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Old Republic International Corporation (NYSE:ORI)

Partial Leveraged Buyout and Planned Spin-Off of its RFIG Subsidiary’s Stock to ORI Shareholders Conference Call

May 22, 2012 11:00 am ET

Executives

Scott Eckstein – Investor Relations

Aldo C. Zucaro – Chairman and Chief Executive Officer

Christopher S. Nard – President and Chief Operating Officer

Analysts

Jim Ryan – Morningstar

Geoffrey Dunn – Dowling & Partners Securities, LLC

Tom Reynolds – Perkins

William Laemmel – Divine Capital Markets

Thomas Kahn – Kahn Brothers & Co.

Geoff Dancey – Cutler Capital Management

Alan Zimmerman – Macquarie Research Equities

Jim Agah – Millennium Partners

Matthew Howlett – Macquarie Research Equities

Darius Brawn – SAC Capital Advisors

Operator

Please standby. Good day ladies and gentlemen thank you for standing by and welcome to the Old Republic International update conference call. Today’s call is being recorded. At this time all participants are in a listen-only mode. Following today’s presentation we will conduct a question-and-answer session and 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 Scott Eckstein of the Financial Relations Board. Please go ahead sir.

Scott Eckstein

Thank you, operator. Good morning everyone and thank you for joining us today for Old Republic’s conference call to discuss its news release. Yesterday afternoon we distributed a copy of the press release. If there is 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 that this call may involve forward-looking statements as discussed in the press release dated May 21, 2012. Risks associated with these statements can be found in the company’s 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.

Aldo C. Zukaro

Thank you, Scott and good morning to everyone. I hope that you’ve all seen yesterday’s news release, which is obviously just a follow-up to what we’ve been saying for quite a while now. And of course that’s that within the Old Republic Holding Company system, we had simply run out of steam so to speak. To provide additional financing to the MI and CCI business lines, in light of the accumulative loses that had been incurred in those lines, since 2007.

And even though we certainly have a fair amount of cash, that we could have added to those businesses. Most of that money however stems from both funds, which we didn’t want to exposed to the repayment risk that exists with any long-term commitment such as the mortgage guaranty insurance or CCI lines. In our view, which we’ve held for the longest of times, these lines have got to be mostly funded with permanent capital. We also did not want to capitalize the business by moving into our MI company’s capital. This stock ownership of various of our general entitled holdings to the possible detriment of policyholders of these companies. We think we believe strongly that this is a critical element in our enterprise risk management objective and that is to not stack or pyramid or otherwise engage in double or triple leveraging of our institution and other component products.

Given, I believe that there is a necessary economic need and true societal benefit in these products. We concluded that separating the combined MI and CCI businesses from the rest of the Old Republic Holding Company system was at this time, the most practical way of at once running off the legacy book and of laying the ground work for raising new capital for a reentry into these markets as quickly as feasible.

So, in light of these four basic considerations i.e. one, having run out of a permanent source of capital for these lines; two, believing in the long-term economic necessity of these products; three, retaining a strong infrastructure to both run-off the legacy book in the most economical and fairly executed basis at our disposal and four keeping the RFIG corporate vehicle in place to enable its recapitalization down the road, with these considerations in mind and just as importantly if not more importantly in keeping the Old Republic shareholders interests at the forefront, we’ve devised this two part spin-off strategy, which is outlined in the release.

First of all, we’ve now sold as you can see a roughly a 20.6% interest to a group that include several of our key people in both the MI and CCI lines as well as three individual investors with extremely well established credentials in the insurance business. We prize the 20.6% interest at a level, which at once reflects the current and unfortunately growing negative equity of RFIG and provides however, for an up side prize adjustment in the event that the OTC, over the counter post spin-off market comes up with a higher price.

So in this way we believe we are providing both the necessary incentive to the LBO participants and we are also allowing the capital market’s post spin-off to impact the value of these incentives and capital contributions.

Secondly, we’ve kept the ORI shareholders interest firmly in the mix by turning over to them substantially all the remaining, which should be around 79% or so. RFIG shares that we currently own within the Old Republic Holding Company system.

In effect the Old Republic shareholders retain substantially all the equity and other tangible and intangible interests they currently have in RFIG, and in the post spin-off world they’ll obviously keep first their Old Republic shares, which will then be cast as a well performing property and liability as well as title insurance business with good growth prospects. And two, they will receive an RFIG stock certificate, which carries both the current residual values of the enterprise as well as a free call so to speak on the upside potential of RFIG as it navigates toward a re-capitalization and ultimately a reactivation of the combined MI and CCI businesses.

