Old Republic International Corp (ORI) 2007 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Old Republic International fourth quarter 2007 earnings conference call. (OPERATOR INSTRUCTIONS) I would now like to turn the conference over to [Leslie Loyet] of the Financial Relations Board. Please go ahead.

Thank you. Good afternoon and thank you all for joining us today for Old Republic's conference call to discuss fourth quarter and year-end 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 on line who did not receive a copy you may access it at Old Republic's website at www.oldrepublic.com. Before I turn the call over to Aldo 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 six 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 as she just said, you have all seen the release this morning so we'll just spend a few minutes embroidering on a few points and then, again, open the call to any questions that may be out there. While we're as we always say in the single business of insurance, we do manage it through three major segments. As you know, as you may know, we also have a small life and health operation which does not amount to very much. That's why we limit ourselves to a discussion of the three segments.

Of those three segments, as you can see in the release, two of them went south on us, while the largest part of our business, namely our general insurance business, produced operating profits that were up moderately year-over-year. Leaving aside the degree of over and or underperformance, these developments of our business in these three segments, as I say, were very much along the lines we had anticipated early in 2007. So going from the bottom up in terms of our capital allocation model and therefore focusing on our title business first, it performed somewhat more poorly in the final quarter of the year than it did in the first three quarters of 2007. And part of the performance lapse, as you can see, stems or as you should know, I should say, it does stem from the natural seasonality of this line, since, as you know, housing transactions begin to slow down in the fall and generally do not pick up steam until late winter or early spring. On the other hand, some of it was due to some very pronounced cyclical downturn issues that we're currently experiencing in the housing and the related mortgage lending industries. And finally, some of it was due particularly in the fourth quarter to a special charge as you see in the release of about $6 million that we incurred in the process of further right-sizing our direct production facilities in the Western states in particular, and also most particularly in this case in the Southern California market, where we've had the greatest difficulty in turning a profit, both in good times as well as in poorer times.

As is generally known, our title business is very much of a transaction-driven business and the reduced level of home sales and resales in these recent times is obviously the root cause of the bottom line problems we are encountering. And in light of the extra $6 million of costs, as I say, that we've just taken out of the business, we currently feel we've got limited opportunities to reduce expenses further or to any significant extent. So our posture now is to basically hold the fort, if you will, and weather the storm. And in this context, I have to say, we're expecting some more hard times for the next 12 to 15 months, at the least. Percentage-wise, we don't believe that our title bottom line should drop much further than has been the case in the past few quarters and most of the downdraft to that bottom line will continue to reflect, again, the somewhat skewed relationship of our production and maintenance costs on the one hand. And of course, the premium and fee revenues line on the other hand, which, again, as I say, is really driven by the extent of housing sales and resales. We would get a small or slight uptick in loss costs, as you see throughout, it's slightly above 7% for the first time in many years. But its effect, again, should pale compared to the effect caused by the expense feature of the income statement. If there is a defining and good quality in the downturn to the title business, is that it does, unlike most other insurance coverages we write, it does have the ability to turn on the dime when new and resale activity turns up. And while there is no single cure out there, as you know, to right the current poor state of the housing sector, the recent changes that are taking place on the interest rate front could shorten the waiting period for a turnaround by obviously loosening the lending strings to qualified borrowers and perhaps encouraging once again a greater level of refinance activity, which would be beneficial to the title business.

Let's see. Turning to our second largest segment of mortgage guaranty insurance. Again, we think that this morning's press release touches on all the hot buttons that are affecting the business currently and as we suspect for the foreseeable future. Top line-wise, we're beginning to benefit from a resurrection of the traditional primary business as the mainstay of this operation for some time to come and more importantly, the level of persistency that we're experiencing in the high 70s, as you see in the release, argues well going forward and, in combination with new production, should propel that top line for some time to come. The type of production we're putting on the books today is marked, I would say, by a much more stringent underwriting standards which include more stringent evaluation of the -- of borrower's income and their ability to pay, it's also marked by somewhat lower loan to value ratio loans and I would say by a much greater percentage of product that meets the more stringent requirements of our two big customers, ultimate customers, in the persons of Fannie Mae and Freddie Mac. There is also a modicum of improved terms of trade, as we like to say in the business, or said in another way, there is some premium rate adjustments, admittedly it's on the margin and I would not use premium rate increases as a major reason for the better prospects we have at the top line. But nonetheless, it's there and every little bit helps.

