Old Republic International Corp (ORI) 2005 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Old Republic International First Quarter 2005 Earnings Conference Call. Today's call is being recorded.

(OPERATOR INSTRUCTIONS.) I would like to remind everyone again that this conference is being recorded.

And now, I would like to turn the call over to Ms. Leslie Loyet. Please go ahead.

Thank you. Good afternoon and thank you, everyone 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've all had a chance to review the results. If there is anyone on line 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-3 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, Thursday, April 27, 2005. Listeners to any replay should understand that the passage of time by itself will diminish the quality of the statement. Also, the content of the call is the property of the Company, and any replay or transmission of the call may 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.

Thank you very much, and good afternoon to everybody.

And as you saw in this morning's press release, or earnings release I should say, we started the year, I think, in a pretty positive note. And I think this augers well for the performance that we should be able to achieve for the rest of this year.

And as always, while the nominal results for any one quarter are not particularly meaningful for our business, we think they are, nonetheless, of some value in evaluating macro trends.

So, starting with our general insurance business, this year’s first quarter shows a slightly lower earned premium growth rate. As you can see, year-over-year, 2005, the top line grew by about 14.5% versus an average of some 17.5% for the four quarters of last year. Still, the 14.5% is much higher, I should say, than the initial high single digit objective we penciled in earlier this year for our business.

Of the -- I might note that of the 12 basic coverages that we underwrite at Old Republic in our general insurance business, all of them except two -- and as in the recent past, those would be the E&O/D&O, as well as the automobile extended warranty line -- all of those registered premium growth.

And while we’re not getting much, if any, price increases, we continue to benefit from what we view as very good customer retention and good growth in our customers’ businesses. Which as you know, tends to trigger higher bases such as payrolls or sales or what have you on which premiums are predicated, as well as very good agency penetration, particularly in our Great West Trucking operation, as well as in the bituminous standard market operation, which we’ve been -- in both of which regards we’ve been expanding that agency plant and are beginning to get some additional volume from those agencies.

In the markets in which we’re operating, we’re experiencing I would say basic stability, in both pricing and terms of coverage. We continue to believe that the harder market we’ve been operating in for the past three years or so still has legs, as they say. As we have reported in recent past, we think that this is driven primarily by investment income, which can’t be depended upon to act as a catalyst for significant price discounting, as has been the case in years past, and as well as what we would regard as still reasonably tight capacity for quality reinsurance, which is forcing primary companies, such as ourselves, to retain greater limits.

Longer term, I think also that any limits that are placed on the use of finite reinsurance and similar financial engineering products are probably likely to prod primary insurers toward greater underwriting discipline, in as much as there will be less of an opportunity to perhaps, while not at least immediately, to underwriting difficulties that could be encountered from time to time.

Incidentally, I might note that -- on this call as well -- Old Republic has never used any financial engineering products. So again, as we point out time and again, what you see with us is what you get.

Loss ratio wise, we again experienced I think real basic stability in the first quarter of the year, particularly in the largest lines, which in our case are workers compensation and commercial automobile or trucking business, in our general aviation business, our credit indemnity and disability in surety parts of the general insurance business.

The aggregate loss reserves for prior years have continued to develop favorably in this first quarter of 2005. So that there’s been no adverse impact again on our current loss ratio from that venue.

At let’s see, roughly what, 24.7%, the general insurance expense ratio is basically staying within the 24% to 26% range that we think is acceptable for our current mix of business.

So in total, the composite underwriting ratio for general insurance of 92.1% for the quarter is well within our continued expectation of an achievable range of 91% to 93% for this year.

Cash flow wise, our general insurance has continued to provide the lion’s share of consolidated operating cash flow. And this latest quarter’s cash addition was about, as I see here, about the same as it was in the same quarter of last year.

In our mortgage guaranty business, it produced the highest quarterly earned premium line ever. As you can see in the statistics that are attached to this morning’s earnings release, earned premiums were up almost 7% quarter-over-quarter. Investment income was slightly ahead this year. But as is the case with the other segments of our business, we still don’t see this particular component of our bottom line to be the major source of upside potential anytime soon. So therefore, we still need and continue to be fixated on the very important underwriting component of this business as well.

