KEY RATING DRIVERS
The affirmation reflects FNF's market-leading margins, scale and strong capitalization in title insurance. Offsetting these positives though has been a history of management's intentions to lever up the consolidated balance sheet to purchase ancillary businesses, resulting in the IFS ratings being weighed down by aggressive financial management. While Fitch notes that past ventures have been successful, historical results do not mitigate future risks.
A recent example of management's aggressive financial management was the
Fitch's rating action considered the forthcoming vote on the creation of a tracking stock (i.e. one stock will track title insurance business and one stock will track non-title insurance businesses). Fitch notes that if the shareholders approve the creation of two separate trading stocks the holding company obligations will remain, as neither group is a separate legal entity.
FNF has a dominant position in title insurance accounting for approximately 33% of the U.S. title insurance market. This scale coupled with an aggressive cost management focus has allowed FNF to be one of the most profitable title insurance companies, reporting a GAAP pretax operating margin of 7.3% for full-year 2013, the second highest amongst large publicly traded title insurance companies.
However, 1Q'14 results declined due mainly to expenses related to the
Fitch believes that a ratings upgrade is unlikely due to management's propensity to meaningfully alter its balance sheet at times, including material changes in financial leverage, which increases the risk profile relative to peers. Any ratings upgrade would be predicated on Fitch's belief that management has changed its willingness to materially alter the balance sheet via periodic sharp increases in leverage.
Additionally, the following is a list of key rating drivers that could lead to an upgrade:
--Sustained performance of operating company capital in line with Fitch's guidelines for 'A' IFS category title insurers, which includes a RAC score of approximately 140% and net leverage below 6.0x;
--Sustained calendar and accident year profitability;
--Sustained improvement in EBIT-based interest coverage of 7.0x or higher.
The following is a list of key rating drivers that could lead to a downgrade:
--An absolute RAC score below 105% or deterioration in capitalization such as net leverage above 7.5x;
--Inability to move financial leverage below 30% on a post-LPS acquisition basis, by year-end 2015;
--A significant write-down in goodwill or signs that indicate a potential write-down of goodwill is possible;
--Deterioration in earnings, primarily measured by consolidated pretax GAAP margins, at a pace greater than peer averages;
--Sustained material adverse reserve development;
--Any additional acquisition that makes a meaningful change to the company's profile, particularly one that increases financial leverage.
Fitch has affirmed the following ratings with a Stable Outlook:
Fidelity National Financial, Inc.
--IDR at 'BBB-';
Fidelity National Title Ins. Co.
Chicago Title Ins. Co.
--IFS ratings at 'BBB+'.
Additional information is available at 'www.fitchratings.com'. The issuer did not participate in the rating process other than through the medium of its public disclosure
These rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com'.
--'Insurance Rating Methodology' (
Insurance Rating Methodology
Source: Fitch Ratings
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