For -- I have to say that for reasons that I'm sure everyone who reads the papers or watches the business TV knows, insurance of subprime loans, which in any event have not been a material portion of our total mortgage guaranty business, and production of the so-called bulk insurance, which is typically attached to securitizations, both of those seem to be a thing of the past and should not come back, hopefully for several years. And if they do, and when they do, hopefully they'll come in at a -- in a different configuration than has been the case heretofore. So from a production standpoint, we're now writing more and better underwritten and priced business. We think that we should be able to continue doing this for at least the next couple of three years or so. And as we see it now, our ability and capacity from a capital standpoint to put this new production on the books, will be an important counter-weight or counter -- well, yeah, counter-weight is as good a word as any, to the higher loss costs we currently expect to incur. And speaking of loss costs, those have turned out to be the critical determinant of our much-downgraded fortunes of late in the mortgage guaranty business. The loss costs we registered for 2007, as you see in the-- as portrayed by the loss ratio for the fourth quarter and the full year that's shown in the press release, those loss costs are of course driven mostly by the reserves we've posted.

We didn't put this in the -- I guess you can see them in the press release, but if you don't mind writing them down, let me give you a couple of big picture numerical relationships that make this point about the impact, the significant impact, that loss reserves are having on the loss costs we're posting. Between 2006 and 2007, our paid claims went from $155.2 million to $220.5 million last year. And that's up about 42.5%. On the other hand, the year-end reserves we posted went from $249.5 million at year-end '06 to almost $645 million at year-end '07 and that's up 158%. The year-end '07 delinquency count, i.e. the number of loans that have been reported to us through December 31st as being delinquent for 60 days or more, went from about 25,008 in '06 to 40,900 in '07 and that's 58% higher.

And finally our net risk in force which is really our calculation of the maximum exposure we have out there for the total book of insurance in force, that was up 24% year-over-year. All of that to say that we've looked at our MI book of business from many angles and at year-end '07 we've again looked at the claims picture with a -- I would say, a very critical degree of skepticism. We think that the judgments we've made relative to such critical variables as cure rates, claim frequency assumptions and loss severity assumptions are on the conservative side and we think as a result they should prove reasonable as the delinquencies reported to us at year-end 2007 evolve into paid claims over the next 18 months or so. But having said that,, we still think that it is prudent, even though our loss ratio was less than this number, we still think that it is prudent for us to manage our business in anticipation of generating an average loss ratio of something on the order of 150% during the next couple of years. This compares, as you see, to about 118, 119% that we posted in '07. The magic, if you will, of the two years is that it provides, obviously, for about a 30-month period of fix-up time, starting at mid-year of 2007, which is when the loss reports really began to accelerate for us, as well as from what we can tell, the rest of the MI industry.

And as we indicated in the fall, last fall, fall of 2007, in the business review that we usually do around that time, we are using the last significant cyclical dislocation that was experienced by the MI industry in the second half of the 1980s as a proxy for the general length and the shape and perhaps even the severity of the current downturn. And again, as I believe we've indicated before, for that '85 to '89 period, the MI industry loss ratio per the Micah reports, Micah is the mortgage guaranty industry trade association, that the loss ratio averaged about 134% for that five-year period and for the two worst years of 1986 and 1987, the average was 166%. Now, it's true -- it's true enough, that the economic circumstances and the product risk configurations then and now are not exactly the same. But we think that experience for those years represents as good a basis for aligning our current expectations or at least as good as the multiplicity of statistics and educated and non-educated guesses that are being bandied about in today's business press.

So with this in mind, our expectations are that for the next 24 months or so, the MI business will deliver some pretty choppy results. The models we use show that our committed capital should be able to withstand very nicely the kind of stress that's implied by loss ratios at those levels, particularly in the context of the continuing business. And I would say that the kinds of underwriting results that would be produced by loss ratios in that 150% range on an average would obviously serve to raise the risk to capital ratio, at which we can operate safely, but still remain well below the regulatory constraint of a 25 to one ratio which has existed for several decades with respect to the mortgage guaranty industry. Again, if we look back to the high stress years of 1984 to 1989, the risk to capital ratios that prevailed for most companies in the industry were in the 21 to one area. They were at least-- those ratios were not uncommon then and the MI industry managed itself out of that period very successfully, as it was able to bank on better priced and better underwritten business to offset the damage of the prior underperforming book. So the long and the short of what I'm trying to say here is that we think that we currently have sufficient capital allocated to our mortgage guaranty line to weather the storm and to enjoy better days from that point forward.

I'll make one other point on mortgage insurance. Those of you that follow Old Republic remember that since our third quarter call, we reported a significant investment through open market purchases of the stock of the PMI Group and the MGIC Investment Corporation. The stakes we reported originally in October, November amounted to about 15% for PMI and about 11% for MGIC. Yesterday, we reported an addition to the MGIC investment, bringing the total interest in that company to 15%, to a little less than 15%. So in the aggregate, our combined investment in those two companies, as we speak,is about 473, almost $475 million, and that's about nearly -- it's nearly equally divided among the two investments. Both investments were funded with available monies in our property and liability as well as title insurance companies and both investments are well within the regulatory allowances for investments in a single investee by each of the insurance companies that constitute those two groups. For obvious enterprise risk management reasons, we did not make any of the investments in MGIC and PMI via the invested asset base of our mortgage guaranty companies.

