Old Republic International Corp (ORI) 2005 Q3 法說會逐字稿

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the Old Republic International third quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to Ms. Leslie [Loyette] Please go ahead.

Thank you. Good afternoon and thank you all for joining today for Old Republic's conference call to discuss third quarter's results. This morning we distribute add 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 can call Deanna Walcott at 312-640-6771, and she'll 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 side 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 thank you everyone for joining us for this regular update on our business. I have to say that given the earlier expectations we had of full-year results, this latest quarterly installment did not disappoint in our view. While individual parts of the business did not line- up exactly as we had anticipated, our overall performance was up to par in terms of consolidated operating revenue trends, as well as the pretax margins on our business. Year-to-date, as you can calculate yourself from the numbers we've given you, operating margins were flat at about 18.5, 18.6%, at just about the same level for the latest quarter. These margins remain well within shouting distance of the 19.5% or so average operating margin for the totality of our business for the last five years.

Looking at the traditional segmentation of our business and starting with General Insurance, that segment performed slightly below expectations. Mortgage Guaranty was at -- was about where we thought it would be, and Title operations were hugely more profitable than expected. At the beginning of this year, we -- I believe we mentioned a couple of times, we did think that our Title business would provide more positive year-over-year comparisons in the second half of the year, and that's come to pass.

Underwriting-wise, our general insurance business continues to perform very well, in our view. The vast majority of our coverages are clocking in at composite ratios in the mid-80s to low 90s. And together, as you see from the stats there, they're producing a composite underwriting ratio in the low 90s, just as we thought they would. I might note that these ratios, again, are very credible indicators of our current performance, since prior years aggregate reserves for general insurance continue to develop favorably so far this year and, therefore, they are not penalizing current results.

Among the various coverages we write, loss ratios, as usual, are bouncing around a bit. But, again, in their totality, the end result is quite stable and very satisfactory to our way at looking at them. As we pointed out in this morning's press release, the most current quarters claims ratios showed a little bit of an uptick, and that was due, as we indicated, to the estimated exposure we have to hurricane Katrina losses. We think this is a passing and rather benign loss exposure for us, since our General Insurance segment is relatively immune to property-related claims, given the basic casualty orientation of our book of business.

Again, for those of you who may not be totally familiar with Old Republic, we've got very little property insurance in our book. The closest we come to it is the inclusion of property insurance in the so-called commercial multi-peril policies. But historically, we have not been oriented towards that line. And the losses, which are -- which amount to a net of reinsurance of about $4.5 million for us as a result of Katrina, involve primarily a few trucks that got way-laid out there, a few airplanes, a few contractors premises that got inundated, and so forth and so on. So lots of little things here and there, but nothing major.

Expense wise, this component of our underwriting ratio and General Insurance is resting within its normal range of about 23 to 25%,where it's been at for many years. And, of course, this reflects the basic stability of our mix of business, as to both coverages as well as the types of underwriting exposures we continue to assume. Volume-wise, you can see that earned premium growth slowed down some from the pace that was set in the first half of this year. We believe that the -- this weaker up-trend is due to a number of factors. Some of them are seasonal. Some are related to premium recognition mechanics having to do with the annualization of premiums that we need to follow nowadays to conform to regulatory requirements, which came into place a couple or three years ago, as I recall.

And some are due to premium recognition adjustments that typically result from loss-sensitive insurance programs. And those, you know, by definition can bounce around a bit since, again, the premiums are adjusted up and down, depending on the loss emergence of individual assured's and, therefore, I think we had quite a bit of it in the second quarter, which we did not have in this quarter. But when you shake all of this together, we think we're -- we've basically got a quarterly aberration, if you will, in this earned premium trend line, and we're still of the mind that,, for the entire year, our general insurance business is likely to reflect a 12 to 13% increase or thereabouts, in net premiums earned. This would be, again, a little higher than we thought we could be achieving at the beginning of the year, and would represent, in our view, a reasonably good achievement in light of the markets in which we are operating.

