Old Republic International Corp (ORI) 2013 Q2 法說會逐字稿

Good day, everyone, and welcome to the Old Republic International second quarter 2013 earnings conference call. Today's conference 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 Mr. Scott Eckstein with MWW Group. Please go ahead, sir.

Thank you, operator. Good afternoon, and thank you for joining us today for Old Republic's conference call to discuss second quarter 2013 results. This morning, we distributed a copy of the press release. If there's anyone online who did not receive a copy you can access it at Old Republic's website which is www.oldrepublic.com.

Please be advised this call may involve forward-looking statements as discussed in the press release dated July 25, 2013. Risks associated with these statements can be found in the Company's latest SEC filings. Participating in today's call we have Al Zucaro, Chairman and Chief Executive Officer; Scott Rager, President of Old Republic; and Mark Bilbrey, President of the Title Insurance Group. At this time, I'd like to turn the call over to Al Zucaro for his opening remarks. Please go ahead.

Thank you, Scott, and good afternoon to all. As Scott just said, we have a somewhat different cast of characters than we've had of late. Specifically, Rande Yeager, who has been handling the Title Insurance discussion is away on a well-deserved vacation and doing the duties on his behalf will be Mark Bilbrey who is President of our Title Insurance business.

By the same token, Karl Mueller, who is our CFO, had to absent himself from the office and he usually discusses more of the financial matters relative to our Company, and I will cover for him this time around in his absence. So I'll start the ball rolling by saying that this year's second quarter also represents the second consecutive quarter of profitability since the onset of the so-called Great Recession in mid-2007. And as the old cliche has it, we're finally seeing, we believe, a light at the end of the tunnel and we're sure that it's not an oncoming train that's speeding toward another wreck. Each of our segments, including the run-off book of business, pulled together this past quarter as well as in the first half to achieve very good results for us.

And, of course, we, as you saw in the release, we added some icing, so to speak, to the cake by taking advantage of a good coincidence of stock market pricing on some securities, as well as a tax planning opportunity to book substantial realized investment gains in this year's second quarter. So addressing, first of all, the run-off book of business, which as you know, as you see, is composed of both the mortgage guarantee and the similar consumer credit indemnity coverages, the story for the second quarter and, as well as the year-to-date periods of 2013, is clearly stated, we think, in this morning's news release. I may say, I might say, that since last year's fourth quarter, we've been experiencing a very steady decline in loss provisions applicable to previously reported defaults that had been in reserve as of the preceding year-end. And as we point out in the release, the significantly lower claim provisions we've posted are affected mostly by the rate at which those previously reported defaults are curing themselves or are being closed out and thus eliminated from the inventory of open claims without a payment being made.

Anyone staying up-to-date on publicly available housing and the related mortgage lending, as well as the general employment trends in this country, is well aware that all of these factors are moving in a favorable direction. So it stands to reason that we should be experiencing this type of turnaround in claim costs. Still, we need to also note that we're still maintaining a relatively higher average claim reserve per loan in default that our overall claim reserves today are still a bit higher, as a matter of fact, than they were a year ago, that risk in force is down almost, what, 19% year over year. And that the traditional primary default rate is down about 7% from where it was, again, a year ago. So we say all of this because we think it sheds some additional light on the trend in claim costs so far this year in the mortgage guarantee business.

And finally, we also should take note of the fact that our better claim performance is not unique to us. Several of our MI competitors and the two GSEs, in particular, are also posting better results and have been doing so since last year-end, as I recall, and these better results seem to be based on the lower pressures from the claim side of the respective businesses, or so it seems from our vantage point. I might also note that in addition to the claim cost down trend we're experiencing in mortgage guarantee that it's worth seeing that we're operating the run-off at a very low expense ratio, even when you consider that we are experiencing a continued drop in the earned premium base for that business. And all the credit for managing the MI run-off so economically goes to what we're blessed with which is a very fine group of professionals who remain fully equipped to manage both a run-off, as well as active business in a most efficient and professional manner.

