Old Republic International Corp (ORI) 2004 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Old Republic International first-quarter 2004 earnings release conference call. (OPERATOR INSTRUCTIONS). It is now my pleasure to introduce our host, Ms. Diane Hettwer of the Financial Relations Board. Ma'am, the floor is yours.

Thank you. Good afternoon and thank you for joining us today for Old Republic's conference call to discuss first-quarter results. This morning we distributed a copy of the press release, and hopefully you have had a chance to review the results. If there is anyone online who did not receive a copy you may access it at Old Republic's Website at www.OldRepublic.com, or you may call Samir Patel at 312-640-6771, and he will send you a copy immediately.

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

Additionally we wanted to let people know that the information in statements made during the call are made as of the date of this call. Listeners to any replay should understand that the passage of time by itself will diminish the quality of the statements. Also, the content of the call is the property of the Company, and any replay or transmission of the call may be done only 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 open up the call for questions. Al, please go ahead.

Okay. Thank you and thank you to everyone for your continued interest in our Company. As was just said in this morning's press release, we have pretty much followed our regular approach of explaining our results in terms of its major components and sources of profits. From a big picture standpoint, I think the table on the second page of the press release shows those major components and pretty much speaks for itself.

The trends there are very much in line with what we expected, if not particularly with respect to the Title business, the dollar effect of those trends. As some of you listen to these calls regularly may recall, specifically we have been suggesting for a couple three quarters now that our General Insurance business would likely continue to produce very satisfactory underwriting results. But that our housing-related businesses of Mortgage and Title Insurance would likely be challenged for several quarters of 2004 as a result of lower business persistency and higher claim costs in Mortgage Guaranty in particular, and, of course, much lower refinancing activity with regard to the Title Segment. As you may recall, refinancing activity sell through the floor starting in June or thereabouts of last year, and it has been downhill every sense. So the big news this quarter I think as we look at Old Republic's results is that the effect of that much lower volume on Title Insurance business has been a lot more accentuated than we thought would occur, and I will briefly outline the key reason for that in a few minutes.

With respect to our General Insurance business, however, there was a 25 percent pretax increase in earnings, and that was driven by two basic factors if you will. First, there was a 20 percent increase in net premiums earned, and that was much greater than the low-teens we had anticipated earlier this year. Though again, that anticipation was predicated on our expectations for the entire year. And secondly, we have had a continuation of very favorable underwriting performance, and that, of course, is validated by the composite ratio you see there of about 93 percent in Q1 '04 versus the 94.8 in the same quarter of last year.

With respect to our top line, about 30 percent of the total increase of some $63 million you see there in earned premiums came from our big trucking line, which is the single largest industry that we service at Old Republic. We had about 12 percent from the contractors business, which is underwritten principally by Bituminous, a group of companies. Some 16 percent came from risk management or alternative market products, and another 15 percent or so from our financial indemnity coverages, which in our case include ENO, DNO, Fidelity, in surety and consumer credit indemnity products. So the total of those four pieces is, what, about 73 percent or so. And you add to that another 6.5 percent or so that extends from a greater retention of business on our part by virtue of reduced purchases of reinsurance, and we have accounted for some 80 percent of the year-over-year quarterly increase. Most of the rest came from a variety of areas, including home warranty as well as our general aviation business.

In terms of pricing, our executive indemnity line, which incorporates as I say our coverage for ENO and DNO insurance, is reflecting some emerging softness now for a couple of quarters in pricing. Otherwise, I would characterize pricing for most other coverages as being relatively stable for us. But by the same token, no longer offering much opportunity for upward pricing adjustments.

As we said in recent quarterly updates, substantially all of the rise in earned premiums is coming from account size growth that is largely driven by slowly improving the U.S. economy, as well as from new business that we have put on the books in the past fifteen months or so. Particularly when you compare Q1 '03 to Q1 '04, you may recall that in the first quarter of last year we cut a deal to acquire a book of runoff alternative market business, and that has been kicking in from an earned premiums standpoint beginning toward the end of the second quarter of last year but more fully in the second half of last year. So, of course, this year's comparison has the full impact of that new book of business or that additional book of business I should say. As the year wears on, we think that premium growth will be lower than it was in the first quarter and perhaps settle down to a rate of 12, 13 percent or perhaps a little better for the year in its entirety.

