Old Republic International Corp (ORI) 2008 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Old Republic International third quarter 2008 earnings conference call. (OPERATOR INSTRUCTIONS) I would like to remind everyone that this conference is being recorded and would now like to turn the conference over to Leslie Loyet of the Financial Relations Board. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining us for Old Republic's conference call to discuss 2008 results. This morning we distributed a copy of the press release and hopefully you'll 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 Web site at oldrepublic.com or you may call [Liz Doliall] (312) 640-6771 and she will send you a copy immediately. Please be advised that this call may involve forward-looking statements as discussed in the press release dated October 23, 2008. Risks associated with these statements can be found on the company's latest SEC filings. With us today from management we have Al, Zucaro, Chairman and Chief Executive Officer, and Chris Nard, President of Old Republic Mortgage Guaranty Companies. At this time I would like to turn the call over to Al for his opening remarks. Please go ahead.

Thank you, Leslie and thank you to everyone for joining this regular quarterly gathering of ours. As you can readily see in this morning's release the news that we published was not much different in terms of either trends or bottom line operating results than we posted for the most recent quarters. The third quarter 2008 bottom line wise now makes it five unfortunate quarters of negative performance. As we've said; however, for more than a year now, we are likely to experience a continuation of this less than stellar performance for another four or five quarters before more positive earnings trends emerge down the road as we expect. For us this means of course that we need to continue to manage our business in anticipation of spilling a moderate amount of red ink well into 2009. In this latest quarter, as you see, operating results continue to benefit from pretty good underwriting, I should say very good underwriting results in the context of the long history of the property and liability business in particular. As well as some investment income contributions from our general insurance business. On the other hand, again the performance in our mortgage guarantee line worsened somewhat and our title segment once again posted moderately negative operating results.

As we've noted in the release, we did have some slippage in general insurance underwriting profits year to date.. This was again as stated, driven mostly by loss experience in several coverages but most of the damage was done by the consumer credit indemnity or CC I. for short as we say, the consumer credit indemnity line. This line incidentally represents about 9, 10% of our general insurance earned premium base and it is currently producing some of the worst underwriting results we've experienced in the 50 plus years that we've offered the product. For the first nine months of this year, the CC I. line added about 500 basis points or five percentage points to our general insurance composite ratio. Whereas it's effect on the same ratio for all of 2007 was I would say rather negligible. So it gives you an idea of again what's driving the upward tilt in our combined ratio for the general insurance business.

It also says, therefore, that that business ex the CC I. coverage is performing rather well. As the name implies, the CC I. coverage, incidentally, is basically tied to consumer borrowings for purchases such as home improvements as well and more importantly nowadays expenditures that have been financed with second liens on home ownership. The coverages therefore, as you might well suspect being impacted, by the abundance of credit issues that are highly visible all over the media. Our expectation right now is that the underwriting pressure that this line is creating on the overall general insurance performance is probably going to dissipate some times in 2009 in line with hopefully the consumer credit field gradually regenerating itself into a greater level of normalcy. It's safe to say; however, that the majority of general insurance coverages delivered are pretty flattish to moderately better underwriting results which together overcame as I say most of the consumer credit indemnity claim costs in particular.

At the beginning of this year those of you who follow Old Republic, we suggested that the general insurance segment would likely produce underwriting results within a composite underwriting ratio ranging between 95 and 98%. So that now nine months down the road we've posted 97%. So it seems probable to us that the entire year will come in at the higher end of that range. From an investment income perspective in the general insurance area, it slipped a bit in 2008 so far. And this is mostly the result of lower dividend income on equity holdings and a somewhat reduced yield on the combination of long and short term fixed income securities. And all this in the light, I might add, of a moderately lower mark-to-market invested asset base. Let's see.

Turning to mortgage guarantee. I would say that the news here again falls in the category of same old, same old. In both the narrative and the numerical tables that we included in this morning's press release, we've listed the main elements which we think drive the down trend in mortgage guarantee performance in the past four, five quarters. So given the fact that we've got those numbers in front of you in the release there is no need for me to rehash, take the time to rehash and recite the printed data. We'll leave it to the question and answer portion of this call later on for you to address any matters that need further explanation or clarification. But in this time frame I'd like to simply note that very little has changed relative to our expectations for this part of our business. We still believe that it's going to take several quarters, probably through year end 2009 before we see any clear daylight at the end of the tunnel.