From an underwriting standpoint, therefore, our mortgage guaranty business posted a very favorable development in the last quarter, in the latest quarter I should say, with the combined ratio, as you see, dropping to about 55.3%. Interestingly, relative to 4Q ’04, this represents, what, about 8, almost a 9 percentage point drop. And relative to all of 2004, the reduction this quarter amounts to 5.8 percentage points.

Most of the improvement, if you look again at the many income statements that are a part of the earnings release, most of the improvement in the combined ratio for mortgage guaranty is coming from somewhat reduced pressure by the loss component. And I might note that, for the first time in several quarters, our loss reserve additions represented less than a 1 percentage point increment to the incurred loss ratio. By contrast, if you look at all of 2004, the quarterly average last year was about 4.8 percentage points.

In turn, I think that the reduced pressure on loss reserve additions in mortgage guaranty is coming from a combination of factors. Most importantly, we think we have a lower number of loans in default. Looks like statistics show that loans in default were almost 2% below the same level at 1Q ’04, and about 9% below the level they stood at year-end 2004.

In a related vein, frequency and severity assumptions we’ve used have remained basically unchanged from year-end 2004. And the paid claims trends, as you’ve seen in the release, did not move much from their fourth quarter ’04 level.

Incidentally, I might again point out, though, that the default rate or delinquency rate for our traditional business did not change much quarter-to -quarter. But on a much smaller, and I might say still in our case relatively green book of bulk business, the default rate, as you can see, did not follow a clear-cut pattern. And until that book matures, we’re not likely to see the same kind of general steady pattern, up or down as the case may be, that you see from our traditional book of business.

As we sit here and look at these MI results, we think it’s still a little hard to tell whether the 1Q ’05 results in this business are beginning to establish an upward trend in our bottom line. On the production side, persistency is still relatively low, around what, 65% by historical standards.

But on the other hand, we’re still maintaining our market share, though I might point out that that share of the business that all the MI companies attempt to participate in, has been shrinking in the past couple or three years, as you know, as a result of such factors as the 80/10/10 and what have you. But nonetheless, even in the light of this smaller share of the total mortgage insurance market that’s open or available to the private sector, we’re maintaining our share of it at around 11% or so.

On the claims side for mortgage guaranty, paid loss ratios have inched down for two quarters in a row now. And the expense ratio in this business for the latest quarter continued to head down, as we expected it to do for this year. And it currently is resting at one -- I might note -- at one of the lowest levels we’ve achieved in MI. And while we don’t as yet see the makings of double-digit bottom line growth for the MI business in 2005, we continue to think that the generally positive trends I’ve just outlined should lead to improved earnings for the current year.

Finally, a couple of words about our title business which, as you know, tends to be driven by some of the same markets, factors as impact the mortgage guaranty business. First quarter activity was pretty hum-drum, I would say. It was -- and this was largely as we expected. Premium and fee production, as you can see, was relatively flat when compared to the first quarter of 2004, as was the case with respect to the expense and the claim and the combined ratios.

As you know, we’re seeing some pretty good statistics relative to new and used home sales. And of course, mortgage rates are remaining at sufficiently low levels, we think, that they should continue to encourage housing affordability to a pretty wide swath of the American home buying public.

So, at this juncture, we see a greater propensity, if you will, for our title business to produce better results this year than was the case in 2004. And you have to recall, 2004 we were coming down from historically high mortgage lending activity, which had crested in mid-2003, or the fall of 2003.

So this year, the comparisons as the year wears on, with all these reasonably positive factors that I just mentioned, should be a better year for us.

Overall, I might say that our business is in good shape and I think it’s pretty well set to show a resumption of bottom line growth for 2005. Most of that growth, again, should come from the underwriting side of the business, and mostly from the general and mortgage guaranty segments.

Investment income, both for the segments as well as in consolidation, should reflect somewhat better growth than has been the case for the past three years or so. But again, as I said before, it should not be the main engine that drives our earnings.

Cash flow this year, as you see in the first quarter, was pretty strong and I think it’s likely to remain strong. But perhaps it’s likely that it will deliver a somewhat lighter kick to the invested asset base that was the case in 2004.

