A.M. Best has affirmed the financial strength rating (FSR) of A-
(Excellent) and the issuer credit ratings (ICR) of “a-” of the five
title insurance subsidiaries (collectively referred to as 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). The outlook for all the
above ratings is positive.
In addition, A.M. Best has affirmed the FSR of A (Excellent) and the
ICRs of “a” of First American Property & Casualty Insurance Company
and First American Specialty Insurance Company, (collectively
referred to as First American PC Companies), as well as the ICR
of “bbb-” of FAF. The outlook for the FSR is stable, while the outlook
for these ICRs is positive. All companies are domiciled in Santa Ana,
CA, unless otherwise specified.
These rating actions reflect First American Title Insurance Group’s
adequate 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 insurance 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 have
significantly improved from the prior five-year period due to its
overall surplus growth, which outpaced premium growth, improved
operating results and cost reduction initiatives.
These positive rating factors are somewhat offset by First American
Title Insurance Group’s continuing challenges in managing the real
estate cycle, significant reserve strengthening actions in recent years
and an elevated level of affiliated investments. Although affiliated
investments have been declining in recent years due to management’s
actions to de-stack capital, the high level and the reserve
strengthening actions have adversely affected the group’s risk-adjusted
capitalization. Revenue and profitability were 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, driven primarily by cost reduction
initiatives, as well as general improvement in the housing and real
estate markets.
The ratings of First American PC Companies recognize its continued
favorable trend of operating performance, disciplined operating
strategies and solid risk-adjusted capitalization. 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 PC Companies’ use of multiple distribution channels to
market its products. Besides brokers and independent agents, First
American PC Companies is able to leverage FAF’s advanced computer
systems and title distribution networks to facilitate direct escrow
sales of homeowners’ insurance. These positive rating factors are
somewhat offset by First American PC Companies’ geographic concentration
and exposure to catastrophic loss events.
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 level, 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 and decline in risk-adjusted capital.
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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