Liquidity fears ebb at Old Republic
(Reuters) - Old Republic International reassured investors that scrapping plans to spin off its money-losing mortgage insurance business would not lead to a liquidity crisis as regulators were unlikely to seize the unit.
The insurer had planned to separate the unit and had even entered into a deal to sell a fifth of the business in a leveraged buyout but shelved the plan following stakeholders' objections.
The company's stakeholders include its regulators, the government-backed Fannie Mae and Freddie Mac and bank customers.
Regulators in North Carolina have already placed the unit under supervision. It is now only allowed to pay claims at 50 cents on the dollar to preserve capital, leading to investor fears that the unit would be seized, triggering a default under the company's debt covenants.
Old Republic eased those concerns on a conference call to discuss the canceled spinoff.
"We're comfortable, based on our discussions (with our regulators), that receivership is not in play," Chief Executive Aldo Zucaro said.
He expressed confidence that the company would be able to either refinance its debt or amend the terms, should a default occur.
Old Republic said the mortgage insurance (MI) unit, which stopped writing new business when its capital levels cratered last year, would continue to lose money for the next two years.
"By (2014), our total loss since 2007 will have been $1.7 billion, versus the total accumulated profit of $1.8 billion booked in the first 26 years ... of our mortgage insurance journey," Zucaro said.
The company said almost all its statutory capital - the standard claims-paying metric - comes from deferred claim payments ordered by regulators. Deferred payments count as a liability under generally accepted accounting principles.
On a reported basis, the company said its mortgage insurance unit has no capital and that it does not have the funds to add to the business.
"To just keep the company solvent, you'd have to come up with $250 million, which we are not committed to doing," a company executive said.
But even as the MI unit's stakeholders got their way with the scuttled spinoff, many Old Republic shareholders are unhappy at the prospect of being saddled with the business for the foreseeable future.
Investors from hedge funds SAC Capital, Anchor Capital, Divine Capital and others grilled company executives on options for the unit, including voluntarily placing it into receivership.
"Why is it not better to simply spin this out and go out to your bondholders and amend the covenants if necessary or to go in receivership?," Darius Brawn from SAC Capital asked on the conference call.
Even a sale of the business to investors specializing in run-off situations, where they just manage the existing book till the policies are exhausted, seems unlikely.
"I think the possibility of a runoff (investor) buying a mortgage guarantee business with regulatory approval is remote," an Old Republic executive said on the call.
The company said it sees no need to amend its debt covenants in advance of a seizure, something shareholders asked it to consider, because it does not believe the default will occur.
"One of our sayings around here is that you don't just jump off the roof because you're afraid you're going to fall off," CEO Zucaro said.
"We don't think we're falling off the roof. So we're not jumping."
(Reporting by Jochelle Mendonca and Sharanya Hrishikesh in Bangalore; Editing by Viraj Nair, Anil D'Silva and Supriya Kurane)
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