Old Republic International Corp (ORI) 2008 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Old Republic International first quarter 2008 earnings conference call.

Today's conference is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we'll conduct a question-and-answer session and instructions will be provided at that time for you to queue for your questions. As a reminder, this conference is being recorded.

And now at this time it's my pleasure to turn the conference over to Leslie Loyet of the Financial Relations Board. Ms. Loyet, please go ahead.

Thank you. Good afternoon and thank you all for joining us today for Old Republic's conference call to discuss first quarter 2008 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 it at Old Republic's website at oldrepublic.com, or you may call Liz [Dolezal] at 312-640-6771, and she will send you a copy immediately.

Before I turn the call to 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 in the press release dated April 24th, 2008. Risks associated with these statements can be found in the Company's latest SEC filings. With that, I would like to the call over to Al for his opening remarks. Please go ahead.

Thank you, Leslie, and good afternoon.

Here we are for another one of our latest earnings reviews, and I'm sure that if you read or listened to our last report and telephonic meeting in January of this year when we covered year end '07, I'm certain that this particular call will probably read and sound like deja vu all over again, as Yogi Berra once said. Every one of our business segments - large, medium and small - performed just as we anticipated late last year as we were putting the final touches on Old Republic's 2008 operating budget.

So to get the ball rolling on this visit, let me just say a couple of things about those businesses to add a little more color, as we usually try to do, and add that color to what we've put into writing in this morning's release. Starting with the smallest segment, which in our case starts at the bottom of the ladder, namely our Life and Health operations, which we have been combining in the corporate and other section of our consolidated report, these lines continue to produce a nice, steady bottom line profit for us. Most of what we write in the small segment is made up of travel accidents, occupational accidents, and intra-system annuities and closed liability insurance claims, as well as a continuing run-off of term life insurance products that we started to write in the U.S. and Canada back in the 1970s and have since put into a run-off mode about four years ago. Of course the small scale of this Life and Health business for us can produce some volatility year to year, but we nonetheless believe that this business is a long-term keeper for us, inasmuch as it does allow us to utilize its feature in certain pockets of our insurance lines, such as workers comp, and as I mentioned before, the related line of what we refer to as occupational accident.

Moving up the ladder a little bit to our Title Insurance line, it did exactly what we thought might happen, at least for the first half of this year, which is as far as we've been able to see with reasonable clarity. As we said many times over the years, the Title business is of course driven by the Yeng and Yang of transactions volume in one hand and the control of production and operating costs on the other hand. As you know, it's not a claims-intensive business, so the name of the game is production and expense control.

It's interesting, to put the business in perspective this morning, I put some numbers side by side here. Our operations reached an all time high, both as to operating revenues and earnings in 2003. That was a high water mark for us. And with the exception of an uplift in 2005, when we and the rest of the Title industry experienced a temporary new lease on life, if you will, by virtue of higher refinance activity during that period, we've been pretty much heading south fairly steady since 2003. Of course our direct operations, as we've said on several occasions now in the large western states, large metropolitan areas in particular, have had to contend with some pretty dramatic or radical housing downturns from what were relatively long periods of pretty heady performance. And while we've managed to reduce on nationwide employee count by about 24 almost 25% through year end 2007 versus a roughly 22% decline in operating revenues since 2003, the expense reductions obviously are still not enough to provide a softer landing for this segment's bottom line.

So at this juncture, we are still pretty much in the stance of holding the fort until we are favored with greater housing activity on a national scale. In this regard we are still of the mind that not very much positive is going to happen until late 2008 or spring of 2009, when all the band aids that are being applied by the Fed and the Treasury and the intercession of various community and consumer groups takes hold, and hopefully has a beneficial effect on the housing sector. As we've said before, the Title part of our business is likely to turn up before our Mortgage Guaranty line, but we still feel that the turnaround will come in small increments rather than being throttled into high gear very quickly.

We think that the synopsis of our Mortgage Guaranty performance that was included in this morning's release, as well as the statistical exhibit that is attached to that release, we think that it touches all the hot buttons that are currently pushing claims to higher levels. So I won't bother repeating what most everyone has already read and digested since this morning's release, but I will say that, as with the Title part of our business, nothing has really changed since mid-year 2007, when it comes to Mortgage Guaranty. Here as well we are still of the mind that when most of the shots have been fired by year end 2009, that we will have a reported a cumulative loss ratio of about 150% for the entire 30-month period. And as a matter of fact, so far for the first nine months since mid-year 2007 through the end of March of this year, the accumulative loss ratio stands at 174.2%.

