OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best has upgraded the financial strength rating (FSR) to A (Excellent) from A- (Excellent) and the issuer credit ratings (ICR) to “a” from “a-” of Fidelity National Title Insurance Company (Santa Barbara, CA), Chicago Title Insurance Company, Commonwealth Land Title Insurance Company (both domiciled in Omaha, NE) and Alamo Title Insurance (San Antonio, TX) (collectively referred to as the Fidelity National Financial Group). The outlook for all the above ratings has been revised to stable from positive. These four domestic title insurance companies are subsidiaries of Fidelity National Financial, Inc. (FNF) (headquartered in Jacksonville, FL) [NYSE: FNF].
In addition, A.M. Best has revised the outlook to stable from positive and affirmed the FSR of A- (Excellent) and the ICR of “a-” of FNF’s separately rated title insurance subsidiary, FNF Title Insurance Company Ltd. (FNF Malta) (Malta). Concurrently, A.M. Best has withdrawn the ICR of “bbb-” of FNF following its acquisition of Lender Processing Services, Inc. (LPS) (Jacksonville, FL), a leading provider of integrated technology, data and services to the mortgage lending industry in the United States, resulting in FNF primarily engaged in businesses for which A.M. Best does not have a rating methodology.
The rating upgrades reflect Fidelity National Financial Group’s improved risk-adjusted capitalization, driven by improved operating results and lower underwriting leverage measures, its strong market profile as the largest title insurance group in the United States, having a market share of approximately 31%, as of first quarter 2014, and the significant improvement in its underwriting performance that has occurred over the past two years. In addition, the group achieved surplus growth in excess of 20% in total, over the past five years, despite depressed housing and real estate market conditions, mainly due to aggressive expense management initiatives, which allowed the enterprise to continue reporting positive operating results throughout that period.
These positive rating factors are somewhat offset by Fidelity National Financial Group’s challenge to manage and sustain operating performance through the current macroeconomic environment, which has negatively impacted the real estate dependent title insurance industry and the housing market as a whole. In addition, the risks associated with FNF’s integration of LPS, could weaken the enterprise’s financial strength and place additional pressures on the title operations to service holding company debt and other obligations, if not done according to plan. The significant slowdown in the U.S. housing market negatively impacted the group’s profitability, as evidenced by the significant decline in its revenue during the five years ending 2011. However, Fidelity National Financial Group undertook aggressive efforts to achieve operating efficiencies, which along with its flexible cost structure, helped to somewhat mitigate the effects of this down cycle and has positioned the group to take advantage of an improved housing market.
The ratings of FNF Malta recognize its adequate risk-adjusted capitalization and the significant reinsurance support provided by its parent, Chicago Title Insurance Company. These positive rating factors are somewhat offset by the longer term uncertainty regarding marketing and the execution challenges management will face expanding into new markets with its title and title-related insurance coverages.
Although FNF’s ICR has been withdrawn, A.M. Best will continue to analyze the company to assess the potential impact, negative or positive, its operations and performance may have on its interactively rated title insurance subsidiaries. On Jan. 2, 2014, FNF completed the purchase of LPS, which resulted in an increase in its debt-to-total capital ratio since the company utilized debt to fund the transaction, along with the assumption of outstanding debt at LPS. In addition, debt-to-tangible capital increased significantly due to the relatively large amount of goodwill and intangibles associated with the transaction. However, management’s stated objective to return its debt-to-total capital in line with historical levels over the intermediate term along with its history of successfully acquiring and integrating companies within its stated guidance and objectives, somewhat mitigates these concerns.
While A.M. Best believes FNF’s title insurance subsidiaries are well positioned at their current rating level, given the rating upgrades, positive rating movement is unlikely over the near term. Factors that could lead to negative rating actions include a trend of deteriorating underwriting and operating profitability, the erosion of surplus that causes a significant rise in underwriting leverage measures and a decline in risk-adjusted capital or a failure of FNF to successfully integrate LPS causing a prolonged period of increased financial leverage measures, increased pressure on the title insurance companies to service enterprise debt or potential write down of goodwill.
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.