Old Republic International Corp (ORI) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Old Republic International second quarter 2009 earnings conference call. Today's call is being recorded. At this time all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. 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 and good afternoon everyone. Thank you for joining us today for Old Republic's conference call to discuss second quarter 2009 results. This morning we distributed a copy of the press release. Hopefully you've all had a chance to review the results. If there is anyone online who did not receive a copy, you can access it at Old Republic's website at www.oldrepublic.com, or you may call Liz [Dolezall] at 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 July 23, 2009. Risks associated with these statements can be found in the Company's latest SEC filings. At this time, I would like to turn the call over to Al Zucaro, Chairman and Chief Executive Officer for his opening remarks. Please go ahead.

Thank you, Leslie. Welcome again, and here we go for another regular quarterly update on our business. We'll dispense with the parroting of the information contained in the morning's release since you can readily see it on our website. Instead, we'll just limit ourselves to giving some additional color to the release and allocate most of the budgeted time to the questions you may have. As we've done in the recent past, Chris Nard is on the call with me. Chris is, of course, the CEO of our Mortgage Guaranty business, and he will join me in particular with respect to the Q-and-A portion at the tail end of the call.

Focusing first on our general insurance business, which is our largest, as you must know, the most critical parts of the story here, of course, relates to both premium trends as well as the year-to-year underwriting performance. With respect to the former, to premium trends, it's basically a matter of -- how best to say it, same old, same old. As a generalization, rates for most coverages have continued to be under some pressure. But on top of that, of course, since mid-year 2008 in particular, the premium line has been affected mostly by the drop in economic activity nationally. All of that, though, doesn't mean that our business persistency is not good, because it is still very good.

The drop in economic activity is, moreover, particularly pronounced with respect to our consumer credit indemnity coverage, or CCI, as we refer to it internally, which is producing renewal, but very little, if any, new premiums. And this, of course, reflects the much reduced willingness of lenders to extend credit and the cut-backs by consumers for both home improvement and equity borrowings and also, I suspect, their unwillingness to borrow given the job situation. And finally, our own decision not to provide new coverage at the same rates and terms of trade as prevailed until the early part of last year.

We're likely, incidentally, to change these rates in terms of trade in anticipation of the greater lending activity and, hopefully, the need for the product as the economy improves down the road. I might also mention that the CCI coverage accounted for just 7% of our general insurance earned premium line for the first half of this year. And this compares to a little more than 10% for all of 2008 and 9% for 2007. So it's clearly on the down trend for the reasons I just cited, and we sure expect that the premiums from this particular coverage will continue to decline in the near term.

With regard to most other general insurance coverages, the year-over-year drop in net premiums earned has ranged -- you can see the overall change in the earnings statement that we put out in the release this morning. But among the various coverages, the drop has been ranging between 5% and 12% in the first half of this year. As we've said before, this is, again, due to the combination of the cumulative rate declines we've experienced for the past 36 months or so, both as a Company as well as on an industry-wide basis. And, of course, the more current effects of the economic recession we're experiencing in the US.

From an underwriting performance standpoint, the general insurance loss ratio -- as you can see in the release of about what, 75%, 75.3% in this year's first half -- that ratio was about 240 basis points, or 2.4 percentage points higher than it was for all of 2008. Among the coverages, the commercial automobile or trucking line and the general liability coverages produced somewhat moderately lower loss ratios. Whereas among our major coverages, workers' compensation and some property types of coverages, such as inland marine and most importantly, our financial indemnity line, have all reflected higher loss ratios than was the case for all of 2008. Again, by way of a refresher, in our case, our financial indemnity lines consist of the E&O and D&O line, the consumer credit indemnity coverage that I mentioned before, as well as our fidelity and surety coverage. As we've reported in recent periods, however, the CCI coverage has been among the worst performers among these financial indemnity coverages. And it once again served to increase the overall general insurance composite underwriting ratio by 6 -- almost 6.5 -- I guess 6.2 percentage points in this year's first half. So if we exclude the CCI policies, the general insurance composite ratio for the first half of this year would have been 95.3%. Now, this is versus the 101.5% we show in the release.

By comparison, for the first half of last year, the reported ratio of 97.4% would have been 5.5% lower, or 91.9%, if we also excluded the CCI line. So as you can see, CCI has had significant negative effect on the underwriting account of our general insurance business. But the upshot of all this when we eliminate the CCI product is that our general insurance business is still producing very good underwriting results in the context, as I say, of a topline that's about 7% lower year-over-year if, once again, we exclude the drop in the CCI coverage. In General Insurance, again, balance sheet-wise, there is very little change since year end 2008. Our reserves in the segment are developing positively. And the capital account is benefiting from a combination of factors, including about $100 million that we pumped in as a result of the capital raise we did at ORI back in April of this year. And it's also benefiting from the positive earnings of the segment and, particularly in the second quarter, from unrealized market appreciation of the investment portfolio that's carried at fair value, or market value.

