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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission file number 0-3658
THE FIRST AMERICAN FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Incorporated in California 95-1068610
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 First American Way, Santa Ana, California 92707-5913
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (714) 800-3000
Securities registered pursuant to Section 12(b) of the Act:
Common New York Stock Exchange
Rights to Purchase Series A Junior
Participating Preferred New York Stock Exchange
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(Title of each class) (Name of each exchange on
which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether 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 X No ___
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (17 C.F.R. 229.405) 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. [_]
On March 27, 2000, the aggregate market value of voting stock held by non-
affiliates was $663,697,761.
On March 27, 2000, there were 63,357,203 shares of Common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement are incorporated by
reference in Part III of this report. The definitive proxy statement will be
filed no later than 120 days after the close of Registrant's fiscal year.
This report includes 57 pages.
PART I
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Item 1. Business.
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The Company
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The First American Financial Corporation (the "Company") was organized
in 1894 as Orange County Title Company, succeeding to the business of two title
abstract companies founded in 1889 and operating in Orange County, California.
In 1924, the Company commenced issuing title insurance policies. In 1986, the
Company began a diversification program by acquiring and developing business
information companies closely related to the real estate transfer and closing
process. In 1998, the Company expanded its diversification program to include
business information companies outside of the real estate transfer and closing
process. The Company is a California corporation and has its executive offices
at 1 First American Way, Santa Ana, California 92707-5913. The Company's
telephone number is (714) 800-3000. Unless the context otherwise indicates, the
"Company," as used herein, refers to The First American Financial Corporation
and its subsidiaries.
General
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The Company, through its subsidiaries, is engaged in the business of
providing business information and related products and services. The Company's
three primary segments are title insurance and services, real estate information
and services, and consumer information and services. The title insurance segment
issues title insurance policies and provides other related services. The real
estate information segment provides tax monitoring, mortgage credit reporting,
property data services, flood certification, field inspection services,
appraisal services, mortgage loan servicing systems, mortgage document
preparation and other related services. The consumer information segment
provides home warranties, property and casualty insurance, resident screening,
pre-employment screening, specialized credit reporting, automotive insurance
tracking, investment advisory, trust and banking services, and other related
services. Financial information regarding each of the Company's business
segments is included in "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Item 8. Financial
Statements and Supplementary Data" of Part II of this report. The Company
believes that its subsidiary, First American Title Insurance Company ("First
American"), is one of the largest title insurers in the United States, based on
operating revenues, and its subsidiary, First American Real Estate Information
Services, Inc., is the nation's largest provider of flood zone determinations,
based on the number of flood zone determination reports issued, the nation's
largest mortgage credit reporting service, based on the number of credit reports
issued, and the nation's second largest provider of tax monitoring services,
based on the number of loans under service. The Company also believes that its
subsidiary, First American Home Buyers Protection Corporation, was the second
largest provider of home warranties in the United States, based on the number of
home protection contracts under service. Substantially all of the revenues for
the Company's title insurance and real estate information segments result from
resales and refinancings of residential real estate and, to a lesser extent,
from commercial transactions and the construction and sale of new housing. The
majority of the revenues for the Company's consumer information segment result
from non real estate-related activity. Real estate activity is cyclical in
nature and is affected greatly by the cost and availability of long term
mortgage funds. Real estate activity and, in turn, a large portion of the
Company's revenue base, can be adversely affected during periods of high
interest rates and/or limited money supply. However, this adverse effect is
mitigated in part by the continuing diversification of the Company's operations
into areas outside of the traditional real estate transfer and closing process.
Overview of Title Insurance Industry
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Title to, and the priority of interests in, real estate are determined
in accordance with applicable laws. In most real estate transactions, mortgage
lenders and purchasers of real estate want to be protected from loss or damage
in the event that title is not as represented. In most parts of the United
States, title insurance has become accepted as the most efficient means of
providing such protection.
Title Policies. Title insurance policies insure the interests of
owners and their lenders in the title to real property against loss by reason of
adverse claims to ownership of, or to defects, liens, encumbrances or other
matters affecting such title which exist at the time a title insurance policy is
issued and which were not excluded from the coverage of a title insurance
policy. Title insurance policies are issued on the basis of a title report,
which is prepared after a search of the public records, maps, documents and
prior title policies to ascertain the existence of easements, restrictions,
rights of way, conditions, encumbrances or other matters affecting the title to,
or use of, real property. In certain instances, a visual inspection of the
property is also made. To facilitate the preparation of title reports, copies
of public records, maps, documents and prior title policies may be compiled and
indexed to specific properties in an area. This compilation is known as a
"title plant."
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The beneficiaries of title insurance policies are generally real
estate buyers and mortgage lenders. A title insurance policy indemnifies the
named insured and certain successors in interest against title defects, liens
and encumbrances existing as of the date of the policy and not specifically
excepted from its provisions. The policy typically provides coverage for the
real property mortgage lender in the amount of its outstanding mortgage loan
balance and for the buyer in the amount of the purchase price of the property,
but in some cases might insure for a greater amount where the buyer anticipates
constructing improvements on the property. Coverage under a title insurance
policy issued to a real property mortgage lender generally terminates upon the
sale of the insured property unless the owner carries back a mortgage or makes
certain warranties as to the title.
Before issuing title policies, title insurers seek to limit their risk
of loss by accurately performing title searches and examinations. The major
expenses of a title company relate to such searches and examinations, the
preparation of preliminary reports or commitments and the maintenance of title
plants, and not from claim losses as in the case of property and casualty
insurers.
The Closing Process. Title insurance is essential to the real estate
closing process in most transactions involving real property mortgage lenders.
In a typical residential real estate sale transaction, title insurance is
generally ordered on behalf of an insured by a real estate broker, lawyer,
developer, lender or closer involved in the transaction. Once the order has
been placed, a title insurance company or an agent conducts a title search to
determine the current status of the title to the property. When the search is
complete, the title company or agent prepares, issues and circulates a
commitment or preliminary title report ("commitment") to the parties to the
transaction. The commitment summarizes the current status of the title to the
property, identifies the conditions, exceptions and/or limitations that the
title insurer intends to attach to the policy and identifies items appearing on
the title that must be eliminated prior to closing.
The closing function, sometimes called an escrow in western states, is
often performed by a lawyer, an escrow company or a title insurance company or
agent (such person or entity, the "closer"). Once documentation has been
prepared and signed, and mortgage lender payoff demands are in hand, the
transaction is "closed." The closer records the appropriate title documents and
arranges the transfer of funds to pay off prior loans and extinguish the liens
securing such loans. Title policies are then issued insuring the priority of
the mortgage of the real property mortgage lender in the amount of its mortgage
loan and the buyer in the amount of the purchase price. The time lag between
the opening of the title order and the issuance of the title policy is usually
between 30 and 90 days. The seller and the buyer bear the risk during this time
lag. Any matter affecting title which is discovered during this period would
have to be dealt with to the title insurers' satisfaction or the insurer would
except the matter from the coverage afforded by the title policy. Before a
closing takes place, however, the closer would request that the title insurer
provide an update to the commitment to discover any adverse matters affecting
title and, if any are found, would work with the seller to eliminate them so
that the title insurer would issue the title policy subject only to those
exceptions to coverage which are acceptable to the buyer and the buyer's lender.
Issuing the Policy: Direct vs. Agency. A title policy can be issued
directly by a title insurer or indirectly on behalf of a title insurer through
agents which are not themselves licensed as insurers. Where the policy is
issued by a title insurer, the search is performed by or at the direction of the
title insurer, and the premium is collected and retained by the title insurer.
Where the policy is issued by an agent, the agent performs the search, examines
the title, collects the premium and retains a portion of the premium. The
remainder of the premium is remitted to the title insurer as compensation for
bearing the risk of loss in the event a claim is made under the policy. The
percentage of the premium retained by an agent varies from region to region. A
title insurer is obligated to pay title claims in accordance with the terms of
its policies, regardless of whether it issues its policy directly or indirectly
through an agent.
