Officials at Old Republic International Corp., and its new private mortgage insurance holding company Republic Financial Indemnity Group Inc. are still talking about plans to once again start underwriting mortgage insurance policies.
Executives discussed this as one of their main goals after RFIG is completely spun-out from ORI. The first step has been accomplished as an investor group led by ORI president Christopher Nard, who conducted a leveraged buyout to acquire 20.6% of RFIG. ORI will retain a 371,000-share stake in RFIG after the spin-off.
The rest of RFIG will be distributed in a taxable dividend in kind to current ORI stockholders, with the aim of becoming a publicly traded company. However, ORI will have warrants to acquire 18 million shares of RFIG at $0.12 per share. ORI chairman and CEO A.C. Zucaro disclosed during an investor conference call that is the same price as the LBO. There will be a minimal tax impact on ORI shareholders because of the low valuation of the RFIG stock.
ORI investors, he said, are getting a "free call on the upside potential of RFIG." RFIG's stock is expected to be traded over-the-counter.
RFIG has three mortgage insurance subsidiaries: Republic Mortgage Insurance Co., Republic Mortgage Insurance Co. of North Carolina and Republic Mortgage Insurance Co. of Florida. The first two were underwriters of new policies but have been in run off since the end of August 2011. The third unit is a reinsurer.
According to Zucaro, that third subsidiary has $15 million of equity capital on hand and is seen as a "viable underwriting vehicle" to start writing new mortgage insurance policies.
Nard, who will leave ORI to become RFIG's president and CEO, said his company would have three priorities, the first being managing the run off of Republic Mortgage Insurance Co., and the other RFIG subsidiaries in the most efficient manner.
Next is to use the "low-cost infrastructure" which is in place to support other run-off activities, including possibly providing these services to unaffiliated parties.
Finally, Nard repeated a statement made by Zucaro of the goal of recapitalizing and reentering the private mortgage insurance business.
Mortgage insurance is "an important business to the economy" and high loan-to-value lending is needed to get the housing market moving, he said.
Zucaro added to reenter the private mortgage insurance business, there needs to be some protection from the "fiasco" of the housing crisis. Some needs to be place to protect from that exposure.
As for the decision not to use capital from ORI's general or title insurance subsidiaries to help support RMIC, Zucaro said it was a risk management strategy and "under no circumstances" did it want to burden title or general insurance policyholders with the negative outcome attributed to the mortgage guarantee business.
Even though the MI subsidiary RFIG wants to use to write new business has positive equity, the company itself has a $17.5 million shareholder deficit.
Zucaro said the consumer credit indemnity unit (which also could start writing business again) has $16.5 million in equity and a noninsurance unit has $14 million in equity.
But RMIC and RMIC-NC have a $65 million deficit, he said.
In addition, RFIG owes ORI $180 million at this time.
The three outside investors in RFIG are George Cochran, chairman, financial institutions group at Macquarie Capital Advisors; David Kimmel, managing partner of Summit Capital LLC; and James W. Schacht, president of the Schacht Group. Zucaro will add the title of chairman of RFIG, while ORI corporate counsel Spencer LeRoy III will be the vice chairman.
Fitch Ratings said the spin-off should significantly diminish liquidity concerns at ORI, as it expects the elimination of debt acceleration risk for ORI due to a default at the MI unit. If the spin-off does take place, ORI's debt rating should be upgraded to investment grade.