Let's see, looking at Mortgage Guaranty, aside from any responses to the questions that I'm sure may be raised after these comments, these opening comments, there isn't much we need to add to the contents of the release, as it applies to this line. We think we've spelled out in the release all the key variables that have affected the results to date. And, as a matter of fact, the operating statistics that we also include with the release on page 9, those statistics shed some additional light on what we've said. Safe to say that the performance of the Mortgage Guaranty line is pretty much in accord with the expectations we had at the beginning of this year. We continue to believe that the restoration of Mortgage Guaranty profitability will be a relatively slow evolving process that will extend well into 2010, if not the early part of 2011. And this is, of course, very much in line, we think, with the current low expectations for an uplift of the American economy any time soon. In this segment of Mortgage Guaranty, operating cash flow for the first half was very positive. As of mid-year, the combined statutory capital of our Mortgage Guaranty group, it continued to be more than sufficient to support the insurance risk in force.

We might note here that risk in force, if you were to compare the quarter-to-quarter numbers, has been declining fairly slowly since September of last year, and that's due, in large measure, to the reduced new business market penetration by both our Company as well as the private mortgage guaranty industry at large. All of this I think says that the combination of the regulatory framework in which we operate and the capital structure of our own Mortgage Guaranty segment, which, as you may know, consists of three risk-taking insurance Companies, as well as the expected profitability of the existing and future business we're likely to underwrite. And finally, given the control that we can exercise on the underwriting exposures, we assume that the combination of all these factors should enable us to at once meet our obligations to policyholders, as well as continue building the capital base of this segment.

Let's see, looking at Title Insurance, as you can see, that was a good news item in this morning's press release. We thought initially, or originally -- at the beginning of this year, we thought that the title business might turn around in the second half of this year. But yet here we are in the second quarter of the year ,and the business has provided a nice offset to the less-than stellar results of our two other major segments. As we've noted in the earnings release, the main driver of this positive reversal of the title line rests, of course, very much on the higher level of title premiums and fees that we've booked in this latest quarter.

It is particularly significant, we think, that our western states operations, which had been a big culprit of our operating difficulties in recent quarters, that those have moved clearly into the black for the first time in many quarters. And while we're not yet ready to call a complete cyclical turn for the title insurance business, we are optimistic that the combination of external economic events and our own abilities to secure market share gains in what we believe is probably a once in a lifetime opportunity to obtain market share gains, that the combination of those factors should lead to a fairly steady emergence of profitability in the coming up leg of the cycle, and probably result in a much larger title business for us.

As you can see in the release, the combination of holding Company and life and health and other small internal services operations, something we classify as corporate and other in the release, that combination of those items produced a significantly lower contribution to this year's consolidated bottom line. It's noteworthy, I think that the increased interest costs that are now emanating from our April 2009 issuance of some $315 million of convertible debt, that this also affected second quarter results adversely in this particular realm. There is, of course, something of an income contra effect to this by virtue of the investment income that's generated by the funds we obtained and that were re-deployed to both the general and title segments from the debt offering. However, as I'm sure you realize, there is a lag effect between the time that we receive those funds and the time that they are fully deployed within the system. So that we should start getting the benefit of this contra investment income to a greater degree starting in the third quarter 2009.

Consolidated-wise, the Company's Shareholders Equity account, as you can see in the release, it reflected an approximate increase of 3% after having experienced several quarterly declines for both -- as a result of both earnings issues, as well as in the second quarter of last year, a substantial other-than-temporary investment charge to the income statement. Most of the increase that we're experiencing is due to the market appreciation of the investment portfolio that we carry at market or fair value, as we indicate. In the Aggregate, our claim reserves have developed positively through mid-year 2009, and we expect them to continue doing so for the rest of the year. We've got -- continue to have very good comfort in the value attributed to our claim reserves on the balance sheet.

Finally, I might note that we've continued, as I'm sure you see -- we've continued to pay a cash dividend at the higher rate that was established in June of last year. From time to time, we are asked about the prospects of continuing the payment stream at that rate, or some other rate, and our answer has always been the same. And that is that we do look at our situation each quarter in terms of both the prospects of our various insurance subsidiaries over the near- and longer-term time horizons, and we make our decision accordingly. So, again, as you see, so far at least we have felt very comfortable in maintaining the dividend at the time higher rate at which we've paid it the last time in June of this year. I think those -- that's the extent of the comments I was prepared to make. So as we indicated beforehand, we'll now open the call to any questions you may have, and, again, as I said, Chris Nard and I will answer the appropriate questions.