Of course, having said that, the $64 question at this juncture, of course, is whether these very favorable trends in mortgage guarantee claim costs can be expected to continue in the near term, and we really don't have a clear cut answer to this. But we can say that, I think fairly safely, that it is more likely than not that they would do so to some relative degree relative to the immediate past as reported, let's say, in 2012. With respect to the CCI portion of the business, which is also in run-off, the operating statistics we've reported in this morning's release on page 5 show a similar substantial reduction of year over year claim costs, as well as a very low expense ratio. This is, of course, a much smaller book of run-off business, but it is basically affected positively by the same, a very good positively pointing housing and general economy factors that we've just mentioned relative to mortgage guarantee. So all in all, this run-off book of business is producing much more beneficial results than we would have thought would be the case earlier this year when we put the final touches to our operating budget for the year. So having addressed this run-off book, I think I will turn it over to, I'll turn the phone over to Scott Rager for some of his additional comments on our General Insurance segment.

Thanks, Al. The General Insurance Group net premiums earned excluding the CCI business grew by 9.1% or just over $1 million. That's just about the average earned premium growth we've experienced in the past 18 months. This growth occurred principally in workers' compensation and commercial auto product lines and as our release stated aviation, construction, energy, home warranty, trucking and large account risk management specialty units were all up. Numbers in most operations are reflecting moderate rate increases and some continued organic growth due to a degree of economic impetus. Customer retention rates are trending upward in most operations and continue within our long-term expectations.

We're still seeing new opportunities in several underwriting units at various, as various competitors either rebalance their books by coverage or perhaps implement wholesale strategies to increase rate levels across an entire book of product line. In these situations, Old Republic's specialization really serves us well as to risk selection and individual account underwriting. Our General Insurance claim ratio year-to-date ticked upward, again, excluding the CCI book and run-off, to 73.1% versus the 71.1% for second quarter of 2012. We think that medical inflation and workers' compensation is the primary driver and general liability claims to a lesser degree. We continue to manage our expense line well as we have historically. The decrease in the expense ratio offsets the loss ratio increase resulting in a composite ratio of 97.4% through this year's second quarter, and that's down from 97.8% at Q2 2012.

By and large we're pleased with our position in General Insurance. We have good opportunities for growth at reasonable rate levels and that our underwriting culture should continue to serve us well as the year progresses. Now, I'll turn the phone over to Mark Bilbrey for comments on our extremely well-performing Title segment. Mark?

Thank you very much, Scott. It's good to report that the Title Group recorded its best ever second quarter in its history with a pretax profit of $40.4 million. That compares to $22.5 million in last year's second quarter. Our premiums and fees were up nearly 28%. We have had significant gains throughout the country in both agency and direct revenue. For the past 18 months, we've been averaging a gain of almost 25% per quarter. This increase was driven by an improving housing market combined with continued market share gains.

Our national market share for this year's first quarter, which is the most recent period available, was about 15% compared to 13.5% for all of 2012. 2013 should mark our seventh consecutive year of market share growth. Our expense ratio has been on a downward trend also since 2008 and that trend continues this quarter. The ratio declined to 86.2% from 88.3% in last year's second quarter. The claim ratio also continued its favorable down trend come in at 6.8% compared to 7.3% for the same quarter last year.

As we are continuing to grow, we're remaining very focused on managing both costs and risk. With the recent uptick in the interest rates, we're seeing some slowing in the refinance activity. However, these gains in purchase transactions are more than making up the difference. We remain very optimistic about our business and as long as interest rates remain relatively low, and economic activity continues to show progress, the housing sector should continue to improve. I'd now like to hand the phone back to Al Zucaro to address various ORI consolidated information and for additional comments and wrap up.

Okay, very good, Mark. So I'll take a few minutes, first of all, to address some key elements of our current financial situation. That's an area that Karl Mueller would otherwise cover if he was here today. In this morning's release, as you saw, we reported total assets of about $16.3 billion and that number is largely unchanged from year-end 2012, and is down modestly from the first quarter of this year. The investment portfolio grew slightly, I might say, during this latest quarter and the growth resulted from the addition of the positive operating cash flow that we reported in the release, but to some degree, obviously, this was offset by declines in the fair value of our fixed income portfolio due to the rising interest rate environment that was experienced in the second quarter, and as you know, bond prices work in the opposite order as rates go up or down.