So over the next several quarters, we are likely to get some relief from captive insurers kicking with their contractual claim participations. In this regard, incidentally, we benefited by about 1.75 points of loss ratio in this first quarter's results from captive claim recoveries, and that amounts to about $26 [billion] of claim cost credits from that source. We still think though that these will show a fairly gradual upswing, as the individual books of businesses that are embedded in the various captive vehicles find their way to the stream of emerging claim costs.

We are certain that the -- well, I would say that the pregnant question out there is how long and how severe this profusion of Mortgage Guaranty claims will be? And of course we don't really know, and we don't know of anyone that really knows, though there are many learned and other assumptions out there that point to varying scenarios of distress. Currently, for our part, as we've said, in terms of the likely cumulative claims ratio, we could sustain for the next 30 months to year end 2009, but the magic number as I've said before remains at 150% cumulatively, and that again is predicated on our study or review or evaluation of the loss trends which prevailed in the Mortgage Guaranty industry during a stress period that extended between mid-1990s and the very early 1990s, and that's the number that we are focused on in managing our ongoing risk in force, the accumulation of that risk in force on a possible market share expansion, which we think is in the cards, and the related capital management considerations that these particular factors bring to the fore. Nine months down the path of this expected 30-month journey, and so far we are not witnessing anything that would cause us to be distracted, if you will, from those intermediate-term claim-cost expectations.

We are certain that most everyone is aware that there are any number of band aids being applied to the housing credit infrastructure in this country, and of course these range from outright government assumptions of some credit risk, to the tax give backs to a significant segment of the U.S. population that will kick in around mid-year this year, and to the Fed's turning on the liquidity faucet, if you will, and probably gunning inflation with rate cuts that could ultimately take some of the sting out of the necessary devaluation of a lot of mortgage debt. And I might add that some of these band aids also represented by the GSEs and FHA being encouraged to assume a greater role in financing and refinancing at least some of the mortgage debt that's out there.

From our perspective, we think is still will take several more quarters for all these band aids to coalesce, if you will, into a bandage that extends the tide of defaults and the foreclosures that we are currently experiencing and likely going to experience for a while longer. We also think that it will take that long because housing values themselves simply need to come down from their perch to, if you will, more realistic level, where the long term up-trend and those values are back in greater symmetry with people's incomes and productivity gains.

Some of you may have seen a couple of days ago one of the rating agency gurus reported that nationwide, home values had already declined by some 18% from their early 2007 peak, and that it was likely that they could decline some more to a 30% cumulative drop from top to bottom. Most of us at Old Republic, for what is worth think, that a 30% to a 40% cumulative decline is probably in the ballpark, and that's why we are expecting a more or less drawn out process to right the ship.

So where -- where does this leave us? First, we think we can weather the storm and keep our Mortgage Guaranty ship afloat in what we expect will be a very stately way. We think that the business we are putting on the books is reasonably priced, it is very soundly underwritten, and it is in our view likely to stick on our books for a sufficiently long period of time, as to produce some profits that will go a long way toward ultimately negating the losses on the old merchandise that is beginning to run off our books, and then of course ultimately becoming additive to the value of our franchise. We think we currently have the necessary capital management flexibility to add funds to our MI segment, to at once repair the gashes, if you will, that are caused by [degrative] claim costs, as well as provide necessary fuel for the expected rise of risk in force exposures. We see some pretty realistic possibilities for expanding our Company's MI market share and for taking advantage of improving MI market penetration opportunities.

As you can see in one of the statistical exhibits that is attached to the release this morning, our balance sheet leverage ratios are in very good shape, particularly if you consider that the makeup of our risk in force is somewhat of a better than average quality, and that the asset side of the balance sheet that funds our liability exposures is as sound and as clean as they come. So the bottom line of all this is that we have again the wherewithal to at once tough it out over the next several quarters, and maintain a sound footing for the better business opportunities that are -- that we think are likely to come our way.

