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' IDR for First American Financial Corporation (FAF). Lastly, Fitch has revised the Rating Outlook for all ratings to Positive from Stable.
Fitch's rating affirmation and Outlook revision to Positive 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.
As of year-end 2011, First American reported a risk adjusted capital (RAC) score of 163% and statutory operating leverage of 2.9 times (x). As of March 31, 2012, First American reported a GAAP calendar year combined ratio of 93% versus a 103% for first quarter-2011. Driving the year-over-year improvement was less adverse reserve development during 2012 and to a lesser extent a lower expense ratio.
Offsetting these positives are concerns about First American's reserve adequacy and concentrated position in CoreLogic, Inc. (CLGX) common stock. Reserves developed unfavorably in 2011 continuing a several year trend for FAF of adverse reserve development. Policy years 2005, 2006 and 2007 have posted the highest loss ratios for FAF in recent history. They are now at a point where 50% or more of all claims losses are paid. This should lessen the chance of further severe loss development in these periods going forward.
On June 1, 2010 First American Financial Corporation became a publicly traded company following its spin-off from its prior parent (later rebranded to CLGX). As part of the transaction First American received 12.9 million shares of CLGX of which four million shares were sold in April 2011. Approximately two-thirds of the remaining shares are at First American Financial Corp, and the balance is at the First American Title Insurance Company (FATICO) level.
As of March 31, 2012 First American owned approximately 8.9 million shares of CLGX, with a cost basis of $167.6 million and an estimated fair value of $145.8 million. This represents less than 10% of First American's shareholder equity. In August 2011, First American publicly announced that it had intentions to purchase CLGX. First American withdrew the offer in December of last year.
At March 31, 2012 FAF reported a debt-to-capital and a debt-to-tangible capital of approximately 12% and 19% respectively. For the same time, FAF reported EBIT based interest coverage of 18 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 5.0% or better.
Conversely, the following are key rating triggers that could lead to a downgrade:
- 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 and revised the Outlook to Positive:
First American Financial Corporation (FAF)
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 and revised the Outlook to Positive for the following entities:
- First American Title Insurance Company;
- First Title Insurance, PLC.;
- Ohio Bar Title Insurance Co.