Credit rating giant Moody’s Investor Service recently upgraded ratings of First American Financial Corporation (FAF - Free Report) as well as its lead title insurance unit, First American Title Insurance Company. For First American Financial, the rating agency upgraded the senior debt rating from Baa3 to Baa2. Concurrently, the insurance financial strength (IFS) rating of the subsidiary has been upgraded from A3 to A2. The outlook for these ratings remained stable.
This rating action came on the back of the property and casualty (P&C) insurer’s enhanced operational efficiencies, solid earnings performance and its capability to effectively steer the highly cyclical title insurance market.
Ratings Representation of First American Financial and its Unit
First American Financial’s improved operational abilities, which led the company to emerge as the largest title insurer in the United States displaying robust profitability, is reflected by the ratings’ upgrade. The P&C insurer’s core title insurance franchise delivered a strong operational performance with pretax profit margins averaging 11.3% over the last three years as well as displaying positive claims experience.
The rating agency anticipates First American Financial's centralized operations, underwriting experience, dedicated expense oversight and stellar technology abilities to bolster its operating margins in the future.
Robust profitability, solid market position, strict underwriting discipline and financial controls as well as a substantial presence in both residential and commercial properties, are reflected in the First American Title’s ratings upgrade.
The P&C insurer’s efficient expense management in the time of real estate sector downturns and specialty insurance segment, which includes a profitable, thriving home warranty business, are some of its other strengths.
However, volatility in revenues and profitability are likely to offset the above-mentioned forte. First American Financial remains exposed to higher regulatory and legal risk due to its intensified focus in title insurance.
First American Financial’s sustained operational performance is highlighted by its stable outlook with the rating giant estimating the company’s ability to maintain its financial flexibility metrics within rating expectations.
Factors Leading to a Rating Upgrade/Downgrade
The factors that could lead to a ratings upgrade include maintenance of profit margins in low double digits (10%) or better through the title insurance cycle, interest coverage above 8x, holding company cash flow coverage of interest above 5x, a long-term commitment to moderate adjusted financial leverage below 30% and unadjusted leverage below 20%.
On the flip side, factors possibly resulting into a ratings downgrade are profit margins in mid-single digits, interest coverage below 5x and adjusted financial leverage above 30%.
Zacks Rank and Share Price Movement
Currently, First American Financial has a Zacks Rank #3 (Hold). Shares of the company have rallied 18.3% in a year’s time, outperforming the industry’s increase of 12.2%. Further, we expect solid bottom-line growth, strategic initiatives as well as a robust capital position to drive the stock higher in the near term.
Stocks to Consider
Some better-ranked stocks from the insurance industry are Alleghany Corporation (Y - Free Report) , NMI Holdings, Inc. (NMIH - Free Report) and RLI Corp. (RLI - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Alleghany provides property and casualty reinsurance and insurance products in the United States and internationally. The company delivered positive surprises in three of the last four quarters with an average beat of 17.61%.
NMI Holdings provides private mortgage guaranty insurance services in the United States. The company came up with positive earnings surprises in three of the last four quarters with an average beat of 24.55%.
RLI Corp. underwrites property and casualty insurance in the United States and internationally. The company pulled off positive surprises in each of the last four quarters with an average beat of 33.65%.
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