Old Republic International Corp (ORI) 2007 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 2007 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 your questions. And now I would like to turn the conference over to Leslie Loyet of the financial relations board. Leslie, please go ahead.

Thank you. Good afternoon, and thank you all for joining us today for Old Republic's conference call to discuss third quarter 2007 results.

This morning, we distributed a copy of the press release and hopefully you've all had a chance to review the results. If there is anyone online who did not receive a copy, you may access a copy at Old Republic's website at www.oldrepublic.com or you may call Liz (inaudible) at 312-640-6771 and she 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 pages of the dress. Words associated with the statements can be found in the company's latest SEC filings. With that I would like to turn the call over to Al or opening remarks.

Thank you as always, Leslie, and good afternoon to everybody. Well, what can I say? Even though we don't like to surprise anybody, we obviously delivered a real doozy of a quarterly report this morning.

If you had a chance to read the earnings release, I believe you will see and you'll understand pretty clearly the sources and the reasons for this turn of events.

As we do each time, we have one of these post earnings release conference calls, I won't bother reciting the data in the press release. You can read English as well as I can if not better, so I will refrain from repeating the release and instead I will just add a little color to the picture and then leave most of the time we've alloted to the question and answer section of this call.

As most most everybody that follows us that's connected to the insurance industry in any way is aware, we've got three major segments at Old Republic, and obviously currently two of them are not doing so good, and the third is performing very nicely as it has for many years now.

In most years the balance we've achieved in terms of diversity of insurance coverages, the industries we serve at the core of the American economy, and the business cycle management that we've attempted to achieve has worked very well for us. But in terms or in times I should say where you have some particularly accentuated stress in some key industries we serve, those high stress levels can undermine that balance, and starting with our third quarter of this year, we think we're going to be navigating some pretty choppy waters before we sail to calmer waters once again.

As we now see it, looking at our title business first, we think it is likely to mosey along for the next six to eight quarters while the housing and the related mortgage lending industries restabilize themselves so to speak.

While we don't believe these industries are likely to exhibit a quick turnaround, even though those of you that follow the title business know that it can turn on a dime up or down, neither do we think that they contain the seeds of deconstruction.

Claim costs and title have been inching up for a couple of years now, and this may well continue for awhile, but we don't see much of an exposure to any significant reserves strengthening in this part of our business. I think it all goes to the claim reserve structure we've built over many years which has continued and should continue to stand well by us.

So the main reason why our title segment will just travel along will continue to be a function of the lackluster top line input by virtue of the weakened new and used home sales we expect, and the limited opportunities that we have to reduce period costs to a significant degree. Now, of course that does not mean that we've given up on the idea of pruning here and there, nor of better rationalizing, if you will, the more labor intensive or less promising parts of that business, but as I say, we think we've got some limitations on any significant cost-cutting in that business.

Turning to our much larger and much more critical, particularly today, part of our business, namely our mortgage guarantee business, the current negative trends that are emerging with full speed this past quarter are, I think, a reminder that most markets ultimately and always revert to the mean.

As we said many times, the results posted for this business only make sense if they're assessed over a complete economic cycle which obviously will meld the ups and downs into an average that's more indicative of the long-term profitability of the business, and in this context what we're beginning to experience in this segment I think is a reversion towards more sustainable averages.

Of course, the trends as you all know from a simple reading of the newspapers and financial magazines, these trends are being triggered by the significant dislocation that's taking place relative to mortgage lending, related financial instruments, and of course the multitude of what have been called somewhat opaque financing mechanisms that have been largely invented in the past ten or fifteen years -- ten or fifteen years. With specific reference to our mortgage guaranty business, this location translates itself pure and simple into I greater number of more expensive claims that are caused by many more homeowners who can no longer afford either, their fixed or worse rising monthly mortgage payments.

In this latest quarter, the number of loans that were reported to us in various stages of default rose significantly and while we actually dispersed greater sums to pay off the portion of loans which we had exposure, the greatest effect on our overall claims costs that were incurred as we say in the business stemmed from additions to reserves for claim payments that we estimate we'll make in the near future.

Said another way, if you look at the number that is we've included in this morning's earnings release, the third quarter claims ratio which was almost 162% is made up of paid losses or a ratio of paid losses to premiums of 44% which represents the money we took out of the cash register to pay those claims which were finally resolved, and almost 118% which represents the amount we estimate we will pay in the near future on defaulted loans reported to us.