As we see it, the thinking process is that these investments are part of our overall equity portfolio, which as you see in the summary balance sheet, amounted to about $840 million at year-end '07 and as we've indicated in the necessary SEC filings that we're obligated to make, our intent is to hold these equity positions for the long term, viewing them as a passive interest in the North American and foreign MI businesses of those two largest of companies in our industry. One of the ways, among several, that we've reasoned our decision to make these investments, is to view them in the context of our existing U.S. market position. Specifically, I mean that we now manage directly roughly 11% of the U.S. MI market business through our Republic Mortgage Insurance Company and its sister companies, with the capital allocation of about $1.25 billion, and now through these two investments we have an additional, albeit passive, interest, of about 6.5% as an investor in PMI and MGIC combined, at a cost of about, as I said before, $473 million.

So we think that the mix of the active and passive aspects of our interest in the MI business make a lot of sense at this stage of the game, in light of the fact that we view the industry as being extremely viable and important to the American economy and that it will survive very well and come through this period of dislocation that we are experiencing. Let's see. Touching briefly on our largest segment of general insurance, the business ended the year at the lower end of the range of 92 to 94% composite underwriting ratio that we had anticipated early in 2007 when we finalized our budgets for last year. Earned premiums came in as expected, as we indicate, as we have been indicating in our press releases for each of the quarters of '07. Most of the growth that you see there, in the teens, came from that new book of business that we acquired late in 2006, such that the ongoing non-new business produced about a 2%, or thereabouts, growth rate. Most of the coverages we write and, again, for us, our coverages are mostly in the liability insurance category, as opposed to the property side of the business, most of those coverages performed very well from an underwriting standpoint.

As I recall, we indicated in our third quarter earnings call the coverages that we categorize in the so-called financial indemnity line, and these include our directors and officers' liability, our fidelity and surety, our consumer credit indemnity and the relatively new and growing book of d asset protection coverage, which are relatively small amount policies that are sold through our automobile warranty channel, that in their totality, these coverages did not perform as well. In total, all of them amount to about 14% of our overall general insurance earned premiums. To give you a flavor for the numbers that we'll with posting in the 10-K this year for that aggregation of coverages, the loss ratio for them went from 41% in '06 to 70% in '07. Whereas, as you can see, the overall loss ratio for the segment went from about 66% in '06 to about 67.5% in '07. But otherwise, the general insurance business performed very well, again, from both an underwriting standpoint and with growth in investment income, in as much as cash flow was very positive and the invested capital base of that business grew some more last year.

Consolidated-wise, as you see in the summary balance sheet, provided this morning, our financial condition remains very sturdy and our capital base, which has very little debt in it, we think affords us a great deal of fire power and flexibility and certainly enables us to manage the totality of our business in all of its segments, without requiring any additional capital. Tax rates-wise, again, not much of a change there. As I say, cash flow remains positive all around.

We had a little bit of a negative cash flow in the title business, as you can well imagine, with the kinds of results we posted, but again, the negativity of it was not very significant. Having said that, we will once again open this meeting to questions and as we did with the third quarter conference call, I've asked Chris Nard who is our CEO of our Mortgage Guaranty Insurance Companies to join me here in the q&a section of the call so if there are technical that I'm not on top of, and certainly Chris knows his stuff and is on top of all the details. He should be able to answer them very well. So, we'll open it up to questions.

Thank you. [OPERATOR INSTRUCTIONS]. We'll take our first question from [Ron Bobman] with Capital Return.

Hi.

Yes, sir.

I had a couple of MI questions, I guess not a surprise. And I appreciate the loss ratio information that you provided sort of where you think you're going to be booking it in the ballpark for the next couple years and how you're using the late '80s as a bit of a guides post. I'm curious if you could-- with respect to the prime book of business that you insured in the MI operation, where you see, whether it be '06 vintage or the beginning of '07 if you could give -- relative to-- of risk in force for that book, what the loss ratios you think will get to, whether that corresponds to where you're going to be booking it and maybe in a stressed case where you think that might get-- , where it could conceivably get to in a stressed

Well, let me start and then I'm going to ask Chris to add to the comment, to the response to your question. On the big picture basis, you're focused, and I can understand why you would be, on the 2007 book and what kind of expectations we have for it. But as you know, unfortunately that is the book relative to which we have the least knowledge right now, so that what we, and all other insurance companies deal with when you're dealing with a new book of business, is that you try to apply historical data to the current book and try to make judgments about how that new book might differ, to come up to a set of expectations as to, let's say, what loss ratios will look like.

What we do, obviously, in our-- on our book of business is to look at the totality of all the policy use, since those are in effect from all intents and purposes, continuous policy years in that we tend to do business with the same insureds and all that happens from one year to the next is we change underwriting standards and what have you and as I indicated before sometimes there's some price changes, et cetera. Having said that, I'll ask Chris to add a little more color to that.