Thank you. Ladies and gentlemen, the question-and-answer session will be conducted electronically. (Operator Instructions). We'll pause a moment to assemble the queue. We'll begin with Dan Johnson with Citadel.

Great, thank you very much, Al. Good afternoon.

How are you doing Dan?

Very well, thank you. Just one question today, and that's just on maybe drilling down a little bit deeper into the commercial auto market that you serve. Maybe could you talk a little bit about what we're seeing in terms of, I guess what used to be just a discussion around price trends, but now we have to talk about the economic impact to that business. So both sort of a rate comment and a unit comment would be much appreciated. Thank you.

From a rate standpoint, I think we've done a very decent job. I think our people that are involved with that part of our business have been exceedingly disciplined. And I would say that, if anything, trucking has borne the lesser burden of rate declines of the past three years in our business. So we're very happy with that. Our persistency has been very good, which, to us at least, indicates that in the climate of the last two or three years when rates have been under pressure, that the general population of assureds has placed value on the quality of the service we provide in trucking and has been willing to stay the course from a rate renewal -- from a policy renewal and acceptance of our rate structure.

In terms of the amount of business that we are writing, we have the usual competition that we face day in and day out. And we have to fight to keep our business. Again, as I say though, we find ourselves fortunate in having long-term tenures of our customers, and that's very helpful in this kind of situation.

But there is no question whatsoever that the economic situation we're in in this country, is having an impact, in terms of miles traveled and goods transported throughout the country. And as you know, miles and the value of cargo and so forth are -- as well as the value of the equipment, are very much the base upon which premiums -- premium rates are applied. So when the economy is in the doldrums, as it is today, it stands to reason that we are having difficulty maintaining an uptick in the topline. As a matter of fact, the first half of this year it was down, I don't know, 4% or 5%, I think. Don't hold me to that. But the point is, it was on the down trend and not on an up trend.

Trucking, as you may know, does tend to roll out of the box pretty quickly when the economy turns around and when that occurs, we think we're going to be in very good shape in that part of our business.

Directionally, would you say that at the end of the second quarter, versus the end of last year, that the pricing trends are any more favorable? And are the unit trends similar, or have they gotten tougher as the year has gone on?

I think the pricing trends have remained pretty tough in that business, and that's why I said before, it's quite remarkable, and I know we're patting ourselves on the back, or at least I am patting the back of our people in having remained very disciplined in securing and keeping business at rates that we feel are reasonably adequate.

There's no question that that business has obviously incurred a somewhat higher loss ratio. I don't have the number in front of me, but it's been declining. It's still a very profitable book of business. But the cost of goods sold in terms of claims has been inching up, and that, of course is a reflection of the lower rates at which we've written. But I would say that -- having said all of that, though, I should say, the rate situation is pretty much the same -- has remained pretty much the same as it has been for the last 18, 24 months.

Great, thank you very much.

We'll go to Bill Clark with KBW.

Good afternoon, gentlemen.

Yes, sir.

One Title question and two MI questions, if I may. Take the Title one first. Is there any way could you give a little more breakout of the impact of market share versus just overall industry volume increases in the Title business? I know you mentioned market share, so maybe it sounded like most of that pickup came from there, but just wanted to get a sense of, depending on where industry trends might go, if -- how your premiums might follow that.

Well, I would say, and I don't have specific numbers to separate the two, but I would say right now that a lot of the increase in the topline was due to the refinancing activity that was very heavy in the second half, in the later part of last year, and the first four months, five months maybe of this year. And as you know, there is a lag effect between the reporting and recording of premiums in our business, particularly in our case since much of our business stems from independent agents. Therefore, that lag effect results in having the benefit of premiums on the refinance activity being booked in the tail end of the first quarter, but most pronouncedly in the second quarter of this year.

As to the second part of your question, therefore, I would say that we are just beginning to get the benefits of the additional market share gains that we have been and will be experiencing as a result of taking advantage of various market dislocations and consolidations that have taken place in the title insurance industry in the last nine months or so. And those, again, because they stem, or will stem, predominantly from agency sources as opposed to direct sources, that those will continue to lag. And I would suspect that we're going to start seeing most of that beginning to come through in the third quarter and the fourth quarter. So even though the fourth quarter, as you know, tends to be typically a slow quarter -- even the beginning of the year tends to be slow because of the seasonality of house purchases and sales, as you know -- that even though that may be the case, I think the thrust of this market share addition should be beneficial to our topline. At least, that's our current thinking.