And if you compare this to the same quarter of 2006 which I did on a piece of paper here, you would see that the claim ratio we reported in that period that the paid loss portion was about 33% and the reserve component was just 9%, so I think you get a clear idea of the significant impact that the reserve estimates we make from time to time have on the lost costs we book in the income statement.

As we wrote this morning's release, the higher claim reserves we posted through September 30th were simply due to the combination of the higher number of defaulted loans as I said before that we estimate will turn into actual claims and the greater average amounts we're likely to pay on each of those claims. If there are any questions about the minutio of the calculation that is go into our periodic claim reserving process, we'll address those. We'll be willing to entertain them during the question and answer session that follows our initial remarks. Okay?

Since we're -- I should say that we're kind of certain that the pregnant question on many lips goes to how long before these claims cease to damage our bottom line. And the simple answer, the truthful answer, is that we don't know, and that we don't really know of anybody out there that's so nonchalant as to pretend knowing.

When we look at the history of the MI industry since it was reinvented by -- what was his name, Max Karl back in the mid-50s, there is really just one period that stands out as representing anything remotely close to a systemic stress scenario, and that period extended roughly between 1985 and 1989 for the entire private mortgage guaranty industry of that time, and during that period if you looked at the claims experienced that was incurred by that industry, it went from about 74% in 1984. It peaked at just about 192% in '87, and then it proceeded to did he send to a normal level of about 65% in 1990.

When you composite the loss ratios for that entire five-year period, which again as I say was the most significant stress period that most of us who are involved in the business today live through, that average came out to about 134%.

Our own Old Republic segment in mortgage guaranty segment experienced similar ratios though ours were a little lower than the aggregates I've just mentioned for the industry.

Now, and we've had many discussions internally about the meaning that history trying to import it to the present, but we think that any student of the business and anybody that he that lived the business during those years will tell you that the lay of the land was different in those years. For example, premium rates were much lower than they are today. They weren't as many types of loan configurations as we're dealing with today.

The loan underwriting and the documentation standards that existed in those days were not as shall we say benevolent as they had become recently, and home price appreciation and appraisals had been much more time than has been the case in the past five years. We sure as hell didn't have the easy money or the fanfare of opaque financial instruments and financing devices that have tended to cloud the reality of loan exposures in today's market.

Still, taking into account all of those differences, there is some merit to an assumption that the current state of the mortgage debt, whether it is insured or not, could come under similar stress for an extended period, and using that earlier period as a guide post for our times, we think we'd be looking at a time frame extending between mid-2007 to perhaps mid-year 2010.

We think this could come to pass, but perhaps it could be shortened, particularly in private industry, and I would include the members of private industry we've had who've taken part in the mortgage lending industry of the past several years, and that would include the lending banks, the investment banks, the mortgage bankers, and, yes, the mortgage guaranty industry.

If they can come together as private industry as opposed to seeking a government fix of our problem, if they can come together and agree to a reset of at least the most exposed and vulnerable mortgage paper, so as to keep the largest number of people in their homes and stem the detriment of foreclosures, then we could conceivably come to a shorter period of stress for that business.

So in this light, we're currently preparing ourselves to manage this part of our business for a stress period that probably will extend to 2010.

In that light, we take great comfort from having the necessary financial under pinnings in the form of a quality, highly liquid invested asset base, strong capital resources, and a very sound claim reserve position to meet our just claim obligations as they come due.

Importantly, we're counting on what we think is an emerging evolution of mortgage underwriting towards stricter industry-wide underwriting standards, and somewhat higher prices for certain products to enable the production of greater quality insured mortgage loans to take us to the other side of the bridge by 2010 or thereabouts as I say.

That's our commentary on the mortgage guaranty side of the business. Moving to the sunnier side of the street if you will for us, you can see that the totality of our general insurance business continues to perform extremely well.

Paid loss ratios have crept up a little bit, but incurred losses which as you know are inclusive of any reserve additions or subtractions as the case may be, are holding up quite well, and we think that this situation in terms of the critical loss ratio for us, we think that it is due to the continued adequacy of claim reserves that we've established in prior years which are not coming back to bite us, and of course the reserve levels we're posting in the context of the currently developing premium rate levels of the-- premium rate levels in particular of the last couple of years. On this point, I think it suffices faces to say that we're not experiencing any greater downward rate pressures currently than we've sustained in the past 24 months of what is generally considered to be a softening market for most property and liability insurance products.

Even so, the three largest coverages that we write, namely workers' compensation, commercial auto, and general liability which we tend to write or to underwrite if you will in concert as to most accounts, that the loss ratio for those three coverages combined came into about, oh, less than 71% for the first nine months of 2007 versus 73.6% in the nine months of 2006.

