Cancellation of ORI Spinoff Means Lower Rating

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Analysts at Fitch Ratings have returned Old Republic International Corp., Chicago, to Ratings Watch Negative status following the cancellation of the spinoff of the mortgage insurance business into a separate entity. They have the same worries that many of the company's investors have, which is a potential acceleration of debt if Republic Mortgage Insurance Co. were to be forced into rehabilitation by regulators.

Fitch had put ORI on Ratings Watch Positive after the spinoff was first proposed, stating it would mitigate concerns about a breach of the debt covenants and eliminate any potential future cash drain to the parent company.

During a conference call with investors, ORI chairman and chief executive A.C. Zucaro steadfastly said the company would not be putting any more capital into the mortgage insurance subsidiaries.

The company previously said it had cancelled the spinoff of Republic Financial Indemnity Group due to "objections by certain stakeholders." During his introduction, Zucaro listed all of the stakeholders, including state insurance regulators; the government-sponsored enterprises; banks and other lenders who purchase mortgage insurance; ORI employees, many of whom are company shareholders; and ORI debt holders and shareholders.

But when asked specifically during the call which stakeholders objected, Zucaro demurred from giving an answer.

He did repeat a number of times that those who did object to the spinoff felt the MI business in runoff could have greater value if it remained under the ORI corporate umbrella.

"The value enhancement would likely arise from the commonality of such business elements as cash flow management, enhanced possibilities of staff continuity, tax planning strategies, and generally speaking the values that can arise from small operations situated within a large holding company system," Zucaro explained.

ORI saw the spinoff as the only way to raise new capital for the MI business. As part of that strategy, it proposed eventually using the third of its three MI subsidiaries to write new business.

But now, ORI has elected to "postpone indefinitely" re-entering the MI underwriting business.

In his opening remarks, Zucaro also noted that in the past five and one half years, the MI operation has lost $1.5 billion, with projected total losses of $1.7 billion through 2014. Between 1990, when ORI went into the MI segment, and 2006, it made $1.8 billion from this business.


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