Fitch Places Fidelity National on Rating Watch Negative
August 28, 2008
CHICAGO -- Fitch Ratings has placed the following 'BBB+' Issuer Default Rating (IDR) of Fidelity National Financial, Inc. (NYSE: FNF - News) on Rating Watch Negative, along with the 'A' insurer financial strength (IFS) ratings of its nine title insurance underwriting subsidiaries (collectively known as Fidelity Title). A complete list follows the end of the press release.
The Negative Rating Watch reflects the unsustainability of FNF's 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. 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. Resolution of the Rating Watch depends on FNF's ability to report sufficient earnings to support its dividend to shareholders.
The ratings are supported by operating performance of the title underwriting subsidiaries that is better than peers albeit down significantly given the pressures on an industry-wide down cycle. In addition, FNF's risk-adjusted capital (RAC) ratio is better than the industry average and an important sign of balance sheet strength. Lastly, financial leverage at FNF remains consistent with the rating category although interest coverage is weak, reflecting the deterioration in earnings.
Fidelity Title enjoys an expense advantage over other national underwriters as seen in the company's combined ratio and return on capital. Over the most recent five-year period, Fidelity Title's average statutory combined ratio was 94.5%, which was more than two percentage points better than the average for the national underwriters. Over the same five-year period, Fidelity Title's statutory return on surplus averaged 45% compared to a 26% average for the five national underwriters.
In spite of losing its number one market share to First American Financial during 2006 according to the American Land Title Association, Fidelity Title's market share remained strong at approximately 27%, holding an approximate eight-percentage point advantage over the number three competitor in title insurance.
The Fitch Risk-Adjusted Capital Ratio (RAC) for Fidelity Title was 151%, which is above the industry aggregate of 140%. The Fitch RAC ratio quantitatively tests capital adequacy relative to several risk areas, including investment risks, reserve adequacy and leverage, exposure to large losses, business concentrations, expense leverage and agency-related risks. Despite the fact that Fidelity Title's RAC decreased by 24 percentage points from the prior year, it exceeded the weighted average RAC score of Fitch's rating universe due to substantial declines in RAC scores by other national peers.
Balance sheet strength will remain an important component of insurer financial strength ratings for title insurers during the current unusually severe down cycle. FNF's RAC ratio is expected to remain near the industry average for 2008.
As of the close of the second quarter of 2008, debt-to-total capital at FNF was 26%. FNF's long-term target debt-to-total capital in 20%-25%, and this level of financial leverage is consistent with Fitch's guidelines for the rating category. Financial leverage is a key rating issue for FNF and will continue to weigh heavily.
Fitch has placed the following ratings on Rating Watch Negative:
- Fidelity National Financial, Inc.
- --IDR 'BBB+';
- --$250 million 7.30% senior note maturing Aug. 15, 2011 'BBB';
- --$250 million 5.25% senior note maturing March 15, 2013 'BBB'.
- --Unsecured bank line of credit 'BBB'.
- Fidelity National Title Ins. Co.
- Ticor Title Ins. Co. of FL
- Alamo Title Insurance Co. of TX
- Nations Title Insurance of NY
- Chicago Title Ins. Co.
- Chicago Title Ins. Co. of OR
- Security Union Title Ins. Co.
- Ticor Title Ins. Co.
- National Title Ins. Co. of NY
- --IFS 'A'.
Source: Fitch Ratings