We think that the combination of all the initiatives taken so far primarily at the U.S. treasury and Federal reserve levels are bound to have their intended effect of ultimately suppressing the falling in-home values, fixing some of the mortgage instruments that are out there both individual loans as well as the securitized feature of home loans. And, of course, to detoxify the financial system generally. For what it's worth our best guess at the moment is that the benefits of all this financial re-engineering and legerdemain that's taking place is probably going to emerge very gradually in 2009, bearing in mind that the government and semi-government institutions that are involved in this fix up are huge institutions which usually take quite a bit of time to find their sea legs, so to speak.

With all of this in mind; however, we still continue to manage this part of our business with the expectation that new insurance written and risk in force growth are going to taper off to some degree just as they already have in this year's third quarter. And this of course has implications for the capital needs and the intensity of capital of this business. In this regard we still believe that the best, most economically sufficient course of action for us efficient course of action for us is to stress the statutory mortgage guarantee balance sheet toward a 20 to one risk to capital ratio which as some of you may know keeps it well within the regulatory constraints of 25 to one. So that we've adopted a very gradualistic disciplined approach to mortgage guarantee capital additions which to our way of thinking has to reflect the combination of actual quarter to quarter bottom line results and the evolution of important capital bench marks such as the one I just mentioned, of risk to capital ratios, and, of course, always a rational and disciplined balancing of the long-term interests of policy-holders as well as shareholders. In all these regards we also continue to be very mindful of the important lessons of history which in the specific case of the mortgage guarantee industry shows that it weathered very well. The significant housing and mortgage lending dislocations of the mid 1980s to the early 1990s and that was done in the context of risk to capital ratios that exceeded 20 to one for a period of time.

The cumulative mortgage guarantee underwriting results we expect through year end 2009. In our view, still contemplate about 150% loss ratio that we pegged early or since summer of 2007, I should say. And between July, '07, and current date at the end of September, the actual cumulative loss ratio we've posted pencilled out at about 184%. So our feel for these numbers at this time is that the ratio is still likely to continue to inch up for the next two quarters or so. And then start to peel off by mid year of 2009 or thereabouts. As we've said repeatedly there are many, many variables that can affect these expectations but the type of scenario I've just outlined seems realistic to us at this point and it is the best educated guess we are making at the moment. I might add that operating cash flow in the mortgage guarantee segment is still very positive and continues to be additive to a growing invested asset base to a large degree of course that's due to the lag between the occurrence of claims cost which are affected obviously by the amount of reserves that we put up and the actual payment of losses. Even though as you can see the statistics we published that paid loss ratio is inclining as you might suspect it would by now. We have a much greater asset base than we did about a year ago and it is in fact responsible for producing the modicum of investment income growth that you see in the income tables of the press release.

Let's see. For reasons we've already cited not much needs to be said additionally to what's been recorded for our title business. From an earnings standpoint this segment is likely to-- I guess the best way to put it is-- likely to idle in the bottom line ranges of the last three quarters. And if our assumptions are reasonably correct, housing activity should pick up some time in 2009, say by late spring. And in that case title insurance results will likely be first out of the gate, that business, as you know, is rather transaction intensive and oriented and it turns on-- typically turns on the dime when the level of transactions starts to rise measurably. Consolidated-wise, we've included the usual shareholders equity per share reconciliation at the tail end of the release and, of course, this type of reconciliation brings together all the elements of our business activities into pretty good focus. As you can see more than half of the equity loss per share for the first nine months has come from paper losses resulting from mark-to-market impairment adjustments.

So far as we can see, we've kept the quarterly cash dividend pay out at the higher rate we announced back in February of this year. As we say repeatedly we look at this rate every quarter in conjunction or at the same time as we hold our quarterly board meetings. And so far we felt and continued to feel comfortable in letting the higher rate ride given our long-term capital management plans. And the expectations for earnings that are built into our play book for the next couple of years or so. Looking at my notes here, that's about the extent of the additional comments I thought we should make. So now Chris Nard and I will take whatever questions you have.

