Correction: Fitch Affirms First American Group's Ratings; Outlook Stable
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'. See the complete list of rating actions at the end of this press release. The Rating Outlook for all ratings is Stable.
KEY RATING DRIVERS
The 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 7 percentage points from the prior year. The main drivers behind the decrease were lower policyholder surplus, a reduction in statutory balance reserve adequacy, and an increase in (R10) large loss and ceded reinsurance risk charge. This was offset by a reduction in (R6) affiliated investment risk, (R9) adverse claim development charge, and (R11) expense leverage and agency risk charge.
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. The ratio of affiliated investments to surplus was down to 28% at year-end 2014 compared to 108% at year-end 2011.
Offsetting these positives are concerns about First American's reserve adequacy and the impact of higher interest rates on title revenues. Title reserves developed $62.2 million unfavorably for full-year 2014, continuing a several-year trend for FAF of adverse reserve development. The development in 2013 was primarily related to policy years 2004-2008, commercial policies for policy years 2003, 2005, and 2007, and mainly from mechanics liens.
Fitch recognizes that 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.
As of March 31, 2015 FAF reported debt-to-capital and debt-to-tangible capital of approximately 18% and 28%, respectively, along with favorable EBIT-based interest coverage of 9.3x.
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'.
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.