From an investment income standpoint, this segment is reflecting a little more get up and go, if you will, than has been the case for awhile. The basic reason for this is the continued strength of operating cash flow, which is obviously additive to our invested asset base. In the next several quarters, we should get some increasing help from this feature of our business, as the tightening that's taking place at the Fed continues and puts some upward pressure on current yields. Finally, I might note that the $46 million in back taxes we received from the U.S. Treasury early in the third quarter, which we announced previously, should also add a bit to investment income contribution in the General Insurance segments, since this new money was primarily, or exclusively I should say, attributed to our property liability insurance business. And, therefore, as it's put to work, it should be also additive to the investment income stream.

In our quarterly releases, as usual, we include a number of key statistics relative to our Mortgage Guaranty segment, and the latest update you see in the press release tells a lot about what's happening here. Premium production continues to be under some pressure, even though year-over-year persistency trends from our traditional primary book of business have improved some. New business written, in this category of business, on either primary or traditional primary business, is lagging some. But the combination of both higher overall premium rates from products that have somewhat greater risk attributes, which we've been writing to some greater extent in the past couple of years, as well as moderate growth of our bulk business, the combination of those two elements are the basic reason for earned premium growth in the mid single-digits for the first nine months of this year.

Operating cash flow in this particular segment is basically flat year-over-year, so that the invested asset base is not growing much, and as is the case for the other parts of our business, overall yield trends are flat as well and, therefore, are not adding to top line growth from that standpoint. On the expense side of Mortgage Guaranty, we think we continued to well in bringing controllable costs down to levels that reflect the type of production, as well as the mortgage market we are dealing with. Year-to-date, the expense ratio of 22.2% is down about 14% from last years 25.7% level, as you see in the statistics there.

Claim costs, however, that's a horse of a different color. They are up about, what, 7.5, 7.6% in the third quarter, and they are up nearly 10% year-to-date when we compare these numbers between '05 and '04. And as we've been reporting for several quarters, the culprits here are, first of all, a reasonably steady up-trend in paid claims. And it was a little more accentuated, as you see, in the 3Q. It's also a contribution from the greater seasoning of higher-risk, but nonetheless, higher-priced product, as well as some adverse pressure on default and cure rates.

And leaving aside seasonal factors, there's been a fairly steady upward trend, when you look at our stat, in our Mortgage Guaranty claim ratio. I have to say that, based on everything we see, again focusing on the trends in default rates, cure rates, our mediation efforts, some expected additional severity for certain claims, that we think that the -- the level of claim ratio should not abate in the near-term. Still, as you can see in the release this morning, we have a near perfect offset between general expense, as well as claim trends from a ratio standpoint. And the sum total of these two offsetting trends is a flat to slightly improved underwriting ratio for this year's quarterly as well as year-to-date periods.

Moving on to our Title business, the information we provided in this morning's press release highlights, in our view, the key factors that drive the performance of this segment. Title, as you know, is the most transaction driven portion of our Company's operations. And, as nationwide mortgage originations trends go so, so does our own premium and fee volume trends. This was evidenced in this years third quarter, as both the top as well as bottom line results, benefited from strong mortgage origination volume in late spring, as well as during the summer months.

And since, again as you may know, we get a large majority of our business from independent title agents and there is an inherent lag in the reporting to us of agency production, premium and fee revenues in this years final quarters should also make for a very positive year-over-year comparisons. Add to that the fact that, in the fourth quarter of last year we settled a longstanding litigation, which penalized our results for that period significantly, and since we have no expectations of a similar charge in this final quarter of 2005, our Title business contribution to the overall results of our Company should shine significantly.

For the latest quarter, the pretax operating for Title Insurance, as you see, came in at about 10.5, 10.7%, compared to 8% in last year's equivalent quarter. Year-to-date this margin was about equal at 8.4% in both '05 and '04 periods. Any improvement in this years third quarter, in particular in our view, reflects the combination of both good cost control efforts, as well as the basic stability of lost costs, which continue at slightly less than what, 6% or so, 5.8, 5.9, for all the periods covered by this latest report of ours. Consolidated-wise, our book of business, all segments, all types of coverages, is -- continues to be a very diversified and very balanced, pretty much in line with our expectations as to the different percentages that each should contribute to the overall picture of our business. In our view the overall business, as I've said, is producing decent results in the marketplace in which we -- we're operating.

