A.M. Best Co. has revised the outlook to positive from stable and
affirmed the financial strength rating (FSR) of A- (Excellent) and
issuer credit ratings (ICR) of “a-” of the five title insurance
subsidiaries (collectively referred to as the First American Title
Insurance Group) of First American Financial Corporation
(FAF) [NYSE: FAF]. These five title insurance subsidiaries are: First
American Title Insurance Company, First American Title Insurance
Company of Australia Pty Limited (Australia), First American
Title Insurance Company of Louisiana (New Orleans, LA), First
Title Insurance plc (United Kingdom) and Ohio Bar Title Insurance
Company (Columbus, OH).
In addition, A.M. Best has revised the outlook to positive from stable
and affirmed the ICRs of “a” as well as the FSR of A (Excellent) of First
American Property & Casualty Insurance Company and First
American Specialty Insurance Company, collectively referred to as
First American P&C Group. The outlook for the FSR is stable.
Concurrently, A.M. Best has revised the outlook to positive from stable
and affirmed the ICR of “bbb-” of FAF. All companies are domiciled in
Santa Ana, CA, unless otherwise specified.
The positive outlook reflects First American Title Insurance Group’s
improved risk-adjusted capitalization, driven by its improved operating
results and lower underwriting and affiliated investment leverage, as
well as its significant market presence in the title industry. The group
maintains a strong franchise value and benefits from the financial
flexibility and operational support from FAF, which maintains relatively
modest financial leverage and solid interest coverage. First American
Title Insurance Group’s underwriting leverage measures significantly
improved in recent years due to its overall surplus growth, improved
operating results, cost reduction initiatives and declining premium
volume.
These positive rating factors are somewhat offset by First American
Title Insurance Group’s continuing challenges of managing the real
estate cycle as well as its significant reserve strengthening actions in
recent years due to unfavorable loss development in prior policy years.
Revenue and profitability were both negatively impacted in 2008 as a
result of the prevailing economic environment, which affected the real
estate dependent title insurance market. However, operating results have
rebounded since 2009. This rebound was mainly by reason of cost
reduction initiatives as the group focused on managing the real estate
cycle. While the housing/real estate market has shown some improvement
in recent quarters, characterized by a rebound in the purchase market,
the group will likely continue to face a challenging operating
environment owing to increased interest rates.
The rating actions for First American P&C Group recognize its continued
favorable trend of operating performance, solid risk-adjusted
capitalization and reduced underwriting leverage in recent years. This
group’s positive results are derived from its strict underwriting
discipline and loss control guidelines, which have resulted in
consistent underwriting profitability and favorable operating results
over the years, despite wildfire and severe weather-related activity.
The ratings also recognize First American P&C Group’s use of multiple
distribution channels to market its products. Besides brokers and
independent agents, First American P&C Group is able to leverage FAF’s
advanced computer systems and title distribution networks to facilitate
direct escrow sales of homeowners’ insurance.
FAF’s ICR acknowledges the capital strength of its insurance
subsidiaries, its modest financial leverage and adequate interest
coverage measures.
While A.M. Best believes FAF and its operating companies are well
positioned at their current rating levels, factors that may lead to
positive rating actions include a sustained trend of improved operating
results, while maintaining favorable underwriting leverage and
risk-adjusted capitalization. However, factors that may lead to negative
rating actions include a trend of deteriorating underwriting and
operating profitability and the erosion of surplus to such an extent
that it causes a significant rise in the organization’s underwriting
leverage measures.
The methodology used in determining these ratings is Best’s Credit
Rating Methodology, which provides a comprehensive explanation of A.M.
Best’s rating process and contains the different rating criteria
employed in the rating process. Best’s Credit Rating Methodology can be
found at www.ambest.com/ratings/methodology.
A.M. Best Company is the world's oldest and most authoritative
insurance rating and information source. For more information, visit www.ambest.com.
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