Old Republic International Corp (ORI) 2003 Q4 法說會逐字稿

Good afternoon, lame. And welcome to the Old Republic international fourth quarter 2003 earnings call. At this time all participants have been placed on a listen-only mode and the floor will be open for questions following today's presentation. At this time, it is my pleasure to turn the floor over to your host, Leslie Loyette you may begin.

Thank you, good afternoon and thank you again for joining us today for Old Republic's conference call to discuss fourth quarter and year end results. This morning we distributed a copy of the press release. If there is anyone on line who did not receive a copy, you may access it at Old Republic's web site at www.OldRepublic.com or you can call us at 312-640-6771 and he will send you a copy. Before we begin, be advised this call may involve forward-looking statements as discussed on the 6 page of the press release. Risks associated with these statements can be found in the company's latest SEC filings. Additionally we want to let people know the information and statements made during the call are made as of the date of this call. Listeners to any replay should understand the passage will diminish the quality of the statements and also the content of the call is the property of the company and any replay or transition of the call may be done only with the consent of Old Republic. On the line with us today from Old Republic is Al Zucaro:o chairman and Chief Executive Officer. Will start with brief remarks and open the -- and open the call up for questions. If you're set, Al.

: I am. Thank you. And good afternoon to everybody. Looking at some statistics here and for those of you who like to keep score on a quarterly basis, it's noteworthy that this last quarter of ours was the 15th consecutive quarter progressively higher bottom lines. And for those of you who are reasonably familiar with our business, this last quarter's results should not really come as a surprise, and are pretty much in line with the expectations we had voiced through each of the quarters of 2003. And as expected, and as you can see, our general insurance business continued to provide the greatest upward thrust to our bottom line. Title while only a quarter over quarter basis, was lower in this final quarter of this year, it's still benefited very much from the strong order pipeline we had at the beginning of the fourth quarter. And our mortgage guarantee line did produce a more moderate bottom line growth, particularly as we noted in the press release on the strength of a reduced expense load. Which when compared to that which applied to the fourth quarter of 2002, which was loaded with some extraneous items, made the quarter look a lot better. Looking at the pieces of our business individually, I think that the most noteworthy performance in our general insurance business truly relates to the premium line and the investment income line and most importantly, the underwriting ratio.

As you can see, earned premiums in 4 Q '03 through by just about 13%, which was obviously a much slower pace of growth than what we had achieved in the prior seven or eight quarters. Through the third quarter of 2003, as I look at these -- some stats here, the average quarter over quarter growth rate in general insurance premiums earned has been about 18%. So, 13% does show a significant drop. I think that this -- the latest quarter's slower premium production shows that it's becoming, obviously, more difficult to grow a property and liability book of business at the higher prices that have been achieved during the past three years or so. The vast majority of the rates with the possible exception, I would say, work is compensation -- workers' compensation which still has some way to go to fix itself, at least in some of the states. But most of these rates have probably reached optimum levels, so that growth now, at least in our case, has to come from greater market share expansion, as well as a -- as well as the effect, the positive effect, that a resurrecting economy should have on the need to insure greater values, as well as greater exposures, which are attendant to a growing or faster growing economy.

I'm not saying, by any means, that we are experiencing rate declines in the long tail lines in which we are typically involved, but I am suggesting that upward price movements have become much more difficult to achieve and I think we are looking more at a stable type situation, from that standpoint. We're still optimistic, though, that the hard market and thus the stability that I just referred to should continue well into 2005, for three basic reasons that most, if not all, of you are familiar with. And that is that the balance sheets of a large number of commercial insurance carriers are still maimed and can only be repaired with the strong pricing and the accompanying strong underwriting income that's necessary, since investment income is not likely to help very much any time soon.

On top of that, reinsurance markets, at least in our view, and I think that view is shared by many, are likewise maimed pretty big time. All we have to do is look at the financial rating trends that apply to the vast majority of reinsurers, to show you that those markets are struggling to get back and to the same level of capacity and financial strength that they exhibited two or three years ago. And therefore, those pressures are leading those markets to instill more discipline than they have for a long time on the primary companies. And finally, as I say, the fact that investment income, even though most companies such as ourselves, are experiencing significant levels of cash flow input to the invested asset portion of the balance sheet, that the yield situation is such that unless you dip into lower quality investments, which have their own obvious detriments in terms of the potential for write-offs or what have you, that it's very difficult to grow that investment income line.