From an underwriting standpoint, most of the coverages that we write produce loss and expense ratios that were very much in line with trends shown in recent quarterly as well as annual periods. I might point out that we have a statistic in the report to the effect that our paid/loss ratio was about 51 percent in the first quarter of this year, and that is about 8 percent down from both Q1 '03 and full year 2003 levels of about 54 to 55 percent of paid loss ratio. So we had another drop in paid losses.

This drop I might note also or should accounted for much of the greater operating cash flow that we have experienced in this segment. For both General Insurance as well as for our Company in total, this year's cash flow was at the highest level ever experienced in any one quarter. But again, I might point out that by the same token this additional cash that is being added to our invested asset base is not enhancing investment income since we are still facing as you know a very low yield environment for an investment portfolio that is still relatively short at about 4.5 years average life.

So overall our General Insurance business performed very much as expected, again a little more on the top line. Underwriting results are very much in line with the downtrend we have experienced now for several quarters in investment income that is relatively stable and not adding very much to bottom-line improvement.

Our MI business, Mortgage Guaranty Insurance business, performed pretty much as expected. Our premium production was still hindered by a relatively low business persistency. However, I might point out that for the second quarter in a row persistency has risen to a higher level, and that is a turnaround from a downward spiral that we had been experiencing for a couple three years now.

As we said before, we are likely to experience increasingly higher persistency percentages as the year moves along, and that would be particularly so if interest rates should rise as we expect them to do gradually during the year.

In the first quarter this year, we experienced a little bit of a catch-up on captive reinsurance sessions, but based on what we are aware of, see that percentages should be within a reach of 2003 levels as we get closer to year-end 2004, and that implies a 13.5 to 14.5 percent session level, which is pretty much what we have had for the past 12 to 18 months.

Loss ratio-wise, we booked almost a double year-over-year from 15.2 percent, as you see in Q1 '03, to 29.5 percent loss ratio in the first three months of this year. At this level, the MI loss ratio in the quarter that just ended was down from the 32 percent we have posted in the final quarter of 2003. I would say that the improvement is largely due to a slightly reduced delinquency rate, which as you see in our publication was 3.67 percent at the end of March versus 3.78 percent at the end of 2003 and to a reasonably stable severity level, which, therefore, did not lead us to add measurably to our loss reserve levels.

Our expectation has been and is that a continuing improvement in the American economy should lead to a better job picture, and I think we are seeing that in the statistics that are coming out of the government. And this higher job level should in turn ultimately produce a downtrend in loan delinquency rates and, therefore, the loss ratios that result from that.

Expense-wise we are in reasonably good shape. As you saw in the press release, there was a non-recurring charge which emanates from a so-called vesting acceleration from one of our stock option plans which is no longer in place now. So this should be truly a non-recurring expense charge but nonetheless in this first quarter. A lot of it given the size of our Mortgage Guaranty business, a lot of that charge of some $6 million or so got charged to the Mortgage Guaranty business and did serve to push-up its expense ratio to some degree. But for the year as a whole, we should experience a MI expense ratio ranging between 24 to 25 percent over the next several quarters.

Turning to the third leg, the third key major leg of our business, Title Insurance. It also exhibited a bottom-line downdraft if you will that we anticipated, but in this case, I have got to say that the nearly 50 percent drop was a lot more severe than we thought would occur at the beginning of the year or towards the end of last year when we were planning this year's budget. There is only a simple and only one answer to this particular development, and it lies in both our inability, as well as our reluctance, to cut variable costs faster. I say inability because you have to remember that quite a bit of follow-through work takes place in our direct Title operation after a real estate closing, and this causes us to obviously incur some expenses for a longer post-closing period if you will.

On the other hand, I also say reluctance because beginning in February of this year, we began to see a pickup in activity which lead us to, in fact, abort our ongoing expense reductions in the Title Segment. So the expense ratio in that segment went from a low of about 82.5 percent in the third quarter of last year to 87.3 percent in the final quarter of '03 and now to 91 percent in the first quarter. So we will probably need another quarter before we are able to I think better rationalize our Title expense structure with a more normal transaction volume picture.

Consolidated-wise, the three segments obviously are the ballgame for our business. The composite underwriting ratio for all of these lines combined was moderately higher as you see in the stats at 89.3 percent in the first quarter this year, and that compares to 85.7 percent in the same quarter of 2003 and 86.4 percent for all of last year. As I say, about 100 basis points, 1 percentage point, of the total increase is due to the stock option expensing that we have mentioned in the release, as well as the remaining increase that stems largely from the higher Title expense ratio that I just alluded to.