Premiums. The premium for title insurance is due and earned in full
when the real estate transaction is closed. Premiums are generally calculated
with reference to the policy amount. The premium charged by a title insurer or
an agent is subject to regulation in most areas. Such regulations vary from
state to state.
The Company's Title Insurance Operations
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Overview. The Company, through First American Title Insurance Company
and its subsidiaries, transacts the business of title insurance through a
network of both direct operations and agents. Through this network, the Company
issues policies in all states (except Iowa), the District of Columbia, Puerto
Rico, Guam, the U.S. Virgin Islands, the Bahama Islands, Canada, Mexico,
Bermuda, the United Kingdom and Australia. In Iowa, the Company provides
abstracts of title only, because title insurance is not permitted. Through
acquisitions and start-ups during the mid-1980s, the Company has grown from a
large regional company to a nationwide company, becoming less dependent on
operating revenues from any one state or region.
Based on industry statistics showing premiums written in the major
areas in which the Company operates, in 1998, the Company had the largest or
second largest share of the title insurance market in 30 states and in the
District of
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Columbia. In addition, the Company's national market share grew from 21.5% in
1997 to 22.0% in 1998. Industry statistics for 1999 are not currently available.
The Company plans to continue increasing its share of the title
insurance market through strategic acquisitions and further development of its
existing branch office and agency operations. The Company also will continue to
focus on expanding its share of the higher margin title insurance business
conducted on behalf of commercial clients. The Company believes its national
commercial market share has grown through programs directed at major developers,
lenders and law firms.
Sales and Marketing. The Company markets its title insurance services
to a broad range of customers. The Company believes that its primary source of
business is from referrals from persons in the real estate community, such as
independent escrow companies, real estate brokers, developers, mortgage brokers,
mortgage bankers, financial institutions and attorneys. In addition to the
referral market, the Company markets its title insurance services directly to
large corporate customers and certain mortgage lenders. As title agents
contribute a large portion of the Company's revenues, the Company also markets
its title insurance services to independent agents. The Company's marketing
efforts emphasize the quality and timeliness of its services and its national
presence.
While virtually all personnel in the Company's title insurance
business assist in marketing efforts, the Company maintains a sales force of
approximately 1,000 persons dedicated solely to marketing. This sales force is
located throughout the Company's branch office network. The Company provides
its sales personnel with training in selling techniques, and each branch manager
is responsible for hiring the sales staff and ensuring that sales personnel
under his or her supervision are properly trained. In addition to this sales
force, the Company has approximately 20 sales personnel in its national accounts
department. One of the responsibilities of the national accounts department
sales personnel is the coordination of marketing efforts directed at large real
estate lenders and companies developing, selling, buying or brokering properties
on a multistate basis. The Company also supplements the efforts of its sales
force through general advertising in various trade and professional journals.
The Company's increased commercial sales effort during the past decade
has enabled the Company to expand its commercial business base. Because
commercial transactions involve higher coverage amounts and yield higher
premiums, commercial title insurance business generates greater profit margins
than does residential title insurance business. Accordingly, the Company plans
to continue to emphasize its commercial sales program.
Although sales outside of the United States account for a small
percentage of the Company's revenues, the Company believes that the acceptance
of title insurance in foreign markets has increased in recent years.
Accordingly, the Company plans to continue its international sales efforts,
particularly in Canada, the United Kingdom and Australia.
Underwriting. Before a title insurance policy is issued, a number of
underwriting decisions are made. For example, matters of record revealed during
the title search may require a determination as to whether an exception should
be taken in the policy. The Company believes that it is important for the
underwriting function to operate efficiently and effectively at all decision
making levels so that transactions may proceed in a timely manner. To perform
this function, the Company has underwriters at the branch level, the regional
level and the national level.
Agency Operations. The relationship between the Company and each
agent is governed by an agency agreement which states the conditions under which
the agent is authorized to issue title insurance policies on behalf of the
Company. The agency agreement also prescribes the circumstances under which the
agent may be liable to the Company if a policy loss is attributable to error of
the agent. Such agency agreements typically have a term of one to five years
and are terminable immediately for cause.
Due to the high incidence of agency fraud in the title insurance
industry during the late 1980s, the Company instituted measures to strengthen
its agent selection and audit programs. In determining whether to engage an
independent agent, the Company investigates the agent's experience, background,
financial condition and past performance. The Company maintains loss experience
records for each agent and conducts periodic audits of its agents. The Company
has also increased the number of agent representatives and agent auditors that
it employs. Agent representatives periodically visit agents and examine their
books and records. In addition to periodic audits, a full agent audit will be
triggered if certain "warning signs" are evident. Warning signs that can
trigger an audit include the failure to implement Company-required accounting
controls, shortages of escrow funds and failure to remit underwriting fees on a
timely basis.
Title Plants. The Company's network of title plants constitutes one
of its principal assets. A title search is conducted by searching the public
records or utilizing a title plant. While public records are indexed by
reference to the names of the parties to a given recorded document, most title
plants arrange their records on a geographic basis. Because of this difference,
records of a title plant are generally easier to search. Most title plants also
index prior policies, adding to searching efficiency. Many title plants are
computerized. Certain offices of the Company utilize jointly owned plants or
utilize a plant under a joint user agreement with other title companies. The
Company believes its title plants, whether wholly or partially owned or utilized
under a joint user agreement, are among the best in the industry.
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With the formation of a limited liability corporation ("LLC") with
Experian Group on January 1, 1998, the Company enhanced its investment in title
plants. Experian Group contributed to the LLC its real estate information
division, which the Company believes is the nation's leading operator of title
plants, with the second largest repository of imaged title documents.
The Company's title plants are carried on its balance sheet at
original cost, which includes the cost of producing or acquiring interests in
title plants or the appraised value of subsidiaries' title plants at dates of
acquisition for companies accounted for as purchases. Thereafter, the cost of
daily maintenance of these plants is charged to expense as incurred. A properly
maintained title plant has an indefinite life and does not diminish in value
with the passage of time. Therefore, in accordance with generally accepted
accounting principles, no provision is made for depreciation of these plants.
Since each document must be reviewed and indexed into the title plant, such
maintenance activities constitute a significant item of expense. The Company is
able to offset title plant maintenance costs at its plants through joint
ownership and access agreements with other title insurers and title agents.
Reserves for Claims and Losses. The Company provides for title
insurance losses based upon its historical experience by a charge to expense
when the related premium revenue is recognized. The resulting reserve for known
claims and incurred but not reported claims reflects management's best estimate
of the total costs required to settle all claims reported to the Company and
claims incurred but not reported, and is considered by the Company to be
adequate for such purpose.
In settling claims, the Company occasionally purchases and ultimately
sells the interest of the insured in the real property or the interest of the
claimant adverse to the insured. The assets so acquired are carried at the
lower of cost or fair value, less costs to sell. Notes, real estate and other
assets purchased or otherwise acquired in settlement of claims, net of valuation
reserves, totaled $10.9 million, $2.7 million and $10.6 million, respectively,
as of December 31, 1999.
Reinsurance and Coinsurance. The Company assumes and distributes
large title insurance risks through mechanisms of reinsurance and coinsurance.
In reinsurance agreements, in consideration for a portion of the premium, the
reinsurer accepts that part of the risk which the primary insurer cedes to the
reinsurer over and above the portion retained by the primary insurer. The
primary insurer, however, remains liable for the total risk in the event that
the reinsurer does not meet its obligation. As a general rule, the Company does
not retain more than $40 million of coverage on any single policy. Under
coinsurance agreements, each coinsurer is jointly and severally liable for the
risk insured, or for so much thereof as is agreed to by the parties. The
Company's reinsurance activities account for less than 1% of its total title
insurance operating revenues.
Competition. The title insurance business is highly competitive. The
number of competing companies and the size of such companies varies in the
different areas in which the Company conducts business. Generally, in areas of
major real estate activity, such as metropolitan and suburban localities, the
Company competes with many other title insurers. Approximately 90 title
insurance underwriters are members of the American Land Title Association, the
title insurance industry's national trade association. The Company's major
nationwide competitors in its principal markets include Fidelity National Title
Insurance Company (which also includes Chicago Title, Ticor Title Insurance
Company and Security Union Title Insurance Company) Land America Title Insurance
Company, Stewart Title Guaranty Company and Old Republic Title Insurance Group.
