Old Republic International Corp (ORI) 2004 Q3 法說會逐字稿

Good afternoon and welcome to the Old Republic International third quarter 2004 earnings conference call. (OPERATOR INSTRUCTIONS) It is now my pleasure to turn the floor over to your host, Leslie Loyet of Financial Relations Board. Ma'am, you may begin.

Thank you. Good afternoon and thank you all for joining us today for Old Republic's conference call to discuss third quarter results. This morning we distributed a copy of the press release and hopefully you've all had a chance to review the results. If there is anyone 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 I turn the call over to Al Zucaro, Old Republic's Chairman and CEO, please be advised that this call may involve forward-looking statements, as discussed on the add four 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 and statements made during the call are made as of the date of this call, Tuesday, October 26, 2004. 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 replay or transmission of the call may be done only with the consent of Old Republic International. With that said, I'd like to turn the call over to Al for his opening remarks. Al, please go ahead.

OK, thank you, and good afternoon to everyone. And, as you can see in this morning's earnings release this latest quarter represented, basically, a continuum of trends that have been in place in our three major business segments for several quarters.

Big-picture-wise, again, as you can see, our general insurance business tracked our expectations. The loss ration in the mortgage guarantee insurance segment was somewhat higher than we thought it would be and the drop in earnings for title insurance, I have to say, was a lot more accentuated than we were expecting earlier this year.

As we always do on these post-release conference calls, I'd like to add some more color, so to speak, to the numbers we've just published and then give-- as his been indicated, give everyone that's on this call a chance to ask any pertinent questions that we may not have addressed.

The numbers are the numbers and the numbers show that our general insurance business continued to be the star performer of our business. Earned premiums were up very nicely across the board and net investment income reflected a more robust uptrend, namely 6.1 percent in this last quarter, and that's due to improving yields on the short portion of the portfolio as well as the significant additions that have been made to the invested asset base from the very good and strong operating cash flows we've been experiencing for two or three years now.

In the aggregate, earned premiums for the six largest coverages we write at Old Republic in general insurance grew by 19 percent, a little more than 19 percent, in the 3Q '04 and by 20.7 percent in the first nine months of this year. Now this compares to growth of about 19 percent in 2003, for all of 2003, over 2002 for the same coverages, which, in this case, includes workers' compensation, of course, and our trucking lines, general liability, the directors and officers errors and omissions area, as well as home warranty and our credit indemnity book of coverages.

What these comparisons, I think, show is that we're still enjoying premium growth due to the effects of a continuation of reasonably strong pricing, pretty much across the board, some benefit from increased retentions on our part and this has been going on for several years now where we've inched up our net retained lines as opposed to reinsuring them with the outside reinsurers, as well as continued benefits that a generally improving economy provides by boosting our customers' sales as well as salary structures, which are the more significant basis upon which premiums are calculated. And finally, the-- I would say we continue to gain very good entree and acceptance by more potential customers as a result of the strong financial underpinnings and strong financial ratings that we're blessed with at Old Republic.

As you see in the statistical exhibits, both the overall loss and the expense ratios have continued to trend down through September 30th of this year and this is also true for most of the individual coverages that I mentioned before and that represent the lion's share of our total production.

Workers' compensation, which has been a problem child for us and for the industry for several years now, is beginning to reflect some improvement. As a matter of fact, from an overall standpoint it was profitable from an underwriting standpoint so far this year. And we think that this is reflecting, to a large degree, the greater portion of this business that has gravitated toward less exposed risk management or alternative market approaches with regard to our large customers in the past several years.

Our relatively small exposure to A&E, asbestos and environmental claims, as you know, is contained mostly within our general liability line, which is one of our smaller coverages at about a $90 million annual earned premium level. And, as has been the case for many years, it continues to be the source of some claim surprises for us and that causes us to periodically react and inch up reserves or pay more than we may have originally estimated on a case-by-case basis.

Also, of some note in the loss area in this past quarter and nine-month period was our aviation business that added something on the order of 60 basis points or thereabouts to our overall year-to-date loss ratio and this was due to some storm-related aircraft losses. We had a bunch of smaller airplanes that were being serviced, mostly, in some areas and could not be flown out of danger and, as a result, we lost some. I think the total cost, net, to us was about $850,000 of thereabouts for the year-to-date.