As we have noted in the press release, operating cash flow both at the General Insurance business as I mentioned before, as well as in our Mortgage Guaranty business, lead to an all-time quarterly high. As a result, our cash and invested asset base crossed the $7 billion mark at March 31st, 2004, and that reflects an increase of 3.5 points roughly from year-end 2003 and 10.5 percent from the end of March of last year one year ago.

But again, as I say, given the continuing low yield environment in which we are in, that increasingly greater asset base is not doing much for our investment income line. But by the same token, the short-term nature of our portfolio with its current average life of 4.5, 4.25 years really as I said before should stand us in good stead when interest rates rise, and we do expect them to certainly rise after the coming national election. At least that is a scenario that we have been managing our business by.

Given the long-term nature of our business and the way in which we need to run it as a long-term undertaking, obviously we do not think that a single quarter or even an annual period means a whole lot. We need to stay focused on long-term performance, and I think from that standpoint our business is going to continue to produce very good and growing results over the years. But over the short-term that most of the investment community in particular is tied to, I think we have the same expectations we have mentioned in the two most recent quarterly updates. Consolidated-wise, as we have said, the first two or three quarters of this year should make for challenging comparisons for the same periods of 2003, and this year's first quarter lived up to that assumption, of course, in spades. And we remain of the same view.

In Mortgage Guaranty, we have now had two consecutive quarters as I say of improved business persistency that we think will continue in succeeding quarters. And also the gradually improving U.S. economy and the better job picture that is emerging should also begin to help level out and probably reverse claim trends in that business.

In Title Insurance, the effects of coming down from unusually high transaction levels that we experienced in last year's first half in particular will again or should again make themselves felt in the next two quarters in particular. After that, I think short-term quarterly comparisons should become gradually more positive.

And finally, when we look at our largest revenue-producing business of General Insurance, we still currently expect a continuation of very good underwriting results. We may do a little better, as I think I said before, on the premium revenue line than the 10 to 13 percent growth rate we alluded to earlier this year. And underwriting-wise, our original expectations of a composite ratio ranging between 92 and 95 percent remains a realistic objective I think for us and particularly in the light of the 93 percent ratio that we just published for 1Q '04.

So again, a little more on the topline maybe in the 14, maybe even as high as 15 percent rate area. We are having good success in putting new business on the books, and that is why we are inching up that expectation a bit from our original expectations earlier this year.

That is about the extent of our commentary on this morning's press release. And so as has been indicated, we will now make time for whatever questions you may have.

(OPERATOR INSTRUCTIONS). Geoffrey Dunn, KBW.

First, can you quantify the amount of the catch-up in the MI segment for captives this quarter?

Well, usually, Jeff, as you know, it has been running at about a 14, 14.5 percent level, and this quarter was about 16.9 percent as you see in the stats by simply comparing our direct and net premiums. So I would say you have got about a 2, 2.5 increase, which as I say should level itself out pretty much for the rest of the year.

In MI reserves, you put up a pretty good chunk, which I guess seemed a little counterintuitive, since last year we saw a lot of -- not a lot but a trend of net increases, and now this quarter we actually see a positive turn in delinquencies but a more material addition to reserves. Can you walk me through how the methodology lead to that?

In setting reserves in the businesses in most of our -- all of our other businesses, we are both looking in the rearview mirror and the front windshield. And I would say that the reserving issue that you are talking about is driven particularly by looking through the windshield a little more to a greater degree now. We are still concerned about the job picture. We are not seeing the default rate dropping significantly even though it did drop this quarter as you see. So we have tended to keep our foot a little more firmly on the break pedal.

Assuming that the first-quarter's turn on the prime book was maybe a little overstated by tax refunds, but maybe we are seeing a little bit of an inflection point, what kind of reserving would you maybe guide us toward for the remainder of the year?

In Mortgage Guaranty?

Yes.

Well, I think it is going to be driven primarily again by what happens on the default rate on the one hand, as well as our perception and judgment of the cure rates in particular going forward. There is a series of judgments being made there. The length of defaults enter into it. Obviously if defaults do not stick on the books as long as they have, then that would lead to a reduction or a stabilization of the reserve. That is the best answer I can give you.