Before leaving this particular segment of our business, I'd like to take just one more minute to address the status of some of the relatively large passive investment positions we've taken in the two largest MI companies in our industry. Some of you may recall those positions were accumulated mostly in the second half of 2007, and mostly on the books of our general insurance subsidiaries, relative to which we've had a certain amount of capital in excess of that needed to carry current underwriting exposures. It's no secret by now that the stocks of MI and financial guaranty insurers, as well as those at most insurance and banking institutions, have not fared very well in the past 12 months or so; so that the market valuations of those two holdings of ours that rest, as I say, primarily on our insurance books, that those valuations have not been spared. However, we made those investments in the light that we were, and continue to be focused on the long run with respect to the totality of our business, including those two holdings, which we bought with a three to four-year time in terms of our expectations for an expansion of their values. And in this context, we think that the takedown of their values by the marketplace, so far, is temporary in nature. It is not impeding our ability to do business, and it's not impacting our ability to hold those securities for a long period of time. Our balance sheet has purposefully been structured to emphasize a high degree of both credit quality and liquidity in the 85% of our investment portfolio that is consecrated to fixed maturity securities, and these features, this approach to asset management, provide us with a powerful first line of defense through the entirety of our enterprise.

I might also note in passing that the decline in the market value of those two investments has cost us about $0.77. Yes, $0.77 in book value per share through the end of March. It's not a big deal. It's a negative, but not a huge deal for us.

Let's see. Moving along to our largest segment of general insurance. There are two or three, maybe four, noteworthy items in this year's first three months, and those items of course are the subdued top line that you've seen in this morning's release; the composite underwriting ratio which has landed in the first three months within the 93 to 96% range we anticipated earlier this year for the year as a whole; of course the continuation of the sound reserve position, which continues to develop favorably year over year; and a very positive operating cash flow, which is both additive to our invested asset base; as well as the high level of liquidity and credit quality that I just mentioned before, and that we like to maintain throughout our business.

At this stage of the underwriting cycle and property liability insurance in this segment, it's simply not in the cards we think to raise expectations anywhere that the premium line will grow very much. We would categorize the current pricing situation for the composite of all of our insurance coverages and general insurance as remaining moderately soft, so that adding new business remains difficult unless one is willing to give the store away, and this is not -- has never been a willful option for us. So absent the acquisition of one or more new books of business, which are not currently in the making - though as we've said repeatedly, we never stop looking at opportunities that are there to add books that provide some continuity to our sphere of competence - the premium line is likely to look pretty much humdrum for the next several quarters.

Having said this, we've got every expectation that the combination of the reasonably positive underwriting expectations we have, and a modicum of investment income growth, should enable our general insurance business to perform very well and to remain as our strongest capital anchor and steady earnings provider for the foreseeable future. As we said in this morning's release, our overall consolidated operating cash flow remains quite strong. As a matter of fact, on apples-to-apples basis, which eliminates a one-time pick up of about [16] million bucks in the first quarter of '07 from the late 2006 acquisition of a construction book, this year's cash flow is about 45% higher than a comparable number for the first quarter of 2007. But still the most of the growth, and more of it, came from the Mortgage Guaranty business, where premiums are growing much faster than pay losses. And as we indicated in the press release, that's due to the fact that the incurred loss is growing at a much faster clip than the payout of losses, since we are continually - and have been doing now for several quarters, even though it's become more accentuated in the past three quarters - since we continue to add measurably to our loss reserve levels and Mortgage Guaranty, as more information becomes available to us, and as we evaluate on a quarter-to-quarter basis the trends and the reported defaults, foreclosures and what have you, that impact our business directly.

Let's see. Having said that, I don't think there's very much else that is new or worthy of reporting for the entirety of our business at this time. And therefore, as was indicated earlier, we'll just make time now to address questions that we may not have anticipated in the release or in the comments we've just made.

As we've done for a couple of quarters now, we've asked Chris Nard, who is our Mortgage Guaranty Company's CEO, to join me for this phase of this conference call, and I'm certain that he'll welcome the opportunity to address any questions that I may not be able do full justice to.

So let's get rolling with your questions.

(OPERATOR INSTRUCTIONS) Our first question will come from David Lewis with Raymond James.

Good afternoon. A couple of questions to start on the Mortgage Guaranty side. With the rating agency actions over the past month or so, and Old Republic maintaining a AA rating on financial strength, do you think that that is going to have a material difference in your ability to gain market share in the business relative to your A-rated carriers?

