Fitch Downgrs Old Republic's IDR and Places Ratings on Watch Negative

2008-06-05 23:40:28 -

- Fitch Ratings has downgraded the Issuer Default Rating (IDR) and commercial paper rating for Old Republic International Corporation (ORI) to 'A+' and F1, respectively. The Insurer Financial Strength ratings (IFS) of the property casualty insurance operating group and Republic Mortgage Insurance Co. (RMIC) were downgraded to 'AA-' from 'AA', while the IFS ratings of the title insurance operating group

were downgraded to 'A+' from 'AA-'. All ratings were placed on Rating Watch Negative. (See the full list at the end of this release.)

The downgrade reflects a substantial capital shortfall at RMIC relative to the guidelines for the 'AA' rating category, as most recently evaluated by Fitch's proprietary capital model, and increased concerns over the performance of ORI's consumer credit indemnity (CCI) program. Please refer to Fitch's mortgage industry press release issued today for more details on the RMIC rating action.

Management has indicated that ORI intends to increase capital at the mortgage insurance subsidiary at its discretion over the next 3- to 18-month period. Based on its past capital raising approaches, the company is likely to issue non-dilutive preferred or debt securities and use proceeds to bolster capital at RMIC. However, the timing and amount of a future capital contribution remain inconsistent with Fitch's expectations for a mortgage insurer in the 'AA' rating category. Fitch notes ORI has very good financial flexibility with virtually no outstanding debt, but depending on the type of security issued by ORI, the IDR could face further downgrade if leverage increases significantly.

The CCI product provides first loss coverage to pools of primarily second lien residential mortgage loans up to a cumulative loss limit of 10% of eligible loans for any one policy year. The credit indemnity program resides in the property casualty operations, and is underwritten by Old Republic Insurance Company (ORINSCO) and shared with two affiliated insurers through an internal reinsurance quota share arrangement. Fitch believes that the performance of ORI's credit indemnity product line is closely correlated with the performance of its mortgage and title insurance businesses.

Historically, the Old Republic Group has benefited from the diversification provided by its three primary lines of business: commercial lines, property casualty, mortgage insurance and title insurance. The severity of the mortgage industry downcycle has resulted in significant deterioration in the operating results of both Old Republic's mortgage insurance and title insurance operations, and a modeled capital shortfall at RMIC. The stress from two-out-of-three underperforming operating units is negatively affecting the overall financial strength of the entire enterprise, resulting in the one-notch downgrade.

The Negative Rating Watch reflects concern about the mortgage industry downcycle which adversely affects ORI's mortgage insurance and title insurance businesses as well as the CCI product.

Future rating actions on ORI and its subsidiaries will depend in large part on whether future loss trends in its mortgage insurance and second-lien portfolios decline materially from their current levels. Consequently, the Negative Rating Watch will be resolved when more definitive actual loss trends on the business emerge over the next one to two years. If loss trends increase from present levels, the probable resolution to the Negative Rating Watch will be another single-notch downgrade of ratings at ORI and its property/casualty, mortgage and title insurance subsidiaries.

Fitch has downgraded the following ratings, and placed them on Rating Watch Negative:

Old Republic International Corp.

--Issuer Default Rating to 'A+' from 'AA-';

--Short term IDR to 'F1' from F1+';

--Commercial paper to 'F1' from F1+'.

Old Republic Property Casualty Group:

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.

--Insurer Financial Strength to 'AA-' from 'AA'.

Republic Mortgage Insurance Co.

--Insurer Financial Strength to 'AA-' from 'AA'.

Old Republic Title Group

--Insurer Financial Strength to 'A+' from 'AA-'.

Members of the Old Republic Title Group:

American Guaranty Title Insurance Co.

Mississippi Valley Title Insurance Co.

Old Republic General Title Insurance Co.

Old Republic National Title Insurance Co.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Fitch Ratings
Douglas M. Pawlowski, CFA, +1-312-368-2054 (Chicago)
James B. Auden, CFA, +1-312-368-3146 (Chicago)
Davie Rodriguez, +1-212-908-0386 (New York)
Media Relations:
Kenneth Reed, +1-212-908-0540 (New York)