Old Republic International Corp (ORI) 2011 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the Old Republic International second quarter 2011 earnings conference call. At this time all participants are in a listen only mode. Following the presentation, we will conduct a question and an answer session. Instructions will be provided at that time for you to queue up.

I would like to remind everyone that this conference is being recorded. I would now like to turn the conference over to Ms. Leslie Loyet, of the Financial Relations Board. Please go ahead, ma'am.

Thank you. Good afternoon and thank you all for joining us today for Old Republic's conference call to discuss second quarter 2011 results. This morning we distributed a copy of the press release. If there is anyone online who did not receive a copy you may access it at Old Republic's website which is www.oldrepublic.com. Please be advised that this call may involve forward-looking statements as discussed in the press release dated July 28, 2011. Risks associated with these statements can be found in the Companies latest SEC filings.

Joining us today from management are Al Zucaro, Chairman and Chief Executive Officer and Chris Nard, President. At this time, I'd like to turn the call over to Al Zucaro for his opening remarks. Please go ahead.

Thank you and good afternoon and welcome again to everyone. As we've done for some time now, we'll make a few comments, as Leslie just said, about our major segments and then we'll respond to your questions.

As you've seen in this mornings release, the big news of course about Old Republic continues to relate to our housing and mortgage lending related insurance businesses. These insurance products are, of course, underwritten primarily in our mortgage and title insurance segments and, to a smaller degree, in our general insurance segment with respect to the home warranty and consumer credit indemnity lines.

In the aggregate, when you put it all together -- these lines all together, they account for some 45% to 47% of our top line. The remaining, or roughly 55%, say, is mostly made up of our commercial property and liability insurance coverages. And our financial reports, obviously, show the revenues and the bottom line results of these lines in our 3 major segments.

So, as we usually do, we'll start with saying a few words about our largest segment and then we'll proceed with comments about mortgage guarantee and title that Chris will handle and then we'll conclude with a few comments on our overall corporate results and financial condition.

When you look at the Old Republic general insurance story, it is beginning to turn increasingly more positive. The all important underwriting ratio has been below 100% for the second consecutive quarter and this is, of course, a good omen for his business. As you've seen in the release, our consumer credit product has been increasingly less taxing, insofar as the overall loss ratio of general insurance is concerned and this has now taken place for 3 consecutive quarters.

In the second quarter this year as we indicate in the release, the CCI, which is our -- again our consumer credit indemnity product -- accounted for 1.7 points of loss ratios and that compares to about 11 points in the same second quarter of 2010. And for the first half of the year, again as you can see, the impact was 3 percentage points this year versus the 7.4 percentage points in the same period last year.

So, if we exclude this product from the overall general insurance results, the underwriting ratio has ranged between a low to mid 90s for the past 10 years, as well as for this year and last year and so forth and so on. So, while it may yet be perhaps too early to call it a day on the adverse impact that the CCI line has had on our general insurance results, the current trends in the claim emergence patterns that we've been observing in that product for the last several quarters is very much declining.

In the release, we've also shown the positive impact that last year's acquisition of the PMA organization has had on our general insurance operating revenues as well as pre-tax income so far in 2011. As you may recall, we merged with PMA in the effective at the beginning of the fourth quarter last year so that this year, the first 3 quarters will not be comparable to the first 3 quarters of last year. And that's why we are pointing out to the impact which has been beneficial of PMA on our general insurance line when we compare the results between the first quarter and first half of this year with last year.

On the pretax -- now if you eliminate the PMA revenues from what we've posted on general insurance, you would see that the revenue line is pretty much flattish in comparison with 2Q of 2010 as well as first half this year versus last year -- first half. But that the pretax operating earnings without PMA would still be up by 122% in the second quarter this year and up about 24% in the year-to-date period.

Again, as I indicated before, a lot of the benefit reflected by this apples-to-apples comparison emanates from the less negative impact of the CCI line. But the rest of the business is proceeding ahead very well in what is still a relatively weak economic recovery for the US.

In the final analysis, we still think that the US economic malaise has a lot to do with the dearth of progress we're experiencing on the revenue side in general insurance. And while we're getting some relief from a modicum of premium rate increases here and there, we don't think that any real progress will take place in general insurance, particularly from a top line standpoint, until the US economy starts to percolate.

