Fitch affirms Old Republic ratings at BBB+

Fitch affirms Old Republic International ratings at BBB+, outlook is negative

• On 12:17 pm EDT, Thursday September 10, 2009

CHICAGO (AP) -- Fitch Ratings on Thursday affirmed its ratings of insurance company Old Republic International Corp. and its subsidiaries.

Fitch kept its issuer default rating at "BBB+," its insurer financial strength rating of the property/casualty and title insurance groups at "A+" and kept a "BBB" rating on the $316 million of convertible unsecured senior notes.

The ratings are investment grade. The rating outlook is negative.

Fitch said the affirmation reflects modest financial leverage, a conservative investment portfolio and a profitable core property/casualty business, after adjusting for Old Republic's consumer credit indemnity product.

The consumer credit indemnity product provides credit protection against pools of prime second-lien mortgages.

"The current economic environment and specifically the troubled real estate market has adversely affected all three business segments at ORI, namely mortgage guaranty, title insurance and property/casualty through its (consumer credit indemnity) product," Fitch analysts said, referring to the Chicago-based company by its New York Stock Exchange ticker. "Consequently, earnings have been challenged as the current downturn has damaged the historic diversification benefits enjoyed by ORI."

Even after issuing new debt in April, the company has very low leverage compared to its peers, and it has financial flexibility through other available borrowing. Fitch expects the company to maintain its borrowing near current levels.

Meanwhile, the company's investment portfolio is less risky than its peers because it has minimal exposure to real estate, mortgage-backed securities, collateralized debt obligations, derivatives, high-yield bonds or private equity investments. These instruments have been behind many of the troubles companies in the financial sector have had in the past year.

The profitability of the core property/casualty business remains solid, except for the consumer credit indemnity product, Fitch said. Earnings in its property/casualty business, which counts commercial auto and workers' compensation as its two largest business lines, "have been a stabilizing influence of its ratings" considering struggles in mortgage guaranty, title insurance and consumer credit indemnity, the analysts said.

The negative rating outlook reflects Fitch's concerns regarding the consumer credit indemnity product. The company grew this product segment aggressively in 2006 and 2007, at the peak of the U.S. mortgage lending cycle, Fitch said, and delinquencies and losses rose considerably in 2008 and this year.

Fitch believes Old Republic is potentially at risk for a substantial loss, which would likely result in a multi-notch downgrade of the ratings. The analysts did note, however, that Old Republic has been actively managing claims, and so far losses in the consumer credit indemnity portfolio have been modest.

Noting that much of this exposure is currently the subject of a lawsuit, Fitch said it plans to continue monitoring the company closely.

In midday trading, Old Republic shares slipped 9 cents to $11.64. The stock has traded between $6.77 and $17.25 in the past 52 weeks, and started the day down about 2 percent for the year.

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