Great, that's helpful. On the delinquencies in MI, I know you give the delinquency rate, but just -- if you could, maybe comment on the delinquency count in terms of the sequential change. Was that the same sequential change? Was it accelerating, decelerating? Any kind of update there.

Okay. Chris, you want to take that?

Sure. I think what you see first off in that, not to change the question, but when you look at the delinquency ratio, I think one thing you have impacting that is the buildup that you get with these foreclosure moratoriums. So in a more normal cycle, you would wash out some of these late-stage delinquents that are building up in some of the later stages as the foreclosure moratoriums in many of these states still hold. Or some states where the moratoriums may have passed, but simply they are states that have a longer judicial process and those court systems are backed up today and having a tough time moving the existing foreclosures through. I think the increase in the delinquencies also impacted obviously by the declining cure rates as this market suffers through the continuing declines in home prices and sort of the tough employment forecast.

So sounds like there may be some deceleration in the rate of new delinquencies, just the ones that are there are hanging on a little bit longer.

Yes. I think to get a long term look at those new delinquents we've really got to see how the third and fourth quarter of the year play out for us.

Okay great. Last easy one. Do you have the number of -- that captive reinsurance benefited in the quarter in terms of dollars?

From a loss ratio standpoint? Is that what you're asking?

I think last quarter it was like $60 million that benefited in the quarter. Wondering if you have that for the second quarter.

I'm going to stick my neck out, Chris, but I thought it was around [$72 million, $73 million]. Am I wrong?

I think it was down from that, Al. I think that was first quarter number. I think it was in the mid high [$30 millions, $32 million, $33million] something like that.

Okay great. Thank you very much.

We'll go next to Bill Laemmel with Divine Capital Markets.

Hello, Bill.

Hey, Aldo. How are you?

Good. Fantastic.

Well, you had several strategies, if I'm correct, in the Title business. Could you just give us an indication of how they worked out? You first -- you have a new arrangement in Florida.

Yes. We've -- when we speak about our ability to gain market share, it's coming from two directions. One, we do this have new arrangement, which we communicated in the last couple months, with a very good name in the Florida market. We formed an underwriting venture which will hopefully enable to us capture most of that company's business jointly with it. The second part of the sources of market share gain stems from what we've referred to as dislocations in the title business and consolidation of title insurance companies, the most prominent of which, as you may know, relates to the LandAmerica Company, which was -- I guess it was the third or fourth largest title insurer in the nation.

That was Lawyers Title?

That was the Lawyers Title -- the old Lawyers Title Company and Commonwealth Title Companies. And it, of course, went out of business in late 2008, and was picked up by the nation's largest title company.

But what occurs whenever you've got consolidations of that nature, is that you get some overlap of agency relationships, and people relationships all of a sudden may be brought into question, which, therefore, then gives others, competing organizations such as ourselves, an opportunity to start new relationships and thereby gain a footing in various markets. So those are the two sources. And as I tried to say before Bill, in answer to another question, we don't think we have yet seen but the tip of the line of -- of the thrust of the new production we're going to get by virtue of this acquired market share gain. That's to come, I think, starting in the third quarter.

Yes, and I think it's super to have that. You made several moves there. They're working out very good. You don't want to say how good they could be, but I think that's very positive.

And all of it plays with our philosophy of stressing agency production, although we have gained some pretty significant direct production sources through some people we've retained, as a result of all these changes that have occurred. So we're happy with what's happening to the business from that standpoint.

Yes, and thank you very much.

Yes, sir.

(Operator Instructions). We go next to Mike Grondahl with Northland Securities.

Yes, Al, just a couple of quick questions. Could you remind us, the capital raise you did earlier in the year, where are you allocating, what businesses are you allocating that $315 million to?

Yes. $100 million went to the General Insurance business. $30 went into our Title business. $130 million or thereabouts went to repay commercial paper balances, and the remainder was kept for general corporate purposes.

At any point in time do you plan on putting any into the Mortgage Insurance Company?

Well, as I tried to say in my initial comments in this call, we think right now we're in tip-top shape in terms of the amount of capital we have committed to the Mortgage Guaranty business, and the ability of that capital to sustain our obligations to policyholders as well as sustain the new business in force that we are currently putting on the books, which as, again, we indicated, is much smaller, much smaller size because of current market conditions. So at this point in time, we feel very good about the capital we have in place, and therefore we are not seeing any need to add further to the capital that we have there. As you may recall, we did add $150 million of assets to that business at year end 2008, or earlier this year, and so in that context, we think that the addition of that plus what was there is sufficient.