In addition to these nationwide competitors, numerous agency operations
throughout the country provide aggressive competition on the local level.
The Company believes that competition for title insurance business is
based primarily on the quality and timeliness of service, because parties to
real estate transactions are usually concerned with time schedules and costs
associated with delays in closing transactions. In those states where prices
are not established by regulatory authorities, the price of title insurance
policies is also an important competitive factor. The Company believes that it
provides quality service in a timely manner at competitive prices.
The Company's Related Businesses
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As an adjunct to its title insurance business, in 1986 the Company
embarked on a diversification program by acquiring and developing business
information companies closely related to the real estate transfer and closing
process. In 1998, the Company expanded its diversification program to include
business information companies outside of the real estate transfer and closing
process. As a result of these diversification programs, the Company has become
the nation's leading provider of business information and related products
The Real Estate Information and Services Business. The real estate
information service business encompasses tax monitoring, mortgage credit
reporting, flood certification, mortgage loan origination and servicing systems,
mortgage document preparation and other property information services.
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The tax monitoring service, established by the Company in 1987,
advises real property mortgage lenders of the status of property tax payments
due on real estate securing their loans. With the acquisition of TRTS Data
Services, Inc., in November 1991, the Company believes that it is the second
largest provider of tax monitoring services in the United States.
Under a typical contract, a tax service provider monitors, on behalf
of a mortgage lender, the real estate taxes owing on properties securing such
lender's mortgage loans for the life of such loans. In general, providers of
tax monitoring services, such as the Company's tax service, indemnify mortgage
lenders against losses resulting from a failure to monitor delinquent taxes.
Where a mortgage lender requires that tax payments be impounded on behalf of
borrowers, providers of tax monitoring services, such as the Company's tax
service, may be required to monitor and oversee the transfer of these monies to
the taxing authorities and provide confirmation to lenders that such taxes have
been paid.
The Company's primary source of tax service business is from large
multistate mortgage lenders. The Company's only major nationwide competitor in
the tax service business is Transamerica Real Estate Tax Service. Because of
its broad geographic coverage and the large number of mortgage loans not being
serviced by a third party tax service provider, the Company believes that it is
well positioned to increase its market share in the tax service market.
The fee charged to service each mortgage loan varies from region to
region, but generally falls within the $44 to $95 price range and is paid in
full at the time the contract is executed. The Company recognizes revenues
from tax service contracts over the estimated duration of the contracts.
However, income taxes are paid on the entire fee in the year the fee is
received. Historically, the Company has maintained minimal reserves for losses
relating to its tax monitoring service because its losses have been negligible.
The Company's mortgage credit reporting service provides credit
information reports for mortgage lenders throughout the United States. These
reports are derived from two or more credit bureau sources and are summarized
and prepared in a standard form acceptable to mortgage loan originators and
secondary mortgage purchasers. The Company's credit reporting service has grown
primarily through acquisitions. In 1994, the Company acquired all of the
minority interests in its lower tier subsidiaries Metropolitan Credit Reporting
Services, Inc., and Metropolitan Property Reporting Services, Inc. In 1994, the
Company also acquired California Credit Data, Inc., and Prime Credit Reports,
Inc., and in 1995, the Company acquired Credco, Inc. (now named First American
Credco, Inc.). With the acquisition of First American Credco, Inc., the Company
believes that it is now the largest mortgage credit reporting service in the
United States.
In January 1995, the Company acquired Flood Data Services, Inc. (now
named First American Flood Data Services, Inc.). This business furnishes to
mortgage lenders flood zone determination reports, which provide information on
whether or not property securing a loan is in a governmentally delineated
special flood hazard area. Federal legislation passed in 1994 requires that
most mortgage lenders obtain a determination of the current flood zone status at
the time each loan is originated and obtain updates during the life of the loan.
First American Flood Data Services, Inc., is the largest provider of flood zone
determinations in the United States.
In April 1996, the Company acquired the Excelis Mortgage Loan
Servicing System (MLS), now known as Excelis, Inc. Excelis MLS is the only
commercially available real-time on-line servicing system that has been
developed since 1990 to meet increasingly sophisticated market demands. The
software employs rules-based technology which enables the user to customize the
system to fit its individual servicing criteria and policies.
In December 1996, the Company acquired Ward Associates, now known as
First American Field Services. The company was combined with First American's
existing field services company to provide comprehensive inspection and property
preservation services to mortgage lenders nationwide. With the acquisition, the
Company believes that it is now the second largest field services company in the
United States.
In May 1997, the Company purchased all of the operations of SMS, other
than SMS' flood zone determination business. SMS is a leading provider of real
estate information services to the U.S. mortgage and title insurance industries.
The acquired businesses include SMS' credit division, which the Company believes
is the third largest provider of U.S. mortgage credit information; SMS' property
appraisal division, which the Company believes is the second largest provider of
U.S. appraisal services; SMS' title division, which provides title and closing
services throughout the United States, servicing primarily home equity mortgage
institutions; SMS' settlement services business, which provides title plant
systems and accounting services, as well as escrow closing software, to the
title industry; and a controlling interest in what is believed by the Company to
be the largest mortgage document preparation firm.
On January 1, 1998, the Company and its real estate information
service subsidiaries (other than Excelis, Inc.) (the "Real Estate Information
Subsidiaries") consummated a business transaction with Experian Group
("Experian"), pursuant to which First American Real Estate Solutions LLC
("FARES") was established. Under the transaction, the Real Estate Information
subsidiaries contributed substantially all of their assets and liabilities to
FARES in exchange for an 80% ownership interest and Experian transferred
substantially all of the assets and liabilities of its Real Estate Solutions
division ("RES") to FARES in exchange for a 20% ownership interest. RES is
believed to be the nation's foremost supplier of core real estate data,
providing, among other things, property valuation information, title
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information, tax information and imaged title documents. As a result of this
transaction, the Company believes that FARES will become the nation's largest
and most diverse provider of information technology and decision support
solutions for the mortgage and real estate industries.
In April 1998, the Company acquired Contour Software. This business
supplies mortgage loan origination software to the mortgage industry. Contour
offers a complete line of software products for every facet of mortgage lending,
from qualification to servicing.
In June 1998, the Company acquired Data Tree Corporation. Data Tree is a
supplier of database management and document imaging systems to county
recorders, other governmental agencies and the title industry.
In July 1998, the Company acquired ShadowNet Mortgage Technologies, LLC.
ShadowNet is a provider of electronic mortgage preparation and delivery systems
and now conducts business under the First American Nationwide Documents brand-
name.
The Consumer Information and Services Business. In 1998 the Company
created this business segment to provide non-cyclical, high margin services to a
customer base outside the Company's traditional clientele and to expand the
Company's opportunities for revenue consistency. This business segment markets a
variety of services including automotive credit reporting, direct-to-consumer
credit reporting, multi-family resident screening, pre-employment screening,,
property and casualty insurance and other related services. This segment also
provides home warranties and trust and thrift services.
The automotive and sub-prime automotive credit reporting service provides
auto dealers and lenders with consumer credit reports tailored to the specific
needs of the automotive market. This credit reporting service also offers credit
reports directly to the consumer, accessing information from the nation's three
largest credit bureaus.
The multi-family resident screening service provides landlords with
information regarding a housing applicant's rental payment history, occupancy
responsibilities, eviction actions, credit information and similar background
data.
The pre-employment screening service offers employers a variety of
reports on prospective employees, providing information on criminal records,
warrants, motor vehicle reports, credit reports, drug screens, education, prior
employment, professional licenses and more.
Property and casualty insurance is offered by the consumer information
segment through Five Star Holdings and Great Pacific Insurance Company, both
acquired in 1999.
