Stewart Information Services - 10-K annual report

(Mark One)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large Accelerated Filer þ Accelerated Filer ¨Non-Accelerated Filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ

The aggregate market value of the Common Stock (based upon the closing sales price of the Common Stock of Stewart Information Services Corporation, as reported by the NYSE on June 30, 2005) held by non-affiliates of the Registrant was approximately $717,556,602.

As of March 2, 2006, the following shares of each of the registrant’s classes of stock were outstanding:

Portions of the definitive proxy statement (the Proxy Statement), relating to the annual meeting of the registrant’s stockholders to be held April 28, 2006, are incorporated by reference in Parts III and IV of this document.

We are a Delaware corporation formed in 1970. We and our predecessors have been engaged in the title business since 1893.

     Stewart is a technology-driven, strategically competitive, real estate information and transaction management company providing title insurance and related information services. Stewart delivers via e-commerce the services required for settlement by the real estate and mortgage industries – including title reports, flood certificates, credit reports, appraisals and automated valuation models, document preparation, property information reports and background checks. Stewart also provides post-closing lender services, mortgage default management solutions, automated county clerk land records, property ownership mapping, geographic information systems and expertise in tax-deferred exchanges.

     Our two main segments of business are title insurance-related services and real estate information (REI). The segments significantly influence business to each other because of the nature of their operations and their common customers. The segments provide services through a network of offices, including more than 8,500 policy-issuing offices and agencies in the United States and several international markets. Our current levels of international operations are immaterial with respect to our consolidated financial results.

     The financial information related to these segments is discussed in Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The title segment includes the functions of searching, examining, closing and insuring the condition of the title to real property.

     Examination and closing. The purpose of a title examination is to ascertain the ownership of the property being transferred, debts that are owed on it and the scope of the title policy coverage. This involves searching for and examining documents such as deeds, mortgages, wills, divorce decrees, court judgments, liens, paving assessments and tax records.

     At the closing or “settlement” of a sale transaction, the seller executes and delivers a deed to the new owner. The buyer typically signs new mortgage documents. Closing funds are then disbursed to the seller, the prior mortgage company, real estate brokers, the title company and others. The documents are then recorded in the public records. A title policy is generally issued to both the lender and the new owner.

     Title policies. Lenders in the United States generally require title insurance as a condition to making a loan on real estate, including securitized lending. This is to assure lenders of the priority of their lien position. The purchasers of the property want insurance to protect against claims that may arise against the ownership of the property. The face amount of the policy is normally the purchase price or the amount of the related loan.

     Title insurance is substantially different from other types of insurance. Fire, auto, health and life insurance protect against future losses and events. In contrast, title insurance insures against losses from past events and seeks to eliminate most risks through the examination and settlement process.

     Investments. Our title insurance underwriters maintain investments in accordance with certain statutory requirements for the funding of statutory premium reserves and state deposits. We have established policies and procedures to minimize our exposure to changes in the fair values of our investments. These policies include retaining an investment advisory firm, emphasizing credit quality, managing portfolio duration, maintaining or increasing investment income through high coupon rates, and actively managing profile and security mix based upon market conditions. All of our investments are classified as available-for-sale.

     Losses. Losses on policies occur when a title defect is not discovered during the examination and settlement process. Reasons for losses include forgeries, misrepresentations, unrecorded liens, the failure to pay off existing liens, mishandling of settlement funds, issuance by title agencies of unauthorized coverages and other legal issues.

     Some claimants seek damages in excess of policy limits. Those claims are based on various legal theories usually alleging misrepresentation by an agency. Although we vigorously defend against spurious claims, we have from time to time incurred losses in excess of policy limits.

     Experience shows that most claims against policies and claim payments are made in the first six years after the policy has been issued, although claims are also incurred and paid many years later. By their nature, claims are often complex, vary greatly in dollar amounts and are affected by economic and market conditions and the legal environment existing at the time of settlement of the claims. Estimating future title loss payments is difficult because of the complex nature of title claims, the length of time over which claims are paid, the significantly varying dollar amounts of individual claims and other factors.

     Provisions for policy losses are charged to income in the same year the related premium revenues are recognized. The amounts provided are based on reported claims, historical loss experience, title industry averages, current legal environment and types of policies written.

     Our liability for estimated title losses comprises both known claims and claims expected to be reported in the future. The amount of our loss reserve represents the aggregate future payments, net of recoveries, that we expect to incur on policy and escrow losses and in costs to settle claims.

     Amounts shown as our estimated liability for future loss payments are continually reviewed by us for reasonableness and adjusted as appropriate. Independent actuaries also reviewed the adequacy of the liability amounts on an annual basis and found our reserves adequate at each year end. In accordance with industry practice, the amounts have not been discounted to their present values.

     Factors affecting revenues. Title revenues are closely related to the level of activity in the real estate markets we serve and the prices at which real estate sales are made. Real estate sales are directly affected by the availability and cost of money to finance purchases. Other factors include consumer confidence and demand by buyers. These factors may override the seasonal nature of the title business. Generally, our first quarter is the least active and the fourth quarter is the most active in terms of title revenues.

     Selected information for the national real estate industry follows (2005 figures are preliminary and subject to revision):

     Customers. The primary sources of title business are attorneys, builders, developers, lenders and real estate brokers. No one customer was responsible for as much as ten percent of our title operating revenues in any of the last three years. Titles insured include residential and commercial properties, undeveloped acreage, farms, ranches and water rights.

     Service, location, financial strength, size and related factors affect customer acceptance. Increasing market share is accomplished primarily by providing superior service. The parties to a closing are concerned with personal schedules and the interest and other costs associated with any delays in the settlement. The rates charged to customers are regulated, to varying degrees, in many states.

     Financial strength and stability of the title underwriter are important factors in maintaining and increasing our agency network. Among the nation’s leading title insurers, we earned one of the highest ratings awarded by the title industry’s leading rating companies. Our principal underwriter, Stewart Title Guaranty Company (Guaranty) is currently rated A” by Demotech, Inc., A+ by Fitch and A by Lace Financial.

     Market share. Title insurance statistics are compiled quarterly by the title industry’s national association. Based on unconsolidated statutory net premiums written through September 30, 2005, Guaranty is one of the leading title insurers in the United States.

     Our principal competitors include Fidelity National Financial, Inc., The First American Corporation and LandAmerica Financial Group, Inc. Like most title insurers, we also compete with abstractors, attorneys who issue title opinions and attorney-owned title insurance funds. A number of homebuilders, financial institutions, real estate brokers and others own or control title insurance agencies, some of which issue policies underwritten by Guaranty. This controlled business also provides competition for our offices. We also compete with issuers of alternatives to title insurance products, which typically provide more limited coverage and less service for a smaller fee.

