Fitch Affirms Fidelity National Financial's Ratings; Outlook Stable

Tue Jun 3, 2014 11:32am EDT

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(The following statement was released by the rating agency) CHICAGO, June 03 (Fitch) Fitch Ratings has affirmed Fidelity National Financial, Inc.'s (FNF) Issuer Default Rating (IDR) at 'BBB-' and senior unsecured debt at 'BB+'. Fitch has also affirmed the Insurer Financial Strength (IFS) of FNF's title insurance companies at 'BBB+.' The Rating Outlook is Stable. A complete list of rating actions follows at the end of this release. KEY RATING DRIVERS The affirmation reflects FNF's market-leading margins, scale and strong capitalization in title insurance. Offsetting these positives though has been a history of management's intentions to lever up the consolidated balance sheet to purchase ancillary businesses, resulting in the IFS ratings being weighed down by aggressive financial management. While Fitch notes that past ventures have been successful, historical results do not mitigate future risks. A recent example of management's aggressive financial management was the Jan. 2, 2014 acquisition of Lender Processing Services, Inc. (LPS) for $3.4 billion, of which $839 million was in stock, the remainder in cash. This transaction increased FNF's financial leverage ratio to 35% as of March 31, 2014 versus 20% as of Dec. 31, 2013. Tangible financial leverage increased to 107% from 31% over the same time period. This transaction also had a negative impact on first quarter 2014 (1Q'14) results due to various one-time charges. Fitch's rating action considered the forthcoming vote on the creation of a tracking stock (i.e. one stock will track title insurance business and one stock will track non-title insurance businesses). Fitch notes that if the shareholders approve the creation of two separate trading stocks the holding company obligations will remain, as neither group is a separate legal entity. FNF has a dominant position in title insurance accounting for approximately 33% of the U.S. title insurance market. This scale coupled with an aggressive cost management focus has allowed FNF to be one of the most profitable title insurance companies, reporting a GAAP pretax operating margin of 7.3% for full-year 2013, the second highest amongst large publicly traded title insurance companies. However, 1Q'14 results declined due mainly to expenses related to the Jan. 2, 2014 acquisition of LPS. Further, the quality of capital is significantly affected by the large amount of goodwill generated from the LPS acquisition. Fitch believes that the remainder of 2014 FNF will generate positive GAAP pretax operating margins. RATING SENSITIVITIES Fitch believes that a ratings upgrade is unlikely due to management's propensity to meaningfully alter its balance sheet at times, including material changes in financial leverage, which increases the risk profile relative to peers. Any ratings upgrade would be predicated on Fitch's belief that management has changed its willingness to materially alter the balance sheet via periodic sharp increases in leverage. Additionally, the following is a list of key rating drivers that could lead to an upgrade: --Sustained performance of operating company capital in line with Fitch's guidelines for 'A' IFS category title insurers, which includes a RAC score of approximately 140% and net leverage below 6.0x; --Sustained calendar and accident year profitability; --Sustained improvement in EBIT-based interest coverage of 7.0x or higher. The following is a list of key rating drivers that could lead to a downgrade: --An absolute RAC score below 105% or deterioration in capitalization such as net leverage above 7.5x; --Inability to move financial leverage below 30% on a post-LPS acquisition basis, by year-end 2015; --A significant write-down in goodwill or signs that indicate a potential write-down of goodwill is possible; --Deterioration in earnings, primarily measured by consolidated pretax GAAP margins, at a pace greater than peer averages; --Sustained material adverse reserve development; --Any additional acquisition that makes a meaningful change to the company's profile, particularly one that increases financial leverage. Fitch has affirmed the following ratings with a Stable Outlook: Fidelity National Financial, Inc. --IDR at 'BBB-'; --$300 million 4.25% convertible senior note maturing Aug. 15, 2018 at 'BB+'; --$300 million 6.6% senior note maturing May 15, 2017 at 'BB+'; --$400 million 5.5% senior note maturing Sept. 1, 2022 at 'BB+'; --Four-year $800 million unsecured revolving bank line of credit due July 2018 at 'BB+'. Fidelity National Title Ins. Co. Alamo Title Insurance Co. of TX Chicago Title Ins. Co. Commonwealth Land Title Insurance Co. --IFS ratings at 'BBB+'. Contact: Primary Analyst Gerald Glombicki, CPA Director +1-312-606-2354 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Dafina Dunmore, CFA Director +1-312-368-3136 Committee Chairperson Martha Butler, CFA Senior Director +1-312-368-3191 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. 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 These rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Insurance Rating Methodology' (Nov. 13, 2013). Applicable Criteria and Related Research: Insurance Rating Methodology here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON 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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