(OPERATOR INSTRUCTIONS) We'll go first to David Lewis with Raymond James.

Good afternoon, Al. Doing fine, thank you. A couple questions, start with mortgage insurance. Over the past year or so we've all been talking about the sub-prime side. Are you seeing the prime side of your book start to see higher delinquency rates yet? And do you anticipate that kind of developing with some of the predictions of what will occur with unemployment?

Higher delinquency rates with respect to any particular vintage or what?

Well, just thinking more the prime side of the business versus the sub-prime side, if there are.

Okay, Chris, do you want to .

Yes, sure, David, how are you?

Good.

One thing I'll differentiate is we were never a huge player in the sub-prime space. So it's not like through this period that all the stress in the mortgage guarantee business has been caused by the sub-prime book and the prime book has been fine and then all of a sudden now the prime book is under pressure. I think it's save to say that through this whole period most sides of the insurance books, either sub-prime or other high risk attributes like reduced stock, and the prime book have been under pressure for awhile. So I wouldn't think that the increasing pressure on the economy, employment in particular, is all of a sudden going to take the prime book from a dead stop, meaning if everything was fine all of a sudden now it's going to take a huge jump because of the stress in the economy. It's been under stress for awhile.

With that said I would also say there's not, we've never found there to be a linear relationship between losses and stress in the employment side. It takes a long time for kind of normal job losses to work their way through to mortgage guarantee claims. The bar has to work through any severance he may have, unemployment, whatever savings, and by that time you're generally 12 months or so into the cycle. Not to say that delinquencies don't put pressure on us but again we don't see it as a director unemployment, we don't see it as kind of a direct one to one.

That's helpful, Chris, I recall earlier in the year you kind of boosted your reserve per delinquent loan from something maybe 12.5 to 14.5 or some thousand dollars per loan. Do you know what those figures are running today?

They've continued to go up from that rate. I don't have them right in front of me but again I think they are up, what did you say 14.5?

I think the last time we talked somewhere around 14,500 per delinquent loan.

Yes, that continues to rides and I think we are rise probably up to 17, 18.

17, 18 now I think, Chris.

Okay. And,Al, given kind of the demise of the financial stocks in general, obviously your investments in TMI and MTG. continue under pressure, probably just as much related to concerns from investors than maybe reality but any change in your thoughts there or about the entire industry being able to continue to provide services for the government sponsored agencies giving the rating actions of late?

No, we still feel comfortable that those companies are going to survive one way or the other. As I indicated before in my brief remarks, again, if history is any indicator of what is likely going to happen I think the industry is going to be allowed to continue, perhaps at a higher risk to capital ratio as I say. In order to enable it to rectify the balance and the mix of its business so that the better product, the more diligent the underwritten product, the better priced product that is being put on the books can start to have a beneficial effect on the rest of the business.

It's a long-term guaranteed renewable product as you know and those types of insurance coverages just need to have time on their side in order to as I say rectify issues that have taken awhile to develop. With respect to those two specific investments, we still like them, although I have to say I wish we had bought them today instead of a year ago.

I understand. Thank you very much.

We'll go next to Beth Malone with KeyBanc.

Thank you, good afternoon, can I ask a question about the trucking business, the general insurance business, I mean, are you seeing much evidence of company's coming in to compete in that market that may not have been experienced in that industry before? Are you seeing new entrants at all trying to price their way into your market?

We are seeing some, Beth, but it's not particularly large involvement by others that were not-- that are not our usual competitors. I think this time around in this cycle this seems to be a lot more disciplined on the underwriting side and also with interest yields what they are, companies couldn't bank on investment income to save the day so they are having to be a lot more careful than they could otherwise be. Having said that though there is no question that there is more pressure including from our regular participating peer companies so that it is difficult to get any new business on the books.

And are you seeing any opportunities to gain market share in the mortgage insurance market?

Chris, why don't you explain what we are seeing there and what we think.

