|[June 03, 2014]
Fitch Affirms First American Group's Ratings; Outlook Stable
CHICAGO --(Business Wire)--
Fitch Ratings has affirmed the Issuer Default Rating (IDR) of First
American Financial Corporation (FAF) at 'BBB+' and the Insurer Financial
Strength (IFS) rating of the First American Title Insurance Companies
(First American) at 'A'. A complete list of members is attached below.
The Rating Outlook for all ratings is Stable.
KEY RATING DRIVERS
The rating affirmation of the company is based on the company's strong
capitalization, moderate financial leverage, and continued
profitability. Fitch looks at FAF's capitalization on both a risk
adjusted and non-risk adjusted basis.
Fitch estimates that FAF's risk adjusted capital (RAC) score for year
end 2013 is 162% up 6pp from prior year. The main drivers behind the
increase were a 3% increase in adjusted policyholder surplus (APS) and a
34% decline in (R6) affiliated investment risk. These factors were
slightly offset by a doubling in (R4) market volatility risk as FAF
substantially increased its exposures to common stocks.
FAF has also taken several steps in improving the quality of
policyholder surplus at the insurance company operating levels by
transfering ownership of several non-insurance subsidiaries out from the
lead operating subsidiary to the parent. The ratio of affiliated
investments to surplus was down to 54% at year end 2013 compared to 107%
at year end 2011.
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 2014. Title reserves developed $149 million
unfavorably for full year 2013 continuing a several year trend for FAF
of adverse reserve development. The development in 2013 was primarily
related to three areas: domestic lender policies for policy years
2004-2008, commercial policies for policy years 2007-2008 mainly from
mechanics liens, and a guaranteed valuation product offered in Canada.
Fitch recognizes the magnitude of reserve deficiencies have declined
from the highs of 2007 and started to stabilize to more historical
levels. Further, as policy years 2004-2008 mature the potential for
material increases related to these policy years decreases. As of
year-end 2013, FAF carried incurred but not reported (IBNR) reserves of
approximately $840 million, within the internal actuarial range of $730
million to $1 billion, but below the implied midpoint of $920 million.
As of March 31, 2014 FAFreported a debt-to-capital and a
debt-to-tangible capital of approximately 16% and 24% respectively.
FAF reported EBIT based interest coverage of 9.3 times as of March 31,
The following are key rating triggers that could lead to an upgrade:
--A solid reserve position such that GAAP reserves develop favorably on
a consistent basis;
--A sustained increase in RAC score of 200% or greater;
--A sustained pretax GAAP operating margin of 12% or better;
--A demonstration that operating performance would not be materially
impacted by another downturn in the real estate cycle.
Conversely, the following are key rating triggers that could lead to a
--Adverse GAAP reserve development in excess of 1-2% of earned premium;
--Deterioration in earnings, primarily measured by pre-tax GAAP margins,
at a pace greater than peer averages;
--A sustained increase in financial leverage above 30%;
--A RAC score below 130% or deterioration in capitalization profile that
would lead to a material weaker balance sheet.
Fitch has affirmed the following ratings:
First American Financial Corporation (FAF)
--IDR at 'BBB+', Stable Outlook;
--$700 million revolving bank line of credit due 2016 at 'BBB'.
--$250 million 4.3% debt due 2023 at 'BBB'.
Fitch has affirmed the 'A' IFS Rating of the following entities with a
--First American Title Insurance Company;
--First Title Insurance, PLC.;
--Ohio Bar Title Insurance Co.
--First American Title Insurance Company of Louisiana.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Nov. 13, 2013).
Applicable Criteria and Related Research:
Insurance Rating Methodology
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