As the release shows, we produced higher than normal realized investment gains during the quarter, as I indicated before, and the total net sales proceeds from those sales was about $157 million during the quarter, and we reinvested those proceeds and equity in fixed income securities that would produce about a 4.5% yield based on cost. So that should ultimately add a little bit more money to the investment income portion of the operating statement. As a result of doing that, the composition of the portfolio, therefore, remains pretty much consistent with prior year periods. On the liability side of the balance sheet, the overall claim reserves decreased slightly during the quarter, and consistent with last quarter, we believe this is reflective of both business growth in our General and Title Insurance operations and offset somewhat by declines by the RFIG runoff business by virtue of the factors that I mentioned before, which is the payment of claims on the one hand, as well as elimination of certain claim reserves due to their closed without payment.

During this year's second quarter and first half, the year-end reserve of 2012 developed favorably on an overall consolidated basis. Just as was the case in prior periods, our General Insurance reserves have trended favorably by a percentage point or two which is about average for us. We typically average 1% to 3% on a quarterly or even more importantly on an annual basis of one-year developments, so that favorable trend in developments has continued. And the Title Insurance reserves were -- so far this year have been spot on with the original estimate. So other than the reserve release that we mentioned before relative to our mortgage guarantee business, we're looking at same old same old insofar as reserve developments at General and Title Insurance.

As we've already noted this afternoon, and as well in the press release, the prior year's RFIG run-off segment, as I say, has developed favorably and is, in fact, producing or enhancing significantly the bottom line that we are posting for the first two quarters of this year. And, again, this is largely the result of the factors that we've enumerated in the news release. Elsewhere from a balance sheet standpoint, we ended the second quarter with a debt to equity ratio of, let's say, what, almost 16% and a debt to total capitalization of about 13.7%, almost 14%. And both of these relationships or ratios are substantially unchanged since year-end 2012, so we've got some fire power if we need to increase the amount of debt on the balance sheet. Not that we have any immediate plans to do that.

This morning, we reported that Old Republic from a consolidated standpoint ended the quarter with shareholders equity of almost $3.6 billion and that translates to $13.95 per share, as, again, you see in the news release, and that's down from $14.31 that we reported at the end of March. The operating earnings per share are in excess of the quarterly dividend and, therefore, they added $0.23 and $0.25 to book value for the quarter as well as the first half of this year. Of course, this was more than offset by the effect of the investment activity for the quarter and year-to-date periods, as some previously reported unrealized gains were, in fact, converted into realized gains that I mentioned before, as well as the offset being caused by the fair value of fixed income portfolio securities declining due, again, to the rising interest rate environment we've already mentioned.

From a parent Company standalone liquidity standpoint, we ended June with approximately $265 million of cash and highly liquid money market type of securities held at the both at the Holding Company as well as in our non-regulated agency service type of subsidiaries as opposed to Insurance Company subsidiaries. The dividend paying capacity from the regulated subsidiaries, as well as other sources of cash flows to the Holding Company, is substantially unchanged from the level at year-end 2012, and as a result, we do continue to believe that the sources of cash to the Holding Company are both sufficient, as well as sustainable, to meet our Holding Company obligations for the foreseeable future, including dividends to shareholders, as well as the interest on the debt securities that are lodged on the right side of the balance sheet.

So before we open this up to questions and answers, let me wrap up by saying this about what's happened so far this year in our business and what we see happening in the near term. As we said in the last few moments, each of our three segments is performing as well, if not better than we anticipated at the beginning of the year. With respect to the MI and CCI run-off books, our feeling is that we should be able to take a couple of steps forward and maybe a step back for awhile longer until the housing sector gains even greater stability, and as well as employment levels improving further ever so slowly as they have been doing for the past couple of years or so. The Title business should hum along very nicely given its very fine and still improving market share and cost of operations positions as Mark Bilbrey mentioned before. And as you know, as we reported over the last several years, our Title management team made huge investments in people and infrastructure resources in the depth of the Great Recession and to the end that together with our good name and our good reputation of the business, this is now paying off, and I think it's augurs very well for the future.

As we indicated in the release and, again, as Scott Rager noted, our largest segment of General Insurance has been experiencing some claim cost pressures in parts of the workers' compensation insurance line in particular. We've been dealing with this for the past couple of years or so, as those of you who follow us know, and we may well be, still be nicked here and there for a bit longer before the combination of both the ongoing rate increases and continuing refinements in our underwriting focus take hold in various parts of the system. But nonetheless, our overall General Insurance line is expected to reflect increasingly positive momentum as the next several quarters are lopped off the calendar. And as we've noted beforehand, our overall financial condition at ORI is very stable and it is more than sufficiently strong to enable us to grow our active business very successfully for the long run.

