Best Downgrades Ratings of Most Old Republic Subsidiaries

August 17, 2011

A.M. Best Co. has downgraded the financial strength ratings (FSR) to ‘A’ (Excellent) from ‘A+’ (Superior) and issuer credit ratings (ICR) to “a+” from “aa-” of Old Republic Insurance, Bituminous Insurance Companies of Rock Island, Ill and their respective property/casualty members, as well as Nebraska-based West Casualty Company.

Best also revised its outlook on the above ratings to stable from negative.

Best also announced the following related rating actions:
1) It has downgraded the ICR to “a” from “a+” and affirmed the FSR of ‘A’ (Excellent) of Old Republic General Insurance Corporation (ORGENCO), Old Republic Surety Company (ORSC) (Brookfield, Wisc.) and Old Republic Insurance Company of Canada, and has revised the outlook for the ICR to stable from negative, while the outlook for the FSR is stable.
2) It affirmed the FSR of ‘A’ (Excellent) and ICR of “a” of The PMA Insurance Group and its property/casualty members. The outlook for these ratings is stable.
3) It withdrew the ICR of “bbb” and debt ratings of PMA Companies, Inc. due to the acquisition of the company by Old Republic International Corporation (ORI) and the assumption of its debt by ORI.
4) It downgraded the FSR to ‘A-‘ (Excellent) from ‘A’ (Excellent) and ICR to “a-” from “a” of Old Republic Union Insurance Company, and assigned a stable outlook to both ratings.
5) It has downgraded the FSR to ‘B+’ (Good) from ‘B++’ (Good) and ICR to “bbb-” from “bbb” of Arizona-based Old Republic Security Assurance Company (ORSAC), and has revised its outlook on the ratings to negative from stable.
6) It downgraded the ICR to “a” from “a+” and affirmed the FSR of A (Excellent) of Minneapolis-based Old Republic Title Insurance Group (ORTIG) and its members, and has revised the outlook for the FSR to negative from stable; the outlook for the ICR is also negative.
7) It downgraded the FSR to ‘B++’ (Good) from ‘A-‘ (Excellent) and ICR to “bbb+” from “a-” of Old Republic Life Insurance Company. The outlook for both ratings is stable.

All companies above are subsidiaries of ORI and are headquartered in Chicago, Ill., unless otherwise specified.

These rating actions largely reflect Best’s review of “ORI’s substantially greater operating losses reported in its second quarter 2011 earnings release, primarily attributable to its mortgage guaranty operations, where claim costs have significantly increased in recent quarters, net premiums earned and net investment income have continued to decline and where operating losses were particularly large in the second quarter,” Best explained.

“Also of significant importance in the company’s second quarter earnings release and conference call with investors was the announcement of ORI’s intention to place the mortgage guaranty flagship carrier’s (Republic Mortgage Insurance Company—RMIC) existing book of business in run off.”

As a result of the “second quarter 2011 disclosures, expectations of further substantial mortgage guaranty losses in the foreseeable future and increased financial leverage in 2011 at ORI” its financial strength has be “somewhat weakened.”

The report also noted that the management has indicated that “the run-off business would be managed within the constraints of RMIC’s current capital base, and that this amount would be ORI’s ultimate potential liability.”

Best said it “acknowledges that RMIC’s legal liability is limited to its shareholders’ capital, and that, as a matter of enterprise-wide risk management, ORI does not extend parent holding company guaranties for its insurance subsidiaries’ liabilities.”

As a result, Best explained that it “calls into question ORI’s commitment to all policyholders’ entity wide should other insurance subsidiaries encounter financial stress. This along with the weakened financial strength of ORI was the primary drivers of the downgrades for Old Republic Insurance, Great West and Bituminous. These factors also were the drivers of the rating actions for ORGENCO, ORSC, Old Republic Union, ORSAC, Old Republic Canada and Old Republic Life for which rating enhancement that previously had been afforded was removed.

“The affirmation of PMA’s ratings largely reflects the financial support provided by affiliates through quota share agreements.

“ORTIG’s FSR was affirmed due to its solid liquidity and strong balance sheet. The downgrading of its ICR reflects the company’s increasing underwriting leverage trend from significant premium growth outpacing increases in surplus.

The outlook for the FSR was revised to negative from stable due to the group’s potential challenge in managing growth and sustaining profitability in the current uncertain economic environment and ongoing weakness in the housing market.”

A complete listing of Old Republic International Corporation and its subsidiaries’ FSRs, ICRs and debt ratings ia available.

Source: A.M. Best

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