Fitch Affirms Old Republic International Corp.'s Ratings; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed Old Republic International Corporation's (ORI) holding company ratings, including the senior debt rating at 'BB+'. Fitch has also affirmed the Insurer Financial Strength (IFS) ratings of ORI's insurance subsidiaries at 'A-'. The Rating Outlook is Stable. A full list of ratings follows at the end of this release.

KEY RATING DRIVERS

The affirmation of ORI's ratings reflect its property/casualty and title insurance subsidiaries' solid capitalization, sound underwriting results, and conservative reserving practices. This is offset by continued operating losses in Republic Financial Indemnity Group, Inc. (RFIG), the runoff mortgage insurance and consumer credit indemnity (CCI) businesses.

ORI reported an operating loss for the fifth straight year in 2012, largely due to continued losses related to its mortgage insurance (MI) business. ORI reported a pretax operating loss of $176 million in 2012 compared with a loss of $352 million in 2011. Republic Financial Indemnity Group, Inc. (RFIG), the runoff mortgage insurance and consumer credit indemnity (CCI) businesses, continues to weigh down profits. The segment reported a smaller loss during 2012, but results will likely remain negative through at least 2014.

The company's property/casualty (P/C) operations remain strongly capitalized with a NAIC risk-based capital ratio of approximately 391% of company action level as of Sept. 30, 2012, and net premiums written-to-surplus of about 0.8x. Additionally, ORI's score on Fitch's Prism capital model was 'very strong' at year-end 2011 and is expected to remain relatively constant at year-end 2012.

ORI's title companies remain firmly capitalized despite modest deterioration due to rapid growth over the past several years, as profits have been largely retained within the businesses. Operating leverage was approximately 4.8x as of Sept. 30, 2012 compared with 5.2x and 3.6x at years-end 2011 and 2008, respectively. Fitch's 2012 risk-adjusted capital (RAC) ratio for ORI's title operations is expected to remain within Fitch's guidelines though modestly lower than the 167% at year-end 2011 (please refer to Fitch's 'Title Insurance (U.S.) -- Sector Credit Factors' for model changes).

ORI's underlying P/C business remained profitable in 2012 with a combined ratio of 98.7% compared with 94.4% in 2011, excluding CCI in both periods. The deterioration is largely due to weaker results in its workers' compensation and commercial auto lines.

The workers' compensation industry is adversely affected by weak unemployment, which typically leads to longer periods of disability for injured workers, low interest rates and medical inflation. ORI has increased rates with further hardening expected in 2013; however, it may be insufficient to offset inflationary trends in loss costs. Higher loss cost trends in commercial auto (trucking) and general liability also contributed to weaker underwriting results in 2012.

ORI's title insurance operations reported improved underwriting results again in 2012 with a 96.8% combined ratio compared with 99% in 2011. The segment's growth over the past several years has led to significant market share gains, but the pricing adequacy of this business remains uncertain, in Fitch's view.

ORI's ratings also reflect solid debt servicing capability from dividend capacity in its p/c and title insurance subsidiaries. Additionally, ORI has approximately $234 million of cash in highly liquid securities held at the holding company and non-regulated subsidiaries. ORI's year-end 2012 financial leverage ratio declined to approximately 15% (excluding unrealized investment gains) from 21% in 2011 following the repayment of debt in May 2012.

ORI's title subsidiaries are considered 'very important', and Fitch believes the parent remains committed to these operations. Given that group ratings and the title subsidiaries' stand-alone ratings have been equalized, parental support is irrelevant at current levels. However, parental support remains critical to the ratings in a scenario where uplift is applied.

Fitch's ratings of ORI at the holding company level remain notched down by one additional notch from the operating company IFS ratings compared to standard notching to reflect ongoing, albeit reduced, uncertainties related to the runoff of RMIC and the risk this poses for ORI's debt.

RATING SENSITIVITIES

Factors that could lead to an upgrade, including a movement to standard notching, include a return to consistent operating earnings and positive internal capital formation following five consecutive years of operating losses, greater certainty of a successful runoff of RMIC with reduced adverse impact from related operating losses. Other factors that could lead to an upgrade include a favorable resolution to the CCI litigation/product and continued solid capitalization.

Factors that could lead to a downgrade include:

--Heightened concerns related to CCI or the RMIC runoff compared to expectations, including an adverse amendment to the Final Order by the NCDOI;

--A weakening of debt servicing capabilities, whereby holding company liquidity and statutory dividend capacity cover interest expense by less than 7x, which would represent a 75% drop from approximately 28x at year-end 2012;

--Significant deterioration in P/C capitalization, whereby ORI's score on Fitch's Prism capital model deteriorates to 'adequate' or operating leverage increases above 1.4x;

--Deterioration in P/C underwriting results with combined ratios above 105%;

--Increase in financial leverage to levels near 30%.

Fitch affirmed the following ratings with a Stable Outlook:

Old Republic International Corp.

--IDR at 'BBB-';

--$550 million 3.75% senior notes due March 15, 2018 at 'BB+'.

Bituminous Casualty Corp.

Bituminous Fire & Marine Insurance Co.

Great West Casualty Co.

Old Republic Insurance Co.

Old Republic Lloyds of Texas

Old Republic General Insurance Co.

Old Republic Surety Co.

Manufacturers Alliance Insurance Co.

Pennsylvania Manufacturers' Association Insurance Co.

Pennsylvania Manufacturers Indemnity Co.

American Guaranty Title Insurance Co.

Mississippi Valley Title Insurance Co.

Old Republic National Title Insurance Co.

--IFS at 'A-'.

Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors. The company did not participate in the rating process except through public information.

Applicable Criteria & Related Research:

--'Insurance Rating Methodology' (Jan. 11, 2013).

Applicable Criteria and Related Research:

Insurance Rating Methodology -- Amended

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=698731

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Contacts

Fitch Ratings
Primary Analyst
Dafina M. Dunmore, CFA
Director
+1-312-368-3136
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Doug M. Pawlowski, CFA
Senior Director
+1-312-368-2054
or
Committee Chairperson
Keith M. Buckley, CFA
Managing Director
+1-312-368-3211
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Dafina M. Dunmore, CFA
Director
+1-312-368-3136
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Doug M. Pawlowski, CFA
Senior Director
+1-312-368-2054
or
Committee Chairperson
Keith M. Buckley, CFA
Managing Director
+1-312-368-3211
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com