CHICAGO--(BUSINESS WIRE)--Fitch Ratings has upgraded Stewart Information Services Corp.'s (Stewart) Issuer Default Rating (IDR) to 'BBB' from 'BBB-' and its senior unsecured debt rating to 'BBB-' from 'BB+'. Fitch has also upgraded the Insurer Financial Strength (IFS) ratings of Stewart's insurance subsidiaries to 'A-' from 'BBB+'. The Rating Outlook is Stable. A complete list of ratings follows at the end of this press release.
KEY RATING DRIVERS
Fitch's upgrade of Stewart's ratings reflects a continued improvement in operating results, sustained solid capitalization, and increased reserve stability. The ratings also reflect strong debt servicing capabilities as a result of low financial leverage and solid earnings.
Stewart reported net earnings of $30.1 million (6.3% pretax operating profit margin) in first-half 2013, more than double its $12.8 million profit (2.4% pretax operating profit margin) during the prior-year period. The improvement was driven by greater revenue from title insurance operations, derived from an improving housing market, coupled with lower title losses. This was somewhat offset by a reduction in mortgage services revenues and lower profit margins on this business.
Stewart's title insurance segment continued to build on the earnings strength demonstrated in 2012. Title operating revenues expanded 10% during first-half 2013 primarily due to improving transaction volume and higher home prices. However, Fitch expects this growth to be more muted during the second half of the year. Open title orders reversed its upward trend in June due to lower refinance activity. Stewart experienced a smaller decline in order activity than peers due to its lower exposure to refinance originations.
Fitch expects Stewart's operating revenues during second-half 2013 to be relatively flat with the prior-year period, as increased commercial volume and residential purchase activity offsets the decline in refinance activity. The company's lower and more flexible cost structure should allow it to better match its expenses with revenues.
Stewart's title policy losses continued to moderate during first-half 2013, as older legacy years mature. Fitch believes that maintaining a relatively higher loss provisioning rate during the past several quarters has allowed Stewart to improve its reserve position. The company reduced its provisioning rate to 5.9% (excluding favorable reserve development) in second-quarter 2013 from 8.7% in the prior year quarter and 6.1% in first-quarter 2013. Stewart also reported $6.6 million of favorable reserve development during second-quarter 2013 to reflect the reduction in paid claims trends.
Stewart's mortgage services segment, which makes up less than 10% of total revenues, reported lower revenue in second-quarter 2013. This represents its first year-over-year drop since 2008, which was prior to the proliferation of loan modifications. As the housing market improves, demand for loan modification services has declined. As a result, the company is targeting mortgage servicing and REO-related services. This product shift is expected to result in significantly lower profit margins as compared with the highs of 45+% during the housing crisis. However, Fitch believes pretax profit margins will remain attractive near 20% and will be further boosted by significantly improved title insurance margins.
Stewart's capitalization remains solid with an improved risk-adjusted capital (RAC) ratio of 161% at year-end 2012. The improvement was largely due to 15% growth in surplus, along with a statutory reserve redundancy benefit that added 8 percentage points to the RAC score in 2012. On a non-risk-adjusted basis (measured as net written premiums to surplus) the company's capitalization is also solid at 3.4x.
Stewart's financial leverage ratio declined to a modest 5.1% as of June 30, 2013, following a recent debt conversion. Similarly, the company's debt servicing capabilities are strong at approximately 35x for the same period. Fitch does not expect a significant change in the company's capital structure in the near term.
RATING SENSITIVITIES
Key rating triggers that could lead to an upgrade include:
--Profitability 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:
--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%;
or
--A large reserve charge that exceeds 5% of prior year surplus.
Fitch has upgraded the following ratings with a Stable Outlook:
Stewart Information Services Corp.
--IDR to 'BBB' from 'BBB-';
--$28
million 6% senior convertible notes due 2014 to 'BBB-' from 'BB+'.
Stewart Title Guaranty
--IFS to 'A-' from 'BBB+'.
Stewart Title Insurance Company
--IFS to 'A-' from 'BBB+'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--'Insurance Rating
Methodology' (Jan. 11, 2013).
Applicable Criteria and Related Research:
Insurance Rating
Methodology ￢ﾀﾔ Amended
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=698731
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=799330
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