We think it's not a negative for us. We think that the other companies, or at least most of them, will continue to do reasonably well. I think the GSEs in particular are very interested in working with the MI industry because it is helpful to the GSEs own self-interest that that take place. But, yes, we feel good about the position we are in from a rating standpoint, and more importantly about the real quality and strength of our capital structure and the flexibility we have to improve, as need be, that structure to accommodate any increase in market share for our business.

And Al, back in the November meeting that you participated in you kind of predicted 150% loss ratio on the MI business over kind of the cycle here, a difficult cycle. How would you anticipate, just from a high level, we are running at 180-plus percent currently in this quarter. It will probably stay high in the second quarter, and if all goes as you may anticipate, would you expect that to start to drift off in the second half and then maybe further in '09? Is that a good way to think about it?

Well, our current thought, for what is worth, and we are not uniform in our views internally, but I would say the general consensus is that until - as I put it, until all these band aids that are being applied to the system take hold, I don't think you are going to see much of an improvement in loss ratios. As to when they take hold, I think that's again going to be a gradual process. Probably by the fall of this year, we should start seeing some improvement. But our view is that 2008 is probably done for. We think that it would be a real accomplishment if we came in between 160 and 170% for the whole year, and that implies therefore that we would start seeing some improvement in loss ratio trends in the early part of next year, springtime of next year.

That's helpful. Thank you.

Our next question is from Beth Malone with Keybanc.

Thank you. Good afternoon.

Hi Beth.

Hi. A question on the Title business. The claims rate, I know that losses aren't a big part of it, but it picked up a little bit last year and I just wondered, it looks like it kind of settled back down to a normalized level in this quarter. I just want to get some of your views of what do you think on that. What do you think was driving that before, and are those conditions still in evidence?

Well, whenever you have a down cycle as we are experiencing in housing, there's been a tendency in the industry over many years for the loss cost to kick up. And if you have a recollection, or if you have read some of our stuff we put out two, three years ago when we were blessed with very low loss ratios in the 3.5 to 4%, we said at that time in anticipating of a turn in the market that we would not be surprised to see the loss ratios in this business kick up to the 5 - I think we said the 5 to 7% level at that time, and that is where it is right now. I think the prospect of its going down is still removed. Would we be surprised if it kicked up to 8% in a particular quarter or series of quarters? No, but do we think it goes to calamity levels, which we view as 9, 10, 11%? We just don't think that is in the cards. So I think this year our best guess is that it's probably a 7%, maybe 7.25% loss ratio for the year in total.

Okay. All right. That's helpful. And then a little clarification on the mortgage insurance business. I understand the dynamic that you have a book of business on your -- that you wrote prior to, say, mid '07, where some of these higher losses are emerging from. But when -- is there a way that you can identify when you started writing business that you think has a much better combined loss experience on it, and is that -- is that what is going to drive down the loss ratio for mortgage insurances, when the newer business starts to overcome the older business? Will the older business stabilize over time?

Right. Let me ask Chris to pipe in and give us his views of the answer to that question.

Sure. There's a couple of questions buried in there. One, I would say the lending in the market probably started to improve in late '06, early '07, I think that is when the market recognized that the guidelines needed to begin to be pulled back. It takes a while to do that in a marketplace. You have to work through pipelines. I think it was about the second half in '07 that the guidelines began to take hold, and that really tightened up through the end of the year.

One thing I think I've said in the past is that while the underwriting guidelines may not have tightened until really later '07, I think you had a change in perception in some of the buyers in the marketplace. Certainly some of the high risk markets, Southern California, Florida, Arizona and Nevada, some of those markets had started to turn negative appreciably before that time. I think buyers who were buying houses in those markets, even in early '07, were less speculators and investors than they were people that simply needed houses in that market, which is always obviously a better risk for us than an investor or speculator on a house. So that kind of the existing book. Yes, that book will stabilize over time. The higher-risk products develop to claim earlier, so we would expect to see those stabilize after they get through this little bit earlier loss development pattern, and then the book that we put on really fourth quarter '07, and certainly the books that we are putting on today, by risk-type certainly look much better than books we've put on in a long time.

Okay. Has the market continued to improve? Let's say - your pricing is, I would assume, where it should be to meet historic profitable lines. Assuming there is some improvement in the overall economy over the next two years, will there be a need for Old Republic to raise capital to support that better market environment because the pricing will be up so you will need it for how you set the liabilities?

