Old Republic International Corp (ORI) 2005 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Old Republic International second quarter 2005 earnings conference call. Today's call is being recorded. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has difficulties hearing the conference please press star 0 for operator assistance at any time. I would like to remind everyone that this conference is being recorded and would now like to turn the conference over to Leslie Loyette. Please go ahead.

Thank you. Good afternoon. Thank you all for joining today us for Old Republic's conference call to discuss second 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 web site at www.oldrepublic.com, or you can call Samir Patel (ph) 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 Chief Executive Officer, please be advised that this call may involve forward-looking statements as discussed on the add 5 and add 6 page of the press release. Risks associated with these statements can be found in the Company's latest SEC filings. With that, I'd like to turn the call over to Al for his opening remarks. Please go ahead.

Thank you, Leslie, and welcome to everyone. As usual, we'll add some details to the -- to the morning's release and then as has been said we'll open it up to questions that may be left unsaid. Overall, the -- the year is progressing pretty much as we thought it would about eight months ago. Of course, we have individual parts of our business that have bounced around a bit, but the -- the pluses and minuses as usual have tended to offset one another and have managed to keep the overall trend lines on the rails, so to speak. Of the three regulatory segments that we're in, I think we've -- I know we would have been happier to see our title line perform on a somewhat higher plane than it has done so far this year but -- but we think we'll see, for reasons we'll give in a few minutes, we think we'll see some better title comparisons as this year moves along.

Taking it by the -- the three basic pieces of our business, sta -- and starting with our general insurance book of business, it is really exceeding our original expectations, particularly in regard to top-line growth as -- as well as the resulting underwriting results. We started this year, as some of you may recall from past conference calls, we started this year thinking that we might get earned premium growth of -- of about 10 to 11 percent and instead now as you see we're looking at better than 15 percent. Among all the coverages that we underwrite here at Old Republic, I would say only our directors and indemnity coverages have lagged 2004 production levels. This has really been the case for several quarters and it's reflective of much greater competition in this particular line as well as some warranted and merited rate cuts.

Most other product lines, however, as I say, have exceeded expectations so far. We think that the -- the biggest reason for these better results are a combination of market share pickups, primarily through geographic expansion of some of our businesses, particularly in the home warranty and the trucking business, and the -- in our so-called bituminous operation as well as our general aviation business. In addition, we think that we still are enjoying basic pricing stability in most parts of this general insurance segment where we do have pricing slippage and we have some. It's currently, I would say, in the range of low single digits, 1 to 3 percent, let's say, the -- the benefits that we're still getting from last year's well priced business that, of course, continues to work itself through the earnings stream, is offsetting the little bit of pricing deterioration that we're experiencing in those lines.

I think as I look at our overall business, I think even though I say so myself, we're do a -- a nice job throughout the system when it comes to expance -- expense commit -- containment. Over the -- the last three years or so we've been able to skinny down our expense ratio by 200 basis points to its current level of about 24.5 percent, which is one of the lowest levels we've had in many, many years. As to claim costs, you can well tell from the statistics that were included in this morning's release that they've been a tad higher in this year's first half. And I would say that most of the upward tilt has been in the past and continued through this quarter stems -- and stems from the -- the legacy reinsurance assumed as well as A & E exposures in that our case hark back to business that we wrote in the 1980s and that from time to time tends to produce claim reva -- revaluations or settlements that are usually more adverse than we had originally anticipated. But as we've reported in the past, these particular exposures for us are not significant for a company our size, but nonetheless they -- they remain a continuing distraction that's more likely than not to nick us from time to time. And incidentally all of that -- those claim occurrences take place in our general liability line, and that's the reason why from a loss ratio standpoint, that line typically produces very poor results, particularly since it's a low premium income line for us.

But all in all, I would say our general insurance business remains in very good shape. We continue to think that an underwrite -- underwriting ratio within a range of 91 to, say, 93 percent is very achievable for this year as -- in its totality. And we also think that we still have opportunities in most types of coverages we write to both retain as well as pick up some businesses -- some business at price levels that have, in our view, the makings of very acceptable underwriting margins. For now and for the longer term, I think we're still looking to investment income as the great leveler of underwriting fluctuations in this business. And on this core, we're still generating very positive operating cash flows which are additive to the invested asset base. For what it's worth, our opinion is that short to intermediate-term yields are on a very gradual up trend in the U.S. economy and -- and this up trend should, therefore, be a positive to investment income down the road. This particular scenario should, of course, be of increasing value as -- as the industry-wide underwriting account begins to climb down from its pretty high perch on which it is lodged currently.

Let's see, turning to Mortgage len -- Guaranty, the stats in this morning's earnings release seem to be pointing to the resumption of a more robust earnings performance for this segment. And this is happening after this line has caught its breath, so to speak, for the past 24 months or so. I think the -- the major telltale signs that -- of -- of a resurgence in this business include, a -- a flattening of the paid claims ratio, which again you see in the statistical trends in the release. We've also had had a very nearly consistent drop in our expense ratio, which has probably reached an all-time low of 22 percent in this quarter just ended. We've had a continuation of strong operating cash flow in Mortgage Guaranty, and further we -- we've had improvements in -- in the persistency of our traditional primary book of business. You figure that during the -- the past 18 month or so, business persistency, in our so-called traditional businesses,I say, has improved by some 45 percent to its current level at the end of June of about 67 percent. Obviously we still have a ways to go before we can enjoy higher levels of persistency as we did in the mid -- in the late 90s, and in particular where persistency was in the mid 80s. But given the generally upward tilt to interest rates for traditional mortgage products we should expect some further improvements in this particular indicator of business stability down the road.

Looking -- looking again at these statistics that are appended to the earnings release of this morning, you'll see that so far this year we've underwritten a -- a greater volume of so-called bulk business. As you know, competition for this product basically comes in the form of our M -- other MI companies, our competitors in the Mortgage Guaranty field, on the one hand, as well as Wall Street securitizations on the other hand. And, of course, what drives these two competing sources are the -- the relative spreads between the two approaches and insofar as competition from the MI companies is concerned, from the continually changing assessments and -- and varying appetite for risk from period to period on the part of our MI competitors. Our own -- our own assessment of available product in this year's first half obviously led us to be much more receptive than we had been to underwriting some deals and that's why bulk business represented a much larger input to insurance written in the first half of this year. However, as we've said on -- on many occasions in the past, our posture remains one of still being opportunistic and being a non-cookie cutter underwriter for this part of the MI market and therefore it's likely that our -- that production trends over time from the standpoint of bulk insurance, that these trends are likely to ebb and flow as the -- as our underwriting evaluations as well as appetite for risk change as well.

I don't believe that much really needs to be said about our title business than has been communicated through the numbers and the write-up in this morning's release. As you know, this is always been a transaction-driven business and it remains that way. In our specific situation, we produce more than 60 percent of title transactions through independent production channels such as attorneys or -- or title agents, abstractors, or what have you. And this, the fact that we have so much of our business, therefore, coming from these independent channels tends to accentuate the time lag between the opening and closing of title orders. But using our directly produced business as to which you see statistics in the release, using this directly produced business as a proxy for the entire sources of production, it does appear that production for 2005 is probably going to mirror what we achieved in 2004 and assuming that our claim's ratio stays within its current range, and at this point in time we don't have any expectations that it will not, it does mean that the expense ratio should trend down and -- a little bit, anyway, and that underwriting margins should, therefore, improve in the second half of this year. Additionally, in the second half, and particularly in the fourth quarter of the year, we're not going to be saddled with the type of non-recurring litigation costs that we incurred in 4Q '04, and, therefore, the second half of -- of this year insofar as title comparisons are concerned, is more likely than not to -- to improve from what we've posted in the first six is months.

For the totality of our business, we're still getting most of our bottom line, as you can tell, from the underwriting and related service side -- services side of our operations. As you can see, our overall composite ratio of claims and expenses, i.e. on the consolidated basis, is almost dead even at about 88 percent year-over-year, whether you look at it quarter-to-quarter or first half-to-first half. Our best guess at this juncture is that this ratio likely to remain in close proximity of those levels for the rest of this year. And we have great comfort as we have had for a long time, that claim reserves for our entire book of business continue to produce slightly redundant developments and, of course, that's helping maintain good overall underwriting margins and not have any issues dealing with the past impact or undermine the quality of the underwriting results we're posting currently.

Investment income-wise, our expectation is that its trend line is going to continue to point north, if you will, because operating cash flows are still, as I've said, additive to the invested asset base for most of our business, title being the lone exception so far this year. And on top of that we do expect, again, as I indicated before, that we should have -- experience a continued upward tilt to short to intermediate term interest rates, and -- and these will have -- are likely to have the most effect on the current structure and average life of our fixed maturity securities portfolio, which is currently at about four and a half years. So quite a bit of our portfolio turns over year in and year out, and when you are, obviously, in an inclining yield situation you are able to take pretty good advantage of the opportunity to improve the overall yield of the portfolio. As we -- as we look ahead we think that investment income will, therefore, become a greater component of pre-tax operating earnings.

As you've seen by now, we -- we recently experienced closure on a longstanding claim we had for recovery of federal income tax adjustments that went as far back as 18 years ago and that's why, incidentally, the -- the earnings -- the interest earnings component of that adjustment are much greater than the -- the principal amount that was in question. But if -- if we leave that aside, our tax rate remains pretty formerly ensconced in the 32 to 33 percent range since we continue to generate substantial amounts of fully taxable income both in the form of underwriting income as well as fully taxable investment income. Our current tax situation, incidentally, leaves us pretty unexposed to any significant IRS demands for either timing or permanent tax adjustments. So I think what you see is what you get from a -- a tax cost standpoint in our financial statements currently.

And finally, I might add, as I usually like to point out, that our balance sheet continues in its very pristine state, and consequently, we're not exposed to having either asset or liability items contain significant exposures to the shareholders' account. That's about the extent of the comments I --I thought I should make. So as -- as was indicated, we'll open up the meeting to any questions you may have.

[OPERATOR INSTRUCTIONS] We'll take our first question from Greg Peters of Raymond James.

Good afternoon, Al.

Hello, Greg.

I thought I'd ask a couple of follow-up questions to your opening comments.

Sure.

First, you hinted and talked about some reinsurance assumed business affecting this year's six-month results from a combined ratios standpoint relative to last year and I was wondering if you could quantify that in terms of either dollars and or combined ratio points so we could sort of see where the underlying combined ratio is excluding this presumably anomalous event?

Okay. Well what I meant to say, Greg, is that it was the combination of reinsurance assumed as well as our A&E exposures which are contained in similar types of -- of accounts that we wrote back in the early '80s.

Right.

And typically, this will not come as news to you, Greg, because if -- I know you do read our -- our 10-K, typically over the years, we've disclosed that we've got maybe 100 to 200 basis points of loss ratios pretty regularly affected by these surprises or increases in reserves for one reason or another, and while I don't have a -- a finite number for you for the -- for this quarter or the first half of this year, I would not be far off base if I said to you that it's probably in the same neighborhood.

Well, would I assume that the -- the last year's result also included a similar --

Yes, and I think that's included, I believe, in the -- in our 10-K footnote disclosures or ei -- either there or in the MD&A, Greg.

Okay. Well, I -- I'm -- I'm not -- I'm not trying to get hung up on -- on a 91.4 percent combined ratio, but most of the other companies, especially the companies that are writing some casualty business seem, not most, some of them seem to be reporting better year-over-year combined ratios, and not that, again, 91.4 percent is something to sneeze at, but I'm -- I'm just curious if there's anything going on there. Are you just taking more conservative posture on loss picks? Or what your -- what's driving this? If -- if I'm to assume that this legacy stuff is affecting both last year's and this year's results.

Yes, I think with respect to your second point it's not just this year and last year but it's a series of years. I would say at least the last five or six years and to -- to a large degree what's driving this is also the fact that we've had an acceleration in -- in paid losses. Until about three or four years ago we were paying mostly defense costs and what's happened in the last three or four years has been, as I say, that the payment of the indemnities claims have matured, et cetera,et cetera, and we've had had more payments. And, of course, one of the elements that we follow or use in establishing reserves is -- is to -- to look at the -- the -- the number of years of paid losses that are contained within a particular reserve level at any point in time, and we've been inching that up a little bit. Again, in response to this acceleration of paid losses.

Another element -- another element which has some bearing on this also is the indirect effect of discounting all the reserves. Just as you have on workers comp you have so -- a little bit of discounting on this GL type of cases. And of course as the -- as the -- as the claim comes to -- to maturity, then the -- the amount of the discount gets reduced and -- and falls through to the underwriting line. In terms of your point about looking at our underwriting results relative to competing organizations, the only point I -- I guess I can make on that, is that since I don't know about their business, is that Old Republic has been showing better underwriting results for a longer period of time than most commercial lines organizations, and I think, therefore, the comparisons are not going to be as -- as -- as obvious with us as they are with the others.

I think that's a fair response, Al. Maybe I could switch gears. I guess I had two other areas that I wanted to touch upon. Just sort of -- and I know you provided some color on this, but on the mortgage insurance industry, with piggybacks and banks in -- involvement and -- and , I guess, pending GSE reform, I'm -- I'm curious what your outlook is -- is for the business there? And then I guess sort of tangentially, from a corporate wide standpoint, I think historically you've sort of talked about a targeted return on equity across the enterprise of maybe 13 to 15 percent, and I'm wondering today as you see it, based on all the ingredients and various issues affecting the various business segments if you think that type of targeted range is still acceptable or is there -- have -- or have you revised that range?

Well, right now, without giving effect what we -- we think is reality, i.e. that investment income should become gradually a greater component of -- of our bottom line. If I were to take a look at return on equity, particularly on the basis of original cost of the shareholders equity account as opposed to its market value adjusted basis, I would still say that perhaps 12 to 14 is a better range than 12 to 15.

Is that ba -- is that average equity at cost, or beginning, or how are you looking at that?

We look at it as a return on equity at the beginning of the year.

Okay.

And as I recall, Greg, we publish those numbers in our annual review every year. Done both ways.

Right.

As to your question on the -- on the Mortgage Guaranty business, listen, it's a business that we're in for the long pull, and we know we're going to have periods such as we've been going through where you have some market discontinuity and -- and you deal with it. But the longer term I -- I think we're -- we're assuming that we're going to be able to pick up some market share of the business that's there. We're assuming that we're going to be dipping and down in terms of -- of asset or loan quality that we're willing to insure and we're going to be willing to do that on the -- on the basis that we can satisfy ourselves that we get a higher premium for taking greater risk. And there is, as you know, more of that product today than -- than there has been in the past. I mean if you -- our own statistics show that, for example, the, excuse me, that the amount of loans -- or the percentage of total loans insured, let's say, that have a greater than 95 percent loan-to-value ratio has grown significantly for us and that's a -- an indication that there is greater risk in the book. Excuse me. But again, we're satisfied that we're getting more money for it.

Okay. Fair enough. I'll requeue with some follow-ups.

We go now to a question from Kelly Nash of KeyBanc.

Hello, Kelly.

Hi, Al. How are you? Just a -- a couple of questions on the general insurance segment. I wonder if you could go into a couple more of the lines more in detail, particularly for example workers compensation and just talk about the premium growth opportunities that you see as well as kind of on the profitability side?

Uh-huh. Well, if your question is on -- on workers' comp, as you know, Kelly, our -- our business, particularly on that line, is heavily weighed towards what we refer to as risk management or loss sensitive types of products, and that's doing reasonably well for us. Now, I know that a lot of the growth that we're showing that line stems from business that we've written in the past,. But nonetheless -- last year, let's say, or the year before --, but nonetheless that business is continuing to perform very well from both a -- a loss ratio standpoint as well as a top line standpoint. I have to say to you that competition is heating up in that area and that we're having to -- to work harder at keeping accounts. But we're doing okay. Year to date our comp combined ratio is about, oh, what, 97, 98 percent, and that's a little bit higher than it was last year for the full year last year. We had a combined of 97. So there's a little bit of hev -- heat we're taking there but still we've had a positive underwriting ratios in comp now for three years running and we don't see that changing any time soon. Even though, as I say, growth is going to be somewhat harder to come by, particularly in this national account, risk management business.

With respect to our large trucking operation, we're still doing very well, a lot better than we thought, and that, again, and that, in that case, is a reflection of our -- of our continued benefits from the geographical expansion of that business that we undertook a number of years ago. So as I said before in my general comments, the only area where we're struggling, and in fact, losing some top line power, is in the -- in the directors and officers and errors and omissions liability area. But then again as I keep remaining everyone that is one line of insurance where three years ago or so we experienced significant price increases and those were not sustainable and, as I said earlier, the rate declines that we're experiencing are warranted on the basis of good experience we've had in the past couple of years in particular.

And then regarding the --the growth which obviously exceeded expectations in the general insurance segment, as you look at the geographic opportunity that you have and as also the ability to retain more risk, what sort of expectations do you have considering the rate environment and the pricing competition? What are your expectations as you look out at the second half and going into '06?

Well, given that we've been wrong two years in a row, in 2004 we started the year same way, thinking that we'd get 10 percent growth and we ended up with almost 16, as I recall, and this year we start with about the same with the same bogey and we still end with 15, 16. So our -- our crystal ball has not been particularly helpful in that area. But that's -- that''s okay. I mean, the -- we're supposed to be in the market and react to-- to -- , on a real-time basis, and -- and what it means is that we've had much better opportunities than we thought we would.

As to the second half, as I said, there is some slippage, a couple or 3 percent at most if you -- if you were to make a -- an overall statement about our book of business. Which isn't a lot and we think that most of that is is going to be offset by a continued ability on our part to get more market share, particularly in light of some of the expansion we have and, again, in our truck operation, in our bituminous operation, in our -- in our aviation business, home warranty business. So we've got a -- a bunch of things going for us that are going to be additive. Now does that mean that we're going to get another 15 percent in the second half? I don't really know, but it should be better than 10 or 11 percent that we started the year with.

And then, finally, regarding the trucking, anything from a legislator front or any trends in overall trucking in general that could have an impact on the insurance -- assurance aspect of it?

Nothing on my -- on my radar screen at this point in time.

Okay. Thanks.

We go next to Mike Dion of Sandler O'Neill Investments.

Hello, Michael.

Good afternoon, Al. Just wanted to -- to follow up with the -- the last question in the general insurance segment relative to your two major lines, the -- the comp and -- and the trucking. You've mentioned market share gains the last several quarters and maybe you could just elaborate a bit. Is it really a lack of -- of competition, lack of players out there that have -- that have gotten out of those -- those two lines of business that -- that's really causing the -- the market share gains for you? I guess given that pricing is now kind of in the -- the low single digits on the downside, how -- what will it take for you to -- to continue to add business if pricing continues to head south in -- in those two lanes?

Well, I -- I think one of the issues is -- is a lack or dearth, if you will, of good honest to goodness, reinsurance capacity. I think reinsurers, particularly when it comes to trucking, are not as -- as I don't have as big of an appetite for that line as they've had in the past and, as a result, the primary companies are having to do a better job of -- of analyzing the book and pricing it properly because they know that they're the court of last resort, so to speak, that the reinsurance markets are not going to bail them out. With respect to -- to the -- and I would say that they're also still fewer players in trucking today than there were when the -- when the line blew up back in '98, '99. That's not to say that we're not going to get more, because typically what happens is as the -- as the underwriting cycle softens you get a lot of players coming into trucking. And the reason for that is that trucking delivers such a big part of the commercial lines insurance business that it tends to attract competition like fruit flies. And -- so that's what you have to look out for, but that's not happening so far at least.

With respect to comp and large national accounts, I think the -- the tightness of the markets, and again the -- the impact of reinsurance markets not being there as forcefully as they were three or four or five years ago, is what's helping us retain business. Our retention rate is still very good. Although I have to say that in that business competition is becoming more intense but it's coming in the form of primary companies being willing to take more risk since they can pass it on to the reinsurance markets. And that, I think, is a reflection of the sturdier balance sheets that are -- that are there. So, looking forward, I think we're going to have a tougher time growing our business with respect to large accounts than we are with the smaller medium sized account.

