Old Republic International Corp (ORI) 2007 Q1 法說會逐字稿

Good afternoon. At this time I would like to welcome everyone to the Old Republic International first quarter 2007 earnings conference call. Our lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer period. (OPERATOR INSTRUCTIONS)Thank you. It is my pleasure to turn the floor over to your host, Leslie Loyet in Financial Relations Board. Ma'am, you may begin your conference.

Thank you, good afternoon everyone and thank you for joining us today for Old Republic International conference call to discuss first quarter 2007 results. This morning we distributed a copy of the press release. If there is anyone on line who did not receive a copy you may access it at Old Republic's website at www.Old Republic.com or call Liz at 312-640-6771 and she will send you a copy immediately. Before I turn the call over to Al Zucaro, Old Republics Chairman and Chief Executive Officer, please be advised that this call may involve forward-looking statements as discussed on the ad four and ad five pages of the press release. Risks associated with these statements can be found in the company's latest SEC filings. With that I would like to turn the call over to Al for his opening remarks.

Thank you, Leslie Here we are for another quarterly review of our business, welcome to everybody. For everybody that looks forward to this quarterly chit-chat of ours the company's results in the first three months were obviously a bit disappointing. As you see on the per share basis operating income was about $0.45, which is about 8% less than last year. And about 52% of this year's net operating income came from the investment side of the business. And the remaining 38% came from the basic underwriting and service operations.

For the same quarter by the way of 2006 when we aggregate these numbers net operating income per share was just about evenly divided between those two sources. And so our purpose in playing this little (disaggregating) exercise is to explain the fact that our bottom line has grown at least in this latest quarter mostly by virtue of the greater invested asset base we have and the greater amount of investment income that it has produced.

On the other hand, the basic underwriting side of the business reflected just about a 20% or so reduction in income as you can readily deduce I'm sure by looking at the many operating statements we put in the press release. Let's see, percentage wise most of the down draft and the consolidated underwriting account obviously came from the title side of our business. And there's no surprise there.

To anybody that follows the emerging housing and mortgage lending statistics that we all get to see every month and quarter. And as you see in the release the closed orders on our title business, at least the closed orders we produce on the direct basis through our own store front and employees, those were down about what, 10.5% year over year. And the revenues from this source were down a shade above it looks like 6% or thereabouts.

So the difference between the larger drop in order count and the smaller reduction in direct revenues that I'm referring to was obviously made up by approximate 6% or so increase in the average closed order size we booked. And that stands to reason when you consider that there are fewer re-FI's which tend to produce lower amounts of premiums and fees than we had in the past and today it's much more back to business as usual and therefore the average cost of the transaction is up. So the greatest damage, if you will, to our top line entitle insurance was obviously delivered by our independent agency production channel, which produced almost a 22% hard to believe decline in premium revenues.

Those of you that are familiar with this segment of our business are fully aware I'm sure that there is a two or three month lag that title companies such as ourselves experience in booking agency revenues. So the drop off we experience from this source reflected the housing bare market conditions which became of course much more accentuated during the winter months. I hate to say it, but when we consider the continued negativity of housing statistics so far this year it does not auger very well for the title business.

Revenue expectations for this year second quarter at the least are probably not going to be met in light of these trends. But of course that's the nature of this, of this beast and we will just have to see it through to the better days that always return after the storm. From an operating cost standpoint our title business produced general production costs, administration costs of about, that were about 14% below last year on the quarter over quarter basis. But of course this was insufficient to offset the greater reduction in the top line. And as we have said in recent quarters conference calls, there are at least in our case there are limits to the expense reduction opportunities we have in this business and we obviously continue to come up against those limits.

Finally I might also note that the loss ratio of some 6% or thereabouts has been holding pretty steady within a 5% to 6% range now for several quarters running and, but here again we do expect some uptick in these costs over time since we all know that housing down turns typically have a bad habit of raising title and escrow issues and, and leading to somewhat higher claims experiences. So having said all that, in summary we obviously do not have a good title report for the first quarter of this year. And our best guess at this moment any way is that we and the rest of the title industry are in for some pretty tough sledding well into 2008 we think.