The Company's home warranty business commenced operations in 1984, in
part with the proceeds of a $1.5 million loan from the Company which was, in
1986, converted to a majority equity interest. The Company currently owns 90%
of its home warranty business, which is operated as a second tier subsidiary,
with the balance owned by management of that subsidiary. The Company's home
warranty business issues one-year warranties which protect homeowners against
defects in household systems and appliances, such as plumbing, water heaters and
furnaces. The Company's home warranty subsidiary currently charges
approximately $245 to $335 for its basic home warranty contract. Optional
coverage is available for air conditioners, pools, spas, washers, dryers and
refrigerators for charges ranging from approximately $25 to $125. For an
additional charge, coverage is renewable annually at the option of the homeowner
upon approval by the home warranty subsidiary. Fees for the warranties are paid
at the closing of the home purchase and are recognized monthly over a 12-month
period. Home warranties are marketed through real estate brokers and agents.
This business is conducted in certain counties of Arizona, California, Georgia,
Nevada, New Mexico, North Carolina, South Carolina, Texas, Utah and Washington.
The principal competitor of the Company's home warranty business is American
Home Shield, a subsidiary of Service Master L.P.
Since 1960, the Company has conducted a general trust business in
California, acting as trustee when so appointed pursuant to court order or
private agreement. In 1985, the Company formed a banking subsidiary into which
its subsidiary trust operation was merged. During August 1999, this subsidiary
converted from a state-chartered bank to a federal savings bank. As of December
31, 1999, the trust operation was administering fiduciary and custodial assets
having a market value in excess of $1.7 billion.
During 1988, the Company, through a majority owned subsidiary, acquired
an industrial loan corporation (the "Thrift") that accepts thrift deposits and
uses deposited funds to originate and purchase loans secured by commercial
properties in Southern California. As of December 31, 1999, the Thrift had
approximately $80.8 million of demand deposits and $87.3 million of loans
outstanding.
Loans made or acquired during the current year, by the Thrift, ranged in
amount from $10,000 to $1,775,000. The average loan balance outstanding at
December 31, 1999, was $282,500. Loans are made only on a secured basis, at
loan-to-value percentages no greater than 75%. The Thrift specializes in making
commercial real estate loans. In excess of 97% of the Thrift's loans are made on
a variable rate basis. The average yield on the Thrift's loan portfolio as of
December 31, 1999, was 10%. A number of factors are included in the
determination of average yield, principal among which are loan fees and closing
points amortized to income, prepayment penalties recorded as income, and
amortization of discounts on purchased loans. The Thrift's primary competitors
in the Southern California commercial real estate lending market are local
community banks, other thrift and loan companies and, to a lesser extent,
commercial banks. The Thrift's average loan is 60 months in duration.
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The performance of the Thrift's loan portfolio is evaluated on an
ongoing basis by management of the Thrift. The Thrift places a loan on
nonaccrual status when two payments become past due. When a loan is placed on
nonaccrual status, the Thrift's general policy is to reverse from income
previously accrued but unpaid interest. Income on such loans is subsequently
recognized only to the extent that cash is received and future collection of
principal is probable. Interest income on nonaccrual loans which would have
been recognized during the year ended December 31, 1999, if all of such loans
had been current in accordance with their original terms, totaled $110,600.
The following table sets forth the amount of the Thrift's
nonperforming loans as of the dates indicated.
Year Ended December 31
----------------------------------
(in thousands) 1999 1998 1997 1996 1995
----- ----- ----- ----- ------
Nonperforming Assets:
Loans accounted for on a nonaccrual basis $ 707 $ 898 $ 287 $ 166 $1,956
Accruing loans past due 90 or more days
Troubled debt restructurings
----- ----- ----- ----- ------
Total $ 707 $ 898 $ 287 $ 166 $1,956
===== ===== ===== ===== ======
Based on a variety of factors concerning the creditworthiness of its
borrowers, the Thrift determined that it had $828,700 of potential problem loans
in existence as of December 31, 1999.
The Thrift's allowance for loan losses is established through charges
to earnings in the form of provision for loan losses. Loan losses are charged
to, and recoveries are credited to, the allowance for loan losses. The
provision for loan losses is determined after considering various factors, such
as loan loss experience, maturity of the portfolio, size of the portfolio,
borrower credit history, the existing allowance for loan losses, current charges
and recoveries to the allowance for loan losses, the overall quality of the loan
portfolio, and current economic conditions, as determined by management of the
Thrift, regulatory agencies and independent credit review specialists. While
many of these factors are essentially a matter of judgment and may not be
reduced to a mathematical formula, the Company believes that, in light of the
collateral securing its loan portfolio, the Thrift's current allowance for loan
losses is an adequate allowance against foreseeable losses.
The following table provides certain information with respect to the
Thrift's allowance for loan losses as well as charge-off and recovery activity.
Year Ended December 31
------------------------------------------------------
(in thousands, except percentages) 1999 1998 1997 1996 1995
------ ------ ------ ------ ------
Allowance for Loan Losses:
Balance at beginning of year $1,150 $1,185 $1,050 $1,344 $ 950
------ ------ ------ ------ ------
Charge-Offs:
Real estate-mortgage (346) (164) (136) (766) (194)
Assigned lease payments (34) (5) (9)
(346) (198) (136) (771) (203)
------ ------ ------ ------ ------
Recoveries:
Real estate-mortgage 0 6 26 0
Assigned lease payments 4 22 18 35
------ ------ ------ ------ ------
4 28 44 35
------ ------ ------ ------ ------
Net charge-offs (346) (194) (108) (727) (168)
Provision for losses 101 159 243 433 562
------ ------ ------ ------ ------
Balance at end of year $ 905 $1,150 $1,185 $1,050 $1,344
====== ====== ====== ====== ======
Ratio of net charge-offs during the year to
average loans outstanding during the year .4% .3% .2% 1.4% .4%
====== ====== ====== ====== ======
The adequacy of the Thrift's allowance for loan losses is based on formula
allocations and specific allocations. Formula allocations are made on a
percentage basis which is dependent on the underlying collateral, the type of
loan and general economic conditions. Specific allocations are made as problem
or potential problem loans are identified and are based upon an evaluation by
the Thrift's management of the status of such loans. Specific allocations may be
revised from time to time as the status of problem or potential problem loans
changes.
8
The following table shows the allocation of the Thrift's allowance for
loan losses and the percent of loans in each category to total loans at the
dates indicated.
Year Ended December 31
-------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------------------------------------------
(in thousands, except % of % of % of % of % of
percentages) Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Loan Categories:
Real estate-mortgage $ 904 100 $1,100 100 $1,116 100 $1,015 100 $1,300 99
Real estate-construction 3 1
Assigned lease payments - - 39 34 41
Other 1 50 30 1
----- ---- ------ ---- ------ ---- ------ ---- ------ ----
$ 905 100 $1,150 100 $1,185 100 $1,050 100 $1,344 100
===== ==== ====== ==== ====== ==== ====== ==== ====== ====
Acquisitions
- ------------
Commencing in the 1960s, the Company initiated a growth program with a
view to becoming a nationwide provider of title insurance. This program
included expansion into new geographic markets through internal growth and
selective acquisitions. In 1986 the Company began expanding into other real
estate business information services. In 1998 the Company launched its Consumer
Information and Services Division where a unique mix of products and services is
directed toward non-real estate related markets. To date, the Company has made
numerous strategic acquisitions designed to expand not only its direct title
operations, but also the range of services it can provide to its customers.
During the current year, some of the key acquisitions made by the Company in
furtherance of this strategy were:
Acquired Entity Principal Market(s)
- -------------------------------------------------------------------------------------------------------------
Title Insurance(1):
Ohio Bar Title Insurance Company Ohio, West Virginia, Indiana, Kentucky, Illinois
Security Abstract and Title Company Kansas
Guarantee Title of Johnson County, Inc. Kansas
Guarantee Title of Wyandotte County, Inc. Kansas
Guarantee Land Title of Leavenworth, Inc. Kansas
Atlantic Title Company, Inc. Maine
Pioneer Agency Pennsylvania
LoneStar Mortgagee Services, LLC California
TitleStar, LLC Texas
Real Estate Information Services:
National Default and Outsourcing Division Nationwide
(Acquired from Barrett Burke Wilson Castle Daffin & Frappier, LLP
Consumer Risk Management:
Tele-Trak, Inc. Nationwide
Ace Information Services Nationwide
Five Star Holdings, Inc. California
National Information Group (2) Nationwide
- -------------------------------------------------------------------------------------------------------------
(1) On January 1, 1999, the Company, through First American Title Insurance
Company, formed a limited liability company, RELS Title Services LLC, with
Norwest Mortgage, Inc. The purpose of RELS Title Services LLC is to provide
title and escrow services. RELS Title Services LLC is 50% owned by First
American Title Insurance Company and 50% owned by Norwest Mortgage, Inc.