Another book we have which we refer to as our financial indemnity book of business which in our case includes E&O, D&O, credit indemnity on consumer loans, and fidelity and surety mostly for Main Street businesses, that book produced somewhat higher loss ratio of 62.5% year-to-date compared to about 41% last year, and most of the rise was caused by our credit indemnity portion on the consumer side of the business.

Our home and auto warranty coverages, they had nearly identical loss ratios, in the neighborhood of roughly 65%, and our aviation and inland marine coverages which include incidental property and cargo and what have you, those also penciled in at slightly lower loss ratios of 49% this year versus 52% in the first nine months of 2006. So as I recite these numbers, I think you get the gist of it that the composite picture of our general insurance business from the loss ratio standpoint is very good, and again goes to show the benefits of the balance that we've attempted and have in fact achieved over time.

All in all, I would say we're reasonably positive about the possibility of reporting favorable general underwriting -- general insurance underwriting results for the foreseeable future.

In this business as well as in all of our other segments including our small life insurance business, the first nine months of this year produced uniformly positive operating cash flows which as you've seen in this morning's release amounted to about $643 million year-to-date which was a couple of digit points -- I mean, in the lower teens, I guess, increase relative to last year.

And staying on this operating cash flow matter and its effect, our consolidated invested asset base as I look at these numbers here, has grown by almost, what, 12% year-over-year, and this, of course, is largely responsible for the nearly identical rise in net investment income for the first three quarters of this year that you see in the many income statement that we put out this morning.

From a consolidated financial condition standpoint, our position remains very strong in terms of asset quality and liquidity. In terms of claim reserve levels across the board, we're in very good shape, and we expect those claim reserve levels to continue to be on the adequate side as opposed to deficient, and of course we think that our capital has got a great deal of substance attached to it.

You merely need to see the balance sheets we publish periodically to note that our capital base does not have any meaningful amount of water in it in the form of goodwill and other book keeping gimmicks. Our debt level remains relatively immaterial so that our ability to leverage that capital base if and when needed I think is quite significant.

At the holding company level, we're not anticipating any issue relative to the sufficiency of dividends that can be upstreamed by our various insurance and noninsurance subsidiaries to enable us to honor our debt service obligations as well as the dividends we're currently expecting to pay to our shareholders, and I say that in the context that given the likely stress period we're likely to encounter in our mortgage guaranty business which will preclude the upstreaming of any significant dividends, I say this in the context that the other parts of our business are in very good shape to feed holding company needs from a cash flow standpoint.

Finally, I might note that from a capital management stand point that we did, again as you saw in the press release this morning, that we did buy back some of our stock in the 3Q of this year, and as we speak we continue to examine our strategic options in this regard.

To conclude, our best guess at the moment in terms of a forward look to Old Republic's business, our best guess is that this year's fourth quarter should probably reflect similar positive and negative operating incomes or outcomes as we've registered in the third quarter. At this moment our preliminary view of 2008 operating results is that they will as well be shaped by the trends reflected by each of our business segments in this year's third quarter.

As was said initially, we're going to now -- that concludes the remarks I have made notes about making.

That concludes those remarks, and we'll open the visit to the questions. This time around, in anticipation that we might get peppered with a lot of nitty-gritty detailed questions about our mortgage guaranty business in particular, I have asked Chris Nard, who is the CEO of our mortgage guaranty group of companies to join me for the Q&A portion of this call, and Chris is on the line, and so if you have questions, any questions, whether they be aimed at mortgage guaranty or anything else, just address them to me, and I'll see to it that Chris gets to answer all the tough mortgage guaranty ones and I'll take care of all the easy ones. Okay, having said that, let's get the ball rolling.

Our first question today will come from Beth Malone at Keybanc.

Hello. This is Beth Malone. Thank you. Could you just explain -- give us a little bit more color on the claims experience in the title business, you know, what kind of claims you're starting to see and what the trends might be there?

I think I would still categorize the claims we're getting in title, Beth, as being run of the mill.

However, with respect to the books of business that we wrote in 2004, 2005, 2006, in particular, as is the case with our mortgage Mortgage Guaranty business, that those blocks of business were put together as you know in real hot markets. And as in all industries, when things get hot, people get sloppy, and as a result of that, you'll get more of a share of frauds, defalcations, what have you such that when loans go into foreclosure or something happens in the transfer of a home, if there is an issue, the lawyers get busy real quick looking for deep pockets, and the title companies if at all exposed will get drawn in. So I think the higher loss ratios and actually if you look at our numbers over a period of time, they have as I said before I think been creeping up for awhile, and that's a reflection as I say of issues that arise in a high quantity of transaction market.

