A.M. Best Downgrades Ratings of First American Title Insurance Group and First American Corporation
April 24, 2008
OLDWICK, N.J. — A.M. Best Co. has downgraded the financial strength rating to A- (Excellent) from A (Excellent) and issuer credit ratings (ICR) to "a-" from "a" of First American Title Insurance Group (First American) and its member companies. A.M. Best also has downgraded the ICR to "bbb-" from "bbb" and the debt ratings to "bbb-" from "bbb" and "bb" from "bb+" on the existing senior debt and preferred securities of First American Corporation (NYSE: FAF) (Santa Ana, CA). The outlook for all ratings is negative. (See link below for a complete list of the companies and ratings.)
While First American continues to possess a significant market presence within the title industry, the above rating actions reflect A.M. Best's concerns over the group's overall capitalization following an approximately $325 million drop in statutory surplus reported for year-end 2007. The decline in surplus primarily was due to a significant increase in non-admitted inter-company receivables and goodwill as a result of First American's planned segregation of its financial services and information solutions segments expected to be completed by third quarter 2008. An additional reason for the decline in surplus is the posting of a supplemental reserve to First American's statutory premium reserve in order to offset the higher claims reserves, reflecting the claims reserve strengthening actions undertaken in 2007. These include a pre-tax charge of $122 million in reserve strengthening taken in fourth quarter 2007 and a pre-tax charge of $243.6 million in reserve strengthening taken in second quarter 2007 as a result of unfavorable loss development from prior years, particularly the policy years of 2004-2006. The reserving actions of 2007 follow a $155 million pre-tax charge due to unfavorable loss development from prior years the group took in second quarter 2006. The higher than expected claims arising from 2004 through 2006 derived from the significant increase in defaults, foreclosures and mortgage fraud, which developed in 2007 and was related to mortgages originating in those years, particularly those in the subprime category. First American remains challenged to achieve future profitability owing to a significant softening in key real estate markets, which have negatively impacted title premium revenues in 2007. The outlook is based on First American's ongoing challenge to manage the current real estate down cycle and improve operating earnings and capitalization.
For a complete list of First American Title Insurance Group and First American Corporation's FSRs, ICRs and debt ratings, please visit www.ambest.com/press/042205firstamerican.pdf.
Source: A.M. Best Company