Analysts at Fitch Ratings say it’s likely they’ll lower the ratings of First American Corp. and its title insurance companies by a notch once the company posts results for the year on Feb. 28.

In separate announcements last week, First American said it was spinning off its title insurance and related financial business into a separate company, and that it expected to report a $50 million fourth-quarter loss (see Inman News story).

First American officials said the company would have been profitable if not for “catastrophic losses” from October wildfires in California, write-downs of “certain private strategic investments and operational assets,” litigation reserves and employee severance payments. First American announced 1,900 layoffs in September (see story).

But Fitch analysts noted that in announcing its fourth-quarter earnings expectations, First American also revealed results were dented by higher provisions for title claims. Fitch said it was placing First American and its title insurance companies on “Rating Watch Negative” largely in anticipation that the company’s title insurance segment will perform below expectations.

Placing First American Corp.’s issuer default and senior debt ratings on Rating Watch Negative “reflects the likelihood that upon review of full-year results Fitch would likely lower ratings by one notch,” Fitch analysts said. Lower ratings would make it more expensive for First American to borrow money.

Also placed on Rating Watch Negative were the A+ insurer financial strength ratings of First American Title Insurance Co., First American Title Insurance Co. of New York, First American Title Insurance Co. of Oregon, First American Title Insurance Co. of North Carolina, First American Title Insurance Co. (UK) PLC, Land Title Insurance Co. of St. Louis, Ohio Bar Title Insurance Co., Port Lawrence Title & Trust Co., Mortgage Guaranty & Title Co., Massachusetts Title Insurance Co., Western National Title Insurance Co. and United General Title Insurance Co.

Fitch has had a negative outlook on First American Group’s ratings since August, after the company announced a $243.6 million charge to strengthen loss reserves, and a $181 million decline in surpluses related to the valuation of its subsidiaries and affiliates.

The plan to spin off its title insurance and related businesses into a new company, to be known as First American Financial Corp., will protect the title business from debt First American takes on as it expands its real estate information business, Fitch analysts said.

While that’s “significant” strategic shift for First American, Fitch analysts said their rating action “is largely focused on performance below expectations at the title operations.”

Fitch analysts said they also have longer-term concerns about reserve quality and operating performance relative to peers, given First American’s ratings. “First American has one of the highest standalone insurer financial strength ratings for title insurance and thus Fitch has expectations that the company’s financials and metrics will be representative of an industry leader,” analysts said.

First American Corp. officials did not immediately respond to a request for comment Monday.


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