Asset quality remains strong in each of the segments and in totality. And aggregate reserves, i.e. the reserves for our Title, Mortgage Guaranty, property and liability business, and a little bit of life and health business, that all those claim reserves continue, in the aggregate, to play out favorably and, again, are not serving to go impact, adversely, the overall results for the periods we're reporting on.

Net operating cash flow again was enhanced by the tax recovery of about $46 million that we booked in 3Q, '05. But without it, it would still have been up about 24% in the latest quarter. Year-to-date since we had a slower first half of 2005, year-to-date that means we are basically on the par with last year on an apples-to-apples basis. Again, not counting the extra $46 million we booked.

As to where we go from here, I think for the remainder of this year we're expecting our General Insurance business to reflect underwriting and investment results that are in line or similar to those achieved during the first nine months of this year. Pricing for the vast majority of the General Insurance coverages we offer is expected to remain at acceptable levels for the foreseeable future. Those of you that are particularly attuned to the scuttlebutt on the Street relative to what's happening in the General Insurance area, there is some thought out there to the effect that, given the loss of capital that has been sustained by many insurers and reininsurers by virtue of the various natural disasters, the hurricanes, that we've sustained as a industry that there might be a move a foot to use casualty line pricing as a help on the property side. I think it's a little too early to tell.

I suspect that the reinsurance area. in particular. which tends to view it's business in more of a total context, that we might see some upward pressure from a reinsurance cost standpoint. But from a primary side, at least insofar as the effect of these natural disaster losses on pricing for those lines, I think it's a little too early to tell as to whether that thought is going to gain traction. As to our Mortgage Guaranty and Title Insurance businesses, we should complete the year in a fashion that's not too dissimilar from the performance of the first nine months. Again, with the Title business, however, vis-a-vis 2004 final quarter showing much better results. That's the extent of my comments and as was suggested before, we'll open up this meeting to any questions you may have.

[OPERATOR INSTRUCTIONS] We will take our first question from Stephen Petersen.

Hello, Stephen.

Hi, Al, how are you?

Good.

If you could comment real quickly on M. I. production following the third quarter hurricanes, were there any disruptions in terms of just general business flow coming out of the southeast following --

I think we got the start of it. You only had basically one month, right, and we fully expect that you're going to see reduced premium levels coming that area, for the simple reason that if the house is not habitable then people -- and people are not able to find a job or what have you, that you may have more delinquencies. But as you know, as an industry, there's a stay, so to speak, on that. There should be no foreclosures that trigger any loss for us, as a result of that. So we are looking, primarily, to a reduce premium volume. For us we don't think that it's a big deal. It should nick us here and there but nothing major.

That was it. Thank you.

[OPERATOR INSTRUCTIONS] We will go next to Greg Peterson.

It's Greg Peters, Al.

Yes, I know, Greg.

Not to be confused with Stephen. [LAUGHTER] Let's see, sir, I was going to focus on the General Insurance for a second, if you don't mind. Specifically going through your statistics here and there was a bump-up in the paid-loss ratio in the third quarter and on the year-to-date basis. And I'm curious if there is anything behind there, just an unusual claim being paid out or is there a trends in frequency and/or severity here that's working against you, if you will, in terms of a negative trend?

No, no. As I tried to say before, Greg, pricing is pretty level, minus two, 3% in the last 18 months or 12 months or so. So that should have no effect on claim ratios. Paid losses in the General Insurance business are not -- as a trend, are not as meaningful as they are in the Mortgage Guaranty business. I might say the same holds for our Title business. I don't think the particular quarters indication holds much by way of where the whole year is going to end up.

Okay. Fair enough. And I think in your opening comments, you referred to in spite of the aberration of issues affecting the growth for the third quarter, I think you indicated that the top line would be coming in somewhere between 12 and 13% for the year. Is that right?

