Fitch Maintains Old Republic International Corp.'s Rating Watch Negative
Fitch Ratings maintains a Rating Watch Negative on Old Republic International Corporation (ORI) and its insurance subsidiaries. A complete list of ratings follows at the end of this release.
This rating action reflects Fitch's ongoing concern surrounding the possibility of an acceleration of ORI's outstanding debt (related to a potential future breach of a subsidiary collateral covenant), as well as uncertainty as to ORI's ability to fund an acceleration should one occur. ORI's debt is subject to acceleration if any of its significant subsidiaries experience bankruptcy, insolvency, rehabilitation or reorganization.
Since Jan. 19, 2012, ORI subsidiary Republic Mortgage Insurance Co. (RMIC) has been operating under an Order of Supervision (Order) issued by the North Carolina Department of Insurance (NCDOI). The Order instructed RMIC to reduce the cash payment on all claims to 50%, and to defer payment of the remaining 50% until a future date authorized by the NCDOI. The Order was put in place for an initial period not to exceed one year.
On Sept. 14, 2012, RMIC submitted a Corrective Plan to the NCDOI, for which a hearing was conducted on Oct. 16, 2012. The substance of RMIC's proposal was for RMIC to increase its cash payments to 60%, and for the NCDOI to keep RMIC under supervision until at least year-end 2021. Fitch notes that a formal extension of regulatory supervision of RMIC over such a long period would likely allow ORI to avoid a covenant breach and related debt acceleration, since RMIC would then more likely avoid bankruptcy, insolvency, rehabilitation or reorganization.
An independent study of RMIC's reserves was conducted by a consulting firm engaged by the NCDOI. The results of the study indicate that RMIC has a material probability of exhausting its surplus over the next two to three years regardless of the deferred payment obligation (DPO) percentage. The consultant recommended maintenance of the 50% cash payment. The consultant's views on RMIC's financial capabilities are consistent with Fitch's views, and are already incorporated in the Negative Watch.
ORI anticipates that 'in the foreseeable future' the NCDOI will issue its conclusions.
As of Sept. 30, 2012, ORI reported $146 million of parent liquidity resources, including cash and short-term investments at the holding company and its non-regulated subsidiaries. ORI's outstanding debt is $550 million, which creates a potential funding shortfall of $354 million in the event of acceleration.
Fitch notes that ORI could fund a potential shortfall through other sources, including but not limited to, a debt issuance or extraordinary dividends from its insurance subsidiaries. However, the agency views an issuance concurrent with a potential acceleration as having increased credit market risk. Additionally, extraordinary dividends would require regulatory approval.
Fitch believes that ORI's holding company ratings are subject to above-average ratings migration over the near to intermediate term. Such migration could include sudden, multi-notch downgrade risk, as well as the potential for a multi-notch upgrade.
The most noteworthy multi-notch downgrade risk, as reflected in the ongoing Rating Watch Negative, would be acceleration of ORI's debt obligations without sufficient liquidity to meet them. This would result in a default, and a sharp downgrade in ORI's holding company ratings.
Upward movement in ORI's rating is highly likely if management was able to fully mitigate its covenant/acceleration risk by renegotiating its covenants or refinancing its debt. Fitch could also remove the Watch Negative if the Order of Supervision is extended for a prolonged period of time.
Fitch maintained its Rating Watch Negative on the following ratings:
Old Republic International Corp.
--$550 million 3.75% senior notes due March 15, 2018 'BB-'.
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.
Manufacturers Alliance Insurance Co.
Pennsylvania Manufacturers' Association Insurance Co.
Pennsylvania Manufacturers Indemnity Co.
American Guaranty Title Insurance Co.
Mississippi Valley Title Insurance Co.
Old Republic National Title Insurance Co.
--Insurer Financial Strength 'A-'.
Additional information is available at www.fitchratings.com. The company did not participate in the rating process except through public information. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria & Related Research:
--'Insurance Rating Methodology' (Oct. 18, 2012).
Applicable Criteria and Related Research:
Insurance Rating Methodology -- Amended
Dafina M. Dunmore, CFA, +1-312-368-3136
70 W. Madison Street
Chicago, IL 60602
Doug M. Pawlowski, CFA, +1-312-368-2054
Keith M. Buckley, CFA, +1-312-368-3211
Brian Bertsch, +1-212-908-0549