Fitch Affirms Stewart’s Ratings; Outlook Remains Negative

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'BBB-' Issuer Default Rating (IDR) and 'BB+' senior unsecured debt rating of Stewart Information Services Corp. (SISCO). Fitch has also affirmed the 'BBB+' Insurer Financial Strength (IFS) ratings of Stewart Title Guaranty Company (STG) and its wholly owned subsidiary Stewart Title Insurance Company (STIC), collectively referred to as Stewart. The Rating Outlook for all ratings remains Negative.

Fitch's rating action is predicated on the lack of profitable operations which has led to reductions in capital. The lack of profitability is magnified when compared to peers. Stewart's technology-related investments have not allowed the company to show better margins than peers during the current down market. SISCO's year-to-date GAAP pretax margin was a negative 1.6% compared with the national peer average, excluding SISCO, of positive 5.6%. Similarly, SISCO's year-to-date GAAP combined ratio of 107.7% was above the national peer average, excluding SISCO, of 96.6%.

Favorably, Fitch notes the company has taken several steps to bolster profitability and has had several profitable individual quarters but has not been able to sustain that momentum for a calendar year. The last full year that SISCO reported an operating profit was 2006.

Traditionally, Fitch viewed Stewart's capitalization as strong, which was a primary factor in the company's above average industry rating. However, beginning with the sharp deterioration in capital in 2008, Stewart's capital levels both on an absolute and risk-adjusted basis have been reduced to being just adequately capitalized for the current rating category.

Despite an $85.2 million net loss for 2009, Stewart's statutory policyholder surplus grew approximately 16% or $53.5 million. The two main sources for this increase were a $69.6 million capital contribution from the holding company into the operating companies which related to the holding company paying off debt of the operating subsidiaries and a $50.1 million favorable change in unrealized gains and losses primarily from positive change in affiliated common stocks. While increases to capital are a credit positive, Fitch evaluates the quality of the increase to determine its sustainability and permanence.

The increase in policyholder surplus increased Stewart's risk-adjusted capital (RAC) score 157% from 143% at year end 2008. The improvement reflects a 16% increase in surplus that more than offsets the 5% increase in its expense leverage and defalcation risk charges, the greatest driver of Targeted Policyholder Surplus (TPS). While the 2009 RAC results show improvement the company's capitalization remains well below historical levels.

The current Negative Outlook reflects Fitch's belief that Stewart's margins will continue to be pressured in the near to intermediate term given the current downturn in the real estate cycle.

Within Fitch's rating rationale are multiple key rating drivers that expose the company's rating to uncertainty. If Stewart were to materially deviate from any of these items, especially for an extended period, the ratings could be affected. The following is a list of key rating drivers:

--Fitch believes that for capital to be a factor in creating positive rating pressure surplus would have to organically grow to a level where RAC scores would be in the 220-250% range while maintaining traditional leverage ratios in line with historical norms. The current ratings anticipate a relatively flat RAC score over the near term.

--Severe operating losses or material deterioration in capital would place further downward pressure on Stewart's ratings.

--If SISCO is operating at a pretax operating loss for the first half of 2011 there could be negative pressure on the ratings particularly if peers are still operating at a gain.

--Fitch anticipates that SISCO's tangible financial leverage, which was 24.5% as of June 30, 2010, will remain below 25% over the near term. If this metric were to increase there could be pressure to widen the existing debt notching and/or downgrade all ratings.

Fitch has affirmed the following ratings:

Stewart Information Services Corp.

--IDR at 'BBB-';

--$65 million 6% senior convertible notes due 2014 at 'BB+'.

Stewart Title Guaranty

Stewart Title Insurance Company

--IFS at 'BBB+'.

The Rating Outlook is Negative.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology', dated Aug. 16, 2010;

--'Title Insurance Rating Methodology', dated March 24, 2010.

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547766

Title Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=506370

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Fitch Ratings
Primary Analyst
Gerald Glombicki, CPA, +1-312-606-2354
Director
Fitch, Inc.
70 W. Madison, Chicago, IL 60602
or
Secondary Analyst
Dafina Dunmore, CFA, +1-312-368-3136
Director
or
Committee Chairperson
Julie Burke, CFA, CPA, +1-312-368-3158
Managing Director
or
Media Relations
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com

Source: Fitch Ratings