Income tax rates should remain pretty flattish since we don’t expect any significant change in the taxable base of our business. And again, our taxes are driven primarily by the mix of taxable income from the underwriting side of the business versus investment income, some of which as you know is sheltered from taxes by virtue of our investments in tax exempt bonds, or the investment income we earn on dividends paid by corporations.

And as a final note, I’ll say that our balance sheet, as always, remains very pristine. And as I said, it’s devoid of financial engineering mechanisms and, therefore, it should not be a source of deviant behavior, if you will, affecting the income statement or the shareholders book value of -- in the company.

That’s the extent of my comments. And as was promised, we will open up this meeting to any questions you may have.

(OPERATOR INSTRUCTIONS.) Geoffrey Dunn, KBW Analysts.

First, a question on MI credit. As we look back over the ’04 delinquency patterns, is it a good assumption for the pay trend this year kind of looks flat to up modestly for the remaining quarters?

Well, as you’ve seen, Geoff, the published numbers do show, at least through this quarter now, again a couple quarters in a row, that the paid loss trend seems to be attenuated. And all we have is the same kind of data that you are focused on in terms of employment, housing appreciation and so forth. And those are currently all positive factors. So, if there is any logic to the game, then you should -- we should -- you know, it’s rational to expect a downtrend in the paid loss ratio.

Okay. And then, could you give a little color on the bulk production this quarter? You’re one of the few companies who is actually able to put up a strong number. Just interested in whether you were focused--.

Right. Well, again Geoff, as we’ve said repeatedly, this business -- this part of the business, I should say -- is very lumpy. It’s a very opportunistic approach that we’ve historically taken to it since we started nibbling at this business a couple or three years ago.

And so, what happened this quarter is that we just, in the cases we looked at, we had strong activity at the beginning of the quarter and then, as the quarter wore on, the activity dried up a bit. But nonetheless, we were able to hit the jackpot, so to speak, on several deals and that’s what drove that.

But again, I have to emphasize that what you see in a particular quarter, even a couple of quarters, is never -- should never be taken as indicative that we’re going to have a repeat performance as we go forward.

Okay. And last question. Very impressive top line growth in the GI segment. Can you give a little bit more color as to which lines really stood up for the growth?

Well, I think I tried to say it, Geoff. But it was our key lines. Workers Comp is still doing very well for us. And as you know, we write that business in two fashions; you know, traditional workers comp, as well as on a risk management or alternative market basis. And loss ratios are remaining in great shape there. Expense ratios currently are not growing at the same -- expenses are not growing at the same rate as the top line. So, that’s indicative of some pretty good efficiency in our management of that book. And as a result, we’ve got great top line as well as underwriting income results to look at.

Our promotional automobile business, the trucking line, is doing well as I tried to say briefly in the comments. You know, we’ve been expanding both our traditional standard markets, as well as our specialty markets, such as trucking, in other parts of the country, mostly towards the West and the Southeast. And that’s providing good opportunities for us to do more business with new agencies that we’ve signed up in the last couple or three years. As you know, when you start the process of signing up new agents, it’s a relationship business to a large degree. And it takes time for those relationships to gel. And I think we’re just now beginning to get some benefit from that.

So that, even though as I said, pricing is pretty stable and, therefore, is not the source of additional input to the top line. The fact that we are expanding the market and the fact that we are retaining our business, and the fact that the business we’re retaining, as well as the new business, that the premium rates, though stable, are being applied to a higher subject base, whether that subject be payrolls or whether it would be sales, is providing impetus, continued impetus to the top line in these key areas.

Aviation the same thing. Aviation in particular, general aviation, which is what we’re involved with, has got fewer players in it today than was the case, let’s say five, six years ago. And since September 11th, there’s been general, good discipline in that business. So that’s working out well for us.

Our home warranty business is going like gangbusters. It almost became $100 million book of business for us last year, and I think we’re going to do even better there this year. It’s more of a property type of coverage, you know, with a short tail. It’s a little different than most of the commercial stuff we write. But again, that’s a -- the growth in that line is a reflection of the -- of increased or greater geographical spread that we’ve been working at for several years.