Specifically that means, of course, as everyone knows, that we need to just get more people back to work, more consumers spending money on goods and services, and with corporate America as well as the public sector, getting more things done, more things and ways of doing business that go to increasing the need for insurance.

For what it's worth, our current view, at least the basis upon which we're managing our business, is that all this necessary required activity in the economy at large is likely to take place in relatively slow motion over the next couple of years at the least.

With respect to investment income in our general insurance business, we're still struggling there as well as in the rest of our segments with employing the relatively small amount of operating cash flow as well as the more significant amounts of reinvestment of maturity investments -- of maturing investments I should say, at reasonable yields. And this of course means that investment income is also unlikely to contribute much to this segments top or bottom line growth for the foreseeable future.

Let's say, though, that in all other regards our general insurance segment is in very good shape. We sure have enough capital. Our prior years reserves are continued to play out very favorably and thus, as you know, when you have favorable developments, it does not impact adversely the current years results.

The asset base is as clean as it comes and therefore very much supportive of the obligations that are posted on the right side of the balance sheet. It bears repeating, I think, that this part of our business is the main source of dividends upstreamed to our holding company. This has been so for the past 35 years or so.

Many years general insurance has been the source of much cash flow upstreamed to the parent holding company. And today, and in the recent past, given the relatively slow premium growth we have been experiencing and, therefore, the lack of addition to the risk profile of the general insurance business or the amount of the risk that needs to be posted on the balance sheet, the combination of a strong capital base and reasonably consistent earnings have enabled this segment to continue the role of being the main provider of dividend upstreaming to Old Republic International Corporation.

As such, therefore, its recurring dividends have, in large measure, allowed us to also, at the holding company level, at once honor our debt and related interest cost obligations, as well as to pay a cash dividends to our common shareholders, in continuation of many years of record of having done so at an increasing rate, albeit now days a much smaller percentage increase than has been the case before.

I think this is a good time, that's the extent of the comments we think we need to make about general insurance. It's a good time to, therefore, turn it over to my colleague here, Chris Nard, to speak about our title and mortgage guarantee business.

Good afternoon, everybody. When you look at the release, you can see that Old Republic's MI results in the second quarter deteriorated from the same period as a year ago, as well as did the year-to-date results. When you set aside the effects of the captive terminations, captive commutation and pool insurance terminations that occurred in the period comparison last year, you can see that the weakness in the quarterly results were driven largely by increases in the paid claims trends.

Change in the reserve provisions. It's worth noting that the change in the reserve provisions were largely related to more conservative assumptions about our rescission expectations at this point in the market, a slight uptick in severity and then a general decline in the operating revenue environment.

With regards to the delinquent loan portfolio, what we saw in the quarter was the total delinquencies had declined 25% in the period and traditional primary delinquencies had declined 26% in the second quarter when compared to the second quarter last year. These declines continued to be largely related to a reduction in newly reported delinquents in each period, but also due to a reduction in delinquents related to the elevated paid claim activity that we have been seeing in the last several quarters.

Long term trends on the production side of the business, including the new insurance written and the net earned premiums, continue to be challenged, obviously, by the macro trends that we've seen present in the MI industry over the last 5 years. You see those generally related to changes in guidelines in pricing on the part of Old Republic's mortgage guarantee business and a general decline in the MI penetration rate since the bursting of the real estate bubbles in 2007.

Net risk in force, obviously, is subjected to the same macro environmental trends as the new production activities are. And what you'll see there is that the relatively insignificant levels of new production that we are experiencing have been insufficient to offset the reduction in risk in force that we're seeing in the portfolio due to refinancing and, obviously, due to the elevated level of claim terminations in the book.

The larger news item in the release, obviously, was our discussion around our flagship mortgage guarantee business, Republic Mortgage Insurance Company, which is domiciled in the state of North Carolina. As we have talked about in the past, that business has been operating under a risk-to-capital ratio waiver from the state of North Carolina for about a 2-year period.

That waiver was set to expire at the end of June 2011 and since then, we've negotiated with the department 2 separate 30-day extensions leading to the August 31 waiver termination at this point in time.