We look at this thing on an monthly basis. We track our numbers monthly, and we obviously set our reserves quarterly, and we do it in the context of how we see the world at that point in time.

Just last question. Have you seen any change in your cure rates?

No. Not really. Those have been pretty stable for us. It takes a little bit longer to cure, but we have had -- I would say last year we had a little bit of a decline, and that has pretty much stayed where it was last year in the most current quarter.

Nancy Benacci, McDonald Investments.

On the MI side, I wanted to ask a few more questions following on Geoff's. Talk a little bit more if you could regarding the claims ratio? Obviously it improved a bit from what we saw in the fourth quarter, but still could you clarify a bit more? Is it coming from severity or frequency? I think you indicated severity was not really a issue, but again clarify that. Secondly, talk about whether it is spread geographically?

The geography, there is no change in the sources of claims from a geographical standpoint. We still have some difficulty in the Carolinas areas like that that are affected by pullbacks in the textile and furniture industries, and it will take a while to fix that area. It will take a while to enable people to get jobs elsewhere.

But I think the answer to the loss ratio is pretty much encompassed by my response to Geoff's earlier questions. I think it is a combination of all those factors. I hate to say that the fourth-quarter loss ratio was the high, but it does look like as a minimum -- my gut tells me it should stabilize and not rise significantly. But that is just a judgment at this point in time on my part.

Is your sense -- based on your comment and based on a couple of our other conversations we have had before, where we seen the number come out this quarter, were you surprised it was as high as it was for the loss ratio?

No. As I say, it is a little lower than we had in the fourth quarter. Right? And if it had been as high as it was in the fourth quarter, I would have not been surprised. To me, they are not significantly different.

In terms of just the frequency of losses, has that changed at all from quarter-over-quarter? I just wanted to go over that a little bit more, too.

No. I think the whole issue again goes back to my response to Geoff, and that is you do our reserving, and therefore, the loss ratio is affected by how we see the world and how we see cure rates and trends in them, how we see whether severity is going to hold or get worse. There is a lot of judgment involved in all of this. And, of course, we are human beings, and we react to what is happening currently when we are setting those reserves. That may change a little bit from quarter to quarter.

Talk a little bit about your appetite for the bulk book? We saw delinquencies obviously tick up there a little bit more, but certainly it is a small piece of the pie here. As you look out over the rest of this year, can you give us a sense of what you think you will be doing on the bulk side?

Just as in the past, that is a day-to-day type of business for us. It is not like flow business. As we have said repeatedly, we try to be opportunistic about it, and we come and go depending on our assessment of the risks in each of these pools. No two pools is different. It is very much of a tailor-made type of business, and therefore, you are going to see and continue to see I think a great deal of volatility, particularly on the quarter-to-quarter basis in the amount of bulk business that we do. That is my best and the only explanation we can give as to what we do and why things happen the way they do.

Fair enough. Certainly consistent with what you have been telling us. And just a couple of quick questions on the General Insurance side with the net premiums earned number up pretty strongly. You indicated a little bit backing off on some of the lines like the DNO. In general, as we look out for your comments regarding volume increases the rest of the year, it looks like it is going to be more unit growth than anything. Is that a fair assessment of what I heard you said?

I think it is going to be unit growth as well as some continued growth of our customers' businesses. Again, our premiums to a large degree are based on sales, right? They are based on salaries or employment costs in particular. They are based on mileage driven to some degree, right? So, therefore, as the economy improves and you have got more people employed making more money, companies selling more, all those base numbers contribute to a rise in premiums if rates as a minimum stay reasonably stable.

Are any of the other lines -- are you starting to see any pushback at all? You had a lot of growth in your commercial auto book. Are you starting to see, if you look at quarter-over-quarter, any more pushback on any of these lines besides the ones you mentioned?

In terms of rates?

Yes.

No. I think as I said before, our rates are staying very stable. We do not have much opportunity anymore to raise prices except on an account by account basis that deserves, due to bad experience, that deserves a rate increase. But we don't have very much across the board opportunities anymore.

And as I say, other than the DNO area, which seems to be exhibiting some softness in pricing, even though as you know prices went right through the roof in that particular area, and it should not be a surprise that there should be some pullback at this point in time for those high levels, particularly if there is a reduction in corporate scandals, and therefore, the fear factor that affects the pricing of much of insurance.

Stephan Petersen, Cochran Caronia.