Yes.

And then you said -- then you went on to say something to the effect of that that is probably going to be ahead of where you might have originally thought it would be for the year.

Yes, we thought that -- you may recall this, Greg, that when we got through with our budget late January, early February of this year, we thought we might be around ten, 11% at best. So if we were at 12, 13, we would be about 10% or so, better.

If we assume the impact from the hurricane is just going to affect -- affect those lines that were impacted by, obviously, the hurricane, that would mean there would be very little impact on your business. Would it be fair to say that price stability or some price erosion might continue next year?

I would say,you know, I've got -- for what it's worth, I and the rest of us at Old Republic have got mixed feelings. I think it's too early to tell. Common sense tells you that since most company's, other than companies that are strictly oriented towards catastrophe-type of business, but most companies operate the business as we do.

It's a single business, so you would think that there should be some -- some impact on pricing for casualty lines. That's logic. But logic doesn't always necessarily sell. And on top of that you've got at least the appearance of still plenty of capital capacity out there. So then, I don't think there is as much urgency to do something. So as I say, I'm giving you a nonanswer because we've got mixed feelings about it.

That's fair. What about risk management? You referenced scuttlebutt, I think, market rumors. The scuttlebutt is there's some pressure in that line of business. Have you seen anything there? Has it come in the form of reduced deductibles or is there anything going on on top of that.

[MULTIPLE SPEAKERS] you know, but oddly enough, which is interesting, it comes and goes. There's just no -- no discernible pattern that we can detect. So the last, what, three, four months, let's say, since we last talked, things have been pretty stable. But who knows, some companies are in and out of that market. People trade places and that has an effect on individual company's appetite or lack thereof at any point in time. So I don't think there's a pattern developing yet in that area.

Okay. And the final question and I suspect I already know the answer, but I am going to give it a shot anyways. The reinsurance business seems like it might become an interesting area in the next marketplace over the next 12 to 18 months. Given your strong ratings, you could certainly take advantage of opportunities there, if you wanted. Do you have any plans to invest in or grow a reinsurance business, Al?

As you said, [LAUGHTER] you know the answer. We haven't changed our mine about the reinsurance business. It's one of the most deadly businesses out there. It's a tough, tough business and I don't know that there are too many people that have a long-term history of been immensely successful at it, for that reason. Certainly in the last quarter century or so, it's been a tough business. As you recall and I'm sure you recall, we did go into it back in the 1980's, and are happy to have parted company with it.

Fair enough. At least I accomplished my objective of getting you to chuckle on the call, [LAUGHTER] so thanks for your answers.

We will take our next question from Kelly Nash.

Hi, Al.

Kelly, how are you?

Good, thanks, how are you.

Okay. Are you still one or are you two by now.

No, still one. Waiting patiently. Thanks for asking. I wonder if you could provide a little more color on the cure rate and delinquency ratio trends that you are seeing out there?

Well, they just -- if you look again at the long-term -- for the long-term last four, six quarters back-to-back ,you will see that what we're publishing this quarter is pretty much following that pattern. Nothing unusual. I think there is some seasonality, I guess, to the loss feature of the Mortgage Guaranty business. Although I have to say to you that we are kind of surprised that third quarter for both this year and last year were as strong from a loss emergence standpoint. It used to be that it was your first quarter of the year, following the Christmas holiday shopping and so forth, that people usually got in trouble with their budgets and you might have an upsurge in defaults.

But both last year and this year we see it as an idiosyncrasy that you had a pick up there. As to persistency, it's been improving slightly but the burn-off rate, as it's sometimes referred to by virtue of the fact that you still have some low rates of interest, which still perpetuates some level of refinance activity on the one hand, as well as the fact that you've had some significant appreciation of home prices in -- at least in some parts of the country, which therefore negate the need for Mortgage Guaranty insurance. The combination of those factors conspires to undermine the improved persistency or the benefits of improved persistency.

Okay. And any thought as -- are you hearing anything regarding the potential tax deductibility of mortgage insurance, at all?