     Title revenues by state. The approximate amounts and percentages of consolidated title operating revenues for the last three years were:

     Regulations. Title insurance companies are subject to comprehensive state regulations covering premium rates, agency licensing, policy forms, trade practices, reserve requirements, investments and the transfer of funds between an insurer and its parent or its subsidiaries and any similar related party transactions. Kickbacks and similar practices are prohibited by various state and federal laws.

The real estate information segment primarily provides electronic delivery of data, products and services related to real estate. REI services related to the mortgage origination process include flood certificates, credit reports, traditional and automated property valuations, electronic mortgage documents, property information reports and tax services. Stewart Mortgage Information Company (SMI), one of the segment companies, provides post-closing outsourcing services for residential mortgage lenders, including document review, investor delivery, FHA/VA insuring, document retrieval, preparation and recordation of assignments, lien releases and security interests, collateral reviews and loan pool certifications. Stewart Default Solutions, Inc. provides mortgage default management solutions to lenders. In addition, other companies within the real estate information segment provide diverse products and services related to automated mapping projects and geodetic positioning; real estate database conversion, construction, maintenance and access; automation for government recording and registration; criminal, credit and motor vehicle background checks and pre-employment screening services; and I.R.C. Section 1031 tax-deferred property exchanges.

     The introduction of automation tools for title agencies is an important part of the future growth of the REI companies. Automated search and examination tools developed by Ultima Corporation and REIData, Inc. are designed to increase the processing speed of title examinations by connecting all aspects of the title examination process to the public records. Accessible through www.PropertyInfo.com ^TM , a title examiner can utilize Advanced Search Analysis and SearchManager ^TM to automate work flows for search, examination and production of title reports, thus eliminating the steps and inefficiencies associated with traditional courthouse searches. Also available through real estate portals owned and developed by Stewart’s REI companies are aerial photographs and maps offered by GlobeXplorer^® and AIRPHOTOUSA^®.

     Factors affecting revenues. As in the title segment, REI revenues, particularly those generated by mortgage information services and tax-deferred exchanges, are closely related to the level of activity in the real estate market. Revenues related to many services are generated on a project basis. Contracts for automating government recording and registration and mapping projects are often awarded following competitive bidding processes or after responding to formal requests for proposals.

     Companies that compete with Stewart’s REI companies vary across a wide range of industries. In the mortgage-related products and services area, competitors include the major title insurance underwriters mentioned under “Title – Market share”, as well as entities known as vendor management companies. In some cases the competitor may be the customer itself. For example, certain services offered by SMI can be, or historically have been, performed by internal departments of large mortgage lenders.

     Another important factor affecting revenues is the advancement of technology, which permits customers to order and receive timely status reports and final products and services through dedicated interfaces with the customer’s production systems or over the Internet. The use of websites, including www.stewart.com and www.PropertyInfo.com, allows customers easy access to solutions designed for their specific industry.

     Customers. Customers for our REI products and services include mortgage lenders and servicers, mortgage brokers, government entities, commercial and residential real estate agents, land developers, builders, title insurance agencies, and others interested in obtaining property information (including data, images and aerial maps) that assist with the purchase, sale and closing of real estate transactions and mortgage loans. Other customers include accountants, attorneys, investors and others seeking services for their respective clients in need of qualified intermediary (Section 1031) services and employers seeking pre-employment information about prospective employees.

     Many of the services and products offered by the REI segment are used by professionals and intermediaries who have been retained to assist consumers with the sale, purchase, mortgage, transfer, recording and servicing of real estate related transactions. To that end, timely and accurate services are critical to our customers since these factors directly affect the service they provide to their customers. Financial strength, marketplace presence and reputation as a technology innovator are important factors in attracting new business.

Technology. Our automation products and services are increasing productivity in the title office and speeding the real estate closing process for lenders, real estate professionals and consumers. Before automation, an order typically required several individuals to manually search the title, retrieve and review documents and create the title policy commitment. Today, on a normal subdivision file, and in some locations where our systems are optimally deployed, one person can receive the order electronically, view the prior file, examine the indexed documents, prepare the commitment and deliver the finished title insurance product. We are deploying SureClose^®, an electronic document handler that gives consumers access to their closing file during the closing process, for more transparency of the transaction.

     Trademarks. We have developed numerous automation products and processes that are crucial to both our title and REI segments. These systems automate most facets of the real estate transaction. Among these trademarked products and processes are AIM^®, AIRPHOTOUSA^®, E-Title^®, GlobeXplorer^®, Landata Title Office^®, REIMall^®, SureClose^®, TitleLogix^® and Virtual Underwriter^®. We consider these trademarks, which are perpetual in duration, to be important to our business.

     Employees. As of December 31, 2005, we and our subsidiaries employed approximately 9,865 people. We consider our relationship with our employees to be good.

     Available information. We file annual, quarterly and other reports and information with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934 (the Exchange Act). You may read and copy any material that we file with the SEC at the SEC’s Public Reference Room at 450 5^th Street, N.W., Room 1200, Washington, DC 20549. You may obtain additional information about the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxies, information statements and other information regarding issuers that file electronically with the SEC, including us.

     We also make available, free of charge on or through our Internet site (www.stewart.com) our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Code of Ethics and other information statements and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

You should consider the following risk factors, as well as the other information presented in this report and our other filings with the SEC, in evaluating our business and any investment in our business. These risks could materially and adversely affect our business, financial condition and results of operations. In that event, the trading price of our Common Stock could decline materially.

     Our results of operations and financial condition are affected by changes in economic conditions, particularly mortgage interest rates. Our revenues and earnings have fluctuated in the past and we expect them to fluctuate in the future.

     The demand for our title insurance and real estate information services depends in large part on the volume of residential and commercial real estate transactions. The volume of these transactions historically has been influenced by factors such as mortgage interest rates and the state of the overall economy. Typically, when interest rates are increasing or when the economy is experiencing a downturn, real estate activity declines. As a result, the title insurance industry tends to experience decreased revenues and earnings. Increases in interest rates also may have an adverse impact on our bond portfolio and interest on our bank debt.

     We have benefited from a low mortgage interest rate environment and an increase in home prices in recent years. A reversal of these trends could adversely affect our revenues and earnings absent increases in market share, which cannot be assured.