And -- and as far as pricing, your -- your, I guess, comfortable, obviously, today if -- if pricing were to say worsen times two so instead of say down 3 percent it's down 6 percent. I -- I guess what level do you -- do you kind of back off the -- the -- the pedal a little bit?

Yes. Uh huh. That's the $24 question, right? I mean, we all have different appetites and different walk-away prices. Historically, Old Republic has done pretty well. I think the last time we didn't do so well was when we stayed at the poker table a little too long at the -- on our trucking business back in the late 90s. But, otherwise, we've -- we've had a pretty good nose for when to pull out. And that time will come, I'm sure. I don't think it's in -- right now it's on our radar screen yet. I don't think we're -- we're at that level yet by any stretch of the imagination. When you read about price declines in a commercial lines business, I think when you scratch the surface, a lot of it is is occurring more in the middle market -- little market area. A lot of it is occurring in the property lines where Old Republic is not particularly heavily represented. So, again, that -- those big picture reactions you read about are not affecting us directly in the -- in the particular segments of the business that we work in.

All right. Well, thanks very much.

Yes, sir.

We'll go now to a question from Mark Finkelstein of Cochran, Caronia Securities

Hello, Mark.

Hey, Al, good afternoon. Couple quick questions here . Just going back to the MI business. You've hit historic lows, or at least recent historic lows from twe -- at 22 percent expense ratio. And I'm just curious with potentially persistency inching up do you see any scope for that to go down even further or we kind of at the lows?

I think it could go but I -- I think we've -- down a little more. But I think we've -- we've gotten the lion's share. You've got to figure that our company historically has been 26, 27 percent expense ratio company when it comes to the -- and of course mix of business has something to do with it, too. As you write more, let's say, bulk business, which has a different cost structure attached to it than the so-called traditional flow business, that's bound to have a positive impact, if you write more of that stuff, on your overall expense ratio. So since particularly in the last six months or so we wrote more of that bulk stuff I'm sure it's had some additional beneficial effect on the expense ratio and that's what leads me to say that we're probably where we should be. Could it go down to 21 or so? Yes. But, as I say, I think we've had the lion's share of the -- of the benefit so far.

Okay. And then just on the MI business as well going back to your opening comments. At least over the last several years paid loss ratios have tended to pick up in the back half of the year with some seasonality. I guess I just -- I want to make sure I understood what you said in the opening remarks. Do you not see that occurring kind of in the back half of this year or it will be more moderate than what it's been in the past?

I -- I think that would be the -- if -- if we're to talk about expectations, the latter would be our expectation that yes, you're going to continue having a pickup in the loss ratio in the fourth quarter of the year and particularly in the first quarter of the year. And -- and then you -- you see that ease during the rest of the year and therefore it's bound to happen again but I don't think it's going to -- to occur to the same degree as it -- as it did last year or the year before let's say. .

Okay, perfect. And then just moving over to the title business real quick. I guess, in thinking about the expense ratio on that business, and I know that's been an area of focus over the last year o so, how much -- how much of that -- how much expense improvement could come out of initiatives that you guys are taking in terms of drawing expenses out of a system versus purely looking at production?

Well, when you're talking about 60, almost 65 percent of our business coming from independent agents then you've got sales sensitive expenses there which can be taken out of the system pretty readily. Or put back into the system as we write more of that business. So you're basically talking about 42, 45 percent of our business that we write directly. And there, I have to say, as you get to -- to the bottom of the market you're on a slippery slope, because you -- you get down to having to cut marrow out of the bone and that's something we're -- we are always unwilling to do. I mean, we have talented people and you can't just get rid of that major asset of ours. So we're -- there's a cost of carry involved there and so my answer to you would be that we have great difficulty cutting much further from where we are. Now, if the market were to really go south for an unexpectedly long period of time, then you take another look at it. But so long as we're just bouncing around on the waves right now, I think we're pretty much going to be where we are from an expense ratio standpoint.

Okay. And then one final question, just on the -- the general insurance business. When you commented that rates were down in the low single digits, just to clarify, was that --

2, 3 percent.

2, 3 percent, right. That was overall or was that just in specific lines?