Yeah, first thing I would do is echo what Al said, which is the '07 book, which is a large book, today is only on average about seven months old. It's very difficult to project a book that's on average six months old at this point. On the other side of that, clearly, the market is worried about largely the last quarter of the business written in '05, '06 and from our standpoint largely the first three quarters in '07 we felt like the book started to -- the market itself started to improve there in the third quarter of '07. So clearly, those two books represent a large portion of the risk in force for any of the MI companies. You know, and likely Al gave you that 150% loss ratio number. We still feel pretty good about that number, given the size and the early development out of the '06 and '07 books.

Can you provide a loss figure relative to risk in force for the prime component of your book, whether it be for the '06 accident year or the portion of the '07? I'm trying to sort of --

I'd be uncomfortable projecting out that number today. Again, one, it's so new, and two, the prime book is obviously affected by what else goes on in the real estate markets. And if you look at the rate decrease and where rates are today, a lot of changes could come in the next 12 months with that '07 book. I would give you a number that didn't have any certainty around it.

All right. Well, even your 150% loss ratio doesn't have any certainty about it. But I'll move on. I believe that you enter into captive reinsurance agreements. I'm curious to know whether those are sort of annual calendar year relationships and whether, if they are, they've sort of been renegotiated with the terms materially different. I would think there would be cause to do so, but haven't heard of anything in the marketplace.

Those are calendar year agreements and on the main, there have been no meaningful renegotiations of those terms.

I mean, they're no different than other reinsurance contracts that we have with other reinsurers in the property and liability area or what have you. Those contracts run on a year to year. They're typically renewed or not renewed as mutually agreed by the parties. But once the terms are set for a particular calendar year book of business or a policy year book of business, the contracts are typically inviolate and therefore the terms are not changed.

And those are excessive loss agreements.

I just would have thought with the world of pain that the originators have sort of rained down upon you and us, albeit, you weren't blind to it, but albeit there's been a world of pain being rained down upon you, that the terms of trade, the pricing of the relationships would be -- and the structures would be -- would warrant change. But I guess not.

That has not happened so far. Most of our contracts, -- correct me if I'm wrong, Chris -- have stayed in place at their original terms. We may have one or two less than the numbers of -- fingers of our hand, right, that may have asked us about potentially canceling on a go-forward basis, but certainly not changing the terms retroactively. is that right?

Correct.

Yes.

Okay. And my last question, thanks for your patience, with respect to the MGIC and PMI investments, could you talk a little bit about the ingredients or analysis or thought making as far as making those investments with capital, company capital, as opposed to increasing the allocation of buyback of your own stock Thanks and that's it for me. Yeah. And best of luck.

Thank you. I'll address the second point of your question first. Buying back our own stock always involves decapitalizing the company, reducing its capital, and-- whereas making an investment with available investable funds, potentially, at least that's what we believe, increases the capital of your company if those investments turn out to be good. That's point number one.

Point number two, if we were to take the $473 million of investments that we have in our, as I say P and C companies and title companies and move that to the -- our mortgage guaranty company, we could not on an actively-managed basis, pick up anywhere close to the 6% or thereabouts market share that on the see-through basis we gained through the investments in PMI and MGIC. We obviously are showing quite a bit of faith in their management of the business. We think they know what they're doing. We have a pretty good feel, since we compete with those companies and the others on a daily basis. We have a good feel, we think, about the nature of their book of business and obviously, just like us, we think that they are survivors and are going to do well when this market turns. So those were the -- were two of the issues that we focused on when we made those investments.

Thanks again. And again, best of luck.

Yes, sir.

Thank you. We'll take our next question from [Bev Malone] with KeyBanc.

Hi.

Hello, Bev..

Good afternoon. Hi. Just a couple questions. When you were talking, kind of at the beginning of your presentation, you talked about the fact that the insuring bulk and subprime markets are no longer out there. And I just want to make sure I understand. Are you suggesting that you're not -- won't be providing mortgage insurance to subprime loans? Or did I misunderstand.

Well, let me have Chris tell you and everybody else what it is that we're doing today and what it is that we think is out in the market that can or cannot be done from an underwriting standpoint.

Sure. When we talk about the bulk subprime business, that was largely the business written to Wall Street firms that then got securitized in the public markets. We largely scaled out of that business in 2000 -- late 2006 and it's never been a big portion of what we do. So we haven't written it in a while. And it is a big part of the liquidity that disappeared from the market in '07.

So I think suffice it to say that that's not been a very active part of the origination market as a whole. Same for the other portion of the bulk insurance business, which was the reduced stock business. It again was also a big chunk of the liquidity that disappeared in '07 and I think very little of that business is taking place today in the market.

