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Old Republic International Corp. (NYSE:ORI)

Combines Mortgage and CCI Business News Release Conference Transcript

February 22, 2012 3:00 PM ET

Executives

Scott Eckstein – Financial Relations Board

Al Zucaro – Chairman and CEO

Analysts

Bill Laemmel – Divine Capital Markets

Operator

At this time, we are about to begin. Good everyone. And welcome to the Old Republic Combines Mortgage and CCI Businesses News Release Conference Call. Today’s conference is being recorded.

At this time, I would like to turn the call over to Mr. Scott Eckstein of the Financial Relations Board. You may begin.

Scott Eckstein

Thank you, Operator. Good afternoon, everyone. And thank you for joining us today for Old Republic’s conference call to discuss 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 this call may involve forward-looking statements as discussed in the press release dated March 21, 2012. Risks associated with these statements can be found in the company’s latest SEC filings.

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

Al Zucaro

Thank you, Scott, and good afternoon to everybody. The news release we issued yesterday afternoon after the market close. It was issued really as a follow-up to what we’ve been reporting and saying for quite a long time now about our Mortgage Guaranty business and its prospects, as well as the impact it has had on Old Republic’s business during the past four or five years.

I might -- before I go on here I might ask that it would be useful -- I’ll indicate that it might be useful, given how we are approaching this conversation this afternoon. It might be useful to if you have the news release and the exhibits that were posted on the website yesterday afternoon in front of you, as we’ll be referring to them as we go on.

Specifically, what we are saying and what we are confirming through this release is that once again we are firm in the idea that we would not be putting anymore capital in the MI Mortgage Guaranty segment unless, A, we could have written new business in a separately capitalized company; and B, ultimately change the risk management model of the business, which obviously, has shown itself to be quite large for both ourselves and the rest of the Mortgage Guaranty and related industries.

Our ability to remain in the business as is anyway was foreclosed in August of 2011 when the regulators were no longer extend and we understand that we no longer extend a minimum capital waiver pursuant to which we have been operating for couple of years or so.

And our ability to remain into business by writing new production through as we had wanted to do through a separately capitalized insurance subsidiary was similarly foreclosed as we could not obtain permission or as we were not allowed and we understand that as well, to do so, from both regulatory, as well as GSE approved certain points.

And finally, the ability to do anything, but to runoff the business enforce was in case in covenants so to speak, given our agreement to an order of supervision that was issued by our key North Carolina insurance regulatory authority in January of this year.

So starting with the August 2011 event, we obviously began to evaluate all of our options in regard to the Mortgage Guaranty capitalization needs and we looked at that in the context of the state of the MI industry. We looked at it in terms of our best guess about the near and long-term prospects of that industry and of course, in terms of our vision for Old Republic’s long-term underwriting objectives as a well-diversified insurance-based enterprise.

So now we come to this and those options have crystalized to the point where there is no doubt, whatsoever, that our Mortgage Guaranty business together with the much smaller and somewhat related involvement we have in the CCI line will in fact be separated from the Old Republic consolidation within the next several months.

We expect that separation will take place in one or two, or maybe three ways that we are evaluating still, but each whatever way we select will be what we consider to be a most economically efficient from the standpoint of the Old Republic creditors, debt holders and of course, our shareholders.

We’ll report on the actual message we choose to reset the separation as soon as we’re able to close the loop on several necessary regulatory matters that are currently in course of resolution.

A byproduct of the decision to separate those two lines from the Old Republic consolidated business is to -- in our view, is to give much greater clarity to the outlook for the continuing parts of our business and of course, more specifically, our general entitled insurance lines and as well to give greater clarity to the financial condition, the financial flexibility, the liquidity and the dividend paying capacity of the Old Republic holding company system.

Yesterday, as I had said, we posted on our website a statistical set of -- statistical exhibit that’s related to the news release which provides, we think, context to what I just said and as I said earlier hopefully, you’re able to follow this conversation by reference to these schedules that are part of that exhibit.

So if we look at Schedule A, it shows the basic balance sheet configuration of RFIG, which is the new name we’ve adopted or the trade name we’ve adopted for this marriage of our Mortgage Guaranty and CCI lines. Whereas Schedule B shows Old Republic’s consolidated balance sheet, those before and after the separation of the Mortgage Guaranty and CCI lines through the reconfigured RFIG.

