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Rating Action:

Moody's reviews Old Republic's debt ratings for upgrade; affirms A2 IFS ratings of General Insurance Group and Title Insurance Group

02 Aug 2016

Reviews PMA Insurance Group's A3 IFS for upgrade

New York, August 02, 2016 -- Moody's Investors Service has placed the debt ratings of Old Republic International Corporation (NYSE: ORI; Baa3 senior debt) on review for upgrade. The rating action reflects ORI's progress in managing its runoff mortgage insurance operations and our expectation of continuing steady declines in these long-term liabilities. In the same action, Moody's affirmed the A2 insurance financial strength (IFS) ratings of Old Republic's primary property and casualty (P&C) insurance and title insurance subsidiaries with a stable outlook. Moody's also placed the A3 IFS ratings of its PMA subsidiaries on review for upgrade.

RATINGS RATIONALE

Holding Company

The review for upgrade will focus on Old Republic's capital management plans for the MI operations and the maintenance of sufficient surplus levels as the business continues to run off, the status of remaining litigation within the consumer credit unit, prospective profitability, as well as capital adequacy and liquidity across the organization.

The group's runoff mortgage insurance (MI) operation -- led by Republic Mortgage Insurance Company (RMIC) -- remains under the supervision of the North Carolina Department of Insurance (NCDOI). However, the group's earnings have improved significantly over the past several years driven by declining defaults, improving cure rates, and healthy housing trends, broadly. Earlier this year, ORI settled a longstanding litigation case related to its MI operations, within previously established reserves. As a result of the MI's operating performance, a regulatory takeover of RMIC by the NCDOI, leading to default and early redemption of ORI's outstanding bonds (pursuant to cross-default provisions), is less likely.

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 specialty markets franchise, countrywide portfolio of niche businesses, historic underwriting strength, and good risk-adjusted capitalization. Factors tempering the group's credit profile include exposure to long-tail casualty products such as workers' compensation, commercial auto, 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 account for about 55% of the P&C group's total reserves as of 31 December 2015, 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. We believe the P&C group's reserve position remains reasonably adequate, however, adverse development in 2014 and 2015 ($108 million and $44 million, respectively) impacted workers' compensation and general liability case reserves. Reserve development for these lines through the first half of 2016 has been modest.

The review for upgrade of PMA's A3 IFS ratings will focus on its increasingly prominent role within Old Republic's middle-market strategy, prospective profitability, reserve and capital adequacy as well as implicit and explicit support provided the primary P&C operations. Consistent with Old Republic's broader approach to workers' compensation, PMA has shifted from its historical focus on guaranteed-cost workers' compensation to higher-deductible contracts written on a loss-sensitive basis, which now comprise over 80% of PMA's workers' compensation portfolio.

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 above 8%); and adjusted financial leverage at the parent below 20%. The following factors could lead to a downgrade of the P&C Group's IFS ratings: inadequate coverage of parental obligations, including interest and stockholder dividends; gross underwriting leverage above 4.5x; return on capital in the mid-single digit range or combined ratios at or above 103%; adverse reserve development greater than 4% of reserves; and 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), its good capitalization reflecting low underwriting leverage, historically strong reserve adequacy, and high asset quality. These strengths are tempered by historically volatile profitability given the title industry's dependence on prevailing mortgage interest rates and the level of transaction volume in the real estate sector. Despite its market ranking, Old Republic's title insurance business is relatively modest compared to its two larger peers. During 2015, the company posted strong earnings based on steadily growing real estate purchase transactions coupled with an increase in home refinance and commercial transactions given the persistence of low interest rates. Over the near to medium term, however, we expect the company's revenues and profitability will reflect declining revenues from refinance transactions, partially offset by gradually rising revenues from home purchase and commercial transactions.

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 placed on review for upgrade:

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

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

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

Pennsylvania Manufacturers' Indemnity Company -- insurance financial strength at A3.

The following ratings were affirmed with a stable outlook:

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; and

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

The following rating was assigned with a stable outlook:

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

The following rating has been withdrawn (A2 insurance financial strength, stable outlook) as a result of its reorganization:

Mississippi Valley Title Insurance Company.

Please refer to the Moody's Investors Service's Policy for Withdrawal of Credit Ratings, available on its website, www.moodys.com

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 six months ended 30 June 2016, Old Republic reported total revenue of $2.8 billion and net income of $224 million. As of 30 June 2016, shareholders' equity was $4.4 billion.

The principal methodologies used in rating Old Republic International Corporation was Global Property and Casualty Insurers published in June 2016, and Global Title Insurers published in April 2016. The principal methodology used in rating Old Republic National Title Insurance Company was Global Title Insurers published in April 2016. The principal methodology used in rating BITCO General Insurance, BITCO National, Great West Casualty Company, Old Republic Insurance Co., Manufacturers Alliance Insurance Company, Pennsylvania Manufacturers' Assoc. Ins. Co., Pennsylvania Manufacturers' Indemnity Company and Old Republic General Insurance Corp was Global Property and Casualty Insurers published in June 2016. Please see the Ratings Methodologies 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 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.

Pano Karambelas
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

Marc R. Pinto, CFA
MD - Managed Investments
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

No Related Data.
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