No, I'm not kept up with that. Again, as we said it would be of some benefit or advantage to our business but, again, is it going to be a huge -- is it going to have a huge impact? At this point in time, I for one don't think it would be that significant.

Looking out just in terms of what we are seeing from an economic perspective on the Mortgage Guaranty segment, persistency rates looking out into next year, it looks like you don't anticipate significant -- we should see some nice stable, or maybe steady increases there but nothing too dramatic?

Right. I think the same pattern as you're seeing for the last five or six quarters should probably continue.

And then, flipping over into the General Insurance segment, I wonder if you could talk about which lines in particular you are seeing maybe more of the price competition? And if you can give us an idea, overall, in terms of where rate increases are right now, or where you expect them to be, kind of on a year-to-date basis?

Well, price competition today, I would say, is emerg -- has been emerging for the last four or five quarters now in our trucking operation. It's been emerging in our contractors business, both of which, as you know, are very significant lines for us. A little in the comp area, but I can't say that's as accentuated. But again, even in the contractors and the trucking area, we're still talking about about minus two, 3%. I mean it's not a huge difference for us. So when you are getting the kind of top line growth that we're exhibiting, whether it's 8% or 13%, what that's telling you is that we're growing the General Insurance part of our business, on the basis of both our customers businesses, growing by virtue of a strong economy. And, secondly, we're still able to -- to gain from market penetration by expanding the geographical spread of our contractors business, for example, as well as the trucking business. Those are the reasons.

When it comes to pricing, I tried to say before that I think that the -- these natural disasters may have a little bit of an impact on casualty lines, to which we are oriented But, again, to repeat myself, we are ambivalent about that. So, we are -- we're getting involved with the budgeting process. We are beginning to do that. And our feeling is that next year is going to basically be a repeat of this year with a reasonably stable pricing environment in the areas in which we play, including the errors and omissions, directors and officers liability, the aviation business, the home warranty business, the automobile extended warranty business, as well as the big lines that we are talking about, as well as the risk management area. So we are getting prepared for deja vu all over again for next year.

Then, just finally, any new lines? I know you briefly commented on reinsurance, but any other lines within the General Insurance area that you are looking to get in.

No, no.

Thanks.

We will take our next question from Mark Finkelstein.

Hey, Al.

Hello, Mark.

A couple clarification questions from your opening remarks. First, I want to make sure I caught you correctly in respect to your thoughts on M. I., mortgage insurance, trends. Did you say that you thought they would stabilize at current levels, and not turn back more favorable, or alternatively that kind of delinquency increases on a year-over-year basis, accounting for seasonality, would continue to trend moderately more negative?

Well, as I recall, there were a couple of questions raised. One had to do with persistency, and on that score, I said that I thought persistency would improve ever so slowly and follow, basically, the same trend line that's been established for the last six or seven quarters, or thereabouts. With respect to the claims side, I believe I indicated, or tried to say, that we thought that it might be -- that we might have to deal, for at least a couple of quarters, which is as far as we can see right now, with some additional severity, which is what we've been experiencing on individual claims. We would tend to drive up our loss reserves and, therefore, incurred lost costs and that, therefore, we did not see any significant abatement of our loss cost trends that we've been experiencing for the past, what, seven or eight quarters now.

Okay. That makes sense. And then just on the Title, obviously a pretty sizeable increase in premium there. You talked about it surpassing expectations. I'm curious if there's anything that you are seeing, or anything that you guys have done, that is really kind of pushing forward that premium level? Are you seeing anything out of your competitors, maybe regulatory scrutiny, et cetera, as having an impact? What is it that you think is driving the Title growth at these levels?

Well, I think as I tried to say, Mark, I think it's just a transaction-driven business. And we've had some pretty strong mortgage originations, particularly in terms of initial purchases, whether it's used homes or new homes. You read throughout the summer about housing appreciation and the concern about the housing bubble and so forth. And all of that has conspired to drive-up the top line. On top of that, with the lessened percentage of transactions being in the refinance activity area, as you know refinance transactions tends to be lower priced transactions. We're getting better margins on the product that's being -- you know, on the totality of our product right now by virtue of the reduced amount of refinance activity that's contained in that.