With this -- with our view of the commercial insurance landscape, if you will, we're still sticking to the objective we've had for quite a while now, which is to basically double the size of our property and liability business in the five-year period from the en of 2000 through 2005.

And through the end of 2003, we've got just about 61% of the way there, and I'm still optimistic that this expectation of ours for a continued hard market and a reviving economy will enable us to go the rest of the way by the end of 2005. We've got good pricing still in place, as I say. And a strong reserve position, which at least in the case has enabled us not to have to eat crow for past sins so it's not really surprising that our underwriting ratios through year end 2003 continue to look as good as they are.

Our production, and other expenses, as you can see from the summary data, we've put in the press release, are saying within, what, 25, 26%. Our paid loss ratio is basically staying in the mid 50s. It's been hanging there for a couple, three years now. And the incurred loss ratio is averaging about 68 points, and that's compared, as you can see, to about 73 points that we booked in 2002. So, this differential is a very positive different shall, and accounts for all of the improvement in the composite ratio that we ended up registering for 2003. As some of you follow us may recall, we started the year with the expectation that we had a good chance of booking a combined in the range of 96 to 98%, and of course we've posted much better results and again, as I say, that's wholly due to the fact that we've not had to post reserve deficiencies for prior years' results so that the full beneficial effect of the pricing improvements we've enjoyed these past few years is falling pretty much down to the bottom line. Looking at our mortgage guaranty line, it continued to perform pretty well as we expected for the entire year.

In the final quarter of last year, we did experience a blip in our ratio, and it was totally due to higher frequency of loss emergence that caused it, and as a result, as you can see loss ratio grew to 32 points. And that's really the highest level we've reached in any one quarter for the past six years, since 1998. Again, as we've said, we have not expected that those very low loss ratios that we experienced through 2002 were going to stay there permanently. Free market just doesn't operate that way. On top of which we've had some economic difficulties and that alone you would expect should ultimately have a bearing on the loss ratio of mortgage guaranty insurance.

For reasons that we don't still, after all these years, still don't quite fully understand, we do have a fairly consistent pattern of higher fourth quarter loss reports, which tends to reverse itself in the first quarter of the following year, pretty religiously. But still, as I say, there's no question that paid loss trends have been accelerating in this line, and in fact have been the main driver of the incurred loss costs we've posted throughout 2003. Fortunately, claims severity has not been an issue. In fact, our assumptions relative to this factor have proven to be fairly consistently on the high side, so that the higher paid loss trends have not required a concurrent rise in reserve postings. I might also note that our MI loss costs are still, in Old Republic's case, affected primarily by what is -- what we usually refer to as our traditional primary book of business. In our case, again, for those of you who follow us, in our case, you've seen that bulk and other substandard or nontraditional blocks of mortgage guaranty insurance have not been material parts of the overall book.

You can see from the statistics that are attached to the -- to this morning's press release in terms of the amount of risk in force that those books of business do not account for more than 10% or so of the total. So that while the loss content of this nontraditional MI business is higher, it is not sufficiently greater in its impact on the loss trends, the overall loss trends that we're exhibiting. So, in a nutshell, while the loan default rate has continued to rise fairly consistently through year end 2003, it is these lower severity factors that I'm referring to that are serving to keep the lid on any significant accretion of the loss reserve account. So, as was the case throughout the quarters of 2003, our incurred losses have been driven for these various reasons by paid losses as opposed to any need to increase reserves materially. We feel very comfortable by -- with the reserve levels in that segment, as well as the reserve level in our other segments. We're truly, truly blessed with reserves that typically produce redundancies as opposed to deficiencies. And as you know, that's a great position to be in in this business, if you don't have to constantly look over your shoulder and worry about where the next bomb is going to burst.

On the brighter side of things, in MI, I might mention that, again, as you saw from the statistics that we published, the persistency trend finally seems to have reversed itself favorably, for the first time in many quarters in the fourth quarter of last year. And this is not rocket science. We think that this change is probably reflective of the drop in the refinancing activities since mid year 2003, and that's beginning to reduce the in force turnover rates which in the face of forever rising new insurance written, have caused our in force to basically mark time for the past couple of years or so. I believe that in the press release we also pretty much addressed the reasons for the year over year, as well as quarter over quarter trends in the mortgage guaranty business production and general expense side of the income statement, and suffice to say that the reductions in contract underwriting services in particular, which have typically gone hand in hand with reduced refinancing activity, are having a beneficial effect on our MI expense ratio.