Based on the current position of the North Carolina Department of Insurance, at this point, they are not willing to extend the waiver beyond August 31 of this year but during this period, we've also been discussing with Fannie Mae and Freddie Mac a proposal whereby we would utilize a separately capitalized and separately held mortgage guarantee subsidiary. It operates under the name of Republic Mortgage Insurance Company of North Carolina, as our primary direct writer in all 50 states.

But, as of this point, we've not been able to reach any agreement with regards to the usage of Republic Mortgage Insurance Company of North Carolina as a direct writer on a nationwide basis. Therefore, as we stated in the release, given these events, it's likely that we will stop writing business at least temporarily in the flagship Company prior to August 31 of this year.

During this period; however, we will continue to work with the agencies and the North Carolina Insurance Department for the purpose of attempting to reach an agreement whereby we can write business in all 50 states in the Republic Mortgage Insurance Company of North Carolina subsidiary. Although at this point, there is certainly no assurance that we will be able to do that in this period of time.

At this point when we think about the run-off of the risk in force at Republic Mortgage Insurance Company, all of our internal analytics at this point and the outside analytics that we have had run on the portfolio show that this book will run-off at the end of its life with the positive balance. Now, certainly as you go through this period, you can have timing discrepancies with this premium deficiency type analytics because in the MI business, you can run into a phenomenon where your claims, as we are seeing today, are obviously front loaded into the life of the policy and the premiums, particularly now, extend well out into the tail.

Obviously, what you see in the marketplace today is a very high persistency rate in the MI business where the loans stay around for a long time because they were originated generally at very low rates and also they haven't had significant equity build up. So if even the rate was in the money, it's difficult to refinance due to the LTV of the product.

With that, let me segue on a more positive note to our title insurance business. The title insurance business continues to build on a lot of positive momentum that we've seen over the last 4 to 6 quarters now. And in the second quarter of 2011, we posted a pre-tax profit of about $5.6 million in comparison to a profit of about $4 million in the same period last year.

The year-to-date comparison also improved significantly in 2011 showing a year-to-date profit of $8.2 million versus a loss of $4.6 million in the first half of 2010. When we look at the premiums and fees comparisons for the title group, we're looking at about a 14% improvement over last years second quarter. And then in a slow residential real estate market, most of that growth we would have ascribed to market share gains that we've seen over the last several years as the real estate markets and the title market, in particular, has had some dislocation in its ranks.

The market share for our title business, I think, it's at the end of the first quarter, which is the most recent period for which we have available share data, was about 13.5%, which was up almost 30% from the same period in 2010. On the expense side, we've seen a little bit of reduction in the expense ratio in the period to 92.3% versus the same quarter in 2010 when it was in the vicinity of 93.5%.

The claim ratio has been fundamentally flat for the comparative period at about 7.5%. So, I would say we continue to be very pleased with the progress the title group is making, particularly in what continues to be a tough real estate market and it seems to be that this line of business has stabilized and will continue to stabilize through this period. With that, I'll turn it back over to Al.

Okay. When we put all of the pieces together, obviously, we've got ourselves a much poorer situation than we anticipated just a few months ago. There is no question but that the mortgage guarantee business is not looking to get well for quite a while, in our opinion. We just don't believe that the housing is going to come back strongly because there are just too many uncertainties in the larger economy to warrant great optimism at this juncture.

But, longer term, as we've said in the earnings release and on many prior occasions; however, we still see mortgage guarantee as a very necessary business in the overall context of this country's housing and related mortgage lending industries.

But, given the reversal of claims trends that we've experienced and that Chris just spoke to a couple minutes ago, given what we've seen now for 3 consecutive quarters, i.e. starting in the fourth quarter of last year and continuing the first quarters of this year, we've simply reached for the pause key, so to speak, to suggest that our flagship mortgage guarantee Company is likely to evolve into a run-off situation in the foreseeable future.

I might say that in a run-off situation, an insurance just stops taking on more new business and simply collects all of the premiums that are due on that business that remains in force. And it also, obviously, continues to pay the legitimate claims that are presented to it and it does that from the funds that are at its disposal, meaning again, the premiums it collects, the capital and the other assets that it has placed, most of which, as you know, are placed in reserves, and goes on with a business on a so-called run-off basis.

