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A.M. Best Revises Outlook To Positive For First American Financial Corp. And Its Title And PC Insurance Subsidiaries

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.

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