Morningstar DBRS Confirms First National Financial LP's Long-Term Issuer Rating at BBB, Stable Trend

DBRS Limited (Morningstar DBRS) confirmed the Long-Term Issuer Rating of First National Financial LP (FNF LP) at BBB and the credit ratings on the Senior Unsecured Debt and Class A Preference Shares of First National Financial Corporation (FNFC; together with FNF LP, FNF or the Company) at BBB (low) and Pfd-3, respectively. All trends are Stable. The Intrinsic Assessment (IA) for FNF LP is BBB and the Support Assessment is SA1. FNFC's Support Assessment is SA3, which reflects no expectation of timely external support. This results in FNFC's Senior Unsecured Debt credit rating being positioned one notch below FNF LP's IA at BBB (low).

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations and Stable trends reflect our expectations that FNF's scale and top-tier market position will continue to anchor the Company's resilient performance through the headwinds created by the new U.S. administration and the uncertainty related to its policies/tariffs and the ensuing potential unfavourable impact to the Canadian economy, employment, and the housing market. Additionally, Morningstar DBRS expects this performance to continue, despite the subdued Canadian housing market, which has resulted in lower new residential origination activity.

FNF is one of the largest nonbank mortgage finance companies in Canada, with a top-tier market share position in the independent mortgage broker channel. Reflecting the Company's market position, mortgages under administration (MUA) grew in 2024 despite reduced housing activity as the Company experienced solid growth in its multifamily residential and commercial mortgage business. FNF's scale underpins its ability to generate consistent earnings and underlying cash flows, which are a consideration in the credit ratings. In addition to generating revenues from placements with institutional investors and interest from securitized mortgages, FNF's MUA generates recurring revenues from mortgage servicing rights and renewals. Beginning in 2015, FNF commenced its third-party underwriting and fulfillment process services, and this business now serves three Schedule I Canadian banks and acts as a diversification of revenue.

FNF's low credit risk balance sheet is a consideration in the credit ratings with the Company having limited exposure to credit risk as originated mortgages are either placed with institutional investors or are insured. Credit metrics have historically been solid with FNF-originated mortgages having had low delinquency rates.

The credit ratings also reflect FNF's monoline business model, client concentration in institutional investor customers, and dependence on wholesale funding. Morningstar DBRS notes, however, that nearly 70% of securitized funding vehicles used for F2024 originations were from stable, government-sponsored programs offered by Canada Mortgage and Housing Corporation (CMHC; rated AAA with a Stable trend by Morningstar DBRS) that support much needed affordable housing initiatives. Dividends remain discretionary and FNF maintains the flexibility to reduce dividends if needed in order to fund growth in the business, absorb credit losses, and/or cover debt servicing costs in an emergency. Morningstar DBRS notes that FNF's dividend payout ratio in F2024 was 89% (including a $29 million special dividend) compared with 76% in the prior year.

CREDIT RATING DRIVERS
Morningstar DBRS would upgrade FNF's credit ratings if the Company continues on its path to increased diversification in revenue, underpinned by growth in third-party underwriting and fulfillment processing services or a notable broadening of FNF's institutional investor customers, which leads to improving financial performance.

Conversely, a prolonged deterioration in financial performance or any changes in government-backed securitization programs that could constrain the Company's ability to fund mortgage originations would also result in a downgrade of the credit ratings. Morningstar DBRS would also downgrade the credit ratings if FNF were to incur substantially higher delinquency rates and a sustained deterioration in asset quality metrics, which could result in reduced investor appetite for FNF-originated mortgages.

CREDIT RATING RATIONALE
Franchise Strength Building Block Assessment: Good
FNF is one of the largest nonbank mortgage finance companies in Canada, with MUA up 7% year-over-year (YOY) to a record $153.7 billion as of December 31, 2024. The Company offers single-family residential mortgages (approximately 62% of MUA), predominantly originated through the independent mortgage broker channel, as well as multifamily residential and commercial mortgages (approximately 38% of MUA). Total originations and renewals were relatively flat YOY at $37.5 billion; commercial origination and renewal growth of 14% YOY benefitted from FNF's leading position in the insured multiresidential market but was offset by a decline of 7% YOY in single-family residential that was affected by the aggressive re-entry of a leading player in the mortgage broker market that had retrenched in 2023.