A run-off situation however in the case of a mortgage guarantee company, or for that matter, I might add, a professional casualty re-insurance company, could extend for a long time and some mortgages stay on the books for 20, 30 years.

And it is not inconceivable that, therefore, that a run-off situation could last that long. But there are enough precedents, both in the mortgage guarantee business and, more specifically and to a larger degree, in the property and casualty or the life business, there are enough precedents in the long history of our industry to make the management of a run-off situation fairly straightforward over time.

Now while this run-off mode takes place, as Chris indicated, we'll just continue working with our state regulator, namely the insurance department in the State of North Carolina in the case of our mortgage guarantee companies, as well as, and just as importantly, if not more so, Fannie Mae and Freddie Mac, as well as the conservation of those 2 institutions, namely the Federal Housing Finance Agency, to evaluate and to study various means through which we can maintain an active presence in the business for Old Republic. So, having said this, I guess it's time to turn it over to you all for any questions that we may be able to answer.

(Operator Instructions)

And we'll take our first question from Beth Malone with Wunderlich Securities.

Okay, thank you. Good afternoon. I have a number of questions, actually. I'll try to make them short. On the run-off, if that is the process you have begun, does that suggest that you will be reporting your mortgage insurance operations below the line?

No. The run-off, Beth, does not imply -- I think you're alluding to a discontinued operation or termination of some sort. It does not imply that at all. As Chris said, we have -- I think he said we have 3 mortgage insurance Companies in our fleet of that segment and the Company that -- only one of the companies, namely Republic Mortgage Insurance Company, which we referred to as our flagship MI Company, is likely to be in run-off before the end of August. The other 2 Company, and more specifically, as Chris indicated, Republic Mortgage Insurance Company of North Carolina, is very much qualified. And that is the Company that we aim to continue to keep in business and as he said and as I just reiterated, it is a Company that we're going to be talking with Fannie and Freddie and the FHFA about being enabled to stay in the business on the new production basis while the other one, potentially and possibly, goes into run-off. So the business will still be active and we expect it to remain an active part of our business for a while, at least.

And is there sufficient capital in the other ongoing business to take up whatever business would've been written in the one that's in run-off?

Yes, well there are 2 things. First of all, that Company -- the answer to your first question -- to the question is, yes. It's so-called risk-to-capital ratio is below 25 to 1. And secondly, you may recall, Beth, we have been very public for a couple of years about the fact that we still were inclined to add up to $100 million of additional capital to the MI business. Our stance has been, and is, that that additional capital would be committed to the second Company since it is intended to be the Company that would in fact write new business exclusively. That capital should -- that level of capital together with what's there now -- should enable that Company to write business for quite a while, particularly in the current situation where production in the mortgage insurance industry, not just with us but for our competitors as well, is at a very low level. Now, the business, we think, all of us think, is of very good quality and should therefore be additive to the bottom line of the business and therefore, additive to capital for the foreseeable future, if and when it gets to write exclusively new production.

Okay. And then a question on the general insurance, the loss ratio and the combined ratio, if you X out the consumer product was fairly stable. Did it include any weather related losses?

No. As you know, Beth, we've got very little exposure to property insurance, whether it's standalone or otherwise. And therefore, we rarely get affected by property losses from just about any type of natural disaster.

Okay. And then one other question on the mortgage business. The Dodd-Frank proposal would limit -- potentially limit the amount of mortgage insurance at the marketplace with demand. And I know that the mortgage insurance lobby is trying to get this resolved. What do you see as the outlook for that?

Well, I think it's obviously too early to tell. But I think if you looked at the analytics that we've produced in the industry, we can clearly show, I think, that the MI product does what in fact the Dodd-Frank Bill essentially charges it with, which is reducing defaults. I think we can show that the mortgage guarantee product, in essence, selects a better quality of risk in the marketplace and I think that should be well received on the hill. But it's a long way to go between what we think are very solid analytics and actually getting on the qualified residential mortgage language in Dodd-Frank to a point where it treats the mortgage guarantee product on an equal footing with the FHA. So long answer to -- I think we have good data. The question is whether politically we'll be able to be successful.