But, as I've said, these are just a few negatives which were more than offset by favorable results for the other coverages that we write.

Expense-wise, we continue to benefit from a very tightly controlled cost structure that we think is sufficiently elastic to enable greater business production without proportionately increasing our production and operating costs. Year to date, the expense ratio, as you see, again, in the statistics, clocked in at about 24.5 percent, almost, and that's one of the best numbers we've published in many years.

So year to date our general insurance segment is also throwing off some-- throwing off some very good operating cash flows and these were about, oh, what, 32 percent ahead of last year. This, of course, is driven mostly by a continued drop in the paid loss ratio juxtaposed to the increasing top line, for premiums in particular.

I'll turn now briefly to our mortgage guarantee group, which represents, as you know, the single largest insurance coverage that impacts our bottom line, as well as our plans for Old Republic's business for the long term. The latest news on this front is not particularly good, but it is not much worse than we expected at the beginning of 2004.

As you can see on the operating statistics page of this morning's release, business production in terms of our traditional new insurance written was down significantly, about, what, 46 percent, in the 3Q this year and 35 percent in the year-to-date period and this was, of course, due to the very much anticipated dropoff in refinance activity beginning in the summer of 2003. Also, as expected however, business persistency has continued to inch up and to improve for the same reason, i.e., lower refinance activity. And persistency has gone from a low of 43 percent, which was posted at the end of 3Q '03 and it has now risen gradually to the 62.8 percent that you see as of the latest quarter end.

With regard to the production statistics, for bulk and other business sources, pools, what-have-you, we obviously continue to experience the usually flip-flops between periods and this is part, as you know, of our MI business which is the least open to a cookie-cutter approach, if you will, as each block of loans that we write is unique and is priced accordingly and, as we've said on many past occasions, we tend to be very opportunistic and react to market conditions and are careful to write only those blocks of business that meet our hurdle rates and provide, to the best of our knowledge and ability, the best opportunities to ultimately produce a profitable book of business.

Our mix of MI business basically reflects what's happening in the mortgage lending market since we fish, basically, in the same pond as the rest of our competition in that line. For example, refis accounted for 21.7 percent of our volume in 3Q '04 versus 43.1 percent in the same quarter of '03. New business from the 90 percent to 95 percent LTV ratio loans was about the same, 31.7 percent in 3Q '04 versus 31.9 percent the same timeframe last year. Volume from ARMs, on the other hand, just about doubled to 26.9 percent in 3Q '04 from 13.6 percent and we think that this reflects consumer preferences in the current interest rate climate for mortgages.

Top-line-wise, the factors that I just enumerated produced earned premium growth that was a little better in this last quarter, as you can see, and, as in the case of general insurance, we're also getting a little more lift from investment income in the mortgage guarantee business. But you can readily see, however, that the bottom line in our MI segment has been almost totally affected by higher claim provisions.

Year-over-year the expense ratio is relatively flat, but the claims ratio was up about 76-77 percent to, what, 41.4 percent in the 3Q '04 and 34.4 percent in the first nine months of this year. And this general uptrend in the loss costs, which, if you go back, began in earnest in the second quarter of 2003 when we posted a 20 percent loss ratio, has climbed fairly consistently to this quarter's level, which, by the way, we've not experienced a 40 percent or thereabout loss ratio since 1990, which was the ratio-- when the full-year ratio stood at 42 percent.

As we've reported for several quarters now, the higher ratio is being driven by a combination of key factors. Most importantly, we have greater paid claims, as shown in the stats. Year-to-date our paid loss ratio of about, what, 30 percent is about 40 percent higher than the 21.3 percent we posted for the first nine months of last year.

The other key variables, we think, that affect rising loss costs in particular relate to somewhat more pessimistic assumptions that we're making with regard to claim frequency, severity, potential future mitigation benefits on settlements of both current as well as prior year's reported defaults. The most-- speaking of defaults, the most current default rate stands at 3.9 percent whereas it was at the lower 3.43 percent level at the beginning of 2002, so-- or I should say '03. So we've had a significant increase in the default rate in the span of a year and nine months.