Going forward, in a market that we expect is going to be much less affected by refinance activity, I for one wouldn't be surprised to see the mortgage guaranty segment ratio, expense ratio settle down to, say, within a 25 to 26% range on apples to apples basis. Let's see.

Turning to our title business, the fourth quarter drop in pretax earnings that you see in the press release is resulting mostly from, or to a large degree from the mix of our business that was booked in 4Q '03 versus 4Q '02. I think it was also affected by steadily rising claim cost ratio, which we've been experiencing and again have been anticipating for some time. And to a smaller degree, it's also affected by a slower than expected lopping off of general operating expenses in the face of the drop and order counts in our direct book of business as, again, you see in the stats appended to the press release. Our mix of business, as you may recall, in the title business, has been gravitating, and this has been intentional on our part for a good ten years now, toward independent agency production sources, and in 2003 the agency business accounted for about 60% of our volume, versus 55 to 56% or thereabouts in 2002.

In the last ten, 12 years, that mix has gone from a 45% agency to 55% direct, ten, 12 years ago, as I say, to currently last year now 60%. So there's been a sea change in those production sources. And that has an impact on both the level of commission costs that we incur, as well as the timing or the booking of premium reef news. As you may recall from your review of our -- of our reports, there is typically a 60 to 90-day lag in agency production of title insurance products, and as a result therefore the business we booked in 4Q '03 really was business that was written in 3Q '03 and the early part of the fourth quarter which still was benefitting from the residual effects of the refinancing activity that had been taking place and which started to die down, as you know, sometimes around July, June or July, of 2003.

So, it is primarily that difference in mix of business input to our top line that is creating the disparities you see there in the expense ratio in particular, in the fourth quarter of 2003 for our title business. As to the loss ratio portion, we've been saying again for some time that it would likely rise gradually to as much as 7% and this is in fact happening. Again, in this case, as is the case with the mortgage guaranty business, we had been experiencing very, very low and gradually dropping loss ratios in the title business, and in 2000 and 2001, and particularly they average about 3.8% and we've known for a long time that that wasn't going to be the case for long, and that ultimately order finds its level and this is happening here, and we think that 7% or thereabouts is probably where this loss ratio ends up in the next 12, 18 months or so.

From an overly consolidated standpoint, when you take these three major segments into account, our profit margins are holding up very nicely. As you can -- if you can do the calculations yourself, but you can see that for all of 2003, they amounted to about a 20.2% or so, and that's compared to 19.9% for all of 2002. And in the fourth quarter of 2003, margins, pretax margins, this is -- we're about 18.7% versus 17.8% in 2002. So, again, while we've got all these ups and downs in these three major segments, again the benefits of the marriage of these three segments in the consolidated picture is such that it is still through year end 2003 producing some very nifty results for us. Our tax rate, you may have noticed, has gone up a little bit, and that's a reflection of the fact that a higher proportion of our pretax earnings is coming through the fully taxed underwriting account, again investment income, as you can see, is not growing very fast. The amount of investment income that's coming from the tax sheltered securities principally are municipal and state bonds, is not growing very fast, so that all of the growth and earnings again is coming primarily from underwriting, which, for all of these segments, is taxed at full boat rates of 35%.

Again, as you see in the press release, operating cash flow mushroomed to three quarters of a billion dollars in 2003 and the trends in that cash flow line is pretty much mirrors the trend in the pattern of revenue and bottom line growth for Old Republic. So, in light of all this, 2004 should turn out to still be a reasonably good year in its totality. I think, however, it's fair to say that the performance comparisons we're likely to make in the first couple of quarters of this year and perhaps even the third quarter, are going to be shall we say somewhat inhibited or challenged by reduced contributions from our title segment in particular. And this depend should not come as a surprise since the refinance activity that's fueled the much faster growth of this particular line for at least the past two years, through 2003, has abated significantly, and it's not likely to reemerge, given the general consensus out there that there's going to continue to be upward pressure on interest rates and only the timing currently is in question, though, as you know most observers think that the second half, as we come closer to -- of the year -- as we come closer to election day, we might see some upward pressure. So that does not portend well for any resumption any time soon of refinance activity. However, all the indications are that both new and used housing activity should continue at reasonably strong levels, so that that should lead to still to some pretty respectable title results for all of 2004.