If you’ve downloaded the news release and the related statistical exhibit we posted on our website yesterday afternoon, you’ll see that RFIG’s negative equity account at the end of March of this year amounted to about $17.5 million, and this we think it’s important to remember that this is a net number, which is made up of a reasonably stable CCI capitalization of about $16.5 million, most of which is lodged in a property and liability insurance charter to carry the CCI run-off and hopefully new CCI business, as we reactivate that line. As well as about $15 million in one of our three MI company charters that is fully licensed and that can be reactivated in short order.

So the point here is that we have viable underwriting vehicles to reenter the markets as soon as we can, recapitalize them and as soon as we can obtain the necessary regulatory and other clearances to reenter the business. Most importantly we think we’ve got, and believe strongly that we have the critical infrastructure, which is in our case made up of the people talents that are expected to remain well engaged in this process of running off the book on the one hand and reestablishing the company as a viable participant in the marketplace.

We will be filing as we indicated in the news release yesterday a registration statement in the next several days, so called Form 10 with the SEC, and there you will see details about RFIG’s business, the risk factors that are attempted to it, it’s intermediate and long-term objectives and the governance structure that’s in place to manage the company as a stand-alone enterprise going forward.

Most importantly, we think you will read and see a clear-cut statement of the company’s mission. As we mentioned in yesterday’s news release, Chris Nard who is currently Old Republic’s President will take on the objectives and the challenge of leading the charge and executing that mission. So maybe Chris, so you can take a few minutes to provide an outline of what that mission is and what we’re about to do.

Christopher S. Nard

Sure. We’re really focused on three things in a newly public RFIG, and that is first and foremost, always the responsibility that we have to runoff the book in the most efficient and highest quality manner possible for the policyholders and then that’s always our first priority. The second thing we’re focused on, is we look to the future at RFIG is the ability to use what we think is a very low-cost infrastructure that we built in Winston-Salem, North Carolina to be able to support other runoff activities, to be able to support other system needs in the market and continually utilize our loss mitigation services possibly to unaffiliated party. And then thirdly as Al mentioned early on to take the opportunity to try to get these businesses recapitalize to see if we are able to re-enter the market on a primary mortgage insurance side. As Al clearly mentioned certainly there are regulatory and other approvals that need to be obtained to do that. But we’ve always thought that the mortgage guaranty in the CCI businesses, more important businesses to the economy.

I think this last bump in the housing markets from 2007 on have shown nothing if they haven’t shown that high LTV mortgages are very volatile assets, under stress. In spite of that, high LTV mortgages are important to getting the housing economy re-started in the country. So we think the bios going forward will certainly be to maintain access to high LTV loans in the country but to have more private capitals supporting that risk not less.

So that gives us some confidence in our outlook for the business.

Aldo C. Zucaro

Okay, so there you’ve it. The execution of the strategy that we telegraphed sometime ago and our purpose driven objectives in establishing two separate businesses in a manner that should and can be in the best interests of long-term Old Republic shareholders as well as our debt holders.

So, now as we said before hand, we’ll open it up to whatever questions may be out there.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll hear first from Jim Ryan with Morningstar.

Jim Ryan – Morningstar

Good morning.

Aldo C. Zucaro

Hi, how are you?

Jim Ryan – Morningstar

Good. Just wondering about the effect this might have on your remaining convert in terms of any acceleration provisions or anything along those lines?

Aldo C. Zucaro

Well, of course as I’m sure you can well imagine, we’ve looked very clearly, very in much detail at those issues, obviously we have just like everybody else access to some of the best accountants and lawyers in the business. And we feel very comfortable that this is eminently doable in the context of that issue that remains on our books. So we should be able to navigate with that fairly easily we believe.

Jim Ryan – Morningstar

Okay. Looking forward, with the remaining two business lines, are there any covenants in the existing convert that you have to be careful off in terms of general or title insurance like you had with the MI or are they the same or is there anything else to think about there?

Aldo C. Zucaro

So, the key issue, as you know has been the fear that one or more of our MI companies might be placed in receivership and that fear would exist relative to our other insurance companies. Now at this point in time we have no expectations certainly that the MI companies are going to be placed in receivership, but with respect to the continuing Old Republic business we don’t have any fear that any of those property and liability or title insurance companies are exposed to any kind of receivership or such negative outcomes.

So we think we will be solid, that’s why I said, as I indicated in my closing comments that we think that both the shareholders and the debt holders are well protected through the execution of this strategy.

Jim Ryan – Morningstar

Great, thank you very much.

Aldo C. Zucaro

Yes, sir.

Operator

We’ll take our next question from Geoffrey Dunn with Dowling & Partners.