Okay. Would that change your decision-making on how you proceed with this -- with the mortgage insurance operation?

No. I think we're proceeding as the way we described throughout the call in trying to get the relevant regulatory bodies in Fannie and Freddie supportive of what we think is the right long term decision and that is to write business in Republic Mortgage Insurance Company of North Carolina.

Okay. Thank you.

(Operator Instructions)

And we'll now take Bill Clark with KBW.

Hi, guys. I've got a couple questions too. Just wondering if you could expand on the reasoning that North Carolina Insurance Department wasn't willing to grant another waiver to the flagship sub? And in particular, if you think that reasoning would have an impact on whether or not they are likely to approve the new sub?

Yes, Bill, this is Chris. That really wouldn't be my place to hypothesize on what North Carolina was thinking in that respect. So I really -- it was a risk -- in our instance, it was a risk-to-capital ratio waiver. We're running a high combined risk-to-capital ratio so I couldn't tell you really anymore than they were uncomfortable with the one that we presented to them.

Okay. And you can correct me if I'm wrong, but I believe that when an MI company goes into run-off, the GSEs retain some type of ability to transfer the mortgage insurance over to a different MI company --

Yes, I think actually the way that works is throughout history, the GSEs have been very concerned about taking the risk from one MI and moving it to another. And really in all respects, I think in the property and casualty or in the life business it's actually called twisting and it's prohibited. What ends up happening is taking one counter party -- essentially gutting them because nobody takes the bad risk as you might imagine -- takes the good risk and leaves them insolvent in essence on the bad risk. So that's always been prohibited in the GSE model. I think you would have, Bill, the same phenomenon if there were to be a run-off scenario where nobody would want to take the suspect risk. So if you moved the good risk to another insurer, you would simply exacerbate a difficult situation.

So you don't see anything like that?

At this point, I would not anticipate anything like that.

Okay. And then one more if I may. Could you just go over your capital available at the holding Company?

Capital available at the holding Company? Well, as you may -- first of all, I'm going from memory, but I believe we had something on the order and you're addressing liquidity, right, Bill?

Yes, exactly.

At the end of last year, 2010, I think we had $80 million, $90 million. And then, as you know, we are upstreaming every quarter dividends primarily from the general insurance Companies, as I mentioned before. And then thirdly, as you know, earlier this year, we raised $550 million in a public offering of convertible debt and we used about $105 million, $110 million of that liquidity to refinance some of the debt we had acquired from the PMA companies. So that today, after all the shots are fired, with respect to that amount of money we raised, we're sitting on some $400 million some-odd, which we are holding at the parent holding Company just in case that we're not able to convert or that the debt we issued back in 2009, $316 million as I recall, of convertible debt as well at the time. In the event that that does not convert then we would use these funds to pay off that debt. So, bottom line, right now, we have no liquidity issue to deal with at the holding Company level, whether that liquidity is needed to honor our debt obligations, meaning keep the interest payments current. Number two, take care of any relatively minor amounts of capital that we need in the system. And number three, in the event that it is appropriate to add some capital to the Republic of North Carolina Company, as Chris and I have talked about, to write new business.

That last one was the $100 million?

Yes. We had, Bill, we had added $25 million in the first quarter so we have at least another -- we have $75 million to go.

Okay, great. Thank you.

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

Yes, hi.

Hi, Steve.

Sort of like a basic question and I'm not so sure how you would respond to it but, as a shareholder, how do I get a fix on what happens to book value over time and the impact of the run-off of the mortgage insurance business? And what information will be there for me to get a better feel for that?

Well, Steve, if you refer to the fifth page, refer to it as Add 5 of our press release, and the very first paragraph there, the last 3 lines or 2 lines, there we speak about what happens in the event that we're not able to get back in the business or stay in the business in one fashion or another and that our flagship Company is in run-off. There we say that we would have an interest to manage that run-off because we think we can do it very efficiently and we've got very good people, good staff who know our business in and out. And -- but effectively, that stance, or that position at that point, would indicate that our maximum exposure would be the $445 million and the $1.74. So how do you see that? You will see that by virtue of the earnings or losses, as the case may be, that we publish each quarter going forward that we'll stand out and we'll tell you exactly how much of that $445 million absent any addition to capital as we've just discussed, how much of that is being invaded by possible future losses.