So there you have it insofar as our commentaries are concerned. So as was indicated before, again, we'll proceed with the questions-and-answer period. As appropriate, if you'll address your questions to me, I'll direct them to Scott or Mark or myself as the case may be.

Thank you, sir.

(Operator Instructions)

For our first question, we go to Jim Ryan with Morningstar.

Hi, good afternoon, Al.

Jim.

Question on General Insurance. I'm trying to get a handle on how much workers' comp may be affecting the composite ratio for General Insurance. So, my question is -- without workers' compensation, what would be the loss ratio for General Insurance or even, maybe, if you want to tell me, what the loss ratio is for workers' comp, maybe that would help.

I don't have the answer directly to that question. First of all, let me say this -- as to the first part of your question. I would guess, and I think it's a pretty good guess, you can bank on it, that it's maybe 45% of our comp business which is written in a traditional risk transfer basis. That's been creating some loss reserve issues for us.

As to the second part of your question, if you have access, Jim, to the statistical or the financial supplement that's posted on our website, you'll see, I think it's on page 4, that we show the loss ratios for each of our main coverages, including workers' comp. And I think you can easily calculate what the answer to your question would be. As I say, I don't have it here, but the comp ratio for 2010 by itself was 70.7%; for 2011 it was 72.3%; and year to date in 2013 it's 77.1%. So, it's been inching up steadily.

When you look at the other loss ratios, whether they are in commercial, automobile, or general liability, they've been inching up, but not to the same degree as workers' comp. But as I say, I think you can easily make the calculations, Jim. I wish I had them in front of me, and I don't have a calculator to do it, but I know you can do it.

Okay, thank you. Secondly, today it was reported by Lender Processing that after five months of improvement, the mortgage delinquencies rose dramatically in June, which would seem to time out with the increase in interest rates. And I'm wondering what your thoughts are in terms of the mortgage insurance? What happens if rates were to continue to rise? Does that automatically then mean more claims in the mortgage insurance business, or can you give me some thoughts on that?

Yes, well, common sense would tell you that if the factors that enter into the stability of mortgage payments is askew, that you are going to have an adverse impact on claim costs. I think in our case, you still have those government programs in place, HAMP and HARP, and those are very helpful to keeping the lid on claim costs. In our case, also with respect to the run-off book of business, we have a declining amount of in-force business. Our reserve structure on the per-claim basis, as I said before, I think, is very strong.

So, are we going to have a quid pro quo? My guess tells me no. By the same token, we've had several occasions, in the last three years in particular, of defaults going back and forth -- people going to default, and then they cure it, they start making two or three payments, and then they go back into default. And a lot of it is, of course, driven by employment in particular, and therefore, people's income and their ability to make timely payments on a pretty consistent basis.

The long and the short of it, yes, it could have an impact on us and the rest of the industry. How much? Who the heck knows. But I don't think by any stretch of the imagination, Jim, that we're going to go back to the kind of situation claim-cost-wise that we were looking at, let's say, at the beginning of 2012 or in 2011. I don't think that's in the cards.

Okay, one final question. I have been noticing the increase in the market share in the Title Insurance business.

Yes?

Is there any certain geographic area or certain programs or anything that is allowing this to happen? It is rising very dramatically.

Yes. Mark, do you want to address that?

Thank you, Al. Jim, I think our growth has really been across the entire footprint. We have -- it's kind of a reward for what we think we've been doing right for some time. We (inaudible - technical difficulty) really were chasing. If there's a chase involved, it's really trying to hit to the bottom line. And I think we continue focusing on providing the right services and the right way of doing business, the bottom line will take care of itself on that, and market share will come along. But I do think there's still areas of growth in that for us.

Okay, well, thank you.

You're welcome.

(Operator Instructions)

We go next to Stephen Mead with Anchor Capital Advisors.

Al, hi.

Hi, Stephen.

How are you?

Good.

Just a couple questions. As you look at the gains that you took in the quarter, what part of the investment account was most affected by that, or where were you taking your gains?

You mean which subsidiary or --?

No, no, no, just in terms of whether it was bonds or equities or --?