And then finally credit indemnity, which we write in our general -- we’ve been writing in our general insurance business since the mid-1950s, has been growing quite nicely for us in the last three or four years. We’ve had great success in marrying the relationships that we have in our mortgage guaranty business with that. And as you may know or recall, credit indemnity for us involves insurance of non-first mortgage stuff. You know, it’s more consumer loans or what have you. But that’s been doing well.

So, the only line of size for us that has not participated in this continued upward trend in volume is the E&O/D&O. And as you may recall, we and others have said that that line has begun to experience, sometime early last year, late ’03 as I recall, some downward price bias. And that’s been a reflection, I think, of the fact that prices had grown to such a degree in reaction to lousy claims experience in 2002 and prior periods, that now it’s coming down to a somewhat more reasonable level.

So, those are -- in a long-winded fashion -- some of the color that I think you might have been looking for.

Kelly Nash, KeyBanc Capital Markets.

Following on that great detail you provided on the general insurance lines, could you give us a little more insight as to how much of an impact was the increased risk retention versus some of the new business that you’re seeing? And then again, obviously, the rates have been relatively stable.

You mean risk management? You said risk retention. You meant the risk management business?

Right.

Yes, right. I would say there’s very little difference. As you know, risk management by definition produces a smaller top line than our standard business because the insured retains, in one fashion or another, either through a captive insurance company or some sort of retrospective premium adjustment mechanism, retains more of the premium that would otherwise go to the insurance company. So, I would say that, given that, that most of the growth in workers comp from a top line standpoint is coming from the traditional business.

And then looking at the competitive environment, can you give us an idea of, if you look at the competitive environment today in terms of pricing pressure versus maybe at year-end, how has this changed?

We -- again, as I attempted to say before, Kelly, we just -- in the areas in which we participate, you know, and I guess one area which I've pointed to is the E&O/D&O area, which has been experiencing some downward pricing pressure, and what we're experiencing in the first quarter is in line with what we experienced throughout 2004, as I said, beginning in 2003.

But in the other parts of the business, I mean last year -- if there is any difference between 2004 and currently, because in 2004 we were still able to get a couple or three percentage point increases on average on most of our business. And that just is not in the cards anymore. I think we're looking at a pricing environment which is, in our case, is pretty much as flat as a pancake. So that, again, we're looking to our growth -- to the sources of growth for us to be, one, greater penetration and greater number of agency relationships on the one hand, and the geographical spread that that implies, as well as the inherent growth of our customer base.

Okay. And on the title insurance side, the industry has generally been under pressure in several states. Can you discuss the potential impact on your business and the overall industry?

Well, I think what you may be referring to are the AG, actions against some title companies in this case, which had been involved with the use of captive insurance arrangements, which have been alleged or pointed to as not containing so-called transfers of risk. And as a result, have been deemed to be non-insurance. And companies that have participated in that have had to back off. And in at least one case that I'm aware of return some money to the insured, or to producers or what have you. Now, we did not have any participation in those kinds of arrangements. Have never done it and, therefore, it's been a non-issue for us.

Another development in title insurance, in particular, has to do with at least one company, again that I am aware of, having come out having announced that it might reduce premium rates on certain specific types of business. You know, obviously, we've looked at that just as we've looked at some companies in the mortgage guarantee business looking to reduce premiums on certain, traunches if you will, of the MI business. And -- but we -- in either case, we don't see those advances, if you will, by those companies or certain members of those -- of the industries to, at least so far, have much of a bearing on our opportunities to continue doing well in those businesses.

Okay. And then finally, just regarding kind of the corporate thought process. You know, could you discuss maybe your thoughts in terms of a dividend policy or perhaps share repurchase program or something along those lines?

Well, as you saw following our March meeting of the Board of Directors, we increased the cash dividend rate by some 30%, as I recall, which is a much higher increase than we have historically had. And that should be an indication to shareholders that obviously we felt rather positive about our prospects to keep growing the bottom line and, therefore, the contribution to shareholders equity and our desire, again at this juncture, to have the shareholders get more of what we're producing since we think we've got enough capital to support the business opportunities that we're currently looking at.