In a nutshell, we think that those are the factors that affect loss costs the most and losses are where the ball game is being played in our mortgage guarantee segment's income statement.

Turning to our title business, as we keep saying, our most volatile line. Basically a simple business, which is very much a transaction-oriented business. The results that we are currently experiencing, I think, can be explained quite easily. In comparison with last year, with 2003, the top line is suffering to a significant degree from malnutrition and this is caused by the substantial drop in loan refinancing activity that we've been experiencing since summer of 2003.

And that source of business, as you may recall for those of you that follow our company produced for both ourselves as well as the rest of the title insurance industry, a bonanza of historic proportions through the third quarter of 2003.

Our ability to cut general operating costs in the title insurance is not sufficiently elastic, if you will, as to enable a reduction proportional to what's taking place at the top of the income statement. And this, of course, reflects itself in a top-line drop of almost 17 percent in 3Q '04 versus a decline of just about 10.5 percent on the expense line.

In all other regards, I think our title business performed very much as expected.

So when you wrap it all together, the combination of these three major pieces of Old Republic's business explains, pretty well, the consolidated results we've just posted. Our general insurance business is performing exceptionally well and top-line-wise, in particular, it looks better than we thought it would when we put our budgets to bed earlier this year. However, the bottom line drops in both the mortgage and title insurance portions of our business have, obviously, been more severe than we had anticipate, certainly, and have been so severe as to negate fully the general insurance performance.

When we look at our financial position and the overall results, they are unremarkable to the good. The left side of the balance sheet remains clean and we think it's not likely to be a source of any significant adversity.

The important claim reserve line on the right side of the balance sheet, it remains in very good shape with aggregate reserve developments for the first nine months of this year continuing very much in the positive vein they've been in for a great many years. So no loss reserve deficiencies to be concerned about.

Looking to the near term, looking ahead a bit, we think that we will probably conclude the year with quite strong general insurance results and these will be driven by a combined ratio ranging between 90 and 92 percent, which is what we've been projecting, more or less, for the entire year so far. And earned premium growth that so far looks-- will be somewhat above the mid teens. It's likely that this year's results for the mortgage guarantee segment, on the other hand, will reflect the composite picture of the first nine months since we don't see very much near-term chance for measurably increasing the top line nor decreasing significantly the claims content of our cost structure. And, as to title insurance, fourth quarter 2004 results should begin to reflect, perhaps, a more favorable set of comparisons as last year's final quarter had begun to show the effects of the aging housing bull market.

Let's see, that's about what I was prepared to add to this morning's earnings release, but I'll take-- I'd like to take a couple more minute to address an industry issue of some-- of current vintage. As I'm certain everyone listening is aware, some pretty serious allegations of wrongdoing through the use of certain questionable commission arrangements as well as instances of bid-rigging and false or artificial price quotes have been lodged against a number of leading participants in the insurance industry and while it's our long-standing disclosure policy at Old Republic to address only material issues that are fully pertinent to our business, we think that the-- at this time we should speak to these allegations because they obviously are on people's minds and we should not-- we don't believe we should allow these allegations to bring into question the integrity of our business practices at Old Republic.

From this standpoint, I think we can fairly say that, first, Old Republic has always employed traditional commission arrangements over the years that have obtained widespread industry acceptance for decades and have not been used in a business-steering mode. Further, in our largest business of general insurance, commission arrangements have at times included volume or contingent underwriting performance features designed to achieve necessary diversification of risks, as well as encourage adherence and observance of what we consider to be solid underwriting standards.

In-- but in any event, in the nearly five-year period ended September 30th of this year some statistics we drew out of our accounts show that the total commissions incurred pursuant to these particular features have added just a de minimus 0.49 percent to our basic commission costs of about 11.39 percent on the total gross premium volume that we've produced through a large number of independent agents and brokers during this nearly five-year period.

And finally, I should note that I believe-- we believe that our company has not and is not engaged in any business steering, bid-rigging or similar shenanigans because our corporate culture has always been alert to possible conflicts of interest and has not condoned those practices. So I think sure you will not see Old Republic's name associated with these issues.

That's about the extent of my comments and so, as promised, we'll now open the visit to any questions you may have.

(OPERATOR INSTRUCTIONS) Geoff Dunn, KBW.