It was all equities, Jim. We had a number of equities which had done very well for us from a market value standpoint, and others not so well. So, as we indicated in the news release, some of the equities we had cut back in terms of their values -- book -- values on the books by taking impairment charges as early as 2008. And all of these equity securities that we sold were non-dividend-paying securities. And that's why I said before -- by reinvesting the proceeds of about $157 million, as I recall, in a combination of equities and bonds, both of which are yielding something, we should be improving the investment income going forward. But it was all equity securities that we sold.

How much of MGIC do you own at this point?

Well, as you know, we have to adhere to SEC rules as to our percentage ownership in any one security where we exceed 5%. So, the answer to that will come forth as we file those reports, as necessary.

Okay. The other thing is -- in the Title business, can you just talk about the mix of business between refi's and purchases, and what you were seeing with the increase in interest rates as the quarter came to a close? And then looking at the volume expectations in terms of the title business going forward, just shed -- if you can provide a little bit of guidance as far as the second half of the year, as it relates to refi's and purchases? And then looking at the margin or the expense ratio, as the mix changes, is there an impact on the margin in your Business in the Title business?

Boy, that's a loaded question, and I'm happy to turn it over to Mark Bilbrey.

Thank you, Al. There's no question -- the increases in the rates have impacted the refinances right away. We're seeing that activity start to slow down. But we're also seeing, on the purchase side, remain strong, and in a lot of areas still growing. And the rate, even though it's ticked up about 1% in the last month or so, is still a very good rate. As long as it stays, what I'd call realistic rate, along a fairly low rate, I think we'll do fine. Probably the inventory would be a bigger concern for me of available housing, but I think that will come along.

From the refi, how it impacts us -- we're probably about 35% refi driven. We're an agency-driven business in most cases, but that overall has dropped slightly. But for every drop we've had in that, we've had an increase in our purchase activity business. Since we are agency driven, a lot of the ups and the downs in the refi side do not impact us dollar for dollar like they might on a direct operation. And the direct operations we do have, we're very conscience of the fluctuations in that, and have been watching the costs very, very closely. Feel pretty positive about that end of the market as we go forward to the end of the year.

As it relates to the margin question or expense ratio?

Yes, that's what I was saying. On our expense margins, I do not see that having a negative impact on us. We watch those very closely -- and -- from a staffing side. And a lot of the refi business has been coming to us through various channels, agency markets, et cetera. So, I do not see that being a very negative effect for us at all.

But is a purchase mortgage more profitable for you?

Oh, there's no question, the purchase business is more profitable per order than the refinance business.

And then the other question I had, Al, for you -- just looking at some of the detail on the run-off business in the mortgage insurance business --

Yes?

The thing that struck me was -- as you look at the vintage in the -- what you still have in terms of insurance in force, and the persistency of that business, I was trying to get a sense for what -- in terms of expectations, who are these borrowers? And should persistency actually stay relatively high, and should that business stay on the books a lot longer, given the fact that people are living in a house with fairly high loan-to-value ratios based upon the vintage of that business or not -- am I going the wrong direction or the right direction?

No, no. I think, again, if you look at the statistics, particularly on page 7, as I'm looking at them now, of the supplement, statistical exhibit, you'll see that the loans that were made in 2008, 2009, '10 and '11, true enough on the declining scale because both we and the rest of the mortgage guarantee industry had less of a market share during those years. But whatever loans we did insure were pristine. Everybody was puckered up, and our underwriting and the lending standards were high. I think they remain high. Interest rates on those loans were low.

To the extent that you had HAMP and HARP affecting those loans, or loans issued in prior periods, it should make the quality of those loans better. So, the answer to your question is that they should stay on the books longer. But the fact that they stay on the books longer is not necessarily indicative that they are going to turn into defaults, permanent or otherwise, because, again, the faults get cured, as we experienced to a large degree in the first half of this year.

And the factors that affect those cures relate to the employment situation, to what's happening to home prices. As the home prices increase, and they've been increasing in many parts of the country, including parts of my area here in Chicago, then it means that fewer and fewer people are under water insofar as their mortgage loan is concerned. If there is a claim, then the mortgage insurer is more apt to get out of that situation by selling the place, and getting close to value.

So, those are not necessarily negative factors. The thing to keep in mind is that things are moving in the right direction, even though temporarily you may have hiccups in interest rates, and this and that, but things are getting better, okay? We're not going to go -- as I said before, I think we're about to take two steps forward, and maybe a step or half a step back, but we're going to be moving forward.

