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S&P Announces: Stewart Title Guaranty Co. 'A-' Ratings Affirmed; Outlook Stable

May 6, 2004

NEW YORK--(BUSINESS WIRE)-- Standard& Poor's Ratings Services affirmed its 'A-' counterparty credit and financial strength ratings on Stewart Title Guaranty Co. (Stewart). The outlook remains stable.

The ratings are based on the company's very strong capitalization, status as a core operation of a strong holding company, strong market position, and very strong operating performance. Partially offsetting these strengths are the cyclical and highly competitive nature of the title insurance industry.

Outlook

Excluding shorter-term cyclical factors, Stewart is expected to grow in the long term at a moderate pace through organic growth and acquisitions of agencies; however, a cyclical downturn in refinancing volume because of rising interest rates is expected to cause a decline in revenues and earnings in 2004. Earnings for full-year 2004 are expected to be strong and comparable with those achieved in 2001 and 2002. Annual earnings have been consistently positive, even in cyclical troughs, and are expected to remain so. ROR is expected to be 5%-8% in 2004 and 2005, which is close to competitor average. The company's recent incremental improvements to its cost structure are expected to persist. Stewart's ROA is expected to remain better than the industry average, as it was in each of the past three years.

Major Rating Factors

  • Very strong capitalization. Stewart's capitalization is very strong and above average relative to its competitors, as demonstrated by a high ratio of statutory reserves plus surplus to paid losses of 15.0 in 2003. Statutory loss reserves to five years' average claims paid--a traditional measure of capital adequacy in the title insurance industry--was 10.4 in 2003, an improvement from a strong 10.2 in 2002.
  • Core operation of a strong holding company. Stewart is by far the largest subsidiary of its holding company, Stewart Information Services Corp. (NYSE:STC). It benefits from its parent's low financial leverage, management focus on the core title insurance segment, and some diversification of earnings through the real estate information segment.
  • Strong market position. Stewart is the third-largest title insurer in the U.S. and is a member of the fourth-largest title insurance group, with a market share that has grown to about 12% in 2003. Its strengths in customer service and title technology as well as its strong agency force enhance its market profile. As a result, the company is expected to increase its market share slightly. In addition, barriers to entry to the title insurance industry are high, enhancing the company's competitive position.
  • Very strong operating performance. Stewart and SISCO's recent operating performance has been very strong, with record earnings in 2003 driven by very strong housing purchase and mortgage refinance activity. Since at least 1986, SISCO has been consistently profitable through several housing cycles, but it is subject to the cyclical nature of title insurance. Increased use of new technology and growing economies of scale have helped Stewart improve its expense ratio in the past few years to the point that its former expense disadvantage versus the industry is largely gone.

Source: Standard& Poor's



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