurance book of business. In all other respects, our business reflects a great deal of stability and the changes in our assets, in our liability accounts, and in the shareholders account reflect quite a bit of symmetry, if you will, with what's happening on the operating side of the business.

Our investment stance retains its historical plain vanilla color and is well positioned to benefit from any uptrend in yield that may occur down the pike, and we think that will take place as soon as the economy heats up, which I'm sure it will, one of these days. Based on the results of this first half, I think that our general insurance book of business, has I said before, should pretty much mimic itself in the second half, though I have to, as we always do, throw a little bit of caution in that expectation, in as much as particularly with regard to our truck insurance business, the winter months can lead to greater claim frequency and severity, depending on how severe the winter is. But absent that, we should have a good second half from an underwriting standpoint, as well as production standpoint in the general insurance area.

Mortgage guarantywise, I think that business, as I said before, is likely to experience the higher loss ratio it's had in the last quarter, but the expense comparisons in that business should be more favorable, particularly when you consider that in the third quarter of last year, and much more accentuated in the fourth quarter of last year, we [--] our expenses for those periods were burdened by some litigation related as well as discontinued marketing charges that are not going to repeat themselves this year, so year over year, you're going to see us put together a pretty nice picture from an expense ratio standpoint in our mortgage guaranty standpoint [--] business.

And then as to our title business, I think if you look at the stats on the second quarter's open order statistics, they represent a pretty good leading indicator of revenue trends for at least the third quarter, and when, again, when you consider the fact that these statistics pertain to the portion of the title business that's produced on a direct basis, as opposed to the 55% of the business roughly that's produced on an agency business basis, when you consider that there is a lag, a reporting lag insofar as our agency business is concerned, that these direct open orders for the second quarter should also be reflected in terms of trends, should also reflect themselves in terms of trends, I should say, with regard to our agency business. So, I believe that our third quarter results from a production standpoint for title insurance are pretty much in the bag and should be very good looking and given this lag effect with respect to our agency business, that the fourth quarter should also reflect some very good comparisons to 2002 results.

So, all in all, when you wrap it all together, we feel very good about our prospects for the rest of this year, and are pretty confident that we can post some very nice results for both the second half as well as the year in its totality. As was said at the beginning therefore, following these remarks, which have gone longer than I thought they would, we'll address the questions that some of you may have. Hello?

The floor is open for questions. If you have a question or comment press the numbers 1 followed by 4 on your touchtone fore. If your question has been answered press the pound key to remove yourself from the queue. That's 1 followed by 4 for any questions you may have.

Our first question comes from Bill Laemmel from May Davis group.

Bill, how are you, sir?

These are good times.

They sure are. We're enjoying them.

Now, I am puzzled about the future in one respect.

Uh-huh.

And that is that I'm reading about Orrin hatch and you know nationalizing asbestos claims, and it seems to me that in that is a requirement by the companies in the property and casualties industry that have asbestos related business to make considerable contribution of equity to the fund, and it seems to me it's such a large number that it almost is an extension of the incredible shortage of loss reserving we've already had, and it would seem to me if I was an Old Republic shareholder that the purchasing power of my company's equity to get business would be enormously enhanced. I don't know if I'm saying that right. Do you have any comments in that regard?

Well, as you know, it's pretty fluid situation on the Hill, as they say, but our last [--] our understanding, when they were getting close to, as I recall, 108 billion dollar universal [--] that the arrangement was that the insurance industry, I'm going say, as I recollect, is going to make a $45 billion contribution, and that contribution was going to be allocated to the various insureds, mostly commercial lines and insurers, on the basis of their reserve position at the end of 2002, as I recall. However, that reserve position was arrived at, whether it was high, low, in between, what have you.

And based on that understanding, you know, every company was -- would be able to make a pretty quick calculation of what their likely exposure under that scenario would be. And with respect to Old Republic, given the fact that we don't have huge exposure showers there, even though we do have some reserves there, we came to the conclusion that for all of our companies in our group, that the amount would be some $20 million or so. So it would be a nonevent for us, based often that understanding, at $108 billion global settlement.

If it goes up, and as you know, some senators have been pressing to increase the amount from the $108B to something else, but as I recollect, that number is not more than $30 or $40 billion more, and therefore that would imply, what? About a 40% increase or so. So, again, if you add 40% to that $20 million, and these are all back of the envelope calculations as best we can make them, but in any event, Old Republic has never been one of the key players when it comes to contributing to either environmental losses or asbestos losses, so that any settlement, global settlement in this area should not be a significant event for us. You are correct, therefore, in suggesting that our equity account should not be adversely impacted by that kind of development.

