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TMCNet:  Fitch Affirms First American Group's Ratings; Outlook Stable

[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, 2014.

RATING SENSITIVITIES

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 downgrade:

--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 Stable Outlook:

--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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723072

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=832777

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


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