Okay. And then, in terms of the delinquent loans, and the progress on that, would you -- you -- and at the end of the first quarter or when you were talking about the first quarter, I think you kind of mentioned the fact that on a seasonal basis, you were in a favorable sort of seasonal position as it relates to delinquencies and the trends in the business. Things have turned out even better, but I was just wondering in terms of seasonal kind of impact now as we go forward, whether that seasonal impact has been totally overwhelmed or offset by the favorable trend in the business?

Well, you've got a good memory. We have been saying that for at least three years, as I recall, that, for whatever reason -- and I know I don't think anybody has been able to put their arms around it in the industry, but we certainly have not been able to put our arms around it -- is that the second half of the year tends to be somewhat worse than the first half of the year. So, it would stand to reason that the experience we've had in the first half may not necessarily, and will not necessarily, duplicate itself.

However, I did also say in the earlier comments, Steve, that our reserve levels with respect to current defaults -- more current defaults, has remained high, okay? We've not taken down reserves from that standpoint. We've only taken down reserves where it's been absolutely -- there has been absolutely no question that we would not have a claim, okay? Or that the claim went away because it got cured and so forth. It was black and white.

But where there is a question about whether claims are going to -- that have been defaults that have been reported to us are going to go into foreclosure or what have you, if anything, we have strengthened that. I know we did in the first quarter. And in the second quarter, we left it pretty much where it was. So, if there is a downturn due to any kind of seasonal aspects that we have experienced in the past, and could experience again, I think to a large degree they should be mitigated because of the relatively strong reserve position that we have maintained in all that book of business.

And one last thing and then I'll turn it over to somebody else. So, when I look at the resets across your portfolio, I guess, 74% or 73.5% resets and greater than five years, which would suggest, in terms of the current rise in interest rates, you have less sensitivity to that factor?

Yes, we do. We do, but, again, we've been burned so often in terms of our making predictions that we are kind of gun shy. I would only say this to you, repeat, again, what I've said before, Steve, and everybody else. Listen, we're not going to go back to the dark days of 2010 and 2011, or even the beginning of 2012. It doesn't feel that way.

Now, we may go there in a better climate in a stair-stepped fashion, yes, but we aren't going to go backwards all the way. It just doesn't feel that way from a judgmental standpoint, Steve.

Okay. Thanks.

Yes, sir.

And for our next question, we go to Ron Deysher with Pinnacle. I apologize, John Deysher.

That's okay. A quick question on the investment portfolio. I think you said that most of the proceeds from the sale of the equities went into dividend-paying stocks and bonds. What was the duration of the bond portfolio at the end of the quarter versus the end of the first quarter, if you have it?

I don't have that number, so I'm just going to go from memory. I don't think it's changed very much in the last three or four years, and it's around 4.2 or 4.3 years.

And you're comfortable with that level at this point?

Oh, yes. Listen, both from a duration standpoint, as well as average life standpoint of the portfolio, we could go further out if we wanted to, and still be on safe ground. So long as we stick with quality securities that we can hold until maturity in the case of bonds, and quality dividend-paying stocks that have got a long history of dividend stability. Or better still in our case, an improving dividend stream for many years. We've got good liquidity throughout the system, so that's not an issue, either duration or average life of the portfolio.

Very good, thank you.

Yes, sir.

It appears that we have one question left in the queue.

(Operator Instructions)

We'll take our next question from Ron Bobman with Capital Returns.

Hello.

Yes, sir.

I had just two questions. One on the mortgage business, and the other on the General Insurance. On the mortgage business, I was wondering, in light of what's developed at PMI and the Arizona Department's success in finding an interested party to purchase the platform, I'm wondering if there's any chance -- and I think you've answered this sort of negatively in the past, but I don't know if that's changed at all. But is there any chance that the Republic mortgage platform has sort of a second wind, and begins to write new business, either under the Old Republic umbrella or under someone else's?

Well, as you know, if you followed our Company, we attempted to take the mortgage guarantee business, as well as the CCI business, public last year through a spinoff for our shareholders. And that was the intent at the time to establish that combined platform as a standalone company that could access the capital markets. For reasons that were clearly stated, we backed off that proposition for a number of reasons having to do with the reasoning of stakeholders important to us.

But that does not mean that we have taken that idea, or any other idea relative to our mortgage guarantee and CCI business, off the table. So, I guess the answer to your question is that we will answer it at this time in the same negative way, as you recall, we gave when you raised the question before.