My point is that if everybody else's equity account is severely impacted, and yours isn't, doesn't that put you in a position to significantly increase your [--]

Well, you know, if you have a higher chips at the poker table, you're always better off.

I'm always trying to get the multi pull of the stock up one way or the other and try to use every argument I can.

Al Zucaro Okay.

Okay, thank you.

Our next question comes from Jeffrey Dunn from Keefe Bruyette and Woods.

How are you?

Good, thanks. Couple quick number questions. Can you give us the insurance in force in the MI segment at quarter end, and would you be willing to give us a rougher breakdown of the credit quality of that book?

I don't have our total insurance in force. I have the direct portion of it, and that's a 68.1 billion number. We do, as you know, as you've seen, Jeff, we have been putting out both new insurance written numbers as well as net risk in force numbers, and we think that the net risk in force number for us, as well as our competitors, is a much better indicator of what's happening to our book of business and that also serves, I think, to some degree, to answer in part, at least, your second question as to the quality of the book. As you can see from the stats that we've published, some 93 percent or thereabouts of our book is in the traditional primary side, and we've got just 4% in bulk, and we've got just 3% in other, which in our case represents a pool insurance. I might point out that bulk, in our case, is inclusive of both primary bulk, as well as pool bulk. That's [--] those are the best [--] that's the best information I can give an answer in answer to your question write rite now.

And just a follow-up also on the MI segment, the loss trends we've heard from your competitors, while not as -- while not holding up as well as yours have, show the similar upward trend, and I was wondering if you could talk about a couple of issues that popped up this quarter. One is that cure rates have slipped and the second is that severity is slowly creeping up with higher average loan balances in the newer business.

Uh-huh. Well, with respect to the cure rate issue, Jeff, we continue to believe that the assumptions that we have been making, as well as have continued to make through June, have proven us to have been quite conservative. In fact, our cure rates, and you might make [--] somebody might make the argument that one of the reasons why our loss ratio has been as good as it's been is in part due to the fact that we've been obtaining greater benefits from cures in current years, in current periods, relative to the original estimates that were made. You know, it's not different than making assumptions in the general insurance business relative to your expectations as to salvage and subrogation and to the extent that those recoveries of S & S are greater than assumed, then obviously, your loss costs in current periods benefit.

There is some merit to what you say about the severity issue, although, we don't see that at least right now impacting, you know, the assumption that is we've been making to any serious degree. And then finally, I would suggest to you that by virtue of the fact that we do not -- have not had and continue to not have the same exposure to bulk business, as well as substandard business, that that is one more reason why our loss ratio has been [--] while it's been trending up some, has not been as bad as some as what has been [--] as what we've seen published by the competition.

Okay. Thank you very much.

Yes, sir.

Our next question comes from Benacci from McDonald investments.

Al, just a couple more questions on the MI side. You went through a little bit of this in your commentary. As we look at the delinquency ratios and certainly they have trended up, better than some of your competitors, you said you thought persistency might worsen from here. As you looked at these final results for the quarter, were they much tougher than you had anticipated? I guess that's one.

Persistency?

Yes, persistency and the overall numbers in general in terms of a claims number.

Well, addressing persistency, we've had a steady downward drum beat there for many quarters. I mean, I've got some status in front of me that show that our persistency at the end of the third quarter of 2001 was 70.4%, and I remember clearly thinking at the time that we could not see it go much below that, and here we are at just about a little below 49%. But, again, that's a reflection, obviously, of the refinancing phenomenon which none of us has ever experienced as long as we've been in this business. So is it a little worse than [--] yeah, it's a lot worse than we thought.

And so long as refinance act sift continues, and it looks -- activity continues, and it looks like, particularly given those proxies that we use for the title business of direct open orders, it looks like, you know, it's going to continue for at least the next couple, three months. So I don't think that that's going to change in the third quarter. But as soon as rates turn around, and I think they will, then you are going to see a turnaround in persistency. We think that would be a good thing to happen to the MI business. Not such a good thing for the title business, but a good thing for the MI business. In terms of the loss ratio trends, which I think was your other question.

Uh-huh.

