Old Republic International Corp (ORI) 2003 Q3 法說會逐字稿

Good afternoon and welcome to the Old Republic International third quarter 2003 earnings conference call.

At this time, all participants have been placed a listen-only mode and the floor will be open for questions following the presentation.

It is now my pleasure to introduce your host, Leslie Loyette of FRB Weber Shanwick. Ma'am, you may begin.

Thank you.

Good afternoon and thank you all for joining us today for Old Republic's conference call to discuss third quarter results.

This morning, we distributed a copy of the press release and hopefully you've all had a chance to review the results. If there is anyone on line that didn't receive a copy, you may access it at Old Republic's web site at www.oldrepublic.com, or you may call (inaudible) at 312-640-6771 and he will send you a copy immediately.

Before we begin, please be advised that this call may involve forward-looking statements as discussed on the Add 5 page of the press release. Risks associated with the statements can be found in the company's latest SEC filings.

Additionally, we wanted to let people know that the information and statements made during the call are made as of the date of this call. Listeners to this replay should understand that the passage of time by itself will diminish the quality of the statement. Also, the content of the call is the property of the company and any replay or transmission of the call may only be done with the consent of Old Republic International.

On the line with us today from Old Republic is Al Zucaro, Chairman and Chief Executive Officer.

We will start with brief remarks and then open the call up for questions.

Al, if you're all set?

I'm ready. Thank you.

So as we said this morning in the press release, this latest quarter was number 14 for us in terms of the number of consecutive quarters that our earnings have reached successively higher levels. And as we look forward to the completion of this year, we feel, you know, quite good that we can make it 15 in a row when we visit next time, after the completion of our fourth quarter season.

Throughout this year, the big top and bottom line drivers of -- of Old Republic's business have been our general as well as our title insurance segments, as you can readily see.

Pretty much as we had expected early in the year, our MI business has basically taken a breather from a relatively fast-pace of earnings growth that it had been on for some 15 consecutive years, as I remember.

General insurance earnings, starting with that segment, they've continued to benefit mostly from a declining claim ratio. This part of the composite ratio has dropped fairly consistently. If you go back to our historical press releases, they've dropped for some 16 quarters from the time it reached its zenith in the third quarter of 1999, as I recall.

The key elements in these particularly positive trends are the same as those we've cited in prior updates and -- and reports to our shareholders, namely the continued benefit that we're getting from cumulative pricing improvements we've been able to make and put through since we started the process back in early 2000 or thereabouts. As well as the more stringent underwriting standards that we put in place for most of our coverages at about the same time.

And perhaps just as importantly, the continued strength of our reserves for claims and claims expenses which have not caused a penalty against current period earnings. I might note, with quite a bit of pride, that we've had 12 consecutive years of reserve adequacy for our general insurance business. And in our judgment, as we always say, we think that this adds a lot of credibility and reliability to the earnings trends that we've been posting for this segment, for all these years.

From a production and operating expense standpoint, the general insurance composite underwriting ratio showed that feature of it leveling off within a range of 25% to 26% or so. And we think that we can probably maintain this level based on current volume trends, which I suspect should lift our full-year earned premiums to between $1.35 billion and $1.40 billion, assuming that the trends we've been experiencing so far this year continue, and I think they should.

As I say, the better product pricing is a big part of the underwriting success we're now enjoying in our general insurance segment. I might also say that there are relatively few coverages as to which we've not been able to garner, some price improvement on top of the stiffer underwriting standards that we've adhered to.

Worker's compensation, on the other hand, which represents some 20% or so of our net volume, is still not where it should be from a price standpoint. And as a result, is still injecting some red ink into the underwriting account. The same holds true of our much smaller general liability line which accounts for 5% of general insurance volume, but then again, it's not so significant as to cause major damage.

But in both incidences, we continue working at it and continue to be hopeful of -- of ultimately fixing the pricing and the risk selection issues relative to both of these coverages. But otherwise, we couldn't be happier with the underwriting results we're experiencing pretty much across the board in our general insurance business.

In terms of overall pricing trends, and again, excluding the worker's comp and the general liability line that I just mentioned, we think we're pretty much -- we've pretty much reached objectives so that going forward further top line growth for this business is going to be driven substantially by the combination of an improving economy and any market share gain we can engineer.

As you know, a better economy will typically lift sales as well as wages and both of those factors have got a beneficial effect on premium revenues since they tend to be based on one or the other, or sometimes both. And, so that, as we see it, we should benefit from those trends as the U.S. economy continues to improve.