Okay. On the GI side of the Firm, I had a question as far as -- and there was some discussion about rates, and the order of magnitude of the rate increases in some of the various subsegments in the General Insurance business -- and I was wondering what the trend there is? Are rates that you're realizing in some of these individual lines pretty much sort of at the same level that they were 90 days ago, let's say? Or are they improving or pulling back at all? Thank you.

This is Scott Rager. I'd preface my response by saying, first of all, we have a very diverse group of operations, and the rate enhancements that we've seen over the last year or so vary by specialty underwriting. Some units have been basically flat, up to low-single digits, while others have been up by high-single digits to just a bit in excess of 10%. Our core business in total is probably averaging something in the mid-single-digit range.

I'd follow that by saying that the rate increase, the beneficial realization of rate increases is influenced by market competition. But as an underwriting Company, our best objective is to achieve rate adequacy irrespective of the cycles, and thus, our more steady underwriting returns. I think the press more recently has been centered on the workers' compensation book of business, and that is -- those rates are driven, of course, by state-approved loss costs, by class, and largely by individual industry for the most part. Those rates we see -- we've seen rates approved in the mid-single digits all the way up to the low-double digits. (multiple speakers)

I'm sorry, but what I was trying to focus on was the change -- like, what you're seeing now as to what you were seeing 90 days ago. Is the market enabling you to sort of get more rate, the same rate, or less rate, or less retention, I guess?

We're seeing a market that's roughly the same as it was about 90 days ago.

Okay, thanks a ton.

And with a follow-up question, we return to Stephen Mead with Anchor Capital Advisors.

Yes, if I can, Al, before you go, I can't resist this question. What's your take on whether the government really sort of sticks with, in a sense, the plan that's coming out from the FHA or the FHFA, or whatever it is, in terms of the merger of Freddie Mac and Fannie Mae, and the idea of pushing more of the underwriting of home finance back into the private sector?

Well, we think -- for what it's worth, we think that it is good government policy to try to reduce the exposure of the American taxpayer to the housing finance sector of the American economy. As to how they end up -- the government ends up doing that -- hell, we don't know. On the other hand, whatever it does in that area should be beneficial to the private sector.

You have to remember that the -- just looking at the mortgage guarantee industry, before it imploded starting in mid-year 2007, the industry had something close to $20 billion of statutory equity. And today, after having incurred all the losses that have been incurred, which fundamentally on an industry-wide basis wiped out that entire $20 billion, the industry is sitting on $6 billion, $7 billion of capital. And the last numbers we have are as of year-end 2012. So, it may be, let's say, $10 billion now, after some of the companies put in more money in there through either public floatings of securities or what have you.

So, the point is -- we're still at 50% of where we were as an industry in terms of committed capital. So, if the $20 billion was right as capital necessary to carry the private sector MI risk at the end of 2006, well, if the government on the other hand now ultimately reduces its interest in the mortgage insurance business through Freddie, Fannie, or what have you, well, then it stands to reason that there's going to be a need for much more capital in the private sector. Whether that capital is required by just the MI sector, or by a combination of the MI sector and the banking sector having to carry more of the -- or a sliver more of risk on the mortgages.

So, I think whatever happens, to the extent that the ultimate outcome is a reduction in the US government's direct or otherwise interest in mortgages that falls in the hands of the private sector, you're going to need more money in the business. And that augurs well, particularly -- and provided that underwriting standards remain at reasonable levels, so that we don't end up in the soup again, in terms of undermining standards, which to a large degree caused the implosion we've all experienced during this downturn that we are just beginning to come out of.

Does that answer your question, Steve?

Yes, no, no, no, and it provides a nice -- that's good. Thank you.

Yes, sir.

Okay?

And that does conclude today's question-and-answer session. At this time, I will turn the conference back over to management for any additional or closing comments.

Well, we don't have any more comments. We gave them in the first half hour of this visit, and here we are just about on top of the hour now, or thereabouts, and we appreciate very much the questions, and the interest that they evince on the part of all of our listeners and shareholders, what have you. So, we said that we wish you well for the rest of the day, and look forward to next quarter's visit and an update on our Business. Thank you.

Thank you.

And, ladies and gentlemen, this will conclude today's conference. Thank you for your participation.