(2) National Information Group was acquired in May 1999 in a transaction
accounted for under the pooling-of-interests method of accounting.
9
Regulation
- ----------
The title insurance business is heavily regulated by state insurance
regulatory authorities. These authorities generally possess broad powers with
respect to the licensing of title insurers, the types and amounts of investments
that title insurers may make, insurance rates, forms of policies and the form
and content of required annual statements, as well as the power to audit and
examine title insurers. Under state laws, certain levels of capital and surplus
must be maintained and certain amounts of securities must be segregated or
deposited with appropriate state officials. Various state statutes require
title insurers to defer a portion of all premiums in a reserve for the
protection of policyholders and to segregate investments in a corresponding
amount. Further, most states restrict the amount of dividends and distributions
a title insurer may make to its shareholders.
During 1999, the Company entered into the property casualty insurance
business through the acquisitions of Great Pacific Insurance Company (included
in the acquisition of National Information Group) and Five Star Holdings, Inc.
The property and casualty business is subject to regulation by government
agencies in the states in which they transact business. The nature and extent of
such regulation may vary from jurisdiction to jurisdiction, but typically
involves prior approval of the acquisition of "control" of an insurance company,
regulation of certain transactions entered into by an insurance company with any
of its affiliates, the payment of dividends by an insurance company, approval of
premium rates and policy forms for many lines of insurance, standards of
solvency and minimum amounts of capital and surplus which must be maintained. In
order to issue policies on a direct basis in a state, the property and casualty
insurer must generally be licensed by such state. In certain circumstances, such
as dealings initiated directly by citizens or placements through licensed
surplus lines brokers, it may conduct business without being admitted and
without being subject to rate and/or policy forms approval. The Company is
currently licensed to write property and casualty insurance in 46 states and the
District of Columbia.
The Company's home warranty business also is subject to regulation by
insurance authorities in the states in which it conducts such business. The
Company's trust company and industrial loan company are both subject to
regulation by the Federal Deposit Insurance Corporation. In addition, as a
federal savings bank, the Company's trust company is regulated by the United
States Department of the Treasury's Office of Thrift Supervision, and the
Company's industrial loan company is regulated by the California Commissioner of
Corporations.
Investment Policies
- -------------------
The Company invests primarily in cash equivalents, federal and
municipal governmental securities, mortgage loans and investment grade debt and
equity securities. The largely fixed income portfolio is classified in the
Company's financial statements as "available for sale." In addition to the
Company's investment strategy, state laws impose certain restrictions upon the
types and amounts of investments that may be made by the Company's regulated
subsidiaries.
Employees
- ---------
The following table provides a summary of the total number of
employees of the Company as of December 31, 1999:
Business Number of Employees
Title insurance 12,940
Real estate information 6,010
Consumer information 1,115
-------------------
Total 20,065
===================
Item 2. Properties.
- --------------------
In September 1999, the Company moved its executive offices to one of
the newly constructed office buildings at MacArthur Place in Santa Ana,
California. The Orange County branch and certain other operations of the
Company's title insurance segment moved into the two other buildings constructed
on the site later in 1999. The three new buildings are in a campus environment
and total approximately 210,000 square feet. The Company continues to own the
two adjacent buildings in Santa Ana, California, which previously housed its
executive offices. That location, comprising approximately 105,000 square feet
of floor space, continues as the home of the company's trust and banking
division. In addition, there are plans to move certain other divisions into
that complex as their existing leases expire. The Company also owns an 18,000
square foot building located across the street from that complex. This building
is currently used primarily for storage.
10
The Company's title insurance subsidiary, First American, and its
subsidiaries, own or lease buildings or office space in more than 400 locations
throughout the United States and Canada, principally for their respective title
operations.
The Company's real estate information subsidiary, First American Real
Estate Information Services, Inc. ("FAREISI"), houses its national operations in
a leased 231,000 square foot office building in Dallas, Texas. FAREISI's
corporate headquarters are housed in a leased office building located in St.
Petersburg, Florida. In 1999, the Company completed the construction of two
office buildings in Poway, California. The two buildings total approximately
152,000 square feet and are located on a 17 acre parcel of land. The buildings
are occupied by various divisions of FAREISI. In addition, FAREISI and its
subsidiaries lease office space in more than 75 locations throughout the United
States, principally for their respective operations.
The Company's home warranty subsidiary owns 1.7 acres of land in Van
Nuys, California, which contains a 20,000 square foot office building, a 7,000
square foot warehouse and a parking lot.
Each of the office facilities occupied by the Company or its
subsidiaries is in good condition and adequate for its intended use.
Item 3. Legal Proceedings.
- ---------------------------
On May 19, 1999, The People of the State of California, Kathleen
Connell, Controller of the State of California, and Chuck Quackenbush, Insurance
Commissioner of the State of California, filed a class action suit in the
Sacramento Superior Court. The action seeks to certify as a class of defendants
all "title insurers", all "underwritten title companies" and all "controlled
escrow companies" (as those terms are defined in the California Insurance Code)
--------------
and all "independent escrow companies" (as the term is defined in the California
Financial Code) doing business in the State of California from 1970 to the
- --------------
present who (i) hold dormant, unclaimed escrow funds; (ii) charged California
home buyers and other escrow customers $10.00 or more for delivery services or
administrative fees; (iii) charged California home buyers and other escrow
customers reconveyance fees and/or (iv) earned interest (or its equivalent) from
financial institutions on customers' deposited escrow funds.
The plaintiffs allege that the defendants unlawfully (i) failed to
escheat unclaimed property to the Controller of the State of California on a
timely basis; (ii) charged California home buyers and other escrow customers
fees for services that were never performed or which cost less than the amount
charged; and (iii) devised and carried out schemes with financial institutions
to receive interest, or monies in lieu of interest, on escrow funds deposited by
defendants with financial institutions in demand deposits.
In February 2000, the Company entered into an administrative
settlement with the California Department of Insurance ("DOI"), whereby the DOI
released the Company from any further claim of liability as to the Company's
receipt of earnings credits or any alleged overcharges for various miscellaneous
escrow fee items, such as courier, Federal Express or wire service fees. The
DOI further agreed to direct the Attorney General to dismiss it as a plaintiff
from the action brought by the State of California. In the settlement with the
DOI, the Company agreed to (i) make a contribution to a consumer education fund
and (ii) accept a new regulation to be promulgated by the DOI, whereby earnings
credit programs will be authorized and regulated by the DOI and rate filings
will be required for escrow fees including several specified miscellaneous fee
items.
Subsequent to the filing of the action by the State of California,
First American Title Insurance Company was named and served as a defendant in
two private class actions. The allegations in the complaints include some, but
not all, of the allegations contained in the class action filed by the State of
California. The private class actions independently seek injunctive relief,
attorneys' fees, damages and penalties in unspecified amounts. The private
class actions have been stayed by court orders pending settlement negotiations
relating to the class action filed by the State of California.
The Company does not believe that the ultimate resolution of these
actions will have a materially adverse effect on its financial condition or
results of operations.
The Company is involved in various routine legal proceedings related
to its operations. While the ultimate disposition of each proceeding is not
determinable, the Company does not believe that any of such proceedings will
have a materially adverse effect on its financial condition or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
11
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
- ---------------------------------------------------------------------
Matters.
-------
Common Stock Market Prices and Dividends
- ----------------------------------------
The Company's common stock trades on the New York Stock Exchange
(ticker symbol FAF). The approximate number of record holders of common stock
on March 20, 2000, was 3,679.
