KEY RATING DRIVERS
Fitch is maintaining the Negative Outlook on Stewart as it is unlikely the company will achieve a full-year consolidated operating margin of 5% or better despite positive operating performance. Additionally, while shareholders' equity has grown 3% over year-end 2015 to
Fitch views capital strength as the main factor supporting Stewart's current ratings, but increased borrowings and dividends to shareholders place greater weight on the importance of profitable operations to maintain capital levels. Fitch would likely consider downgrading the rating if sustained financial underperformance leads to further deterioration in capital.
Conversely, if reported results are better than expected going forward, leading to improved capital metrics, Fitch will likely revise the Outlook to Stable from Negative.
Fitch does not believe a ratings downgrade is warranted at this time as capital metrics are still within Fitch's rating sensitivities, though measures such as financial leverage have further deteriorated through 2016. The affirmation of Stewart's IFS and IDR ratings reflect these capitalization metrics as well as the company's market position as the fourth largest title insurer in the U.S. market.
Stewart reported a consolidated GAAP operating margin of 4.1% through the first nine months of 2016. This is an improvement over the 0.3% margin reported in the prior year period, which was negatively affected by the discontinuation of delinquent-loan servicing operations. Stewart's combined ratio also improved to 96.9% versus 98.4% in the prior year period, and the company has no reported large losses through the first nine months of 2016.
Despite the improvement, consolidated results still trail peers by roughly 5-6 percentage points and will likely trail peers in the future due to the absence of higher margin ancillary services. Comparable title-only pretax operating margins, expected to move more in-line with competitors in the near to mid-term, trail peers by a roughly equal margin, with Stewart reporting a 7% title operating margin through the first nine months of 2016.
Financial leverage deteriorated to 17% at nine-months ended 2016 as the notes payable balance increased to
The GAAP fixed-charge coverage ratio improved materially to 28x at the end of the third quarter, as operating earnings were up significantly and interest expense on notes payable remains low. Coverage for full-year 2016 is anticipated to move modestly lower but remain strong.
Key rating triggers that could lead to a downgrade include:
--Sustained operating profit margin below 3%;
--Capital deterioration whereby Stewart's RAC ratio drops below 125% and/or net written premiums-to-surplus increases above 4.5x;
--Financial leverage ratio above 20%;
--A large reserve charge that exceeds 10% of prior year reserves;
Key rating triggers that could lead to a return to Stable Outlook include:
--Improvement in capital metrics and stabilization or growth in policyholders' surplus;
--Consolidated operating profit margin above 5% in 2016, which would move operating performance more in line with peers;
--No further material goodwill impairments or large one-time expense charges that materially impact results.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings with a Negative Outlook:
Stewart Information Services Corp.
--IDR at 'BBB'.
--IFS at 'A-'.
Additional information is available on www.fitchratings.com
Insurance Rating Methodology (pub.
Dodd-Frank Rating Information Disclosure Form
Copyright (c) 2016 by Fitch Ratings, Inc.,
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from
Source: Fitch Ratings