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 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.

FAF's risk adjusted capital (RAC) score for year-end 2014 was 157% down 7pp from prior year. FAF has taken several steps in improving the quality of policyholder surplus at the insurance company operating levels by shifting ownership of non-insurance subsidiaries from the lead operating subsidiary to the parent holding company.

As of Sept. 30, 2015, FAF reported a debt-to-capital and a debt-to-tangible capital of approximately 18% and 26% respectively. FAF reported EBIT based interest coverage of 16 times (x) as of Sept. 30, 2015.

For a similar time frame, FAF reported a consolidated GAAP pretax operating margin of 8.3% an improvement over prior year period of 6%. FAF's profitability was helped by higher direct and commercial revenues despite the company announcing a $3.5 million claim for wildfires in the company's property/casualty operations.

Offsetting these positives are concerns about First American's reserve adequacy and the impact of a higher interest rate on title revenues. Title reserves developed $65 million unfavorably for full year 2014 continuing a several year trend for FAF of adverse reserve development. For the first nine months of 2015, the company has reported just under $15 million in adverse reserve development.

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 2014, FAF carried incurred but not reported (IBNR) reserves of approximately $802 million, within the internal actuarial range of $726 million to $991 million, but below the implied midpoint of $859 million.

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;

--Improvement in capital strength demonstrated by an increase in RAC score to 200% or greater;

--A sustained pretax GAAP operating margin of 12.0% or better;

--Demonstration of greater operating performance stability in the next period of unfavorable mortgage and real estate market cycle.

Conversely, the following are key rating triggers that could lead to a downgrade:

--Adverse GAAP reserve development in excess of 10% of total reserves;

--Sharp deterioration in earnings performance, 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.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

First American Financial Corporation (FAF)

--IDR at 'BBB+' Stable Outlook;

--$700 million revolving bank line of credit due 2019 at 'BBB';

--$250 million 4.3% debt due 2023 at 'BBB';

--$300 million 4.6% debt due 2024 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;

--First American Title Guaranty Company.

Additional information is available on www.fitchratings.com

Applicable Criteria

Insurance Rating Methodology (pub. 16 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871172

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=993805

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=993805

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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 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.

View source version on businesswire.com: http://www.businesswire.com/news/home/20151111005891/en/

Fitch Ratings
Primary Analyst
Gerald Glombicki, CPA
Director
+1-312-606-2354
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Jeremy Graczyk
Analyst
+1-312-368-3208
or
Committee Chairperson
Martha Butler, CFA
Senior Director
+1-312-368-3191
or
Media Relations:
Hannah James, +1 646-582-4947
[email protected]

Source: Fitch Ratings

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