Yes, the obvious trends have been in the last quarter or so some increases but we have been-- there have been somewhat moderated by the fact that we have been first out of the blocks to take some conservative underwriting measures. We eliminated-- were first to eliminate captive reinsurance transactions. We were the first to eliminate some dock waver programs. And then we were the first to make some pricing changes. So while I think certainly we have been thought of positively given the counter party strength we have done some things to get the business on the right footing that may moderate those share growth trends. But we are certainly not first and foremost looking at share growth at the moment. We are looking at fixing the terms of trade for later periods.

If it's possible to kind of quantify what the price increases you've put in place, say, in the last year on your new business?

Yes, I think if you have to adjust for mix, obviously, but I would think on a mix like we are writing today you might see it 25 to 30% increase, again, can move around based on the types of product. That's probably a good range.

And at that rate increase you are comfortable you can get the margin that you've priced for on the mortgage insurance side?

Yes we feel good about that rate and the underwriting guidelines,

I guess this might be a question more for Mr. Zucaro, how does that rate increase compare to other past pricing experiences where there's been a real issue in the mortgage insurance market that you've had to rectify through pricing?

Well, the last time and correct me if I'm wrong, Chris, as we did what, we have been looking back to our history and the history of the industry, the last time again that we had anything similar to what we are experiencing now was in, from the period from '85, '86, to early 1990s. And in that late '80s period, I'm going to say '86, '87, we had about a 25% increase in pricing. Admittedly we did not have then the variety of products that we have today which is what Chris is intimating. But I would say that that was about where we were and it sounds and it seems to us that that's where we are today. Am I right, Chris?

Yes, if you look where we are today our underwriting guidelines are similar today to what they were in the early '90s. And yet we'll have about 25 to 30% more rate than we did in that period. So we feel pretty good about the rating guideline relationship.

And then just lastly on the outlook for the housing market recovery and you've kind of articulated since over a year ago when things started-- first started to look weak, it looked like it was a 2010 kind of recovery target or stabilization in the housing market? It sounds like you are saying that continues. And I was just curious as to what factors are you seeing that may give you the confidence that the time frame of late 2009, early 2010 still makes sense.

Well, first of all, when we first start to talk about those expectations, Beth, in late summer, early fall last year, we did not have the benefits of all the-- as I refer to, the financial re-engineering that's taken place in the last couple of months in particular. and that is ultimately going to be very beneficial. And secondly the one thing we are looking at is what level or when can you expect housing prices to bottom out. And so far we are probably using [Kay Schiller] as a proxy for that. We are probably looking at a 20% maybe by the end of September cumulative drop from the peak at the end of 2006 and we've said, based on our crystal ball, looking at what's happened national to the housing prices, we think that 30% is necessary. So what we are effectively saying is that between September and early spring or thereabouts of next year you are probably going to get another 10% before it bottoms out. So the combination of that-- of those factors is what we still feel comfortable that we should start beginning to see some beneficial effects starting around late '09, spring of 2010.

Okay. And then one last think on the government take over of the Freddie and Fanny, from your perspective, is that going to be-- was that the move that was necessary and is that going to be sufficient to stabilize-- to help stabilize the housing market?

Well, I think the move was probably necessary because I don't think the Congress was-- had that much of an appetite to throw potentially $700 billion of taxpayer money against the problem. As to whether it's going to have a beneficial effect, we think the combination of those agencies being now fully supported by the government and therefore having not just the implied, but the actual support of the taxpayer is important to stabilize the market. We think that the introduction of the FHA as a means of taking care of some of the particularly bad loans that are out there is bound to have a positive effect on stemming foreclosures and that of itself is good but it obviously eliminates a large number potentially of homes being dumped on the market and further the depressing price and creating the kind of spiral that we've been witnessing now for about a year or so. So all of these things we think are good for the long term health of the housing and mortgage lending industry. Chris? Can you think of anything else?

No, I would concur. Those things particularly the Fanny, Freddie moves will add stability to the residential mortgage markets that we need to get housing prices to recover.

Okay. Thank you.

We'll go next to [Mike Rondell]. with Key Colony Funds.

Thanks for taking my questions, guys. Just a couple on the mortgage insurance business. With your risk to capital now at 16 to one, when would you project that it would be at 20 to one and kind of what are your plans when you get there?