     Competition in the title insurance industry is strong, particularly with respect to price, service and expertise. Larger commercial customers and mortgage originators also look to the size and financial strength of the title insurer. Although we are one of the leading title insurance underwriters based on market share, Fidelity National Financial, Inc., The First American Corporation and LandAmerica Financial Group, Inc. are each substantially larger than we are. Their holding companies have significantly greater capital than we do. Although we are not aware of any current initiatives to reduce regulatory barriers to entering our industry, any such reduction could result in new competitors, including financial institutions, entering the title insurance business. Competition among the major title insurance companies and any new entrants could lower our premium and fee revenues. From time to time, new entrants enter the marketplace with alternative products to traditional title insurance although many of these alternative products have been disallowed by title insurance regulators. These alternative products, if permitted by regulators, could adversely affect our revenues and earnings.

     Technological advances occur rapidly in the title insurance industry as industry standards evolve and title insurers frequently introduce new products and services. We believe that our future success depends on our ability to anticipate technological changes and to offer products and services that meet evolving standards on a timely and cost-effective basis. Successful implementation and customer acceptance of our technology-based services, such as SureClose, will be crucial to our future profitability, as will increasing our productivity to recover our costs of developing our technology-based services. There is a risk that products and services introduced by our competitors, or advances in technology, could reduce the usefulness of our products and render them obsolete.

     Estimating future loss payments is difficult, and our assumptions about future losses may prove inaccurate. Claims are often complex and involve uncertainties as to the dollar amount and timing of individual payments. Claims are often paid many years after a policy is issued. From time to time, we experience large losses from title policies that have been issued, which require us to increase our title loss reserves. These events are unpredictable and adversely affect our earnings.

     As part of our overall growth strategy, we selectively acquire businesses and technologies that will allow us to enter new markets, provide services that we currently do not offer or advance our existing technology. Our ability to continue this acquisition strategy will depend on our success in identifying and consummating acquisitions of businesses on favorable economic terms. The success of this strategy will also depend on our ability to integrate the operations, products and personnel of any acquired business, retain key personnel, introduce new products and services on a timely basis and increase the strength of our existing management team. Although we actively seek acquisition candidates, we may be unsuccessful in these efforts. If we are unable to acquire appropriate businesses on favorable economic terms, or at all, or are unable to introduce new products and services successfully, our business, results of operations and financial condition could be adversely affected.

     We are a holding company and our principal assets are the securities of our insurance underwriting subsidiaries. Because of this structure, we depend primarily on receiving sufficient dividends from our insurance subsidiaries to meet our debt service obligations, to pay our operating expenses and to pay dividends. The insurance statutes and regulations of some states require us to maintain a minimum amount of statutory capital and restrict the amount of dividends that our insurance subsidiaries may pay to us. Guaranty is a wholly owned subsidiary of Stewart and the principal source of our cash flow. In this regard, the ability of Guaranty to pay dividends to us is dependent on the acknowledgement of the Texas Insurance Commissioner. At December 31, 2005, under Texas insurance law, Guaranty could pay dividends or make distributions of up to $97.6 million in 2006 without approval of the Texas Insurance Commissioner. However, Guaranty voluntarily restricts dividends to us so that it can grow its statutory surplus and maintain liquidity at competitive levels. A title insurer’s ability to pay claims can significantly affect the decision of lenders and other customers when buying a policy from a particular insurer. These restrictions could limit our ability to fund our acquisition program with cash and to fulfill other cash needs.

     State authorities regulate our insurance subsidiaries in the various states in which they do business. These regulations generally are intended for the protection of policyholders rather than shareholders. The nature and extent of these regulations vary from jurisdiction to jurisdiction, but typically involve:

     These regulations may impede or impose burdensome conditions on rate increases or other actions that we might want to take to enhance our operating results. Changes in these regulations may also adversely affect us. In addition, state regulatory examiners perform periodic examinations of insurance companies, which could result in increased compliance or litigation expenses.

     We are periodically involved in litigation arising in the ordinary course of business. In addition, we are currently, and have been in the past, subject to claims and litigation from large classes of claimants seeking substantial damages not arising in the ordinary course of business. Material pending legal proceedings, if any, not in the ordinary course of business, are disclosed in Item 3 — Legal Proceedings included elsewhere in this report. To date, the impact of the outcome of these proceedings has not been material to our results of operations or financial position. However, an unfavorable outcome in any litigation, claim or investigation against us could have an adverse effect on our results of operations or financial position.

     Our certificate of incorporation and by-laws, as well as Delaware corporation law and the insurance laws of various states, all contain provisions that could have the effect of discouraging a prospective acquirer from making a tender offer for our shares, or that may otherwise delay, defer or prevent a change in control of Stewart.

     The holders of our Class B Common Stock have the right to elect four of our nine directors. Pursuant to our by-laws, the vote of six directors is required to constitute an act by the Board of Directors. Accordingly, the affirmative vote of at least one of the directors elected by the holders of the Class B Common Stock is required for any action to be taken by the Board of Directors. The foregoing provision of our by-laws may not be amended or repealed without the affirmative vote of at least a majority of the outstanding shares of each class of our capital stock, voting as separate classes.

     The voting rights of the holders of our Class B Common Stock may have the effect of rendering more difficult or discouraging unsolicited tender offers, merger proposals, proxy contests or other takeover proposals to acquire control of Stewart.

None.

We lease approximately 253,000 square feet, under a non-cancelable lease expiring in 2016, in an office building in Houston, Texas, which is used for our corporate offices and for offices of several of our subsidiaries. In addition, we lease offices at approximately 750 additional locations that are used for branch offices, regional headquarters and technology centers. These additional locations include significant leased facilities in Los Angeles, Dallas, San Diego, Seattle and Las Vegas.

     Our leases expire from 2006 to 2016 and have an average term of four years, although our typical lease term ranges from three to five years. We believe we will not have any difficulty obtaining renewals of leases as they expire or, alternatively, leasing comparable properties. The aggregate annual rent expense under all leases was approximately $64,698,000 in 2005.

     We also own six office buildings located in Texas, Arizona and Colorado. These owned properties are not material to our financial position. We consider all buildings and equipment that we own or lease to be well maintained, adequately insured and generally sufficient for our purposes.

As first reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, Stewart Title Insurance Company (STIC), an underwriter subsidiary of the Company, was a defendant in a New York state class action lawsuit in the Supreme Court State of New York. The lawsuit alleged that STIC directly and through its agencies routinely collected excess premiums in connection with refinance transactions. Similar actions were brought against seven other unrelated underwriters. STIC denied culpability on a number of grounds. In February 2005, STIC reached a settlement with the plaintiffs, which was approved by the court and which fully and finally resolved all purposed claims of the plaintiffs. At December 31, 2004, the Company had a reserve of $5.3 million for this claim, which was sufficient to cover the payment of the final settlement in the third quarter of 2005 and other expenses associated with this lawsuit.

