LandAm Acquisition Leads to Downgrade at Fidelity National

At least one rating agency expressed concerns last week about the acquisition of now-bankrupt LandAmerica Financial Group’s title underwriters by Fidelity National Financial, Inc. (FNF), with Fitch Ratings downgrading its issuer default ratings on Fidelity National, as well as docking the insurer financial strength of the conglomerate’s title insurance subsidiaries. Fitch said it cut its IDR on Fidelity National to ‘BB’ from ‘BBB,’ and cut all of Fidelity’s title insurers to ‘BBB’ from ‘A-,’ on concerns that taking on such broad exposure to the title business via the LandAm acquisitions could strain capital positions at any single underwriter now owned by the nation’s largest title insurance conglomerate. On Nov. 26, LandAmerica and a subsidiary filed to reorganize under Chapter 11 of the U.S. bankruptcy code, agreeing to sell its title underwriting subsidiaries, Lawyers Title Insurance Corporation and Commonwealth Land Title Insurance Company, as well as United Capital Title Insurance Company, to subsidiaries of Fidelity National. The acquisition included $235 million paid toLandAm, plus a $157 million capital infusion into the acquired underwriters. The $157 million infusion was paid by Fidelity National’s underwriters directly into the acquired underwriters, Fitch said. While the acquisition hurt Fidelity’s existing underwriters and its corporate debt rating, it managed to help the IFS ratings of the acquired LandAm units, which were upgraded to ‘BBB-‘ from ‘BB,’ according to Fitch. “While the $157 million payment will improve the quality of capital at the acquired underwriters, they will remain undercapitalized relative to FNF’s underwriters,” Fitch analysts, including Douglas Pawlowski, said in a statement. “In addition, FNF’s underwriters will also be in a weaker risk-adjusted capital position following the acquisition.” Fitch’s analysts also cited a “less favorable statutory capital position of the combined entity,” as well as further adverse reserve development and increased financial leverage as factors in the downgrade. In other words: looking to dominate the title industry during a historic industry downswing doesn’t come without risk. At the close of the third quarter of 2008, debt-to-total capital at Fidelity National was 32 percent, which currently exceeds the company’s long-term target debt-to-total capital of 20-25 percent. Write to Paul Jackson at Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

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