Well, we are going to, and we do, take a look at our book and the finances that support on a quarter-to-quarter basis. So you can expect us to react as the size of the book and the experience dictate, which means that you are likely to see us progress or do capital enhancement of that part of our business on a sequential basis, which is, as I say, reactive of what is actually happening to our book of business. You are not going to see us throw up a bunch of capital in anticipation of this or that happening. We are going to react to actuality as opposed to supposition. As we indicated, we think we've got a wonderful, very flexible balance sheet structure that allows us to do some leveraging of it and enables us to also raise a modicum of funds internally to achieve what we need to do with respect to the capitalization of our Mortgage Guaranty business.

And just one final question. Given where the stock is trading relative to the book value, any thoughts to revisit the idea of buying back stock? Or would that not give you the flexibility you need in your capital structure?

I would say that is not in the cards at all. As you know, we've been dead set against the idea certainly of buying stock above book values, and there is a price below book value at which the idea of buying back stock becomes pretty attractive, but we are nowhere close to that. We would be adding pennies to earnings per share, even if we spent 5 or $600 million at these prices for our stock, and it's just not worth our while, particularly when we see a very good opportunity to increase the value of our Mortgage Guaranty franchise substantially. We think that's where we want to put our money. We think we need to keep some of our powder dry also, in order to enhance our ability to perhaps acquire other businesses in the general insurance area in particular. So the combination of all those factors, Beth, is what leads us to be quite impervious to the idea of fooling around with the idea of buying back our stock.

Okay.

Our next question comes from Kevin Preloger with Perkins Wolf.

A quick question on - not that the rating agencies have the greatest credibility anymore, but when downgraded the whole group, MGIC has somewhat less of a rating relative to PMI, and I guess when you look at your investments, and when you did your due diligence, do you agree with that? Or what are the rating agencies missing or what might you be missing?

That's an interesting question, Kevin. First of all, you start with the idea that we -- nobody that we are aware of is fully familiar with the models that the various rating agencies utilize. One rating agency in particular that we are aware of is still in the process of redoing its own modeling techniques. So you have that issue. So we are in the dark as to how those models drive the ratings of individual companies. There seems to be a consistency in the rating agencies' views that companies -- MI companies that are associated with perhaps larger institutions that have different sources or avenues of generating both income as well as capital, may be better situated than companies that are strictly monoline companies, and that's just conjecture on our part, and perhaps that's one of the things that differentiates us from, let's say, monoline companies.

As to your specific and direct question relative to the differentiation of one rating agency between MGIC and PMI, we are just too far removed from the books of either institution to have a handle that the rating agencies may have relative to the size and the nature of the risk of each of -- the risk content of each of these companies that maybe is another force that is driving the differentiation. That's the best that we can offer in answer to your question.

That's helpful. A couple of other questions. Can you give an update on the contractors book? Where is that located and how big is that now?

Well, that started, Kevin, as roughly a 250, $260 million book of business gross before reinsurance, and we have the typical retention business, which go up to a million bucks for comp and NGL. The beauty, in our eyes at least, of that book is that it fitted very well a similar book of business that we had in - primarily in our bituminous operation, which was concentrated in the central part of the United States, and stayed away from the two coasts in particular; whereas this new book has got some pretty heavy concentrations on both the East and the West Coast. So from a national book of business and spread of -- diversification of risk, that was the - a very key appeal of that book.

And then, secondly, that new book has is produced through a different production channel, specifically the brokerage community, as opposed to the American agency system that we utilized in our bituminous operations. So there also was a nice fit in terms of obtaining business from a new or additional marketing channel.

As to where the book stands right now? It has performed exactly where we expected it to be, with a - as I recall about a - 95, 96% combined ratios. The reserves - as you may recall, we did assume a book of loss reserves in concurrence with the acquisition of the renewal rights of that business, and those reserves have played out reasonably well since we put them in the books in late 2006. So when it comes to that entire experience, all I can say is that we are happy campers.

And I know one of your competitors there was saying that they were having difficulty in California in the quarter. Are you seeing any signs that California might be weaker than say Texas or Illinois, for example?

You always worry about those large markets, whether they be California or Texas or the New York area. Those are tough, tough markets, not just in the contractors business but just about everything we touch at Old Republic. So there's always a concern. But the direct answer to your question is that so far we are not seeing any disintegration in the quality or the loss experience of that book from that part of the country.