Got you. In the press release it mentioned there was an increase in fraud rescissions. And that claim severity actually went down. Can you give us some numbers around that so we can understand that a little bit more?

Okay, Chris, you're in charge of those numbers.

One thing I want to be clear on is we don't classify it as fraud. We think of that as more of a legal term. Simply the master policy is specific in relation to misrepresentation and the fact that we're able to rely on the information provided in the file as being true and correct on its face. So we don't essentially reference fraud, simply that the information was misrepresented when we eventually go back and look at the file.

From a numbers standpoint, I don't know that I have anything directly in front of me, but it is certainly -- there's always been, if we go back as long as 2003 and 2004, there's always been an element of misrepresentation in high LTV lending. So even in good times, certainly you don't see the levels that you see today, but there has always been that component to the business.

So I think the increases that you see today from us are not a change in process. It's simply the result of a process that's been in place for a long time working as the higher risk books from 2005, 2006, 2007, roll through the system. That will, over the long haul, get back to more normal trends as those -- again those high-risk books work their way through .Those numbers are real lumpy. They come up and down, depending on what the investigations look like, the timing and such.

And claim severity was down. Can you comment on that?

Yes. Claims are down a little bit as you get some slowing of the -- not slowing of claims, but you get an increase in rescissions. The rescissions do have a tendency to be more heavily weighted towards the high-risk markets in the country. Certainly California, Florida, Arizona and Nevada, and I think those things have impacted that average claim amount.

Okay. And then did you guys comment at all on modifications, how many you did in 2Q versus 1Q?

No, but I think certainly we've seen a big increase in the second quarter in modifications. As you guys know, there's certainly a lot of talk about the government modification program, it's called HAMP. That was released, I think, at the end of the year. People worked hard to get things in place to be able to do that in the first quarter. In the second quarter we have started to see a very positive trend in those modifications starting to come through.

Great. Maybe I can get some of the details offline from you guys then. Thank you.

We'll go next to Andrew Kahn with Kahn Brothers Group.

Hi, Al. Hi, Chris. How are you guys doing?

Good.

Good.

How are you?

Good. Just two quick questions. Can you give us an idea of which origination quarters are creating the bulk of the losses?

I don't think of it so much as -- well, you think late 2005, 2006, 2007 are really when I think all of us in the industry looked at the books, the more worrisome books. We all made significant changes to underwriting guidelines in the fourth quarter of 2007. Here at RMIC, we would have -- it would have taken maybe the first month or so of 2008 for those to work their way through. But really we worry the most about 2006 and 2007.

Okay, that's helpful. Following that, do you guys have a sense of when the losses will begin to significantly diminish. I don't know if that's something that should be on the horizon in the next year-and-a- half or so?

I think as Al said in the beginning, we don't really see a material recovery until late 2010.

Right.

But I think it would be tough for us, at this point, to tell you when we had any level of confidence to be able to predict when that's going to turn for us.

All right. Fair enough. That's about it. Thanks, guys.

We'll go next to Ron Bobman with Capital Returns.

Hi, thanks a lot and good afternoon.

Yes, sir.

I had a couple MI questions. In the modification activity, is it a fair assumption that when the mortgages are modified, if the legacy mortgage had MI coverage on it that presumably the modified mortgage prospectively will continue to have MI on it? Is that sort of always the case?

Generally. That's a good question. For all intents and purposes, if the modification was insured, it will remain insured. And we're more than happy to modify the loan because we're always on the risk. So anything that puts the borrower in a better position, ultimately accrues to our benefit as well.

Got you. And then as part of that reserving -- loss reserving process for those loans subject to modification, is there sort of an explicit or implicit re-default rate or re-delinquency rate that you assume as part of your loss reserve setting or loss reserve adjusting process?

Well, I think in this case, when we talk about modifications, it's really too early in the process to be able to project what that's going to look like from any standpoint. Certainly, you hear numbers in the marketplace about expectations, that 50% would re-default. But again, I think for the efforts we put into the activity, that's not an unreasonable expectation. Although I think it's way too early to put a hard number there.

Got you. So from a practical perspective, if you were to look at a mortgage, it's delinquent, it may be -- it's delinquent and getting more so as time passes. The lender or if the servicer is in discussions to modify the loan. I assume, prior to the technical modification being effective, you get a look at it. If you still think there's a good probability this thing is going to reenter delinquency, do you really have sort of a say in process to say, "Hey, guys this is futile, this probability is too high, this person is going to revisit this in three months, six months, a year from now?" Or are you, from a practical perspective, sort of along for the ride?