     We are a party to routine lawsuits incidental to our business, most of which involve disputed policy claims. In many of these suits, the plaintiffs seek exemplary or treble damages in excess of policy limits based on the alleged malfeasance of an issuing agent. We do not expect that any of these proceedings will have a material adverse effect on our consolidated financial condition. Additionally, we have received various inquiries from governmental regulators concerning practices in the insurance industry. Many of these practices do not concern title insurance and we do not anticipate that the outcome of these inquiries will materially affect the consolidated financial condition of the Company. We, along with the other major title insurance companies, are party to a number of class actions concerning the title insurance industry. We believe that we have adequate reserves for these contingencies and that the likely resolution of these matters will not materially affect the consolidated financial condition of the Company.

None.

Our Common Stock is listed on the New York Stock Exchange (the NYSE) under the symbol “STC”. The following table sets forth the high and low sales prices of our Common Stock for each fiscal period indicated, as reported by the NYSE.

     We paid regular quarterly cash dividends on our Common Stock from 1972 through 1999. During 1999, our Board of Directors approved a plan to repurchase up to 5% (680,000 shares) of our outstanding Common Stock. The Board also determined that our regular quarterly dividend should be discontinued in favor of returning those and additional funds to stockholders through the stock repurchase plan. Under this plan, we repurchased 116,900 shares of Common Stock during 2000 and none in 2001 through 2005. An additional 208,769 shares of treasury stock were acquired primarily in the second quarter of 2002 as a result of the consolidation of a majority-owned subsidiary that was previously held as an equity investee. An additional 160 shares of treasury stock were acquired during the fourth quarter of 2005 in connection with a net exercise of stock options. All of these shares are held by us as treasury shares.

     The Board of Directors declared an annual cash dividend of $0.75, $0.46 and $0.46 per share payable December 20, 2005 and 2004 and December 19, 2003, respectively, to Common stockholders of record on December 6, 2005 and 2004 and December 5, 2003, respectively. Our certificate of incorporation provides that no cash dividends may be paid on the Class B Common Stock.

     We had a book value per share of $42.21 and $38.48 at December 31, 2005 and 2004, respectively. At December 31, 2005, this measure was based on approximately $766.3 million in stockholders’ equity and 18.2 million shares outstanding. At December 31, 2004, this measure was based on approximately $697.3 million in stockholders’ equity and 18.1 million shares outstanding.

     As of March 2, 2006, the number of stockholders of record was 4,801, and the price of one share of our Common Stock was $45.94.

The following table sets forth, for the periods and at the dates indicated, our selected consolidated financial data. The financial data were derived from our consolidated financial statements and should be read in conjunction with our audited consolidated financial statements, including the Notes thereto, beginning on page F-1 of this Report. See also Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Management’s overview. We reported net earnings of $88.8 million for the year ended December 31, 2005 compared with net earnings of $82.5 million for the same period in 2004. On a diluted per share basis, net earnings were $4.86 for the year 2005 compared with net earnings of $4.53 for the year 2004. Revenues for the year increased 11.7% to $2,430.6 million from $2,176.3 million last year.

     In comparing 2005 with 2004, pretax earnings (which is calculated before minority interests) were increased by a higher level of commercial transactions and a higher mix of revenues from direct operations compared with lower-margin agency business. Acquisitions increased revenues by $37.3 million and pretax earnings by $8.0 million in 2005. Earnings for 2005 were impacted by higher employee costs and other operating expenses primarily because the Company continues to incur the costs of investment in technology advancements. The Company’s goal is to increase productivity, gain market share and provide superior service to its customers. Profits in 2005 were also impacted by an addition to title loss reserves of $10.5 million in the fourth quarter of 2005 relating to a mortgage fraud and a defalcation. The fourth quarter of 2005 also includes charges relating to corrections of the Company’s accounting for leases and employee vacations of $2.8 million and $2.1 million, respectively. The combined after tax-effect of these two items was $3.2 million, which is immaterial for the year to net earnings, cash flow and stockholders’ equity.

Critical accounting estimates. Actual results can differ from the accounting estimates we report. However, we believe there is no material risk of a change in our estimates that is likely to have a material impact on our reported financial condition or results of operations for the three years ended December 31, 2005.

Our most critical accounting estimate is providing for title loss reserves. Our liability for estimated title losses at December 31, 2005 comprises both known claims ($79.2 million) and claims expected to be reported in the future ($267.5 million). The amount of the reserve represents the aggregate future payments, net of recoveries, that we expect to incur on policy and escrow losses and in costs to settle claims.

     We base our estimates on reported claims, historical loss experience, title industry averages and the current legal and economic environment. In making estimates, we use moving-average ratios of recent actual policy loss payment experience (net of recoveries) to premium revenues.

     Provisions for title losses, as a percentage of title operating revenues, were 5.5%, 4.8% and 4.4% for the years ended December 31, 2005, 2004 and 2003, respectively. Actual loss payment experience, including the impact of large losses, is the primary reason for increases or decreases in our loss provision. A change of 0.5% in this percentage, a reasonably likely scenario based on historical loss experience, would have changed the provision for title losses and pretax earnings by approximately $11.6 million for the year ended December 31, 2005.

     Estimating future loss payments is difficult and our assumptions are subject to the risk of change. Claims, by their very nature, are complex and involve uncertainties as to the dollar amount and timing of individual payments. Our experience has been that most claims against policies and claim payments are made in the first six years after the policy has been issued, although claims are incurred and paid many years later.

     We have consistently followed the same basic method of estimating loss payments for more than ten years. Independent consulting actuaries have reviewed our title loss reserves and found them to be adequate at each year end for more than ten years.

Based on our annual June 30^th evaluation of goodwill and events that may indicate impairment of title plants and other long-lived assets, we estimate and expense any loss in value to our current operations. The process of determining impairment relies on projections of future cash flows, operating results and market conditions. Uncertainties exist in these projections and bear the risk of change related to factors such as interest rates and overall real estate markets. Actual market conditions and operating results may vary materially from our projections. There were no impairment write-offs of goodwill during the years ended December 31, 2005 and 2004. During 2003, $2.0 million of goodwill attributed to a subsidiary held for sale was written off and is included in other operating expenses in the consolidated financial statements. We use independent appraisers to assist us in determining the fair value of our reporting units and assessing whether an impairment of goodwill exists.