Geoffrey Dunn – Dowling & Partners Securities, LLC

Thank you, good morning.

Aldo C. Zucaro

Hi Geoff.

Christopher S. Nard

Hi Geoff.

Geoffrey Dunn – Dowling & Partners Securities, LLC

I guess two questions, number one is, is it fair to assume on a recap effort that at a minimum it will be something that would have to take you out of the DPO. And then secondly, have you had any preliminary sessions with the [GFP] about whether or not they would let you back in as an underwriter?

Aldo C. Zucaro

Okay. And so far as the DPO is concerned that as we speak applies to just one of our MI companies and it applies potentially to a second company. It does not apply to the third company that I mentioned before. So therefore in our strategy, we’re assuming that it will be a while, before, with or without DPO that those two companies would be freed up to reenter the market. So we are casting a line with the third mortgage guaranty company.

As to your question, Jeff, about the acceptability of that company, when we capitalized to the GSC’s or whomever only time what we will tell, part of our strategy is going to be to say and to have a voice in how the mortgage guaranty business is remodeled and specifically what we’re talking about is the idea that you absolutely need to address the catastrophic exposure that’s inherent to that line of insurance.

So what we will attempt to achieve is not just to reenter the business, but to reenter it in such fashion that clearly provides for some protection that in the event that there is a reoccurrence of the fiasco we have experienced since 2007 that the money will be in place to address that exposure. So we’ve got work cut out for us, but we think if only as a public service that it is necessary for us to follow the road that we have set for ourselves.

Geoffrey Dunn – Dowling & Partners Securities, LLC

Okay. And then just the last follow-up. what specifically is the incremental capital is coming in from the partial LBO?

Aldo C. Zucaro

Very little.

Geoffrey Dunn – Dowling & Partners Securities, LLC

Okay. Are you able to give those out or is that not being disclosed?

Aldo C. Zucaro

It will be set forth in the Form 10, which we will be publishing in the next couple of days or I should say filing with the SEC in the next couple of days, which you will see Jeff, that we have priced that LBO with an adjustment, as I indicated before that reflects the post market, value post spin-off I should say, evaluation of the RFIG stock. so that we have attempted to provide both an incentive as I say, an upside sold to the LBO buyers, but also I’ve come up with a mechanism that attenuates that upside potential based on market considerations.

Geoffrey Dunn – Dowling & Partners Securities, LLC

Okay, thank you.

Operator

(Operator Instructions) We’ll hear next from (inaudible).

Unidentified Analyst

Good morning.

Aldo C. Zucaro

Hi.

Unidentified Analyst

Just a follow-up, yeah, are you able to give that post spin evaluation now or do we have to wait a couple of days for the Form 10?

Aldo C. Zucaro

Well, as I just indicated, the value of the company was predicated of the fact that, it has currently a negative equity of about $17.5 million, and as we’ve indicated, we have every expectation that the MI portion of the business is going to continue to generate losses this year and probably next year, so that implies that negative equity account is going to grow in a negative sense. And it was in light of that in fact we looked at existing one or more existing situations that are publicly held out there specifically we looked at a company by the name of Triad Corporation, which is currently in run-off in the mortgage guaranty business. And of course we look at the two GSEs, which as you know are insolvent but still have their shares priced by the market for very small amounts of money.

So we took all of that into consideration in setting the LBO price, but as again as I indicated we put in a for lack of a better word or expression, a true-up adjustment such that post spin-off the market will decide as to what the value is of that LBO the shares we sold through the LBO as well as the shares that we in fact distribute to the Old Republic shareholders and that valuation will go that market valuation, I should say will go also to determining the value of the dividend in kind that we are distributing to the shareholders.

So I’m trying to say, what I’m trying to say here is that we looked at a composite picture and we looked at the impact not just on in pricing the product, in pricing the shares I should say, on both the LBO purchases, which include as I indicated some key managers as well as outside investors, and the Old Republic shareholder interests going forward.

Unidentified Analyst

And I appreciate the color. Just mechanically if you can outline the checklist and the timing, obviously you had indicated that you’re going to file the Form 10 over the next several days, week or two. What else needs to be done with respect to getting this corporate action completed?

Aldo C. Zucaro

Well nothing, it’s all been approved by the distribution as well as the LBO approach were approved by the Old Republic Board. We have prepared the Form 10 to be filed in the next couple of days with the SEC that Form 10 has been poured over in great detail by both internal accountants and lawyers as well as external accountants and lawyers.

So we think we’ve got a good feel for what we are about to send to the SEC and that is going to be a matter of giving the Securities and Exchange Commission staff time to review the material. Get back to us with any questions or comment they may have, for us to then address that, and we think that entire process is likely going to be to extend over as a bear minimum, a 30 day period and most likely a 45 day period.

