Rating Action on Fidelity National

Recently, Reuters reported that Fitch Ratings Inc. has affirmed its Issuer Default Rating (“IDR”) of 'BBB-' and the Insurer Financial Strength (“IFS”) of 'BBB+' on Fidelity National Financial, Inc. (FNF - Snapshot Report). It has also assigned a 'BB+' debt rating to the company’s newly issued senior notes. The outlook for all the ratings is stable.

The rating affirmations came on the back of the company’s leading position as the title insurer together with the prudent handling of expenditure by the management team. It also reflects the company’s capability of earning profits under stiff economic conditions and an unfavorable real estate market scenario coupled with a better capital and a sound reserve position.

The current outlook is based on Fidelity National Financial’s better positioning compared to its peers with respect to operating advantage. The company also awaits the collapse of “mortgage originations” during the remaining period of this year as it will prove to be a positive for the company and further enhance its favorable position.

However, the rating agency continues to be concerned regarding Fidelity National Financial’s reluctance towards raising its financial leverage to invest in inorganic expansion and the overall capital management strategy. Also, these factors can mar the overall effect of the positive attributes.

The company’s financial leverage ratio and tangible financial ratio stood at 19.3% and 30.7%, respectively, at the end of second-quarter 2012. These ratios are subject to revision after the adjustments made for the addition of the new loan in order to offset another loan slated to mature during March next year.

Fitch may consider an upgrade in the ratings if capital adequacy, as measured by the agency’s Risk Adjusted Capital (RAC) ratio, increases to roughly 150%. Also, an improvement in the conventional operating metrics (including net leverage below 6.0x) may trigger rating upgrades.

However, the ratings are subject to downgrades if the RAC falls below 105%, net leverage exceeds 7.5x, financial leverage surges beyond 30% and the reserves are not maintained adequately,

In a separate development, Standard & Poor's Ratings Services (“S&P”) has assigned its senior debt rating of 'BBB-' on the company’s recently issued secured notes. The ratings came on the back of Fidelity National Financial’s strong and competitive market position, proper management of operations and efficiently tackling the mortgage market activity partially neutralized by the company’s increased focus on the cyclical industry.

The S&P expects the total obligation to capital on a pro-forma basis to exceed 27% and interest coverage ratio to be approximately 7x.

Rating affirmations or upgrades from credit rating agencies play an important part in retaining investor confidence in the stock as well as maintaining creditworthiness in the market. We believe the company’s strong ratings scores will help it retain investor confidence and write more businesses going forward, thereby boosting its results.

Stewart Information Services Corporation (STC - Snapshot Report), which competes with Fidelity National Financial on the same lines, also received a similar debt rating of 'BB+' from Fitch with a stable outlook. Both Fidelity National Financial and Stewart Information retain a Zacks #1 Rank, which translates into a short-term Strong Buy rating.