Fitch Affirms First American Group's Ratings; Outlook Remains Positive
CHICAGO -- December 06, 2012
Fitch Ratings has affirmed the 'A-' Insurer Financial Strength (IFS) rating of
the First American Title Insurance Companies (First American). A complete list
of members is attached below. Additionally, Fitch has affirmed the 'BBB'
Issuer Default Rating (IDR) for First American Financial Corporation (FAF).
The Rating Outlook for all ratings remains Positive.
Fitch's rating affirmation is a reflection of First American's capitalization,
profitability, and moderate financial leverage. Fitch looks at FAF's
capitalization on both a risk adjusted and non-risk adjusted basis. By both
measures First American's capital is amongst the highest in Fitch's title
insurance rated universe.
FAF also had several favorable developments since the last review including
the complete sale of CoreLogic, Inc. (CGLX) stock in third quarter 2012 for
$207.9 million resulting in a realized gain of $40.4 million. Additionally,
open residential orders are up 27% in third quarter 2012 compared to third
quarter 2011 and commercial revenue is up 19% to $106.3 for the same time
Offsetting these positives are concerns about First American's reserve
adequacy and the potential for a slowdown in mortgage originations in the
second half of 2013. Reserves have developed unfavorably so far in 2012 by
$24.4 million, this continues a several year trend for FAF of adverse reserve
development. The development so far in 2012 was primarily related to a
guarantee valuation product sold in Canada which the company continues to sell
but with altered terms and conditions. For 2011, the company's reserves were
adversely impacted by $112 million.
At Sept. 30, 2012 FAF reported a debt-to-capital and a debt-to-tangible
capital of approximately 10.8% and 16.7% respectively. For the same time, FAF
reported EBIT based interest coverage of 37 times (x). Fitch notes that its
interest coverage calculation uses stated interest expense per SEC filings.
FAF does not break out interest expense paid on its debt from interest paid by
its banking subsidiaries.
The following are key rating triggers that could lead to an upgrade:
--An increase in reserve strength and stability such that prior accident year
reserves do not deteriorate;
--A sustained increase in RAC of 175% or greater;
--A strengthening of First American's traditional capital metrics, such as
operating leverage of 4.0x or better, while maintaining risk profile;
--An improvement in quality of policyholder surplus;
--Sustained GAAP calendar year underwriting combined ratio of 96% or better;
--A sustained pretax GAAP operating margin of 5% or better.
Conversely, the following are key rating triggers that could lead to a
--Sustained adverse reserve development;
--Deterioration in earnings, primarily measured by pre-tax GAAP margins, at a
pace greater than peer averages.
--An increase in tangible financial leverage above 30%;
--An absolute RAC score below 130% or deterioration in capitalization profile
that would lead to a material weaker balance sheet.
Fitch has affirmed the following ratings with a Positive Outlook:
First American Financial Corporation (FAF)
--IDR at 'BBB';
Fitch has affirmed the following rating of FAF
--Four-year $600 million revolving bank line of credit due 2016 at 'BBB-'.
Fitch has affirmed the 'A-' IFS Rating with a Positive Outlook for the
--First American Title Insurance Company;
--First Title Insurance, PLC.;
--Ohio Bar Title Insurance Co.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Oct. 18, 2012).
Applicable Criteria and Related Research:
Insurance Rating Methodology - Amended
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
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.
Gerald Glombicki, CPA
Fitch, Inc., 70 W. Madison Street, Chicago, IL 60602
Dafina Dunmore, CFA
Brian Schneider, CPA, CPCU, ARe
Press spacebar to pause and continue. Press esc to stop.