So it is possible that we will be out of the gate by the end of the June, but realistically we think that the spin-off to the Old Republic shareholders will, in fact, occur probably by the middle of July. Those are our expectations as we speak.

Operator

And Mr. (Inaudible) is there anything further, Sir.

Unidentified Analyst

No, thank you. Thanks, very much.

Operator

We’ll take the next question from Tom Reynolds with Perkins

Tom Reynolds – Perkins

Hi, just wanted to confront that the investor group is directly investing into the spin co i.e., no more ORI shares issued.

Aldo C. Zucaro

Well, absolutely the LBO purchases are again Senior Managers in the MI and CCI business as well as and includes three individuals with significant insurance industry, experience are only buying RFIG shares. And so far as Old Republic shares are concerned the only thing that’s going to happen is that the Old Republic shareholders are going to get another piece of paper, as soon as the form is passed upon by the SEC. and that will be shares in RFIG, Old Republic shares are not involved at all in any of this.

Tom Reynolds – Perkins

Good and the 30 to 45 days interest spin or maybe you know mid July timeframe are the regulators okay with this. Any approvals needed from them that we need to watch, and then the other thing is if CCI is going to be taken out of the general insurance companies and putting into RFIG, you need customer approvals for that or other regulatory approvals for that or has all that been taken care of and we are just waiting on the SEC for a mid July spin?

Aldo C. Zucaro

The short answer is what you just said, we think that all that we need right now is the SEC review and it’s bringing up of the Form 10, so that we can in fact proceed with the spin-off. And so far as regulatory approvals we have received the regulatory approvals we needed and they relate primarily or exclusively I should say to the CCI company that we’ve moved from the General Insurance segment to the RFIG segment. That company incidentally has been established as a reinsurance assuming reinsurance company for the run-off of the CCI business, so that it will have to ingratiate itself and obtain a following from lenders and whatever to whom the new product will be issued down the road. Does that answer your question Tom?

Tom Reynolds – Perkins

Yeah and just to clarify so the RFIG is going to reinsure the CCI book from ORI or?

Aldo C. Zucaro

Correct from one of our the lead company that’s been producing business, that business is in run-off, that business has been in run-off since 2008. It’s been in run-off true Old Republic insurance company, which is our flagship company, which has been writing that product since the early 1950s. And so what we are doing now is really to move that run-off to the RFIG CCI insurance company, and then establishing that company with additional capital et cetera as a policy issuing company going forward. So what you will have over a period of time is that company will act as again, an assuming reinsurer from Old Republic insurance company relative to the runoff and as a new policy insurer going forward for the CCI business.

Tom Reynolds – Perkins

Okay. And any conversations of rating entries on this, but I think it was, A.M. Best was had a negative view of kind of the runoff taken on MI as it relates to customer claims for other businesses so I don't know what they, if you’d shared this plan with them at all and what their thoughts are?

Aldo C. Zucaro

Yeah. We've given the three key rating agencies we deal with namely, S&P, Moody’s and A.M. Best a heads up on this thing, obviously we cannot speak for their reaction, but to the extent that any of them had any concerns about the possible infection of that MI and CCI lines would have on the rest of our general insurance or title insurance business, we have shown so far and through this process that we are now following, it should be clear to them or anybody else that that’s not going to happen that there are sufficient and very effective, firewalls around all of our insurance companies in general insurance and title insurance, and those firewalls cannot be breached by these two lines. That will not happen. That’s one of the reasons Tom that I indicated again that we were absolutely against the idea of potentially capitalizing the MI and CCI lines with the stock of our general insurance companies or title insurance companies because under no circumstances that we want the policyholders of those companies to be exposed to any negative outcome that is possible with respect to the RFIG book of business.

Tom Reynolds – Perkins

Thank you.

Aldo C. Zucaro

Yes, sir.

Operator

We’ll take our next question from Bill Laemmel with Divine Capital Markets.

William Laemmel – Divine Capital Markets

Aldo?

Aldo C. Zucaro

Good morning.

William Laemmel – Divine Capital Markets

Well an interesting idea, now I think that as time goes on here that the title and the general insurance business continued to prolong with the $3.7 billion, which is in equity at the present time. Also that the RFIG, which is under – well, the mortgage guaranty, which is under the run-off provisions of North Carolina that’s going to continue also and that program looks workable as far as we’ve gotten into the present time, and what seen by the amount of capital in RFIG that this would be the case. Just wanted to check those items and thank you.