Our expectation also is that the reduction on the other hand, of refinancing activities, should lead to a steady increase in mortgage guaranty persistency rates, since less of the loans will find their way out of the door, and therefore the size of the in force book of business should start to grow again. And as you know, in mortgage guaranty, the in force book is the growth in the in force book is a precursor to activity at both the top line as well as the bottom line, all things being equal. I think where we still main encounter a bump or two relative to the loss ratio mortgage guaranty insurance. But with any improvement or continued improvement in employment growth, and the decline in delinquency rates, that that should occasion, we should not see a rise in mortgage guarantee loss ratios of the debacle proportions by any stretch of the imagination. And then finally, when we look at our general insurance business, I think it should continue to chug along.

Top line growth in 2004, probably in the range of 10 to 13%. I feel pretty comfortable with that kind of range, even though some of you may think it's a pretty wide range. But that's the best we can presume right now. So far as the underwriting ratio which is critical and important to that business, for reasons that I've cited already, I think we have a good chance of posting in 92 to 95% capacity of all of 2003, again we're going -- 2004, I should say. Again, we're going into the year with what we consider to be an optimum loss reserve position.

We don't think there are any bombs out there about to burst on the scene, so that the strength of the premium rates that we are booking, should be mirrored on the bottom line from an underwriting standpoint in our general business. I think if you take all these indicators into account, they should give you a fairly good idea of what to expect from Old Republic in the next several quarters.

I've gone for -- didn't realize, 20, 30 minutes already. So it's about time we opened it up to any questions you may have.

Thank you. The floor is now open for questions. If you have a question, you may press the number 1, followed by 4 on your Touch-Tone telephone at this time. If at any point your question has been answered you may remove yourself from the queue by pressing the pound key. We do have ask while you pose your question you pick up your hand sets to provide optimum sound quality. Once again, that is 1-4 on your Touch-Tone telephone at this time. Your first question is coming from Jeffrey Dunn of KBW. Please pose your question.

Hi, good afternoon.

: Mr. Dunn, how are you sir?

Thanks. First of all, I think when we first started seeing rate difficulty in the property casualty businesses you saw some of the larger competition prove move away from your markets. Have you started seeing them come back in in force, or is there still a an opportunity to take game from our smaller competitors?

: Well, I think in most areas I would say, Jeff, whether it's aviation or the executive protection, ENO, DNO types of coverages, the trucking to some degree, contractors, businesses to some degree, I think we still have great opportunities for growth there, although you know, given the ranges of premium growth that I just gave a couple minutes ago, it does tell you that, you know, we sense it's going to be tougher to get that growth without giving, you know, pricing incentives to customers. So, if we're going to play it close to the vest, which we expect to, we're not going to see, you know, 18 or 20% growth rates. In terms of the rest of the competition, I think particularly with some of the majors, and I don't think I need to tell you who they might be, I think some of their balance sheets are in such disarray that they are also, to use the same term, playing it close to the vest, so that we don't see an avalanche of competition coming in in post most of the areas that we're in.

Okay. And then shift together MI side, it looks like given some of the delinquency trends we saw third and fourth quarter of last year, the sequential jump-ups shouldn't have been too surprising. When you refer to potential bumps in the road, recurring again maybe in '04, is the path -- is the past delinquency trend a good way maybe to judge when those might be coming up. It looks like maybe third, fourth quarter of '04 04 might react to the trend from the last quarters?

: That seems to be for reasons we have not quite understood fully, that seems to be a pattern with us, you know, and then -- and I've not looked at the competition to see whether their trends exhibit the same kind of pattern, but with us that third and fourth quarter tend to be a lot more deadly than the first and second quarter of the year. And therefore, you know, if the past is any indicator, I think you're expectation would be sensible.

Okay, great, thank you very much.

Thank you. Our next question is coming Nancy Benacci.

Good afternoon, I had missed the first couple minutes. But on the MI side, again with the claims ratio so much higher than we saw last quarter, what I wanted to get a sense of, is it a severity issue and more importantly shall you've certainly moved up a little bit in the bulk business. Are you seeing any of the losses coming from there?

