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Rating Action:

Moody's downgrades Old Republic senior debt to Baa2, review continues

16 Nov 2011

$913 million in outstanding debt; Republic Mortgage downgraded to Caa2; P&C and Title subsidiaries placed on review for downgrade

New York, November 16, 2011 -- Moody's Investors Service has downgraded the senior debt of Old Republic (NYSE: ORI) to Baa2 from Baa1; and the insurance financial strength (IFS) rating of Republic Mortgage Insurance Company (RMIC) to Caa2 from B1. The senior debt rating remains on review for possible downgrade, while the IFS ratings of the primary Old Republic General and Old Republic Title companies were placed on review for possible downgrade. The outlook for RMIC is negative.

RATINGS RATIONALE

The rating actions were prompted by continued deterioration at RMIC, the company's lead mortgage insurance company, and potential financial strain at ORI, the parent company, particularly if a regulatory takeover of the mortgage insurance operation triggers a technical default and early redemption of ORI's senior debt.

In explaining the rationale for Moody's rating action, Senior Credit Officer Paul Bauer said, "While Old Republic has indicated that it does not plan to add capital to RMIC -- which by itself is positive for the company's bond holders -- the potential need to redeem the company' senior bonds could place cash demands on the parent that exceed its currently available resources." Mr. Bauer added, "The combination of a continued very high stock dividend, an increased risk of regulatory takeover of the lead mortgage insurance company over the near term, and the potential need to fund an early redemption of its outstanding debt, has reduced financial flexibility and increased liquidity risk for the company."

Moody's said that if a technical default is triggered, the rating agency expects that a waiver by bondholders would be likely in order to avoid an early redemption of the debt, particularly given the ongoing credit support available to bondholders from Old Republic's P&C and title insurance operations. The mortgage insurance operations have not been a meaningful (positive) contributor to the group's interest coverage in recent years, and interest coverage would be reasonably strong at about 5x year-to-date if mortgage insurance losses are excluded. In addition, even if the company were required to redeem its outstanding debt, Moody's believes that funding options remain available, including extra dividends from the P&C group, intercompany loans, new debt or equity capital, and a reduction in the stockholder dividend. However in spite of these options, the company's actions to date indicate diminished financial conservatism and a weakened liquidity management profile.

According to Moody's, its review of Old Republic's debt, P&C and Title ratings will focus on the degree to which the company and those operations can be separated from the distressed mortgage insurance operation, including in a scenario such as a regulatory insolvency, rehabilitation or reorganization. The rating agency also said that the review for downgrade will focus on the degree to which senior management appears to have decreased its general level of conservatism in managing parent company obligations, liquidity, and creditor interests. In particular, the continuation of a high stockholder dividend during a period of financial stress, and the limited alternative liquidity mechanisms available to the parent, could strain financial flexibility, which impacts the credit profile of both debt and insurance company policyholder obligations.

Mortgage Insurance

Moody's said that the downgrade of RMIC to Caa2 from B1 reflects the firm's weakened credit profile and lack of parental support. The rating agency believes that RMIC is likely to breach the North Carolina $1.25 million minimum regulatory capital requirement over the coming quarters and that continued high claims are threatening its liquidity position. RMIC had $100 million of surplus and $1.25 billion in liquid assets at September 30, 2011, and has been paying about $215 million of claims per quarter for the last year. Such deterioration is expected to result in the implementation of a runoff plan that would involve the settlement of claims with both a cash and a deferred component to preserve liquidity. Moody's currently estimates that RMIC should be able to ultimately cover all claims out of its current resources and projected premium income in an expected case scenario but that substantial uncertainty and downside risks remain due, in part, to the continued weakness in the housing sector. The negative outlook reflects that uncertainty. Higher than anticipated losses or more front-loaded claims could lead to a downgrade while improved visibility on ultimate losses could stabilize rating or lead to an upgrade if financial resources are sufficient to cover such losses.

