Dec 6 - 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 period.
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
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 following
--First American Title Insurance Company;
--First Title Insurance, PLC.;
--Ohio Bar Title Insurance Co.