And then what about the investment in the two mortgage insurance business?

Well, there we have, again, if you look towards the tail end of the -- on page Add 7, we have from the very beginning from the very start of that investment, we've indicated what our cost is of those investments, what the current market value is of those investments, what the aggregate amounts of those investments that have been written down because those amounts were deemed to be other than temporary losses in value. And we also show as the last line in that little table, are so-called equity interest or the book value of those investments. So when you look at it today, we had an original cost of $313 million. We have written down those 2 investments in the aggregate to $67.5 million, that their market value at the end of June was $90 million, so the market is in excess of the written down value, and that our equity in those Companies, book value which they publish is $117.9. And we repeat that every quarter. So, in a worst case situation, if you wanted to assume that all hell breaks loose and so forth, our exposure there is $67.5 million. Everything that would be the remaining investment that we have recorded that would be written off. But right now, we're not expecting that to occur.

That's helpful. When you go back to the PMA business, going forward, what kinds of things are you doing or what does PMA offer you in terms of upside from this point?

Well, the Company is in process of being a more focused on things that it does particularly well. One of the great interests we have in the Company is that it's got a long history of being a very good insurance provider to certain key industries of our economy. It's got a big interest in the educational field. It's got a big interest in the healthcare field, which has appealed to us given the macro aspects of our population. And we think that we can expand gradually, that Company's platform to western -- move it from its eastern -- East Coast base on which it has been for many years. So we think the combination of expanding that footprint on the one hand and therefore expanding some parts of its -- some key parts of its business that it is particularly good at. And then finally, that Company came to us with a good sized service-oriented business. It does a lot of claims handling, claims management for both assureds and non-assureds and that service business is of great appeal to us from the standpoint of melding it with other things that we do at Old Republic. And it is also great appeal because it does not have the same kind of risk attached to it as an insurance underwriting business. So those are the -- and then, of course, it always starts with people and we think we've got ourselves a bunch of new colleagues that are -- that we look forward to working with and that are very much -- that are going to be very much a part of Old Republics future.

Is there any trigger that would get you back into the mortgage insurance business? I know that there were things on the table in terms of certain things that congress was looking at and seemed to have just gotten tabled because of the debt ceiling issue, but are there some things that could happen in terms of policy that would cause you to want to get back into this business?

Yes, as we've said through this, we're not out of the business, right? We have 1 Company that we think will likely stop writing business at the end of the month. We have 2 others that are separately held and capitalized that are largely licensed in all states. So I would by no means say we were out of the business. At the same time, you mentioned individual regulatory things and I don't think our interest is opportunistic in so much as we're waiting for some regulatory pop. What we have said repeatedly and what we strongly believe is mortgage guarantee product is important to housing in this country. The last 5 years have shown nothing if they haven't shown that low down payment residential mortgages are volatile assets. We believe strongly that there's a place in the economy for low down payment mortgages, simply if you look at savings rates and household formations in this country, you need that product. And I don't think in the long run the government wants to supply all that credit, particularly on a first dollar basis. So as you think about the reworkings of Fannie and Freddie in the future, our thinking would be regardless of how that plays out, the government will have a position and the catastrophic guarantee of mortgage back securities. And I think they will continue to look for private capital to be the shock absorber in front of that guarantee. So irrespective of what happens in any kind of shorter intermediate term regulatory outlook, we think it's an important product in the economy. And that's kind of our orientation towards that business.

The problem is that on the private side, we're eating up any capital that we might have. Correct?

Well, again, to reiterate the point, Steve, the capital that may be eaten away would be the capital of the flagship Company if it were to end up in Never-Never land after the run-off, right? But the rest of the capital that we have, we don't believe is going to be exhausted. So when we point to that $445 million and the $1.74 or whatever it is, that's an ultimate potential loss for us but right now do we attach full credibility to it? No. We just felt obligated to tell the shareholder what the heck could happen if all hell broke loose as I say.

