Fitch Downgrades First American on Title Insurance Concerns

Add one of the nation’s largest title insurance and property data information providers to the list of companies who have seen their key ratings hit as a result of the ongoing mortgage mess.

Fitch Ratings said Thursday morning that it had downgraded and placed on negative rating watch a number of key ratings for the First American Corporation (FAF: 27.21 +2.95%), including moving its core issuer default rating rating down one notch to “BBB” — just two notches above a junk rating. The company also saw its senior unsecured debt downgraded to “BBB-,” while the company’s title insurance business unit saw its financial strength ratings dropped one notch to “A-,” Fitch said.

The drop in ratings is the second in less than three months for the company, with Fitch originally knocking First American’s ratings down in mid-February.

The rating company said its downgrades were driven by a “significant deterioration in First American’s pro forma capital adequacy” using Fitch’s models, and that the new ratings bring the title industry giant in line with its peers.

Policyholders’ surplus at First American’s group of title insurers declined approximately $320 million during 2007, Fitch said. Risk-adjusted capital — the ratio between available and required policyholders surplus — fell to approximately 74 percent from 142 percent the prior year, according to the ratings company, the second consecutive year that First American’s RAC ratio had fallen.

Fitch also warned that further downgrades may be in the offing if First American doesn’t pump additional capital into its insurance subsidiaries.

“Ratings may further deteriorate one to two notches below current ratings if the company does not increase capital to its title subsidiaries such that the RAC ratio increases to levels more comfortably above 100 percent,” Fitch said in a press statement.

The First American Corp. has already contributed $115 million to First American at the end of the first quarter, Fitch said, which bumps the company’s risk-adjusted capital score to 91 percent.

First American is in the process of actively splitting apart its title insurance business from its property information and analytics business, as CEO Parker Kennedy has said that the information business segment was being undervalued due to the negative pull on title insurance.

Disclosure: The author owned no positions in FAF when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.