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Rating Action:

Moody’s affirms Old Republic International’s ratings (senior debt at Baa2); stable outlook

29 October 2019

New York , October 29, 2019 – Moody's Investors Service ("Moody's") has affirmed the Baa2 senior debt rating of Old Republic International Corporation (Old Republic, NYSE: ORI; "Old Republic") and the A2 insurance financial strength (IFS) ratings of Old Republic's primary property and casualty (P&C) and title insurance subsidiaries. The outlook for the ratings is stable.

RATINGS RATIONALE

According to Moody's, the rating affirmation reflects Old Republic's diversified revenue and earnings from its general property & casualty (P&C) and title insurance subsidiaries, good profitability, moderate use of financial leverage, and high cash flow coverage metrics. Offsetting these strengths are exposure to volatile long tail commercial lines including workers' compensation, commercial auto and general liability, which have greater pricing and reserving risk and volatility of the title operations given reliance on mortgage refinance and resale transactions as well as a sizable common stock dividend that lowers financial flexibility.

For the first nine months of 2019, Old Republic reported net income of $780.6 million, a significant increase from $477 million for the prior year period. The increase reflected $439.3 million of unrealized pretax gains in the fair value of equity securities and continued solid earnings for its General Insurance (P&C) and title segments. The group's run-off mortgage insurance unit also generated pretax operating income of $22.8 million for the period.

The following factors could lead to an upgrade of ORI's ratings: upgrade of IFS ratings of the company's P&C and/or title insurance subsidiaries; consistent profitability (sustained returns on capital in excess of 8%); adjusted financial leverage consistently below 20%; interest coverage consistently above 6x. The following factors could lead to a downgrade of ORI's ratings: downgrade of the IFS ratings of the company's P&C and/or title insurance subsidiaries; a decline in shareholders' equity by 10% or more; adjusted financial leverage consistently over 35%; interest coverage consistently below 4x.

P&C Insurance Group

The affirmation of the A2 IFS ratings of the primary members of the Old Republic General Insurance Group is based on the group's strong P&C commercial markets franchise, countrywide portfolio of niche businesses, historic underwriting strength, and good risk-adjusted capitalization. Factors tempering these strengths include exposure to long tail casualty products such as workers' compensation, commercial auto, and general liability, which have greater pricing and reserve risk, and its relatively modest scale in US commercial lines versus larger national competitors. The rating agency added that Old Republic's workers' compensation net loss reserves accounted for about 53% of the P&C group's total reserves as of June 30, 2019, which is above its peer average. In addition, much of the business is written over large deductibles which tends to lengthen the duration of reserves and their sensitivity to shifts in claims inflation including medical inflation and the legal environment.

For the first nine months of 2019, Old Republic General reported GAAP pretax operating income (excluding investment gains) of $285.8 million, slightly higher than $279.1 for the prior year period, reflecting higher investment income from equity securities and more favorable prior year reserve development, partially offset by higher current year losses. For the first three quarters of 2019, the combined ratio deteriorated modestly to 97.1% from 96.8% in the prior year period, reflecting a higher current year loss ratio and expense growth, partially offset by more favorable reserve development.

The following factors could lead to an upgrade of the P&C Group's IFS ratings: increased scale and business diversification while maintaining strong subsidiary capitalization; improved profitability through the cycle (e.g. returns on capital consistently above 8%); gross underwriting leverage consistently below 3.2x; and, adjusted financial leverage at the parent consistently below 20%. The following factors could lead to a downgrade of the P&C Group's IFS ratings: gross underwriting leverage above 4.5x; return on capital consistently below the mid-single digit range or combined ratios at or above 103%; adverse reserve development greater than 4% of reserves; inadequate coverage of parental obligations, including interest and stockholder dividends; adjusted financial leverage at the parent above 35%.

Title Insurance Group

The affirmation of the A2 IFS rating of the Old Republic National Title Insurance Company reflects the group's position as the third largest US title insurer (15% market share), strong reserve adequacy, low underwriting leverage, and high asset quality. These strengths are tempered by the potential for volatility in the group's revenues and profit margins, reflecting the title industry's dependence on interest rates and the real estate sector. The company is also exposed to regulatory and legal risk. Despite its market ranking, Old Republic Title's scale is about half the size of its two larger peers.

Old Republic Title has posted strong earnings in recent years based on steady real estate purchase transactions coupled with home refinance and commercial transactions. For the first nine months of 2019, the group reported GAAP pretax operating income of $153.7 million, moderately down from $158.2 million for the prior year period mostly caused by lower favorable reserve development and rising general expenses.

The following factors could lead to an upgrade of the title insurer's rating: the demonstration of an ability to maintain positive earnings and margins on the down side of the title industry's underwriting cycle; maintenance of low financial leverage at the parent (e.g. below 20%); and an improvement in the macro mortgage issuance environment such that real estate sales transactions increase, reducing dependence on refinance volume. The following factors could lead to a downgrade of the title insurer's rating: meaningful decrease in market presence (i.e. market share below 5%); and worse than expected performance on the down side of an industry cycle (i.e. losses greater than a year's worth of earnings); increase in parent company willingness to use financial leverage (e.g. adjusted debt-to-capital above 35%).

The following ratings were affirmed:

Old Republic International Corporation -- senior unsecured debt at Baa2;

BITCO General Insurance -- insurance financial strength at A2;

BITCO National -- insurance financial strength at A2;

Great West Casualty Company -- insurance financial strength at A2;

Old Republic Insurance Co. -- insurance financial strength at A2;

Old Republic National Title Insurance Company -- insurance financial strength at A2;

Old Republic General Insurance Corp -- insurance financial strength at A2;

Manufacturers Alliance Insurance Company -- insurance financial strength at A2;

Pennsylvania Manufacturers' Association Insurance Company -- insurance financial strength at A2; and

Pennsylvania Manufacturers' Indemnity Company -- insurance financial strength at A2

The outlook for the ratings is stable.

Old Republic International Corporation, headquartered in Chicago, Illinois, is a multi-line insurance holding company whose subsidiaries are currently engaged primarily in property and casualty insurance and title insurance with a run-off mortgage guaranty business. For the first nine months of 2019, Old Republic reported total revenue of $4.8 billion and net income of $780.6 million. As of September 30, 2019, shareholders' equity was $5.8 billion.

The principal methodology used in rating Old Republic National Title Insurance Company was Title Insurers published in May 2018. The principal methodology used in rating BITCO General Insurance, BITCO National, Great West Casualty Company, Manufacturers Alliance Insurance Company, Old Republic General Insurance Corp, Old Republic Insurance Co., Pennsylvania Manufacturers' Association Insurance Company, and Pennsylvania Manufacturers' Indemnity Company was Property and Casualty Insurers published in May 2018. The principal methodologies used in rating Old Republic International Corporation were Property and Casualty Insurers published in May 2018, and Title Insurers published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jasper Cooper, CFA
VP-Sr Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

Sarah Hibler
Associate Managing Director
Financial Institutions Group
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

Releasing Office :
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

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