We recognize revenues on title insurance policies written by independent title agencies (agencies) when the policies are reported to us. In addition, where reasonable estimates can be made, we also accrue for policies issued but not reported until after period end. We believe that reasonable estimates can be made when recent and consistent policy issuance information is available. Our estimates are based on historical reporting patterns and other information about our agencies. We also consider current trends in our direct operations and in the title industry. In this accrual, we are not estimating future transactions. We are estimating policies that have already been issued but not yet received by us. We have consistently followed the same basic method of estimating unreported policy revenues for more than ten years.

     Our accruals for unreported policies from agencies were not material to our total assets or stockholders’ equity for any of the three years ended December 31, 2005. The differences between the amounts our agencies have subsequently reported to us as compared to our estimated accruals are substantially offset by any difference arising from the prior year’s accrual and have been immaterial to stockholders’ equity during each of the three prior years. We believe our process provides the most reliable estimation of the unreported policies and appropriately reflects the trends in agency policy activity.

Operations. Our business has two main segments: title insurance-related services and real estate information (REI). These segments are closely related due to the nature of their operations and common customers.

     Our primary business is title insurance and settlement-related services. We close transactions and issue title policies on homes, commercial properties and other real property located in all 50 states, the District of Columbia and a number of international markets through more than 8,500 policy-issuing offices and agencies. We also provide post-closing lender services, mortgage default management services, automated county clerk land records, property ownership mapping, geographic information systems, property information reports, flood certificates, document preparation, background checks and expertise in tax-deferred exchanges. Our current levels of international operations are immaterial with respect to our consolidated financial results.

Factors affecting revenues. The principal factors that contribute to increases in our operating revenues for our title and REI segments include:

     To the extent inflation causes increases in the prices of homes and other real estate, premium revenues are also increased. Premiums are determined in part by the insured values of the transactions we handle. These factors may override the seasonal nature of the title business. Generally, our first quarter is the least active and the fourth quarter is the most active in terms of title revenues.

Industry data. A table of published mortgage interest rates and other selected residential data for the years ended December 31, 2005, 2004 and 2003 follows (amounts shown for 2005 are preliminary and subject to revision). The amounts below may not relate directly to or provide accurate data for forecasting our operating revenues or order counts.

     Most industry experts project mortgage interest rates to rise modestly in 2006. Due to the large number of refinancings completed in 2003, 2004 and 2005 and rising interest rates, significantly fewer refinancing transactions are being forecast for 2006.

Trends and order counts. In the third quarter of 2003 mortgage interest rates increased significantly by 50 basis points to 6.01%. Since that time, mortgage interest rates have fluctuated from 5.45% to a high of 6.33% in the fourth quarter of 2005. Mortgage originations fell to lower levels beginning in the fourth quarter of 2003 primarily because refinancing transactions fell dramatically. Mortgage originations continued to fall substantially during 2004, although there was a slight increase in 2005. Sales of new and existing homes continued an upward trend throughout 2004 and 2005.

     As a result of the above trends, the Company’s order levels began to decline in the third quarter of 2003. They remained below prior year levels through August 2004. For the rest of 2004, orders exceeded the number of orders received in 2003. Order levels for 2005 remained relatively comparable to 2004, although orders for the fourth quarter of 2005 were lower than the comparable period in 2004. Some of the increases in 2005 and 2004 were due to acquisitions.

     Our order counts follow (in thousands):

A comparison of the results of operations of the Company for 2005 with 2004 and 2004 with 2003 follows. Factors contributing to fluctuations in results of operations are presented in their order of monetary significance. We have quantified, when necessary, significant changes.

Title revenues. Our revenues from direct title operations increased 18.3% in 2005 and decreased 0.9% in 2004. Acquisitions added revenues of $37.3 million and $53.2 million in 2005 and 2004, respectively. The number of direct closings we handled increased 5.5% in 2005 and decreased 20.8% in 2004. The largest revenue increases in 2005 were in Texas, Florida, California and Arizona. The largest decreases in 2004 were in Texas, Colorado and Illinois, partially offset by increases in New York, Canada, California and Puerto Rico.

     The average revenue per closing increased 12.3% in 2005 and 25.2% in 2004 primarily due to a lower ratio of refinancings closed by our direct operations compared to the prior year. Title insurance premiums on refinancings are typically less than on property sales. The increase in 2005 in average revenue per closing was also due to an increased proportion of commercial transactions and rising home prices.

     Revenues from agencies increased 5.9% in 2005 and decreased 3.9% in 2004. The increase in 2005 was primarily due to a decrease in the ratio of refinancing transactions compared to property sales, partially offset by our acquisitions of some agencies that were formerly independent. The decrease in 2004 was primarily due to an overall decrease in the volume of transactions completed and a decrease in refinancing transactions offset somewhat by an increase in property sales. We are unable to quantify the relative contributions from refinancings and property sales because, in most jurisdictions, our independent agencies are not required to report this information. Our statements on sales and refinancings are based on published industry data from sources such as Fannie Mae, the Mortgage Bankers Association, the National Association of Realtors^® and Freddie Mac. We also use information from our direct operations.

     The largest increases in revenues from agencies in 2005 were primarily in Florida, New Jersey, Georgia and Maryland, offset partially by decreases in California and Texas. The largest decreases in 2004 in revenues from agencies were primarily in California, Utah, New York and Michigan, offset partially by increases in Virginia, Florida and Pennsylvania.

     The Texas Department of Insurance reduced title insurance premium rates by 6.5% effective July 1, 2004. As a consequence, our revenues and net earnings were reduced by approximately $17.6 million and $5.2 million, respectively, in 2005 and $8.8 million and $2.6 million, respectively, in 2004.

Title revenues by state. The approximate amounts and percentages of consolidated title operating revenues for the last three years were as follows:

REI revenues. Real estate information revenues were $82.5 million in 2005, $68.9 million in 2004 and $78.7 million in 2003. The increase in 2005 resulted primarily from a greater number of Section 1031 property exchanges and increases in automated mapping services, partially offset by reduced revenues relating to post-closing services and electronic mortgage documents. The decrease in 2004 resulted primarily from a lesser amount of post-closing services and electronic mortgage documents resulting from a reduction in the volume of real estate transactions, offset somewhat by an increase in Section 1031 tax-deferred property exchange services.

Investments. Investment income increased 29.4% in 2005 because of an increase in average balances invested and higher yields. Investment income increased 13.7% in 2004 because of increases in average balances invested, partially offset by lower yields. Certain investment gains in 2005, 2004 and 2003 were realized as part of the ongoing management of the investment portfolio for the purpose of improving performance.