Aldo C. Zucaro

Yeah, well again Bill and everyone we have no control over what the North Carolina regulators can or would do. All we know is that there has been very, we’ve had a very good working relationship with that department, and that so far they’ve been very amenable to the request we had to in fact allow the mortgage guaranty business to be in the run-off state through the so called DPO approach to the business, which gives these companies in run-off the ability to buy time to come up with the premiums and assets et cetera, which maximizes the benefit to the policyholders and their beneficiaries.

So far so good, as I indicated before we are not assuming that we would get back in the business through major vehicle right now because only time will tell as to what it’s capital will look like or what it’s future will look like until several years have elapsed, and that’s why we are in fact tying our kites to the other – to the third mortgage insurance company, which with adequate capital and also acceptance by the marketplace more specifically the GSEs and other lenders can get back in business.

William Laemmel – Divine Capital Markets

Well, thank you.

Aldo C. Zucaro

Yes sir.

Operator

We’ll go next to Thomas Kahn with Kahn Brothers.

Thomas Kahn – Kahn Brothers & Co.

Hi, good morning, Al.

Aldo C. Zucaro

How are you?

Thomas Kahn – Kahn Brothers & Co.

Good, thank you. Two quickies, just to be sure. Once this transaction is complete, the new ORI will be completely separated from all liabilities of the mortgage companies and CCI that’s interrogatory even though it didn’t sound like it?

Aldo C. Zucaro

This clear-cut you will see in the Form 10, Tom, that the mortgage guaranty business will be a stand-alone company within RFIG as it has been, and that the CCI business as I indicated before, will be in a runoff status within the RFIG until it can get back, get into a licensed position. now I should say to you however that again as you will see, as everyone will see in the Form 10 filing that there is litigation attached to both the mortgage guaranty business as well as the CCI business. Now with respect to the litigation exposures of the mortgage guaranty business, those stay there so those again will stay outside of the Old Republic family. The litigation exposures, which we do not believe are real, but nonetheless, they are litigation exposures will stay with Old Republic International such that we have built again, something like of a firewall around the RFIG property and liability company that will be running off the CCI product, but nonetheless if there are real litigation exposures in excess of the premiums that would be paid to that company. Then those exposures remain with Old Republic.

Thomas Kahn – Kahn Brothers & Co.

Okay, second and last question. Will we be getting some sort of a pro forma and when on the new ORI, so we can see what the new company will look like without the CCI and mortgage guaranty side?

Aldo C. Zucaro

Yeah, currently Tom there is a – we put a series of schedules in a statistical exhibit back in conjunction with the March 21 news release we put out, which addressed in part at least the strategy that we are now following, and I believe those are still very accessible on our website and you will see that we show exactly what you are looking for which is ORI consolidated, it shows the combination of the MI and CCI businesses, and then it shows therefore separately what ORI would look like without those businesses. Okay, so if you…

Thomas Kahn – Kahn Brothers & Co.

I’m looking at the pro forma in that release.

Aldo C. Zucaro

In the March 21 release.

Thomas Kahn – Kahn Brothers & Co.

Dated 5/21/12, eight pages.

Aldo C. Zucaro

Okay, that’s yesterday’s release.

Thomas Kahn – Kahn Brothers & Co.

Okay, I’m sorry.

Aldo C. Zucaro

Yeah, that’s yesterday’s release. I was referring Tom to the…

Thomas Kahn – Kahn Brothers & Co.

Anyone, I got it. Okay.

Aldo C. Zucaro

The first release and that one has got some fairly expensive set of schedules that I believe address your questions.

Thomas Kahn – Kahn Brothers & Co.

Well, that two 21 well I got confused. Thank you very much, Al.

Aldo C. Zucaro

Yes sir.

Operator

We’ll take our next question from Geoff Dancey with Cutler Capital Management.

Geoff Dancey – Cutler Capital Management

Good morning.

Aldo C. Zucaro

Good morning.

Geoff Dancey – Cutler Capital Management

I just have a question on the converts. I want to be clear I understand, are you saying that if, do you have to fund the $550 million due to put that you would have sufficient source of capital for that?

Aldo C. Zucaro

That’s what we have said, but we don’t think that this transaction causes an early redemption of the debenture. When you look at that debenture, there is as a matter of fact, a mechanism in place to adjust the exchange ratio embedded in that security and one of the elements that leads to the adjustment of that exchange ratio deal specifically with a transaction such as we are entertaining right now, which is a spin-off of a part of the business that specifically addressed in that security.

Geoff Dancey – Cutler Capital Management

Okay. Thank you.

Aldo C. Zucaro

Yes, sir.

Operator

We’ll take our next question come from Alan Zimmerman with Macquarie.