Okay. Just another clarification. So that business that has been phased out, was that a relatively new phenomenon with this recent run-up in mortgage demand for mortgage insurance that wasn't part of the business, if you go back a few years or certainly when the markets had their other problems earlier that you were referencing?

Yeah, I would tell you the bulk business probably started to develop in '02, maybe, later '01, but then certainly gained its footing in '03, '04, '05, peaked in late '05, early '06 and then tapered down from there.

Okay. And then in terms of where you're seeing the most delinquencies, is it somewhat concentrated on the West Coast or are there certain markets that you're seeing more problems in than others?

Well, I think if you look to what you hear largely in the press, it affects us all the same way. I think we all refer to it a little differently, but most people are concerned about the deterioration in Florida and California. Those were sort of the more recent trouble spots. And then the ongoing troubles that everybody's had in the upper Midwest, particularly Ohio and Michigan. So if you look at the recent increases in losses the industry suffered, it's really from the onset of a slow market in Florida, California and then a little slowness in the other hot markets, obviously Nevada and Arizona.

Okay. All right. Thanks.

Sure, thank you.

Thank you. We will take our next question from Dan Johnson with (inaudible) Investment Group.

Thank you very much for taking my call.

Hi, Dan.

Good afternoon, sir. Question about the outlook, when you think about the next two years and how the role of captives may play in your reported loss ratios. I mean, I guess I have my own set of assumptions, but I'd be very interested to hear if you think that those captives will be called upon in '08 and '09 and if that has any impact in the way the '08 loss ratio on a reported basis will look relative to '09, even if on a gross basis they are sharing similar levels.

Right. Let me just say, first, before I ask Chris to embroider on that. When we throw out that 150% shorthand loss ratio, Dan, that's a net loss ratio. So inherently, it is inclusive of any and all recoveries that we may get from the captives. In terms of the numbers as they will come through the income statement, I'll ask Chris to give us an idea of what our current thinking is as to the timing of those recoveries from the captives.

Sure. What we would anticipate is those captives will begin to support us in a more meaningful way late in 2008, later this year, and then really come on line as a claims paying benefit in 2009. It's a little -- it can be a little bit tricky to forecast exactly when you'll pierce these layers, because each book with each large lender, has a little different flavor to it, be it geographically, concentrated based on where the lender originated most of their product or the various types of products that lenders do. But again, we think they will start to provide more benefit later this year and then come on line more meaningfully in '09.

And is there much time lag, I guess this is a liquidity question, between when you need to make the payment on a gross basis and when you can draw on the cash?

No.

You mean from the captives, you're talking about?

Yes.

Chris said no, that's the answer.

Finally, when you look at the performance of the delinquencies within the quarter, can you talk about if you -- what you're seeing from the monthly performance, say, in December, relative to what we were seeing maybe overall on average? In other words, are we seeing us exit 2007 on sort of an accelerating basis?

You mean an absolute number of delinquents.

I guess however you want to put it. I guess I'd think more in ratio space, just to normalize for any growth, although maybe that's not that big of a deal in the quarter, I guess however you would want to think about answering the question.

Delinquencies, I mean, the easy way to answer that is delinquencies have increased throughout the quarter and I'll reference back to Bev's question, which was the meaningful part of those increases have come out of the deterioration in Florida and California and then again some continued softness in the upper Midwest. So while we wouldn't forecast when any of those economies will turn around, certainly they'll continue to be weak through the bulk of '08.

Okay. Then finally, with the outlook that you have, I know there's a lot of sensitivity this business around unemployment. Can you talk a little bit about what sort of unemployment environment you're using when you think about the loss outlook that you've given to us? Thank you very much for the questions.

Yeah, I would tell you that forecast as it is is built on a -- not built on a lot of job growth. In fact, it's basically in the short run a down -- a flat to slightly down job environment that backs up those numbers.

Great. Thank you.

Thank you. We'll take our next question from [Peshal Tems] with Raymond James.

Hi. I just wanted a little bit more color on the mortgage insurance, the net premiums on growth. You had a double-digit growth in '07. Do you think it's going to be like that in '08 as well?

Chris, you want to take it?

Sure. The market for private mortgage insurance I think has benefited strongly by this dislocation if the mortgage market. I think it's shown the value of the primary mortgage insurance market to originators and investors around the world and that has gone a long way towards increasing the MI penetration rate, which is the amount of loans done in the marketplace that have mortgage insurance on it, to close to record highs. I think at its lowest point, about 6% of the market had primary insurance on it and maybe mid- to late '05, and I think we're running in the mid- to upper teens today.

Was it around 16-point something at the end of September, Chris?

Yeah, sounds about right. So we would expect -- now, you know, whether it stays at those record high levels or not is yet to be seen, but we would expect continued good penetration rate in the market because our largest competitor, which had been the piggyback business, where the borrower gets a first and second mortgage to avoid mortgage insurance is largely a structure that is not out there in the marketplace any longer.