Okay. All right. That's fine.

Again, though, let me just say this also, Beth, that the -- if you go back again to the history of the title business, you will see that loss ratios in that business inched up to the 10, 12% area back in the late 1980s, and we for one changed the reserving approach we followed in that business, but again I think a lot of cure has taken place in the business in terms of better underwriting standards, greater attention to the production sources of the business, so that I don't think we're going to see those kinds of loss ratios occur in our business.

Okay. And then just on the mortgage business or both the mortgage and title, are there any capital or reinsurance or other kind of efforts you can do to limit since you kind of have a sense of where this is going in terms of continued loss ratios being much higher than average? Is there any way that you can mitigate that through reinsurance purchases or anything or do you just have to manage through it?

Well, I think the simple answer is that we have to manage through it for the simple reason that we have always been at Old Republic a gross line underwriter, meaning that the piece of business is going to make sense from a gross standpoint assuming you keep it all, that you should not depend on the underwriter to make right something that is not right at the very start.

That's a matter of philosophy. With respect to the title business, historically that business has not relied on reinsurance in order to spread risk or anything like that. Most companies will retain net what they write and will participate facultatively in what other title companies write and therefore have a limited exposure to the extent of their facultative assumption.

When you go to Mortgage Guaranty, as you may -- I am sure you're aware, most of the reinsurance that has taken place in that business has been on a so-called excessive loss basis where typically you've got a retention by the primary company which would be ourselves as the primary policy issuing company, and then you've have got a reinsurer in the case of Mortgage Guaranty typically that reinsurer has been a captive reinsurance company that is owned by the mortgage lender or what have you as opposed to external or totally unrelated reinsurance companies as is mostly the case in life insurance or the PNC business. So the long and the short of it is that the answer is, no, other than this ability to rely on the excess of loss protection that we get from these captive companies in the Mortgage Guaranty business that we cannot manage our net by laying off some of our exposures on the reinsurance mechanism, and that's particularly true in any kind of insurance, whether it is Mortgage Guaranty, title, or property and liability.

It is very difficult when things go bad to find a reinsurer that is willing to take the load off your hands at a reasonable price.

Okay. Thank you.

We'll take our next question from [Bill Lamelle] with Divine Capital Markets.

Hello, Bill.

Aldo.

Welcome back.

Wish the whole world were General Insurance.

Me, too, but listen, you've been around a long time.

I went through the last dip.

You know that the complexion of our business and its totality has worked very well for us, and you must remember that back in the 1990s we were very apologetic in talking about our General Insurance business which was fundamentally dead in the water from a top line standpoint and our Mortgage Guaranty and title business were carrying the flag, so we've got to remember, you know, that balance works most of the time.

Well, I like the theme, and we're hopeful that happens again. Now, in the loans and default status there in old Mortgage Guaranty rose by 18.6% in the latest quarter compared with what was running at 6% in prior quarters.

Now, the year-to-date paid loss ratios were running 13.7% higher. Now, that I take it is through the September 2007, since it was compared to the nine months ended September '06. Now, then I notice here that the claim reserves here are up 102%.

Vis-a-vis a year ago, right, vis-a-vis.

I just wondered, can you give me sort of a general-- what time period that 102% amount of money applies to?

Right. As you might well expect, Chris Nard has been heavily involved in the review of our reserve situation, as have many of us this past quarter in reaction to what was happening, so I am going to ask Chris to comment on your question.

Okay.

Thanks, Al. What we've seen is those reserves have built at a slower pace throughout the year. The bigger increase would have been in this quarter, and as I am sure everybody knows, we're a case basis, the GAAP accounting standards for Mortgage Guaranty is a case basis loss reserving methodology where we set up reserves for new delinquents and what we would expect to happen to the existing delinquent population, and I think what we've seen and everybody at the mortgage industry has seen over the last quarter is there was a pretty good deterioration in the cure rates and the mitigation potential for the existing delinquent loans on the books and that increase that Al had mentioned in new delinquents. So again the bulk of that would have been in this last quarter.

And based on what we know, Bill, based on what we know and hear about competitors, that seems to be a pretty uniform development with everybody that there was a real acceleration of the number of reported defaults in the 3Q as Chris just said.

Of course, my concern is, I am trying to go ahead in quarters, and I just want to know if I have a significant increase in the composite ratio this quarter.