It just takes a while, it took awhile for the housing and mortgage lending industries to reach a fever pitch and it will simply take as long to wring the excesses out of this part of the economy and bring down the temperature so to speak. Staying with the housing and mortgage lending fields, I might embroider a bit on the results of our mortgage guaranty line. And here the top line grew by a rather decent amount, certainly greater amount than we had originally expected. And this was caused by the factors which are cited in the release of this morning, namely that we have experience, continued, steady increase in persistency which as you see that was about almost 74% this year versus just about 67% at the same time in '06.

We have also had a nice double digit growth in new insurance written, both in the traditional as well as the bulk channels. And of course we have had about a 5% year over year growth in our net risk in force. The quality of our business if we use FICO scores as a proxy for that, that quality has remained quite stable through the end of the first quarter. Again, in both the traditional as well as the bulk in force categories.

For example, the less than 620 FICO in force, FICO part of our enforced business held steady at about 8.5% for traditional primary and also held steady in the mid 20s as it has been in the bulk area. Loan to value ratios have also remained basically unchanged through the first quarter of '07. So you can relate this update to the, to the same information you see, particularly in the MDNA and the foot notes of our 2006 10- K. And you will see as I say that it's been steady as she goes in the configuration of our, of the quality aspects of our book.

We continue to believe that we have a reasonably well balanced book, therefore that's not unduly exposed to low FICO scored loans or reduced documentation loans or for that matter loan to value concentrations much greater than 95%. Together with these I think reasonably good statistics on the production front our operating expenses dropped some more in this latest quarter. And as you see in the release they rested at about what 20.8% for the latest quarter. That's one of the lowest levels we have achieved in this business. I think it may have been a little lower in the 4Q '06, but it's very good in our opinion.

It does reflect both a continuation of careful expense management on our part as well as the greater bulk production and volume that we're enjoying, which we can obviously produce, produce in a more cost efficient way than the traditional book of business. The claims line of the MI income statement was perhaps the sole detractor from these good revenue numbers. The 54.5% loss ratio that you see in our published report of this morning is about equal to what we posted in 4Q '06. But it was much higher than the corresponding claims ratio of about almost 39% that we registered in 1Q '06.

As you can see among the various statistics in this morning's release the pay loss ratio has remained relatively stable in this first quarter of ours. So that the rise in the incurred loss ratio was obviously driven by greater reserve provisions. Most of the added reserves came from the greater severity we have attributed to the traditional portion of reported claims at various stages of deIinquency. We estimate that at least roughly let's say 80% or so of the reserve increase this quarter is due to greater severity.

The remainder is about evenly split, maybe a little more due to higher delinquency and a little less due to frequency. But again the lying share of the reserve increase is a severity driven increase. As you can see again in the release, the delinquency rates have not changed significantly, so what's changed are again the drivers of greater severity trends and the assumptions we make on the basis of those trends. And those include the key factors that you might expect such as higher loan balances in default due to the higher average insured loans in the book.

Some growth in the average risk in force and of course the reduced opportunities we're encountering experiencing today to mitigate claim costs and that's of course due to in large measure to declining home prices and a rising supply of homes on the market. Similar factors obviously drove the higher severity assumptions on bulk business. Although delinquency counts particularly on the lesser quality loans in the bulk channel for us, those lesser quality loans tended to have a greater impact on loss reserve additions in the latest quarter.

Finally, I should say, I should note that we don't believe that the ongoing saga in the sub prime lending arena is likely to contribute directly to MI loss costs. Rather we think the impact is likely to be in the form of collateral damage, if you will. And that damage is caused principally by foreclosures, which obviously will tend to amplify the housing stock that's available and of course add some downward pressure on home prices, so that again that would affect the mitigation efforts that are usually at our disposal to reduce claim costs. As we, as we look at loss trends in our mortgage guaranty business we think that loss ratios are more likely than not going to continue to creep up during the next several quarters for the reasons I've just cited.

On the other hand, we think that the tougher lending standards that are taking hold in the marketplace, the higher interest rates that are required today for AD 10/10 loans, types of loans, and those loans as you know have put a real damper on mortgage guaranty companies competitive position for several years. And also we think that the greater pricing power in the bulk arena, which itself is due to lessened competition from alternative securitization mechanisms that also have competed with the MI, the mortgage guaranty business, that all of these factors can, should create over time some pretty significant revenue building opportunities for this line of business for us. So that looks pretty good.