Historically, our dividend rate has been predicated on a look back approach through the last five years and trying to mentally make some judgmental adjustments as to what lies ahead for the next couple of years and set the policy accordingly.

As to stock buybacks, you’ve heard us say this before, that we're not a prime candidate for that so long as the stock price in the marketplace is above the nominal book value of the shareholders equity.

Mike Dion, Sandler O'Neill.

Good afternoon, Al. Just kind of a follow up to some of your prepared comments on the mortgage business. You know, obviously, the last year was a tough one in that line. And just looking to get a little bit more color on what changed in the first quarter versus the prior year. Both with respect to top line, which grew as you mentioned probably at a much rate than it ever has, as well as your loss reserve assumptions in the first quarter versus the prior years.

Well as you know, from an underwriting standpoint, there are two basic elements that you look at, right? The loss ratio element and the expense ratio element. And the expense ratio element, as I believe we indicated during our conference call and release for the year-end 2004, that we said that given our expectation that some of the services we provide such as contract underwriting services are likely to not be as high or as great as we did in the past, in 2004 and prior, that we should expect both the fees we get from that, as well as the attendant expenses of providing those services, to come down this year. And that to some degree is happening, and is leading to the relatively low -- for us at least -- expense ratio that you see there. Something of about 23%. And I think we tried to point out, that's probably the lowest or one of the lowest expense ratios we've published in MI.

With respect to the claims side of the business, we -- again, as we pointed out, there's been very little change in frequency and severity as such, as well as assumptions relative to them. So that between the fourth quarter '04 and first quarter '05 that has had no impact.

And secondly, as I mentioned, we had, what, a 9% drop as I recall saying, in the number of loans in default between year-end 2004 and March of this year. And that alone, I would say, is one of the biggest factors which led to a lack, for all intents and purposes, of an upside increase -- or an increase in the loss reserve addition for the first quarter. Those are the key points.

Okay. And maybe just a bit on, as far as the regional aspects within that segment. You had mentioned that, for a number of quarters, that the Southeast had been so problematic in terms of higher job losses than the rest of the country. I think Texas is also a problem state. Any more color on those areas?

Well, you just have to use a much abused word. You know, you have I think what -- I would classify it as an attenuation of those issues, okay? They're still there. They're not as accentuated as they were in 2003 and going into 2004. And again, as to whether this reduced pressure from those areas on the claim ratio is indicative of a trend reversal, I don't really know. I wouldn't bank on it right now. But all the factors, whether critical to this business, employment, home appreciation and so forth, those are still reasonably positive. And again, if there is any logic to all of this, then you should expect claims, costs to trend down and not trend up.

Alan Fournier, Pennant Capital.

I wanted to ask you a question. I'm a portfolio manager and not an insurance expert. But I wanted to understand, I guess in layman's terms, what the risks would be to, I guess earnings and book value, of a [retracement] of home prices. There's been a lot of speculation about the potential for a “bubble.” And I'd just like to understand what sort of a really worst case scenario looks like in terms of potential damage in the MI business, I guess primarily. And I'm not sure what the effects would be in the title business, if any.

Well, in the MI business, what happens when home prices come down to the extent that you -- the MI company takes over the house in order -- you know, when it pays off on the loan that has gone into default, to the extent that when it comes to reselling that house, there is less equity, if you will, in it that might accentuate the ultimate loss that's incurred. Though, I have to say to you that most of our claims today are paid outright, that there are relatively fewer situations in the case of a claims situation where we take over the house and take a risk on selling it, at least for the amount that we paid off.

With respect to title insurance, as you may know, the premiums there are predicated on the filed rates generally, and those rates are applied to the value of the home. So, to the extent that home values go down, then the amount of premium that would be booked by the title insurance company would come down.

But by the same token, particularly in our case where we've got some 60% to 62% of our business in title insurance emanating from agency channels and relative to which we pay the equivalent of a commission or service fee for doing some of the underwriting -- for performing the underwriting function in particular, well, that would come down as well. So you have, to some degree, an quid-pro-quo.

And then finally, you do have premium taxes which are predicated home premium. You have your loss costs, which also are predicated on the value of the -- that you’ve insured. So that in title insurance, you have almost a self-correcting mechanism in place so that you don't end up with a disaster if you -- if the bubble bursts, as you put it.