A particular note, I think here is the fact that the key balance sheet strengths and the ratios related to that strength remain as strong and as they’ve been, both before, again and after the planned disposition of RFIG. Schedules C and C-1 show the RFIG performance as the reconstituted holder of both the Mortgage Guaranty and CCI lines, which are the two franchises obviously that we are disposing off in one manner or another.

Schedules D and D-1 show the Old Republic General Insurance Group’s performance for the last five years, both with and without the CCI line which we’re moving into RFIG as indicated. And then Schedules E and E-2 show the Old Republic International consolidated business performance for the last five years again with and without the reconstituted RFIG impact on the consolidated results for those years.

And then finally, I would say that in a very important way, we think that Schedule F brings into sharp focus, deposited bottom line, dividend paying capacity and holding company liquidity effects that the RFIG separation would have had in the past five years and prospectively, if these past five years trends should repeat themselves in the foreseeable future.

Specifically, Schedule F part II of it shows that Old Republic’s consolidated business ex the MI and CCI involvement produced very stable earnings and beginning in 2011, I think reflects an indication of a positive turnaround in those our general entitled insurance lines.

On the same Schedule F part III of it, it shows that our dividend paying capacity that could be upstreamed to the holding company was largely unaffected by the catastrophic bottomlined results in the MI and CCI portions of our business.

And those of you who followed Old Republic know that we have been saying this very steadily that over many years, our General Insurance business, in particular, has been the key provider or the key element, if you will, of our dividend paying capacity upstream. Federal business has been little more volatile as you know for us but nonetheless overtime has been also a reliable provider of dividend paying capacity.

So there again, you see in this part III, that what I just said, as in fact, continued unabated during the past five years, during which we have had to contend with the catastrophic events that have affected our Mortgage Guaranty and CCI product lines.

In Schedule F part IV, we show that the dividends that were actually upstreamed to the Old Republic holding company level that they retained reasonable symmetry and consistency with the capacity shown in part three of the schedule.

And as I look at part V of Schedule F, it shows that the dividends that we actually paid to the Old Republic shareholders during the last five years have remained well within the historical boundaries of both overall dividend capacity on one hand, and the actual dividend flows to the holding company that stands from that capacity.

So, in summary, we think that this very -- this observable and very tangible evidence on the Schedule F poise to -- on the one hand, Old Republic’s possible earning power ex MI and CCI as well as to the flexibility that the holding company has maintained and has retained to address it’s liquidity needs including the facility it has in the continuation through year-end 2011 of its long dividend paying history.

We also think that the composite information that’s provided by all of the schedules in the exhibit show that Old Republic International is well positioned to meet its debt maturities, both scheduled and by that I mean, the $316 million that’s coming due in May of this year, as well as those that maybe possibly unscheduled, if these should occur in 2012.

So together with that dividend paying capacity together with the money we have in the system, which are still as we speak within a range of $600 million to $700 million. As well as I may add to the fact that the capital markets are in much better pay -- much better positioned, much more receptive. We think of a -- if we should have a need at Old Republic to raise new funds in the event that the unscheduled maturity should come to pay us in 2012.

Certainly, those markets today particularly when it comes to any kind of investment grade as we are convertible security, which we could consider down the road, if necessary, would be very welcome by the market we think.

That’s the end of my model log. So now, we’ll open this up to any questions that any of you that are on interactive mode wish to raise.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) First, we’ll go to Bill Laemmel with Divine Capital Markets.

Bill Laemmel – Divine Capital Markets

Aldo?

Al Zucaro

How are you, Bill?

Bill Laemmel – Divine Capital Markets

I’m pretty good. I want to thank you very much for giving all those effort to clarify things further. And now, I take if there are still a number of items between you and state of North Carolina which have to be -- which are open and they have to be decided?

Al Zucaro

Well, right now with respect to the state of North Carolina, we’re proceeding to run the mortgage guaranty business according with its order, supervision. And so really we do not have any issue to resolve with that insurance department.

Bill Laemmel – Divine Capital Markets

Okay. And thank you very much.

Al Zucaro

Yeah, sir.

Operator

(Operator Instructions) We have no questions further. I’ll turn the call back over to Mr. Zucaro for any additional or closing remarks.

Al Zucaro

Okay. Unfortunately, there are no questions -- no further questions. I assume that this is fundamentally a non-event for everyone that follows Old Republic. And so, whatever is out there, we appreciate your interest. So we thank you and bid you a good afternoon.

Operator

And this does conclude today’s conference and [we do thank you for your participation today].

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