: Right. In terms of severity, I can say categorically that is not the case with us, Nancy, and you've listened to these calls often enough the past couple of years, particularly to know that our severity trends for a variety of reasons, have been going down and our assumptions relative to what the future holds have been similarly going down. So what we're suffering mostly from is a frequency driven type of issue with respect to the loss ratios, particularly in the last two quarters of the year. With respect to the bulk business, again, as I think we have said, we do reserve that bulk, you know, separately from the -- our traditional primary business, and yes, it does show that it's beginning to mature for us and yes, therefore it has a greater impact on the loss cost, but does it have sufficient impact as to explain what's happened to that loss ratio? No, it's not that large a book of business for us. As to cause that.

In terms of your response just to Jeff, where we're looking at the delinquency numbers and potentially loss ratios into the third and fourth quarter, as we've seen an improvement in the economy and job levels and things, wouldn't that result in a better delinquency number in third and fourth quarter?

: It should. That's the rational way of looking at it, that if your employment improves, you know and again I think particularly in the case with a lot of our book coming from some of the southeastern states like the Carolinas and Georgia where employment has been particularly affected by job losses in the furniture manufacturing, textile, et cetera, industries, that to the extent that you have improvements in that picture, that should help and therefore you don't necessarily have the same kind of symmetry going forward as you've had in the past. But again, in both good times and bad times, as I've said a couple of times already, we do seem to have more of a accentuated emergence of claims in the fourth quarter of the year in particular than the rest of the year.

Okay. And then in the issue regarding slow-down and refinancing and the persistency numbers getting better, as we saw the 46% versus the 43, was that higher, lower, or around where you expected?

: Well, actually, we didn't think it was going to turn itself around as quickly as it has, and we think that is good for where we're going in 2004.

and a question on the general insurance side. Your forecast of the 10 to 13% premium level, what type of rate are you factoring in there, or is that all unit?

: or is that what?

Is that -- are you talking about are you assuming rates generally flat as you assume the 10 to 13%?

: in most cases we're experiencing flattish rates. Most cases, okay. Let's say for roughly 60% of our gross general insurance business, we're experiencing flattish rates. For maybe 10, 15%, we're still getting a little bit of rate increase, and the rest of it we're getting not as high rate increases but still double digits. When you put it all together, okay, don't hold me to this, my gut would say it's about a 5% rate increase overall and the rest would have to come from, you know, market share, would have to come from growth of our customers, and so forth, and growth in the economy.

Okay, great.

Thank you. Our next question is coming from Mike Dion from Sandler O'Neill.

: Hello, Michael.

How are you, Al? Just following up with Nancy's question, if you could just elaborate a little bit in terms of lines, I think you may have alluded to that in the beginning of the call in terms of rate increases on the GI side, and kind of as a follow-up to that, do you kind of view your rates as being adequate right now given your balance sheet versus some of your peers out there?

: in terms of rate increases, again, as I said, you know, just now, at most we're probably looking at if let's say we had a 13% increase in volume in 2004, I would say in 4, 5% would come from rate increases on the overall scbookt rest would have to come from growth of accounts and the economy. In terms of the lines of insurance that are probably causing most of that rate increase, I would say that workers' comp is at the top of the line. I don't think we're going to get much in the trucking area. I think we're going to get maybe a little bit more in the aviation area, and a little bit more in the offices and directors protection area. I'm not sure I follow your question about the adequacy of our balance sheet, but certainly it is not -- we're not taking that adequacy as a basis for being able to reduce rates in order to gain market share. Again, as I said, I'm not sure I united the thrust of your question on that.

Yeah, that was what I was getting at, but if some of your peers out there are in a weakened state in terms of their balance sheet, you know, would it payoff for you to try to he can extract more rate --

: I think one of the issues, particularly with large commercial accounts, is that they're very sensitive, obviously, to the price of insurance, number one, and they do take some comfort from the fact that even if they buy insurance from a less than quality company, they do have the fall-back position of the guaranty funds, and so people are not as frightened, I think they should be, because bad things do happen to them when an insurance carrier goes belly up. Or struggles in one fashion or another. But I do think that that attitude, or that pragmatism, if you will, is what's keeping the lid on our ability and that of others similarly situated strong carriers, to take an extra pound of flesh, full, on the rate side. On top of which, you know, if we're doing the right job with our customers, in terms of evaluating their loss control practices, and their general business practices, and they merit, you know, a rate decrease, we have to give it to them. I mean, you know, what's good for the goose is good for the gander, and we've gone through a two or 3-year period when we've socked it to some of these customers and now if they're good boys, you know, we've got to say, hey, you know, you do get a reward. So that is having also an impact on our ability to raise prices.

