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Rating Action:

Moody's downgrades Republic Mortgage Ins Co to B1; Old Republic debt placed on review for downgrade

03 Aug 2011

Multiple actions taken: ratings of Old Republic's affiliated property-casualty and title insurance companies affirmed; PMA subsidiaries' outlook positive; Republic Mortgage on review for possible further downgrade

New York, August 03, 2011 -- Moody's Investors Service has taken multiple actions on the ratings of Old Republic International (NYSE: ORI) and its insurance operating subsidiaries following the company's second quarter financial results and the announcement that it could suspend new business written through its lead mortgage insurance subsidiary, Republic Mortgage Insurance Company (RMIC). Moody's downgraded the insurance financial strength (IFS) rating of RMIC to B1 from Ba1, with the rating under review for possible downgrade. In addition, Moody's placed the debt ratings (senior debt, Baa1) of Old Republic International on review for possible downgrade.

Moody's also affirmed the IFS ratings of the lead subsidiaries of the Old Republic General P&C Group and the Old Republic Title Insurance Group at A1, with stable outlooks. The IFS ratings of the recently acquired PMA subsidiaries were affirmed at A3, with the outlook changing to positive, from stable.

RATINGS RATIONALE

According to Moody's Senior Credit Officer Paul Bauer, "The negative rating actions on Old Republic are driven by the continued credit deterioration of the lead mortgage insurance subsidiary, and the prospect that it could soon cease writing new business." In addition, the rating agency said that it plans to evaluate the potential impact of stress at the mortgage operation on the credit profile of the parent company. However, Mr. Bauer also added that, "In spite of pressures at the mortgage operation, Old Republic's property and casualty subsidiaries continue to produce good operating results, while the organization's title insurance companies have managed to maintain a strong credit profile in the midst of a very difficult operating environment."

Mortgage Insurance:

Moody's said that the downgrade of Old Republic's mortgage insurance subsidiary RMIC reflects the high likelihood that the insurer will be placed into run-off when the current risk-to-capital waivers from the state insurance regulators expire on August 31, 2011. The rating action also takes into consideration management's indication that it does not intend to provide support to RMIC going forward. The company has said that its objective is to move the production of new business to RMIC of North Carolina, a separately capitalized and held mortgage insurance company. The rating of RMIC is on review for further possible downgrade while Moody's evaluates the potential size and impact of any additional reserve charges on the company's financial metrics and total statutory capital.

There are three operating companies in Old Republic's mortgage guaranty platform -- RMIC, RMIC of North Carolina (RMIC of NC) and Republic Mortgage Insurance Company of Florida (RMIC of FL). RMIC's standalone risk-to-capital ratio breached the 25:1 regulatory limit enforced in 16 states in the third quarter of 2009. The insurer obtained regulatory waivers from 14 of those states, including RMIC's domicile state of North Carolina, and wrote business out of RMIC of NC in the two remaining states, with the approval of the government sponsored entities (GSEs).

Due to weak operating performance, the statutory capital position of the RMIC companies has declined substantially such that, at the end of the second quarter of 2011, risk-to-capital for the combined group was 45.6x. Given the circumstances, Moody's does not expect the waivers for RMIC to be extended by state regulators. Additionally, one of the GSEs, Fannie Mae, announced a suspension of RMIC and RMIC of NC as eligible mortgage insurers, further increasing the chances that the mortgage insurers will be placed into run-off. Limited reinsurance arrangements exist between the RMIC insurance companies, however, beyond the defined risk sharing mechanism, each company's capital base would be the main resource available to support claims. If the trend of high incurred losses continues for the next few quarters, the mortgage insurance companies' statutory surplus position on a stand-alone and combined basis could deteriorate materially and could even breach the minimum regulatory threshold of $1.25 million. Therefore, the financial and capital profile metrics for RMIC on a combined and standalone basis will be an important consideration during the review process.