You mean losses that pertain to this quarter that will be incurred in the -- which would reflect in future periods?

My time period question applies to -- well, this is not catch-up reserving, I take it.

Oh, no.

It is to some extend, but it is also reserving what you're making for the current quarter and the beginning of next year at a higher level.

Yes, Chris just said we fundamentally are in a case reserving mode every quarter, and what varies quarter to quarter is perhaps -- and I know this as a fact, is the extent of the severity that we attach to claims, the mitigation, the results of mitigations, whatever they might be that might result in a lowering of average claim costs, all the elements that I think Chris already mentioned. But if your question, Bill, if I sense your question that you're trying to divine, no pun intended, that you're trying to divine where the next quarters are going to be, I think the best answer we can give to you is the one that I try to give in my remarks before, and that is that we're not expecting this stress period in Mortgage Guaranty in particular to end any time soon.

We think it is going to be of some vintage like a year-and-a-half or so as a minimum. And there, the loss ratios that we will be reporting will again, as they were in the third quarter, be reflective of the data that's available to us at the end of each of those quarters.

Okay. So I can assume that the 176 is catch-up refunding in there?

I don't know. Wait a minute. I don't know what you mean by that catch-up refunding.

Well, because you make certain assumptions forward about reserves, and retro aggressively, too, and you just moved all the reserves up to a higher level.

Okay. I see what you mean. There was some of that, Bill, but I think --

I am not expecting to come back down to the 60% loss ratio.

I don't think so.

I think that I just wanted to understand that there is -- it seems to me there was a significant amount of catch-up refunding in there which hadn't been done, got done, and then now there is an assumption going forward at a higher level of reserving until the problems are over.

If I understand now your point about catch-up reserving, I think I might ask Chris to respond to that in terms of how we've handled expected severity.

I think I now understand what you mean by catch-up. What we've done is at the end of each quarter we make a judgment about what we think the-- what rate the existing delinquents will go to claim, and also the severity of loss on those claims, and I think what we've seen again with particular emphasis on the last quarter, is an increase in the severity of loss on each individual loan. So we made a pretty good increase in our severity assumptions this quarter related to the fact that there is just less mitigation out there in the marketplace for people to avail themselves of.

When a whole market gets tough, it gets harder to sell properties, do short sales, those things that a lender might do to mitigate our loss. I think your term catch-up I think in our parlance would simply mean a better reflection of a market that had changed pretty dramatically in the last 90 days.

Thank you.

We'll go next to Kevin with Perkins wolf.

Hi, Al, how are you?

Hi, Kevin, how are you doing?

Just fine, yourself?

Holding on tight?

Yes, we're trying to. A few questions here.

Looking at that reserving, is there a way that you can say these were '05 or '06 vintage mortgages or what's the trend been and what you're seeing that caused you to say, severity is going to be worse?

Chris, you might answer that. In terms of the number of defaults we have and how much of them pertain to defaults which took place this year versus the defaults that are remnant from last year which are just getting to the point of being settled or potentially settled any moment now.

I think when we look at the mix of delinquents in the portfolio and look at the books that have been developed, I think what you'll hear out of the market which won't be any different from us is the books really that are of concern are really the late '05/'06, and then the early 2007 delinquents.

Those are the ones that I think the market has the most concern about how they develop, and those delinquents represent a reasonable portion of our overall delinquency population.

The ones -- the delinquencies from before that period, the '04, '03, '02, they've had a chance to benefit from some pretty good home price appreciation throughout those times. We think those early delinquents will still have some mitigation opportunities in them. Again, the tougher ones were the ones originated closer to the peak of the markets in late '05 and '06.

When you say reasonable portion, is that 50% or 60%?

Probably a little less than 50, something in that range.

Okay. And then, Al, just kind of link this to a bigger picture question, when you say that looking out through the next two years that it is going to be tough sliding, and you look at all the players in the industry, what does the mortgage insurance industry look like in a couple of years? Are there players that go away? Is M&A required? Any thoughts there would be appreciated.

Well, we tend to be very respectful of our competitors. We think that going into the stress period they seem to have -- we don't have access to their books, but from the public appearance of what they publish, their balance sheets seem to be well structured and they seem to have some firepower left.

The big unknown is for them as well as ourselves is how stressful the situation is going to become, and I think it would be logical to assume that the amount of capital that's there now, unless it gets replenished through some other fashion, that if you have a stress period with loss ratios in excess of 100% for any length of time as we did in the third quarter, that by definition all balance sheets are going to suffer.