Earnings Power Building Block Assessment: Good
Historically, FNF has generated consistent earnings and underlying cash flows, as originations revenue from placement and interest on securitized mortgages is augmented by growth in the customer base and income from mortgage servicing rights and renewals. In F2024, earnings decreased 19.5% compared with the prior year to $203.4 million. Excluding the increase in realized and unrealized losses on financial instruments of $13.7 million in F2024 (gains of $22.1 million in F2023), earnings decreased 10% YOY to $290.3 million. This reflected several factors, including the impact of lower single-family origination on placement fees, lower originations in third-party underwriting and fulfillment processing services, and higher operating expenses related to investment in IT platforms and infrastructure. Earnings were also affected by increased direct securitization compared with the prior year which delays the recognition of income to future periods. FNF continues to be exposed to institutional investor concentration risk with approximately 5.7% of its placement fees and mortgage servicing income in F2024 generated from one major Canadian financial institution, albeit much reduced from 8.5% in the prior year and 12.7% in F2022.

Risk Profile Building Block Assessment: Good
FNF has limited credit risk exposure, which is a key factor supporting the credit ratings, as largely all mortgages originated by the Company are either placed with institutional investors or insured. While single-family residential arrears/delinquency levels trended upward, particularly with FNF's nonconforming Excalibur Alt-A product, mortgages originated by FNF continue to perform well with manageable upticks in overall arrears metrics. The small amount of credit risk faced by the Company stems from uninsured mortgages that are temporarily held on the balance sheet prior to securitization, residential mortgages that are held to maturity, and a small portfolio of primarily first and second commercial bridge mortgages that are held by the Company until borrowers are approved by CMHC for a traditional term mortgage. As at December 31, 2024, 95.7% of MUA had no residual credit risk to FNF. FNF is well-regarded in the institutional investor community for its underwriting standards, and Morningstar DBRS notes that sustaining this credit performance is critical to the Company's business model of placing or securitizing FNF-originated mortgages. To this end, FNF has chosen to comply with certain Office of the Superintendent of Financial Institutions (OSFI) standards such as its Guideline B-20 so that it is a satisfactory counterparty to OSFI-regulated entities. Morningstar DBRS views this risk as well-managed with negligible loan repurchase volumes historically, reflecting FNF's strong underwriting and adjudication processes.

Funding and Liquidity Building Block Assessment: Moderate
FNF is predominantly funded through government-sponsored National Housing Act Mortgage-Backed Securities (NHA MBS) and Canada Mortgage Bond (CMB) securitization programs and a $1.5 billion committed syndicated revolving credit facility ($1.1 billion outstanding at December 31, 2024). FNF uses a combination of both committed and uncommitted repo facilities and the revolving credit facility to temporarily fund mortgages it originates and warehouses (prior to settlement with institutional investors or funding with a securitization vehicle). FNF uses unsecured notes to fund the origination costs associated with securitization, cash collateral, sub-notes in securitization structures, and mortgage and loan investments. Given that FNF-originated mortgages remain on the Company's balance sheet for only a short period, this funding model is viewed as appropriate and aligned with FNF's assets.

Capitalization Building Block Assessment: Moderate
Morningstar DBRS views FNF's capital as adequate, particularly as the Company faces limited exposure to credit risk and its capital primarily comprises common shares and retained earnings. While FNF is not subject to any regulatory capital requirements, the Company must maintain a certain level of capital as an approved issuer under CMHC's NHA MBS and CMB programs. Morningstar DBRS views FNF as having the flexibility to reduce dividends in any year as necessary, as dividends are discretionary. FNF's common share dividend payout ratio in F2024 was 89% (including a $29 million special dividend) compared with 76% in the prior year.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Governance (G) Factors
The following Governance factor had a relevant effect on the credit analysis:
Corporate/Transaction Governance is a relevant factor in the credit analysis, but it does not affect the credit ratings or the trends assigned to FNF. Morningstar DBRS finds the issuer's corporate structure reduces board and audit independence. The board of directors consists of nine members, six of whom are independent, with three board members being senior executives (two of whom are co-founders who together control approximately 71% of FNF's common shares). This factor is incorporated into FNF's Franchise grid grades.

There were no Environmental or Social factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions (November 19, 2024) https://dbrs.morningstar.com/research/443208. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

The following methodology has also been applied:
Morningstar DBRS Global Corporate Criteria (February 3, 2025)
https://dbrs.morningstar.com/research/447186

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at dbrs.morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' trends and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit https://dbrs.morningstar.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577