[--] I have clear recollections in past conference calls, as well as some of the dog and pony shows we've had over the years that we have been saying that it would be unrealistic to expect loss ratios in the MI business to stay at the 14% and 13% levels that they were at. It just was not in the cards, particularly since we did start to write some bulk business and it does account for somewhat, 4% or so of our risk in force, but nonetheless, it's more dicey business, so that alone should add to our loss ratio costs. So I think our loss ratios are going to trend, perhaps, minimally, but still uptrend, as opposed to down trend.

As I'm looking at the numbers in the first quarter, then, in comparison to what we have in the second, your claims ratio is up almost five points.

500 basis points.

500 basis points, yes.

That's driven mostly, Nancy by the pay loss ratio.

Right. I guess my question is, if I heard you correctly, I think you indicate, as you just refer to again right now, but in your prepared comments, you anticipate that the claims number will tweak up a bit here, but the expense ratio, you anticipate will level off and improve a little bit; is that correct?

Yeah, just the mere fact, Nancy, that I think the number in the second half of the year was about 20-1/2 million dollars of nonrecurring expense, well, hell, you know, you knock that out of our, you know, relative to the premiums in this business, which, let's say for the first six months of this year were roughly, what, 199 million or thereabouts, and you've got $20 million off, that's a big number, just by itself.

Right.

And then as I say, if you look at the trend of our expense ratio normalized expense ratio, again, excluding these items from the third and fourth quarter of last year, there is a definite downtrend. So I think we're doing a better job in managing our business, a better job in providing our contract underwriting services, a better job in taking advantage of the infrastructure, the systems infrastructure we put in place a number of years ago. I think the combination of all of those is helping reduce our expense ratio. Will the continued downtrend in expenses be enough to offset loss ratio uptrend? I don't know, but every bit helps.

Okay. And just to switch over to general insurance for a second, you indicated what you've been doing with the rates, and what you anticipate going forward. And your workers are [--] I should say more your trucking line, the commercial auto line, are you starting to see any real competition coming back there?

No. But we are, as I said, as a general comment, I said, you know, that most of the rate increases we're getting are 5% to 8% range, and I think that would apply to our trucking operation. The other thing that also applied to both [--] applies to both that trucking operation and our other businesses that, given our experience of the 1990s, when our underwriting results did not look as good as it should have, that we have tended to be a little quicker on the draw, if you will, and have not been keeping pieces of business that you know, we thought we could work with and so forth. We've been more quicker in getting rid of things that don't work, and I point to that as a means of throwing some caution as to our potential growth rate in that, you know, if you get rid of more business then you've got to right that much more new stuff to offset it.

Thanks, very helpful.

Our next question comes from Stephan Petersen, from Corona securities.

Thank, Al, in the same vein as Nancy's question, I wonder if you can give us a little bit more color in what you're seeing in worker's compensation and whether or not rates are getting better there for you or if you are continuing to sort of withdraw there a little bit, and then in addition to that, maybe a bit of color on your risk management business this quarter.

Well, oddly enough, the two points that you are raising are related Stephen. Worker's comp in the traditional sense of traditional risk transfer business still looks very bad to us. We're getting some rate relief, but as some have pointed out and others have pointed out, it's a real slow boat to China trying to get that fixed. You've got to be a very patient person. So, you know, we're not holding our breath for a change any time soon there. On top of that, the involuntary markets are growing and showing worsened results, and we are being very careful about trying to anticipate what those results will be in the future, so that we can book, you know, what appears to be necessary right now, so that we don't have any surprises going down the road. And then thirdly, I would say that most of the growth that we're experiencing in worker's comp today is stemming from alternative market approaches to writing the business, as opposed to the traditional.

As you know or recall, we bought some renewal rights earlier this year, and those [--] we've written quite a bit of business as a result of that. On top of which, again, as I'm sure you know, there has been a retrenchment by some companies from this market. Today, you know, there are many fewer companies, maybe 6 companies really that matter in this alternative market area and that's down from probably more than 15 companies just four, five years ago. So there's been a real shrinkage of market participants in this alternative area, particularly as it impacts on worker's comp, and as a result, we've had greater opportunities and we've taken, I think, are taking full advantage of those opportunities to write more of that business in that fashion as opposed to the traditional risk transfer fashion.

Okay. And then shifting gears to the MI business, again, you guys have been fairly particular about the kinds of bulk transactions that you've participated in.

Yeah.

Over the course of the last couple of quarters, your competition has definitely seemed to have felt a little pain in that market. Has pricing in that arena changed at all? Do you foresee yourselves writing relatively more business throughout the rest of the year than you have the first half of the year and is pricing changing at all? Is that market getting more or less attractive to you, I guess, is the short way to phrase the question.

Well, we have always felt and continue to feel that this is a part of the business, whether it's the pools or this bulk type of business, where the businesses should be marked by a high degree of opportunityism and that means therefore that deals come and go, and that sometimes you're going to hit it right and sometimes you're not going to hit it right, because you don't think that you're getting your price. I don't think because these are all priced, you know, on a deal by deal basis for all intents and purposes, I don't think you can come up with any, you know, overall feel as to what that market looks like. And certainly, when you look, let's say what the happened to us with respect to new insurance written between just the second quarter of last year and first quarter, and the second quarter of this year, you know, it was cut almost by half. You know, that gives you an indication that we were not married to either one of these books of business, that we will, you know, play it by ear on the deal by deal basis. That's the best I can give you.

Okay. Terrific. Thank you very much.

Uh-huh.

Our next question comes from Mike Dion of Sandler O'Neill.

Good afternoon.

Michael how are you.

I'm fine, thank you. My question concerns general insurance, and outside of trucking, which I believe you addressed, if you could just indicate if you are seeing any price-based competition in your other lines of business and how does that compare to, you know, the overall combined ratio and the guidance you've given in terms of decline. Are you getting a sense that your rates are adequate here? If you could just address that, that would be great.

Well, the answer .as to rates is that, yes, except, as I said before, a few minutes ago, Michael, we have tended [--] I think that's a pretty good description of what we've been doing of late [--] we've tended to be a little quicker on the draw and have not had as much patience trying to make things work if they [--] if it looks like they are long shots. And I think that's a big difference in our approach today versus the way we were back in the 1990'd. We tried to be a lot more accommodating, and it turned out we were too accommodating to our chagrin. But that tells you, therefore, that when you move business around, that there is some price elasticity there, that there are others that are willing to take the business at less than what you think is needed.

But with respect to the business we keep, and as I said before, we are keeping today, pretty much across the board, a greater percentage of our total business than we were three years ago, four years ago, when in some cases, as I said, we were down to 45 and 50% retention rates. Today we're in the 80s. You know, we're back in the saddle there. And the fact that we're increasing prices on an average in the range of 5 to 8%, as I said, should be indicative that we think that we are where we should be from a pricing adequacy standpoint.

Okay. Thank you very much.

Our next question comes from Rene Scinto your from Scinto capital.

Good afternoon. I was wondering if you could talk a little bit more about the Kemper transaction and what that might have done in terms of growth for GI year over year.

That business, as you know, Renee was all risk management and that business does not book the same way as traditional business from a volume standpoint. So you don't necessarily see it. A lot of it is high deductible or what we call in the trade matching deductible business where a lot of premium does not get reflected on our books. A lot of it is seeded to captive insurance companies and therefore from a net premium standpoint, we don't see it. I will say this to you with respect to that business, as to the renewal rights of it, that we and I don't have an exact percentage, but we did not renew [--] we did not renew the lions share of that business, which means that we did not renew more than 50% or 50% for that matter.

I will say that it's been additive to our risk management book, but I will also say, as I tried to say before, that market conditions, in particular, the fact that there are fewer realistic players out there for that type of business, has helped us land quite a number of new accounts. And then finally, I will say to you that from a traditional or standard premium standpoint, i.e., if you make-believe that all of this business was written at standard rates and therefore adjust the premium that you are booking, that we have gone from roughly 22% or so of our total P & C business, gross wise now, not net, emanating from risk management to a good 35% plus of our total business, and we've done that in the last couple of years or so. So that gives should give you those round numbers, back of the envelope numbers, should give you and everybody else, a pretty good indication that that has been a fast growing part of our business, but you don't necessarily see it at the top line, because of the way it books.

Thank you. I'll ask the requisite capital management question. Just looking at some of the historical numbers of Old Republic, your debt to equity in the past has ranged up to 15% as compared to the 2 to 3% range that you are in right now. What kind of environment might you see yourselves move up to that kind of debt to [ that type]he can range again, and also, just with regard to overall capital management, you know, by my calculation, you're throwing off like over 100 million free cash flow, a quarter now given the strength in your businesses and also allows to you book premium without increasing your leverage at all. With that in mind, I was just wondering if there might be, you know, a change in view with regard to purchasing stock at, you know, these low values to book as it stands right now.

Insofar as debt growth, we don't have any expectations that our debt load will grow. We think that the capital we have right now is sufficient and appropriate for the amount of business we're putting on our general insurance capital base in particular. With respect to your point about free cash flow per quarter, you, of course, I believe, are looking at our consolidated number, which to a large degree is impacted by the 50% or so of the earnings and cash flow, perhaps, emanating from the mortgage guaranty business. And I have to caution that with respect to mortgage guaranty in particular, cash flow is not very indicative of the availability or the amount of capital that is at risk or not at risk, in as much as you may know that a 50% portion of each year's earned premiums [–] earned premiums [--] not income, but earned premiums has got to be set aside in a tax deferred reserve. Which means that 50% of each year's earned premium, and therefore whatever that means in terms of bottom line for the MI business, is not available.

Okay.

The other issue is with respect to our general insurance business, and there, while we are still after the amount of growth we've had for the last couple of years or so, we are still somewhat redundant capitalwise. We think that because we are a so-called long tail lines of company, that those reserves are going to continue to grow, our claim reserves and eat into that [--] the appearance of that capital adequacy. So, do we have some extra money right now? Do we have more extra money today than we did, let's say, two years ago?

Yeah, but I think some of it is stashed away and can't be touched because of the way we have to account for from a regulatory standpoint in the MI area, and number two, because we think that the money we have in general insurance is going to be sopped up if we continue to grow the book at the rate we've been growing it.

Thank you. I just was asking the question because I think your balance sheet is about the best I've seen.

Oh, I agree with that.

And I'm just wondering, you know, when will the market recognize that?

Yeah. Well, you know, if you look at the annual review that we put together, you know, that blue book, this year, and we've got a 35-year history of what the stock has done from a book value standpoint, and I can assure you, if you do the same exercise from a market value standpoint, it has been a pretty remarkable record, so that if you put things in perspective, even though old republic has historically been a low P, low price to book value ratio type of stock, that our performance has been recognized in the marketplace in a pretty steady fashion, and the shareholders have done pretty well.

I agree. Thank you very much.

Okay.

Our next question comes from Greg Peters from Raymond James.

Good afternoon, Al.

Greg, how are you?

Well, I actually think I have one or two questions that haven't been answered, but I'm struggling to find some, so -- since you've answered most everything, perhaps circle back from a corporate standpoint and remind us what kind of annual operating targets you might have, and clearly this year is going to be a blowout year for the company. So I think many investors are maybe beginning to look towards 2004 and with an eye on 2004, maybe could help us establish what kind of benchmarks the board might be measuring the company's performance on.

Well, that hasn't changed. And as you, in particular, should know, and remember, Greg, our objective still is and we think we have a realistic opportunity to achieve a 13 to 15% post tax return on equity, with the current configuration of our business, and it's [--] and the opportunities for each of those businesses. As we always say, one of the biggest questions with respect to earnings stability and therefore stability of return on equity, when it comes to old republic, is the title insurance business, which as you know, is the most volatile part of that business. So I always have to caution people about that. But other than that, right now, the way things stand, I think we've got a shot at producing those kinds of results.

With some of the prognosticators of the refinancing market looking for a 30 to 40% decline next year, although they probably were looking for 30 to 40% decline this year and that hasn't materialized, do you think the company would still be able to achieve its targeted ROEs in '04, if that sort of outlook in the title group materialized?

Well, I don't think we've done that exercise. Well, I know we've not done that exercise on the anticipation of a 30 or 40 percent in title. Again, you've got the offsetting factor of what happens to the mortgage guaranty business in the event that the title business suffers by virtue of a significant drop in refinance activity? We still believe very strongly that that drop in refinance activity is admittedly a bad thing for the title business, but can be a very good thing for the MI business. And the costs associated with refinance activity and so forth would drop significantly, and that profit margin should improve in that business.

Now, of course, the level of employment, and the, you know, the nature and [vibrancy] of the American economy would all have an impact, of course, but by and large, the way we're seeing the world right now, is that we think that our property and liability business is going to continue to motor away. We think we're in good shape. We think if there are upward changes in interest rates, even though there might be they might be accompanied by a pickup by inflation, that would be a good thing for our property and liability business because we are extremely well positioned to redirect our invested assets to a greater advantage in that business as well as the MI and title business invested asset base.

Fair enough. On the general insurance side, you mentioned probably a couple times comments regarding the fact that pricing in the trucking side had probably come down to a mid-single digit price increase type of range, and I'm curious if you have that same sort of expectation for some of the lines like do you DNO and ENO where you've been getting a little more juice this year?

No, that line, I think the General Aviation line for reasons that should be obvious, okay? One in terms 8 of this whole issue having to do with trust in corporate America and Wall Street, and number two, the issue of the nation's security and its impact on the air travel business of this country, that both those [--] and also the fact that in both cases, incidentally, that just like in the risk management area, there has been a pullback in terms of the number of viable participants in those businesses that those two areas of our business are going to continue to do well for the foreseeable future in terms of their ability to command additional business, both in terms of premium increases, premium rate increases, as well as new accounts. With respect to the rest of our business, I think that it comes down now to getting market share in the right places, getting more market share in the right places because, to use your word, we're not going to get as much juice from the rate side of the business.

And one follow-up to the comments you were making in regard to the workers comp, where you are still reporting, you know, not the best results, we've observed many of the reinsurers, especially the Bermuda guys talking very favor plea about the casualty market. Are your reinsurers participating in the worker's compensation business on a proportional basis or excess basis should we assume they are making money where you are not? How should we be looking at this as it relates to your reinsurance partners on the worker's comp business?

Well, our comp business, other than the captives, other than the participation by the captives, which as you know is typically on a quota share basis within their limits of retention, all of our worker's comp business has been CEDED for years. We have not had quota share business. And we've had very good stability of reinsurance markets, which has always been and their sound reinsurance markets, which has been an indication to us, even though we've been charged some more money at times, that they've been happy with the money that they have been making off of our account. So we don't have an issue with respect to finding satisfied reinsurers in the context of our existing reinsurance program. Where we do have an issue, as we've said many times, is the amount of real capacity that's out there in the worker's comp area. We think it's no more than a couple hundred million dollars worldwide.

Fascinating. [ --] congratulations on the quarter.

Thanks.

Our next question comes from Nancy Ben knack key from Mc Donald Investments

think I should correct that. I think we should pronounce your name properly. It's Benacci.

Appreciate that. Just as you've looked at the company and the performance that we've seen in the numbers and also you've had a record of raising the dividend and we've got a new change in the tax laws here, are you thinking differently about that whole aspect?

Well, as you know, our dividend gets reviewed once a year by the board of directors and that's at its March meeting, and it will be reviewed then in the context of both our earnings expectations and as you know, or you may recall, our dividend rate has been based on a moving average of the past five years net operating earnings. And that approach will not change, and the reason it is that is because, again, we're in a long-term business, and we can't base dividend on just one year.

It's important we've always felt that our dividend rate should be as stable and as reliable as we can possibly make it. That's why we have used that approach. Certainly we're going to be as any other company has to be conscious of the changed landscaping in terms of the changed taxation of dividends and capital gains, and certainly, you and among a number of others, are aware of our feelings about when it comes to [distributing] money to shareholders, about our preference for treating all shareholders the same as opposed to treating certain select shareholders in a particular way way.

Fair enough. Thank you.

Uh-huh.

Our next question comes from John Hannen, of Westrock […]

Al, how are you?

Good, John, and yourself?

And congratulations again on another marvelous quarter. I would just say that your 16.7% for 35 years compares very favorably with the "Wall Street Journal" yesterday talking about AIG returning 17% a year since 1969.

If you do it on a market base circumstances and we've been tempted to send out that information because after we saw what those numbers looked like on the book basis, we said what would it look like on the market base circumstances and we did it, and the average is 20.6% for the same 35-year period.

Wow!

That's pretty good.

Not bad. Just one question, on the mortgage business, the size of the book on the new business being written, has it gone up a great deal?

Aisles, John, would you repeat that?

The size in the mortgage insurance business, the size of the book, you know, is it changing, you know? It was like 125,000 or $135,000 area?

You mean the size of the average loan?

Yeah, the average loan.

No, no, it's pretty much in the same area. That has not changed for us.

I think that people when they talk about the so-called housing bubble [--]

They are focused on the higher prices.

Exactly. We're not talking about $150,000 houses here.

Right.

Al, congratulations again, we say that every quarter.

Well, thank you. Hope we cannery pet it.

I'm sure you will.

At this time I'll turn the floor back over to our speakers for any further comments.

Al, you can go ahead with any closing comments.

I don't have any others. Other than, again, repeat that we're very appreciative of your interest in joining us in this quarterly review process, and hopefully, we can keep reporting good results that will be pleasing to all of our shareholders.

Thank you for joining today's Old Republic International conference call. You may disconnect your lines and have a wonderful day.