As I understand it, at least one of the rating agencies has come out and said that right now they don't expect any avalanche of credit declines for the mortgage guaranty players or some of them at least. I am not sure of that particular fact.

But at this point in time from our vantage point we obviously can speak mostly about ourselves, which is what we know the best about, and we think we're in a very sturdy position given the balance of our business and the overall strength of the balance sheet, and the others don't appear to be teetering on any kind of possible demise.

With the caveat that it is still early.

That's right. That's why I took some time, Kevin, to hark back to that period of 1985 to '89, and you have to look at that because for one thing still as I said the mortgage business was different in those days than it is today, but then rates were lower, but all the Companies save one, I don't know if you've read the history of the business, but only one company in the Mortgage Guaranty business went belly up at that time, and as I recall it now, that was mostly the effect of some leveraging that had taken place in its parent holding company situation rather than pure and simple Mortgage Guaranty business by itself taking it down. But I am not sure -- I am a little rusty on that history, but I think that puts it in perspective that that was a pretty serious period in the Mortgage Guaranty business, and we all came through it, and as you listen today to what's happening, you know, there is definitely a strengthening of the underwriting standards. There is a strengthening of the pricing from any of the products we insure, so both as individual companies as well as an industry we're going to be able to write forward and on the better basis which will serve to attenuate -- at least attenuate, some of the problems we have that need to be resolved with respect to past underwritings for particularly the three years that Chris mentioned before.

Great. Last question. Appreciate that commentary. Last question on the share repurchase, what's authorized?

On the surety purchase?

The share repurchases.

Oh, I'm sorry.

That's all right.

500 million.

Okay.

We've eaten through very little so far, as you can see.

Right. That's open ended, correct?

That's right.

Okay. Thanks a lot.

We'll take our next question from Stephen Mead with Anchor Capital.

Hi, Al.

Hi, Stephen, how are you?

I am all right. Can you talk a little bit about the tone or what kind of business that you're writing on the mortgage insurance business and I was just looking at the year-over-year comparisons in the growth in that business, and I was trying it get a sense of how much that growth offsets the cost and the increase in the claims.

Well, I am going to let Chris Nard take a crack at that.

Sure. One thing I will comment on is the period we had in the 80s was not coupled with the increase in new insurance writings that we have today, so it is somewhat comforting to see the fundamentals of this business improve, particularly when you see the increase in the traditional primary that we've written quarter over quarter, and the nine months ending September 2007 versus '06, and I think that's largely related to the mortgage markets coming back to mortgage insurance as good solid provider of liquidity today. As these other structures have disappeared, so I think that bodes well for us after we get through this tough period.

I don't know how to specifically answer that, but it is -- it makes it easier to get through the claim period in this time of rising revenue than it did in the 80s when you had declining revenues during a tough period.

Just looking at the sort of pace of the bulk business in the traditional, excuse me, not bulk, traditional primary mortgage insurance business, I just want to sort of how, what can you take that up to in terms of the amount of business that's available, your share of the market, the pricing and stuff? Should we see continued growth in that category?

I think we'll see continued growth. I don't think we'll see it at this rate, but if you remember as we talked about over the preceding years, we think we lost roughly half of the MI business through the piggyback market, the 80/20 market, and we think through a lot of those years, we lost the high FICO, good quality business to those piggybacks, so I think what you're seeing today is the piggyback market has absolutely, has virtually dried up, so what we see coming back into the MI business is a pretty good product that we feel that we've lost over the years. MI penetration rates for our industry I think reached a low in that sort of 5 or 6% range, and throughout the most recent period I think we've seen that sneak up to the back up to the low to mid-teens, which is kind of a number where it was in the early 90s.

Around 16, right?

Yes.

Chris, as we speak?

Right.

I think that's a great point, Stephen, that we have a saying around here which I am sure is not unique to us, that you write the best business when it comes to any kind of credit indemnity business, whether it be Mortgage Guaranty, whether it be surety, whether it be credit indemnity, whether it be financial guarantees generally, that you write your best business when you are in periods of stress and nobody wants to do anything, and some of the bad products or some of the lesser quality products that Chris alluded to before evaporate and therefore make room for stuff where you've got a better chance of making a buck. And so from that standpoint, if there is-- we can't forget that there is a bases for being positive out of what's happening currently, and that's where a great deal of the positiveness rests, particularly if you have the wherewithal from a capital standpoint to carry the greater exposures that -- the greater amount of risk in force that you're likely to accumulate in a more positive market from those stand points.

The other thing, just geographically, are you seeing -- is it occurring sort of uniform geographically or are there any parts of the country that actually have gone through or have already sort of gone through the losses and the delinquencies in our leveling out or not?