I don't know if "along for the ride" is the right term. But I think it's safe to say we are generally supportive of virtually all modifications. I think in some instances we delegate that responsibility or authority back to the lender. But again, at the end of the day, we're generally supportive of most all reasonable modifications they would bring to us.

Okay. And I had another question, another MI question -- and the last gentleman asked about rescissions. Would you -- I'm trying to sort of get an idea, I know it's a bit of a cohort basis where rescission activity now may have been put into the pipeline, the investigations, I don't know, 12-plus months ago. Do you have any sort of order of magnitude as to where these things -- this problem period, late 2005, 2006, 2007 -- ultimately what percentage of the book is going to be subject to a rescission, basically is what I'm getting at?

Yes, I really don't have that number for you. I mean, these -- the big bubble that was the 2006 and 2007 book to the mortgage industry as a whole, makes it really difficult to try to project that out.

At what point -- at what point will you have done enough investigation of that 2006, 2007 book and put it back to the lender asking for their agreement with respect to rescission or their not opposition to it? Will you have an idea where will you be through the lion's share of that bubble period.

Maybe 36 months, but again, it's -- I don't have enough experience with it yet to be able to give you a firm number.

I'm sorry, 36 months from the issue period, or today?

Well, 36 months from today, I think we will have seen that run its course.

Okay, thanks a lot for your time and your help.

(Operator Instructions). We'll go next to Beth Malone with [Woolderich].

Thank you. That's Wunderlich. And, my question --

Hi Beth, how are you?

Hi, how are you?

Welcome back.

Thank you. Thank you. I just was interested to know what your perspective is on the mortgage and title business, given that when we started to see the deterioration a few years ago in this market very rapidly, you often referenced back Houston in the early 1980s as a good example of a similar kind of environment as a way to kind of measure how the mortgage insurance and title business could develop. And I'm just wondering now, after we've gone through some of this, would you still argue that that's a fair comparison, or is this so much worse or different that you really can't use those kinds of comparisons today?

Well, I'll start, and then Chris can pipe in. If you recall, and I forget now whether it was in the first quarter of this year or the year-end call, when I remember distinctly saying that I would eat crow on this issue, in that we had assumed that in this cycle, in the Mortgage Guaranty business, we would have a cumulative loss ratio of 150%, which was the -- for the period from 2007, mid-year 2007 to the end of 2009, when we thought that the business would turn itself around as Chris just indicated before.

And as matters now stand, and as they have stood now for at least a couple of quarters, that cumulative loss ratio is much closer to [190, 195.] Correct me if I'm wrong, Chris. I think we are in that area, cumulatively, between mid-year 2007 and current date. So from that standpoint, okay, this particular cycle seems to be a lot harsher than what we experienced back in the late 1980s, early 1990s.

And to the extent, therefore, that this goes into 2010, we may yet turn out to be right about that 150, but it will be over a longer timeframe than was the case back in that earlier cycle.

With respect to the title business, this cycle does not have as much loss ratio content as the last significant down cycle we had in title insurance. You have to remember that back in the late 1980s, early 1990s, late 1980s in particular, we were running loss ratios in the high teens, or mid teens I should say. Today, we are down to around 7%, 8%, perhaps. So there's a big difference there from a title insurance standpoint. I don't know if I have answered fully your question.

No, I -- that makes sense, that it is worse. Kind of similar question on the trucking market. Do you see that as being more severe than most other cycles that you've seen in the past that have been driven by the economy?

No. No, this one just doesn't feel as bad. The last time we had anything similar in trucking, a real down cycle, was in the 1992 to 1994, 1995 period. This one does not -- maybe I've got some of my years wrong. Maybe it was 1996 to 1998. Yes, I think that's correct. This one does not feel like that at all. This one is not as amplified, certainly not from a loss standpoint, certainly not from a rate decline standpoint.

And do you see -- in the competitive environment, are you starting to see -- is there any kind of moderation or some of your more aggressive competitors stepping back a bit in the trucking market at this point, being kind of forced out because of losses they've already incurred? Or -- ?

There are a couple, I'm sure, that you're aware. There are a couple of smaller players that have had to pull in their horns. One or two that have gone out of business. But insofar as the major competitors we face, everybody is in the fray still. Everybody is pounding away.

Is AIG in particular more of an issue?

I can't speak to that.

Okay. That's fine. All right, well, thank you very much.

You're welcome.

Our next -- Craig Rothman with Millennium Partners.

Hi, thanks for taking the question.

