OREANDA-NEWS. Fitch Ratings has affirmed the Issuer Default Rating (IDR) of First American Financial Corporation (FAF) at 'BBB+' and the Insurer Financial Strength (IFS) rating of the First American Title Insurance Companies (First American) at 'A'. A complete list of members is attached below. The Rating Outlook for all ratings is Stable.

KEY RATING DRIVERS

The rating affirmation is based on the company's strong capitalization, moderate financial leverage, and continued profitability. Fitch looks at FAF's capitalization on both a risk adjusted and non-risk adjusted basis.

FAF's risk adjusted capital (RAC) score for year-end 2015 is up significantly from prior year to 187% due to an increase in policyholder surplus and reduction in affiliated investments.

As of March 31, 2016, FAF reported a debt-to-capital and a debt-to-tangible capital of approximately 17% and 24% respectively. FAF reported EBIT based interest coverage of 10 times (x) as of March 31, 2016.

FAF reported a consolidated GAAP pretax operating margin of 8.5% for full year 2015, an improvement over prior year period of 7.3%. FAF's profitability was helped by higher commercial title revenues and higher direct premiums. FAF had a 5.9% consolidated GAAP pretax operating margin as of March 31, 2016 as typically first and fourth quarters tend to by slower due to cyclicality of real estate transactions.

Offsetting these positives are concerns about First American's reserve adequacy and the impact of any future mortgage interest rate increases on title revenues. Title reserves developed $93 million unfavorably for full year 2015, continuing a several year trend for FAF of adverse reserve development. The company cites new methodology related to large policy losses as a primary driver of the development.

Fitch recognizes the magnitude of reserve deficiencies have declined from the highs of 2007 and have somewhat stabilized. Further, as policy years 2004-2008 mature the potential for material increases related to these policy years decreases. As of year-end 2015, FAF reported incurred but not reported (IBNR) reserves of approximately $884 million, within the internal actuarial range of $720 million to $922 million, and for the first time in recent years carried reserves are above the implied midpoint of $821 million.

RATING SENSITIVITIES

The following are key rating triggers that could lead to an upgrade:

--A solid reserve position such that GAAP reserves develop favorably on a consistent basis;

--Improvement in capital strength demonstrated by an increase in RAC score to 200% or greater;

--A sustained pretax GAAP operating margin of 12% or better;

--Demonstration of greater operating performance stability in the next period of unfavorable mortgage and real estate market cycle.

Conversely, the following are key rating triggers that could lead to a downgrade:

--Adverse GAAP reserve development in excess of 10% of total reserves;

--Sharp deterioration in earnings performance, primarily measured by pre-tax GAAP margins, at a pace greater than peer averages;

--A sustained increase in financial leverage above 30%;

--A RAC score below 130% or deterioration in capitalization profile that would lead to a material weaker balance sheet.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

First American Financial Corporation (FAF)

--IDR at 'BBB+';

--$700 million revolving bank line of credit due 2019 at 'BBB';

--$250 million 4.3% debt due 2023 at 'BBB';

--$300 million 4.6% debt due 2024 at 'BBB'.

The Rating Outlook is Stable.

Fitch has affirmed the 'A' IFS rating of the following entities with a Stable Outlook:

--First American Title Insurance Company;

--First Title Insurance, PLC.;

--Ohio Bar Title Insurance Co.;

--First American Title Insurance Company of Louisiana;

--First American Title Guaranty Company.