I was hoping you could provide maybe a little extra color on the MI paid losses, either general or specific color as to the developments we've seen and whether or not they've come more through the bulk book or some of the traditional business?

Most of it, Geoff, is coming from the traditional business. As you know, we were slow on the uptake in terms of writing bulk business. Now, by the same token, there's no question that that bulk business is beginning to mature and it is throwing off some-- some losses, but I would say-- I'm going to stick my neck out and I'm going to say that 80-85 percent of our total paid losses is coming from the traditional or what's referred to as flow business and the remainder is coming from loss adjustment expenses and the bulk and pool and other miscellaneous pieces of business.

OK. But on a delta basis, you do think the seasoning of the bulk business might be having some impact?

Yes, I think so. I mean, you know, it stands to reason that, as I say and as you know, that as that book matures, you know, given the accounting that we follow in the mortgage guarantee industry that, you know, the claims start to catch up with premiums after a couple of years or so.

OK. And then you did write a healthy chunk of bulk business in the quarter. Any specific color on the type of deals that might have hit?

No, I tried to address it in my comments, Geoff, and I think the best color I can put on it is by describing them in terms of our approach, which we've defined as being opportunistic. Every deal is different. We look at them differently in the context of the markets at that time and we try to be, you know, pretty consistent relative to our hurdle rates and what we expect from the books of business, but there is, to my view of things, in our view of things, I don't think you should expect any consistency in those writings for that reason.

OK. And last question, a couple of the title players saw some pretty good volatility in their order flow during the quarter, specifically a slowdown in the beginning month and an acceleration towards the end of the quarter. Did you see a similar trend or did your mix leave you more level during the quarter?

No, it's been bouncing around. I know it started bouncing around. As a matter of fact, if you recall, sometimes in the first quarter of this year we were surprised and that's why we slowed down on our cost cutting and that was a good move, but then the business slowed down in the second quarter and we started again looking at costs, but then sometimes in the third quarter it started bouncing around again and we, you know, we pull back from the cost-cutting mode. So it's been a very volatile type of market that we've been in. It's been tough to anticipate what we face and, therefore, you know, not to make excuses, but that's one of the reasons we've been shy on putting our foot on the brake pedal totally with respect to cost reductions.

Mike Dion, Sandler O'Neill.

Just a couple questions. First, a followup on the mortgage insurance. Any, you know, geographic concentration issues that you're seeing? I think in previous quarters you mentioned that the Southeast had been somewhat more problematic than other areas of the country. If you can, you know, talk about that? And did the hurricane affect, you know, this segment at all in the third quarter?

OK. As to the first part of your question, Michael, the Southeast, as we've said, you know, continues to be a problem area for us and that's due, you know, to the significant loss of jobs in the textile, the furniture manufacturing industries, in particular. Some parts of the Midwest are an issue, also, for the same reason, you know, loss of jobs, which is a big deal in the political discussions that are taking place currently. So those are the two main areas where, you know, our loss costs seem to have inched up, in particular.

With respect to the hurricanes, we don't see a discernible effect of those on title insurance. With respect to general insurance, as you know, we've got very little property exposure at Old Republic and the only major property exposure that I mentioned in my comments related to some small airplanes that we insure and that were stuck there that could not be moved because they were serviced and we ended up losing a bunch of them. But that's the extent of the effect of the hurricanes on our business.

OK. And just with respect to the general insurance segment, you know, you had mentioned, I guess, workers' comp had seen that line turn to profitability this year. If you could just expand on individual business lines that have really exceeded your expectation this quarter and, I guess, for 2004 in general?

Well, our credit indemnity business is performing very well. Our home warranty business is-- has been performing well for years. This year it's got a little bit of a higher combined ratio, but still is very profitable from an underwriting standpoint. Let's see, as I'm talking I'm fishing for a worksheet that I have here, just going from memory, I guess. Our workers' comp business, as I say, has produced good results and we think that that's primarily reflective of the higher content of risk management business that we've been able to put on the books in the past three years or so. And, as you know, that business tends to be insulated somewhat, to a great degree, I should say, from loss costs, given the use of captives or retro arrangements or what-have-you that are common to that type of business.