Retention by agencies. The amounts retained by agencies, as a percentage of revenues generated by them, were 81.2%, 81.6% and 82.0% in the years 2005, 2004 and 2003, respectively. Amounts retained by title agencies are based on agreements between agencies and our title underwriters. The percentage that amounts retained by agencies bears to agency revenues may vary from year to year because of the geographical mix of agency operations and the volume of title revenues.

Selected cost ratios (by segment). The following table shows employee costs and other operating expenses as a percentage of related title and REI operating revenues.

     These two categories of expenses are discussed below in terms of year-to-year monetary changes.

Employee costs. Employee costs for the combined business segments increased 17.5% in 2005 and 3.1% in 2004. The number of persons we employed at December 31, 2005, 2004 and 2003 was approximately 9,900, 9,000 and 8,200, respectively. The increases in staff in 2005 and 2004 were primarily due to 552 and 605 employees, and $18.3 million and $26.9 million in employee costs, from acquisitions, respectively. The number of employees and employee costs also increased in 2005 due to the increase in the volume of real estate transactions closed by us.

     In our REI segment, employee costs increased 10.7% in 2005. These employee costs did not increase proportionately with the 19.7% increase in revenues due to an increase in revenues from Section 1031 property exchanges, which are less labor intensive than other REI services. In 2004 employee costs were comparable to 2003.

Other operating expenses. Other operating expenses for the combined business segments increased 14.9% in 2005 and 5.7% in 2004. The increase in other operating expenses in 2005 was partially due to acquisitions, which contributed approximately $9.4 million of the increase. Other 2005 increases included rent of $10.0 million, certain REI expenses, business promotion and technology costs. Increases in 2004 were in acquisitions, which contributed $12.4 million of the increase, litigation costs of $4.7 million, rent and technology costs. The increases were partially offset by decreases in certain REI expenses in response to volume decreases, supplies expense and attorney fees.

     Other operating expenses also include title plant and travel expenses. Most of our operating expenses follow, to varying degrees, the changes in transaction volume and revenues.

     Our employee costs and certain other operating expenses are sensitive to inflation. To the extent inflation causes increases in the prices of homes and other real estate, premium revenues also increase. Premiums are determined in part by the insured values of the transactions we handle.

Title losses. Provisions for title losses, as a percentage of title operating revenues, were 5.5%, 4.8% and 4.4% in 2005, 2004 and 2003, respectively. An increase in the number of larger losses resulted in an increase in our loss ratio in 2005. The increase included a $10.5 million addition to title loss reserves in the fourth quarter of 2005 related to a mortgage fraud and a defalcation. An increase in loss payment experience for prior policy years also resulted in an increase in our loss ratios in 2005 and 2004.

Income taxes. The provisions for federal, state and foreign income taxes represented effective tax rates of 37.9%, 37.4% and 37.6% in 2005, 2004 and 2003, respectively.

Contractual obligations. Our material contractual obligations at December 31, 2005 were:

     Material contractual obligations consist primarily of notes payable, operating leases and estimated title losses. Operating leases are primarily for office space and expire over the next 11 years. The timing for the payment of estimated title losses is not set by contract. Rather, it is projected based on historical payment patterns. The actual timing of estimated title loss payments may vary materially from the above projection because claims, by their nature, are complex and paid over long periods of time. Loss reserves represent a total estimate only, whereas the other contractual obligations are determinable as to timing and amounts. Title losses paid were $82.2 million, $68.4 million and $58.0 million in 2005, 2004 and 2003, respectively.

Cash provided by operations was $173.5 million, $170.4 million and $190.1 million in 2005, 2004 and 2003, respectively. Cash flow from operations has been the primary source of financing for additions to property and equipment, expanding operations, dividends to stockholders and other requirements. This source is supplemented by bank borrowings.

     The most significant non-operating source of cash was from proceeds of investments matured and sold in the amount of $580.9 million, $405.7 million and $264.3 million in 2005, 2004 and 2003, respectively. We used cash for the purchases of investments in the amounts of $679.0 million, $470.8 million and $416.3 million in 2005, 2004 and 2003, respectively.

     Acquisitions during 2005, 2004 and 2003 resulted in additions to goodwill of $30.1 million, $45.6 million and $13.7 million, respectively.

Restrictions on liquidity. A substantial majority of our consolidated cash and investments at December 31, 2005 was held by Stewart Title Guaranty Company (Guaranty) and its subsidiaries. The use and investment of these funds, dividends to the Company and cash transfers between Guaranty and its subsidiaries and the Company are subject to certain legal restrictions (Notes 2 and 3).

     Our liquidity at December 31, 2005, excluding Guaranty and its subsidiaries, was comprised of cash and investments aggregating $35.6 million and short-term liabilities of $3.3 million. We know of no commitments or uncertainties that are likely to materially affect our ability to fund cash needs (Note 17).

Loss reserves. Our loss reserves are fully funded, segregated and invested in high-quality securities and short-term investments. This is required by the insurance regulators of the states in which our underwriters are domiciled. At December 31, 2005, these investments aggregated $427.0 million and our estimated title loss reserves were $346.7 million.

     Effective September 1, 2005 and retroactive to the start of the year, the Texas Legislature reduced statutory reserve requirements for our major title insurer. The change does not directly impact reported earnings or loss reserves under U.S. generally accepted accounting principles. However, the change released approximately $25.2 million, or approximately $18.3 million after tax, of low-yielding statutory reserve investments making that portion available for other uses.

     Historically, our operating cash flow has been sufficient to pay all title policy losses incurred. As reported in Note 4, the market value of our debt securities maturing in less than one year was $33.8 million at December 31, 2005. Combined with our annual cash flow from operations ($173.5 million in 2005), we do not expect future loss payments to create a liquidity problem for us. Beyond providing funds for losses, we manage the maturities of our investment portfolio to provide safety of capital, improve earnings and mitigate interest rate risks.

Capital resources. We consider our capital resources to be adequate. We expect external capital resources will be available, if needed, because of our low debt-to-equity ratio. Long-term debt was $70.4 million and stockholders’ equity was $766.3 million at December 31, 2005. We are not aware of any trends, either favorable or unfavorable, that will materially affect notes payable or stockholders’ equity. We do not expect any material changes in the cost of such resources. Significant acquisitions in the future could materially affect the notes payable or stockholders’ equity balances.

Off-balance sheet arrangements. We do not have any material source of liquidity or financing that involves off-balance sheet arrangements.

Forward-looking statements. All statements included in this report, other than statements of historical facts, addressing activities, events or developments that we expect or anticipate will or may occur in the future, are forward-looking statements. Such forward-looking statements are subject to risks and uncertainties including, among other things, adverse changes in the levels of real estate activity, technology changes, unanticipated title losses, adverse changes in governmental regulations, actions of competitors, general economic conditions and other risks and uncertainties discussed under Item 1A – Risk Factors included elsewhere in this report.

