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Fitch Upgrades First American Group's Ratings; Outlook Stable

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Fitch Ratings has upgraded the Issuer Default Rating (IDR) of First American Financial Corporation (NYSE: FAF) to 'BBB+' from 'BBB' and FAF's $250 million 4.3% senior unsecured notes to 'BBB' from 'BBB-'. Fitch has also upgraded the Insurer Financial Strength (IFS) rating of the First American Title Insurance Companies (First American) to 'A' from 'A-'. See the complete list of affected ratings below. The Rating Outlook for all ratings is Stable.

KEY RATING DRIVERS

Fitch's rating decision 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's rating action today is predicated on the belief that FAF's management has achieved a sufficient level of loss reserves and will maintain an adequate reserve position going forward.

FAF's risk-adjusted capital (RAC) score for year-end 2012 was 154% using Fitch's new RAC model. FAF's score was adversely affected by a RAC model change to the reinsurance charge in addition to an increase in correlation of this charge with other risk charges, causing year-over-year RAC scores to decline 9 percentage points. On a non-risk-adjusted basis FAF's operating leverage metrics are the best in Fitch's rated universe.

FAF has also taken several steps in improving the quality of policyholders' surplus at the insurance company operating levels by destacking First American Data Co., LLC and First American Home Buyers Protection. The ratio of affiliated investments to surplus was down to 73% at year-end 2012 compared to 107% at year-end 2011.

First American publicly releases open and closed order counts on a monthly basis. Open orders are a leading indicator of revenue in the short term. Open orders were down 19% in June 2013 compared to June 2012 but were up almost 2.6% for second quarter 2013 compared to second quarter 2012. Fitch believes that near-term order flow will decline, primarily driven by a drop off in refinance orders but will be offset somewhat by an increase in purchase orders. Title insurers' premium revenue from a purchase order is approximately double that of a refinance order, but margins are similar.

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. GAAP loss reserves have developed unfavorably through the first half of 2013 by $118 million, which continues a several year trend for FAF of adverse reserve development. The development so far in 2013 was primarily related to policy years 2004-2008, which were adversely affected by a few large commercial claims and increased claims frequency related to residential lenders policies.

Fitch recognizes that the magnitude of reserve deficiencies has declined from the highs of 2007 and started to stabilize to more historical levels. Further, as policy years 2004-2008 mature there is a decreasing potential for material increases related to these policy years. Management stated that carried reserves are currently 5% above the internally estimated midpoint of reserves post the second-quarter reserve charge. Future reported reserve deficiencies could lead to a rating downgrade back to prior levels.

At June 30, 2013, FAF reported debt-to-capital and debt-to-tangible capital of approximately 11.8% and 17.8%, respectively. FAF reported EBIT-based interest coverage of 15.6x as of June 30, 2013.

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 12.0% or better; --Demonstrating that operating performance would not be materially affected 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%; --An absolute RAC score below 130% or deterioration in capitalization profile that would lead to a materially weaker balance sheet.

Fitch has upgraded the following ratings:

First American Financial Corporation (FAF) --IDR to 'BBB+' from 'BBB'; Stable Outlook; --$600 million revolving bank line of credit due 2016 to 'BBB' from 'BBB-'; --$250 million 4.3% senior unsecured notes due 2023 to 'BBB' from 'BBB-'.

Fitch has upgraded the IFS rating of the following entities to 'A' from 'A-' with a Stable Outlook:

--First American Title Insurance Company; --First Title Insurance, PLC.; --Ohio Bar Title Insurance Co.

Fitch has assigned the following an IFS rating of 'A' with a Stable Outlook: --First American Title Insurance Company of Louisiana.

Additional information is available at www.fitchratings.com.

Applicable Criteria and Related Research: --'Insurance Rating Methodology' (Jan. 11, 2013).

Latest Ratings for FAF

DateFirmActionFromTo
Apr 2019UpgradesNeutralOverweight
Jan 2019Initiates Coverage OnBuy
Jul 2018MaintainsNeutralNeutral

View More Analyst Ratings for FAF
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Posted-In: Analyst Color Upgrades Analyst Ratings

 

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