Old Republic Rated Baa3 from Moody's with Stable Outlook - Analyst Blog

Old Republic International Corporation (ORI) was recently assigned a provisional Baa3 rating to the shelf registration by leading credit rating Moody's Investors Service, a wing of Moody's Corporation (MCO). The outlook remains stable.

 

The rating account for the company's continued growth and good scale of operations. Old Republic International reported mixed results for its general property & casualty (P&C) and title subsidiaries in the case of revenues and earnings in the last reported quarter.

 

This multi-line insurer maintained profitability, and has prudently used financial leverage and has high cash flow coverage metrics.  However, limited financial flexibility owing to its exposure to mortgage insurance operations, volatile long-tail commercial lines including workers' compensation and volatility at Title operations attributable to dependence on mortgage refinance and resale transactions weigh on the strengths.

 

Old Republic International's rating difference between financial strength rating of A2 of P&C and title operations, and Baa3 rating to the senior debt reflects weak financial strength due to the absence of RMIC Companies, Inc. Moreover, RMIC's takeover would lead to an increase in Old Republic International's senior debt. 

 

Nevertheless, profitability in Old Republic International's run-off portfolio, along with a $125 million capital contribution in second-quarter 2014 marked improved finances for the mortgage insurance operations over a period of 18 months. However, the capital level at mortgage operations compares unfavorable with insurance exposure.

 

Old Republic International's debt ratings could witness an upgrade depending on the following factors. These include reduced risk that the company would require to support mortgage of RMIC in case of insolvency or rehabilitation, lower risk to fund an acceleration of outstanding debt, material reduction at run off operations and upgrade of financial strength ratings of P&C and title insurance subsidiaries.

 

The company's debt rating can also be downgraded if there is more capital support needed to mortgage RMIC, the inability to weather liquidity risks, downgrade of financial strength ratings of lead operating companies, financial leverage moves beyond 35% and cash coverage of interest falls below 4x.

 

Rating affirmations or upgrades from credit rating agencies play an important part in shaping investor confidence in the stock as well as in maintaining creditworthiness in the market. Currently, Old Republic International has a Zacks Rank #3 (Hold). Better-ranked stocks in the same industry that are worth reckoning include Fortegra Financial Corp. (FRF) and Radian Group Inc. (RDN), Both of these carry a Zacks Rank #2 (Buy).