Okay, that's helpful. Thank you.

: Uh-huh.

Thank you. Our next question is coming from Stephan Peterson.

: How are you?

Just wondering if you might talk a little about where you feel you're situated in terms of capitalization following the December one-time dividend and then the stock dividends, and dividend as well, and whether or not your feelings about share buybacks this year have changed at all since the last time we spoke. And then I've got a quick follow-up question on what you may be seeing in terms of the bulk insurance market. Any color that you can provide in terms of what you see competitors doing.

: Uh-huh. Okay. In terms of the impact of that special dividend that we declared in December, none that is monies that we had been accumulating from the various subsidiaries for, you know, couple of years. As their need for capital was declining because of the great results that we were experiencing. So, that's a nonevent for us. As to what it implies going forward, particularly from the standpoint of share buy-back, I can't say anything about that. I mean, I think you've heard us say it often enough that there is a time to buy shares back, and there's a time not to buy shares back, and obviously when we looked at our situation, market price of the stock, et cetera, in December, we decided that giving it to all the shareholders was the way to go then, and we'll revisit the whole area from time to time, as we do, and make the necessary decision at that point in time. As to what we're seeing in the bulk market, we're seeing nothing, in that nothing has changed from the standpoint of our position relative to it in the past, which continues, and that is that it is not a cookie cutter market, and therefore it's a market that you have to approach very gingerly and opportunistically, because each book of business is not the same. They're all different books, the contents of them in terms of the quality of the underlying loans differs from book to to book. The appetite of our competitors comes and goes, month to month, quarter to quarter and that obviously has an impact on our success rates in bidding on this business. So, we're not tying our kite and I believe we said that, to the bulk business. We're in it, we have to be in it because we are a factor in the market, but we're not looking at that business as a -- as the greatest source of our growth. We continue to view the traditional primary business as the area of our main focus .

Remind me again which quarter you and the board think about dividend policy?

: It's usually in March when we look at our regular dividend policy. December was an unusual situation for us.

Okay. Terrific, thank you very much.

: Yes, sir.

Thank you. Our next question is coming from Michael Peterson of (inaudible) investments. Please pose your question.

: How are you, Michael?

Very well, thanks. I had two questions on expenses. One in title, one in mortgage. I think the title was just a clarification, because I think I understood you. But we should interpret the fact that expenses were slightly up, which would be contrary to our expectation due to the fact that we're on a lag with the agency basis, so agency revenues weren't really down quarter to quarter, therefore expenses weren't down?

: Exactly.

Okay.

: You're right on.

and on the mortgage side, just a little bit unclear. I thought from the press release there was a 5 million, one-time pretax benefit so expenses were actual actually flat quarter to quarter?

: if you look at the press releases, Michael, you'll see we attempted to equalize the effects both in 2002 as well as in 2003 of the expense up -- the special charges up and down.

Okay. So, if --

: That's I didn't said, excuse me. I said earlier, I believe, that we expected that loss ratio on an apples to apples basis -- that expense ratio, should say, on an apples to apples basis to range and settle down in the 25 to 26% range.

Right. But you would not be there this quarter, if you add back the 5, you would be significantly higher than that, so you would not yet see in this quarter the benefit of --

: Well, let me get -- I thought we were at 26. I may be mistaken here. Let me just give me a second here, let me pull the press release. Let's see, where is it? It says absent these charges on Page 4, expense ratios for mortgage guaranty segment would be 29% and 26.3% of time quarters of 2003. And respectfully in 26 and 26 for the full year, then ended. Okay, I see where you're coming from. We had, come to think of it, we had I'll call it about a million bucks, which, of various expenses, for example stock option expensing, in the fourth quarter, big chunk of which fell on our mortgage guaranty operation since we parceled out the cost of that based on number of option shares granted to each of our profit centers. And we had some production expensed that were somewhat unusual from the standpoint of refinanced and business. And that might have added about a point to our expense ratio, point in a quarter, maybe. So the 29 would have been 27 and three quarters, or thereabouts. Slightly higher.

