UPDATE 1-Title insurer First American posts surprise loss

(Adds details, byline)

By Jonathan Stempel

NEW YORK, Aug 2 (Reuters) - In a widening of the fallout from the U.S. housing downturn, First American Corp. (FAF.N), one of the nation's largest title insurers, posted a surprise second-quarter loss on Thursday as it beefed up reserves to combat rising defaults, foreclosures and fraud.

Santa Ana, California-based First American said it added $243.6 million to reserves to cover title policy losses and other claims, reducing net results by $158.3 million, or $1.64 per share.

The company's net loss totaled $66 million, or 68 cents per share, compared with net income of $25.5 million, or 26 cents, a year earlier. Results also included a loss of 18 cents per share for asset write-downs and title branch closures.

Analysts on average expected a profit of 90 cents per share, according to Reuters Estimates.

"It's very appropriate that First American bolstered reserves, even if it's disappointing that it put itself in this situation by not reserving enough," Doug Pawlowski, a director at credit agency Fitch Ratings, said in an interview.

"Many companies expected title losses to be lower in the recent period of heavy refinancing volume, which is (usually) typified by lower loss ratios," he said. "That didn't come to fruition in this housing cycle."

First American said the higher reserves stemmed mainly from adverse real estate market conditions, "including a significant increase in defaults, foreclosures and mortgage fraud." They related mainly to policies issued from 2004 to 2006.

"The increase in the title insurance loss provision was disappointing but necessary," Chief Executive Parker Kennedy said in a statement.

Revenue was little changed at $2.16 billion, and topped the average $2.15 billion forecast.

Fitch revised its outlook on First American's low investment-grade ratings to "negative" from "stable," citing "longer-term concerns" about its reserve practices. Pawlowski expects other title insurers to bolster reserves this year. One large insurer, Fidelity National Financial Inc (FNF.N), last week said it posted a 36 percent decline in quarterly profit. It did not immediately return a call for comment on its reserves.

Shares of First American were little changed, up 28 cents to $43.71 in morning trading on the New York Stock Exchange.

((Editing by Mark Porter; Reuters Messaging: jon.stempel.reuters.com@reuters.net, 646 223 6317)) Keywords: FIRSTAMERICAN RESULTS/

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