Old Republic International's CEO Hosts Old RMIC Corrective Plan Call (Transcript)

Sep.24.12 | About: Old Republic (ORI)

Old Republic International Corporation (NYSE:ORI)

Old Republic International RMIC Corrective Plan Call

September 24, 2012 10:30 am ET

Executives

Scott Eckstein - MWW Group, IR

Al Zucaro - Chairman and Chief Executive Officer

Chris Nard - President and Chief Executive Officer, Republic Financial Indemnity Group, Inc.

Analysts

Don Taylor - Franklin Templeton

Thomas Khan - Khan Brothers

Jim Ryan - Morningstar

David Lapierre - Loomis Sayles

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Old Republic International RMIC Corrective Plan Call. Just a reminder, 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 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 I would now like to turn the conference over to Scott Eckstein with MWW Group. Scott, please go ahead.

Scott Eckstein

Thank you, operator. Good afternoon, everyone, and thank for joining us today for Old Republic’s conference call to discuss its news release. This morning, 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. 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 morning to everyone. I am sitting in an office here with Chris Nard who is our CEO of the mortgage guarantee companies among other things that he does around here as well as Spencer LeRoy, who is our General Counsel, and I have got them here just in case there should be questions I may not be as well equipped to address.

In addressing this morning's news release, it's probably a good idea to spend a few minutes to think of it in the context of what has transpired relative to our mortgage guarantee business in the past 12 months or so. So, going back to August of 2011, when the minimum capital waiver pursuant to which we had been operating, when that waiver was not extended by the North Carolina Department of Insurance, which is our main regulator for that part of our business, the waiver expired, and at that point therefore stopped writing any new business and we placed the entire segment in what we've called a run-off operating mode.

In this run-off situation, the operation was downsized very gradually so that we could focus on the basics of collecting renewal premiums on business produced in August 2011 and prior periods, as well as settle all legitimate claims presented to us. Our expectations then and were and continue to be that a run-off would mostly likely extend at least over a decade, so as to allow for a sufficiently long period of time for most future premiums to arise and relative to the in force book of business and for legitimate claims to be settled and paid.

In October of 2011, we submitted an initial corrective plan to the North Carolina Department of Insurance, and in substance of that plan asked for the authority for RMIC to in fact run-off the book of business over an indefinite period time and to make a partial cash payment of 60% on all settled claims from that point forward. The remaining 40% in that plan would be held in reserve and would be paid at a future when there would be greater assurance that sufficient funds have been accumulated from all premiums to pay off the 40% unpaid balance.

After this filing that was made with the regulator, the regulator issued a Summary Order on January 19th of this year, and that order effectively place our flagship mortgage guarantee subsidiaries run-off under the supervision of the North Carolina Department of Insurance.

Now, this order responded to an accelerating depletion of the capital of our flagship carrier and that depletion was of course mainly due to the unprecedented level of claim costs that were being incurred and were likely to be incurred going forward. The order also listed a variety of business activities that required regulatory approval. It also required that all claims instead of being paid in cash to the extent of 60% as we had recommended that they'd be paid to the extent of 50% in cash and that the remaining 50% later than the original 40% be held in reserve for payment again at a later date.

The order also provided for the development as well as the implementation of a more or less final corrective plan that would be designed to bring our mortgage guarantee carrier into compliance of capital and other provisions of the North Carolina statutes.

North Carolina Department of Insurance Summary Order of January 19, 2012, also called for an informal conference which was to be held, and in fact took place, on February 22 of this year, and that conference was to be opened to RMIC's policyholders as well as other interested stakeholders. This conference was set up for the purpose of resolving any potential disputes which could arise relative to the terms and the provisions of the order as well as to narrow any issues with regard to any possible disputes or differences of opinion among those stakeholders.

So, in that informal conference which was held in February, the Senior Deputy Commissioner announced that the department would engage first of all an independent qualified actuarial firm to determine whether the 50% deferred payment obligation plan was appropriate and whether it should be set at some other percentage level. So, now rolling forward, following the department's receipt of that analysis, the Deputy Commissioner announced that the department would sent out a notice to convene a formal administrative hearing, which would also be opened to policyholders and to public.