Alan Zimmerman – Macquarie Research Equities

Fine, thank you. Al, I just have a question on the tax status…

Aldo C. Zucaro

Are you the Alan Zimmerman that I’ve known for years?

Alan Zimmerman – Macquarie Research Equities

Still around as you are.

Aldo C. Zucaro

Son of a gun.

Alan Zimmerman – Macquarie Research Equities

Anyway, the question is on the tax status. So this is a taxable transaction and I would just wondering if you go through your thinking I mean you didn’t try to make it a tax free spin-off and I presume the logic is that there is not going to be a lot of taxes on the board either. The co-operation or the shareholders, but I was just curious that you go through the thinking.

Aldo C. Zucaro

And I think you are absolutely right on target. If our thought is correct is anywhere close to reality we don’t think that the spin-off stock of RFIG is going to have a high value attached to it, at least not initially. And therefore, the amount when you consider the fact that some 80%, 85% Alan of our stock of the Old Republic stock that is held by institutions and that includes mutual funds and pension plans and what have you.

I mean the tax impact either on individual shareholders or on institutional shareholders should be the minimum. So that’s why we took the position that the easy way out is to just allow the transaction to be categorized as a taxable event. It’s in fact framed as you can see as a dividend in kind, to the Old Republic shareholders who will get 79% of that stock after the considering the LBO shares.

And therefore it’s pretty much amount of that, and so that’s why I’d say you are on target as to what the thinking process was.

Alan Zimmerman – Macquarie Research Equities

And thank you.

Aldo C. Zucaro

Yes, Sir.

Operator

We’ll hear next from Jim Agah with Millennium Partners.

Jim Agah – Millennium Partners

Good morning. Al, can you walk through the $17.5 million of negative shareholders’ equity in historical RFIG in today’s supplement and how much equity is it CCI, and how much is in the three MI units?

Aldo C. Zucaro

Correct. This I should say $16.5 million in the CCI portion of the business and most of that is identified with the insurance company. The company had been talking about which is currently is an assuming reinsurer right of the run-off business.

Jim Agah – Millennium Partners

Right.

Aldo C. Zucaro

And is being set up as a policy issuing company once we can put enough capital in it, and come up with a necessary policy forms and so forth and so on. So you’ve got that…

Jim Agah – Millennium Partners

That’s right.

Aldo C. Zucaro

That this equity account. That was respect to our the mortgage guaranty side of the RFIG business. Okay, what you’ve got there is about $15 million roughly in one mortgage guaranty insurance company, which we have identified as the most likely candidate to get us back in the business as a fully licensed company. So any capital we would raise, right now our thinking process is that we would in fact put that capital in that one company. And then we’ve got about $14 million in a non-insurance company organization and that covers any number of assets both tangible and intangible, such assets are back-office processes, software, IT, IP equipment and so forth and so on. That’s the company that provides, that is the driver of the infrastructure assets we have in our mortgage guaranty business and to some limited extent in the CCI business.

and then offsetting that you’ve got about $62 million, call it $65 million currently of negative equity in two of the larger mortgage guaranty insurance companies. and those are the companies that I tried to indicate before right now, that we’re not at the moment counting on as vehicles that can be recapitalized to get back in the business. So whereas we’ve been operating the MI business with three insurers going forward right now, we are banking on just one of those, and the reason for that is that, that is the one relative to which we have the greatest certainty of its continued future viability of the run-off business notwithstanding.

Jim Agah – Millennium Partners

Okay, okay that's good. The two lines above that there’s a $177.8 million of debt?

Aldo C. Zucaro

It’s actually $180 million and when that we had $175 million of debt until I don’t know February of this year. In anticipation of executing these plans, we added $5 million of debt.

And then we took and that represented either three or four separate notes, which in fact emerged or rose back as far back as 2008, okay. We combined those four notes into a single note of $180 million in February or early March of this year. And concurrent with that, we issued to Old Republic warrants to acquire 18 million shares of RFIG down the road at the same price as we set for the LBO shares, okay.

When we did that the accounting rules required therefore that part of the consideration of these notes of $180 million be allocated to the related detachable warrants that were issued. And the result of that is that we went through a typical pricing model and came up with a couple of $3 million as I recall two point something million. And that’s why, you see on that pro forma balance sheet, a $177 million versus the $180 million that means that roughly to the difference between that number and $180 million was allocated to the valuation of the warrants.

Jim Agah – Millennium Partners

And then the warrants are included in the pro forma shares outstanding or no?

Aldo C. Zucaro

No, they’re not. Because they’ve not been exercised.

Jim Agah – Millennium Partners

Okay, so there is $60 million once they are exercised or so.

