OREANDA-NEWS. 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-'. Fitch has revised the Rating Outlook to Negative from Stable. A complete list of ratings follows at the end of this press release.

KEY RATING DRIVERS

Recent deterioration in financial performance is the key driver behind the Negative Outlook. Fitch views capital strength as the main factor supporting Stewart's current ratings, but increased borrowings and dividends to shareholders place greater weight on the importance of profitable operations to maintain capital levels. Fitch would likely consider downgrading the rating if sustained financial underperformance leads to deterioration in capital.

Conversely, Fitch believes Stewart has the potential to post a modest operating profit for full-year 2016 as the company anticipates minimal remaining expenses linked to discontinued delinquent-loan servicing operations. Title revenue growth is expected to be flat to slightly higher in 2016. If reported results are better than expected Fitch will likely return the Outlook to Stable from Negative.

Results have recently been affected by a number of one-time and non-recurring charges. The company reported a net loss of $11 million in first quarter 2016 tied to lower revenue and costs from discontinued operations. Notable costs in 2015 included the delinquent-loan servicing segment goodwill impairment and non-operating charges taken in the third quarter along with large claims losses and shareholder settlements reported in 1Q15.

Fitch does not believe a ratings downgrade is warranted at this time as capital metrics are still within Fitch's rating sensitivities though there was slight deterioration in 2015. The affirmation of Stewart's IFS and IDR ratings reflect these capitalization metrics as well as the company's market position as the fourth largest title insurer in the U. S. market.

Stewart's operating performance continues to lag peer results, reporting a 0.5% consolidated pretax margin at year-end (YE) 2015 and negative margin through first quarter 2016. In contrast, peers have posted margins in the mid to high single digits over the same period. Results are expected to improve going forward with a renewed focus on title operations but may still lag peers in the near term.

Stewart's risk-adjusted capital (RAC) score of 153% at year-end 2015 decreased 15% from year-end 2014 but is still well above Fitch's 125% downgrade trigger. On a nonrisk-adjusted basis, operating leverage increased to 3.2x from 2.7x at year-end 2015. First-quarter 2016 financial leverage rose to 15.8% but is expected to modestly decline going forward.

Both 1Q16 and 1Q15 GAAP fixed-charge coverage ratios were negative, and the company reported a materially lower coverage ratio of 6.3x at YE2015 as compared to 14.9x at YE2014. Coverage in full-year 2016 is anticipated to move modestly higher relative to the prior year so long as no large unexpected charges occur and interest rates on notes payable remain relatively low.

RATING SENSITIVITIES

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 4.5x;

--Financial leverage ratio above 20%;

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

Key rating triggers that could lead to a return to Stable Outlook include:

--Improvement in capital metrics and stabilization or growth in policyholders' surplus;

--Consolidated operating profit margin above 5% in 2016, which would move operating performance more in line with peers;

--No further material goodwill impairments or large one-time expense charges that materially impact results.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings with a Negative Outlook:

Stewart Information Services Corp.

--IDR at 'BBB'.

Stewart Title Guaranty

Stewart Title Insurance Company

--IFS at 'A-'.