Okay. Then on to the general, the insurance business, do you have any combined ratio goals for this year?

We think that as you saw, as you see there for the fourth quarter, a little bit of an inching up, we think that most of our coverages are going to show some loss ratio growth, for the simple reason that we've had in the last, oh, two and-a-half years, compounded or perhaps we've lost maybe 7, 8% of the premium rate through rate cuts of one sort or another. So that of itself is going to -- should show an increase in the loss ratio for 2008. We don't have our budgets finished yet for '08, but the -- I'll stick my neck out and suggest that whereas at the beginning of '07 we were suggesting a 92 to 94% combined ratio, and we came in slightly below that 92, as you can see, that I would say that a 93 to 96% is probably a better range for 2008.

Okay. That's helpful. All right. Thank you.

Thank you. [OPERATOR INSTRUCTIONS]. We'll take our next question from Kevin [Preloger] with Perkins Wolf.

Hi, Al, how are you.

Hi, Kevin. Good, yourself?

Doing all right.

Good.

Well, a few questions and I'll ask in a different way. Just on the buyback and that. I guess looking at the MGIC and the PMI stakes, both have losses and I think the scenario that you paint out for the next 24 months or so, looks to be pretty ugly and you see the losses mounting there at those two firms and the capital raises probably seem inevitable and you just wonder what the (inaudible) is going to be there. In addition book value is going down. Now, look at Old Republic stock and see that you guys have been growing book value through this and buying back stock now that's at a 30% discount to book would seem to be like a pretty good investment at these prices, wouldn't you agree?

Well, as I said before, Kevin, when you buy back your own stock you're decapitalizing the company and we don't think that this is a time to decapitalize Old Republic. As I indicated before, we think that given that scenario that we've painted for the mortgage guaranty business of let's say -- we've used a shorthand of 150% loss ratio, that's going to be-- that's going to have a negative effect on its capital and we may need to do some capital reallocations within the system.

Currently we think, based on our understanding of what our customers, rating agencies and so forth are looking for in the mortgage guaranty area, we think we're going to be allowed to run those businesses at a higher risk to capital ratio. But the question is going to be how high is high. As you know, as I believe I may have said, from a regulatory standpoint, the bogie is 25 to one. However, we think that the ratios at which we were operating back in the '80s, the last significant stress period of 21 to one is probably a max. And if that, perish the thought, should be achieved, then we're going to need capital. So, again, this is not the time where you part with capital. You saw us in the 3Q. buy back a small amount of our stock. But then, when we saw the developments, where they were going, we said to ourselves, uh uh, we keep our powder dry right now.

But I guess dry powder in the investment portfolio, given what those two companies have done, I guess I look at it as a Old Republic shareholder where to make my bet they the mortgage insurance space I'd put my capital on you guys because I think you're going to survive because you have a stronger balance sheet or better underwriters, versus those other two because I haven't invested my money with the others because I don't think you know what book value is and I don't think you know if conceivably if they're around, if the going gets really tough over the next 24 months.

Well, you know, again, I think we could have pretty good argument as to what they're going to do and not do and I don't know any more than you do about that. But the assumption we're going on now, Kevin, is that we're all going to be allowed, at least the rating agencies are not making noises about cutting back on ratings, that we're going to be allowed to write more business at a higher risk to capital ratio. And the very fact that we have made what we, for us, are significant investments in those companies should tell you that at least we believe that they're going to be survivors and that if they do issue more capital of one sort or another, that we don't think it's going to delude us below the cost at which we acquired those stocks.

I guess just one final point and I'll leave it alone, but I think that clearly there's -- there has been and continues to be some crisis of confidence here in the mortgage insurance space and I think it does send a pretty good signal. I know you do have a balance sheet better than the rest of the industry, but that buying back stock would send a good signal that you're committed to your business as well and feel pretty good about your book of business, while maintaining, I think, significant capital to be able to write new business when it comes down the pike.

Right. Well I'll just add one point, Kevin. You've been around Old Republic as you say for a long time now and I think you understand how we think. If it came back to getting rid of capital, you know that we have strong feelings that that capital should be given back to all the shareholders, not just a few, which is what happens when you buy back your own stock. Because again, you decapitalize the company, and you're just making it he easier for others to exit the stock. If we have money burning a hole in our pocket, we say okay, we'll give it to all the share holders as we did back in -- what was it 2003 and we did it again in 2005. But at this point in time we think that the combination of potentially, hopefully, increasing our dividend steadily, the regular dividend steadily, and keeping some of our powder dry is the right thing to do in terms of the long-term interests of our shareholders.

All right. Thanks, Al.

Yes, sir.

Thank you. We're going to take our next question from Bill Laemmel with [Divine Capital Markets].

Hello, Bill Laemmel how are you.

Chris.

Hey, Bill.

Good to hear your voices. Well, what you're telling me is that your market share is going to go up, is that one of your assumptions in MI?