The trucking business is operating, which is our biggest single coverage, as you know, is operating very much in the black from an underwriting standpoint, from a cash flow standpoint, and the other areas, the contractors business and forestry business, which are pretty big ticket items for us in general insurance are also performing well.

So, as I say, the general liability line stands out. That's a relatively small line and it doesn't take much to throw it off course. But that's the only one that really comes to mind that has had any major issue this year.

Stephan Peterson, Cochran, Coronia Securities.

Just a couple quick questions. Any potential spillover effect, maybe particularly in risk management. I know that you, in that particular segment, you concentrate on some Fortune 500, maybe Fortune 1000 accounts. Any worries as to whether or not some of the current problems that are being investigated by the New York AG have some repercussions from-- for just a business retention perspective for you?

For us? Well, no. Not having, you know, participated to any degree in the-- in regard to what has been alleged, we don't expect to be negatively affected by that and, as we understand it from press releases that have been issued by the-- at least three, from what I understand, of the major brokerage houses, the-- it sounds like they are thinking of changing their business model and, in fact, charge their fees directly to the customer so that they would, in effect, keep the insurance company, such as ourselves, out of the loop. So given that, in particular, you know, I don't expect that that should have any impact on our business.

So-- but you think that those organizations are likely to be able to retain the majority of their current client base?

The insurance companies or the brokers?

Yes, well, I meant either. The brokers. I mean--

Well, there are just so many, you know, brokers to go-- that can provide services, both, you know, in this country as well on the world scale and particularly since the criminal aspects seem to have been eliminated now in the last 24-48 hours, you know, there's no question that these brokers, you know, who have provided a very valuable service over the years will remain and will remain competitive and should continue to serve their customers. And, as I say, lacking any involvement on our part in these areas, I just don't see that, insofar as Old Republic is concerned, that this is going to have any negative aspect to our business.

OK, terrific. And you touched it-- in your prepared remarks, you touched a little bit about-- on your A&E reserves. Were there any material changes to, I think, what was the roughly $83 million you were carrying, net, at the end of the second quarter?

Yes, we've got about-- I'm going from memory and don't hold me to this, but we probably had something on the order of 80 basis point impact year to date -- not for the quarter, but year to date -- from A&E. Now, as I think I've said before, also, however, sometimes, as has occurred in our case, you have a switch between the general liability line and the workers' comp line. You know, some claims come in and, you know, they get registered, perhaps, initially as GL but then become workers'-- more workers' comp claims and so that serves, you know, to move some of our so-called IBNR -- incurred but not recorded -- reserve from one type of coverage reserve to another type of coverage reserve.

But net-wise, I'm pretty confident that what I said is the case that year to date we had about an 80 basis point impact and if that's-- that part is true, then, you know, for the year to date our loss ratio was 66.1 percent, so it would have been, what, 65.3 percent had it not been for that.

OK, terrific, and one quick last question. Any update in terms of commitments or contingencies in the quarter, in terms of anything going on there? In particular, the past discussions you've had with the IRS?

No, there's been no further developments and if the past is any indicator it's going to be years before that gets resolved. I mean, you know, you've got to remember we're still fooling around with tax issues, as we speak, going back to 1986. I mean, you know, it takes a long time, sometimes, to resolve that.

And, as we said, however, you know, the impact on us of any of those resolutions, even if the IRS were to prevail, is one that has to do with timing differences inasmuch as, you know, they're quibbling about when we should have deducted reserves and how much we should have deducted. But ultimately, if your reserves are redundant, as they claim they were, ultimately those redundancies flow through the income statement, you know, two or three years-- within two or three years of the particular reserve date and, therefore, you've paid your taxes so that all that remains is the time value of money issue, which is not a humongous issue to deal with.

Ira Zuckerman, Nutmeg Securities.

Al, can you give us an idea on the general issue what the January 1 renewal period is looking like?

You mean from our direct standpoint or from a reinsurance standpoint?

Well, from both. It's two separate questions.

I think reinsurance we're not going to-- we certainly don't expect any rate increases and we probably expect some rate declines. We also expect to continue to gradually inch our retentions because we think we've got the capacity to carry risk and feel more comfortable, in some regards, to keep the risk as opposed to reinsuring it with, perhaps, less than-- lesser quality reinsurance.