Well, could you walk me through on the MI side, what you actively do from an underwriting standpoint to try to avoid -- I guess what you would try to do is avoid pockets where there's been excessive price appreciation and -- or perhaps you don't even do that, and just sort of rely on the balance of the entire portfolio.

That’s generally been our approach, that -- you know, we think it's key. As you know, diversification, dispersion of risk is one of the key elements of the insurance mechanism, whether it's property and liability, title insurance or mortgage guarantee, or what have you. Life insurance, health insurance. So, it’s creative risk. You know, being all over the country is the best way to protect the overall book of business.

On top of that, when you come right down to it, you know, if you eliminate most of the “normal claims” that arise year to year in the mortgage guarantee business, when you come right down to it, it's fundamentally more of a catastrophe, economic catastrophe type of insurance protection than it is your more traditional type of insurance protection. And therefore, there again, what you're protecting, what you're trying to protect against is a concentration of risks in any one major geographical or metropolitan or economic area such as, let's say the Southeast or the Northeast or California or Texas or the Midwest. So again, a balanced book of business is the best protection we think we have in that line to protect the home claim costs.

Well, I understand we haven't had a broad housing price decline nationally for some long period of time, but what would occur in terms of potential losses in that book if we had a, let's say a 15% national decline in the value of homes?

Well, it has to be a companied also by declining employment and declining ability by people to make mortgage payments. You know, you can still have a decline in housing, but if people are able to still pay the mortgage on the house, have their jobs and pay the mortgage on the house and don’t move, right? Nothing happens.

Got you. So, you need the decline plus job loss?

Well, sure, yeah. Ability to pay. I mean, the underwriting also takes into account, in mortgage guarantee insurance in particular, the credit scores of borrowers. And obviously, the better the credit scores in your book of business, the more apt you are to experience lower claim ratios in good times and bad times.

If you look at the footnotes in our financial statement, you'll see there is a footnote there that outlines the make-up of our book of business in terms of cycle scores. And that's a pretty good indicator, the quality of the risks that we've underwritten over time.

Great. Well, thank you for the wonderful job you've done for us over the years and we appreciate it.

Great. Thank you.

Mark Finkelstein with Cochran, Coronia.

You've covered a lot so I'll just have a couple quickies for you. One is, what is the favorable development, if any, in the quarter? Can you disclose that?

The favorable development. You mean in the -- from a loss development standpoint?

Yes.

You know, we don't quantify that. It's pretty much the same for us. If you look at our 10-K triangles, Mark, you'll see that on average we get, what, 2% to 3%, positive result. And unless something is materially deviant from that average, we just stay with that.

Okay. So it's in line with--?

Yes. [Unintelligible.] Right.

Okay, perfect. And then just going back to a comment you made actually in the last quarter, which was looking at the D&O business. I know you were looking at your retention levels in that business as kind of the reinsurance renewals were coming up. I think you said April/May timeline.

That has not changed, no.

Those have not changed.

We were able to secure good, quality reinsurance so that we were able to maintain our retention at the same level this year. As I recall, it's, what, $3.8 million per claim.

Okay. And then just on the D&O market, I know premium’s come down. It's become a lot more competitive, obviously. But do you believe that pricing has gotten to an irrational level, or is it just much, much more competitive in your view?

Well, it's much more competitive from the standpoint that we're not able to grow our business at the same clip in terms of getting new accounts. And it's much more competitive from the standpoint that we still have to give some on the pricing. Obviously, we're not giving as much as to create losses for ourselves but, nonetheless, the margins are not going to be as good going forward.

Okay. And then just kind of going back to a prior question and thinking about your capital position and the 30% increase in the dividend, etc. Just -- how do you -- I mean, do you guys look at that kind of on a quarterly basis and evaluate it, or do you think that the decision that was made is essentially kind of complete for 2005 and you'll look at it again next year?

Yeah, we actually, you know, it's tied to our annual budget process, which starts sometimes in November of the year and ends up sometimes in February of the following year. And based on that budget, we set the requirements for each of our subsidiaries or operating centers as to the amount of capital we want to keep to carry the expected production, to carry the expected loss reserve content of the business, and also to leave something on the table to take care of possible adverse deviation that can always happen in this business.