Well, that's what we try to do all the time, providing we can grow it in the right spaces, in areas where we think we can make a buck.

Okay. So that's a possibility here. Also, ultimately can you just quickly trace the 178 claims ratio in the MI, how it affects prices going forward?

The 178. I'm not sure --

What do you mean by affects prices, Bill? Affects insurance prices?

Yes.

Well, I think as Al mentioned earlier, we really are attacking the terms of trade on several dimensions. One, obviously being guidelines. So first off, take out of the mix the products that are affecting us negatively that we don't feel like you could really price at any level and as we mentioned what you see being chased out of the marketplace today is a lot of the subprime, a lot of the reduced stock and the very high LTVs. And then the next dimension we would tackle it on is price.

Now, one thing you have to think about is we file rates with the various states and they have to be approved, you have to justify the rate increases on the bulk of the business. So the rate increases that we have put in place are largely on the higher risk products that still remain in the marketplace. On the lower LTVs, higher credit products where the performance is still pretty stable, those are largely still priced as they were last year.

All right. And thank you. And are your inflation assumptions in your loss reserves over in the general insurance business, have they gone up or down?

They've been pretty stable the last few years, Bill. Including the medical portion. Because, inflation -- generally, inflation as you know has been under wraps and we have not seen the effect of inflation to much more significant degree than we did let's say back in the 1990s and even the early part of the 2000s.

Thank you very much. And Chris, one last question. Now, you get a claim and then you reserve it in MI and then you pay the loss, of course. Is there a general time lag between that event?

Yeah. It takes about eight -- well, I'll put it to you the whole time line. It takes about generally 18 months or so between the notification of delinquency to us and the ultimate payment of the claim.

Okay.

Of all the claims.

Yes. And thank you very much. I appreciate it.

Thanks, Bill.

Thank you. We'll take our next question from [Steven Meade with Anchor Capital Advisors].

Hi, Steven. Hello? Steven?

Mr. Meade, your line is open. Please check your mute function. Thank you. We'll take our next question from Brian [Hagler] with Kennedy Capital.

Good afternoon.

Yes, sir.

Maybe to switch gears a little bit to the title business, I guess looking at your direct orders open, they were down 25% year-over-year. Can you just kind of talk about what you've seen kind of in January with the drop in the 10 year or maybe what you would expect to see if the 10 year stays in the 350, 360 range.

As I think I tried to say briefly in my opening comments, there is no question that as these lower interest rates take hold, and you start seeing the prime rate come down, et cetera, et cetera, that you should have a greater opening for refinance activity and hopefully even greater activity in, ultimately, in the extension of mortgage loans. It would certainly make the mortgages, the cost of them, more affordable to more people. Have we seen that yet? You know, there is indications here and there that some people were getting a little more excited about moving down the road with commitments, but nothing hard yet. But the -- I mean, let's put it this way. The lowering of interest rates is a positive thing ultimately for the title insurance business at an earlier date than it is for the mortgage guaranty business.

Sure. Okay. Thanks. Appreciate it.

Thank you. We'll take our next question from Bill [Clark] at KBW.

Good afternoon.

Hi, Bill.

Sticking with the title business, I know you mentioned in your opening comments about expected limited opportunities to reduce expenses going forward. Can you give any perspective for the expenses in the fourth quarter on the kind of breakout between what's variable and what's a fixed cost? Is there anything you can kind of give us some indication there?

I don't have those numbers in front of me, Bill, but you know, basically as you know, we've got roughly still about 65% of our title business written through independent agents. So the lion's share of the costs attendant to that is variable. The rest of it is where we have the issues with cost cutting and so forth. But as I say, I'll have to get back to you with an indication of what percentage of our total cost is variable versus fixed.

Okay. Thank you.

Yeah.

Thank you. We'll take our next question or follow-up for Bev Malone at KeyBanc.

Thank you. Yeah, just a follow-up question on the title. There was an uptick in the loss ratio on the title. Would you anticipate as we work through this that that's going to be case going forward in 2008, that we can anticipate that we'll continue to have that higher loss ratio.

Bev, if you go back to our numbers quarter to quarter or even year to year over the last five years, you will see that the loss ratio ended up around 3.5, 4% a couple three years ago. And at the time, we said that that low loss ratio could not be sustained and that we expected loss ratios to uptick in the 5 to 6% range over time and we did that in effect between '05 and '06 and between '06 and '07 it's gone even further up, as you have noticed, to what is it, 7.2%, I think for the latest period. My gut, for what it's worth, tells me that it might inch up a little bit more than that, let's say 7.5%.

I would be very surprised if it goes to 8% and that will be a reflection of the markets we're in where when there are claims, when there are problems with a loan, people start looking around to see if there is a scapegoat around and title companies will get drawn in. So I think some of it -- some of that is what's driving up the loss ratio currently and maybe for the current year, 2008. But I think it should revert back to 6% or thereabout area.