Okay. One last question. Just if you can give an update on the truckers book, what you are seeing there, I know a lot of the - it seems like the mom and pop operations have shut down due to high gas prices or a slowing economy. What trends are you seeing there?

I think what you just said are issues that apply to that business, that the smaller operators are having a hell of a time being competitive or as competitive as the larger operations who has size in their favor and combined bulk, et cetera, et cetera. We think that the economy, the slowing down of the economy that is an actuality, is impacting everybody, including the large operators. So that's another reason why we are having difficulties growing that top line as well. I mean as you know trucking is a big part of our general insurance business, and we are - as I say, we are having a tough time growing the top line for those reasons; in particular, that mileage is falling down, employment is to some degree falling down, and you've got the number of customers falling down. So I think we are going to experience some difficulties for the next six to nine months, until the economy starts back on upswing sometime next year, which is what our current expectation is.

Great. Thanks a lot.

(OPERATOR INSTRUCTIONS) We'll next go to Richard Wagner with Citadel Investment Group.

Hi Al. I am interested in hearing your views on the 2008 book of business, particularly --

Are you talking Mortgage Guaranty?

Yes, on the Mortgage Guaranty business. Particularly the quality of the book when you consider the long and more drawn out scenario with 30, 40% depreciation and accumulative house prices.

Okay. Well, Chris can handle it.

I think I speak for Al, but when he was talking about those high rates of home price depreciation, we may have been talking in selected markets as opposed to nationwide. If you certainly look at San Bernadino, Riverside and parts of Florida, you may see that. But the '08 book as it's playing out today looks very good, be it by by credit, documentation or LTV. The industry has made significant roll backs and underwriting guidelines really throughout the end of '07 and even into early '08. So you've got the positives of the improving quality of the book of business. You've got the positives in terms of the orientation of the home buyers in this market as well. And I think the only -- the only thing you would worry about in the '08 book is how the economy plays out to these early home buyers. One of the things obviously we do to guard against that is we have limited the LTVs, particularly in some of the markets you have more concerns about with home price depreciation, to try to make sure that there's a cushion in those loans to handle some rough waters over the next 18 months or so.

When you talk about the economy ,it's more of a sensitivity to employment levels or house prices or a combination?

Really a combination of both but for us we are always very focused on employment.

Great. Thanks a lot.

Sure.

Our next question is from a Michael Santelli with Allegiant Asset Management.

Good afternoon.

Hi Michael.

A number of questions --

Do you still like the Mortgage Guaranty business?

I love it. I just wanted to clarify a few points here. Number one, are you getting any pricing on mortgage insurance? Or are they the same schedules of pricing that have been in the industry for the past who knows how long?

We've gone through kind of an interesting cycle here. As the market first got worse, we were attacking it from pricing standpoint, but then as the market continued to cause concern, what we did is basically went in and eliminated whole asset classes. So instead of raising the pricing on very high LTVs, we went in and simply eliminated those from an eligible asset class standpoint. From a documentation standpoint, I think we started out originally raising prices, and as the market continued to deteriorate, again eliminated those completely. So I think if you were to look at what has been the biggest change in the quality of the mix, it's been driven by elimination of high-risk products more so than by an increase in pricing. Now on the existing book that we still do, we raised the prices in some areas, but the bulk of the - 90% fixed rate loans around the country have the same pricing today that they've had over the past few years.

Okay. So implicitly, you think you are getting adequate pricing on that basic product of fixed rate primary flow of business?

Yes. The reasonable LTV fixed primary flow of business is not the business that is causing the industry problems today.

I see on your breakdown here on page 9, I think it is, most of your primary business is fixed rate and most of your business overall is primary, therefore the vast majority of your business is fixed rate primary?

Correct.

Yet the loss ratio was still 180%.

Well, that's good observation. There are other things in there, that fixed rate primary. You are going to have some of that that is low FICO scores that is going to generate a lot of that loss, and a lot of that business, while it would be - not a lot, but a portion of that business while it would fixed rate, it's going to have some reduced DOT component to it. If you were to again parse down through that, you would find the reduced stock and the low FICO scores are going to be the big generators in that loss ratio, particularly in those markets of Florida and California.

Okay.

If I may, Chris, and Michael, the other item which is of some import on the loss ratio that you are alluding to, is the fact that you do have collateral damage as a result of what is happening to the housing and the mortgage lending industries at large, and that when houses are not moving, you have a reduced ability to mitigate losses, and that of course has -- puts an upside to your loss cost.