Okay. I see. Okay. And --

: Does that answer --

Well, I was asking a more general question. But you talked you alluded to lower expense ratios and you're saying assuming refi does not come back in '04, then you would expect a migration down in expenses.

: Exactly, that's how we get to the 25 to 26% range.

Okay. Thank you very much.

: Yes, sir.

Thank you. Our next question is coming from Nutmeg Securities.

Thank you. Al, you've been pretty much covered everything, as usual. On the special dividend, when we look at our model, where should we pull the funds out of to show reduced increase, investment income on the models?

: Well, as I think I said -- tried to say before, the funds had been taken taken gradually over an 18 or 24-month period from various subsidiaries, including our MI business and title business. Which had been growing fast and had been producing significant earnings, and therefore they were residing outside of those segments so that the investment income is already of those segments, is already reflective, as well as a little bit in the general insurance area, I might say, is already a reflective of the funds that were extracted from them.

So in other words basically will come out of the parent company?

: Exactly.

the money's --

: Exactly, right.

That answers the question. Thanks, Al.

: Uh-huh.

Thank you. Our next question is coming from John Gwynn of Morgan Keegan. Please pose your question.

: How are you?

Fine, thank you. What you refer to as your risk management portion of your P&C book, must be doing awfully well these days.

: It is. Given the fact that you're a survivor with good operate ratings.

How important proportion Al is that to your overall book?

: Well, the only way I can address that question, the only way we've addressed it in the past, and the only way we can address it is in terms of our direct volume, okay, because as you know, from a net volume standpoint, risk management business does not produce very much to the net premium line for the simple reason that the premiums that you get on that business typically go to either captive insurance companies, okay? Which becomes reinsurance seated or alternatively they stay on the income statement and balance sheet of the insured since those are the premiums attached to the self-insured retentions.

Right.

: So, but from a direct standpoint, which gives you an idea of the extent to which our overall results may be insulated from the vagaries of the P&C business, currently that book of business has grown to about 37, 39% of our total, and that's up from 21% or so, about three years ago. So, this hard market, and the ability to attract customers has in fact paid very handsome dividends in terms of our ability to grow that part of the business which we wanted to do for a lopping time.

Right. Al, I understand pure front fees are up three or four times versus say, three or four years ago.

: I would not say that, no. That's not our understanding, nor is it our experience.

Okay.

: I think there's been some increase, but it's been most of the increase in front fees have been driven by increased costs of reinsurance.

Okay. On the MI side, what exactly were the special charges in the fourth quarter?

: In the fourth quarter of this year?

of 2003? Correct.

: No, it was a negative special charge, and maybe we did not say it properly, but basically the long and the short of it, John, is that in 2002, 4 Q, and 3Q, we had increased our reserves for RESPA litigation as well as discontinuance of a piece of business we had. But in the fourth quarter of 2003, we settled that RESPA litigation and we settled it at a level below the aggregate reserve that is we had posted in 2002. So, as a result we ended up taking down that reserve by about 5 million bucks, and that's what we're referring to.

Okay.

: in that part of the press release.

Okay. Al, every five or six years I have to ask you this. The computation what have you call your composite ratio, what's the New Mexico numerator and what's the denominator?

: It's a statutory number.

So it's earned and written?

: It's earned and written, that's right. Okay. And now, some people might say, well, but so what's your written publish it, true enough, we don't publish it, and the reason we don't do that, is because of all these changes that occurred in the last two or three years, by virtue of cod -- codification which through that net number out of [indiscernible] it became nonsensical and so we stopped publishing it. I can say to you with a degree of certainty that for 2003, and going forward, that the net earned and the net written should be in close proximity of each other.

Okay, great. Thanks a lot.

: Uh-huh.

Once again, ladies and gentlemen, if do you have a question, you may press the number 1, followed by 4 on your Touch-Tone telephone at this time. Your next question is a follow-up from Nancy Benacci. Please go ahead.

Some of the thought process on your expense ratio on the MI side where you indicated a run rate of 25 to 26%, are you saying for the full year '04, or --

: for the full year '04 and in anticipation as I think it was Ira Z. or just now that said that's in anticipation of our what do you call it, contract underwriting business, dying down by virtue of the drop in refinance activity.

