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TMCNet:  Fitch Expects to Rate First American Group's New Senior Debt 'BBB-'; Outlook Positive

[January 24, 2013]

Fitch Expects to Rate First American Group's New Senior Debt 'BBB-'; Outlook Positive

CHICAGO --(Business Wire)--

Fitch Ratings has affirmed the 'A-' Insurer Financial Strength (IFS) rating of the First American Title Insurance Companies (First American). A complete list of members follows below. Additionally, Fitch has affirmed First American Financial Corporation's (FAF) 'BBB' Issuer Default Rating (IDR) and expects to assign a 'BBB-' to FAF's planned $250 million senior unsecured debt offering that matures in 2023. The Rating Outlook for all ratings remains Positive.

Fitch's rating actions are based on the company's continued profitability, strong capitalization, and moderate financial leverage. Fitch looks at FAF's capitalization on both a risk adjusted and non-risk adjusted basis. By both measures First American's capital is amongst the highest in Fitch's title insurance rated universe.

FAF also had several favorable developments since Fitch's last review in December 2012 including the proposed debt offering, which will term out all borrowings under the revolving credit facility and strong open order flow in December 2012. Open orders are up 9.3% in December 2012 compared to December 2011 and 27.5% for Q4 12 compared to Q4 11.

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. Reserves have developed unfavorably through the first nine months 2012 by $24.4 million, this continues a several year trend for FAF of adverse reserve development. The development so far in 2012 was primarily related to a guarantee valuation product sold in Canada which the company continues to sell but with altered terms and conditions. For 2011, the company's reserves were adversely impacted by $112 million.

At Sept. 30, 2012 FAF reported a debt-to-capital and a debt-to-tangible capital of approximately 10.8% and 16.7% respectively. Pro forma Q3'12 financial leverage will increase to 12.5% as the company will incur a net debt increase of $50 million as the proceeds of the debt offering will be used to pay off the $200 million balance on the revolving credit facility and forgeneral corporate purposes.

FAF reported EBIT based interest coverage of 37 times (x) as of Sept. 30, 2012, and Fitch notes that pro forma interest coverage will be approximately 19x.

SENSITIVITY/RATING DRIVERS

The following key rating triggers could lead to an upgrade:

--An increase in reserve strength and stability such that prior accident year reserves do not deteriorate;

--A sustained increase in RAC of 175% or greater;

--A strengthening of First American's traditional capital metrics, such as operating leverage of 4.0x or better, while maintaining risk profile;

--An improvement in quality of policyholder surplus;

--Sustained GAAP calendar year underwriting combined ratio of 96% or better;

--A sustained pretax GAAP operating margin of 5% or better.

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

--Sustained adverse reserve development;

--Deterioration in earnings, primarily measured by pre-tax GAAP margins, at a pace greater than peer averages;

--An increase in tangible financial leverage above 30%;

--An absolute RAC score below 130% or deterioration in capitalization profile that would lead to a material weaker balance sheet.

Fitch has affirmed the following ratings with a Positive Outlook:

First American Financial Corporation

--IDR at 'BBB';

--Four-year $600 million revolving bank line of credit due 2016 at 'BBB-'.

Fitch expects to assign a 'BBB-' to FAF's $250 million unsecured debt due 2023.

Fitch has affirmed the 'A-' IFS ratings with a Positive Outlook for the following entities:

--First American Title Insurance Company;

--First Title Insurance, PLC.;

--Ohio Bar Title Insurance Co.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Jan. 11, 2013).

Applicable Criteria and Related Research:

Insurance Rating Methodology -- Amended

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm rpt_id=698731

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.


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