Aldo C. Zucaro

I beg your pardon.

Jim Agah – Millennium Partners

There is $60 million down the road once they are executed?

Aldo C. Zucaro

Yeah, you’d have 41.3 million roughly of shares and if we execute those warrants down the road then you’d have obviously 59 million or 60 million roughly, correct.

Jim Agah – Millennium Partners

Alright. The 10-Qs go through some of the mortgage guaranty’s operating results?

Aldo C. Zucaro

I’m sorry, what was the first word.

Jim Agah – Millennium Partners

The 10-Q that I’m looking at…

Aldo C. Zucaro

Okay.

Jim Agah – Millennium Partners

Goes through some of the mortgage guaranty operating statistic?

Aldo C. Zucaro

Okay.

Jim Agah – Millennium Partners

Like loss severity, average loss severity by state and then in general for the portfolio, what are the reserves on loan right now.

Aldo C. Zucaro

Yeah, I figured whether we have reserve numbers as of March 31, but I can say to you clearly that those reserve numbers have not changed dramatically from what they were at the end of December and certainly you will see them in the next couple of days when that Form 10 is filed with the SEC.

Jim Agah – Millennium Partners

Okay, thanks Al.

Aldo C. Zucaro

Yes sir.

Operator

Our next question comes from Matt Howlett with Macquarie.

Matthew Howlett – Macquarie Research Equities

Hello Aldo thanks for taking my question. You guys show a break down the cash hold of the MI company and run-off I know you’ve said that it’s going to be negative for a while, it’s going to be three years before the tales turns positive. Do we have more details on that?

Aldo C. Zucaro

On cash flows?

Matthew Howlett – Macquarie Research Equities

Yes.

Aldo C. Zucaro

Yeah, what you will see again in this Form 10, that you will see the cash flow numbers for at least the last three years I think.

Matthew Howlett – Macquarie Research Equities

I mean the forward cash flow in the projection.

Aldo C. Zucaro

No, no. The only thing we can say to you is the same thing, we’ve been saying for a while now and that is that the models that we use, both the standard models that we have used traditionally in our mortgage guaranty business or even making assumptions that increase the expectation of losses in that standard model. That growth models show that 2013 – and 2012, I should say and 2013 as a minimum are likely going to be producing negative underwriting results for us and for all kinds of purposes, those negative underwriting results are going to equate to similar negative cash flows, okay?

Matthew Howlett – Macquarie Research Equities

Okay. I guess be to it that sales turned positive, like that I’d say that as it relates to the claims paying ability of the mortgage, that the run-off and you’re paying 50% of your claims for effectively, you’ll go towards paying 100% when the cash flow turn positive, and you’ll make up the deficit that you’d afford until that time, [is that fair] to understand that?

Aldo C. Zucaro

Yeah. I mean it’s the answer to that question, I’ve got to make some assumptions as to how quickly the DPO can be extinguished and thereby reach a point when the powers that’d be mostly the regulators right beside that, okay, there is enough money and until now and the cash register to pay this 50% portion of the claims that has accumulated over a period of time.

Right now, our feeling is for its worth and our model show and the feeling is based on those models that it would be at least nine years before you get to that point, which means 2021 when you can get to a situation where, having gone through the next couple of years, 2012, 2013 and maybe even 2014, I mean nobody really knows how long it will be. But after that the model show that we are up with positive cash flows in the business. So that the composition of the negative cash flows between 2012, 2013, maybe 2014 and subsequent years all the way to 2021 get us hopefully to the point where there is enough money as I say to pay off that 50% deferred payment obligation, okay.

We have a unique; we think a relatively unique perspective at RFIG and Old Republic in how long it takes to run-off books of mortgage guaranty business. I know you’re too young to know this Matt, but there was a company called Ticor mortgage insurance back in the 1980s that became insolvent and RMIC, our mortgage guaranty company, ran-off that book of business on behalf of a consortium of mortgage guaranty insurers. And it took the better part of 10 years to exhaust that process, that’s how long it took. Today it may take us long, right, to run-off this book for us. That’s why, I say it won’t be until 2021, 2022 whereabouts, when we’ll know what the outcome of that run-off has been – because – okay.

Christopher S. Nard

That said, I mean the bottom line is the policy holders i.e. the GSEs, (inaudible) that we have to wait to get…

Aldo C. Zucaro

Correct, correct. And the DPO mechanism is a relatively unique approach to the run-off of an insurance company’s business. And it was an approach that was in fact first effected in for all practical purposes in that old Ticor Mortgage run-off that I mentioned before and when it became again became drafted in more recent times to the Triad Corporation, which accounted was put in a run-off position. And now is applicable to our mortgage guaranty business.

