Fitch Downgrades Old Republic International & Operating Subsidiaries; Outlook Negative
|October 22, 2008|
CHICAGO & NEW YORK -- Fitch Ratings has downgraded the Issuer Default Rating (IDR) for Old Republic International Corporation (ORI) to 'A' from 'A+' and affirmed the short-term IDR at 'F1'. Fitch has also downgraded the Insurer Financial Strength (IFS) ratings of Republic Mortgage Insurance Company (RMIC) and the property casualty insurance group (see list below) to 'A+' from 'AA-'. Fitch also affirms the ratings of ORI's title insurance group (see list below) at 'A+'. All ratings have been removed from Rating Watch Negative. The Rating Outlook is Negative.
The downgrades reflect the pressure on ORI's primary operating units, property/casualty, mortgage insurance and title insurance, as each enterprise is directly impacted by the stress on-going in the US residential mortgage markets. In addition, ORI has also suffered significant impairment losses related to the company's 2007 investments into the stocks of other mortgage-related companies, including: The PMI Group, Inc., MGIC Investment Corp. and LandAmerica Financial Group Inc.
RMIC's rating incorporates Fitch's view that RMIC will continue to experience elevated losses on the 2005 through 2007 vintage exposure as the U.S. economy continues to slow, and that the performance of these vintages will continue to outweigh the underwriting and profitability improvements of new business over the near to intermediate term. Please refer to a press release titled "Fitch Downgrades 3 Mortgage Insurers; Rating Outlook Negative" issued on Friday, Oct. 17, 2008 for additional commentary on Fitch's views regarding the challenges facing the U.S. mortgage insurance industry.
Given Fitch's current outlook on loss developments within RMIC's insured portfolio, including an expectation for higher levels of claim rescission activity, Fitch believes that RMIC is inadequately capitalized on a stand-alone basis at its current rating level. However Fitch continues to view RMIC's financial profile as linked to that of ORI, and the operational and management support provided by ORI is viewed favorably in RMIC's current rating level.
ORI and its primary property/casualty subsidiaries have been negatively impacted in the past year by direct exposure to its consumer credit indemnity (CCI) portfolio, which provides credit protection against prime second-lien mortgages and home improvement loans. The company grew this product segment aggressively in 2006-2007, at the peak of the US mortgage lending cycle. Delinquencies and losses on this product have risen considerably in 2008, although the company has been actively managing claim remediation in an effort to limit ultimate potential losses in this sector.
The ratings on ORI's title insurance operations are supported by its conservative balance sheet fundamentals including low operating leverage and solid risk-adjusted capital relative to national peers. The operating results of ORI's title group continue to be challenged by the current operating environment, which is reflected in Fitch's Negative Rating Outlook on the title insurance industry. ORI's title group does receive a ratings uplift given its ownership by ORI.
Management has indicated that ORI intends to increase capital at the mortgage insurance subsidiary at its discretion over the next 12 month period. Based on past capital raising experiences, the company is likely to issue non-dilutive preferred or debt securities and use proceeds to bolster capital at RMIC. Absent the company taking such actions, Fitch would anticipate further negative rating pressure on the mortgage insurance operations based on current loss projections.
ORI's IDR of 'A' benefits from low financial leverage. Specifically, ORI's debt-to-total capital was 2% as of June 30, 2008 and expectations would be for equity-adjusted financial leverage to remain well below 15% of total capitalization after any future debt or capital issuance.
From an overall leverage perspective, Fitch believes ORI has the financial flexibility to raise further debt to support its operating subsidiaries, although the Negative Rating Outlook reflects the perceived execution risk of raising sufficient capital, particularly in the current stressed economic environment.
ORI is a publicly-owned insurance holding company conducting business in three major segments: property/casualty insurance, mortgage insurance and title insurance. Commercial auto and workers' compensation represent the two largest business lines within the property/casualty business. Shareholders' equity and total assets at ORI were $4 billion and $13 billion, respectively as of June 30, 2008.
Source: Fitch Rating