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TMCNet:  A.M. Best Affirms Ratings of First American Financial Corporation and Its Insurance Subsidiaries

[July 24, 2014]

A.M. Best Affirms Ratings of First American Financial Corporation and Its Insurance Subsidiaries

OLDWICK, N.J. --(Business Wire)--

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 (News - Alert), 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 reslts 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.

Copyright © 2014 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.


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