The rating agency added that Old Republic's mortgage guaranty platform is composed of three companies -- the flagship RMIC, RMIC of North Carolina (RMIC of NC, unrated) and Republic Mortgage Insurance Company of Florida (RMIC of FL, unrated). RMIC's standalone risk-to-capital ratio breached the 25:1 regulatory limit enforced in 16 states in the third quarter of 2009 and reached 72.4:1 at 3Q2011. The insurer previously obtained regulatory waivers from 14 of those states, including RMIC's state of domicile, North Carolina, and wrote business out of RMIC of NC in the two remaining states with the approval of the government sponsored entities (GSEs). The regulatory waivers expired August 31, 2011 and both GSEs suspended RMIC's eligibility as an approved mortgage insurer by early September, thus halting the firm's business production. RMIC is currently working with its regulator on a run-off plan.

General Insurance and Title Insurance Groups

Moody's said that its review for downgrade of the A1 IFS ratings of the various operating subsidiaries of Old Republic's General Insurance Group (property and casualty insurance), and Title Insurance Group will focus on the decreased financial flexibility of these groups given the increased risk of liquidity strain at the parent. Over the short term, the potential need to fund $866 million of bond redemptions, combined with existing interest obligations (about $24 million per quarter), and a high stock dividend (about $45 million per quarter) exceed cash resources currently available to the parent, estimated at $600 million. In its review, Moody's will also focus on the long term credit profile of these entities including their business profile, capital adequacy, profitability and operational and financial conservatism.

The ratings of the P&C and Title operating companies could be downgraded if financial strain at the parent worsens, if adequate coverage of parental obligations, including interest and stockholder dividends is not restored to prior levels, or if the rating agency believes the company will have less conservatism in managing creditor interests and liquidity over the longer-term. In addition, the ratings of the P&C companies could be lowered if underwriting leverage increases over 4.5x, earnings continue to be weak (e.g. return on capital in the mid-single digits or lower), or reserves show significant adverse development (more than 4%). The ratings of the title insurance operating companies could be downgraded if there is a meaningful decrease in market presence (i.e. market share below 5%), or worse than expected performance on the downward side of an industry cycle (i.e. losses greater than $50 million).

The ratings on the P&C and Title groups could be confirmed if parent company liquidity were improved, the risk of adverse developments stemming from the mortgage insurance group were reduced, and the company were to maintain a more creditor-friendly financial profile and liquidity management.

The following ratings have been lowered and continue on review for possible downgrade:

Old Republic International Corporation -- senior unsecured debt lowered to Baa2 from Baa1; and provisional senior unsecured shelf lowered to (P)Baa2 from (P)Baa1.

The following rating has been lowered, and has a negative outlook:

Republic Mortgage Insurance Company -- insurance financial strength to Caa2 from B1.

The following ratings have been placed on review for possible downgrade:

Bituminous Casualty Corp. -- insurance financial strength of A1;

Bituminous Fire & Marine Insurance Co. -- insurance financial strength of A1;

Great West Casualty Company -- insurance financial strength of A1;

Old Republic Insurance Co. -- insurance financial strength of A1;

Old Republic National Title Insurance Company -- insurance financial strength of A1; and,

Mississippi Valley Title Insurance Company -- insurance financial strength of A1.

The following ratings were affirmed with a positive 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 engaged primarily in property and casualty insurance, mortgage guaranty, and title insurance. During the first nine months of 2011, Old Republic reported total revenue of $3.3 billion, and a net loss of $196 million. As of September 30, 2011, shareholders' equity was $3.8 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 October 2008; and Moody's Global Rating Methodology for the Mortgage Insurance Industry published in February 2007. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.

Information sources used to prepare the rating are the following : parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

In addition to the information provided below please find on the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued each of the ratings.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

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 downgrades Old Republic senior debt to Baa2, review continues
No Related Data.
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