I was wondering if you could talk -- we could switch the conversation a little bit to Title Insurance and help me understand how elastic your cost structure is there on a go-forward basis? And as you manage down that process, what might we be expecting for a run-rate expense ratio sort of in a non-heavy refinance environment?

Well, I think the best proxy for that is probably the years 1995, '96, but I have to caution you and us about one thing, and that is that since that time in the last 10 years, as we have said on many occasions, the mix of our business in Title Insurance has changed reasonably dramatically. It has gone from a 45 percent agency or independent agency production sources to today 60 percent or thereabouts coming from agency business. And as we go forward, I wouldn't be surprised if we see even that number inching up a bit.

What does that say? That says that what occurred in this quarter was doubly a surprise for us because when you move some of your business to a greater agency content, you should have to use your word greater flexibility in managing your expenses. But we do still have a huge direct operation particularly on the West Coast, and as I tried to explain before, we got caught into a changing environment. As I say sometimes in February when we sensed that things may be turning around a bit more again positively from a production standpoint, we basically halted our expense reductions for fear that we would not have the bodies in place to take place, to take care of the greater production that we sensed was around the corner. And that has happened and continues as we speak. We are seeing an improvement in production.

Is it going to get to the same levels as last year? No. That is not going to happen. But I think we are looking at a better situation than we had in the first quarter in terms of producing business.

That is the best answer I can give you, which is maybe not as refined an answer as you would like.

What is your outlook -- looking at what you've got in the pipeline, what is your outlook for the next couple of quarters in terms of Title? Should we continue --?

I think it is going to be very challenging. Look you are going to be comparing first quarter and second quarter of 2003 that were the best quarters ever in the Title Insurance industry and the highest levels of refinancing activity. And if you recall last year, it came June or early July the refinancing phenomenon died on the vine. I have never seen a drop in activity to the same degree as was experienced by mortgage lenders, mortgage bankers, Title Insurance companies and so forth. I do not think we are going to return to those heydays.

Then when you consider the fact that we do have a two to three-month lag between the production of Title Insurance by our independent agents and the time that we receive notice that a piece of business has been produced, then we get the cash for it and so forth, you have got to say to yourself, look, for a 60 percent of our business, we had a significant strong set of quarters between January and September 30th of 2003. So what that says is that if we do not have those this year and it does not look like we are going to have them, then, of course, the first three quarters of this year are going to be very challenging so far as Title Insurance comparisons are concerned. And we said that, from the fourth quarter of last year if you recall.

So it is all coming true. The point is, it is degree, right? As I said before, I am the first one to say we were somewhat surprised by the extent to which this son of a gun dropped off the face of the Earth in the first quarter.

Okay. Fair enough. Quick question. If we do see persistency inch up to the mid-50s, maybe approaching 60 percent, what might be fair in terms of expectations for premium earned growth this year?

I think it is going to be a flattish premium growth year through at least September. I think you have got some of the same effects, some of the same delayed effect in Mortgage Guaranty as you do in Title Insurance, though not as accentuated. So I think it is going to be a very gradual improvement in Mortgage Guaranty Insurance for us and the other MI companies. We are all fishing in the same pond. There is no magic wand out there. So it is going to be a slow boat to China.

Mike Dion, Sandler O'Neill.

A couple of questions. One on the commercial lines segment, General Insurance. The last couple of quarters we have seen the loss ratio come in relatively flat, you know, 67 in the third quarter down to 66 and now 67. Is that the best we are going to see here in this line? Clearly still good, but do you think you might be able to inch that down further?

Mike, I think that the range of underwriting composite ratios that we have given you between 92, 95 or thereabout is a good range for you to go by, for anybody to go by this year. I think they are achievable. As to the exact level, I don't know.

I think our expense ratio is going to stay pretty level where it is at now, and therefore, that implies that the loss ratio should remain pretty level based on everything we see. We do not see any big charge out there coming from any significant reserve deficiency for prior years as I usually say. I guess I have not said it this quarter.

Our reserves are in great shape. They are not producing any deterioration that is impacting the current year. So the best I can say, therefore, in answer to your question is 92 to 95 combined ratio.

Just an overall frequency in severity trends? If you can just touch on that for a bit?

Well, in some of our businesses, the first quarter for some odd reason can be very -- well, not for some odd reason. It is the winter months. It can be very volatile for us. And this year we just did not experience a significant increase in the number of claims or severity of those claims in either our trucking line, which is most exposed to the vagaries of the weather conditions, as well as in other lines, like our contractors business for example. So we have got a nice strong start on the year.