Right. Okay. And then just thinking about, kind of going back to prior comments on growth exceeding the expectation, being in -- it sounds like the units are growing at a double-digit pace, whereas you were going into the year thinking it's going to be high single digits.

Right.

Is it fair to say then that further capital management at this stage would look pretty unlikely for '05, but again, be reconsidered going into '06?

Yeah, I think the message you got in March pretty much tells you where we were and where we are.

(OPERATOR INSTRUCTIONS.) Stephan Petersen with Citadel.

Good afternoon Al.

Stephan, how are you?

I’m doing very well. I'm doing very well.

How's your new job?

It's working out. So far, so good.

Great.

I just wanted to follow up on one question, which was last year in some of the conference calls you had said that you were keeping a pretty close eye on asbestos development. I was wondering if you could comment on that. It sounds, obviously, from the release that the redundancy you're finding in some of the places is more than offsetting any worries you may have or any adverse development you may be having in terms of asbestos, right?

Well, as you know by now, you've followed us for many years, Stephan. You know that we usually get nicked here and there on our A&E. I mean, first of all we don't have a huge book of it, but the little bit we have we've had the toughest time. And I would say everybody's had a tough time getting their arms around it. So we get hits, you know. We get hits for $3 or $4 million here, you know, $5 or $6 million there. But you put it all together, it's not a huge bill for us and we just keep doing the best we can in terms of trying to line up the level of reserves we have assigned to that particular type of exposure with the trends in our claim payments over the past three or five years or so.

We got nicked last year, and I think that shows up in the financial statements when you look at our experience in the general liability line, which is the line that contains those types of exposures. And we didn't get too much of it this past quarter, but who the hell knows. You know, next quarter might be a different story.

But again, as I keep saying, if it blows it's going to be a disaster for us. You know, it’s just not -- it doesn't have the makings of a huge hit.

Okay. And one last question, from me anyway. There's been a lot of talk in Washington lately about creating additional regulation for -- well, there's TRIA but also for the GSEs in terms of the mortgage business. Anything that you're hearing out of Washington that would be a net positive or negative? And if you want to talk a little bit about TRIA, that would be fine, too?

No, in terms of the MI, we're still plugging away on this issue of having the MI premium be tax deductible. You know, that's still up in the air.

In terms of the GSEs, obviously, they're under a lot more pressure and scrutiny, control than they've ever been and likely will continue to be. And to the extent that they have in the -- let's say two, three years ago if you recall when there was a great deal of fear that they might really impinge on the private mortgage insurance business, that that fear has somewhat dissipated. Is that to say that it will never return? I don't know. But right now, we just don't see pressures coming from that quarter relative to its impact on our MI business.

With respect to TRIA, well, good Lord, I mean, that's all over the place. If I were to bet, I would say, yeah, it's going to be renewed, but probably in a -- with a lessened participation by the federal government in the event there should be another catastrophe.

Okay. Terrific. Thank you. Nice quarter.

Bill Laemmel, Divine Capital Markets.

Hi, Bill.

Alvin, you did a good job.

Well, that’s nice of you to say that.

And keep it up. And is there any way you measure your marketing or sales, like this year we have 20% more brokers or agents, or is there a way you do that?

Well, when you go down our list of coverages, Bill, MI businesses sold all directly. There's no agency left -- agency build. On title, as I indicated before, we've got 60% to 62% of our business coming from the agents and the rest from our direct operations. And there the production trends over a long period of time are basically the same. We tend to get the same growth percentage on agency business as we do on direct business.

And then with respect to our property and liability business, substantially all of it is agency broker driven. So, we don't have a basis for comparing between that and a direct operation.

Mr. Zucaro, it appears we have no further questions at this time. I'll turn it back to you for any closing remarks.

Okay. Well, I don't have anything else to add to the discussion and, therefore, as always, again, thank you for your interest in following up on our fortunes. And we'll look forward to visiting with you next quarter. You all have a good afternoon.

This does conclude today’s conference. We thank you for your participation, and you may now disconnect your phone lines.