Property & Casualty Insurance:

The affirmation of the A1 IFS ratings on the lead legacy members of the Old Republic General Insurance Group is based on the group's strong franchise in specialty markets and good market presence in various niche lines of business, its historic underwriting strength and focus, its healthy long-term profitability, and its strong risk adjusted capitalization. Contributing to historical profitability has been a consistent focus on underwriting accountability and conservative reserves. Tempering these strengths is the group's relatively modest scale in a US commercial lines P&C market with a number of considerably larger national competitors; a highly competitive commercial lines market; exposure to certain lines of business with long tail liabilities; and exposure to consumer borrowing and housing markets through the company's credit indemnity line.

The A3 IFS ratings on the newly acquired (October 2010) PMA subsidiaries are based on PMA's strong workers' compensation franchise with good 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 certain level of reinsurance support from the Old Republic General Group, and from the more conservative financial management of the Old Republic organization, such as higher reserve adequacy targets. Moody's has changed the outlook of the PMA subsidiaries to positive to reflect the belief that the credit profile of these subsidiaries will continue to strengthen as the companies are further integrated into the Old Republic organization.

Title Insurance:

The affirmation of the A1 IFS ratings on members of the Old Republic Title Insurance Group is based on the group's good capitalization as a result of low underwriting leverage, strong reserve adequacy, high asset quality, low financial leverage at the parent, and a growing market position among the top four title insurers in the U.S. These strengths are tempered by an expectation of weak profitability over the medium term and by the group's modest scale in relation to some of its title insurance peers. We note 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.

Parent Company:

Moody's has placed the debt ratings of parent Old Republic International on review for possible downgrade as a result of the continued credit deterioration at the company's mortgage insurance operation, and its potential impact on the parent. In its review, Moody's will focus on linkages between the mortgage insurance operation and the rest of the Old Republic organization. This will include an evaluation of the ability of Old Republic to separate itself from RMIC in a worst case scenario such as a regulatory insolvency, rehabilitation or reorganization, and the risk that such an event could constitute an event of default for the company's bondholders under its indentures.

The following rating has been lowered, and is on review for downgrade:

Republic Mortgage Insurance Company -- insurance financial strength to B1 from Ba1, on review for downgrade.

The following ratings are on review for possible downgrade:

Old Republic International Corporation -- senior unsecured debt rated Baa1; provisional senior unsecured shelf rated (P)Baa1; provisional subordinated shelf rated (P)Baa2; provisional preferred stock shelf rated (P)Baa3; on review for downgrade.

The following ratings were affirmed with a stable outlook:

Bituminous Casualty Corp. -- insurance financial strength at A1, stable outlook;

Bituminous Fire & Marine Insurance Co. -- insurance financial strength at A1, stable outlook;

Great West Casualty Company -- insurance financial strength at A1, stable outlook;

Old Republic Insurance Co. -- insurance financial strength at A1, stable outlook;

Old Republic National Title Insurance Company -- insurance financial strength at A1, stable outlook; and,

Mississippi Valley Title Insurance Company -- insurance financial strength at A1, stable outlook.

The following ratings have been affirmed with the outlook changed to positive from stable:

PMA Companies, Inc. -- senior unsecured debt rated Baa3, positive outlook;

Manufacturers Alliance Insurance Company -- insurance financial strength at A3, positive outlook;

Pennsylvania Manufacturers' Association Ins Co --insurance financial strength at A3, positive outlook; and,

Pennsylvania Manufacturers Indemnity Company -- insurance financial strength at A3, positive outlook.

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 half of 2011, Old Republic reported total revenue of $2.2 billion, and a net loss of $79 million. As of June 30, 2011, shareholders' equity was $4.0 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.

REGULATORY DISCLOSURES

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 credit rating are the following: parties involved in the ratings, parties not 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.

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.

New York
Paul Bauer
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Robert Riegel
MD - Insurance
Financial Institutions Group
Moody's Investors Service, Inc.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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 Republic Mortgage Ins Co to B1; Old Republic debt placed on review for downgrade
No Related Data.
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