Chris, do you want --

You've got really -- I will isolate it to four areas. You have kind of that of upper Midwest which is Michigan, Ohio, and Indiana, and those are suffering from all the same lending issues that happen around the country, country, but that's coupled with a significant job loss in the auto industry up there.

I think we've seen Indiana flatten out a little bit, but Michigan and Ohio are still on the ramp up, albeit not anywhere near the rate they've been over the last few years. Then the other areas of concern are obviously Florida and California which were the two hottest markets for the last four or five years, and those are the ones that I think have deteriorated more quickly than most people would have anticipated, and I think contributed a lot to what we saw in the last couple of quarters.

Okay. Thanks.

Our next question comes from Matthew Goetzinger with Fiduciary Management.

Thanks for taking the question. Just remind me how much of the primary business is reinsured from an excess of loss position?

I think about half of our traditional primary book is in captive reinsurance structures.

And then do you anticipate kind of piercing that attachment point and it coming back to Old Republic?

Yes. What we would anticipate is -- now, all those captive structures are with different lenders and different lenders originating different geographies around the country, but what we anticipate is we start to see some beginning recoveries in the second half of next year with the more meaningful recoveries of those captives coming in 2009.

Do you think it would be to the extent that it would actually come through and my understanding is if pay losses go to a certain extent they actually can come back to the MI company?

Yes, I think what happens on these, I think what you're getting at is, when the -- you hit the attachment point for the lenders captive reinsurance company, they get all the losses an incurred basis, so when you pierce the layer all the reserves and the paid claims go to that captive, and obviously for that book of business we would flatten out on the paid side and yet still retain the part of the premium that we're entitled to.

Okay. And then in terms of -- I am sorry, the bulk business. How should we think about assessing Old Republic relative to some of the industry peers in terms of the delinquency rates that we're seeing?

Well, as you see in the press release, our delinquency rate on our bulk business is running at this point relatively on top of or a little bit ahead of the traditional primary book. In large extent that bulk book is a relatively young book, so we would fully anticipate that to increase as time goes on and pressure hits the market, but it is increasing from the rates you see there in the press release.

I think we all have different structures in that bulk business, so I think it is going to be very difficult to draw parallels between any one company's bulk book versus another. We've chosen to be pretty opportunistic in that market, and if we felt risk return profile looked good, we participated. If we didn't, we didn't participate, so again to answer your question I think it is hard to draw parallels across various MIs in both books like you might be able to on the primary side.

Okay. In terms of thinking about the next two to three years as Al has kind of discussed here, should we continue to anticipate staying kind of ahead of the curve and in terms of anticipating further increases in severity as well as delinquency and really not expecting positive operating income from MI?

Yes. I think Al has done that probably the best in his remarks about kind of where we expect it to be over the next year-and-a-half to two years.

I think from a severity standpoint, Matt, I think we're close to, wouldn't you say, Chris, to maximum severity per (inaudible).

Yes. Remember in the traditional primary business we do have capped severities at the optional guaranty amount, and I think when we look at how we've set the reserves, we're pretty close to being at what we would say historically is the maximum stress on that severity side.

So most of the claim costs, Matt, are going to be a reflection of number of claims, the extent to which the number of defaults grows significantly, and also the extent to which we're able to mitigate that either by ourselves or as I try to say in the remarks, if everybody that's got something to do with this business comes to the table and tries to fix part of the problem at least, as opposed to going to Washington, D.C. with your hat in hand, I think that could have very measure to her us and positive effects on both our industry as well as the rest. No question that a lot of people are going to have to pay a price, price, but then again whether it is the banks or the insurance companies or whoever, we're all in the risk business, and that's what we get paid to do, and when the risk comes home to haunt, then we have to pay the piper.

Thanks for the color. Just one last question. How should we think about the severity of the bulk business relative to traditional, then?

Chris?

Yes. Let me add one thing on the primary side. The severity is a percentage, it's pretty well where we think it is going to go, close to the top.

What will happen, though, is the larger loan amounts are moving through, so you will pick up some additional claim size with the larger loan amounts. And I think you'll see that similarly on the bulk side where some of that product has a higher loan amount in it than the traditional primary has had in the past. I think that will be the trend that you'll see there.

Great. Thanks a lot. (OPERATOR INSTRUCTIONS)

We'll go next to [Jim DeLyle], Cambridge place.

Good afternoon.

Yes sir.