With respect to our direct business coming in the front door, right now we feel, you know, pretty good about the rate situation. I mean, we're not getting, as we've said before, any significant rate increases by any stretch of the imagination, but we get, you know, a couple, 3 percent, 2 percent, here and there where it's needed and don't have to give up too much on the renewals and, as I've said before, we feel good about our ability to keep penetrating our markets of choice and getting a greater share of them. So I-- you know, from where I sit right now, I feel more optimistic in still being able to grow our top line at prices that we-- we like and feel comfortable with this coming January than I did earlier this year.

Now, on the other hand, I've got to say to you that with respect to large portions of our business, perhaps the majority of it, they-- it renews pretty evenly throughout the year, you know, so we don't have a huge influx coming in just in January. You know, we-- I would say it's almost pretty evenly divided throughout the year. So the point of what I'm saying is that, you know, things could change, but from where we sit right now the world looks pretty good in general insurance.

With your getting just marginal rate increases and costs continuing to go up, do you envision doing much better in terms of combined ratio next year than this year?

Well, this year, I just, you know, said it again, I think, you know, we'll be within that 90 to 92 percent area. I can't see us improving very much from there. I mean, right now things look very good. You know, we got a great reserve structure in place and so forth, but, having been in this business as long as I have, I know that, you know, something is bound to come out of left field and cost us a few bucks and, therefore, keep that ratio within that range as opposed to expecting it to go below 90, you know, for any length of time.

Kelly Nash, Key McDonald.

Just a couple questions for you. First, on the general insurance segment, can you talk to the competitive landscape there, if that's changed significantly, particularly on the transportation side?

Well, as I just tried to say to Ira and my comment was-- pretty much covered the waterfront, you know, whether it's trucking, whether it's the D&O/E&O area, whether it's the aviation area, whether it's our contractors business, whether it's our risk management area, you know, the lay of the land looks very good to us. You know, we get entree. We're able to compete with the best of them, toe-to-toe, and we're getting our share of business that we want to write.

And so, you know, to your specific point of trucking, you know, that looks very good. I mean, we, as I said, also earlier in this conversation, we started the year thinking that we would, you know, be in around a 10 percent increase in volume, you know, overall and here we are looking 17-18 percent. Now, admittedly, a little bit of that is due to some increased retentions as opposed to, you know, having reinsured parts of the business, but that's not the major reason. The major reason is that we've been able to write a lot more than we thought at good prices and with a, you know, good-- in some parts of our business we're writing business with larger customers than we had been in the past and, obviously, that's a more efficient way to go in that you don't have to move as many pieces of paper through the pipeline and can be much more efficient, obviously, from the cost standpoint.

But the fact that we are gaining this acceptance in the market place and we're being sought as a market of choice in the areas we play in is what gives us a lot of comfort that, you know, we're looking at some positive developments going forward.

OK. And then, as far as, you know, thinking about the pressure on rates going forward, it sounds like it's a relatively stable pricing environment now. Going into next year do you see anything dramatically that would be changing that at this point?

Not at this point and you've got to figure, you know, that most of next year's results are already in the can, you know. I mean, we've booked most of next year's earned premiums at what we consider to be good prices and we're seeing nothing on the horizon that leads us to think that we're going to have any major deterioration in pricing anywhere in the fields that we play in.

And then switching to the mortgage insurance side, can you talk again to the assumptions that you changed in the quarter? Anything specifically macro or internally that caused you to change these assumptions in this segment?

Well, I don't know that it's-- I think it's been an ongoing process for us throughout-- starting in, you know, late last year, of reacting to increased paid loss trends and reacting to what was happening to the employment picture in certain areas that I alluded to before, reacting to the severity that were noticing and making judgments relative to those factors that have, you know, led us to, you know, increase the amount of net reserves that we've added to the picture. So it hasn't been a single thing and it's been, to a large degree, judgmental and reactive quarter-to-quarter to what we're seeing.

Are you seeing anything encouraging on the horizon at this point, even now, you know, a month into the quarter, to give you more optimism going into next year for the segment?