Sure.

Can you give a monthly breakdown of title order counts?

No, I don't have that.

You don't give that? Okay. Then just trying to give --

I can say to you that they've been on incline for sure.

They've been on incline. So the last month --

They've been increasing the last four or five months, yes.

Okay. And then trying to get a better handle on the losses at CCI and when we could maybe expect the loss ratio to improve. Are the losses going to track similarly to MI losses that you just talked about maybe seeing improve at the end of 2010, I think?

Yes, I think the pattern is very similar between CCI and MI, the same rate of incline in loss ratio, accumulation from one quarter to the next. What differentiates the CCI product for us, at least, is the fact that a substantial portion of it is retro-rated, meaning that it's a loss -- there's a part of it which is a loss-sensitive product, which therefore provides for some relief in the event that losses exceed certain particularly pre-set levels, such at when those levels -- As those levels are reached, we do get to charge more premium to the assured, and that has the effect of attenuating the loss ratio. But in terms of pattern, you are correct in your assumption that they would track.

Okay. And the retro-rating, have you breached those levels, is it safe to assume?

Well, it's hard to say. I don't mean to evade the question, but the retro-rating applies on a policy in an assured by assured. You may have an assured with some policies that are retro-rated and some that are not retro-rated. So our objective, and what we must do in that business, is in fact to look at each policy and each policy year and make the calculation separately. I can say that some of them that have been particularly poorly underwritten, obviously have reached the maximum amount of premium collection that we can hope for. But we have still others where there is still an opportunity to collect more premium.

Okay. If this is essentially an insurance policy on a mortgage, like an MI, there's no rescissions in this type of product?

Oh yes there is. The same type of issues that we face in the Mortgage Guaranty business apply to the CCI product, which is aimed at home equity loans, aimed at home improvement loans, as we say, so forth and so on. And you see the same pattern with other types of loans in terms of -- Anything that's been packaged, and that has elements in it, whereby the packager did not follow, as Chris said before, the required underwriting, disciplines, pricing disciplines or what have you, then all those types of loans are going to have some element of rescission, where the insurance company can effectively put the loan back to the assured and deny coverage.

So are you having as much success with rescissions in CCI as you are in MI? Does it just go along the similar lines?

I would say so. Chris, help me on that. We tend to share some of the information between the two lines. I think we're having similar degrees of success. Of course again -- I'm sorry, go ahead.

No, go ahead.

I have to say that, again, you have different customers and they're not all the same. Some lenders have done a very good job of adhering to the requisite underwriting standards. Others have not done as good a job. So therefore, depending on which side of the house has got the worst lenders, that's going to indicate the level of rescission activity and success that we have.

Okay. And can you just remind me when you dividend up from the PNC Company?

I'm sorry. Say that again.

Can you just remind me when typically during the year you dividend up from the PNC subsidiary?

We usually do that on a quarterly basis, quarterly mode.

Okay.

Actually, the calculations are predicated on a running 12-month basis for all of our subsidiaries. But the payments occur, are concurrent with the cash needs of the parent holding Company, which are fundamentally debt service as well as dividend payment to the shareholders.

And how much did you dividend up this quarter?

I have no idea.

Okay.

We've indicated -- If you look at our footnotes in the financials for the 10K, as of year-end 2008, we indicated there how much dividend paying capacity we have, and that has not changed. And that dividend capacity at that point in time, which carries over into this year, was such as to provide more than adequately for the needs that we have as I say for debt service as well as dividend payments.

Okay.And just lastly, are you seeing anything concerning [insurety]?

Concerning in surety?

In surety, yes, as far as loss trends go.

Well, as I think I indicated in the opening comments, the surety line, just like the other lines that we -- coverages that we have, in our so-called financial indemnity book of coverages, which again includes E&O, D&O, and surety and the CCI product in particular, that all of those have been experiencing higher loss ratios this year. Some of them, particularly again the CCI product, has been much more accentuated. But we do have issues in all of those financial indemnity type of products for obvious reasons.

Okay. Thanks a lot.

A lot of them are driven by the economic situation in this country.

Okay. Thanks a lot, Al.

Yes, sir.

We'll go next to Geoff Dancey with Cutler Capital.

Hello.

Yes, sir.

Got a few questions for you. I'm first wondering, in the MI segment, operating expenses had come down, [coming on] lower personnel and other costs. Just wondering what we can expect on that going forward. Are there more costs to be taken out?

I think we've got that I [think] in the quarter. It would be difficult for us in this environment to get that much lower. I think we've had good success through this cycle to get it down to I think 14% this quarter. It was up a tiny bit from last quarter. It's hard for me to see that getting much lower, though, to be honest with you.

