NU Online News Service, May 30, 2:29 p.m. EDT

Old Republic International Corp.'s decision last week to spin-off its troubled mortgage-insurance business received positive reviews from analysts and rating agencies.

The Chicago-based insurer announced on May 21 that it sold a 20.6 percent interest in its subsidiary, Republic Financial Indemnity Group, Inc. (RFIG), to a group of investors in a partial leveraged buyout. At the same time, the company is spinning off RFIG to shareholders, establishing RFIG as a separate company.

Old Republic identified the investors as Christopher Nard, president of Old Republic International, along with a number of key associates responsible for managing the RFIG lines and “three unaffiliated individual investors very well versed in insurance matters.”

RFIG handles mortgage guaranty and consumer credit indemnity lines of business.

In report issued earlier this week, Moody's said the move is “credit positive” because it separates the healthy ongoing property and casualty and title insurance business from RFIG's programs.

Moody's says the move would “greatly reduce” the risk that further deterioration at the primary mortgage insurance subsidiary could have caused, including the possibility of insolvency.

An insolvency and regulatory takeover of the mortgage could have triggered a technical default under the company's debt covenants, which “could require an early redemption of the company's debt of $550 million, placing liquidity pressure on Old Republic.”

The spinoff, Moody's says, addresses this issue by separating the companies.

A report issued by SNL Financial points out that RFIG has been a serious financial drag on the parent company, noting that in a pro forma financial supplement released in March, the company would have reported $280 million in net income for 2011 without RFIG. But with the unit, “Old Republic reported a net loss for the year of $140 million.”

The report notes that after the split, RFIG's finances “will remain bleak” for a few years. The company has $2 billion in assets but a common shareholder's deficit of $17.5 million, or 54 cents per share.

Under the new configuration, SNL says Old Republic will begin posting steady profits and paying dividends again.

In its May 21 announcement, Old Republic said Christopher S. Nard, president of Old Republic International, relinquished the presidency to “concentrate on his responsibilities as the president and chief executive officer of a publicly traded RFIG.”

R. Scott Rager, president of Old Republic General Insurance Companies, will assume additional responsibilities as Old Republic International president.

The changes are expected to take effect June 1.

During a conference call with investment analysts on May 21, A.C. Zucaro, Old Republic International's chairman and CEO said the hope is that after the split, RFIG will be able to work through its claims and eventually begin writing new business at some point in the future.

He said the parent “ran out of steam” putting money into RFIG since the economic crisis in 2007 caused substantial losses from the housing-market failure.

The company had money available, but that was borrowed money and the company did not feel it would be prudent to expose that funding to mortgage-guaranty insurance. He added that the RFIG must be funded with its own “permanent capital.”

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