Title Insurer's Financial Position Rated 'Stable,' Claims Paying Ability 'A Minus'

SANTA ANA, CA-First American Title Insurance Co. has been given single “A minus” counter-party credit and financial-strength ratings by Standard & Poor’s. Concurrently, the national rating service gave the parent company, First American Corp., a triple “B” rating on its senior debt and double “B-plus” rating to its preferred stock.

Overall, S&P sees the outlook for the insurance company, FATICO, as stable because of its strong national market share (21.5%) in the commercial and residential real estate sectors, good operating and underwriting performance margins since 1994 and historically strong cash flows.

The rating process, which FATICO voluntarily underwent, is nothing more than a rating of the title insurance company’s claims paying ability, says Tom Clemens, FATICO’s EVP and CFO. “We actually went to them and said let’s get rated, because other companies in the industry are rated. We’re pleased with it. It’s pretty easy to keep our claims rates low because we’re insuring past events. We just have to make sure we don’t make mistakes and pick up all liens and encumbrances on the property.”

On the negative side, S&P cites increased competition and operational pressures on FATICO due to the parent company’s aggressive acquisition strategy to develop a one-stop shopping network and the uncertainty generated by the company’s decision to diversify into businesses not necessarily tied to the cyclical nature of the real estate industry. Because of this diversification strategy, the parent company’s outlook is seen as generally negative.

“With anybody who has that pace, there is the risk of assimilation,” says Fred Loeloff, an analyst with S&P. “The next three years–tops–we’ll see how it plays out. It should work from all standpoints.”

FATICO has a self-imposed, single-risk limit for commercial transactions of $200 million, comparing favorably with its main competitors, whose averages range between $150 million and $393 million.

The company’s National Accounts division handles highly complex multi-property, multi-county and multi-state commercial and industrial real estate transactions throughout the country. It also offers title underwriting, escrow closing and coordinating services to process multimillion-dollar commercial/industrial real estate transactions throughout the country.

S&P believes that over the next three years, FATICO’s expenditure management will remain a critical issue as the parent company’s integration risk increases as it assimilates each acquisition into its operational structure. As for the parent company, the S&P report notes that, barring an economic downturn, its expense ratio for 2000-2001 should be 90% to 93% on a rate of return of 4% to 6%.