Okay. And, let's see, in the fixed income portfolio, looks like you're about 85% [for] fixed income. So that I guess leaves a significant amount of cash that you're currently holding. I was just wondering what your --?

No. Excuse me, no. We have 85%, as I recall, I don't have the figure in front of me. Well, let's see, in the press release we say 85% and 4% in equities, right? Which is 89%. And then the remainder is in cash equivalents and a few odds and ends in the invested asset area, including -- we include in that base number our accrued investment income.

Accrued investment. Okay. Now, I do recall you in the past being worried about inflation. And I think that was part of your thinking, in terms of increasing that percentage of the cash and short-term investments. I think if we look over 2007 it's much higher than it used to be. What are your thoughts on that now?

Well currently, we have stuck to the basically the bell-shaped type of maturity spectrum that we've had for a long time. That spectrum, of course, is highly regulated by our expectation on the payment outflow of claims in particular. So that's a discipline that has to remain in place. Currently we think, as has been indicated by the Fed, that rates are likely to stay down. However, longer term, we think that they're going to go up because of the government competing for cash, given the level of government commitments. And as a result, we're going to be playing it close to the vest and be able to -- and be willing to jump quickly once we sense that rates are going to be going up. Which would imply that we might start going shorter in order to take advantage of the increase in rates down the road, if that should occur.

So you are going to even decrease your duration further before you think rates will rise?

It's conceivable, that's right.

So you clearly don't think that that's happening imminently?

Not yet.

Okay. All right. And then on your long-term capital allocation, I think it was in the November presentation you guys put out last year, you talked about a General Insurance of 60% to 70%, Mortgage, 20%, 25%, and Title 8% to 10%. Is that still -- ?

That has not changed.

That's not changed even though you're --

You may get a little change because the -- our bottom line performance in Mortgage Guaranty keeps eating into the -- obviously into the capital. But then again you are looking at that time November presentation, which was based on the September numbers, and therefore did not include the $150 million that I mentioned before, that we contributed to the Mortgage Guaranty business. So when you add that back in, again, I don't have those percentages in front of me, but my gut tells me that we are still pretty much in the same bandwidth that we were in at that November meeting.

Okay. So if you do end up eating through more capital in the mortgage segments, that brings you below that 20%, 25%, you may be thinking about contributing capital at some point in the future to bring it back up there? Is that fair to say?

Well, we're going to be taking a look at how much business we are writing. As we've indicated, the amount of penetration by ourselves and the rest of the industry has been pretty low in the last several quarters, and therefore that's also going to drive the capital needs of that part of our business. If we obviously see that risk increase over time, then we'll have to take another look and see whether the capital we have in place is sufficiently adequate to carry the added risk. But at this point in time, again, as we've said in this call, based on everything we know, we don't think we are in need of capital in the Mortgage Guaranty business for the foreseeable future.

Okay. That's helpful. And my last question just involves the rescissions. Can you just explain how you account for those? How does it play out on the income statement and the reserves?

Chris, you want to take it, or -- ?

Could you remind -- do you mind repeating that question?

Yes, I'm just curious how we see the accounting for rescissions play out on the income statement in the reserve account.

Well, obviously, when you rescind on a loan, the loan essentially is put back to the borrower -- or put back to the servicer, and the amount of reserve comes out of the equation. So as those rescissions increase, unfortunately, you do get the benefit of a reduction in the reserve.

Okay. So you would reserve for the loan as soon as it goes into --

Yes, we start reserving for the loan as soon as we're notified that it's delinquent.

Okay. And then as you dig in and find out that there's been some sort of error in the files, I think you called it, then you see some favorable development in the reserves?

You factor your estimate of the amount and the percentage of rescissions, of things that have been reported, that are going to be rescinded. You factor that as a variable into the determination of your reserves at a point in time. And that's what Chris says that you get relief as the rescission becomes more real, so to speak.

Okay. Is it safe to say that at the beginning of this cycle, that you probably were -- did not have as high an estimate of rescissions as ended up being the case?

Yes. That is --

Okay, great. Thanks for taking my questions.

Yes, sir.

We have no further questions in the queue.

Okay. Well, very good. Boy, this went a lot longer than we thought it would. An hour 10 minutes. We appreciate everyone's interest, as always, in listening to the Old Republic story and showing your interest with the questions that you pose to us. And on that note we'll look forward to visiting with as many of you as possible at the next quarterly visit. On that note, you all after good afternoon. Goodbye.

Ladies and gentlemen, this concludes today's conference.