Fitch Affirms Stewart Ratings
August 9, 2012
Fitch Ratings has affirmed the 'BBB-' Issuer Default Rating (IDR) and 'BB+' senior unsecured debt rating of Stewart Information Services Corp. Fitch has also affirmed the 'BBB+' Insurer Financial Strength (IFS) ratings of Stewart's insurance subsidiaries and the 'BBB' IFS rating of Stewart Title Limited (STL). The Rating Outlook is Stable.
Stewart's ratings reflect improved operating results, solid capitalization, a conservative investment portfolio and modest financial leverage. However, performance continues to trail its rated peer group, as defined as Fidelity National Financial, Inc., First American Financial Corp., and Old Republic Title Group.
Stewart reported net earnings of $12.8 million through June 30, compared with a net loss of $4.4 million in the prior year period. The improvement was driven by significantly better results in its title insurance operations and continued solid earnings in its growing real estate information (REI) operations.
Through June 30, Stewart's pretax profit margins lagged the title operations of Fitch's rated universe by approximately five percentage points, when adjusted for segment reporting differences. Specifically, “Corporate and Other” expenses were included with title operations for peer companies to be consistent with Stewart.
Stewart reported a modest operating profit in its title insurance segment through the first half of 2012, which can be attributed to rate increases, expense efficiencies through back-office centralization, and the cancellation of unprofitable agents.
The company's higher-margin REI segment provides support to the title operations with continued solid earnings. Profit margins declined (31 percent through six months 2012 compared with 50 percent in prior year period) due to a shift in business mix to mortgage servicing and real estate owned (REO)-related services from higher-margin loan modification services. Management anticipates pretax margins in the REI segment to stabilize to a sustainable level of 25-30 percent, which Fitch views as a favorable offset to title margins (4 percent for second quarter 2012). Stewart's REI segment currently makes up 8 percent of total revenues but is expected to become a larger contributor over the next several years.
Fitch believes reserve adequacy remains uncertain, although recent policy years are showing signs of stability.
Stewart's capitalization remains adequate with a risk-adjusted capital (RAC) ratio of 157 percent at year-end 2011, flat with the prior year. On a non-risk-adjusted basis (measured as net written premiums to surplus) the company's capitalization is also reasonable at 3.4x.
Stewart's debt to capital remains modest at 12.9 percent, excluding unrealized investment gains, as of June 30. When goodwill is excluded, financial leverage is 21.7 percent.