Well, as Chris intimated before, our main focus is on, one, writing quality business, and we have the ability to do that. A second and just as important focus is retaining a world class ability to meet our obligations to existing assureds and policy-holders and those that we add by virtue of writing new business. Having said that, therefore, our focus is more on retention of capital and putting it to maximum efficient use. And thirdly, again as Chris indicated, we think that the combination of the much more stringent underwriting standards we've adopted and the higher pricing structure we've adopted, the higher pricing structure incidentally of the GSEs. And the contra effect of the FHAs greater involvement in lending on homes, that that is going to, in fact, reduce the speed by which risk in force is going to accumulate. So right now contrary to what we thought at the beginning of the year we are not going to see, we don't think, a speedy increase in risk in force. And therefore that's going to alleviate some pressure on the capital side of the equation.

Okay. So what you're saying is the market or you guys are slowing down more than what you originally thought so you are not going to get there as quick. Do you still anticipate being there at 20 to one in early '09 or when do you think you would get to about that level?

Well, it's an educated guess but right now I personally think, Chris certainly can speak for himself, that there's a good chance we may not even reach 20 to one by year end this year. And then of course time will tell as to what happens next year when the system gets unclogged ever so gradually, as to how much of an opportunity then we have, how much of the product will have been covered by FHA and how much of the product at that time, let's say around springtime, early summer of next year finds it's way back to GSE conforming product. Chris?

Yes, I would say that when we did the original forecasts and getting our arms around this in the third and fourth quarter of '07 we were seeing dramatic increases in the MI penetration rate in the market. As you guys know we had gone from very low rates in these piggyback structures were essentially the predominant credit enhancement to I think in the third quarter of '07 we had reached something like 16 or 17% MI penetration rate that had run, new insurance written up for everybody. That has come down dramatically as all of us have tightened guidelines and increased prices. As well as the Fanny and Freddie, the GSEs instituting loan level price adjustments. So you now have a dramatic change where the MI penetration rates have fallen significantly and the FHA rate has grown I would guess somewhere up to close to 20% in this market. So that has greatly reduced the growth in the risk in force outlook that we had which will moderate the need for capital in these next few quarters.

And Al, another question, what do you think the MI industry is going to look like in a couple of years? Are there still going to be seven or so players or what do you think it looks like?

Well, again I will ask Chris to participate in answering this question because I think we are together in feeling-- in thinking that maybe, one or two companies in the business may get derailed or at least go into some quiet time for a period of time before being resurrected again. But we think, I mean it's hard to tell. You've got a company out there that may be spun off by it's current owner. You have another one where the owner has got all sorts of difficulties and is talking about getting rid of some assets. So it's hard to figure right now as to whether you are going to get new entrants in the business either picking up those active companies or creating a new one.

My gut for what it's worth, is that we will be looking at about the same industry. You may have some changes in market share, some picking up some market share and others more or less stable. But I think it would look the same three, four years from now. Chris?

Yes, what I think I would add to that is if you look at the outlook as we work through the format for the GSEs. and what residential lending looks like, I don't think we have any situation that would-- , any solution that would say we need less private credit enhancement in the market. So I think as it being an attractive market for people to be in I think any solution that we look at going forward says, if anything we need more private credit enhancement and more eyes in essence looking at these loan transactions. So I think that's a positive for the industry. I wouldn't opine on how much of us I think there are. I do think though that it's not really relevant whether there's seven, six, five, it's simply is there capital available to meet the needs of the high LTV market in the country and you can do that with any number of

And then last question, guys, you mentioned in the press release that you were rescinding more claims due to fraud. Do you have like a percent of claims that you're rescinding and how that's gone up year over year? Any feel for the number of claims that you are rescinding on a percentage or actual basis?

Yes, all I would say to that is when you see fraud crop up in mortgage loans you see it frequently with early payment defaults, loans that have gone bad within the first 12 months and if you look at the way delinquencies have developed with the '06 and even to some extent the early '08 book you can see that. You couldn't develop those delinquency rates that quickly unless big portions of those books in the market as a whole went to default early in their lives. When we see loans in our insured book go to default early, i.e., in the first 12 to 15 months, generally have a high proportion of misrepresentation and other issues. So I don't have a percentage I would give you I would simply say our procedures for enforcing the master policy which does not pay in those events have been unchanged. Historically we have always handled these things the same way and continue to. The increase is again not a change in our procedures or policies but just watching that '06, '07 book begin to age through the pipeline that's generating much higher residuals.