Thank you very much for the context. Like a lot of people I'm sure on this call I am kind of a newbie to this space, and hearing people talking about 1984 and 1987 is helpful in getting context. Of course, it would be even more helpful if Bloomberg's data went back that far, so if you don't mind I can ask you a couple questions about that period.

Sure.

During that period what -- were there any losses at ORI during that period on an operating basis?

Well, I don't believe we had losses in that period. The last time we had -- when you talk about ORI, you're talking about the entirety of our company, is that correct?

Yes.

The last time we had a loss at Old Republic was in 1975, and that loss was caused in our life insurance business at the time which today is a shadow of its old self.

In terms of parts of our business, we had some losses in the early 80s in our title business, very deminimus. As I say, we had losses in the late 80s in our Mortgage Guaranty business because of that stress that we went through.

We had declines in earnings in various parts of our business, but as I say, for the overall operation, 1975 was the only one.

And during that period obviously an investment in ORI was fabulous investment towards '87 or so.

What was-- once again, hostage to Bloomberg data here and the fact that Edgar doesn't go electronic until much later-- what was the price book ratio you bottomed out out at if you remember?

The lowest we got to, again if you go to our website there is something we call an annual review, and in the forepart of that annual review there is a two-page table that shows returns, market returns for our stock as well as market returns on the book basis, and you will see that the lowest, I forget the year, forgive me now, but I am going to say late 1990s.

Our stock, oddly enough at the time, was around $20 a share from a book value standpoint, and I think the book value quality at that time was as good as it is today, and our stock for a very small period of time, I am going to say no more than a couple weeks went as far down as $11.50, $12 a share, so that means we were selling for as I say a short period of time at 40% below book.

Okay.

That's the worst that I remember has occurred with respect to our stock.

And how is price appreciation, slash depreciation, I know it is kind of a random number if you will, but for internal modeling can we have some kind of context as to the numbers you're reserving around?

Well, I don't know that -- I mean, Chris, you can save me on this question, but I don't know that house appreciation by itself is the single element that we use in reserving. Go ahead, Chris.

It is a factor in how we think about cure rates, you know, how much equity do we think is in a property in a given area and how we think it is going to perform from there, but we try to be very specific down to the MSA level when we think about those sorts of things, and then the same as we think about them in the pricing models,s, but it would be down at an MSA level.

And if I heard you right earlier on the call, you kind of said it is best that management there is framing their expectations for the next year, year-and-a-half, two years on kind of what we've just experienced in the third quarter here, and kind of ignorantly and arithmetically I kind of take the income and multiply it by four and that's kind of I guess the worst case scenario we should be operating from, but I find that over time it has you under earning your dividend, and I am wondering if my (inaudible) is correct about the simple way of looking at projected run rate of earnings and whether you have the ability to release capital to pay the dividend, if that does happen.

I think you've got two questions there. The first question having to do with what you're trying to do to project what likely earnings would be next year or perhaps even the following year if you use the 3Q of '07 as a proxy for that.

I would say to you as on outsider that that is not based on all the facts available to you, that is not a totally illogical position to take, though I am not going to suggest by any means that is what's going to happen.

Number two, with respect to the dividend, I believe I said in the remarks that I jotted had down on paper and that I recited, I think, that we are not expecting to obtain any dividends from our Mortgage Guaranty companies for obvious reasons in the next couple of years because we're going to need that capital to not only sustain the existing business but to add onto our business, but I believe I said also that we have sufficient sources of upstreamed, upstreaming dividends to the holding company from the other parts of our business, and most specifically and most importantly our general insurance business which we expect to perform reasonably well over the next several years as far as we can tell.

And I really like to compliment you on how refreshing it is to hear somebody talk about not coming up with a structured solution to the current situation, and honoring their obligations. That truly is refreshing after many of these calls.

Good.

Thank you.

Yes, sir.

Our next question will come from William Clark with KWB.

Good afternoon. Can you just comment on the share repurchase, if that was more loaded towards the back end of the third quarter or if that was kind of spread throughout the quarter?

I don't remember. I am going to guess if you won't hold me to it, that it was late August and early September that we did it.

Okay. Thank you.

Having no other questions, I will turn the call back to Mr. Zucaro for closing remarks.

Thank you. Appreciate the interest as always, I'd like to publicly say I am truly appreciative of my colleague, Chris Nard, for having saved me on a couple questions, and having said that, we'll look forward to visiting with everyone I guess following the year end conference call. On that note, I will bid you a good day.

Ladies and gentlemen, thank you so much for your participation. This does conclude the conference, and you may now disconnect your phone lines.