CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Fidelity National Financial, Inc.'s (FNF) Issuer Default Rating (IDR) at 'BBB-' and senior unsecured debt at 'BB+.' Fitch has also affirmed the Insurer Financial Strength (IFS) of FNF's title insurance companies at 'BBB+.' The Rating Outlook for all ratings is Stable. A complete list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The affirmation follows both FNF's recent announcement that it plans to acquire Lender Processing Services, Inc. (LPS) for $2.9 billion, as well as Fitch's periodic annual review of FNF's ratings. FNF plans on financing the acquisition, which is expected to close in fourth quarter 2013, with approximately 50% common equity and 50% debt.
The affirmation reflects expected increased financial leverage, reduced financial flexibility, and reduced quality of holding company capital at FNF on a proforma basis post acquisition, offset by recent improvements in the statutory capitalization of FNF's title insurance subsidiaries.
As of March 31, 2013 FNF reported financial leverage of 22% and tangible financial leverage, which excludes goodwill from equity, of 33%. On a proforma basis, financial and tangible financial leverage increase to 33% and 67%, respectively. Although Fitch believes that FNF will actively seek to reduce financial leverage closer to FNF's stated long term target of 25% the additional goodwill the LPS transaction generates significantly alters the quality of capital.
Fitch maintains its concern about FNF's aggressive capital management strategy based on its willingness to periodically lever up the balance sheet to fund acquisitions, which Fitch views as a limiting factor to the company's rating. While FNF has been successful to date in most of its acquisitions, past success does not guarantee future success.
Offsetting some of the integration risk tied to the LPS acquisition is the fact LPS was formerly owned and spun off by FNF. If properly executed this transaction will diversify earnings and be an additional source of cash flow.
FNF's title insurance subsidiaries have sustained profitability during the current difficult economic conditions, and have materially improved their capital positions. Fitch estimates that FNF's Risk Adjusted Capital (RAC) score for year end 2012 to be 161% a significant improvement from prior year's score of 111%. The improvement is attributable mainly to a 52% increase in statutory surplus.
Most of Fidelity's improved surplus in 2012 was derived from earnings. However, accounting changes and deferred tax assets accounted for approximately 20 percentage points of the RAC score improvement. Additionally, Fitch adjusted Fidelity's stated surplus by $65 million after tax to reflect its view of the company's statutory reserve redundancy, which accounted for 10 percentage points of its RAC score. No such benefit was recognized in the prior year.
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. For full year 2012, FNF reported a GAAP combined ratio of 89.2% and a consolidated GAAP pretax margin of 9.4%.
For first quarter 2013 FNF reported a consolidated GAAP pretax operating margin of 6.9% down from first quarter of 2012 which reported an 8.5%. However, from a title insurance perspective FNF reported a pretax operating profit of $171 million or a 12.3% margin, the strongest first quarter since 2004.
The Stable Outlook reflects Fitch's view that FNF will continue to operate profitably despite the challenges faced by the title insurance industry. Specifically, mortgage originations are forecast to fall during 2013, placing added pressure on title insurance margins.
RATING SENSITIVITIES
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 yearend 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-';
--$300 million 4.25% convertible senior note maturing Aug. 15, 2018 at 'BB+';
--$300 million 6.6% senior note maturing May 15, 2017 at 'BB+';
--$400 million 5.5% senior note maturing September 1, 2022 at 'BB+'
--Four year $800 million unsecured revolving bank line of credit due April 16, 2016 at 'BB+'.
Fidelity National Title Ins. Co.
Alamo Title Insurance Co. of TX
Chicago Title Ins. Co.
Commonwealth Land Title Insurance Co.
--IFS ratings at 'BBB+'.
Additional information is available at 'www.fitchratings.com'.
These rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Jan. 11, 2013).
Applicable Criteria and Related Research:
Insurance Rating Methodology - Amended
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=698731
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=792646
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