Fitch Ratings has raised its ratings outlook for First American Financial and its subsidiaries to “positive” from “stable” because of the nation’s second largest title insurer’s “capitalization, profitability and moderate financial leverage.” It affirmed all of its ratings on FAF.
First American’s combined ratio at the end of the first quarter was 93%, compared with 103% one year prior. The improvement, Fitch said, was due to less adverse reserve development during this year, and to a lesser extent, a lower expense ratio.
But offsetting the encouraging signs are concerns about reserve adequacy and FAF’s concentrated position in CoreLogic Inc., which it split off from in June 2010.
FAF received 12.9 million shares of CoreLogic at the time of the spin-off; four million of those shares were sold in April 2011.
At the end of the first quarter, FAF’s CoreLogic stake had a cost basis of $167.6 million and an estimated fair value of $145.8 million. This is less than 10% of FAF’s shareholder equity.
“Policy years 2005, 2006 and 2007 have posted the highest loss ratios for FAF in recent history. They are now at a point where 50% or more of all claims losses are paid. This should lessen the chance of further severe loss development in these periods going forward,” Fitch said.
Among the things that could lead to a ratings increase are an increase in reserve strength and stability such that prior accident year reserves do not deteriorate and a sustained increase in the risk adjusted capital score, currently at 163% to 175% or greater.
On the other hand, a downgrade could happen, if among other things, the RAC goes below 130%.
