|[January 24, 2013]
Fitch Expects to Rate First American Group's New Senior Debt 'BBB-'; Outlook Positive
CHICAGO --(Business Wire)--
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 follows below. Additionally, Fitch has
affirmed First American Financial Corporation's (FAF) 'BBB' Issuer
Default Rating (IDR) and expects to assign a 'BBB-' to FAF's planned
$250 million senior unsecured debt offering that matures in 2023. The
Rating Outlook for all ratings remains Positive.
Fitch's rating actions are based on the company's continued
profitability, strong capitalization, 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 Fitch's last review in
December 2012 including the proposed debt offering, which will term out
all borrowings under the revolving credit facility and strong open order
flow in December 2012. Open orders are up 9.3% in December 2012 compared
to December 2011 and 27.5% for Q4 12 compared to Q4 11.
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 through the
first nine months 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
At Sept. 30, 2012 FAF reported a debt-to-capital and a debt-to-tangible
capital of approximately 10.8% and 16.7% respectively. Pro forma Q3'12
financial leverage will increase to 12.5% as the company will incur a
net debt increase of $50 million as the proceeds of the debt offering
will be used to pay off the $200 million balance on the revolving credit
facility and forgeneral corporate purposes.
FAF reported EBIT based interest coverage of 37 times (x) as of Sept.
30, 2012, and Fitch notes that pro forma interest coverage will be
The following key rating triggers 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
--A sustained pretax GAAP operating margin of 5% or better.
Conversely, the following key rating triggers 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 with a Positive Outlook:
First American Financial Corporation
--IDR at 'BBB';
--Four-year $600 million revolving bank line of credit due 2016 at
Fitch expects to assign a 'BBB-' to FAF's $250 million unsecured debt
Fitch has affirmed the 'A-' IFS ratings 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' (Jan. 11, 2013).
Applicable Criteria and Related Research:
Insurance Rating Methodology -- Amended
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