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Fitch Ratings has affirmed the 'BBB-' Issuer Default Rating (IDR) and 'BB+' senior unsecured debt rating of Stewart Information Services Corp. (Stewart). Fitch has also affirmed the 'BBB+' Insurer Financial Strength (IFS) ratings of Stewart's insurance subsidiaries. In addition, Fitch has affirmed the 'BBB' IFS rating of Stewart Title Limited (STL). The Rating Outlook was revised to Stable from Negative. A complete list of ratings follows at the end of this press release.
The revision in Stewart's Outlook reflects improved operating results and an expectation of profitability going forward. The affirmation of the Stewart's ratings reflects adequate capitalization, a conservative investment portfolio and modest financial leverage. However, the company's performance continues to lag peers.
Stewart reported net earnings of $2.3 million in 2011, its first annual profit since 2006, compared with a net loss of $12.6 million in 2010. The improvement was driven primarily by earnings growth in its real estate information (REI) operations and cost cutting initiatives in its title insurance operations. This improvement materialized despite fewer investment gains recognized during 2011.
Stewart continues to report underwriting losses in its underlying title insurance operations with a combined ratio of 101.4% compared with 102.9% in 2010. Although the company exhibited an improvement over last year, national industry peers reported an underwriting profit during 2011.
Stewart recognized $22.2 million in reserve strengthening, primarily related to jumbo claims for policy years 2005-2007, compared with $15.3 million in 2010. While reserve charges remain a drag on earnings, recent policy years are showing signs of stability.
Fitch views Stewart's capitalization as adequate for its rating category with an estimated 2011 risk-adjusted capital (RAC) score near 2010 levels. On a non-risk-adjusted basis (measured as net written premiums to surplus) the company's capitalization is also estimated near prior-year levels.
Stewart's debt to capital remains modest at 14.6%, excluding unrealized investment gains, at year-end 2011. When goodwill is excluded, financial leverage is 24.7%.
The affirmation of STL's rating and its Stable Outlook reflect the company's solid performance in 2011 with significant premium and earnings growth.
Key rating drivers that could lead to a downgrade include:
--Failure to sustain operating profitability;
--Capital deterioration whereby Stewart's RAC score drops below 140% and/or net written premiums to surplus increases significantly above current levels;
--A large reserve charge that exceeds 5% of prior year surplus;
--Debt to tangible capital, excluding FAS 115, above 30%.
Key rating drivers that could lead to an upgrade include:
--Sustained profitability, as measured by combined ratio with consideration for business mix, in line with higher rated peers;
--Consistently stronger risk-based capital levels, such as a RAC score above 175%.
Fitch has affirmed the following ratings with a Stable Outlook:
Stewart Information Services Corp.
--IDR at 'BBB-';
--$65 million 6% senior convertible notes due 2014 at 'BB+'.
Stewart Title Guaranty
--IFS at 'BBB+'.
Stewart Title Insurance Company
--IFS at 'BBB+'.
Stewart Title Limited
--IFS at 'BBB'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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