CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Stewart Information Services Corp.'s (Stewart) Issuer Default Rating (IDR) at 'BBB' and its senior unsecured debt rating at 'BBB-'. Fitch has also affirmed 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 sustained solid capitalization including modest financial leverage and sustained operating results through 2013. The ratings also consider lower mortgage origination volume, as refinance activity retrenches and mortgage rates climb.
Stewart's capitalization remains within Fitch's rating guidelines with a risk-adjusted capital (RAC) ratio of 149% at year-end 2013. On a non-risk-adjusted basis (measured as net written premiums to surplus) the company's capitalization is also solid at 3.3x. Stewart's financial leverage ratio declined to 4.8% as of March 31, 2014 but will increase to roughly 6.5% following the closing of the LandSafe Title acquisition and the conversion of remaining senior convertible notes to equity.
Stewart reported net earnings of $63 million in 2013, compared with $109 million in 2012, which benefited from a $37 million tax asset valuation allowance reduction. The company reported a $12 million loss for first-quarter 2014 compared with a $3 million profit in the prior-year quarter. Mortgage origination volumes declined sharply in the fourth quarter and that trend continued into the first quarter.
Stewart's title insurance segment revenues declined 6% in first-quarter 2014, due to market pressures. Segment earnings declined 42% and margins dropped to 4.9% from 7.9% in the prior-year period. During first-quarter 2014, the company reduced headcount by 260 employees, or 4% of total headcount, which proved insufficient given the level of volume reduction. Stewart intends to further reduce costs and streamline operations.
Favorably, title revenue per closed order in direct operations increased 23.7% from the prior year, which is primarily due to home price appreciation and a shift in orders towards purchase transactions and commercial orders and away from refinancings. Commercial revenue increased 23% during first-quarter 2014.
Fitch expects a continued decline in title revenue for the remainder of 2014, demonstrated by the sustained drop in year-over-year opened title orders during the first quarter. The closing ratio is expected to return to prior-year levels in the second quarter after falling during the first quarter, which is partially due to timing issues around weather-related office closures and the implementation of new mortgage rules.
Stewart's mortgage services segment, which makes up 7% of total revenues, reported a 35% reduction in revenue for first-quarter 2014. The demand for distressed and default-related services continued to drop as the housing market improved. Stewart's shift in focus to mortgage servicing and REO-related services has not generated sufficient revenue to offset this decline.
The Mortgage Services segment reported a nearly $2 million loss in first-quarter 2014 compared with a $10 million profit in the prior-year period. Stewart maintained much of its existing operational infrastructure to support contracts it acquired in 2013. However, these contracts took longer than expected to become fully operational, which contributed to margin compression. These contracts are expected to ramp up over the next several months.
In an effort to expand service offerings to lenders, Stewart acquired Wetzel Trott, Inc. and the title and collateral valuation business lines of DataQuick Lending Solutions, as well as signed an agreement to acquire LandSafe Title. Fitch views the increased servicing capabilities provided by these companies favorably, given the rising trend of outsourcing by lenders. These acquisitions have an aggregate purchase price of approximately $40 million and are expected to add approximately $150 million of annualized revenues in 2014. The acquisitions were funded by the company's line of credit.
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%;
--A large reserve charge that exceeds 5% of prior year surplus.
Fitch has affirmed the following ratings with a Stable Outlook:
Stewart Information Services Corp.
--IDR at 'BBB';
--$28 million 6% senior convertible notes due 2014 at 'BBB-'.
Stewart Title Guaranty
Stewart Title Insurance Company
--IFS at 'A-'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--'Insurance Rating Methodology' (November 2013).
Applicable Criteria and Related Research:
Insurance Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723072
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=832737
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