So then the next one is December, the fourth quarter of the year. The spring and summer quarters should be very good for us. So the answer to your question is no. We have not experienced any frequency of severity, and that would imply, therefore, that our loss ratio that we have published should be very reliable.

Okay and one follow-up on Title if I can. I know you spent some resources over the last few years upgrading your technology in this sector. To what extent is that going to help benefit some of the expenses that you are seeing there, the uptick there? Are you going to realize some of that? You might see that expense line come down as a result of some your technology initiatives, or how do you kind of grade yourself in that area?

Well, the technology has been employed primarily in the imaging area or I should say aimed at the imaging area, as well as concentration of Title plants into fewer plants, as opposed to the wide distribution that we have had for many years in the past. And to some degree, we benefit from that. But you know a lot of our expenses in Title Insurance are people expenses, and those people expenses are primarily incurred by virtue of the closing process, the issuance of Title policies and so forth and so on.

So the biggest saving opportunity we have in our Title operation is to, in fact, continue to change the mix of our business to accentuate the independent agency-produced business because for that business we need less variable costs.

Ira Zuckerman, Nutmeg Securities.

(multiple speakers). Old Chinese proverb -- better to be silent and thought a fool, than open one's mouth and remove all doubt.

Very good.

Most of the companies we have been listening to so far this quarter are talking about a soft landing for this cycle. Do you agree with the outlook, and have you seen anybody getting maybe a little overly aggressive?

Right now at least in the areas we are playing in, the only area, as I said before, where we are experiencing some pricing softness, and that is coming down from the moon, okay, is in the ENO, DNO area. The other areas that we are playing with, we just don't see any craziness out there. I don't think we should have craziness now.

This business will never change. There will always be cycles in it. It will be a matter of degrees or the accentuation of the cycles, okay? In this particular cycle, I think my own opinion is that there are still problems, particularly in the reinsurance area, of reserving for past years. There are problems in the primary area, again for the big ticket items of asbestos and environment. And those are huge exposures, and they just don't get resolved overnight. To the extent that companies have got to pay for those, and they do, I think that is going -- the combination of tight reinsurance markets and these primary companies issues will serve or should serve to minimize the downdraft of the cycle. Hello? That is my opinion.

Geoffrey Dunn, KBW.

Just a quick follow-up. A number of competitors in the MI space have reconsidered their captive strategies on the deep seats. Is there any update on Old Republic's strategy there?

As I think we have said in the past, Geoff, we don't think -- we don't approach the business on the same shoe fitting every foot. We look at business on an account by account basis. Each account has got its own idiosyncrasies, its own expense structure, its own quality structure, and we are guided by those evaluations when we make a determination as to how much we are going to layoff by way of reinsurance on one account versus another.

Just another question. Would you happen to have the insurance in force number for the end of the quarter?

As you know, we have not been publishing that number. We have been publishing a risk in force number, which we believe is a much better indicator of the nature of the in force that is on our books.

Unfortunately it does not help us track persistency. Thank you.

Rene Skitzo (ph), Skitzo Capital (ph).

I was just doing back of the envelope math here, and perhaps you can help me out. It looks like in the General Insurance business you guys have hit a double-digit ROE this quarter; is that correct? I quite frankly have not looked at it.

In terms of the overall capital structure, clearly it looks like the real story over the last three or four years has been a much better return than the General Insurance business getting the ROEs back up to more normalized levels. With the last couple quarters' hiccups in the MI business, it looks like you have to get back to where you were in the previous half of the year.

Then on the Title side I guess is the real question. Clearly this is the best business has ever been. How can you remove capital from the business and use it to help the other businesses in the next two years, let's say?

Well, the Title Insurance business does have currently some additional capital it does not really need. But, as you know, it is not our most capital-intensive business. As a matter of fact, it is the least capital intensive business we have. I forget what the number is, but I am going to say it is about $330 million or thereabouts of capital. So even if you are 10 percent, even 20 percent overcapitalized, you are not looking at very big bucks there.

Our Mortgage Guaranty business like other MI companies has developed quite a bit of capital, and we have been taking some of it out pretty regularly in the last three years or so, and we will continue to take a look at that.