Well, as we said, you know, we enjoyed some exceedingly low loss ratios in the mortgage guarantee business, you know, going down to the low teens, if you recall, when you go back to our stats for the past two or three years and we've said, you know, pretty-- we've said repeatedly that that was not expected to continue forever. The business is probably, you know, on average, assuming no economic-- major economic recession, the business is probably a 30 to 40 percent loss ratio on a regular basis.

So, you know, we're at 40 now. We're at, what, 30-some-odd, what, 34 percent the nine months and that's probably where, you know, the business belongs. Now is it-- could it go a little higher, you know, in the fourth quarter? That's a possibility. As you know, during the Christmas season and shortly thereafter our loss ratios in mortgage guarantee tend to, you know, inch up a bit and I think that's a reflection of pressures on people's wallets during the holidays. At least that's been historical with us. That could happen. But longer term, I think, you know, we are in a 30 to 40 percent loss ratio business.

One of the things that's accentuating the loss ratio calculation, of course, for us and the rest of the mortgage guarantee industry is the fact that, you know, we're all bearing the full effect of reinsurance, excess reinsurance sessions, which, you know, in all lines of insurance, whether it's fire and casualty or mortgage guarantee or what-have-you, unless you have corresponding losses there, the premiums that you're seeding are, in fact, reducing the denominator. So even if your claims stay put, your loss ratio is going to have a tendency to inch up and I think that's just one more factor that should lead to the-- to the expectation of having a higher loss ratio than we've experienced in the last two or three years, in particular.

And one final question. Any particular legal issues that you're seeing out there, either in title or mortgage or anything along those lines that we should be concerned about?

Well, you know, we don't have any major lawsuit or allegations against us right now, but you have to recognize that both of those businesses are very much in the public eye and, you know, they're always going to be looked at and with so many lawyers floating around, you know, someone is bound to bring one set of allegation after another. So we're always prepared to, you know, to get something coming at us there, but right now we just don't see where it would be coming from, now do we-- nor are we staring at anything immediate that is of concern to us right now.

Greg Peters, Raymond James.

Al, as usual, I have a number of questions, but I thought I'd just limit it to two today.

OK.

First of all, as you know and you're dealing with-- many companies are dealing with 404 compliance regulations and attestation and I'm curious about how that is progressing at Old Republic because we haven't seen much mention of it in any of the Qs or Ks and I'm wondering if-- how it's progressing in terms of cost and management time and if you're on track to meet the regulations there?

Well, you know, we think we're doing OK. I mean, the indications that we're getting from the field-- as you know, we've got a widespread operation at Old Republic in various parts of the country and so we look at this process in terms of its progress in each of these locations and, you know, we feel pretty good about it. You know, we think we've always been a well-controlled company.

Like everybody else, I guess, you know, documentation can always stand some improvement. So if there is any, you know, problem with us it might be that we don't-- you know, we have not necessarily documented or crossed our Ts and dotted our Is as much as we should have. But I don't see the makings in what we have here of a problem. So right now, we're aiming to continue, you know, with the process, testing our systems as we must as of September 30th, and are hopeful that, you know, our auditors are going to see things in the same positive fashion in which, you know, we're evaluating our situation.

Fair enough. And I'm going to apologize up front. I know it's covered a little bit in your last answer. I was in and out of your opening remarks, so if I went back and looked at the transcripts from your prior conference calls of the last couple quarters and squared them with the results, specifically in the loss ratio in the mortgage insurance side, something obviously went wrong in the third quarter and I think you addressed some of that in your previous answer, but then, you also went on to suggest a new loss ratio range, if you will, going forward, of 30 to 40 percent where, if I'm not mistaken, your prior impressions leading up to this quarter have been something lower than that.

I may be mistaken there, Al, but certainly perhaps you might clarify this. And by the way, as you were answering the last question I did a quick calculation and the loss ratio, annual loss ratio average for your company over the last 13 years-- or 14 years, excuse me, has been about 27 percent.

The 1990s through date have been in that area of declining loss ratios. As I said, during the-- my remarks that we had not seen a 40 percent loss ratio since, I believe, it was 1990 when we posted a 42 for the year as a whole. And not to sound defensive about it, Greg, but I believe, as a matter of fact, that in last year's, you know, analyst visit in the fall Bill Simpson, who presents on our mortgage guarantee made the similar comment to the effect that, you know, in normal times there's probably a 30 to 40 percent, 35 percent loss ratio business.

