Fitch Ratings Affirms First American Corp. Outlook To Positive

October 28, 2004

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed all the ratings of First American Financial Corp. (FAF) and its title insurance companies (The First American Group). All ratings are listed below. The Rating Outlook for all ratings has been revised to Positive from Stable.

The affirmation of the ratings and Positive Outlook reflect the company's strong and improving positions in title insurance and real estate ancillary services, solid operating performance during the recent real estate boom resulting in substantial growth in policyholders' surplus, strong capitalization including the second largest policyholders' surplus of the top five national companies, the third highest risk-adjusted capital ratio (RAC) and below-average operating leverage. Offsetting these positives is higher than average intangible equity and above-average affiliated investments that reduce liquidity.

In line with industry trends, FAF's revenue growth slowed in the first half of 2004, as declining refinancing activity was somewhat offset by a strong housing market. While Fitch believes the company's operating results will be in line with national peer averages, the industry will be challenged to maintain profitability levels that have been generated in recent periods. Through the second quarter of 2004, FAF's GAAP revenue growth and pretax margins (excluding minority interest) were 10.8% and 10.3%, respectively, compared to national peer averages at 11.6% and 9.5%, respectively.

First American Group is currently the second largest provider of title insurance in the U.S. based on 2003 operating revenue (market share of approximately 23.9% based on operating income and premium). Going forward, First American Group is expected to maintain or slightly grow its strong market position in the title insurance industry.

FAF is also a lead provider of real estate and non-real estate related products and services. Fitch expects the organization to continue to build its other real estate related and non-real estate related businesses.

Fitch considers FAF's capitalization to be strong. As of June 30, 2004, statutory capital grew to $713 million from $651 million in year-end 2002. At year-end 2003, FAF's capital adequacy on a risk-adjusted basis (based on Fitch's risk-adjusted capital model) was strong at 202%.

Fitch is somewhat concerned that the company's acquisition strategy has significantly increased intangible equity. However, Fitch believes the recent acquisitions align well with the company's strategy and favorably are meeting expectations. Of the five national title companies, FAF has the highest levels of goodwill and intangibles to shareholders' equity (82.2% at June 30, 2004).

Fitch believes financial leverage is moderate and in line with expectations for the rating category. FAF's debt-to-capital ratio is expected to be managed long term at approximately 20% to 25%, with fixed charge coverage at or above 8 times (x). At June 30, 2004, FAF's debt-to-total capital ratio (including minority interest) was approximately 15.9%, debt plus preferred securities to total capital ratio was 19.4% and fixed charge coverage was above 16x.

FAF is a publicly traded holding company based in Santa Ana, CA with GAAP assets of $5.3 billion and shareholders' equity of $2.3 billion at June 30, 2004. FAF is a leading provider of real estate related services to property buyers and mortgage lenders with operations in Financial Services (77% of GAAP operating revenues) and Information Technology (23% of GAAP operating revenue).

Entity/Issue/Type Action Rating/Outlook
First American Financial Corp.
  Senior debt Affirm BBB'/Positive;
First American Capital Trust
  -- Trust preferred securities Affirm 'BBB-'/Positive;
First American Title Insurance Company
  --Insurer financial strength Affirm 'A'/Positive;
First American Title Insurance Co. of New York
  --Insurer financial strength Affirim 'A'/Positive;
First American Title Insurance Co. of Texas
  --Insurer financial strength Affirm 'A'/ Positive;
First American Title Insurance Co. of Oregon
  --Insurer financial strength Affirm 'A'/Positive;
Land Title Insurance Co. of St. Louis
  --Insurer financial strength Affirm 'A'/Positive;
Ohio Bar Title Insurance Co.
  --Insurer financial strength Affirm 'A'/Positive;
Port Lawrence Title & Trust Co.
  --Insurer financial strength Affirm 'A'/Positive;
First American Title Insurance Co. of North Carolina
  --Insurer financial strength Affirm 'A'/Positive;
Mortgage Guaranty & Title Co.
  --Insurer financial strength Affirm 'A'/Positive;
Massachusetts Title Insurance Co.
  --Insurer financial strength Affirm 'A'/Positive;
First American Title Insurance Co. ( UK) PLC.
  --Insurer financial strength Affirm 'A'/Positive.

Source: Fitch Ratings

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