Our General Insurance business has got a little bit of excess capital right now, but we want to keep our powder dry so to speak and see what happens. Particularly if we are able to grow at 14, 15 percent rate again this year topline-wise, that is going to eat up some capital by virtue of the reserves that we have got up.

So we look at it every quarter. We look at it at the end of the year, and we will do what we have been doing, which I think you are aware of.

Just in terms of the General Insurance business, it seems like this quarter's results are a lot better than what we anticipated.

From a topline standpoint in particular.

I guess it seems like the delta was in the trucking business. Would you say that?

No. I think that was pretty much across the board. I don't think there was a single part of our business that was a disappointment. I think we made money everywhere. Perhaps we made a little more money than we thought we would in the risk management area, which has been growing by leaps and bounds for us in the last couple three years, and a lot of that growth in volume and new accounts is coming to fruition. But all of our companies, at least the key operations we have, contributed to that growth you are seeing there.

Is it anything in terms of just overall execution? Is there anything you can point to lead us -- ?

No. It is just that everything is coming up roses. You know all the hard work we have done all these years and the fact that we have had great markets that have enabled us to do our thing as I say have all come to fruition, and we are enjoying the fruits of that labor. That is why I said before, this is not a quarter to quarter business. It is a long-term business, and now this year, last year, we are beginning to enjoy the fruits of those long-term labors. I think it is that simple.

Nancy Benacci, McDonald Investments.

Just a couple of cleanup questions. On General Insurance, what is the average reserve redundancy right now at the end of the quarter? Is it around three to four --?

There has been no change.

Around three to four?

Right.

Of the premiums earned number in the quarter, how much of that is from the book you absorbed through last year?

I have no idea. I did say -- I did give percentages did I not, Nancy, of the net premium sources that contributed to the (inaudible) million, and I think that was, what, 10 percent as I recall. (multiple speakers). Although as you know in that business, net premiums don't mean very much. Right?

And then the last question in terms of the MI expense ratio, can you clarify how much of that is from the option expense?

Round numbers we had about $3 million of total option costs being allocated to our Mortgage Guaranty business. That is simply a reflection, as you know, that the Mortgage Guaranty business has been at least for a couple of years almost a 50 percent on average bottom-line producer for Old Republic. And given the way we manage our business in terms of incentives, it stands to reason that it would get roughly 50 percent of that option costs or the number of options allocated to that business.

And then lastly, any legal issues out there that are pending right now?

We are always faced -- we still have that California situation. At any one point in time, we have rumblings of this and that, the typical plaintiffs/lawyer shakedown operations that affect all insurance companies that are involved with the consumer-type insurance products. But other than those general issues, we don't have any big item that we are aware of.

Greg Peters, Raymond James.

A couple of questions for you. First, I was looking over the annual report, and while I recognized your exposure to asbestos in environmental claims is small, I did observe a deterioration of the so-called survival ratio if we look on the claims payments for the last five years. In fact, for the first time in my recollection, it looks like on a net basis you dropped below the ten-year. I am wondering because you pride yourself on a conservative balance sheet and conservative reserve position, if you might consider bringing it back up to the midteens level that you have consistently had?

Right. Two points in answer to that question. One, as you know, that ratio is affected by payments. You divide the number of payments for a three-year or five-year period, average payments into your ending reserves. In last year in particular, we had a huge loss that got finally, which had been in reserve, that got settled and, therefore, through the average payments upstairs and, therefore, decreased the ratio.

In terms of where we want our reserves to be, the answer is yes we have tried over the years to keep it at least at what we understand to be the average industry levels in terms of the ratio you speak of. So I would not be surprised if you see us inching that up.

Now by the same token I have to say to you that those reserves are not established in a vacuum by us. There are established as part of our overall IBNR, so-called IBNR reserves, and therefore, you do have switches that take place between parts of that IBNR back and forth.

Fair enough. That provides some good color. Also, in your opening comments, you ran through some of reasons that the earned premium growth in General Insurance was stronger than maybe what you had originally expected or certainly what some of us were looking for.

And I was wondering if you could just briefly give us some additional color on your two of the reasons, one being the increased retentions? Specifically I was hoping you could talk to us about some of the policy limits and how they have changed year-over-year? And secondly, you talked a little bit about the risk management business or the program business. I guess program business is the wrong characterization, but the risk management business. I was wondering if you could provide some other color there too as well?