I think, to some degree, that's colored by the fact that, you know, even though we have not written as much of the so-called bulk, et cetera, type of business, we have written some and that business does have a higher loss content attached to it. It has a lower expense content, but it does have a higher loss content.

So from that standpoint, you know, whatever we've written is bound to have-- to provide an upward tilt to the overall loss ratio. Add to that the fact that, you know, when individuals-- when particular areas, whether it be the Southeast, you know, the Carolinas, as I mentioned are currently suffering from unemployment, driven in part by the issues in the textile and furniture manufacturing industries or, you know, the Rust Belt issues in the Midwest, we recognize that it takes a while for a particular region to, you know, find a new way of keeping its people employed or have those people move elsewhere and find the jobs elsewhere.

So, you know, that's why we're getting a little cautious about our expectations. You know, just-- you don't get instant gratification when it comes to resolving some of these economic issues.

Well, and certainly based on your comment and your answer to the last question, it certainly seemed to imply that, and, as you've seen historically, your fourth quarter ticking up for whatever reason that it does. We could be looking at something worse in the fourth quarter, then, if we're to err on the side of conservatism?

I don't know. I mean, if you look at our loss ratio in the last four quarters -- let me see, I've got a sheet of paper some place in here. Hold on. Yes, here. It went from, what, 23 and odd percentage to-- in the third quarter of '03 to 32, then went down to 29.5, went up to 32 and now it's at 41.4. And these are quarters standing by themselves. So they've bounced around quite a bit and I don't know that it's a natural extension to suggest that just because we've got a 41.4 we're going-- in the 3Q we're going to get a 41.4 or even worse in the 4Q. Could it happen? Yes. Anything is possible, but is it a given, I don't necessarily think so.

I mean, you're dealing, as I tried to explain and as we've tried to explain before, you're dealing with a real, live situation when it comes to setting reserves. You know, we are-- we are truly reacting almost on a month-to-month basis to what we see as patterns of paid losses, patterns of default, patterns of mitigation and so forth and so on.

In the past, I think you've hinted that we should be monitoring just national employment trends, but those have seemingly gotten, I guess on the margin, a little bit better, yet the loss ratio is moving the opposite direction. Is there something else that you would encourage us to be looking at to get a better snapshot of what's going on in the loss ratio trend?

Well, again, and I don't know if you heard the answer to one of the questions here and that was, you know, and, again, I'm repeating myself--

Well, I apologize about that.

No, that's OK. I'm-- to repeat myself, I do think that our loss ratio, again, is driven to some degree by the bulk business and it's driven to some degree by the employment situation in particular regions. You take the Southeast, that's always been a very strong point for our mortgage guarantee business and it stands to reason that if there are economic difficulties there that we're going to tend to feel them to a greater degree and I think that's what happening.

(OPERATOR INSTRUCTIONS) John Gwynn, Morgan Keegan.

I'm going to ask this question as politically correct as possible and I hope you understand. Some of your competitors have felt that it was appropriate, indeed, part of their insurance bailiwick to be selling a product that's quaintly called earnings management reinsurance. I think it's better known as finite or fake reinsurance by those in the industry. Your risk management business, obviously, touches on a number of alternative market facilities. It's my understanding that Old Republic has not and does not sell finite or fake products. Is that correct?

That's absolute correct.

Thank you very much.

Geoff Dunn, KBW.

Just a quick followup. Your delinquency trends, obviously, have bounced around in your two different lines, but one of the things we noticed for a number of companies this quarter was that those trends, as they have been for the last couple of quarters, are skewed by the cancellation levels. Do you have an idea of what the total loans in default did, year-over-year, for the two segments, whether they were up or flat or down?

When you say the two segments?

The flow and the bulk.

Oh, OK. No, the answer is, I don't have those. We'd have to get back to you, Geoff. I don't have that set of statistics in front of me.

OK, thanks.

(OPERATOR INSTRUCTIONS) Sir, we are showing no further questions in queue at this time.

OK. Well, again, thank you for attending this conference call. We appreciate your continued interest in our company and look forward to visiting with you, I guess, early next year when we report on the fourth quarter. You all have a good day.

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