Would you say your re-situations are continuing to grow? Would you expect them to be higher on an absolute basis fourth quarter and early '09?

Yes, I think everybody in the market would have to assume that they will continue to increase as that, not to use the rat in a snake metaphor but as that '06, '07 book ages through the pipeline you'll see that occur.

Thank you, guys.

(OPERATOR INSTRUCTIONS) We'll go next to Mark Alpert with Centurion. Investment.

As best you can if there is some type of program to provide relief to distressed home mortgage holders, either through, well I guess worse case would be some type of cram down where $100,000 mortgage perhaps becomes $80,000, as a mortgage insurer are you responsible for the first let's say 20%?

No, the policy does not account for a cram down to be a cause of loss. So we would not, there would not be a situation where $100,000 was crammed down. If the loan was currently obviously because of that there would be no claim to be filed on that $100,000.

So wouldn't any type of program be, I assume if it's a reduction of interest rate it wouldn't affect you because you're guaranteeing principal, not interest. And if there is a principal reduction that if anything this would reduce the frequency it seems to me of foreclosures, so wouldn't this be beneficial to mortgage insurers?

Absolutely. Anything that, well, generally I wouldn't say anything, generally anything that's done to get the home buyer borrower in a position of being able to handle the payments over the long haul is a good outcome for the servicer, the lender and us.

Thank you.

We'll go next to [Ted O'Connor with Cook and Buehler].

Hi, thanks. You've answered a lot of my questions. On that cram down issue would that apply also to just a voluntary reworking if the government encouraged the bank to modify the loans?

Yes, there's a couple of ways to look at it. There's one obviously the policy language in the master policy which in that cram down situation is similar to being essentially a waiver of the UPB. When we look at each one of these modifications on a case-by-case basis and determine how to best participate with the lender to get the borrower into a position where he can continue to make his payments.

In most cases it would be a negotiation with a lender to come up with a solution?

Yes, we would look at them on a case-by-case basis.

Then to take things in sort of a darker vein all of these government interventions sounds a little positive there's certainly a lot of skepticism in the market about the long-term viability of the mortgage insurance business. If something changed and it proved not to be a viable business is there any recourse outside of mortgage insurance to the parent company or as I think about your book value and shareholders exposure should I just look at the surplus in the mortgage insurance business, right that off and then look it's a what's left?

Let me address the first part of that question and Al can address the second part. Again, I think I said this earlier if you look through everything that's going on in the mortgage markets, the way they kind of got to where they are today, the levels of defaults and losses that are being taken kind of the negative outcome of the piggyback market where our product was superseded by a different structure. Again you can't really-- it's hard to reach any conclusion that would say in any way that you would reshape the mortgage markets going forward, you would want less private credit enhancements on loans. We've always said that one of the values that mortgage insurance provides in the market is that friction between the individual that takes the first dollar loss, the investor and the originator. And we being the guy that take the first dollar loss generally is active in working with the originator and the ultimate investor to reach a set of guidelines that works for everybody. One of the things we got away from when this market got a little bit over heated, that's an understatement, over heated in '06 and '07, was that that friction kind of disappeared from the market. And I think that in turn contributed to things getting out of balance. If a group of policy makers was sitting around putting together a map for the mortgage business in the future, I don't think you would want to eliminate private parties taking first dollar risk on high LTV loans. So while certainly there's a lot of gray area around how the mortgage markets look in the future, you got to think that private and credit enhancements plays a pretty good role in any way you would restructuring these markets.

Right. Then relative to the second part of the question, i.e., the-- whether these companies, what is the structure corporately of these companies under the same umbrella, of ORI, each of our companies stands on its own and is responsible solely for the obligations it occurs to its assured's as a matter of enterprise risk management. We do not believe in using the assets of-- or the capital of one insurance company to support the assets and obligations of another insurance company. But by the same token the fact that all of these companies are joined under the Old Republic umbrella as I say, does give comfort to the policy-holders of each of the companies that there is greater flexibility, greater ability to use all of the assets of the holding company to access the Capital Markets and thereby come up with capital to some degree, any way, for each of the companies that would be in need at any point in time.