No, no, I appreciate that.

And we are in the position, we're not, as Chris said and I've said, we are not out of the business. We're not proposing to get out of the business. It is just a matter of our sitting down with the powers that be, in our case, those are primarily Fannie Mae and Freddie Mac and their conservator, the FHFA, and reason together as to how we can best achieve our mutual interests.

Good luck.

Thank you.

No. It's just -- it's incredible. Alright. Thanks.

(Operator Instructions)

Our next question will come from Michael Ting with Goldman Capital.

Can you share with us any comments that you might have received from the rating agencies regarding the run-off in the mortgage insurance operation?

We have not as yet had any conversations since we put out this release, at least I have not.

Okay. How do you think by putting one segment of your business in run-off, how do you think that might affect the ratings of the -- will that have any impact on the ratings of the other parts of your business such as the general insurance?

I think you raise a very good question and I think it requires a look at the nature of insurance companies, businesses and indemnities, particularly companies that are organized as we are with multiple charters that are intended to achieve different objectives. And it's always been our position that when we offer a policy from any 1 of our insurance Companies to any 1 insurance buyer that, that buyer has got every right to expect that indemnity is provided by that Company and that Company alone. There are no guarantees by the holding Company of any of its insurance subsidiaries. Okay? Every insurance Company in our fleet of some 24, 25 Companies stands on its own and each of our Company is also held separately. There is no pyramiding or cross-ownership of those entities by 1 another. And that has been a critical part of our enterprise risk management objective and practices for many years. So it is from that standpoint that we have said to whoever's asked that there is no -- well, for lack of a better expression, there is no stealing from Peter to pay Paul.

Okay.

Each Company is presented to the insurance buying public as a standalone operation, which just happens to be operating in a family or fleet of Companies, in our case, under the [ages] of Old Republic International Corporation, which is a general business corporation with limited liability. As you know, I don't mean to lecture, but all corporations have limited liability. They do not have unlimited liability. No corporation can survive with unlimited -- only the US government can survive with unlimited liability because of its taxing power, but not the private sector as you know. That's our answer to your question.

Okay. So I guess I take it that you think you shouldn't really impact any of your other subsidiaries?

We do not believe so.

Okay. That's helpful. And then just separately, earlier you mentioned having performed very detailed analytics on the mortgage insurance operation. What gives you the confidence that there will be positive value from a run-off and that you wouldn't have to potentially inject even more capital than this original $100 million that you mentioned or add to the reserves of that business?

The $100 million, again, is intended to be placed in what Chris has referred to as Republic Mortgage Insurance Company of North Carolina, which is the Company that we are holding out as a potential successor, if you will, for new business. With respect to the run-off, and I believe Chris addressed that when he said that we look at different metrics and so forth, and the specific metrics that we look at are metrics that are usually looked at by all insurance companies whenever a line of insurance produces poor underwriting results. And we refer to that in the insurance business as a premium deficiency reserve type of calculation. And in its simplest terms, a premium deficiency reserve, or PDR, basically involves modeling techniques which attempt to estimate the amount of premiums that will be received over a period of time, as 1 of us indicated before, the mortgage guarantee business policy can extend over 20, 30 years, right? So we attempt to determine how much premiums are going to be received on a closed book of business and we attempt to determine how many claims and how much claims and expenses are going to be incurred over that same period during which the premiums will be received. Now, as in all models, the assumptions that go into them involve judgment. And judgments by definitions are not infallible. However, to date, the calculations we have made with respect to the mortgage guarantee business ever since it got into difficulty in mid year 2007 have indicated that, based on our past experience and the best knowledge we have that, that set of assumptions as to what the future premiums will be and what future claims will be has played out to the point that we would be in positive capital territory at the end of the rainbow. Okay?

Now, if anything happens subsequent to each of these studies, what we do -- that's negative or positive for that matter, what we do is we revise our assumptions and play them out again to determine whether the results will be more positive, as positive or negative. So as I've said to you so far, there are never any guarantees, as you know, but we feel comfortable that based on what we see, absent not knowing what the future holds, nobody knows that, that we feel comfortable that the business would play out favorably in the event of a run-off.