Okay. Does that suggest, then, that this tickup in the loss ratio is not so much an underwriting issue as it is a change in claims or claim severity.

I think it's a change in the economic circumstances which is what I was trying to say before, when the housing, et cetera, hits the skids, there tends to be a little more claims and another thing that happened to a significant degree in title insurance and I have to say in mortgage guaranty as well is that when we went through a period of high refinance activity and a lot of problems that may have been there with loans or with titles, got swamped by the continual refinancing of some of the product and when the music stops, then the people have got to own up to some of the problems that may be genetically inbred in some of these loans. So I think that's what we're seeing now. We've had the same experience in prior downturns whether it is as a result of frauds or malfeasance of one sort . or another and it will blow over. The other thing we've had going for us in the title business for many years has been the fact that we repriced and re-reserved that business back in the late '80s and benefited from that throughout the 1990s and of course, we're not getting as much of a benefit from that because now the business has leveled out, leveled off, so-to-speak, and so the experience is leveling off as well from the loss ratio

Okay. Thank you.

Thank you. We'll take our next question from Kevin Shields from Deep Haven.

Thank you. Had two quick questions. My first question was what percentage of risk in force and delinquencies now come from California, Arizona, Nevada and Florida in aggregate?

Do you have those numbers broken down, Chris?

Yeah, I've got the third quarter 10-Q in front of me. If you looked at our traditional primary risk in force, which is the bulk of our risk in force, Florida, third quarter '07 was about little less than nine. California was about three and-a-half. And then the other states don't hit our top 10 risk in force states.

Those are the 9/30 numbers. We don't expect those to change significantly.

The risk in force moves more glacially whereas new insurance written can move pretty well quarter-to-quarter.

In the delinquency category for those states, would they equal or be still under the market share?

Again, we report for that same period third quarter '07 total delinquents for the top 10 states. Florida's in the 5% range, a little over 5 and California is about 5%.

Okay.

Again, those other ones don't rate in the top 10 states.

My second question, real quickly, if the GOC conforming loan limit was increased to something like 600,000, and assuming that it was temporary in nature, would you guys participate and follow Fannie and Freddie? Seems to me the temporary nature that's being proposed would be problematic.

Well, we don't have -- I'm not exactly sure (inaudible) question. We don't have a loan limit, per se, that follows the GSE limits. So we insure what we call conforming loans under the GSE limit and we also insure jumbo loans, although it's a small percentage of the book. An increase in the GSE loan limits will certainly bring more liquidity back into the marketplace and we would support that either temporarily or on a long-term basis.

Thank you.

Thank you. We will take a follow-up question from [Peshat Tems] from Raymond James.

Hi. I just have a quick investment question. Looking at the investment section you have maybe over -- slightly over a billion of muni bonds. What percentage of that is insured and what's the underlying credit quality?

Yeah. I don't have the answer to your first question, although I have to say that maybe I can be corrected on this, that most of the muni bonds that we buy now adays tend to have some sort of insurance on them, from MBI A in particular. As to the quality of the portfolio, that's shown in one of the tables in either our annual review or the fall analysts' review that's posted on our website and that quality mix of securities, whether it be munis or corporates, has not changed dramatically for us for many years. It's still a double A average rated portfolio. Okay. Thank you.

Thank you. We will take our final question from Ron [Bobman] at Capital Returns.

Hi. Thanks a lot. What's the -- I'm sorry if I missed it -- the average cost on the PMI and MGIC investments.

We didn't give the cost on each. We gave the cost on both of them combined and that was $473 million, I believe I said. And that we further indicated that it was about evenly split among the companies, and both companies, as I say, we have 15% or something shy of that.

Is there any sort of -- are you sort of effectively at a limit here, as far as how much appetite you have and capital you have to buy more, any sort of practical constraint that's been sort of--

On those two companies?

Yeah, on those two.

Well, we're very respectful of the fact that there is a shareholders' right plan in place in both companies at the 15% level and therefore, we would be -- we would not be inclined to exceed that percentage.

Solely for that reason?

Yes, sir. It would be immediately dilutive to us and I would say, kind of counter-productive.

Right, right, right, right, right. Okay.

Again, we're happy with the amount of money. I mean, you know, 400, almost $500 million for us, even though we've got a very good balance sheet and a great investment portfolio, that's still a lot of money. And therefore, we're happy with what we've got there.

Okay. Thanks a lot.

Okay.

Thank you. That concludes today's question-and-answer session. I would like to turn the conference back over to Mr. Al Zucaro for any additional or closing remarks.

Well, thank you. I don't have any more comments to make. Again, appreciate Chris' input as always in this and certainly appreciate y'all's inviting me coming to visit with us on this fourth quarter call, as you have in the past. And with that, I will say good afternoon to y'all.

That concludes today's conference. Thank you for your participation. You may now disconnect.