Fair enough. Thanks, guys.

(OPERATOR INSTRUCTIONS) Next, [Kevin Pelogger with Perkins Wolf].

Hi, Al and Chris. Quick question, Al, going back to trucking, when gas prices go down, do you see a change there in accident trends and such.

I think most of the change that occurs in trucking accidents or any other accidents really for that matter in any manufacturing or any company that's any service provider, whatever, is related to how much activity takes place. So, therefore, it's really driven by the economy. The harder the economy the more miles are put on buy the trucks and therefore the more they are exposed to traffic accidents and what have you. With respect to the price, the effect of gasoline or diesel price on accidents in the trucking industry, it does appear that the truckers do slow down a bit, they get more miles per gallon that way and therefore by slowing down a bit, that tends to reduce the propensity to get into accident situations.

Secondly what are your thoughts on both for the industry and as it relates to Old Republic just with what's going on in AIG is that an opportunity for you and how do you see this playing out for the industry overall?

Well, as you know the AIG as a matter of public record is apparently in the process of selling some of its assets. And they are going to be assets that are from what we understand mostly in the non-general insurance area. They are assets in its life insurance business, certainly you've seen probably in their financial products area, in their aviation leasing business. None of which of course have any bearing competitively on our relationship with AIG in the marketplace.

With respect to the property and casualty business in North America, which is the only place where we do compete with AIG, I think you have a natural effect of problems at AIG whereby some of its people may be more difficult to retain and therefore those people may find a home elsewhere. But when you shake it all together I think the opportunity arises from customers perhaps taking a second look at their relationship, in this case with AIG or any other company that may appear to have some sort of difficulty attached to it. That customer may want to look for a seconds opinion so to speak-- that type of thing and therefore you may have as a result more opportunities to bid on business than you might otherwise have.

Thanks.

We will go next to [Rick Lane with Rodview\.

Good afternoon, guys.

Hi.

Could you--- do you have the delinquency number for your prime book by chance?

Well, the traditional primary delinquency rate, 8.36%, I don't have that broken out for me by prime and others. It's safe to say that the bulk of our book is in the prime segment but there is some percentage of reduced stock and some lower FICOs that would have come through those agency automated underwriting systems there. It's safe to say that the nonprime delinquency rate would be higher, the prime rate lower.

Chris, might you guess that the prime book could be 150 basis points lower than the 836?

It's lower but I just don't have that in front of me.

All right. Is that something I could get?

I don't think we released that. I think you can look though at the-- and see what the percentages are in the different risk categories. I think we release risk in force by ARM, dock type and some other characteristics.

So I will have to way for the Q. on that.

Yes, it would be in there. Although there would be, I can tell you second to third quarter there would obvious be no increase in new insurance written in those high risk buckets.

Yes. And,Al, when you originally talked about envisioning the '05 through '07 book, I think originally you were talking about 150%,

That's for the entire book of business, though, Rick, which would be 2007 and prior and all prior years together with 2008, and then of course next year, 2009.

Yes.

Complete book of business.

When you originally envision that, did you also equate it to where you thought at that level your risk to capital ratio would bottom out?

No, we assumed-- we assumed a-- we looked at, we determined a guess as to a loss ratio purely on what we expected the books of business for let's say '07 and prior to ultimately come out to and what we expected the books for '08 and '09 to look like and co-mingled the whole thing and that's how we came up with that 150. That's one thing.

The other thing we did was to mimic loss emergence patterns that were a deductible in that '85 to '92 or so period that we keep talking about which was the last period of similarly harsh dislocation in the housing and mortgage lending and mimicked that starting with loss ratio trends for that period. Starting with the 2006 year and running it through 2009. So it was a combination of expected quality of the business for '08 and '09 and what the likely loss ratios would be for that together with the loss ratios for '07 and prior and modeling, super imposing on that a model in terms of what we refer to as link ratios that we took from that earlier period ten or more years ago.

