Fitch Ratings has affirmed the 'BBB-' Issuer Default Rating (IDR) and
'BB+' senior unsecured debt rating of Stewart Information Services Corp.
(Stewart). Fitch has also affirmed the 'BBB+' Insurer Financial Strength
(IFS) ratings of Stewart's insurance subsidiaries and the 'BBB' IFS
rating of Stewart Title Limited (STL). The Rating Outlook is Stable. A
complete list of ratings follows at the end of this release.
Stewart's ratings reflect improved operating results, solid
capitalization, a conservative investment portfolio and modest financial
leverage. However, performance continues to trail its rated peer group,
as defined as Fidelity National Financial, Inc., First American
Financial Corp., and Old Republic Title Group.
Stewart reported net earnings of $12.8 million through June 30, 2012,
compared with a net loss of $4.4 million in the prior year period. The
improvement was driven by significantly better results in its title
insurance operations and continued solid earnings in its growing real
estate information (REI) operations.
Through June 30, 2012, Stewart's pretax profit margins lagged the title
operations of Fitch's rated universe by approximately five percentage
points, when adjusted for segment reporting differences. Specifically,
'Corporate and Other' expenses were included with title operations for
peer companies to be consistent with Stewart.
Stewart reported a modest operating profit in its title insurance
segment through the first half of 2012, which can be attributed to rate
increases, expense efficiencies through back-office centralization, and
the cancellation of unprofitable agents.
The company's higher-margin REI segment provides support to the title
operations with continued solid earnings. Profit margins declined (31%
through six months 2012 compared with 50% in prior year period) due to a
shift in business mix to mortgage servicing and real estate owned
(REO)-related services from higher-margin loan modification services.
Management anticipates pretax margins in the REI segment to stabilize to
a sustainable level of 25%-30%, which Fitch views as a favorable offset
to title margins (4% for second quarter 2012). Stewart's REI segment
currently makes up 8% of total revenues but is expected to become a
larger contributor over the next several years.
Fitch believes reserve adequacy remains uncertain, although recent
policy years are showing signs of stability.
Stewart's capitalization remains adequate with a risk-adjusted capital
(RAC) ratio of 157% at year-end 2011, flat with the prior year. On a
non-risk-adjusted basis (measured as net written premiums to surplus)
the company's capitalization is also reasonable at 3.4x.
Stewart's debt to capital remains modest at 12.9%, excluding unrealized
investment gains, as of June 30, 2012. When goodwill is excluded,
financial leverage is 21.7%.
The affirmation of STL's rating and its Stable Outlook reflect the
company's continued improving performance with significant premium and
Key rating drivers that could lead to a downgrade include:
--Failure to sustain operating profitability;
--Capital deterioration whereby Stewart's RAC ratio drops below 140%
and/or net written premiums to surplus increases significantly above
--A large reserve charge that exceeds 5% of prior year surplus;
--Debt to tangible capital, excluding FAS 115, above 30%.
Key rating drivers that could lead to an upgrade include:
--Sustained profitability, as measured by combined ratio with
consideration for business mix, in line with higher rated peers;
--Consistently stronger risk-based capital levels, such as a RAC ratio
Fitch has affirmed the following ratings with a Stable Outlook:
Stewart Information Services Corp.
--IDR at 'BBB-';
--$65 million 6% senior convertible notes due 2014 at 'BB+'.
Stewart Title Guaranty
--IFS at 'BBB+'.
Stewart Title Insurance Company
Stewart Title Limited
--IFS at 'BBB'.
Additional information is available at 'www.fitchratings.com'.
The ratings above were solicited by, or on behalf of, the issuer, and
therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria & Related Research:
--'Insurance Rating Methodology' (Sept. 22, 2011).
Applicable Criteria and Related Research:
Insurance Rating Methodology
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Fitch RatingsPrimary AnalystDafina Dunmore, CFA, +1
312-368-3136DirectorFitch, Inc.70 W. Madison StreetChicago,
IL 60602orSecondary AnalystGerald Glombicki, CPA, +1
312-606-2354DirectororRalf Ehrhardt, +44 (0) 20 3530
1551AnalystorCommittee ChairpersonMartha M.
Butler, CFA, +1 312-368-3191Senior DirectororMedia
Relations:Brian Bertsch, +1 212-908-0549Email: firstname.lastname@example.org
Source: Fitch Ratings