Okay. Talking about reinsurance first. As we said and others have said, the reinsurance markets are very tight. We think that the quality of reinsurance is not there. We think that reinsurers have got as many if not more problems when it comes to the big ogres of asbestos and environmental issues to deal with. And, therefore, seeing a lower quality and, therefore, reduced quality capacity in the reinsurance market in the last three to five years, we have steadily reduced the amount of reinsurance that we purchase by increasing our retentions.

In this latest around of renewals at year-end, we took another book of business where we had had a $500,000 retention and moved it to about a $1 million retention. As a result, it caused that 6.5 percent portion of the $63 million increase in earned premium. But that is the only change we made.

Today there are very few, I should say, parts of our General Insurance business where we have retentions that are less than $1 million. I would not be surprised if those retentions keep inching up over the last couple of years because we just don't see the resolution of the issues in reinsurance to fix themselves anytime soon.

And across the General Insurance book, what should I be thinking of in terms of your -- and not getting into a line by line discussion -- but what should I think about in terms of what your potential maximum loss or policy on that might be on any given policy?

Well, if I understand the question, when it comes to worker's comp for us, as well as the rest of the industry, that is an unlimited liability you know.

With respect to other areas of insurance, we typically are still issuing relatively low limit policies. You know $5, $10 million is a big deal for us. When we do that, we use a combination of (inaudible) reinsurance, as well as treaty reinsurance. Then when it comes to accumulations, let's say, in the general liability automobile liability area, we have reinsurance protection up to $40, $50 million. I forget the exact number right now. That part is not likely to change.

What is going to change -- all those issues will not change -- those limits will not change. What is likely to change is in the so-called what we refer to in the industry as working late is up to, let's say, $5 million, which is where a big chunk of reinsurance premiums go. That is where you are likely to see us increase the level of reinsurance -- of net retentions.

I understand. Just some additional color on the risk management business, and I know you have mentioned I think the Kemper renewal rights transaction in one of your responses, but you do not provide a lot of color on that segment in the reported results. It seems to be a very attractive component of your story.

Of course, the reason we do is twofold. One, we believe firmly that that information is very proprietary because it leads one to our pricing philosophy and telegraphs to our competition how we price products and so forth, and that is a relatively unique part of the business, and we just don't want to do it, okay, from a self protecting standpoint.

Secondly, in terms of the source of that business, the Kemper renewals you referred to is certainly a part of it. We picked up some 20, 25 accounts out of that, which is good-sized for us. But we also were able to take advantage in the last three years of real structural change in that part of the market. There are today half the number of players that we had four years ago in that business. Companies like the Reliants and Kemper, of course, there were players are no longer there. That created huge numbers of accounts looking for a new home, and we got I think more than our share, and that is what is now contributing.

As you know, you can write new businesses. We did, particularly in 19 -- in 2002 and also 2003, and not see the earned premium results for quite a long time. I think what is happening is those earned premiums now are coming into the flow of the business, and you are seeing them there. That is one issue.

With respect to this alternative market business as you know, a lot of it is subject to retroactive or retrospective premium adjustments, which are driven by the claims experience of individual accounts. So if claims go up for a particular account, usually we are going to be able to raise the premium, and that premium is going to be reflected in the premium base.

So those are some of the reasons that have led to the growth of that part of the business.

You gave me a lot to chew on there.

Well, you wanted color.

One follow-up. Have you seen or heard of any new entrance into the risk management side? I think I saw an announcement out of Excel talking about their strategy for domestic casualty business.

I am aware of that, and I would not be surprised if all of a sudden you get a couple of new people coming into the business. That always happens you know when rates stabilize and growth now comes -- has got to come at the expense of somebody else's business. Then you see companies going into areas that they have never been in. The trucking business is known for that for attracting new players whenever the market either softens or stabilizes as it seems to. Not there we are seeing it now, but I would not be surprised if it happens.

And as Yogi said, deja vu all over again. It is going to happen again. What is new? And we will deal with that. How do we deal with that? Well, when we don't get our price, as you have seen us do, over the years, we will just pull away.

Thank you for your time.

Thank you. At this time, there appear to be no further questions. Mr. Zucaro, do you have any closing remarks?

No. I think I have said everything I wanted to say, and I was happy to respond to the questions that were there. I am appreciative as I say of the interest that everyone has shown.

Thank you and thank you, callers. This does conclude today's conference. You may disconnect your lines at this time and have a wonderful day. Okay. Bye.