So it’s a well tested mechanism for in fact buying time. And in fact telling the policy holders that listen onto have the system, work itself out and we’re going to do or don’t just to run-off this book of business, and as Chris said before, in a very efficient, economically efficient manner such that we maximize the amount of cash that’s ultimately in the cash register to pay off this remaining 50% obligation.

Matthew Howlett – Macquarie Research Equities

It sounds like a terrific strategy particularly if they like you reactivate their the third subject of the calm that, and it sounds like a tariff strategy, and I guess this is the last question. You thought that were breaking in free experienced insurance guys with the LBO. Are they mortgage guys or they like P&C guys, can you sort of elaborate who this investor group is?

Christopher S. Nard

Just be a little patient, you’ll see their names in the Form 10 that’s going to be as I say filed with the SEC in the next couple of days. And I’m sure that you and others will recognize them to be end of the jewels of great substance in the insurance business and we think that we feel very blessed to have got their interest in helping RFIG to get back in the business down the road in a very robust risk managed approach that we have in mind.

Matthew Howlett – Macquarie Research Equities

Thanks a lot, congratulations.

Aldo C. Zucaro

Yes, sir.

Operator

And we’ll take our final question today from Chris Rae with SAC Capital.

Darius Brawn – SAC Capital Advisors

Hi, guys. Thanks for taking my question. It’s actually Darius Brawn. Just a couple of related questions, first, could you comment on the amount of cash at the holding company now?

Aldo C. Zucaro

Which, the Old Republic holding company?

Darius Brawn – SAC Capital Advisors

Correct.

Aldo C. Zucaro

Yeah, it’s around 400 and some odd million, we had – we were sitting on something like 700 and odd million at the end of March, and then as you may have seen, we indicated that we paid off the $316 million convertible debt that came due in mid-May, so therefore 700 less 300 is basically 400.

Darius Brawn – SAC Capital Advisors

Okay, great. And then can you comment on any future capital planning at Old Republic to remain co, maybe intention to do more convert, perhaps raise more common. and then finally, what are your thoughts with respect to the dividend?

Aldo C. Zucaro

We currently believe based on our view of the growth prospects of the general insurance companies and the title companies that we have the ability to grow those companies at a 10% to 12% clip relative to the top line without injecting more capital into them, okay? So what I’m saying to you is that unless we had an opportunity to grow at a faster rate of that. we would not need capital in those companies unless we had an opportunity to acquire a book of business or a company, which would require a substantially greater amount of capital in either of those businesses, we would not need additional capital.

Darius Brawn – SAC Capital Advisors

Okay. And is that primarily a function of improved pricing that you’re able to grow the top line without more capital?

Aldo C. Zucaro

It’s both a combination of that as well as the ability, which we think we have to grow our existing business organically. we think we’ve got very good prospects to keep our market share in the title business at the high levels that have been achieved in the last couple of three years.

And secondly, we think that we’ve got a very surety of general insurance business that can grow both on the basis as I say, of some price increases mostly in our case, in the workers comp area, but in other areas as well. So we have got both growth prospects organically as well as the potential to acquire books of business, which is our preference generally.

Darius Brawn – SAC Capital Advisors

Okay, great. Thank you.

Aldo C. Zucaro

Yes, sir.

Operator

And with that ending our question-and-answer session, Mr. Zucaro, I’ll turn things back over to you for any additional or closing comments, sir.

Aldo C. Zucaro

Okay, well, we appreciate very much the interest. We think we’ve got a good plan that we will be executing and we think that that plan is a win-win plan for all concerned. It’s win-win in terms of our people, our customers, in the mortgage guaranty and CCI lines, not to blab, but we think we’ve got a great bunch of people and a great time tested book of knowledge among our people that can in fact help us remain a positive force in the marketplace for mortgage guaranty and CCI insurance.

And then with respect to our general and title insurance businesses, which are going to be the core of what remains post spin-off, as I just said, we couldn’t be more comfortable and confident about the liability of those businesses to be growth engines for our Old Republic shareholder. So having said that again thank you for your interest and just stay on the look out for this coming filing of ours, when I’m sure you’ll see greater clarity about the strategy we are following in this combined LBO and spin-off of the business. Having said that I’ll bid you a good morning and look forward to visiting with you the next time we've something important to say.

Operator

And that concludes today’s conference, thank you all once again for your participation. And have a wonderful day.

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Source: Old Republic International's CEO Presents at Partial Leveraged Buyout and Planned Spin-Off of its RFIG Subsidiary's Stock to ORI Shareholders Conference (Transcript)
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