High and low stock prices and dividends for the last two years were:
- ------------------------------------------------------------------------------
1999 1998
--------------------------- ---------------------------
Cash Cash
- ----------------
Quarter Ended High-low Range Dividends High-low Range Dividends
- ---------------- --------------- --------- --------------- ---------
March 31 $34.81 - $15.81 $.06 $22.88 - $16.08 $.06
June 30 $20.69 - $13.88 $.06 $30.75 - $21.08 $.05
September 30 $19.25 - $12.00 $.06 $41.25 - $25.75 $.06
December 31 $15.13 - $11.50 $.06 $36.06 - $24.94 $.06
- ----------------------------------------------------------------------------
While the Company expects to continue its policy of paying regular quarterly
cash dividends, future dividends will be dependent on future earnings, financial
condition and capital requirements. The payment of dividends is subject to the
restrictions described in Note 2 to the consolidated financial statements
included in "Item 8. Financial Statements and Supplementary Data" of Part II of
this report.
Recent Sales of Unregistered Securities
- ---------------------------------------
In the last three years, the Company has issued unregistered shares of
its common stock to the sellers of the businesses acquired on the dates listed
below:
Consideration
Date Of Sale Number Of Shares Received
- --------------------------------------------------------------------
July 8, 1997 21,600 $ 192,600
November 17, 1997 23,265 $ 315,047
December 31, 1997 2,475 $ 40,630
April 15, 1998 726,564 $15,500,000
May 6, 1998 125,775 $ 2,587,167
May 7, 1998 27,090 $ 435,698
May 29, 1998 111,039 $ 2,850,000
September 15, 1998 17,925 $ 525,000
February 25, 1999 69,584 $ 1,955,000
12
Item 6. Selected Financial Data.
- --------------------------------
The selected consolidated financial data for the Company for the five-year
period ended December 31, 1999, has been derived from the audited Consolidated
Financial Statements. The selected consolidated financial data should be read
in conjunction with the Consolidated Financial Statements and Notes thereto,
"Item 1- Business - Acquisitions," and "Item 7 - Management's Discussion and
Analysis - Results of Operations."
The First American Financial Corporation and Subsidiary Companies
- -----------------------------------------------------------------
(in thousands, except percentages, per share Year Ended December 31
amounts and employee data) 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues $2,988,169 $2,943,880 $1,962,001 $1,654,976 $1,293,210
Income before cumulative effect of a change in
accounting for tax service contracts (Note A) $ 88,643 $ 201,527 $ 67,765 $ 55,766 $ 2,934
Cumulative effect of a change in accounting for tax
service contracts (Note A) $ (55,640)
Net income $ 33,003 $ 201,527 $ 67,765 $ 55,766 $ 2,934
Total assets $2,116,414 $1,852,731 $1,220,377 $1,010,556 $ 907,252
Notes and contracts payable $ 196,815 $ 143,466 $ 51,720 $ 72,761 $ 77,430
Mandatorily redeemable preferred securities $ 100,000 $ 100,000 $ 100,000
Stockholders' equity $ 815,991 $ 762,265 $ 442,783 $ 384,931 $ 338,659
Return on average stockholders' equity (Note B) 10.9% 33.4% 16.4% 15.4% .9%
Cash dividends on common shares $ 15,840 $ 13,894 $ 14,035 $ 7,928 $ 6,850
Per share of common stock (Note C) -
Basic:
Income before cumulative effect of a change
in accounting for tax service contracts $ 1.37 $ 3.35 $ 1.19 $ .98 $ .05
Cumulative effect of a change in accounting for
tax service contracts (.86)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ .51 $ 3.35 $ 1.19 $ .98 $ .05
- ----------------------------------------------------------------------------------------------------------------------------------
Diluted:
Income before cumulative effect of a change
in accounting for tax service contracts $ 1.34 $ 3.21 $ 1.16 $ .98 $ .05
Cumulative effect of a change in accounting for
tax service contracts (.84)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ .50 $ 3.21 $ 1.16 $ .98 $ .05
- ----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity $ 12.54 $ 12.08 $ 7.74 $ 6.76 $ 5.96
Cash dividends $ .24 $ .23 $ .25 $ .14 $ .12
Number of common shares outstanding (Note C)--
Weighted average during the year
Basic 64,669 60,194 57,092 56,652 56,812
Diluted 66,351 62,720 58,482 57,112 56,812
End of year 65,068 63,120 57,186 56,965 56,849
Title orders opened (Note D) 1,334 1,585 1,173 1,027 894
Title orders closed (Note D) 1,120 1,210 886 775 667
Number of employees 20,065 19,669 13,156 11,611 10,149
All consolidated results reflect the 1999 acquisition of NAIG accounted for
under the pooling-of-interests method of accounting.
Note A - See Note 1 to the consolidated financial statements for a description
of the change in accounting for tax service contracts.
Note B - Return on average stockholders' equity for 1999 excludes the cumulative
effect of a change in accounting for tax service contracts from both net income
and stockholders' equity.
Note C - Per share information relating to net income is based on weighted
average number of shares outstanding for the years presented. Per share
information relating to stockholders' equity is based on shares
outstanding at the end of each year.
Note D - Title order volumes are those processed by the direct title operations
of the Company and do not include orders processed by agents.
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations.
-------------
Any statements in this document that look forward in time involve risks and
uncertainties, including but not limited to the following: the effect of
interest rate fluctuations; changes in the performance of the real estate
markets; the effect of changing economic conditions; general volatility in the
capital markets; the demand for and the acceptance of the Company's products;
changes in applicable government regulations; continued consolidation among the
Company's significant customers; consolidation among significant competitors;
the impact of legal proceedings commenced by the California attorney general and
related litigation; the continued ability to identify businesses to be acquired;
and changes in the Company's ability to integrate businesses which it acquires.
The Company's actual results, performance or achievement could differ materially
from those expressed in, or implied by, any forward-looking statements.
Accordingly, no assurances can be given that any of the events anticipated by
the forward-looking statements will transpire or occur or, if any of them do,
what impact they will have on the results of operations or financial condition
of the Company.
Results of Operations
- ---------------------
Overview - The majority of the revenues for the Company's title
insurance and real estate information segments depend, in large part, upon the
level of real estate activity and the cost and availability of mortgage funds.
Revenues for these segments result primarily from resales and refinancings of
residential real estate and, to a lesser extent, from commercial transactions
and the construction and sale of new housing. The majority of the revenues for
the Company's consumer information segment result from activities not related to
real estate. Traditionally, the greatest volume of real estate activity,
particularly residential resale, has occurred in the spring and summer months.
However, changes in interest rates, as well as other economic factors, can cause
fluctuations in the traditional pattern of real estate activity. 1997 was a
year in which relatively low mortgage interest rates, stability in the real
estate marketplace and increasing property values prompted a resurgence in
refinance and home equity transactions, primarily towards the latter part of the
year. These factors, as well as market share increases in all of the Company's
primary businesses, culminated in a record-setting year. Further rate declines
started in the fourth quarter of 1997 and continued throughout 1998. This,
coupled with higher consumer confidence, led to nationwide record-setting
residential resale and refinance transactions, which, together with the
particularly strong California real estate market, resulted in record-setting
revenues and net income for the Company in 1998. The favorable conditions
present throughout 1998 continued into 1999, resulting in record-setting
revenues for the first half of the year. However, commencing in the second
quarter 1999, new orders began to soften as rising interest rates led to a
significant decline in refinance transactions, although residential resale and
commercial activity remained relatively strong. During the second half of the
year, the trend of higher interest rates continued. New orders, including
residential resale orders, continued to decline. This, coupled with fourth
quarter seasonal factors, led to a decrease in operating revenues. In
response, the Company instituted personnel reductions and other cost-
containment programs; however, because of separation costs, the benefits of the
reductions in the latter part of the year will not be fully realized until 2000.