Okay, and then along with that, though, again you may have done this before I was able to hop on the call but just sort of with that claims ratio number up dramatically from a year ago, and even up quite significantly from the third quarter, any sense of what's a more normal run rate here?

: Well, again, I was surprised by that 32% in 4Q, so whenever you seeing something like, that you say maybe I don't know everything so I'm kind of reluctant to stick my neck out. But I can say, though, you know, I think it's legitimate to expect that based on past experience, even though the past is not necessarily pro log, that the first quarter is not likely to be as high, but then who knows. Sorry, but that's the best I can do for you.

That's fine. And then another follow-up just on the bulk side. As I look at quarter over quarter and we see, you know, pretty good sized number of new insurance written on bulk, and the second quarter and then certainly much lower in the third, and ramped up quite extensively in the third and obviously you're Tunis particular in when you're going to write it, how cover are you getting the sense of the profitability of that business?

: Well, there's nothing like time, and I think we're beginning, as you know, Nancy, we got into that business a lot later than our -- some of the key competitors that were there on the bleeding line, if you will. And as a result, therefore, our book has not aged as quickly as theirs has. I think it's beginning to age now, certainly 2004 is going to become more indicative of what we've done or the effect of our underwriting on -- with respect to that book. But so far, you know, so good. We're just not experiencing the kind of debacle from a loss ratio standpoint on that book of business that appears to have been the case in some of the competitors' books.

Great. Thanks very much.

Thank you. Our next question is a follow-up from Jeffrey Dunn of KBW. Please pose your question.

: Yes Yes, Jeff.

With the expectations for title, thank you give us a update on headcount reduction efforts in that business, get a feel for where you are versus your competitors?

: We've had, and this is on our direct book, again, Jeff, about a 10% reduction so far through December of last year.

Okay. And then, in terms of the returns for the company, it sound like last quarter we were moving further into that goal of sort of 13 to 15%, but it sounds like from some of the indications this quarter that outlook may be tempered. Can you give us of idea of where you are moving the next 24 hours months?

: I don't want to beg the question because we're still in the process of finalizing our budgets for 2004, but I think if you take the various guide posts, that I was giving, that I was giving towards the end of my comments, I think that should give you and erveg else a pretty good idea of where each of the segments are likely going dispoand therefore you can back into the likely return on equity numbers. Gut tells me that 13 to 15 is still a good number, probably we end up at the lower end of that range.

Okay, thanks.

Thank you. Our next question is coming from Bill of Divine Capital Markets. Please pose your question.

: Bill, how are you?

I'm very good. I want to thank you for the Christmas present, and it was in keeping with the season.

: Uh-huh.

but --

: Glad to do it.

I don't know, we already spent it.

: You should have seen me in my Santa Claus hat.

Is there a large portrait of that in your office? We'll have to look at that when we get to Chicago. But you are doing very well in cash flow.

: We're doing fantastically well.

and it looks like this year, I don't know, you could do as well, possibly not quite as well, but -- and then we'd still have a very strong cash generation situation. And you would revisit that kind of thinking, I take it? In the fourth quarter this year?

: Well, we're going to review our dividends, you know, our regular dividend policy in March, as I said in answer to one of the questions before. And then we'll take it, you know, quarter by quarter. See how this develops.

All right. Thank you very much.

: You're welcome.

Bye bye.

Thank you. Our last question is coming from John Hannon of West Rock Advisors.

: Hello, John.

Congratulations again.

: Thank you.

We've had this discussion before, but it seems to me you still have this very nice hedge with mortgage and title earnings. Two weeks ago the purchase mortgage index hit an all-time high which certainly bodes well nor mortgage insurance, we don't know how fast --

: It's just a matter of time, but' appears -- it appears to be be a very low basis for questioning those persistency rates are going to turn themselves around and that therefore the in force book which is, you know, the annuity in that business, will be of greater value going forward.

Okay. At least one of your competitors is looking for a pretty good increase this year, and it would seem to me you still have this nice hedge in the title and mortgage business.

: I would think so.

Okay. Al, keep it up.

: All right, John, take care.

Thank you. We're showing no further questions at this time. I would like to turn the floor back over to you, sir, for any further comments.

Okay, I don't have any further comments. I'm sorry I went as long as I did, a whole half hour. I'm supposed to stick to 20 minutes. But again, as always, we appreciate your interest in our company and look forward to visiting with you for the next quarterly update. You all have a good afternoon.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.