That's absolutely right and that's why I would think you would raise price; not only are you in a bad environment in terms of home price depreciation, whereas for the last 60 years, 70 years, we've had home price appreciation, so that makes the business riskier, but my question is why can't the industry get pricing on the basic 30-year fixed rate business?

I wouldn't say anybody has, speaking for ourselves, has given up on that. We continue to evaluate the book, look at the competitive scenario, and adjust underwriting and guidelines as we can in the marketplace.

Okay. Back to the one of the questions I think on gaining market share, and you basically said there is an opportunity to gain market share versus the weaker competitors. This may be a good time to try and raise price, since now you have a reason to. You're double A, they're single A, give me an extra 10, 20, 30%, whatever it's worth, on the price for my better credit rating.

Absolutely. But it is a little bit more complicated, particularly now in an environment with a resurgent FHA, which historically outside of piggybacks has been our primary competitor. Absolutely. When we can raise price to improve margins, we absolutely look at that as an option. Kind of the other thing we look at is pricing, meaning the cost of the high LTV loan, any delivery fees that may be on that loan to sell the Fannie and Freddie, and then our premium. At the point those things begin to eclipse alternative executions in the marketplace, you begin to rapidly lose share. So every day it's a balance for us in trying to figure out the optimum mix between pricing, guidelines and whether we are willing to see that business move to another investor.

Is there any other alternative execution right now in this marketplace, though? No-one's doing piggybacks, are they?

No. It's the FHA. The FHA will play out here to be a very good competitor.

I'm not sure if you want to compete with the government, because that's probably a rational competitor, right? [Laughter]

The FHA is going to serve the same similar useful purpose as the opening up of the ability of the GSEs to write -- to lend on - effectively on higher loan values. That improves liquidity of the market. At this time, the involvement of those government agencies can turn out to be a real welcome. And even though, as Chris just said, it might prevent us from increasing prices, it does stabilize the market, and that's an important consideration we think.

Okay. Given the tighter underwriting standards and everything you've done to improve the profitability of your business, do you think the OA book of business, as it seasons, that it will be profitable? Do you think it would let's say get a 12% return on equity? Are we at that kind of book or is it still kind of break even?

It's way too early to tell that.

What is your initial sense? I know it's kind of too early. What if I add Q4 '07, which may be a little bit less --

It's way too early to guess return on equity on these books. These books have losses that play out over -- in good times, meaning with good mixes over four, five and six years, I'd be irresponsible to give you an ROE projection on that book.

Given your 30 to 40% cumulative decline in some of the weaker home price markets, what have you done to tighten underwriting standards in those markets, exactly? Have you just kind of shut them off? I'm guessing you are talking about Florida, California, Nevada, Arizona.

What we have done is we have severally limited the LTVs at which will lend. We have significantly increased the FICO scores under which we'll insure - lend - [unsure loan], sorry about that. We have gone to full documentation. We've made -- we've looked at ratios. We've made significant adjustments in the quality of the business that is going on, particularly in what we would refer to there as those declining markets across the country.

Okay. Just a couple questions on the captive reinsurers. What percentage of your business is protected by cap?

I think roughly in the vicinity of about 50% of the book is in captive reinsurance.

Okay, 50% of the primary book?

Correct. Correct.

And most of that is 4-10-40 variety, of is it a combination?

It's a combination. But I think a significant portion is in the 4-10-40, smaller amounts in the [25-5-5].

At this point in time, what do you think is the probability of reattachment after the captives are exhausted for the '07 and '06 [inaudible]?

I'd want to do some more work on that. Certainly individual customers with individual books, you know, that are in high risk markets, you are going to attach some probability to that. Larger customers that are more diversified across risk attribute, you'd have a much smaller probability of that.

Okay. I think that does it for today.

Good. Thank you.

(OPERATOR INSTRUCTIONS)

Last question in the queue at this point is a follow-up. David Lewis with Raymond James.

Thank you. Al, can you maybe talk a little bit about what you are seeing with the general insurance segment, pricing trends overall? Some folks are talking about a - at least the brokers are talking about the accelerating deterioration in pricing overall for general property and liability insurance. Can you say how you are seeing first quarter versus maybe second half '07?