The discussion below about our risk management strategies includes forward-looking statements that are subject to risks and uncertainties. Management’s projections of hypothetical net losses in the fair value of our market rate-sensitive financial instruments, should certain potential changes in market rates occur, are presented below. While we believe that the potential market rate changes are possible, actual rate changes could differ.

     Our only material market risk in investments in financial instruments is our debt securities portfolio. We invest primarily in marketable municipal, corporate, foreign, U.S. Government and mortgage-backed debt securities. We do not invest in financial instruments of a hedging or derivative nature.

     We have established policies and procedures to minimize our exposure to changes in the fair values of our investments. These policies include retaining an investment advisory firm, an emphasis upon credit quality, management of portfolio duration, maintaining or increasing investment income through high coupon rates and actively managing profile and security mix depending upon market conditions. We have classified all of our investments as available-for-sale.

     Investments in debt securities at December 31, 2005 mature, according to their contractual terms, as follows (actual maturities may differ because of call or prepayment rights):

     We believe our investment portfolio is diversified and do not expect any material loss to result from the failure to perform by issuers of the debt securities we hold. Our investments are not collateralized. The mortgage-backed securities are issued by U.S. Government-sponsored entities.

     Based on our debt securities portfolio and interest rates at December 31, 2005, a 100 basis-point increase (decrease) in interest rates would result in a decrease (increase) of approximately $20.5 million, or 4.0%, in the fair value of our portfolio. Changes in interest rates may affect the fair value of the debt securities portfolio and may result in unrealized gains or losses. Gains or losses would only be realized upon the sale of the investments. Any other-than-temporary declines in market values of securities are charged to earnings.

The information required to be provided in this item is included in our Consolidated Financial Statements, including the Notes thereto, attached hereto as pages F-1 to F-19, and such information is incorporated in this report by reference.

None.

Our principal executive officers and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2005, have concluded that, as of such date, our disclosure controls and procedures are adequate and effective to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities.

     There has been no change in our internal control over financial reporting during the quarter ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. As a result, no corrective actions were required or undertaken.

     All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal controls over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal controls over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

     The Board of Directors has adopted the Stewart Code of Business Conduct and Ethics andGuidelines on Corporate Governance, as well as the Code of Ethics for Chief Executive Officers, Principal Financial Officer and Principal Accounting Officer. Each of these documents can be found at our website, www.stewart.com.

     See page F-2 for the Sarbanes-Oxley Section 404 Management Report and page F-3 for the Report of Independent Registered Public Accounting Firm on our effectiveness of internal control over financial reporting.

None.

Information regarding our directors and executive officers will be included in our proxy statement for our 2006 Annual Meeting of Stockholders (the Proxy Statement), to be filed within 120 days after December 31, 2005, and is incorporated in this report by reference.

Information regarding executive compensation will be included in the Proxy Statement and is incorporated in this report by reference.

Information regarding security ownership of certain beneficial owners and management will be included in the Proxy Statement and is incorporated in this report by reference.

Information regarding certain relationships and related transactions will be included in the Proxy Statement and is incorporated in this report by reference.

Information regarding fees paid to and services provided by our independent registered public accounting firm will be included in the Proxy Statement and is incorporated in this report by reference.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, we have duly caused this report to be signed on our behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been signed by the following persons on our behalf and in the capacities and on the dates indicated:

To the Board of Directors and Stockholders of
Stewart Information Services Corporation

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework.

Based on our assessment, management believes that, as of December 31, 2005, the Company’s internal control over financial reporting is effective based on those criteria.

The Company’s independent registered public accounting firm has issued an audit report on our assessment of the Company’s internal control over financial reporting.

To the Board of Directors and Stockholders of
Stewart Information Services Corporation

We have audited management’s assessment, included in the accompanying Sarbanes-Oxley Section 404 Management Report, that Stewart Information Services Corporation maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Stewart Information Services Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Stewart Information Services Corporation maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Stewart Information Services Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as listed in the accompanying index of Stewart Information Services Corporation and our report dated March 7, 2006 expressed an unqualified opinion on those consolidated financial statements.

Houston, Texas
March 7, 2006

To the Board of Directors and Stockholders of
Stewart Information Services Corporation

We have audited the consolidated financial statements of Stewart Information Services Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Stewart Information Services Corporation and subsidiaries as of December 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Stewart Information Services Corporation’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 7, 2006 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

/s/ KPMG LLP

Houston, Texas
March 7, 2006

See notes to consolidated financial statements.

     See notes to consolidated financial statements.

General. Stewart Information Services Corporation, through its subsidiaries (collectively, the Company), is primarily engaged in the title insurance-related services business. The Company also provides real estate information services. The Company operates through a network of policy-issuing offices and agencies in the United States and several international markets. Approximately 29 percent of consolidated title revenues for the year ended December 31, 2005 were generated in California and Texas. The operations in the international markets in which the Company does business are immaterial to consolidated results.

A. Management’s responsibility. The accompanying financial statements were prepared by management, which is responsible for their integrity and objectivity. The financial statements have been prepared in conformity with U.S. generally accepted accounting principles (GAAP), including management’s best judgments and estimates. Actual results could differ from estimates.

B. New significant accounting pronouncements. The Company will adopt SFAS No. 123(R), “Share-Based Payment”, effective January 1, 2006, which will require the fair value of stock options to be recognized in the consolidated financial statements as compensation expense. The pro forma impact of stock option expensing, calculated as required by SFAS No. 123, is disclosed in Note 1S. The effect on the Company’s consolidated financial position or results of operations is expected to be immaterial.

C. Reclassifications. Certain prior year amounts in the consolidated financial statements have been reclassified for comparative purposes. Net earnings and stockholders’ equity, as previously reported, were not affected.

D. Consolidation. The consolidated financial statements include all (1) subsidiaries in which the Company owns more than 50% voting rights in electing directors and (2) variable interest entities when required by FIN 46 and FIN 46(R). Unconsolidated investees, in which the Company owns 20% through 50% and where the Company exercises significant influence, are accounted for by the equity method. All significant intercompany accounts and transactions are eliminated and provisions are made for minority interests.

E. Statutory accounting. Stewart Title Guaranty Company (Guaranty) and other title insurance underwriters owned by the Company prepare financial statements in accordance with statutory accounting practices prescribed or permitted by regulatory authorities.

     In conforming the statutory financial statements to GAAP, the statutory premium reserve and the reserve for reported title losses are eliminated and, in substitution, amounts are established for estimated title losses (Note 1G). The net effect, after providing for deferred income taxes, is included in consolidated retained earnings.