But it will take a while for these assumed or perceived benefits to take hold and reflect themselves in better results in this business. Turning to the sunny side of the street so to speak, our general insurance business continued to perform very well from an underwriting standpoint in the first three months of this year. Top line wise we give credit fully to the new book of construction business that we assumed late last year. And that book accounted for the lie in share of the growth in volume that you see there. Without that, that book, which pencilled in at roughly $55 million of EP, of earned premiums for the first quarter of this year, without that our overall or core business would have grown by about 1.5 %. And 1.5% that's not- thats within range of what we thought at the beginning of the year when we finalized our budgets, we thought we might be able to grow our top line by 1% to 2% and there we are at roughly 1.5% as I say. So no surprise there yet either I should say.

And of course, you know, this is relatively small increase in the core business of 1.5% or so is applied pretty much to the entire book of our general insurance coverages. The exception in terms of various coverages which did better was pretty much limited to our financial indemnity business, which is a combination of our fidelity and surety loan credit indemnity, as well as ENO and DNO which in the aggregate those three types of coverages produced earned premium growth in the high teens for the quarter.

But nonetheless as we have mentioned in the release, the slow down in the general insurance top line is the obvious and natural effect of a gradually declining pricing environment, which is making existing and new business retention much more difficult to achieve. As we have said several times before, it does feel like we're on the slippery slope of the production hill. For all of 2007 however at this juncture we still believe that getting 200 basis points of earned premium growth in our core business is still in the cards, and that is pre new book. And that would be a very good accomplishment we think in the general insurance market that we participate in and based on our view of how it is currently developing.

From an underwriting cost standpoint as you see in the numbers, in the back of the press release, the composite ratio is reflecting about a hundred basis point increase year over year. And that's mostly due to the expense portion of the ratio. But our feeling at this point is that come year-end we should be looking at a 25% or so expense component for general insurance and a 67% to 69% loss ratio. And of course if you just do the basic math this would obviously result in a composite ratio of 92% to 94% and in that range we would be basically meeting the underwriting expectations we had at the beginning of the year. As I say when we put our budget, finalized our budget.

As intimated in the release our general insurance bottom line should continue to be most affected by investment income growth and this is obviously a function in our case of a nicely growing invested asset base, again to refer back to the so-called construction book of business that we got end of last year. We ended up booking some $300 million or so particularly through the end of this quarter when you consider that there were some receivables that we have now collected. So you've got that alone in addition to the normal increase in our cash flow and general insurance being significantly added to the invested asset base.

Of course we like everybody else are enjoying the fruits of a somewhat higher yield environment for the types of investment securities we buy, and the combination of those factors is whats leading to some pretty nice investment growth, investment income growth. Which of course is welcomed after several years of pretty flattish aspects to that part of our business. I think that's pretty much in a nut shell the update on the major factors and the happenings that most have impacted and likely going to impact for the foreseeable future the totality of our business.

Balance sheet wise there is a much happening there other than isn't much happening there other than the significant increase that you see in the many statements we have provided in the amount of invested assets we have. Operating cash flow again as you see in the release was stronger, in our view was stronger than expected in the general insurance segment. And as well as the other smaller parts of our business.

Overall, fortunately for us claim reserves have continued to play out favorably in the aggregate in the first quarter of this year and we again expect that as this year comes to a close eight months or so from now that it should produce the favorable results in the 2% to 4% range that we have basically experienced over time. I've got my notes here and I'm looking down the list and those are the key points on the state of our business that I was prepared to make.

So now we will leave it to any questions that you may have to cover anything else that we have not addressed.

Thank you. (OPERATOR INSTRUCTIONS) We will pause for just a moment to compile a Q&A roster. (OPERATOR INSTRUCTIONS) Your first question comes from Beth Malone with Keybanc, please go ahead.

Okay, thank you. Good afternoon.

Hi Beth, how are you.

Fine. Could you give us a little bit more color on what you're seeing in pricing. Do you believe that the current pricing environment though it's declining is still in a range that's manageable for you to achieve your goals?

I take it you're talking about general insurance, right?

General insurance, yes, sorry.

Yes. Well, when I say Beth that, you know, we're expecting a 92% to 94% combined ratio for the year, you know, if you look at the long-term history of either our company or the general insurance business at large, you know, that's very good. As you know if you get a 2%, 200 basis point margin in the fire casualty business over time you're, you know, a rock star.

And so at 92% to 94%, you know, that's just wonderful. And that's a reflection therefore to address your question of our feeling that while prices are declining somewhat and I think we're still for at least our book of business on the aggregate looking at a 3% to 5% continued price deterioration. This has the makings of producing a good underwriting result.

Okay. And the construction, I know it's early, you just started with that, as far as it's been so far is it pretty much as you anticipated.

Yes, there are no surprises in that business, you know, all the people that we, that we got on board, you know, have made a great contribution to the transition and to the continuity of that book in terms of the reserves that we assumed, you know, we're seeing no surprises there. The pricing indicators we're getting on renewals as well as the little bit of new business that is being written there is pretty much reflecting what we're seeing elsewhere in our core business.

So, you know, it's a nice experience so far and we expect it to continue, that that's going to be a very sound book of business for us and as I believe I said earlier it produced about $55 million of earned premiums for the first quarter, which is as a matter of fact a little bit higher than what we thought we might get given the kind of reinsurance construct that we attached to that book starting on 1-1-07.

One last question on the expense ratio or the cost in the title business, you know, obviously that's a cyclical business in terms of what you can get on the top line. Is there really much you can do about controlling those expenses, the fixed side of them when the market starts to get a little less favorable as they are appearing right now or is that something you just have to manage through until the market comes back?

Yes, I think the latter is where we are. I think we're, you know, there's always some other things you can do and we will do them. But as I try to indicate in my comments earlier, Beth, I think weave reached the limit as to how much we can cut so now we are fundamentally, since it is if fundamentally an order taking business, you cannot manufacture other than perhaps increasing market share, you cannot manufacture revenues in that business.

And our view for what it's worth is that, you know, we're going to have slow times in the housing and related mortgage lending areas of the American economy for several quarters yet. So it's going to be tough sledding as I think I said.

Okay, thank you.

You're welcome.

(OPERATOR INSTRUCTIONS) Your next question comes from Greg Peters from Raymond James, please go ahead.

Good afternoon.

Hello Greg, how are you.

Fine, thank you for asking.

What's happening.

Well, sir, I guess I wanted to ask a couple questions. First starting from a big picture return on equity standpoint. If you were to annualize this first quarter results and clearly given the guidance that you're providing regarding year it certainly would suggest that at least the outlook for 2007 might be below what your return on equity targets are from a corporate perspective. And I was wondering if you could comment on that.

Well, I think you've made the comment that I would make and that is that yes, if you just rest with the first quarter result and you annualize it that's probably where you end up. There's no magic, it's not rocket science. There's no question that the fact that we do have some excess capital that that's holding us back some. But we think that the position we're in from that standpoint is the position we, we would like to be in for the longer term.

Right. You have always been one to conserve the capital. I guess sort of related question would be that I think you have some $115 million or so of debt that comes up on June 15th.

Yes.

And I don't think you have a lot of other debt other than that principle piece.

That's right.

I'm not sure what your view is on that, you probably don't need the money, but maybe you could give us a sense of what your thinking is on that topic at the moment.

Well, I think there again, you know, we have got the ability at least on a temporary basis to self finance the pay back. And we're just going to, therefore we have the luxury of waiting for appropriate market conditions to lead us back into the market and raise at least the same amount of money going forward.

Yes Well, okay. Let's switch over to the mortgage guaranty for a second and then I'll finish up with one question on the general insurance. But on the mortgage guaranty, I certainly appreciated all the color you had to provide regarding severity, etc., especially in the context of the paid loss ratio, which looked as you pointed out relatively consistent.

And so it sounds to me it's more of a judgment call on your part, you're seeing some numbers out there, but you're not seeing anything in the paid ratio that would lead you to be more conservative, but you're seeing other anecdotal stuff out there that's leading you to be more conservative. Is that an accurate perception or is there something quantifiable there that we can be watching to see how this might ebn and flow from quarter to quarter.

Well, one of the things we focus on is, you know, the amount of true risk in force that we have on the business and that's been rising. And that means therefore that when claims get lodged against us, however many there are, or however few there are, that they are likely going to be at a higher level, okay. That speaks for itself. The second thing is that we are as I try to say, we are very much aware of the impact that the, that the sub prime problems have on the, on the housing stock, on the value of homes and therefore, you know, in those cases for example where you take over a house as opposed to paying the contractual amount that's due on the loan as an MI company, you may end up, you know, sitting on that house for a longer period of time and not get the expected value that you would otherwise consider appropriate.

So you've got that as a side or collateral issue. And then when we look at the general housing statistics, you know, they're nothing to brag about. We just can't see the daylight yet at the end of the tunnel. So if there is a judgment as you are pointing out on our part it is that, you know, we're going to, to opt for a more strenuous, a more conservative view of what lies ahead and therefore we're going to take a dimmer view of the, of those delinquencies that have been reported to us as to the amount and percentage of them that are going to resolve themselves ultimately into a paid claim.

Right. Well, I guess from just a claims ratio perspective on that business, you know, the trailing 12 months I think is coming in at 467 or so if I'm reading your statistics right.

Yes.

But then if you take the last two quarters including this quarter it's running well north of 50. I'm just trying to gage you know, should we be thinking about something, you know, more similar to what's happened the last two quarters or, you know, I go back in history I do remember there used to be some seasonality with respect to the way your loss ratio pattern would develop in mortgage guarantee and clearly the fourth and first quarter were quarters that you, and this is going back a number of years, had a little bit more of a temperature than say the middle two quarters of the year.

Exactly.

And I'm just trying to get a sense of how to think about this I trying to get a sense of how to think about this I guess Al. Any color that you can provide there is helpful.

Yes Well, you know, trend lines are difficult to banish and they are what they are. If you look at the trend line of our incurred losses both as a company as well as in the context of the MI industry at large you know there's no question that it's going north and not south or sideways.

Yes

And therefore, you know, since nobody's got a clear crystal ball, if somebody says to me make a bet, the bet, my bet would be, you know, towards a higher loss ratio or at the least one that is in line with that, that we posted in the last couple quarters. Now, again, keep saying quarter, you know, our business doesn't mean very much.

Right.

We keep our eyes on the two or three year horizon really. So we're going to tend to look at least at a full year and I would say that this year is not going to be better than say that this year is not going to be better than last year from a loss ratio standpoint.

Right, right.

That's a safe bet.

Well, that stands to reason. Okay. I do appreciate the color. And then just one follow up and I know, I understand what you said in the press release regarding the uptick in paid loss ratio for general insurance, and you threw in a number there that excluded the effect of the acquired book of business and.

I think though that was in a different context if I remember.

I was going to ask you to explain to me why the paid loss ratio is up so much higher on a reported basis in the first quarter versus this fiscal 12 month number that you're giving us that has this foot note attached to it saying it's excluding the acquired business in the fourth quarter of last year.

Yes. Let me get to the table there just to be sure I don't get the lost here in a misleading statement here. You're talking about page eight here.

Yes.

And the foot note and the little asterisk relates to the paid loss ratio in the fiscal 12 months of 2007, which would be therefore from April 1st of 06 to March 31st. And it has to, it's one of these technical hang ups that accountants, including myself, get stuck with. And it has to do with the way that an insurance company books an insurance assumed insurance portfolio. In that when you book reserves, you know, when you assume reserves as we did, the debit and the credit to make an accountant out of you, Greg, is, you know, a credit to paid losses, okay. And therefore if you credit paid losses by virtue of those reserves, when you calculate your paid loss ratio you're going to understate it. So that's why we took the number out of the base to not run that risk.

I appreciate that.

Do you follow?

I do follow.

You took accounting in school, didn't you.

Yes I did, but in the future, you know, don't waste your time trying to teach me how to become an accountant, I think it's a lost cause. So --

You're a pretty good one, Greg.

Well, I guess just to close things up then, if you could give us a sense on the pricing environment and you didn't really talk about the risk management portion of your general insurance business and you never give us a lot of statistics on that and, you know, it's become a perrenial question I ask every quarter, here it is, it's thrown out at you.

One of the points we have tried to make and obviously in so far as you're concerned we have not made the point very clearly or very well is we do have a big block of business we call risk management within our Old Republic insurance company book. But we also do risk management in other parts of our business, for example in our trucking business. We have got quite a number of large trucking risks that are, you know, handled on alternative risk basis.

We have deductibles in many parts of our business and deductibles, you know, self insured retentions, right, are part of what is typically defined as risk management business. So one of the issues, not to belabor the point, that we have is that, you know, it's it tough for us to delineate our business in such fashion that we have a clear crystal clear distinction between standard or regular business and risk management business, that's one thing. The other thing is I will say to you that the experience we're having in terms of pricing, and I mentioned how it continues 3% to 5%, you know, aggregate reduction in pricing

Yes.

In some cases we don't have any, other cases we have more than that, etc., right, that in so far as our risk management business is concerned, particularly with regard to its reinsurance aspects, okay, the amount of reinsurance we have to buy to protect individual accounts, that that is, you know, declining at an also 3%, 5%, perhaps in some cases 10% area. You know, as I think I said last quarter large accounts, when they hit the street for repricing or what have you, cause a feeding frenzy.

Yes, they're under assault I imagine.

Right.

Yes.

So really there isn't much more I can add to your question.

What about just pure account numbers.

We are increasing the number of accounts we have. Again, in the pure risk management operation, okay.

Right. So the number isn't shrinking, it's growing, it's just being affected by the macro rate environment.

You got it.

Okay. Thank you for your answers.

You're welcome.

Your next question comes from Steven Meade with Anchor Capital Advisors, please go ahead.

Hi Steven, how are you.

I'm all right.

Good.

Just on the construction business do you have a sense of what that's doing year over year in terms of growth as a business and looking forward what's the prospect for growth in that business?

Well, that business again over a ten year period before we got involved with it it, you know, grew from 0 to about $260, $275 million book, gross book. It is a business that's being conducted in the same pricing environment as the rest of our business, so therefore we expect that its growth this year is not going to be as good as let's say it was in 2005 or 2004, in particularly when it experienced significant growth.

So the answer to your question is that after this first year, you know, when we will be booking the business for the the first time as if it was totally new business for us, that all things being equal that we would expect that business to grow at about the same rate as the rest of our business. Now, having said that, we also have a project to, to increase the geographic spread of that particular block of business. But I'm not, we're not in a position right now to call it as to how successful we will be in that. But to the extent we have any success then that book should grow at a faster rate.

But that growth geographically that's just internal, that's not through acquisition.

Oh, yes, it would be internal, organic.

Then when you talk about the composite ratio moving up to the 92% to 94% range, is there an offset on the revenue line to that increase in the composite ratio?

I'm not sure I follow the question. But I'm just saying, you know, assuming that we have in our core business, you know, leaving aside this new block, Steven, assuming that we have a 1% to 2% growth in earned premium, on the resulting earned premium we're saying that the year, you know, has got a good chance of shaping into a 92% to 94% composite.

Okay. And then just going back to the mortgage guaranty business, you obviously saw deterioration and I'm trying to get a sense of, you know, why, the sub prime news aside, then the (altae) news, there's the more normal sort of traditional mortgage guaranty business, why doesn't it get worse from here. Significantly worse, if it's as bad as it was as you sort of saw it, you know, three or four months ago.

Well, let me think a second. I think in answer to Greg Peters question a moment ago I said something to the effect that if I were a betting man I would bet that our experience would lean towards the trends of the loss ratio and MI that's been established from the third quarter of last year to the fourth and now into the first. And that trend is obviously up, but is it, is it a disaster type of trend as I, as I read you to potentially imply, I don't think so. But am I willing to throw a number out there that the loss ratio would go as high as 65 or 70%, no, I'm not going to do that. But I, my bet would be that it's more likely than not that it will be in that, you know, within range of where we are now as a minimum.

Right, right.

That's the best guess we have right now. And as you know in that business you count, you know, you count claims and you look at trends and reported delinquencies an than this and that and you age those delinquencies and from quarter to quarter the aging processor the results of that aging process may change.

And again, depending on what's happening to your average risk in force the combination of all on those factors plus I mean let's face it it, you know, we're human beings, you know, depending on which side of the of the bed we get up on in the morning, you know, it may have a little bit of an impact on the judgments we exercise when we set the parameters.

Do you see any prospect for, of higher growth in the premiums and the business that you write?

Well, as I try to indicate in my comments Steven, we think that the results we achieved on the top line this quarter were somewhat ahead of where we thought we would be. We, we have an old saying at Old Republic, I'm sure it's not you next to us, that you write your best business when, you know, when things are tough in the marketplace.

Right, right.

There's no question that, you know, that everybody out there, that the lenders are, you know, pulling themselves up by the boot straps, you know, and underwriting standards are becoming tougher and so forth, which means that the quality of the business that's being put on the books should be better. And in that light we're trying to be more aggressive, if you will. I think again as I believe I said, pricing is in our favor in terms of the bulk, in the bulk area. And that we're not getting the kind of stiff competition we were getting from the, you know, securitization side of the business against which we naturally compete.

