Fitch Places Fidelity National Title Group on Rating Watch Positive
|September 14, 2006|
CHICAGO -- The ratings for Fidelity National Title Group, Inc. (FNT) and its title insurance subsidiaries (see complete list below) were placed on Rating Watch Positive pending the completion of the proposed spin-off of FNT from Fidelity National Financial, Inc. (FNF). The basis for the Positive Rating Watch is both the strong operating performance at the underwriting subsidiaries level and the expected moderate consolidated financial leverage following the completion of the proposed transaction.
In the proposed transaction, FNF is eliminating its holding company structure and forming two new independent public holding companies, separating its title insurance from its information services operations. FNT, consisting of title insurance, specialty insurance, Sedgwick CMS, Inc. third-party administrator business, and other assets will be distributed to FNF shareholders in a tax-free distribution and renamed Fidelity National Financial (New FNF).
In the balance of the proposed transaction, FNF's Fidelity National Information Services, Inc. (FIS) subsidiary will merge with FNF in a tax-free transaction and continue to be known as FIS. New FNF will have no ownership interest in FIS following the transactions.
Fitch's Positive Rating Watch reflects the strong operating performance of the title underwriting subsidiaries, a top-tier competitive position among national title companies, and reduced consolidated financial leverage after the completion of the proposed transaction that will separate FNT from FIS.
FNT 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, FNT's average statutory combined ratio was 94.2%, which was more than 2 percentage points better than the next best national underwriter. Over the same five-year period, FNT's statutory return on surplus averaged 43% compared to a 25% average for the five national underwriters.
Despite losing its No.1 market share to First American Financial during the first half of 2006 according to the American Land Title Association, FNT's market share remained strong at approximately 29%, holding an approximate 10-percentage point advantage over the No.3 competitor in title insurance.
Debt-to-total capital at FNT was 18% as of June 30, 2006 and financial leverage is expected to stay at approximately the current level after the completion of the proposed transaction early in the fourth quarter of 2006. FNT's financial leverage is significantly lower than the consolidated leverage within FNF, which was 49% at the close of the second quarter of 2006. The risk that dividends from title insurance underwriters will be used to support debt at FIS will be eliminated by the proposed spin-off.
Balanced against these positives are the acquisitive nature of the management team at FNT/New FNF and the multitude of investigations and lawsuits facing FNT and the title insurance industry in general. It is expected that New FNF will support the growth of Sedgwick through acquisitions, and consequently, future financial leverage will remain a key rating issue.
The proposed transaction supports Fitch's view that there remains considerable event risk from strategic changes and that acquisition activity within New FNF will continue to be incorporated into its ratings. There is also some uncertainty related to completing this restructuring, as numerous steps are required including favorable Internal Revenue Service tax rulings, and Securities and Exchange Commission approval. Fitch will closely monitor events related to these transactions and assign ratings for the new entities upon completion of the restructuring.
Fitch expects to resolve the Rating Watch upon the closing of the proposed spin-off with a single-notch upgrade, assuming the transaction does not undergo material changes. The favorable resolution of the Positive Rating Watch would reflect both strong operating performance of the underwriting subsidiaries and moderate financial leverage at New FNF.
No rating actions were taken on FIS or Sedgwick as Fitch continues to analyze the impact of the proposed transaction on these companies as well as expectations for the respective capital structures.
Fitch placed the following ratings on Rating Watch Positive:
Fidelity National Title Group, Inc.
Issuer Default Rating (IDR) '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.
Insurer financial strength 'A-'.
Source: Fitch Ratings