We would say that, particularly with respect to the large accounts, many of which are written through a variety of loss-sensitive products, that the competition has gotten more acute. With respect to your smaller accounts, it's all over the lot. I don't think when you look at any one of our competitors that you see necessarily a consistent approach across the country. You have pockets where a particular competitor is playing it close to the vest, and in another area it's a little more loosy-goosy. With respect to the makeup, however when we look at pricing at Old Republic we look at it through some pretty -- a different set of eyeglasses, in that we have a lot of specialties. You take our home warranty business. You take our automobile warranty business. You say take our assurity business, fidelity, you take E&O business, let's say. They all have different pricing complexions attached to them, and therefore we don't necessarily participate in the same wave of pricing declines as you may get in a -- from a more generalized view of the market.

All of that to say that we've gone through 2007, David, we've gone through maybe a two and-a-half year period of slowly declining pricing through our book, to which we've attributed an average decline of 2.5 to 3%, which probably gives you a cumulative 7%, 8% maybe, decline across the book. We think,as we speak right now, we are still again for the overall book, probably for 2008 looking for another 2, 3, perhaps 4% decline as an average. But we just don't see more than that. In a few areas, which I'm not at liberty to disclose because of competitive and proprietary issues, we are in fact increasing prices. And time will tell whether we will success at once retaining business and its having an impact on the overall mix of our pricing structure.

That's helpful. And finally, in your press release I was intrigued by the comment that one of the reasons you saw the growth you did in net investment invoice was slightly higher yields.

Very slightly, yes.

Others having talking about the deterioration in the yields. Have you changed durations or any other investment strategies to help get that little higher yield?

When we say slightly, David, we mean it literally. We are talking 4 or 5 basis points, and we measure that yield incidentally on the basis of original cost and not market value. Because, as you know, it makes a difference whether you are taking the yield that you are talking about to the market or your original cost. On that basis, we are talking about, you know, a very small, incremental increase.

Very helpful. Thank you very much for your comments.

Okay.

I do have one more follow-up. It is from Michael Santelli with Allegiant Asset Management.

Hi. One more question here. Given that the size of the origination of mortgages has gone down from Q1 '07 to Q1 '08, and given your underwriting standards have effectively shut some of these lower FICO scores, higher LTVs, higher-risk geographies out of the market, how do you explain the traditional prime - I am looking at that exhibit again on page 9, traditional primary new insurance written going from $4.6 billion in '07 to $7.9 billion, call it, in '08, in Q1 of '08?

What you see there is, the low number is really close to the peak of the piggyback market. So you would have had piggybacks eating away huge portions of the MI market share at that period of time. That grew through - that market absolutely disappeared through the fourth quarter of '07. I think it was somewhere in the $10 billion NIW realm, very high MI penetration rate, but on a much smaller mortgage market. The first quarter is down from there, not because penetration dropped, but more so because the MI total pie got smaller. So there's another dynamic in that growth, which is the piggyback mortgage.

Fair enough. I thought it still looked a little high, given the shrinking in the mortgage origination business, and the fact that your tightened standards have probably locked a lot of people that you would have done a year ago out.

You started taking some of them out, but the MI penetration rate at that $4 billion quarter could have been as low -- I was going to say 5, 6, 7. It could have been as high as 18, 19% in those last quarters.

That high. Oh, okay.

So you are getting a bigger MI industry penetration of, admittedly, a smaller pie, and then on top of that, even though we are not in a position right now, we haven't seen the numbers to say, we sense that we are - as a Mortgage Guaranty business, we are getting a somewhat larger market share, wouldn't you say, Chris?

Yes. Somewhat through that period.

Out of the MI pie you mean?

Yes.

It seems like - obviously growth requires capital, and you guys are one of the stronger players in this market. There are three or four other players that are, you might say, under-capitalized, or close to it, and they probably can't support this kind of growth. Is that right?

Yes. I can't speak specifically to others, but I think we are in a good position to grow from a competitive standpoint throughout '08. From a share standpoint, I think the wild card will be, how big does the market turn out being between the amount of business we've choked off because of improved underwriting guidelines, and the amount of increase in penetration from the FHA.

Okay. Thank you.

Thank you.

And with that there are no further questions. I would like to turn the call to Al Zucaro for a closing comment.

We appreciate very much the interest always, and happy to visit with you, and look forward to visiting with you again in a couple or three months, when we publish the next quarter's results.

And on that note, again we thank you and wish you a good afternoon. Good bye.