Following this hearing, which you've seen in this morning's news release, is set for October 16, 2012, and the current anticipation is that a new order will be issued to approve a final deferred payment obligation approach through a plan, a corrective plan that would be intended to extend over several years.

So, if you've had a chance to read at least the executive summary of the September 14, 2012 corrective plan, we just submitted and that's attached to the news release of this morning, you will see that our basic recommendation is to, one, increase the initial cash portion of all settled claims to 60% rather than the current 50%, which came about again in February of this year. And, two, that this revised 60-40 approach remain in place at least through December 31, 2021 with RMIC's continued operation under supervision of the NCDOI.

In this context, in this manner Old Republic would therefore retain ownership of the RMIC companies subject to the DPO run-off, deferred payment obligation plan run-off until such future date as the North Carolina Department of insurance approved the payment of the 40%, which again is to be held in reserve.

As you can read in our corrective plan, our best guess at the moment is that, even with a so called highly stressed future claim scenario and a relatively low investment yields on invested assets, we should be able to pay something on the order of 88% of forecasted reserves, inclusive of the 40% DPO as of year end 2021. So, if you do a quick calculation, together with the 60% upfront cash payment that we are recommending, this 88% implies that under the high stress loss scenario, we would pay approximately 95% of all claims settled between January 19, 2012 and December 31, 2021.

You get to that 95% incidentally again just by multiplying the 40% by 88%, which gives you 35% and you add the 35% to the 60% and it's so plateau you get to 95%. So, there you have it. That's the plan that will be discussed at the October hearing and we think that this plan can bring the run-off to the most satisfactory conclusion for the greatest number of stakeholders. Of course, our expectations, as always, are all driven by a 10-year model which takes into account a large number of assumptions as we've discussed in past conference calls.

Of course the most critical of these assumptions include the level of foreclosures that for one reason or another, have been held in advance by mortgage banks and others, future levels of foreclosures that have not yet occurred. The future levels of claim rescissions. And, of course as I indicated before, the future level of investment yields on our invested asset base, and of course related to all of this the country's economic revival as well its impact on employment levels which obviously drive peoples' ability to make timely payments on their debts.

So, at this time, I guess, bottom line is that we are reasonably confident that the worst is over and that the MI segment in renewal will more likely would not turn the corner into profitability sometimes in 2014, and that given time hopefully through December 31, 2021 that there should be enough funds in the cash register to pay something on the order cumulatively of 95% of all claims settled from January of this year to December 31, 2021.

Thus the end extent of the comments that we were prepared to make, and as was announced initially, we'll open up this conference call to any questions you may have.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). We'll go to Don Taylor at Franklin Templeton.

Don Taylor - Franklin Templeton

Good morning. Just curious, once the 60%-40% plan is in place, is there a scenario where that would be change in subsequent date and what might that be?

Al Zucaro

I am sorry, Don. I did not get the first part of your question. Can you repeat it?

Don Taylor - Franklin Templeton

Assuming this plan goes into effect, is there a scenario in the next several years where the plan could then be changed, or is this pretty much fixed in place for the next long-term October 2021?

Al Zucaro

Well, the answer to that, Don, is that obviously RMIC would continue under North Carolina Department of Insurance Supervision, and then we'll be reporting, on a timely basis, all of our activities so that both, we and the department will always be in a position to determine whether there should be an acceleration of the plan whether we could pay more or perished a thought pay less than the 60% that is being proposed. All of that obviously lies in the future and the only thing we can say at this point in time again is that we think that over a 10-year period, 60-40 works well and it is most likely the greatest benefits for the claimers.

Don Taylor - Franklin Templeton

Okay. I'm trying to get a sense as to how sensitive changes in environment might beat this plan. I mean, I've got a significant change or could it frequently change?

Al Zucaro

Well, as I said before, an awful lot rests on the level of foreclosures that are unloaded on the system, and what happens to housing and mortgage lending over the next several years only time can tell, so that's the greatest sensitivity to use your word in this plan has to do with the levels of foreclosures and the level of recessions, okay? The rest of it is dependent on the general economy and so forth and so on.

