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Rating Action:

Moody's affirms Old Republic's ratings, outlook changed to stable

Global Credit Research - 18 Oct 2013

$550 million convertible senior note outstanding.

New York, October 18, 2013 -- Moody's Investors Service has affirmed the debt rating of Old Republic International Corporation (NYSE: ORI; Baa3 senior unsecured debt) and the insurance financial strength (IFS) ratings of the lead operating subsidiaries of Old Republic General and Old Republic Title at A2 and changed the outlook on the ratings to stable from negative. The IFS ratings of the group's PMA subsidiaries were affirmed at A3 with a stable outlook.

RATINGS RATIONALE

Moody's said the change in outlook to stable from negative is based on stabilizing performance at Republic Mortgage Insurance Company (RMIC, unrated), the group's run off mortgage insurer, which in turn reduces the risk that a regulatory intervention could trigger an acceleration of the group's holding company debt. RMIC is currently operating under a plan, approved by its regulator, that defers a portion of its claims, thereby avoiding a possible liquidity shortfall stemming from the front loaded nature of claims relative to premiums.

Moody's analyst Paul Bauer said, "The improved macro environment for the mortgage sector has reduced the downside risk in RMIC's insured portfolio as its incurred losses have come down over time due to higher mortgage cure rates and gradually declining delinquency counts."

Property & Casualty Insurance

Moody's said the affirmation of the A2 IFS ratings on Old Republic General's lead operating subsidiaries reflects the group's strong franchise in specialty markets, good market presence in various niche lines of business, historic underwriting strength and focus, healthy long-term profitability (excluding the credit indemnity line), and strong risk adjusted capitalization. Challenges include the group's relatively modest scale in a highly competitive US commercial lines P&C market with a number of considerably larger national competitors, exposure to long-tail casualty lines with high-severity risk potential, and profitability challenges associated the low interest rate environment given long tail casualty lines such as workers' compensation.

The affirmation of the A3 IFS ratings on the PMA subsidiaries (acquired by ORI in October 2010) is based on the group's good workers' compensation franchise with solid business flow and stable retention rates. While Moody's believes that the PMA companies have a weaker stand-alone credit profile than the legacy Old Republic P&C companies, these subsidiaries nevertheless benefit from a 40% quota share reinsurance agreement with the Old Republic General Group, and from the more conservative financial management of the Old Republic organization, including higher reserve adequacy targets.

Factors that could result in an upgrade of Old Republic's P&C IFS ratings include: increased scale and business diversification while maintaining strong subsidiary capitalization; decreased earnings volatility; improved earnings through the cycle (e.g. returns on capital above 8%); and financial leverage (adjusted debt-to-capital) below 25% at the parent. Conversely, factors that could result in a downgrade of the P&C companies' IFS ratings include: inadequate coverage of parental obligations, including interest and stockholder dividends; increased underwriting leverage (e.g. gross underwriting leverage above 4.5x); return on capital in the mid-single digits or lower; meaningful adverse reserve development (greater than 4% of reserves), or increased financial leverage (e.g. adjusted debt-to-capital above 35%).

Title Insurance

Moody's said the affirmation of A2 IFS ratings of Old Republic's Title Insurance Group reflects its good capitalization as a result of low underwriting leverage, strong reserve adequacy, high asset quality, and its market position as one of the top three title insurers in the US. These strengths are tempered by volatile profitability (though Moody's expects strong earnings over the short term given ongoing elevated mortgage refinance activity and a partial recovery in resale activity) and by the group's modest scale in relation to some of its title insurance peers. Moody's notes that the ratings of title insurers have traditionally incorporated the expectation of volatility in revenue and profit margins, due to the fundamental cyclicality of the title insurance business caused by its dependence on real estate transactions and mortgage refinance volume.

Factors that could result in an upgrade of Old Republic's title insurance subsidiaries' IFS ratings include: a significant increase in market presence without sacrificing its currently sound financial fundamentals; a demonstration of an ability to maintain positive earnings and margins on the downward side of the title industry's underwriting cycle, and maintenance of low financial leverage (e.g. below 25%) at the parent. Factors that could lead to a downgrade of the title companies' IFS ratings include: a meaningful decrease in market presence (i.e. market share below 5%); worse than expected performance on the downward side of an industry cycle (i.e. losses greater than $50 million); or increased financial leverage (e.g. adjusted debt-to-capital above 35%).

Parent Company

Moody's said the affirmation of Old Republic's parent company debt rating reflects support from its general property & casualty and title subsidiaries, a moderate use of financial leverage, and high cash coverage metrics. The wider-than-normal 4 notches between the A2 financial strength of the group's general P&C and title operations and the company's Baa3 senior debt rating reflects the poor financial strength of the group's run-off mortgage insurance operation and the continued tail risk of adverse developments leading to a regulatory takeover of the unit, and triggering an event of default under the company's bond covenants and acceleration of debt outstanding.

Moody's stated however that the risk of regulatory intervention has declined and as a result the outlook on ORI was changed to stable from negative. Further supporting the stable outlook, Moody's believes that Old Republic has adequate contingency plans in place in the event that the company is required to redeem its senior notes.

Factors that could result in an upgrade of Old Republic's debt ratings include: a decreased risk that parent ORI would be required to support mortgage subsidiary RMIC in a worst case scenario such as regulatory supervision, insolvency, or rehabilitation; decreased risk that ORI could be required to fund an acceleration of its outstanding debt; or upgrade of insurance financial strength ratings of the company's P&C and title insurance subsidiaries. Factors that could lead to a downgrade of the parent company ratings include: increased concern that parent ORI may be required to provide further capital support to mortgage subsidiary RMIC; failure to address liquidity risks at the parent; downgrade of the IFS ratings of the company's lead operating companies; increased financial leverage (e.g. adjusted debt-to-capital above 35%); or reduction in cash coverage of interest below 4x.

The following ratings were affirmed and the outlook was changed to stable from negative:

Old Republic International Corporation -- senior unsecured debt of Baa3; and provisional senior unsecured shelf of (P)Baa3;

Bituminous Casualty Corp. -- insurance financial strength of A2;

Bituminous Fire & Marine Insurance Co. -- insurance financial strength of A2;

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

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

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

Mississippi Valley Title Insurance Company -- insurance financial strength of A2.

The following ratings were affirmed with a stable outlook:

Manufacturers Alliance Insurance Company -- insurance financial strength of A3;

Pennsylvania Manufacturers' Association Ins Co -- insurance financial strength of A3; and,

Pennsylvania Manufacturers Indemnity Company -- insurance financial strength of A3.

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, title insurance, and mortgage guaranty. During the first half of 2013, Old Republic reported total revenue of $2.7 billion, and net income of $250 million. As of June 30, 2013, shareholders' equity was $3.6 billion.

The principal methodologies used in this rating were Moody's Global Rating Methodology for Property and Casualty Insurers published in May 2010, Moody's Rating Methodology for U.S. Title Insurance Companies published in December 2011, and Moody's Global Methodology for Rating Mortgage Insurers published in December 2012. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Paul Bauer
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Robert Riegel
MD - Insurance
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's affirms Old Republic's ratings, outlook changed to stable
No Related Data.

 

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