Also impacting 1999 were a revenue recognition accounting change for the
Company's tax service contracts, which decreased revenues by $22.7 million, and
Y2K expenses of $24.8 million. See Operating Revenues in Note 1 to the
consolidated financial statements for a detailed description of the accounting
change. Results for 1998 and 1997 have been restated to reflect the 1999
acquisition of National Information Group (NAIG), accounted for under the
pooling-of-interests method of accounting.
Operating revenues - A summary by segment of the Company's operating revenues is
as follows:
(in thousands, except percentages) 1999 % 1998 % 1997 %
---------- ---- ---------- ---- ---------- ----
Title Insurance:
Direct Operations $1,067,133 36 $1,097,989 38 $ 761,774 39
Agency Operations 1,086,746 37 965,228 34 700,193 36
---------- ---- ---------- ---- ---------- ----
2,153,879 73 2,063,217 72 1,461,967 75
Real Estate Information 574,784 20 630,510 22 343,076 18
Consumer Information 207,533 7 173,380 6 127,862 7
---------- ---- ---------- ---- ---------- ----
$2,936,196 100 $2,867,107 100 $1,932,905 100
========== ==== ========== ==== ========== ====
Operating revenues from direct title operations decreased 2.8% in 1999 from 1998
and increased 44.1% in 1998 over 1997. The decrease in 1999 from 1998 was
attributable to a decrease in the number of title orders closed by the Company's
direct title operations, offset in part by an increase in the average revenues
per order closed. The increase in 1998 over 1997 was attributable to an
increase in the number of title orders closed by the Company's direct title
operations, as well as an increase in the average revenues per order closed.
The Company's direct title operations closed 1,119,900, 1,210,200 and 885,600
title orders during 1999, 1998 and 1997, respectively, representing a decrease
of 7.5% in 1999 from 1998 and an increase of 36.7% in 1998 over 1997. The
decrease in 1999 from 1998 was
14
primarily due to the significant decrease in refinance transactions experienced
during the second half of 1999. The increase in 1998 over 1997 was primarily due
to the continuation of lower mortgage interest rates which led to an increase in
overall transaction volume nationwide (including California, a state highly
concentrated with direct operations) and increases in the Company's title
insurance national market share. The average revenues per order closed were
$953, $907 and $860 for 1999, 1998 and 1997, respectively, representing
increases of 5.1% in 1999 over 1998 and 5.5% in 1998 over 1997. These increases
were primarily attributable to appreciating home values, an increased mix of
resale activity and a resurgence in commercial real estate transactions.
Operating revenues from agency title operations increased 12.6% in 1999 over
1998 and 37.9% in 1998 over 1997. These fluctuations were primarily attributable
to the same factors affecting direct operations mentioned above, compounded by
the inherent delay in the reporting of transactions by agents.
Real estate information operating revenues decreased 8.8% in 1999 from
1998 and increased 83.8% in 1998 over 1997. These fluctuations were primarily
attributable to the same factors affecting title insurance mentioned above, as
well as acquisition activity. In addition, the decrease in 1999 from 1998 was
also due to a $22.7 million reduction in tax service operating revenues
attributable to the change in revenue recognition policy. Operating revenues of
$19.3 million and $141.0 million were contributed by new acquisitions in 1999
and 1998, respectively.
Consumer information operating revenues increased 19.7% in 1999 over 1998
and 35.6% in 1998 over 1997. These increases were primarily attributable to an
increased awareness and acceptance of this business segment's products,
increased market share and acquisition activity. Operating revenues of $8.1
million and $3.5 million were contributed by new acquisitions in 1999 and 1998,
respectively.
Investment and other income - Investment and other income decreased $24.8
million in 1999 from 1998 and increased $47.7 million in 1998 over 1997. The
decrease in 1999 from 1998 was primarily due to an investment gain of $32.4
million recognized in 1998 relating to the joint venture agreement with
Experian, offset in part by a 24.8% increase in the average investment portfolio
balance and a $5.2 million gain resulting from stock received in the
demutualization of a life insurance company which insures a large portion of the
Company's corporate-owned life insurance portfolio. The increase in 1998 over
1997 was primarily attributable to the investment gain of $32.4 million
mentioned above, as well as a 36.9% increase in the average investment portfolio
balance due to the investment of excess cash flow from operations and a portion
of the proceeds from the Company's $100 million senior debentures (see Note 8 to
consolidated financial statements).
Salaries and other personnel costs - A summary by segment of the Company's
salaries and other personnel costs is as follows:
(in thousands, except percentages) 1999 % 1998 % 1997 %
---------- ---- -------- ---- -------- ---
Title Insurance $ 729,720 71 $659,289 70 $498,424 73
Real Estate Information 231,696 22 221,237 23 132,170 19
Consumer Information 59,106 6 51,425 6 40,879 6
Corporate 14,250 1 13,562 1 10,979 2
---------- ---- -------- ---- -------- ---
$1,034,772 100 $945,513 100 $682,452 100
========== ==== ======== ==== ======== ---
The Company's title insurance segment (primarily direct operations) is
labor intensive; accordingly, a major variable expense component is salaries and
other personnel costs. This expense component is affected by two competing
factors: the need to monitor personnel changes to match corresponding or
anticipated new orders, and the need to provide quality service. In addition,
this segment's growth in operations that specialize in builder and lender
business has created ongoing fixed costs required to service accounts.
Title insurance personnel expenses increased 10.7% in 1999 over 1998 and
32.3% in 1998 over 1997. The increase in 1999 over 1998 was primarily due to
the relatively high number of employees added during the latter part of 1998 and
the beginning of 1999 in order to service the volume of orders processed during
those periods. The Company initiated personnel and other cost reduction
programs in response to the subsequent decrease in business volume. During the
fourth quarter and full year 1999, title insurance staffing levels were reduced
by approximately 6% and 14%, respectively; however, because of separation costs,
the benefits of the fourth quarter reductions will not be fully realized until
2000. Contributing to the increase in salaries and other personnel costs in
1999 were $20.8 million of personnel costs associated with new acquisitions.
The increase in 1998 over 1997 was primarily attributable to the costs incurred
servicing the increasing volume of business and $63.0 million of personnel costs
associated with new acquisitions, offset in part by productivity gains as
measured by new orders per person. Contributing to the increases for both 1999
and 1998 was an increased volume of labor-intensive residential resale
transactions. The Company's direct title operations opened 1,334,100, 1,585,400
and 1,173,300 title orders in 1999, 1998 and 1997, respectively, representing a
decrease of 15.9% in 1999 from 1998 and an increase of 35.1% in 1998 over 1997.
15
Real estate information personnel expenses increased 4.7% in 1999 over 1998
and 67.4% in 1998 over 1997. The increase in 1999 over 1998 was primarily
attributable to $7.6 million of personnel costs associated with new acquisitions
and costs incurred in connection with Y2K. The increase in 1998 over 1997 was
primarily due to costs incurred servicing the increase in business volume and
$61.9 million of costs associated with new acquisitions. Contributing to the
increases in both 1999 and 1998 were higher overhead costs attributable to the
integration of new acquisitions and costs associated with in-house development
of new electronic communication delivery systems for information-based products
to interface with customer needs.
Consumer information personnel expenses increased 14.9% in 1999 over 1998
and 25.8% in 1998 over 1997. These increases were primarily attributable to
additional personnel required to service the increased business volume and
acquisition activity. Personnel expenses associated with new acquisitions were
$2.7 million and $1.1 million for 1999 and 1998 respectively.
Premiums retained by agents - A summary of agent retention and agent revenues is
as follows:
(in thousands, except percentages) 1999 1998 1997
---------- ----------- ----------
Agent Retention $ 871,036 $773,030 $563,137
========== =========== ==========
Agent Revenues $1,086,746 $965,228 $700,193
========== =========== ==========
% Retained by Agents 80.2% 80.1% 80.4%
========== =========== ==========
The premium split between underwriter and agents is in accordance with
their respective agency contracts and can vary from region to region due to
divergencies in real estate closing practices, as well as rating structures. As
a result, the percentage of title premiums retained by agents may vary due to
the geographical mix of revenues from agency operations.