But I've seen some brief reports from competing title organizations, and I sense that everything is profiting from this higher level of transactions. And again, as I believe I said, given the fact that in our business we are getting some 64, 65% of our volume from independent agents, as opposed to the direction operations, and since there is a lag in the reporting of that business, that to the extent that you compare us with another title company that may be more oriented towards direct production, that we in the fourth quarter should look very good because we should be getting some inflow of business, so to speak, in 4Q, which in fact was generated during the summer months and early fall.

That makes sense. Just to elaborate on the -- I guess you mentioned that there was a retro or loss-sensitive adjustment. Does that affect the third quarter of '04 or was it third quarter of '05?

No, it was mostly in 2Q of '05 that we had one. But again, I don't mean to just focus on that one item. I was reciting a litany of items, which conspired to make the comparison of 2Q '05 with 3Q '05, or 3Q '04 and 3Q '05 less than it should be.

Okay. That's great. Thanks.

We will take our next question from Bill Laemmel.

Bill Laemmel, how are you, sir?

Oh, pretty good.

Good.

Now I take it you mentioned the reasonably stable price environment for next year?

Yes.

There is a big wait on that, probably because of the 59 billion loss reserves deficiencies, plus the Katrina, Rita?

Well, as I tried to say, Bill, you would think that the effect of Katrina losses on commercial lines insurers with heavy stakes in the casualty business would have some sort of psychological impact on those writers to boost rates. But the other side of that coin is that there's plenty of capacity out there. As a matter of fact, the buzz on the Street now is that there are three or four companies in gestation in the Bermuda market that are -- would be attempting to take advantage of a capacity shortage insofar as property coverages are concerned and catastrophe coverages are concerned.

And, therefore, if that comes to play -- to pass, then you're going to eliminate a part of a pressure point and therefore there should be very little impact. That's why I keep saying, I've said it a couple of times, I'm going to say it again, from our standpoint, we're kind of ambivalent on this and we just can't get too excited about the prospect of the difficulties in property insurance having a positive impact on pricing for the casualty side of the business.

Okay. Thank you very much.

You're welcome.

We will take our next question from Mike Dion.

Good afternoon, Al.

How are you?

I'm doing fine, thanks. Kind of a related question, but more looking out into 2006, if -- as you mentioned pricing in '06 could be a repeat of 2005. And if that's the case, we will be looking at kind of low double-digit increases in premium in the General Insurance segment. And let's assume that we're still not sure yet where pricing could go, but let's assume it does increase a bit, could we be looking at higher premiums in General Insurance than what we've seen in '05 so far?

Well, as I said, Michael, we're just beginning our budgeting process, and we're going into that process thinking that the situation will be just as you repeated it now. And we still have not given up on the idea of increasing market penetration in areas that we like to play in. So to the extent that we continue to be successful in that area, we should have the benefit of both retention of customers at existing prices as a minimum, as well as benefiting from those customers. both old and new, their business since we see the economy as being pretty perky in 2006. And we should benefit again from additional production by increasing -- continuing to increase the geographical spread of our business. So in a combination of all those, given that combination, it's not inconceivable that we could again be looking at better than single-digit production for our General Insurance business.

Okay. Great. That's helpful. And I guess kind of a follow up, standard Capital Management question, how do you see the Company's capital position now, and would you look to possibly either increase the dividend again when it comes time to do that, and/or perhaps a special dividend or share buybacks?

Well, as you know we are very focused on the process where dividends are reflective of our long-term progress. We have now at Old Republic 24 years under our belt of annual dividend increases and hopefully we can make it 25 years when we next look at our annual dividend at the February or March meeting of our directors early next year. With respect to share buybacks, there's nothing right now on the horizon that would lead us to do that, to consider that. And with respect to the extraordinary dividend, that's something, again, that we would look at -- that we do look at from time-to-time.

