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Announcement:

Moody's reviews Old Republic's debt ratings for upgrade; confirms P&C and title subsidiaries

23 May 2012

$550 million convertible senior note outstanding

New York, May 23, 2012 -- Moody's Investors Service has placed the debt ratings of Old Republic International Corporation (NYSE: ORI; Baa2 senior debt) on review for possible upgrade following the company's announcement that it has sold a 20.6% common equity interest in its subsidiary, Republic Financial Indemnity Group, Inc. (RFIG), to a group of investors and then intends to spin-off substantially all of RFIG's common stock to existing shareholders. RFIG, which contains Old Republic's legacy mortgage insurance and consumer credit indemnity businesses, is expected to be a separate publicly held company. Old Republic has said that they have received necessary regulatory approvals, though the transaction is still subject to SEC review. In the same action, Moody's confirmed the insurance financial strength (IFS) ratings of Old Republic's primary property and casualty (P&C) insurance and title insurance subsidiaries with a stable outlook. Also, Moody's continues to have a positive outlook on the PMA subsidiaries (IFS A3).

RATINGS RATIONALE

The rating actions are based on Old Republic's intention to spin-off its legacy mortgage insurance and credit indemnity lines, which Moody's considers to be the company's highest risk operations. Moody's analyst Paul Bauer said, "The remaining company will be focused on traditional P&C and title insurance, where Old Republic has strong niches, good profitability and is well capitalized." In addition, the rating agency said that a successful completion of the spin-off would alleviate the risk that a regulatory insolvency, rehabilitation or reorganization of the troubled mortgage insurance subsidiary Republic Mortgage Insurance Company (RMIC) could trigger a covenant violation and early redemption of Old Republic's outstanding bonds.

Property & Casualty Insurance

The confirmation of the A1 IFS ratings on the primary 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, and exposure to certain lines of business with long tail liabilities, such as workers' compensation.

The A3 IFS ratings on the PMA subsidiaries are based on PMA'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 certain level of reinsurance support from the Old Republic General Group, and from the more conservative financial management of the Old Republic organization, including higher reserve adequacy targets. The rating outlook for the PMA subsidiaries is 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.

Factors that could result in an upgrade of Old Republic's P&C IFS ratings include increased scale and business diversification while maintaining the company's historically strong subsidiary capitalization; decreased earnings volatility; and improved earnings through the cycle (e.g. ROCs above 10%); and a reduction in financial leverage (e.g. below 15%) at the parent. Conversely , factors that could result in a downgrade of the P&C companies' IFS ratings include a general decline in the high level of conservatism historically demonstrated by management; increased in underwriting leverage (e.g. gross underwriting leverage above 4.5x); a willingness to increase the level of financial leverage at the parent company (e.g. adjusted debt-to-capital above 25%); continued weak earnings (e.g. ROC's in the mid-single digits or lower); or meaningful adverse reserve development (greater than 4% of reserves)

Title Insurance

The confirmation 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, moderate financial leverage at the parent, and a growing market position among the top four title insurers in the US. These strengths are tempered by an expectation of weak (though improving ) 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.

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; and a demonstration of an ability to maintain positive earnings and margins on the downward side of the title industry's underwriting cycle. Factors that could lead to a downgrade of the title companies' IFS ratings include a change in the level of parent company commitment to the title operations; 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 an increase in parent company willingness to use financial leverage (e.g. adjusted debt-to-capital above 25%).

Parent Company

Old Republic's parent company debt ratings reflect the support and risks of its primary insurance operating subsidiaries. Moody's previously had these debt ratings on review for possible downgrade reflecting weakness at the affiliated mortgage insurance operation (RMIC) and the risk that continued deterioration at RMIC, could add to financial strain at the parent company, particularly if a regulatory takeover of the mortgage insurance operation triggered a technical default and early redemption of ORI's senior debt.

Commenting on the review for upgrade of ORI's debt ratings, Moody's said the review will focus on the successful completion of the intended spin-off of RFIG. To the extent that the spin-off is successful in eliminating ORI's exposure to RFIG, Moody's would likely raise ORI's debt ratings by one notch to reflect the standard 3 notch spread between IFS ratings and holding company debt ratings. Conversely, if the spin is not completed, an upgrade of the ratings would not be likely.

The following ratings were placed on review for possible upgrade:

Old Republic International Corporation -- senior unsecured debt at Baa2; and provisional senior unsecured shelf at (P)Baa2;

The following ratings were confirmed with stable outlook:

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 continue 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 currently engaged primarily in property and casualty insurance, title insurance, and mortgage guaranty (to be spun off). During the first quarter of 2012, Old Republic reported total revenue of $1.2 billion, and net income of $0.4 million. As of March 31, 2012, 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; and Moody's Rating Methodology for U.S. Title Insurance Companies published in December 2011. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

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.

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.

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 reviews Old Republic's debt ratings for upgrade; confirms P&C and title subsidiaries
No Related Data.
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