And just a follow up on that question. In talking about some of your competitors it now seems like there is a thought process that may be more like a 25 to one level might not only be acceptable in and of itself but perhaps you'd have to breach that level before at this stage of the game given all the water under the bridge that you could go to that point and maybe have to breach it before you'd have to-- you'd feel you'd have to raise capital again, in other words maybe we are thinking 20 to one prior to let's say the last month and now, I mean let's face it, it's tantamount like in '91 and '92 when the bank regulators kind of looked the other way and allowed capital ratios below what otherwise would have been the case. Well.

Well, if I understand where you are going with that and I try to answer that question in the comments we made earlier and that is that again harking back to where we and the rest of the industry were back in the '80s and '90s we were in fact allowed to operate certainly above 20 to one. I don't have the exact number but I am going to guess, maybe you have the numbers there.

Yes, I think.

22, 23 or something like that. Yes, if you look through that cycle it was I think about 20 to 23, maybe a little bit hire in the worse year.

Right. And then the other thing, Rick, that is present in our current situation is that we think that the GSEs. in particular are much more sophisticated today than they were in those days and do require us as an industry to provide them with modeled expectations of where we think we are going to be and therefore they are approaching the approval of mortgage guarantee insurers to do business with them with a great deal more understanding of the status of these companies and for that reason again we believe that they are more likely than not, to see it in their best interest to work together to make sure that the business is approached on a long-term value standpoint rather than the shorter term orientation that seems to prevail today.

Yes, well, my response to that would be of course. Unusual times. And then I just would follow up and finish by asking, have you seen with all the mitigation efforts that are going on from all of the various different avenues and I can think of one in particular, the Bank of America/Countrywide settlement. One, I take it that it's probably slowing down the payment of claims in the third quarter that otherwise might have been the case. And, two, I would guess it's exaggerated delinquencies because if you're a homeowner on the fence why not consider going delinquent and just saying if your institution contacts you or the mitigation effort. And so my personal guess is that delinquency rates have been somewhat exaggerated by that. But I'd ask how you feel about that.

I would agree with you. That's-- you're unable to guess at how much of the delinquent population is people who are seeing friends, acquaintances being offered mitigation opportunities because they are delinquent and if they are current they are not offered that opportunity. I absolutely worry about that but I have no way, Rick, to estimate how much of that is out there. But it absolutely could be true.

And how about retarding the (inaudible)

Don't you think, Chris, that that's a function of the all the steps we are taking in these areas of fraud and so forth, turning down more claims because of those issues; correct?

Yes, absolutely.

Okay. Well, thanks, guys, hang in there.

Next, Bill Laemmel with Devine Capital Markets.

Hello, Bill, how are you?

Pretty good. Now we are in a recession now and usually during recessions pricing gets better for property and casualty insurance companies. Do you see any evidence of that?

Well, I think there was a question raised earlier, Bill, about what's happening to pricing generally and so forth. And I believe we said that as I recall I said that really what's driving it in our view is the fact that investment income is not particularly additive to the bottom line of property and casualty insurers or any other insurers for that matter and that whenever that happens there is a lot more pressure obviously to the generate a return on capital via the underwriting side of the equation.

So we think right now that that's the main driver in this economic-- likely economic downturn that is going to be first of all probably less business from the standpoint that if you have less sales, less employment, et cetera, that of itself those factors of themselves drive down the amount of premiums that can be charged. But on the other hand there is a premium rate that is charged on the lower sales, lower employment, et cetera, is more likely than not to inch up and, then to go down. So the underwriting results should be better from the standpoint of the composite ratio but not necessarily from the standpoint of the dollars involved because investment income as I say is not likely going to grow significantly for the foreseeable future.

Okay. Thank you. And then we were cruising along 18, 19, 20% in net premiums earned in the mortgage guarantee area and all of a sudden we came up with 10% this quarter. Is that due to repricing or?

Yes, the slowing growth is obviously the slower growth in new production, again contributed largely to tightening of guidelines in the growth in the F HA.

Thank you.

That does conclude our question and answer session. I would now like to turn the call back over to Mr. Zucaro for any additional or closing remarks.

Well, thank you. I have none. As always we appreciate very much everybody's interest in joining us on these calls and look forward to visiting with you in a couple of three months. Having said that, you all have a good afternoon. Bye

Again that does conclude today's call. We do appreciate your participation. You may disconnect at this time