Fitch Warns on Fidelity National, Downgrades Other Title Insurers

Title insurance is a tough business these days — not only are more claims rolling in, but the amount paid per claim is also on the rise. And if that weren’t rough enough, far fewer new policies are rolling in the front door too, making for a trifecta of lost revenue for most of the industry’s behemoths in the space. Fitch Ratings earlier this week took the axe to ratings of two title insurers, too, while warning that it would likely cut the ratings of another soon. Second-largest underwriter Fidelity National Financial, Inc. (FNF) faces the prospect of seeing its ‘BBB+’ issuer default rating and the ‘A’ insurer financial strength ratings of its nine title insurance underwriting subsidiaries downgraded over concerns that a current dividend may be unsustainable. “During 2008, FNF is expected to take $180 million in dividends from its underwriting subsidiaries in order to support the shareholders’ dividend,” Fitch analysts said in a press statement. “Current statutory profitability at the underwriters does not support this level of dividend.” In other words, despite operating strength at the company — Fitch in particular noted that over a five-year period, Fidelity Title’s statutory return on surplus averaged 45 percent, compared to a 26 percent industry average — the industry conditions are sour enough that continuing to pay the dividend would put capital “at a level inconsistent with the rating category.” Elsewhere, not just warnings While warning on Fidelity National, Fitch trimmed both its IFS and IDR ratings for LandAmerica Financial Group (LFG), moving the company’s IDR rating to just one notch above junk status. “Fitch believes LFG’s consolidated balance sheet fundamentals lag national peers at a time in the market cycle where risk-adjusted surplus, financial leverage and reserve redundancy are critical to financial strength ratings,” the agency said in a statement. The downgrades at LandAmerica likely come as no surprise, and the insurer has been the most troubled of the major underwriters throughout the credit crunch. What may come as a surprise, however, was a downgrade to Stewart Title Guaranty Company (STG) — which had boasted an ‘A+’ IFS rating, Fitch’s highest amongst title insurers. Fitch dropped Stewart’s IFS rating to ‘A,’ citing “deterioration in STC’s profitability both relative to peers and on an absolute basis.” The nation’s largest title insurer, however — that would be The First American Corp. (FAF) — actually saw Fitch affirm its IDR rating at ‘BBB,’ although the company was assigned a negative outlook. Fitch noted that it still has concerns about First Am’s capital, reserve levels, and near-term prospects for profitability. For more information, visit http://www.fitchratings.com. Disclosure: The author held no positions in firms mentioned when this story was published; indirect holdings may exist via mutual fund investments, as well. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.