Stewart Title Guaranty Co. Ratings Withdrawn
March 8, 2006
NEW YORK (Standard & Poor's)-- Standard & Poor's Ratings Services has affirmed its 'A-' counterparty credit and financial strength ratings on Stewart Title Guaranty Co. (STGC). The outlook is stable.
Subsequently, Standard & Poor's withdrew its counterparty credit and financial strength ratings on STGC at the company's request. "The ratings on STGC are based on the company's very strong capital, strong market position, and being the core operation of a strong holding company," explained Standard & Poor's credit analyst James Prender. "Offsetting these strengths are heightened regulatory pressure on pricing and sensitivity to the housing market and interest rates." STGC is the flagship carrier of the Stewart Title Insurance Group (Stewart) and the largest subsidiary of its holding company, Stewart Information Services Co. (SISCO; not rated). Much of the analysis deals with the consolidated entity, but the emphasis is on STGC. In addition, most comparisons with the title insurance industry are based on the consolidated GAAP financials of the five largest title insurance groups in the U.S.: SISCO, Fidelity National Title Group Inc. (BBB-/Watch Pos/--), First American Corp. (BBB+/Stable/--), LandAmerica Financial Group Inc. (BBB-/Stable/--), and Old Republic International Corp. (A+/Stable/A-1). STGC is the fourth-largest title insurer in the U.S. and a member of the fourth-largest title insurance group, with a market share based on title insurance premiums that is about 11% in 2004. SISCO's market share of the real estate transaction service industry is slightly less because it derives less revenue from peripheral products and services (e.g. credit reports) than its larger competitors. Regulators in several states, are examining the title industry. These investigations create modest potential for changes in pricing and other market practices. The recent operating performance at Stewart and SISCO has been good, with solid results in 2004 and 2005 following record earnings in 2003 driven by very strong housing purchase and mortgage refinance activity. The downside of Stewart's strategy of maintaining stable staffing levels is greater pressure on earnings during the down portion of the housing cycle. This point is demonstrated by the fluctuations in SISCO's GAAP expense ratio between 94.6% and 85.9% at the peaks and troughs of the past two housing cycles; however, STGC has increased surplus for the past 31 years, which is the longest streak in the industry. This exhibits the good underlying profitability of Stewart's business. STGC's capitalization is very strong and above average relative to its competitors, as measured by a high ratio of statutory reserves plus surplus to five years' average paid losses of 19.1x in 2005. A traditional measure of capital adequacy in the title insurance industry--statutory loss reserves to five years' average claims paid--was 9.9x in 2005, a decrease from a strong 11.4 in 2004. STGC benefits from its parent's low financial leverage, management's focus on the core title insurance segment, and some diversification of earnings through the real estate information segment. Standard & Poor's believes all title insurers will likely experience a decline in revenue in 2006 due to higher interest rates and questionable housing affordability. The 30-year fixed rate has risen 154 basis points since falling to 4.6% in June of 2003. This increase will depress both refinance and purchase transactions. After rising 12% in 2004, Freddie Mac's home price index was up 13% in 2005. These gains will make it harder for first time buyers to acquire a home and cause existing homeowners to think twice about trading up for a larger, more expensive house. The recent industry wide investigations into direct and indirect payments to realtors and premium cessions to builders and lenders will create pressure for lower rates and stricter adherence to market conduct rules. Despite the above factors, Standard & Poor's expects SISCO's earnings for full-year 2006 to be strong and comparable with those achieved in 2005. SISCO will continue to leverage its innovative technologies and make strategic acquisitions. GAAP pretax ROR is expected to be between 4% and 7% in 2006.
Complete ratings information is available to subscribers of RatingsDirect, Standard & Poor's Web-based credit analysis system, at www.ratingsdirect.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com; under Credit Ratings in the left navigation bar, select Find a Rating, then Credit Ratings Search.
Source: Standard & Poor's Ratings Services