That would be for the -- the large -- the vast majority of our basic commercial lines of -- of comp, automobile liability, physical damage, general liability, that's about it. I would say that the -- obviously the rate declines in our E&O, D&O are much higher, but, of course, that's -- that's a good sized part of our business, but it doesn't have as much of an impact on the totality of what's happening there. So that's where -- I would say, most of our business is flattish. Some areas like home warranty, you don't have any decline in -- in rates. Our -- our growing book of -- of automobile extended warranty business, you don't have any rate declines or aviation. We're not seeing rate declines of any significance. So I would -- I'm talking in generalities, but I think those are very applicable to the totality of our business right now.

Okay. Just want to clarify that. Thank you.

Uh huh.

We go now to Mike O'Keefe of Two River Capital.

Good afternoon. This is actually Kevin Silverman of Two Rivers Capital.

Yes, sir.

Just curious, you're so well capitalized and it appears that you'd have room to expand using existing clients into other segments. Is there any thought to trying to evolve a -- another leg to the stool based on existing clients' needs?

I would say not so much existing clients as hopefully -- or extensions of -- of the client base. And I have to say to you that I don't think a month goes by around here without something coming up where -- that we look at in terms of a new -- an additional book of business that we could buy, and -- and to -- and today is no exception. We're looking at a couple of things. But, it's -- to make good deals is very difficult in our business. But we are very mindful of -- of the need to put our capital to work and we keep looking at it and -- but we do take the long view. We're not going to -- to do a deal just because we're able to do it.

Are you finding that in the market that the deals you would perhaps be interested in tend to be accretive, or do they tend to require an investment of a period of time before they would turn positive, or how would you you lay out --

Well, it depends on how you structure a deal. If you're buying a whole company that becomes much more of a capital intensive way of doing things, and, therefore, it becomes a lot more treacherous in terms of there being -- such an acquisition being additive, particularly when you consider that after you do those kinds of deals, usually the surprises you get are -- tend to be negative as opposed to positive. On the other hand if you are looking to acquire books of business, which is our preference, then properly priced those ought to be additive. However, sellers out there are not exactly dummies, and -- and , therefore, you -- you have to be able to make a deal where it's a win-win situation for both the seller and the buyer. And that's what makes doing a good deal very difficult.

Are there any Justice Department issues that would preclude from you from expanding in any of your areas at this point?

No, no, no, no, uh uh.. We -- the highest market share we have in our business is in our Mortgage Guaranty business where we've got about 11.5 percent, or thereabouts,so. And we're not looking to -- to grow that business via acquisition at this point in time anyway. So we don't have any issues in that regard.

Thank you very much.

Yes, sir.

We now go to a question from Bill, excuse me -- we'll go to a question now from Bill Lemo of Divine Capital Markets.

My old friend, is Bill Lemo, how are you?

Yes, well, we're still going on this thing.

Yes, yes.

And -- and you're doing pretty good. It's good to hear that the litigation equation has lightened up in the title business.

Yes. Right.

It's hard for me to believe, however, that the California politicians have stopped trying to find inventive ways to narrow the profit margins in title in benefit of the voter, of course. Do you have anything on your radar screen there?

No, I mean, as we've disclosed in our -- in our 10-K, Bill, we -- we have -- we -- along with other title companies, are subject to some litigation, as I recall, in Florida and Ohio, which have to basically -- which basically deal with consumer issues to which your -- I think you're alluding. And that's a never ending saga, you know. It continues, and it will continue, and it -- it -- it's bound to continue whenever you are, as an insurance company, involved in a consumer type of product. You're in the eye of the storm, and -- and that's -- becomes a cost of doing business and -- and you work with it.

Very good. What are your thoughts on higher interest rates in Mortgage Guaranty market and the title market?

Well, right now you can get a 30 year loan for about, what, 5.5 percent. That's a very low rate. And we've always said, you can have rates that go up to 7, 8 percent, let's say, and so long as you have good employment patterns, so long as people keep their jobs and so forth, they'll -- they'll squeeze out a few more bucks to get into that house. And -- and so right now we don't see an issue in terms of growing that business by virtue of what might happen on the interest rate front. It's jobs, jobs, jobs.