In terms of our capital structure, currently, we think we are well capitalized. We think we've got some, as we mentioned before, some extra money in our Mortgage Guaranty business. We think we've got a little bit of extra money in our General Insurance business. But by the same token, I always mention the fact that we don't just sit around here. ,We do look for opportunities to grow our business faster by, hopefully, buying some blocks of insurance and we're always looking. And if that happens and if it's material, then we would be able to put some excess capital to work, if we can advantageously. That's the picture.

Fair enough. Thank you very much.

[OPERATOR INSTRUCTIONS] We'll go next to Morris Williams.

It sounds like from your comments that '06, at least at this juncture, is shaping up to be another trend line year of sort of six, seven, eight, nine, 10% earnings growth, putting the trends of the three businesses together. Is that a fair impression to take away from this conversation?

I would say that -- I would put it a little different way. I would say that our objective has been and continues to return 12 to 14% on our shareholders investment ,with that investment being calculated on the cost basis, as opposed to a market driven basis, you know, where bonds and stocks are valued at market. That has been part of our record for a number of years now. We think that that's still achievable, going forward.

Second, with regard to following up on the capital structure, it was asked earlier, two dimensions. One, to what extent are you anticipating a renewed growth in investment income next year, particularly if in fact, interest rates continue to rise or even taking into account the increase that's taken place over the last six months?

Well, again I think I broached that subject in some limited way before. But again, given what's happening with the Fed, and we don't see -- at least from our standpoint, we don't see the Fed loosening up any time soon. We see a continuation, even with a new Fed chairman, of tightening and that has an impact. So far, as you know, the impact has been primarily on the short end of the maturity range, right?

But ultimately it does have an impact on the longer rates, and we should get some benefit from that. I think we are beginning to get some benefit. But so far, at least, whatever benefit we've had on investment income has been by virtue, as I said, of the fact that we've had strong operating cash flows, which have been additive to the invested asset base. So as a minimum, we do expect the invested asset base to increase and, therefore, all things being equal to have some on investment income.

Good, and I guess the last question would be in the 90s you were earning 12, 14% return on shareholders equity. And the last several years have been earning more in the area of ten to 11%. What factor do you think you need to achieve in order to get back to a 12, 14% return on equity?

Well, I think that's been bouncing up and down a little bit but, again, I think what I said before, a 12 to 14% return on equity based on equity valued at cost is what we have been achieving pretty regularly. And I believe what we are currently at achieving.

When you think of it in those terms you are talking about on a 3% dividends yield and a 10% earnings growth, is that what we're talking about?

We are talking about earnings -- earnings as a percentage of beginning book value, with that book value being calculated, as I say, on the cost basis without benefit or hindrance of posting to market our bond and stock portfolio.

Thank you very much.

We will go next to Geoff Dunn.

Thank you. Good afternoon, Al.

Geoff, how are you?

Good, thanks. I want to follow up on the earlier capital question and look specifically at the M. I. segment. Capital extraction and request for dividends has been a common theme in the industry, as credit seems to be somewhat stabilizing on the delinquency front. Whether or not you necessarily have an opportunity for that capital now or not, does it attract you, now that the DOIs seems to be loosening a little bit, to try to extract capital from that entity and give you more flexibility by keeping that at the parent?

Yes, and we're looking at that. We've done some of that the last few years, last couple of years. We've extracted more than the regular amount of dividends.

Can you give us an idea what the size of your last sort of extraordinary extraction was and a rough idea of what your risk to capital might be?

Risk to capital, as you know, is down to the low-teens currently for us and it's been coming down. As to the amount of money that we've taken out, I'm going to say it's been a hundred million or so for the last couple of years, and that has been a major source of our own dividends to our international shareholders.

Okay, great. Thanks, Al.

It appears there are no further questions at this time. Mr. Zucaro, I would like to turn the conference back over to you for any determine or closing remarks.

I have none. I certainly appreciate the interest of everybody participating in this conference call, and the interest evidenced by the questions that were raised. Since there are no one else there with questions, I guess we'll bid you all good afternoon. No one else with questions.

Thank you, that does conclude the conference. You may disconnect at this time. We do appreciate your participation.

Thank you. Good bye.