So all those factors put together would lead us to say that, that that top line could grow somewhat better than we expected at the beginning of the year. But again, you know, when ever you get involved with new marketing thrusts, it it takes a while between the time that you, you know, that you get into the market and start making noises and when the results of those noises appear on the, on income statement.

Just going back to the balance sheet question and the use of capital, i.e., you know, paying out capital to shareholders versus retaining capital and reinvesting it, as you look at the next couple years what's your thinking, I mean do you want to retain more capital for opportunity or do you see that you pay out more, what --

Well, our tendency and our history and you have been around the Old Republic stock for a number of years, you know this to be the case, is that we take a look at it. We believe firmly in the idea of having cash dividends to shareholders follow in a nice steady up line. We believe in keeping some excess capital, particularly in our general insurance business, because of the, of the inherent issues that can cause loss ratios to, to spike at least for a period of time. And you're always better off having the money as opposed to relying on wall street to raise money for you when you need it.

Certainly that's been our experience and so far it's protecting the interest of the shareholders. And thirdly, in looking at our situation once each year, at least that's been the case since, you know, 2003 when we started to develop more significant amounts of excess capital, that we will consider paying a special cash dividend. We did that what, two times in the last three years or so. So I'm not saying that that's likely again, but I'm not saying it's totally out of the realm of possibility.

And finally with respect to the question that was raised about our debt situation, you know, we think we're in a good position right now to handle it internally with existing cash resources and when market conditions change to our advantage from an interest cost standpoint we would consider raising money at that time.

All right, thanks.

You're welcome.

Your next question comes from Mark Finckletin from Cochran Carania. Please go ahead.

Hay Al.

Hello Mark.

I just have two very quick questions, I jumped on late, I apologize. What was the actual dollar value of the reserve charge in the U.S. MI business to reflect the higher severity expectations?

I think it was $22.5, $22.4 million as I recall.

$22.4.

Yes

Okay.

And again, if you look at the paid loss ratio, I'm not telling you anything new since you're such a good accountant Mark, if you look at the paid loss ratio and you compare it to the incurred loss ratio and take the difference and multiply it by the earned premium it will get you there.

Okay. And then what is the actual percentage of your risk in force in California, which at least, you know, a couple of your competitors have kind of stated is really where they're most concerned.

I don't have that number.

Okay.

I will will try to give it to you off line.

Okay.

I can say that it has not changed significantly for us for several years.

Okay.

But it is, you know, a big part as it it is Florida and some of the other states.

Okay. And then if you discussed this earlier I'll just read the transcript, but can you remind me of the nature it of the bulk you wrote in 2006.

The nature of the bulk we wrote in 2006.

Yes, I mean there's a number of different kind of bulk, I'm curious what was kind of the underlying.

I'm not so sure, forgive necessity I'm not sure I follow the question.

I mean it was it sub prime, high FICA.

Bulk by definition for everybody has got more, a lower FICO, I mean, you know, lower quality I should say. Forget about FICO scores, will tend to have some lower quality business in it. But if you look at our delinquency rates and so forth that we publish, you know, it's not raising its you ugly head at least so far. As a matter of fact most of the, of the hit in the quarter in terms of added loss costs in MI came mostly from the traditional and not the bulk.

That's what I have, thank you.

You're welcome.

(OPERATOR INSTRUCTIONS) Our next question comes from Jeff Dunn with KBW, please go ahead.

Just one quick question for clarification.

That's not Jeff Dunn.

Yeah, Jeff actually had to step away, this is Bill Clark.

Right.

The 55 million of earned premium that you mentioned for the construction business, does that represent a full quarter since January 1 or was that ramped up --

It's a full, it's a complete three month worth of earned premiums.

Okay, great, thank you.

You're welcome.

(OPERATOR INSTRUCTIONS) There appear to be no questions at this time. I will now turn the floor over to Mr. Zucaro for any closing remarks.

Okay. Well, thank you. I don't have any further comments and as always we appreciate the interest evidenced by the questions and the attendance on this quarterly chit-chat of ours and having said that I'll bid you a good afternoon and look forward to visiting with everybody in three months or so. You-all have a good afternoon.

Thank you. This does conclude today's Old Republic International first quarter 2007 earnings conference call. You may now disconnect, have a wonderful day.