As to market share gains, we think we can get some of that based on the good quality of the financial security we offer. As has been said today, companies that are -- have got a strong capital position as we do and good, stable financial ratings as we do, do benefit from some flight to quality, particularly with respect to quality accounts. And -- and the -- and I think also that the continuing benefits we get from our long-term relationships with both production sources, as well as the much better and more increasingly more positive market perception of Old Republic's facilities, are both going to help us gather some additional market share.

I might point out in particular that with respect to our risk management business, which as you know, involves providing those services to major U.S. corporations, basically Fortune 2000-type companies, that that business, which at one time had accounted for some 40% of our total revenues back in the mid-'80s, had been driven down to about a 20% share of our gross line. And over the last two years, we've jacked it up to almost a 30% portion.

That business, as you know, includes -- is featured by a lower risk profile in as much as quite a bit of the -- of the basic exposures are retained by clients, via either captives or self-insured retention mechanisms of one sort or another, and therefore, has been a great source of underwriting profitability for Old Republic, even though it doesn't throw off much by way of cash flow. But I cite that that growth in that part of our business as a very good indicator of the greater acceptance of the security we offer as well as the service quality and the value of long-term relationships.

Therefore, I would say that our prospects in general insurance still look very good to us. They've not looked as good to us in a long time and if there is a fly in the ointment, so to speak, in this particular segment, as is the case with the other two major segments, it is the (inaudible) of investment income.

I might note that I was just looking at some numbers yesterday that our invested asset base in general insurance has grown by almost 25% in the last three years, and yet net investment income has not budged. Of course, this issue is not unique to Old Republic, it's just a matter of degree and oddly enough, I think it is one of the elements that, in our opinion, as we've said in the past, is likely to constrain competitors from quickly lowering prices and bringing the hard market that we have been enjoying to a halt anytime soon. We still think that this business of general insurance is good way into 2005, before we -- we get any kind of -- of drop in, significant drop in, prices.

I think even though we're not involved in the area, I think property insurance and reinsurance rates seem to be getting softer, but when it comes to the casualty lines which represent the predominant portion of our general insurance exposure, I think those rates remain as solid as they have been.

Turning to our mortgage guaranty business, it has performed pretty much as we thought it would at the beginning of the year. Though we've been admittedly surprised by the extent to which persistency has dropped, including a further drop that you see in the statistics we published this morning, in the last quarter.

We started 2003 thinking that the employment picture would not get much better before the end of this year. So, as a result, we thought that loan default rates would obviously continue to inch up from the lows that -- that they had reached at the beginning of 2002. And that these -- these default rates would, as expected, result in an upward pressure on the loss ratio portion of the combined ratio.

We also thought, I might add, that our expense ratio would be trending down by -- by virtue of a somewhat greater premium volume that we expected and -- and that this would have a positive effect on the -- on the combined ratio. That it would pretty much produce an offset to the expected rise in the -- in the loss ratio. In fact, that one would negate the other. And that as a result, our combined ratio would be -- would remain relatively flat for the year.

Our actual results, however, so far in 2003, show that we were close to our expectations but that the -- the drop in the expense ratio was just not sufficient enough to offset entirely the increase in the claim ratio portion of the composite ratio that you see in the statistics.

As you see in the exhibit, our paid loss ratio has continued to inch up and it's done so pretty steadily since the last quarter of 2001. Offsetting this upward tilt, if you would -- if you will, has been lower, pretty consistently, lower claim severity that has had the effect to -- of (inaudible) the impact of the rise in the default rate.

I might also point out that in the latest quarter, that the paid loss ratio in the third quarter of this year does reflect a speed up in payments relative to a group of claims that we had previously put in reserve and had been on hold as a block pending resolution of some technical issues we had with a settlement. And -- and this particular speed up added about 2.5 percentage points almost to the third quarter 2003 paid loss ratio that we've indicated in the press release of 26.9. So that on a more normalized basis, the third quarter paid loss ratio for MI would be roughly 24.4, 24.5%.

I might also note that the -- in our case, the bulk business has not been a significant contributor to our mortgage guaranty segment's total lost costs since it's still, as we speak, does not represent a significant percentage of our total MI book of business.

But by and large, we're still expecting the incurred claim ratio to inch up some more for perhaps three or four quarters, until the default rate trends reverse themselves on the heels of our expected improvement in the economic picture and -- and the likelihood of some further, and perhaps moderate, appreciation in home values.

In totality, I think our MI business has performed very competitively so far in 2003. Like is the case with other segments, investment income has not been particularly additive to the bottom line, but the investment portfolio in this segment as well as the others remains quite liquid and, in our view, well positioned to be redirected when yields improve and when that occurs, we should get a little bit of a kick in the pants.