F. Revenue recognition. Operating revenues from direct title operations are considered earned at the time of the closing of the related real estate transaction. The Company recognizes premium revenues on title insurance policies written by independent agencies when the policies are reported to the Company. In addition, where reasonable estimates can be made, the Company also accrues for policies issued but not reported until after period end. The Company believes that reasonable estimates can be made when recent and consistent policy issuance information is available. Estimates are based on historical reporting patterns and other information obtained about the operations of agencies, as well as current industry trends, including trends in direct operations.

     Revenues from real estate information services are considered earned at the time the service is performed or the work product is delivered to the customer.

G. Title losses and related claims. Estimating future title loss payments is difficult because of the complex nature of title claims, the length of time over which claims are paid, the significantly varying dollar amounts of individual claims and other factors.

     The Company’s liability for estimated title losses comprises both known claims and claims expected to be reported in the future. The amount of the reserve represents the aggregate future payments, net of recoveries, that are expected to be incurred on policy and escrow losses and in costs to settle claims. Large losses are individually evaluated. Provisions are charged to income in the same year the related premium revenues are recognized. The Company bases the estimates on reported claims, historical loss experience, title industry averages and the current legal and economic environment.

     The Company’s estimated liability for future loss payments is regularly reviewed for reasonableness and adjusted as appropriate. Independent consulting actuaries also review the adequacy of the liability on an annual basis. In accordance with industry practice, the amounts have not been discounted to their present values.

H. Cash equivalents. Cash equivalents are highly liquid investments with insignificant interest rate risks and maturities of three months or less at the time of acquisition.

I. Short-term investments. Short-term investments comprise time deposits with banks, federal government obligations, money market accounts and other investments maturing in less than one year.

J. Investments. The investment portfolio is classified as available-for-sale. Realized gains and losses on sales of investments are determined using the specific identification method. Net unrealized gains and losses on securities, net of applicable deferred taxes, are included as a component of other comprehensive earnings within stockholders’ equity. Any other-than-temporary declines in market values of securities are charged to earnings.

K. Property and equipment. Depreciation is computed principally using the straight-line method at the following rates: buildings – 30 to 40 years and furniture and equipment – 3 to 10 years. Maintenance and repairs are expensed as incurred while improvements are capitalized. Gains and losses are recognized at disposal.

L. Title plants. Title plants include compilations of a county’s official land records, prior examination files, copies of prior title policies, maps and related materials that are geographically indexed to a specific property. The costs of acquiring existing title plants and creating new ones, prior to the time such plants are placed in operation, are capitalized. Such costs are not amortized because there is no indication of any loss of value. The costs of maintaining and operating title plants are expensed as incurred. Gains and losses on sales of copies of title plants or interests in title plants are recognized at the time of sale.

M. Goodwill. Goodwill is the excess of the purchase price over the fair value of net assets acquired. Goodwill is not amortized but is reviewed no less than annually and, if determined to be impaired, is expensed to current operations.

N. Acquired intangibles. Intangible assets are comprised mainly of non-compete and underwriting agreements and are amortized on a straight-line basis over their estimated lives, which are primarily 3 to 10 years.

O. Other long-lived assets. The Company reviews the carrying values of title plants and other long-lived assets if certain events occur that may indicate impairment. An impairment of these long-lived assets is indicated when projected undiscounted cash flows over the estimated lives of the assets are less than carrying values. If impairment is determined by management, the recorded amounts are written down to fair values by calculating the discounted values of projected cash flows.

P. Fair values. The fair values of financial instruments, including cash and cash equivalents, short-term investments, notes receivable, notes payable and accounts payable, are determined by references to various market data and other valuation techniques, as appropriate. The fair values of these financial instruments approximate their carrying values. Investments in debt and equity securities are carried at their fair values (Note 4).

Q. Derivatives and hedging. The Company does not invest in hedging or derivative instruments.

R. Income taxes. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the tax bases and the book carrying values of certain assets and liabilities. Valuation allowances are provided as may be appropriate. Enacted tax rates are used in calculating amounts.

S. Stock option plans. The Company combined its two stock option plans into a single plan in April 2005. The Company applies the intrinsic value method of APB No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations in accounting for the plans. Accordingly, no stock-based employee compensation cost is reflected in net earnings, as all options granted had an exercise price equal to the market value of the Common Stock on the date of grant (Note 13).

     Under SFAS No. 123, compensation cost is recognized for the fair value of the employees’ purchase rights, which is estimated using the Black-Scholes Model. The Company assumed a dividend yield of 0% to 1.4%, an expected life of ten years, an expected volatility of 34.5% to 37.2% and a risk-free interest rate of 4.0% to 6.0% for the three years ended December 31, 2005.

     Had compensation cost for the Company’s plans been determined consistent with SFAS No. 123, the Company’s net earnings and earnings per share would have been reduced to the pro forma amounts indicated as follows:

Restrictions on cash and investments. Statutory reserve funds of $449,475,000 and $401,814,000 and short-term investments of $47,804,000 and $56,870,000 at December 31, 2005 and 2004, respectively, are maintained to comply with legal requirements for statutory premium reserves and state deposits. These funds are not available for any other purpose.

     A substantial majority of consolidated investments and cash at each year end was held by the Company’s title insurer subsidiaries. Generally, the types of investments a title insurer can make are subject to legal restrictions. Furthermore, the transfer of funds by a title insurer to its parent or subsidiary operations, as well as other related party transactions, are restricted by law and generally require the approval of state insurance authorities.

Dividend restrictions. Substantially all of the consolidated retained earnings at each year end were represented by Guaranty, which owns directly or indirectly substantially all of the subsidiaries included in the consolidation.

     Guaranty cannot pay a dividend in excess of certain limits without the approval of the Texas Insurance Commissioner. The maximum dividend that can be paid without such approval in 2006 is $97,639,000. Guaranty declared dividends of $31,000,000, $21,615,000 and $33,790,000 in 2005, 2004 and 2003, respectively.

     Dividends from Guaranty are also voluntarily restricted primarily to maintain statutory surplus and liquidity at competitive levels. The ability of a title insurer to pay claims can significantly affect the decision of lenders and other customers when buying a policy from a particular insurer.

     Surplus as regards policyholders for Guaranty was $488,193,000 and $417,906,000 at December 31, 2005 and 2004, respectively. Statutory net income for Guaranty was $56,449,000, $26,609,000 and $35,645,000 in 2005, 2004 and 2003, respectively.

Investments. The amortized costs and market values of debt and equity securities at December 31 follow: