Old Republic's stock has lost over 20% of its value since an announcement last Friday that it was canceling a restructuring move to spin off a financially troubled mortgage insurance unit into a separate company.
Friday afternoon, Old Republic "reported that it has withdrawn the previously announced spin-off of its Republic Financial Indemnity Group, Inc. ("RFIG") subsidiary stock to ORI shareholders" in a press release, and said that the partial leveraged buyout of the new unit had been "reversed". "These decisions respond to objections raised by certain stakeholders that RFIG's separation from Old Republic would be disadvantageous to their interests and expectations," the company said. There was no further explanation for the cancellation of the move in the press release.
The troubled mortgage insurance unit, Republic Mortgage Insurance Company (RMIC), was ordered to suspend writing any new insurance policies last August by the North Carolina Department of insurance, its primary regulator, because its reserves to pay claims had fallen far below statutory minimums. If the subsidiary had defaulted on its obligations, it could have triggered a default on Old Republic's corporate debt, causing hundreds of millions in debt to be accelerated and come due immediately, according to Old Republic's management.
Such a default would have likely effects on other Old Republic subsidiaries, including its title insurance unit.
In January, as the subsidiary quickly burned through its cash reserves, Fitch put Old Republic on Credit Watch Negative, a precursor to a downgrade in the company's credit rating.
Later that month, RMIC was placed under supervision by the NCDOI and ordered to pay only half the dollar amount of any claims in order to conserve its cash reserves-- a development that was hailed as a positive by Old Republic executives, as it significantly reduced the likelihood that the subsidiary would run out of cash and trigger a default at Old Republic. But while the immediate threat of default had mostly passed, Old Republic CEO Aldo Zucaro acknowledged at the time that the solution was not a permanent one.
In March, Old Republic announced that it had created a new subsidiary, Republic Financial Indemnity Group (RFIG) and was combining its mortgage insurance subsidiaries and its consumer credit subsidiary in RFIG. Then, in May, it announced that it was spinning off RFIG as a separate, publicly held company, with Old Republic selling a partial interest in the company to an investment firm, with the remainder of ownership passing to current Old Republic shareholders in the form of publicly traded shares in RFIG.
The spinoff was seen as a key move for Old Republic by insurance rating agencies Fitch and Moodys, which both upgraded Old Republic's financial outlook after the announcement of the spinoff plan, and said they would likely raise Old Republic's ratings after the spinoff was completed.
The news spooked investors. Just before the announcement, which was released by Old Republic at about 3:40 PM on Friday, just before the 4 PM closing of the normal U.S. stock trading session, Old Republic's stock price was at $10.88 per share-- the highest it had been in three months. After the announcement on Friday, the stock price plummeted to $9.27 in just 20 minutes, and nearly 10 million share were traded in just twenty minutes-- nearly four times the number of Old Republic shares that are traded in an entire trading day. Shares dropped another 10% when trading resumed on Monday, falling to $8.33 by the close of trading, and again, the stock was heavily traded, with over 12 million shares changing hands, five times the normal trading volume.
In response to its cratering stock price, Old Republic issued a press release shortly after the market opened on Monday, announcing a conference call at 11 AM today in which it said it would explain more about the cancellation of the spinoff.
This morning, Old Republic's stock price has recovered slightly to $8.50, on much tamer trading volume, as investors apparently await this morning's conference call for guidance from Old Republic's executives.