Okay. Thank you.

Yes.

Next on our roster we go to Craig -- Greg Peters of Raymond James.

Al, I'm jealous. You've never referred to me as your old friend. Maybe I need a couple more gray hairs.

You are an old friend, Greg. It's just that I've known Bill Lemo since 1969. I've known you for 12 years, right?

Something like that. Anyways. I thought I'd follow up on Kevin's question on capital. One of the things that you've commented in the past on your conference calls is -- and when asked about excess capital at the organization, you've talked about your surplus to reserve ratio, especially as it relates to the general insurance business, and I thought you might take this opportunity to provide your shareholders an update of where that ratio is today and give us some historical sense of where it is in the context of a range of where it's been, say, over the last ten years?

Uh-huh. Well, there's two ways of looking at loss reserves, both on a net basis, net of reinsurance and gross of reinsurance, and we look at it both ways. Net of reinsurance and the rating agencies will tell you this, that once you start moving towards 1.6, 1.7 times reserves to capital, that's all in the statutory basis, you have problems with respect to your rating, if you care about that rating, and we do, given the nature of our business, our financial ratings are critical to us. So, therefore, part of the answer to your question is that we tend to want to keep more capital than is necessary so that if something bad, if some surprise comes down the -- the line,. If -- if stock market go to [expletive], and as a result deplete the capital base upon which -- which we depend, we like to have a cushion to weather those particular storms. Having said that, our ratio currently is -- is at about the 1.1, 1.2 times, so we have the ability to grow our business, i.e. leverage it to a greater degree with the capital we have.

Historically, in answer to your question that ratio has been as high as 1.75 when we were a much more leveraged company than we are today. So we do have a luxury and -- and -- and we like that it way because it gives us also the ability to grow the business through an acquisition. If one should come down the pike, without having to go to -- to the securities market to raise money and potentially undermine the shareholders equity account by virtue of any dilution that we might have.

Two follow-up questions to that. First of all, the -- when you talk about the reserves to capital, you're talking specifically about general insurance, correct?

Yes, uh-huh.

And what was the capital base that you're using to come to that 1.1 to 1.2 ratio?

I don't have it in front of me, but, it hasn't changed materially from what you see there in -- as of year end, in the 10-K for our general insurance business.

Okay. And -- well, fair though, Al. That's -- that -- that's -- thanks for the response.

Yes.

We'll go now to a question from Ira Zuckerman of the Stanford Group.

Al, how are you?

Hello, Ira. I haven't talked to you in a long time.

Yes, well, sometimes I don't have any questions.

Uh huh.

Couple of things. First of all, on the tax refund, do you have any plans for the -- for that cash at this juncture?

Well, that cash goes to the insurance companies, it doesn't go to the holding company. It goes into three of our insurance companies and -- or in light of the question that was just raised, you're going to have basically, what, 45, $46 million after tax being additive to the capital and surplus of those three insurance companies. And given the amount of capital, that's not a whole lot of money. We've got more than $1 billion, 1.5 billion, 1.6 billion, as I recall, of capital in those companies on a statutory basis. So, that adds a little bit but doesn't make that much of a different.

Okay. So then -- it's not -- it's not really free cash yet?

No, no.

Okay. And the other question was there's been a couple of big settlements in the California title insurance business and I'm wondering where you sit relation with those suits at this juncture?

Well we've never done -- we were never a subject to those suits because we never participate -- participated in the -- in the reinsurance -- in the captive reinsurance situations that the other companies did. We never did those types of deals, so we weren't sued.

Okay, Al, thanks very much.

Yes.

And that will conclude today's question-and-answer session. I would like to turn the conference back over to you, Mr. Zucaro, for any additional closing remarks.

Okay. I don't have any other comment. I certainly appreciate the interest and -- and the thrust of the questions that were raised by everybody and I look forward to -- to visiting with you all you sometimes in, what, October, I guess, after the end of the third quarter. So y'all have a good afternoon.

Once again this will conclude Old Republic International's second quarter 2005 earnings conference. We do appreciate your participation.

You may disconnect at this time.