Okay, great. Thank you for that explanation.

And we have a follow-up call with Beth Malone with Wunderlich Securities.

Thank you. Chris, you mentioned there was severity that contributed to the losses in the mortgage insurance.

Just very slight. It was not a driving force in there.

So I wasn't sure, how do you get severity in mortgage insurance though?

You get more payment as a percentage of the ultimate exposure than you were getting previously, so --

Oh, okay.

An easy way to think about it is if you've got loans hung up forever in a foreclosure status and you accrue more expenses and more costs, you're likely to pay a greater portion of those under your optional guarantee.

Okay, but that trend wasn't necessarily the big concern for you then?

No, no. The big concerns were the other ones.

Of which there's enough, I guess. Okay, do you -- are you seeing in terms of statistical information available to you now, are you seeing anything? I saw on the press release that you said delinquencies were declining but what about cure rates or other indications that this is at all stabilizing?

The cure rates I would say have been of a concern. I think through 2010, and I don't have the numbers in front of me but the trends are there, I think we had a fairly solid -- at least through the last 3 quarters -- increasing ratio of cures in relation to, I think, measured against beginning delinquents. That trend turned the other way in the second quarter. And I think that was something that we didn't anticipate that the cures did not perform along the trend line that had been there for a while. And again, I think if you look to cures, you've got to look to the general housing market and say how many people simply weren't able to sell a house that they were trying to sell that was in some delinquency status? Or how many people simply gave up and the payment as opposed to continuing to scrape to get by? So that would be the additional thing in there, Beth, that was a little bit discomforting in the second quarter.

Okay, thank you.

We'll take our next question with David Lapierre with Loomis Sayles.

Hi. Thanks for having the call.

Hi.

Just quickly, I think you already answered this but is there any sort of approval required from the regulators to put the flagship into run-off or is that something that they don't need to approve?

Well, I think what occurred, David, is we had been operating under a waiver from the primary regulator which is the North Carolina Department of Insurance. The flagship Company Republic Mortgage Insurance Company is domiciled to the state of North Carolina. Its risk-to-capital ratio for the last little over 2 years has been running above the regulatory maximum of 25 to 1 -- that being $1 of capital for every $25 of current risk. So we were operating above that level with the waiver. That waiver expired at the end of June and then was extended until the end of August. The department was then of the opinion they were no longer going to grant the waiver, so that's in essence the action that leads you to stop writing business, as opposed to an independent action that you would then have to return to the department to have blessed.

And the moment you stop writing new business, therefore you automatically go into effectively a run-off operation. And again, as we think we mentioned before, there are many, many precedents in the various states as to how run-offs are conducted in this country and they usually are conducted by -- typically by the former or existing managements of a particular company under the supervision of insurance departments, whose function is to make sure that the assets of the company that is in run-off and all the values that, that company can acquire by way of, again, future premiums and so forth, are solely dedicated to the preservation of those assets and the payment of legitimate claims posted against a company. That's what typically happens.

Okay, great. Also, could you just refresh my memory on the split of risk in force between the 3 separate mortgage insurance Companies?

The bulk of the risk in force, I think there's about $16.5 billion, $17 billion of risk in force in the group and the bulk of that is all with Republic Mortgage Insurance Company, the flagship operate.

Okay. And do you break out the capital in the other 2 divisions?

We do. The $445 million -- I don't have the numbers in front of us, David -- but the $445 million, I believe is roughly -- and that's a GAAP number incidentally.

Okay.

The $445 million -- I believe it's about 1/3 in the RMICNC and there's a little bit in that Florida Company and the rest of it rests in the flagship Company, as Chris and I have been referring to it.

Okay, great.

Yes.

Thank you.

You're welcome.

At this time we have no further questions. I'd like to turn the call back to Al Zucaro for any closing comments.

Well thank you. We appreciate your continued interest in our Company. We wish we had had better news to report but we think that our Company, which has been around for over 90 years now I guess, will continue to do well once we overcome these what we believe to be temporary difficulties. With that, we'll wish you a good afternoon. Thank you.

Ladies and gentlemen, this does conclude today's conference call. Thank you for attending.