[April 23, 2014]

Fitch Upgrades Old Republic International Corp.'s Insurance Ratings; Affirms Debt Rating

Fitch Ratings has upgraded the Insurer Financial Strength (IFS) ratings of Old Republic International Corporation's (ORI) insurance subsidiaries to 'A' from 'A-'. Fitch has also affirmed ORI's holding company ratings, including the senior debt rating at 'BBB-'. The Rating Outlook is Stable. A full list of ratings follows at the end of this release.

KEY RATING DRIVERS

Fitch's rationale for the upgrade of ORI's P/C and title insurance company ratings reflects continued earnings strength and solid capitalization in these segments, along with improved consolidated results. Affirmation, as opposed to upgrade, of the holding company's debt ratings reflects the offsetting impact of ongoing exposure of the holding company to the troubled run-off mortgage insurance business, following ORI's March 20, 2014 statements that it cancelled a previously announced recapitalization plan.

ORI attributed the cancellation to its inability to attract sufficient capital markets funding. ORI has now requested regulatory approval to substantially increase the pay-out on both deferred claim obligations and new claims going forward. Related to this, the company intends to bolster regulatory capital in its mortgage insurance companies by down streaming holding company funds.

As of Dec. 31, 2013, ORI reported that total statutory capital held at its runoff operations (Republic Indemnity Financial Group, Inc. or 'RFIG') was approximately $457 million, which includes accumulated deferred payment obligation (DPO) reserve funds of $479 million. Statutory capital was negative $22 million excluding the benefits of the DPO. The payout of previously deferred claims will reduce statutory capital, thus requiring a potential capital injection should full payment be resumed.

Fitch estimates that ORI's holding company liquidity currently includes $427 million of statutory dividend capacity from its insurance subsidiaries in 2014, and $216 million of cash and highly liquid securities and funds residing in non-regulated subsidiaries. While any capital injections into RFIG would lower holding company liquidity, it would also reduce the likelihood that the runoff operation's financial difficulties would worsen, and thus trigger debt covenants that result in debt acceleration.

ORI reported tremendously improved earnings of $448 million in 2013 compared with a net loss of $69 million in 2012. The improvement was largely due to favorable segment results at RFIG, which benefited from improving trends in home prices, foreclosure activity, and real estate markets generally. The delinquency rate declined to 13.8% in 2013 from 15.0% in 2012. Claim provisions related to the CCI (News - Alert) product also declined in 2013, which the company attributes to improving delinquency trends and greater than anticipated claim salvage recoveries.

ORI's P/C operations reported a combined ratio of 97.3% in 2013 compared with 98.7% in 2012. The competitive environment for workers' compensation and commercial auto, the company's two largest lines, remains challenging. ORI's title operations reported further improvement in underwriting results in 2013 with a combined ratio of 94.7%, compared with 96.8% in 2012.

Fitch views ORI's P/C operations as strongly capitalized demonstrated by its 'very strong' score on Ftch's Prism capital model at year-end 2012. Also supporting the agency's favorable view of capital is net premiums written-to-surplus of 0.7x at year-end 2013.

ORI's title companies remain firmly capitalized with an operating leverage ratio of 4.4x at year-end 2013. Fitch's 2012 risk-adjusted capital (RAC) ratio for ORI's title operations was also solid at 174%. Fitch expects its RAC ratio to remain relatively unchanged at year-end 2013. Fitch has some concerns, however, given fast growth in recent years within the title companies.

ORI's financial leverage ratio remains moderate at 13.6% (excluding unrealized investment gains) and debt servicing capability improved significantly with a GAAP fixed charge coverage ratio of 25x as of Dec. 31, 2013.

ORI's title subsidiaries are considered 'very important' under Fitch's group rating methodology and Fitch believes the parent remains committed to these operations. Given the title subsidiaries' stand-alone assessment of 'A-' and Fitch's group rating methodology, one notch of uplift has been applied. However, ratings could be downgraded if the profile of ORI's title subsidiaries deteriorates significantly below current levels.

RATING SENSITIVITIES

Key rating triggers that could lead to an upgrade include:

--Consistent underwriting profits;

--Continued solid capitalization with a 'very strong' score or better on Fitch's P/C Prism capital model; and

--Further reduced, or eliminated, uncertainty related to RFIG.

If upgraded triggers are achieved, Fitch could either return to standard notching via a one notch upgrade of the ORI's holding company ratings, or upgrade the holding company ratings by two notches with a one notch upgrade to IFS ratings, depending on the degree of improvement.

Key rating triggers that could lead to a downgrade include:

--Heightened concerns related to RFIG including capital support that exceeds existing holding company liquidity;

--A weakening of debt-servicing capabilities, whereby GAAP fixed-charge coverage falls below 7x for a sustained period;

--Significant deterioration in capitalization, whereby operating leverage increases above 1.0x or ORI's score on Fitch's P/C Prism capital model falls below the "very strong" level;

--Deterioration in P/C underwriting results with a combined ratio above 103%; or

--Financial leverage above 28%.

Fitch affirms the following ratings:

Old Republic International Corp.

--IDR at 'BBB';

--$550 million 3.75% senior notes due March 15, 2018 at 'BBB-'.

Fitch upgrades the following ratings with a Stable Outlook:

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.

--IFS to 'A' from 'A-'.

Additional information is available at 'www.fitchratings.com'.

THE ISSUER DID NOT PARTICIPATE IN THE RATING PROCESS OTHER THAN THROUGH THE MEDIUM OF ITS PUBLIC DISCLOSURE.

Applicable Criteria & Related Research:

--'Insurance Rating Methodology' (December 2013).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723072

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=827545

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE '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 MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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