Fitch Affirms Stewart Information Services Corporation's Ratings; Outlook Stable

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has affirmed Stewart Information Services Corp.'s (Stewart) Issuer Default Rating (IDR) at 'BBB' and the Insurer Financial Strength (IFS) ratings of Stewart's insurance subsidiaries at 'A-'. The Rating Outlook is Stable. A complete list of ratings follows at the end of this press release.

KEY RATING DRIVERS

Stewart's ratings reflect solid capitalization, modest financial leverage and a major position within the title insurance market. Offsetting these favorable factors are concerns about the company's financial performance particularly as measured by the consolidated GAAP pre-tax operating margin. If sustained financial underperformance were to negatively impact Stewart's strong capital position, Fitch would likely consider downgrading the rating.

Stewart's capitalization metrics have trended positively recently, with a risk-adjusted capital (RAC) score of 180% at year-end (YE) 2014, increasing nearly 21% over the YE2013 score of 149%. On a non-risk-adjusted basis (net written premiums to surplus), capitalization is also solid at 2.7x.

First-quarter financial leverage increased slightly from YE2014 to 8.9% from 8.7%. Relatively low financial leverage facilitates favorable debt servicing capabilities. Though Stewart reported a negative GAAP fixed-charge coverage ratio for both first quarter 2015 (1Q15) and 1Q14, the company has reported strong annual coverage levels over the past few years, most recently finishing 2014 at 14.6x. Coverage in full-year 2015 is anticipated to move modestly lower relative to the prior year. First-quarter financial leverage increased slightly from YE2014 to 8.9% from 8.7%.

First-quarter results deteriorated as Stewart reported an $11.8 million reserve charge (2.4% of 2014 reserves) stemming from large losses on prior year policies. Recognition of $7.3 million in additional expenses from shareholder settlements and implementation of the cost management program also contributed to $12.4 million first-quarter losses. Profitability continues to lag peers but is expected to move more in-line in the mid- to longer-term as the potential for adverse claims experience from prior policy years fades over time.

While Stewart reported a loss for 1Q15, revenue growth of 14% over the prior year quarter and stronger 2015 mortgage origination forecasts by the Mortgage Bankers Association (MBA) point to increased near-term revenue opportunities. While 2014 revenues declined 3.0% year over year the decline was somewhat offset by increasing housing market activity beginning in 4Q14 and the impact of acquisitions completed in 2Q14 and 3Q14.

Stewart was also able to leverage their 2014 acquisitions with the recent positive momentum in housing activity to substantially increase order counts during 1Q15. Open-order counts from direct title operations increased 59% over the prior quarter, with closed-order counts increasing 55%.

Mortgage services segment results have been somewhat volatile over the past few quarters as Stewart continues to integrate their 2014 acquisitions and eliminate cost redundancies. While 1Q15 segment pretax earnings were positive at $2.7 million resulting in a 4.2% pretax profit margin, Fitch does not expect the mortgage services segment to meaningfully provide positive contributions to Stewart's consolidated operating results in the near term.

RATING SENSITIVITIES

Key rating triggers that could lead to an upgrade include:

--Operating performance in line with rated peers particularly in industry down-cycles;

--Sustained favorable profitability indicated by an operating profit margin of 8% or better;

--A strengthening of capital metrics, including a RAC ratio above 175% and operating leverage below 4.0x;

--Financial leverage ratio maintained below 15%.

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 4.5;

--Financial leverage ratio above 20%;

--A large reserve charge that exceeds 10% of prior year reserves.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings with a Stable Outlook:

Stewart Information Services Corp.

--IDR at 'BBB'.

Stewart Title Guaranty

Stewart Title Insurance Company

--IFS at 'A-'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Exposure Draft: Insurance Notching Criteria (Proposed Methodology Changes) (pub. 12 May 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865576

Insurance Rating Methodology (pub. 04 Sep 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=987127

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=987127

Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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