So as we've said several times, Don, we have continued to in fact model forecasts on the basis of what we refer to is a standard model, and that standard model indicates that we should be able to pay $0.100 on the $1. Then we have used at the Insurance Department's request a so called high stress loss scenario, and that's the loss scenario that we are using to in fact conclude and recommend this 60-40 approach and its possible payout percentage down the road. I mean, this is the best we can offer right now.

We are obviously going to keep looking at this thing, but the thing to keep in mind is that as long as the run-off remains in this current status, which is that it remains under the supervision of the North Carolina Department and that RMIC is able to do that run-off, and that Old Republic continues to retain ownership of that company that this run-off can work very well. Irrespective of whether it stays at 60-40 or goes to a higher percentage like 70-30, or goes back down to a 50-50, okay? That's the key thing to remember.

Don Taylor - Franklin Templeton

Okay. Thank you.

Operator

Moving on, we'll go next to Thomas Khan at Khan Brothers.

Thomas Khan - Khan Brothers

Hi. Thank you, Al. What did you say about profitability in 2014? I missed it. Could you please explain what you said?

Al Zucaro

Yes. That's a little different than what we've said on several recent occasions, Tom, and that is that this forecast of ours shows that we are going to lose money this year, 2012. That's baked in, and that 2013 gets somewhat better, and that 2014 gets better than 2014, and indicates that perhaps the business turns the corner into profitability, okay? And, it's from that point forward from 2014 until 2021 in the plan that we have offered that the business should continue to generate therefore positive cash flow which is additive to the invested asset base and which in fact increases the amount of assets available to pay off the 40% deferred payment obligation that would have been held in reserve from this point forward until 2021.

Thomas Khan - Khan Brothers

I got it. And, this is only referring to the Mortgage Guarantee segment?

Al Zucaro

Correct.

Thomas Khan - Khan Brothers

We're not discussing the rest of ORI's business, correct?

Al Zucaro

Correct.

Thomas Khan - Khan Brothers

Okay. Great. Thank you very much, Al. Thank you.

Al Zucaro

Sir.

Operator

Our next question today is from Jim Ryan at Morningstar. Jim?

Jim Ryan – Morningstar

Good morning, Al.

Al Zucaro

Hi, Jim.

Jim Ryan – Morningstar

Could you give an update on the status of the mortgage insurance business since the end of the second quarter when you last reported, particularly in regards to delinquencies, claims, general conditions?

Al Zucaro

Correct. Okay. I'll let Chris speak to that.

Chris Nard

I think there has been no dramatic change in the business, Jim, since the end of the second quarter. I think, we've seen trends there continue to play out with the nominal seasonal adjustments, although I'd say maybe somewhat muted by the improvements in home prices in some of the areas in the country, but no dramatic reversals or surprises so far.

Jim Ryan – Morningstar

Okay. Thank you.

Operator

Our next question today is from David Lapierre with Loomis Sayles.

David Lapierre - Loomis Sayles

Hi. Thanks for the call.

Al Zucaro

Good morning, David.

David Lapierre - Loomis Sayles

Good morning. You had mentioned there is a the State of North Carolina was engaging a third-party actuary to look at the reserves and the plan. Would that report the release or is it just for their use in approving your corrective plan?

Al Zucaro

If you look at the release this morning, there is a reference to the order. And, when you look at the order which is attached to the release, you will see that there are two exhibits attached to it. One exhibit is an executive summary of the independent actuary's conclusions that was submitted to the North Carolina, the Department, okay?

Second exhibit is represented by the corrective plan that we submitted to the North Carolina, the Department on September 14, a couple of weeks ago. So, you do have at your disposal there at least the executive summary of that actuarial report.

David Lapierre - Loomis Sayles

Okay. Great. Excellent. Thank you very much.

Al Zucaro

Yes, sir.

Operator

Gentlemen, I have no further questions at this time. I would like to turn the call back to Manger, for any additional or concluding remarks.

Al Zucaro

Okay. Thank you. Well, we appreciate your continued interest in Old Republic, and hopefully the combination of the news release that we put out this morning and the attachments will be useful to you, our shareholders and all other stakeholders in gaining a current understanding our run-off situation of the Mortgage Guarantee business.

So, on that note, we'll wish you a good day.

Operator

Once again, ladies and gentlemen, that does conclude our conference for today. I'd like to thank everyone for your participation.

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