As is also the case in our other segments, MI loss reserve levels in -- remain at what we consider to be reasonably strong levels and they should continue to insulate the bottom line from adverse claim development from prior year's claim occurrences that would, in turn, penalize our future earnings. So, we feel in this case, as well as the other areas, as I say, very comfortable with a level of claim reserves and they provide, I think, a -- a very good anchor to -- to future year -- to future periods' earnings.

Our title business has continued to surprise us big time and the surprise has all been on the upside throughout the year. I don't believe anybody in our company, or in the industry at large, ever expected refinancing activity to rise to the levels it did in 2003. Nonetheless, that activity looks like, to us, has probably crested around mid-year, I would say sometime in July and we can get an idea of its turning by looking at the direct order counts figures that appear in the statistical exhibit in this morning's press release.

As you can see there, year-over-year our direct orders opened dropped by about 17% in the third quarter this year, versus the same quarter last year. However, as you can also see, closed direct orders in this last quarter were up a healthy 29% and year-to-date they were up by nearly 37%. So, again, an indication that we've begun to get some slippage in the third quarter.

But nonetheless, it's these high levels of order closings that have -- have driven pretax operating earnings growth of almost 60% in the third quarter of this year and almost 54%, again, as you can see, for the year to date period.

In so far as premium and fee revenue growth in this segment of title insurance, I think it would be even higher than is indicated by the direct order trends I just mentioned and this reflects, of course, as we've noted many times in the past, the fact that the volume from our independent agency business, which currently accounts for about 55% of our total title premium fee volume, lags as it does for most title insurers, it lags by about a quarter's time.

So, that means that the -- the independent agency business that was produced in the third quarter will hit our books in the fourth quarter and that gives us quite a bit of comfort in our -- or assurance, I should say, that the final quarter of the year will still be a strong one for title insurance. In all other respects, the title line has performed very well from an underwriting standpoint.

The loss ratio, as you can see, while it's been inching up pretty steadily in the past couple of years or so, but it still remains very well within our expected ranges of 5 to 7%. And the -- the production and the administrative costs of -- of running our business remain well confined, below revenue growth.

Unlike the other segments, cash flow in title insurance has been a little more additive to the invested asset base and as a result, it's led to a somewhat greater increase in investment income than in the case in the -- in the instance of the two prior segments that I've discussed so far.

And finally, I might just point to a little bit of a hiccup we had in our tiny, very tiny, life and health insurance line, which is very much run in conjunction with our property and liability business. It's basically an appendix to that business, if you will, in that it does provide us with a level of cross marketing opportunities, but nonetheless, it does stand on its own as a segment.

And in this past quarter, we did have, as I say, a hiccup in terms of our term life death claims, which just came out of the blue. But currently, based on what we see and know, we do see a return to -- to a more stable claims pattern in life insurance and -- in the future.

So there you have some additional flavor, if you will, to the report we -- we issued this morning. As I said initially, we're -- we're very optimistic about ending 2003 on a high note with a final quarter of the year, as I said, bringing to 15 the number of consecutive up quarters for Old Republic.

General insurance, I expect, will continue in the same vein it's followed so far this year. Again, the -- the combined ratio this year is coming in significantly below where we -- we thought it would be. Initially we thought it would be ranging between 96 and 98 and there you see, as I say, it is significantly below that and that's -- that's being posted again on the strength of a -- of a continued strong reserve position, which is not throwing any -- any red ink from the past into current results.

I always question -- caution, I should say, that a hard winter can have serious consequences for driving conditions and that that can have a possibly adverse effect on our truck insurance business which represents some 40, 45% of our total property and liability volume. But that's -- at this stage of the game, that's the only negative we see on the horizon.

With respect to MI, again, based what I've just said, it should perform along the same lines that have been exhibited in the first nine months of this year. And title results, again, should begin to reflect some softening in the final quarter, but they should nonetheless still make a sufficiently large contribution to ensure the posting of an all-time high in profitability for that particular segment.

So, when you put it all together, these three major legs of our business model are, again, likely to produce very positive results for both the final quarter and the full year and -- and so we're looking forward to our next visit and talk about our success in achieving that objective.

Having said that, looking at my notes here, that's the extent of it and as was indicated, as is our practice, we'll open up this conference call to any questions you might have.

Thank you.

The floor is now open for questions.

If you do have a question, please press the number 1 followed by 4 on your touch tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. Questions will be taken in the order that they are received and we do ask that while posing your question, you please pick up your handset to ensure proper sound quality.

Once again, if you do have a question at this time, please press the numbers 1 followed by 4 on your touch tone telephone.

And our first question today is coming from Geoffrey Dunn of KDW. Please pose your question.

Hi, Al. How you doing?

Geoff, how are you?

Thanks. A couple of numbers questions to support the fair amount of development we're seeing in the MI space.

Can you give us an idea, of sort of the past four quarters, the severity of loss per loan as well as the past four quarters' (inaudible) rates?

I don't have specific numbers for you, Geoff, on the -- in answer to both of those questions, but I can say categorically to you that we have been witnessing a steady reduction in per-claim severity. And that by virtue of the fact that our reserves have been holding up very well, we attribute the -- that -- that strength to the combination of the reduced or less than expected severity on the one hand and the ability and the experience we've had in -- in having more of the defaulted loans, cure themselves after a period of time and not produce claims. That has been -- you know that pattern, that experience, has been with us now for at least the last couple of years. And it doesn't seem to be diminishing.

Okay.

Two more questions on the MI front.

First, can you give us an idea of your Midwest exposure, following on MGIC's commentary that their higher than average mix was hurting their paid claim development?

And second, given, I think, your commentary was basically the trends this year are shaping up better than expected. Now that you're able to revise those trends, looking out on '04, should we expect the reserve releases, or the favorable development to cease?

In terms of Midwest, Geoff, it is a strong part of our business. I don't think -- I mean I -- I looked at the MGIC report that you speak of, but I suspect that -- no, I know for a fact that our southeastern area, you know, the Carolinas, Georgia, and so forth, historically has been the stronger part of our business. California has been, you know, a much smaller part than the other members of the industry for us.

But the Midwest has certainly been a -- a growing part of our book of business and we have seen it based on our experience so far as a positive development for our company. Both in terms of diversifying and spreading the risks as well as viewing the economies of the Midwest as being, you know, reasonably well-positioned to produce good loss ratios and that's been our experience. We have had good loss ratios in the Midwest.

In so far as what you categorize as loss reserve releases, I think you called it, I'll stand by my comments to the effect that it may be a matter of degree but from where we stand, we have no reason to expect that our estimations -- estimates of cure rates and estimates of severity are still probably on the high side. And as a result, we should still continue to benefit from the strength of our reserves.

Now, again, as I say, it's a matter of degree and I -- I don't have a crystal ball to, you know, to show me or tell me whether it's going to be the same -- to the same extent as we've experienced in the last two or three years in particular.

Okay. Thank you.

Uh-huh.

The next question is coming from Nancy Benacci of McDonald Investments. Please pose your question.

Yeah, to follow up on Geoff's question, in terms of -- did you just indicate that you feel that the cure rates and the severity are still on the high side? So, have the very much conservative view looking out?

That's right.

Okay.

And then back to the comment on the Midwest, you indicated you have greater strength in the Southeast and the Carolinas. Are you seeing any unusual default experience type there at all? Or can you give us a little bit of a flavor of within your book of business, is there any type of economic disruption?

No, I mean as has been the case with our competitors, I think, you know, some states like California, Utah, you know, have been -- have had -- have experienced higher loss ratios, you know, for us. But the rest of the country is in, you know, pretty good shape.

You know, again, I would say you had some problems in Georgia and the Carolinas don't look as good nowadays as they used to, but it's degree. Those are still very profitable states for us.

And -- and on the other hand, California, which was a real problem for us, you know, is not as much of a problem. But those are the states we look at.

The midwest, as I say, has been a good source of profitability for us, both from a -- the standpoint of our general insurance business as well as the mortgage guaranty or the title business. That's pretty uniform.

Okay.

And then on the general insurance side, and I apologize, I missed the first couple of minutes of the call, we've seen some very good pricing and very good underwriting results.

Are, one, you surprised that you've been able to put through the rate increases at these high levels for as long as you have? And do you anticipate that it’s going to start to back off at all here?

Yeah, you missed it.

I said definitely, Nancy, that I think most of the rate increases are done with in that business. So now it comes down to -- to doing a better job in the -- in market share and in particular -- in particular and that's where, you know, we're going to experience -- that's going to be the source of growth for the top line.

Okay.

And then your expense ratio, if I have this correct in my notes, was very -- very good in the general insurance line, versus where it was at the end of the second quarter. Any particular thing happening there?

No, no. That's just a slight -- slight mixes, slight changes I should say, in the mix of various coverages, which have different expense configurations attached to them. But nothing unusual.

We have -- we are benefiting ever so slightly from, you know, from -- at least on the GAAP standpoint, from deferred acquisition costs. As you know, with those predicated on the level of loss ratios on -- I think it's in most cases with us, it's about a three-year moving average. So as our loss ratio improves, there's been a slight improvement in the amount of deferred acquisition costs that can, in fact -- the amount of costs that can, in fact, be deferred. So, GAAP-wise that's benefiting ever so slightly. But it's certainly not a major reason for the -- for the drop in the expense ratio.

And it is what we've seen in this quarter more sustainable going forward?

I think I said, or I meant to say during my comments, that we thought that -- that the expense ratio between 25 and 26 should be -- we should be able to maintain it in that area. I think it was around 25.5, roughly, for the first 25.2% or 25.3% for the first nine months of this year.

Okay.

And then just lastly, on the persistency number, which again, I think you have indicated has been at consistently lower levels.

As the title business starts or the financing business starts to back off, how quickly do you think you will be able to recognize in your numbers persistency looking better and overall composite ratios improving?

Boy, we've been so wrong. You're talking about mortgage guaranty insurance, right?

Yes.

I've been so wrong for so long that I'm gun shy at this point. I mean it's going to improve, how quickly and when, I just don't know.

But it would seem to me that -- from a logical standpoint, that with an improving job picture and improving economy and -- and a stabilizing or still inclining feature to interest rates, that -- that that should start having an effect.

Great. Thanks very much.

That's the best I can tell you.

That's fair.

Thanks, Al.

The next question is coming from Stephan Petersen of Cochran Caronia. Please pose your question.

Good afternoon.

Hi, Stephan.

I just want to drill down a little bit on the question that Nancy brought up and maybe get you to focus just a little bit more on the trucking business specifically.

Can you quantify the rate increases that you're still getting? It sounds as though you're quite happy with the margins there, but I'm curious is -- is it still running double digits?

No, no, no, no. If I infer that, that is not the point at all. That's not the case, Stephan.

As a matter of fact, I thought I said I think we're pretty much done with -- pretty much across the board, which, therefore, would include trucking with respect to rate increases.

Are we going to get rate increases? Yes, we are.

We're going to get them, though, on individual, troubled accounts that we want to keep or that we think we can work with. But by and large I think -- I think in casualty, in the casualty area, rate increases now, where we're still getting them. Such as, for example, in the errors and omissions and directors and offices liability or in the aviation side of the business, are gravitating toward single digits and I -- I think they're about to, you know, to reach -- we're about to reach the end of the line in terms of our ability to -- to raise rates further.

Okay.

And obviously that means that you're fairly comfortable with current loss cost trends?

Oh, absolutely.

Yeah.

Oh, and, okay.

And maybe to follow up a little bit on -- on the mortgage guaranty business, if you might be able to give us a little bit more color on what you're seeing in the bulk market.

My recollection is that maybe on calls in the first and second quarter you -- you tended to sound a little bit more optimistic that deal flow that you liked, seemed to be picking up again and this quarter's comments seem to be a little bit more reserved and I'm wondering if what you're seeing in that particular market and what that might mean going forward?

Well, as we've said repeatedly, Stephan, we're -- we've always been one slow on the uptake. We've always lagged the rest of the market in terms of our participation in bulk insurance and we've always viewed ourselves as being an opportunistic participant in that area.

And if you look at, I think it's the last page of the press release, where we indicate the amount of new insurance written and we break it down between traditional, bulk and other, you'll see that relative to last year in the 3Q, you know, we're less than half of what we wrote in 2002.

And year to date we're about, what, 15% below? And that's, to us, is an indication -- first of all, we feel a lot more comfortable with our ability to price that product. We feel that we've got our arms around good data to enable us to do that and therefore, you know, particularly in light of what's happened with competitors, you know, with respect to their pricing of the product in the past, we've been very gun shy and very conservative in our approach to it.

So, we don't, right now, you know, at least the pricing we've seen has been such that we have not been particularly aggressive in it.

Have -- have -- have -- has pricing in that particular segment trended up or down?

We think it has.

It trended down?

It trended up.

Oh, it has trended up, but still not to the level that you find particularly attractive?

Yep.

As you know, it's a deal-by-deal type of thing and a block-of-business by block-of-business, so, no two-block is the same and we underwrite each block separately. So, by its very nature, by the very nature of that product it's tough to make, you know, to generalize, but by and large I would say what I just said is so.

Okay. Terrific.

Thank you.

Yes, sir.

The next question is coming from Michael Dion of Sandler O'Neal. Sir, please pose your question.

Good afternoon, Al.

Hi, Michael, how are you?

I'm fine. Thank you.

Kind of related to Nancy's question, but looking at the commercial lines business more from the loss ratio side of it. You know, you had indicated earlier this year that you expected the combined income in at, you know, between 96 and 98 and you're obviously much lower than that, 93.5 through the nine months.

Just wondering now, you know, with rates kind of leveling off here, do you expect, you know, much improvement in the combined going into -- into next year? Or do you think it's kind of flat here at the -- at the kind of 93.5 level?

Well, I don't know whether 93.5 is going to continue next year. I do feel comfortable today in saying that we're going beat the 96 to 98 big time in 2002 and I do feel comfortable in suggesting that we don't see any basis for lowering our prices, which means that the quality of the business from a pricing standpoint is going to remain up there.

And I don't see that we have, as I keep saying, a reserve issue developing out there of any significance for our entire book of business, that would – whose outcome would be to penalize underwriting results going forward. So, you take all of those elements into account and I say, well, you know, I think we've got a pretty good chance of staying, you know, below a 96.

Are we going to repeat what we're done so far this year? As I say, you know, I don't know. But the odds are better now based on what we know than they were at the beginning of the year.

Okay.

Thank you.

Fair enough.

As kind much a follow-up, you said for several quarters now that, you know, your -- your big area of concern in commercial lines has been worker's comp.

Yeah.

Maybe you can just take a minute and just discuss if you've seen any deterioration in that line over the last three months or has it generally been stable or, you know...

Yeah, yeah.

Oddly enough, you know, in the last quarter, in the third quarter of this year and even for the year-to-date period, it's been better performing than it was last year.

Our combined ratios may be 10 points lower. Which is a lot of money, you know, for a 20% portion of our book of business.

But nonetheless, the big fear we have in that line is the involuntary market-to-pools. You know, those are beginning to raise their ugly head and, you know, for a book of business which for us amounts to let's say $250-$275 million net. You know, if you get socked with some assessments, you know, a lot of which we can't quantify ahead of time that can have an adverse impact on -- on your overall results. Particularly on the loss ratio side.

So, it's hard to figure, you know, right now as I say, our experience is a lot better than we would have thought it would be.

It is, to some degree, reflecting a couple of things. In our case, the fact that, as I mentioned earlier in this conference call, we have grown the -- the risk management portion of our business to a much greater level than the rest of our business and as you know, or may know, worker's comp is -- is a big part of the risk management area. And, therefore, if you can insulate yourself as you do in risk management, to some degree, that's going to benefit the results in the comp area. And I think to a large degree, that's what we're experiencing, we're getting the benefits now so far this year of that change in the content of our business in terms of fully risk exposed to -- to a reduced exposure.

But, you know, again I'm going to use the same expression, you know, we tend to be gun shy when it comes to comp because we've had so many quick turnarounds in it and adversities over the years that you just don't want on to count it until, you know, it's as rock solid as you can get it.

Great.

Thanks, Al.

Uh-huh.

Your next question is coming from Cheyanne Lim of Smith Barney Asset Management. Please pose your question.

Hello?

Cheyanne Lim, your line is live, do you have a question?

It wasn't me. Sorry.

The next question is coming from John Hannen of Westrock Advisors. Please pose your question.

Hi. How are you?

Good, John. How are you?

All right. Al, certainly we seem to be in the sweet spot of the cycle for general insurance, but even if profit margins, you know, can't get any better or don't get any better, certainly they could stay here for a few more quarters, I would think, right?

That's our feeling, you know, again, I'm not committing to any particular 92, or 93, or 94% combined ratio. But we just don't see any basis in the areas that we play in for any decline in -- in rates any time soon. We see our ability to retain our book of business being better than it's been for a long time.

You know, our retention rates are getting up to the, you know, mid-80s and even a little higher in parts of our P&C business. And so the combination of that, and our ability to maintain our expense ratio at, you know, at reasonable 25, 26% level, is what gives us, you know, the -- the feeling that -- that we're looking at several good quarters in general insurance.

Okay.

And just one thing about housing, you know, which, you know, the bubble that everyone keeps talking about --

Yes.

But, you know, September was the -- the third best month ever for new home sales.

Yes, exactly.

And it is the third consecutive month of record sales for (inaudible) homes.

Absolutely. We have to remember, going back to 2001, I think it was, where interest rates, mortgage rates were at what? Around 8% or thereabouts?

Yeah.

And today, you know, they're still way below there and -- and then with an improving economy, meaning more people keeping their jobs and getting more income out of them, I think we're going to have a good time in the housing area.

I don't think it's, you know, I think what's the negative is the refi area, which has been a particular bonus for the title business. But other than that, I think housing is likely to remain strong.

I like to look at your housing and mortgage on a combined basis.

Sure.

I think, you know, certainly you can't get title right either way, either up or down, but by the same token, persistency at 43, that used to be 83.

Man, there's a lot of upside.

Exactly. Those are our feelings and as I said in answer to an earlier question, I think it was Nancy's question, you know, I just don't know when that turnaround is going to occur but we -- but it has to occur with, you know, with a significant expected reduction in the refi activity. That's bound to have an effect on persistency and mortgage guaranty.

Okay, Al, thank you very much.

You're welcome.

Your next question is a follow up question coming from Nancy Benacci of McDonald Investments. Please pose your question.

Al, not to belabor this issue again --

But you will anyway.

I will. [ Laughter ]

If we just go back to the issue on delinquency, or I should say, the persistency.

If you can control the downturn in title, based on what you've done with expenses and the move towards a greater amount of independent agents, and you get the persistency to become much – at more reasonable levels, shouldn't you have much stronger growth in the MI side as you move out through '04?

Well, I mean, again, you know, logic tells you that as interest rates blew up and the refi activity dies down, or is reduced significantly, that that should have a beneficial effect on mortgage guaranty.

The question is and what we can't get our arms around is how quickly does that happen? And I have a tough time putting a time and place to that question.

Okay. That's fair.

I can't do any better.

That's fair. And then just a couple of cleanup things. Anything on the legal front that's occurred or is expected to have decisions coming forward here?

I think our mortgage guaranty, you know, RESPA situation is either in the process of being finalized as we speak or is just around the corner. And -- and as we expected that's going to settle out very much within the confines of the reserves where you set up -- as you recall, in the fourth quarter, in particular of last year.

So, I think that by the time we visit again, I think that issue will have gone away and what will remain are will be the west coast title litigation which we thought we might be able to settle by spring, early summer of this year, but it doesn't look like, you know, that's going to happen anytime soon. I mean the -- the court system in California, we're told, is as clogged as it's been at any time and it's just tough to move things through.

So we are just going to have to wait and see.

Okay.

Did you give a reserve redundancy number for the general insurance that I missed?

No, no.

We give, as you know, we publish those reserve redundencies once a year when we file our 10K.

We do say, though, as I've said that our reserves have continued to be, you know, positive and have not created a penalty to current year results and -- in any of the segments that we report on.

Great. Thank you.

Uh-huh.

Once again, if you do have a question at this time, please press the numbers 1 followed by 4 on your touch tone telephone.

And our next question today is coming from Geoffrey Dunn of KDW. Sir, please pose your question.

Thanks.

Al, can you give us an update -- some of your competitors on the title side gave an idea of where they are on head count management in the title business against the shift in the cycle and the drop in open orders in August. Is there any kind of indication you can give us of where you are, versus the rest of your competition?

I would say that, you know, we're all fishing in the same pond, Geoff, and I think we all react, you know, basically to the same trends and, therefore, we all tend to react in the same fashion when it comes to hiring and letting go of people. And that's the best answer I can give you.

I can assure you that we're very focused on what's happened and we are reacting throughout the country where -- where we have direct operations. And as you can well imagine, that includes, in particular, our big California operation as well as some parts of Texas and -- and a few offices here and there in the Midwest.

Okay.

Thank you.

Uh-huh.

The next question is coming from Bill Laemmel of Divine Capital Markets. Sir, please pose your question.

Hi, Al.

Hi, Bill. You calling from your new house, huh?

That's right. And, of course, super good news on the report.

Uh-huh.

The only thing I saw that was unusual is when you track the new insurance (inaudible) over the mortgage guaranty part and you get a 40% plus number there.

Uh-huh.

And then by the time you get down to the total, it's 20.

Uh-huh.

And then, of course, on down your earned is 4% and then, of course, your pretax is plus 1%.

Sort of give us the difference between the 40% and the 1%, would you, please?

Bill, I have to apologize, you lost me.

Well, on the last page, page 30.

Okay.

Okay.

You show up at the top there mortgage guaranty, new insurance written.

Okay.

You're at 40% plus.

Okay.

All right? Okay? And then -- but -- then the net, you know, the total, it's about 20% plus.

Where am I 40% plus?

Let's see. Last year in the second quarter you wrote 7.8 and in the quarter September '03 you wrote 11.1. In new insurance written, mortgage guaranty.

Yeah. I wrote 7.8 in new traditional, versus the 11.1 you're saying?

That's what it says here on my sheet, unless someone else wants to correct it --.

I'm sorry, I'm slow. I am beginning to follow you. But the whole issue here is persistency, Bill, right? Our persistency has dropped to such a degree that it eats into, you know, whatever amount of business we write so that our in-force, when you look at the net risk in-force, which is a good proxy for the -- what's happening to the in-force ---

Okay.

It's as flat as a pancake.

Okay.

And then you come -- when you -- and then every -- and the other concerns that have been talked about, persistency, and your thoughts about persistency, versus title and mortgage guaranty, and that's the difference.

Okay. Okay. Yeah.

Sure.

You've gone from, you know, year-over-year, as you see there, from a 62% to a 43% persistency. That's a huge drop.

Uh-huh, yeah.

And it's been, you know, a down, down, down now for, I don't know, 12, 15 quarters.

Okay.

It's just been awful. We've never experienced this kind of drop off in in-force.

But 40% new written, that's a lot of internal power to generate business.

Well, yeah, but a lot of it, again, you know, I wish I could brag fully about it, but a lot of it is due to the refinance activity and that's what's been driving a lot of this --. That's why when you listen to mortgage bankers, for example, it's -- it's hunker-down time because, you know, they've been living off these -- these -- this refinancing activity and now it's drying up big time for them.

Uh-huh. Okay. Right.

And -- but on the other -- well, from what you're saying then is that we should not expect the internal generating power at Old Republic to be 40% for new insurance written as the title calms down?

That's right.

Oh, okay.

That should slow down.

All right.

And the offsetting factor, which is, you know, at the -- at the core of -- of -- of Nancy's two questions --

Right.

So far, is, you know, how quickly does that persistency go back up?

You know, and -- and if -- if whoever's got that answer will know pretty quickly as to what happens to our top line and what happens to growth of insurance in-force.

Now, we know your power isn't 40% plus, right?

No, it isn't.

Okay. Can you give us a guess on what you sort of think it is?

I have no idea.

Okay.

I will say this to you, though, that in the last seven or eight years we have seen our market share, you know, just about double our mortgage guaranty business and that's the thrust of what we're trying to accomplish and that is to pick up market share.

Are you still being pushed around there by Fannie Mae and Freddie Mac or are they out of that?

I would say those two GFCs have, you know, issues of their own to contend with and I don't -- I don't feel that the MI industry has got the same pressure coming from those answers as it was a couple of years ago.

Very good. Thank you very much, Al, now. Good quarter.

Okay.

Your next question is coming from Rene Scinto of Scinto Capital. Please pose your question.

Good afternoon.

Hi.

I was just wondering if you guys could talk a little bit more about what you can expect your ROE to be in the next couple of years? In particular, you know, you've had significant improvement in your ROE over the last three years as you've moved away from a difficult GI market to where we are today.

Uh-huh.

Now, it does appear to be a transition between mortgage guaranty and title insurance in the next year. And I was just wondering what your expectations were --

Well, right now we haven't gone through our budgeting process yet or any -- that will take place later this year, early in 2004.

But right now, we're still in the area of -- of having 13 to 15% return on equity as an objective.

And there's nothing within the foreseeable future in terms of this transition between title and mortgage guaranty that would preclude you from --

Well, right now we're expecting right, wrong or indifferent our general insurance business to -- to keep motoring away. We're expecting our --

No pun intended, right?

Yeah. We're expecting our mortgage guaranty business to turn itself around as soon as we've been saying ad infinitum so far this afternoon, as -- as -- as lapsation and persistency of the business improves and we are expecting our -- our -- our title business to have a softer landing than it would have otherwise had, were it not for the fact that given -- I should say based on the fact that over the last eight, nine years or so in particular, we've had a huge effort in that business to change its mix from a 45, 55% percent agency direct to a reversal of that. Which means, therefore, then in a downturn in a market, as we've expecting, even though we don't know to the full extent -- the degree of the downturn, we're not going to have to lop off as much expense we would have otherwise had to lop off.

Thanks.

Just in terms of your GI, your top line growth continues to surprise on the upside, it looked like another 18% quarter.

General insurance, did you say?

Yes.

Uh-huh.

You know, given your ability to, you know, continue to gain market share in the casualty lines that you're in, is that 15%-plus number a good number for the future.

As to whether we can achieve that?

Yes.

I don't know. It's been staying at a reasonably high level in the last year and a half or so. Some people have suggested, as a matter of fact, that they would have expected us to grow faster than that.

But I would say -- I would say that 15% is not a bad number to -- to look forward to. Although as I say, we're still up in the air and that we have not even started our budgeting process.

I appreciate the time.

Thanks.

Yes, sir.

There are no more questions at this point.

I will turn it back to you, Al, for any closing comments.

Well, I have no other comments.

I appreciate the interest evidenced by all of your questions and, as always, enjoyed our visit and look forward, as I say, to our next time together following the end of the fourth quarter.

Thank you for your participation.

That does conclude this afternoon's teleconference. You may disconnect your lines at this time and have a great day.

Thank you.