Fitch Ratings has taken a variety of actions on six companies associated with the title insurance industry. The actions include two rating downgrades, three outlook revisions to negative, and one Rating Watch Negative.

Regarding title insurers as a whole, Fitch said holding company Stewart Information Services Corp. (STC) is currently the only company in its universe of rated insurers in the sector to have a stable rating outlook. “All other companies have a Negative Outlook or are on Rating Watch Negative, due to market pressures,” Fitch said.

The insurer financial strength ratings were downgraded for the insurance subsidiaries of LandAmerica Financial Group (LFG), from A minus to BBB plus. Additionally, LFG's issuer default rating (IDR) was lowered to BBB minus from BBB. All outlooks have been revised to negative from stable, Fitch said.

The rating agency said, it 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.”

LFG's year-end 2007 risk-adjusted capital (RAC) ratio, which tests capital adequacy for several risks, including investment risks, reserve adequacy, exposure to large losses, expense leverage and agency risks, was 110 percent–down from the year before and lower than industry averages of 140 percent, said Fitch

The LFG subsidiaries affected include Commonwealth Land Title Insurance Company, Commonwealth Land Title Insurance Company of New Jersey, Land Title Insurance Company of Pasadena, Lawyers Title Insurance Corporation, Title Insurance Company of America, and Transnation Title Insurance Company

Fitch also downgraded the financial strength ratings of Stewart Title Guaranty Company (STG), and its wholly owned subsidiary, Stewart Title Insurance Company, collectively referred to as Stewart, to A from A plus. Fitch noted that the companies are ultimately owned by the STC holding company,

The rating action “was driven by deterioration in STC's profitability, both relative to peers and on an absolute basis,” according to Fitch. Fitch's prior A plus IFS rating of STG, was the highest stand-alone rating Fitch had amongst title insurers.

The rating, it said, considered “not only STC's ongoing strong balance sheet and capital position, but also a belief that STC would perform better than peers from a profitability perspective in a down market.”

Fitch said that, through the first six months of 2008, STC's reported pretax margins were below the national peer average, excluding STC, and that its combined ratio was above the national peer average, excluding STC.

“Part of the difference is driven by STC's ongoing investments in technology,” said Fitch. “The prior rating level, in part, was based on an assumption that STC's historic technology-related investments may have allowed STC's to show better margins than peers in a down market, which has not been the case.”

The continuing downturn in the real estate cycle will also pressure STC's margins through the near-to-intermediate term, Fitch said.

The BBB plus issuer default rating of Fidelity National Financial, Inc. and the A financial strength ratings of its nine title insurance underwriting subsidiaries (collectively known as Fidelity Title) have been placed on Rating Watch Negative. Fitch said the rating watch reflects doubt that FNF can sustain its current shareholders' dividend.

“During 2008, FNF is expected to take $180 million in dividends from its underwriting subsidiaries in order to support the shareholders' dividend,” Fitch said.

“Current statutory profitability at the underwriters does not support this level of dividend. The concern is that future dividend requirements could reduce statutory capital to a level inconsistent with the rating category,” Fitch added.

It said that resolution of the rating watch depends on FNF's ability to report sufficient earnings to support its dividend to shareholders.”

Fitch affirmed the A minus financial strength rating of Connecticut Attorneys Title Insurance Company (CATIC) and revised the rating outlook to negative from stable.

The outlook revision, Fitch said, reflects the rating agency's view of the U.S. title insurance industry as a whole, and CATIC's “relatively lower tolerance to absorb operating losses in the current environment because it is a modestly-sized underwriter in a concentrated geographic area with limited access to outside capital funds relative to larger, more geographically diverse peers with greater financial flexibility.”

Attorney's Title Insurance Fund, Inc. (The Fund) was also affirmed at A minus with a revised outlook to negative from stable, Fitch said,

The rating action, it was explained “reflects The Fund's poor operating performance and slower response to cutting operating expenses relative to peers during this current difficult environment of reduced mortgage originations and greater title insurance claims.”

High exposure to the Florida market, which has suffered disproportionately in the real estate down cycle, was also a factor, Fitch said.

Fitch affirmed First American Corp.'s BBB issuer default rating, and removed it from rating watch negative. The A minus financial strength ratings of FAF's subsidiaries were also affirmed and removed from rating watch negative. All of the ratings have a negative outlook.

Fitch said that on April 10, it lowered all ratings of FAF one notch to their current levels and placed the ratings on rating watch negative due to “significant deterioration” in the company's RAC as modeled by Fitch.

The rating agency added, “Further, the rating watch was tied to management's evaluation of capital at First American given the potential spin-off of the title and specialty insurance operations, which was scheduled to be a third quarter event but has now been delayed to 2009.”

In the second quarter this year, Fitch said that FAF contributed $200.5 million to First American Title Insurance Company (FATICO). “This increase in surplus coupled with a pro forma decline of approximately 20 percent in operating expenses increases First American's 2008 pro forma RAC score to a range of 105 minus115 percent from a 2007 RAC score of 74 percent.”

However, the rating agency added, “While Fitch recognizes the improvement in capital, both on an absolute and a risk adjusted measure, the agency notes that relative to peers First American continues to underperform.”

The negative outlook, Fitch said, is related to the company's reserve levels and profitability.

Special Reports /

Fitch Takes Action On Multiple Title Insurers

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