Other operating expenses - A summary by segment of the Company's other operating
expenses is as follows:
(in thousands, except percentages) 1999 % 1998 % 1997 %
-------- ---- -------- ---- -------- ----
Title Insurance $327,182 48 $307,055 49 $247,579 56
Real Estate Information 249,987 37 253,695 40 146,671 34
Consumer Information 72,996 11 58,243 9 32,835 8
Corporate 28,691 4 14,424 2 10,591 2
-------- ---- -------- ---- -------- ----
$678,856 100 $633,417 100 $437,676 100
======== ==== ======== ==== ======== ====
Title insurance other operating expenses (principally direct operations)
increased 6.6% in 1999 over 1998 and 24.0% in 1998 over 1997. The increase in
1999 over 1998 was primarily due to $9.7 million of costs associated with new
acquisitions, Y2K expenses of $5.8 million, a $2.5 million charge resulting from
a previously announced fine imposed by the California insurance commissioner,
approximately $2.0 million in impaired asset write-offs, and general price-level
increases, offset in part by a reduction in certain incremental costs associated
with the decline in title order volume. The increase in 1998 over 1997 was
primarily attributable to an increase in the incremental costs associated with
the increased order volume, marginal price-level increases, Y2K costs and
acquisition activity.
Real estate information other operating expenses decreased 1.5% in 1999
from 1998 and increased 73% in 1998 over 1997. The decrease in 1999 from 1998
was primarily due to a reduction in costs resulting from the Company's cost-
containment programs initiated in response to the decline in business volume,
offset in part by $6.9 million of costs associated with new acquisitions and Y2K
expenses of $19.0 million. The increase in 1998 over 1997 was primarily
attributable to costs incurred servicing the increased business activity, as
well as $60.6 million of other operating costs relating to new acquisitions,
offset in part by cost-containment programs.
Consumer information other operating expenses increased 25.3% in 1999 over
1998 and 77.4% in 1998 over 1997. These increases were primarily attributable
to costs incurred servicing the increased business volume, as well as
acquisition activity. Other operating expenses associated with new acquisitions
were $3.3 million in 1999 and $1.8 million in 1998.
Corporate other operating expenses increased 98.9% in 1999 over 1998 and
36.2% in 1998 over 1997. The increase in 1999 over 1998 was primarily
attributable to $10.8 million of nonrecurring merger-related charges incurred in
the NAIG acquisition. The increase in 1998 over 1997 was primarily due to
increased costs associated with supporting the overall growth of the Company's
businesses.
16
Provision for title losses and other claims - A summary by segment of the
Company's provision for title losses and other claims is as follows:
(in thousands, except percentages) 1999 % 1998 % 1997 %
-------- ---- -------- ---- ------- ----
Title Insurance $ 65,925 57 $ 68,697 55 $52,924 55
Real Estate Information 10,391 9 17,428 14 8,806 9
Consumer Information 39,902 34 38,053 31 35,075 36
-------- ---- -------- ---- ------- ----
$116,218 100 $124,178 100 $96,805 100
======== ==== ======== ==== ======= ====
The provision for title insurance losses, expressed as a percentage of
title insurance operating revenues, was 3.1% in 1999, 3.3% in 1998 and 3.6% in
1997. These decreases reflect ongoing improvement in title insurance claims
experience. The provision for consumer information losses principally reflects
home warranty claims, and to a lesser extent, property and casualty insurance
claims. The provision for home warranty claims, expressed as a percentage of
home warranty operating revenues, was 49.8% in 1999, 56.2% in 1998 and 58.3% in
1997. This decreasing trend reflects the relative change in the average number
of claims per contract experienced during these periods. The provision for
property and casualty insurance losses expressed as a percentage of property and
casualty insurance operating revenues approximated 32.5% for the three-year
period ended December 31, 1999.
Depreciation and amortization - Depreciation and amortization, as well as
capital expenditures, are summarized in Note 19 to the consolidated financial
statements.
Premium taxes - A summary by pertinent segment of the Company's premium taxes is
as follows:
(in thousands, except percentages) 1999 % 1998 % 1997 %
------- ---- ------- ---- ------- ----
Title Insurance $21,265 93 $19,959 94 $16,034 93
Consumer Information 1,632 7 1,376 6 1,204 7
------- ---- ------- ---- ------- ----
$22,897 100 $21,335 100 $17,238 100
======= ==== ======= ==== ======= ====
Insurers are generally not subject to state income or franchise taxes.
However, in lieu thereof, a "premium" tax is imposed on certain operating
revenues, as defined by statute. Tax rates and bases vary from state to state;
accordingly, the total premium tax burden is dependent upon the geographical mix
of operating revenues. The Company's underwritten title company (noninsurance)
subsidiaries are subject to state income tax and do not pay premium tax.
Accordingly, the Company's total tax burden at the state level is composed of a
combination of premium taxes and state income taxes. Premium taxes attributable
to title insurance operations, as a percentage of title insurance operating
revenues, were approximately 1% for the three- year period ended December 31,
1999.
Interest - Interest expense decreased 8.9% in 1999 from 1998 and increased 85.5%
in 1998 over 1997. The decrease in 1999 from 1998 was primarily due to $2.5
million of capitalized interest expense related to the development of internal-
use software and the construction of the Company's new corporate headquarters,
offset in part by increased interest expense associated with debt incurred in
connection with company acquisitions. The increase in 1998 over 1997 was
primarily due to $5.5 million of interest expense related to the 7.55% senior
debentures issued in April 1998, as well as incremental interest expense of $2.8
million related to the mandatorily redeemable preferred securities (outstanding
for the full year 1998).
Income before income taxes, minority interests and cumulative effect of a change
in accounting principle - A summary by segment is as follows:
(in thousands, except percentages) 1999 % 1998 % 1997 %
-------- ---- -------- ---- -------- ----
Title Insurance $128,738 58 $227,906 62 $ 79,602 56
Real Estate Information 54,914 25 110,069 30 40,608 28
Consumer Information 38,080 17 28,455 8 22,134 16
-------- ---- -------- ---- -------- ----
221,732 100 366,430 100 142,344 100
==== ==== ====
Corporate (51,760) (1,379) (27,967)
-------- -------- --------
$169,972 $365,051 $114,377
======== ======== ========
The Company's profit margins vary according to a number of factors,
including the volume, composition (residential or commercial) and type (resale,
refinancing or new construction) of real estate activity. For example, in title
insurance operations, commercial transactions tend to generate higher revenues
and greater profit margins than
17
residential transactions. Further, profit margins from refinancing activities
are lower than those from resale activities because in many states there are
premium discounts on, and cancellation rates are higher for, refinancing
transactions. Cancellations of title orders adversely affect profits because
costs are incurred in opening and processing such orders but revenues are not
generated. Also, the Company's direct title insurance business has significant
fixed costs in addition to its variable costs. Accordingly, profit margins from
the Company's direct title insurance business improve as the volume of title
orders closed increases. Title insurance profit margins are also affected by the
percentage of operating revenues generated by agency operations. Profit margins
from direct operations are generally higher than from agency operations due
primarily to the large portion of the premium that is retained by the agent.
Real estate information profits are generally unaffected by the type of real
estate activity but increase as the volume of residential real estate loan
transactions increases. Consumer information profits increase as the volume of
transactions increases and are not affected by real estate activity. In general,
the title insurance business is a lower-margin business when compared to the
Company's other segments. The lower margins reflect the high fixed cost of
producing title evidence, whereas the corresponding revenues are subject to
regulatory and competitive pricing constraints.
The increase in net corporate expenses in 1999 over 1998 was primarily due
to an investment gain of $32.4 million recognized in 1998 relating to the joint
venture agreement with Experian; and in 1999, $10.8 million of nonrecurring
merger-related charges incurred in the NAIG acquisition; and decreased equity in
earnings of unconsolidated subsidiaries. The decrease in net corporate expenses
in 1998 from 1997 was primarily attributable to the investment gain of $32.4
million mentioned above.
Income taxes - The Company's effective income tax rate, which includes a
provision for state income and franchise taxes for non-insurance subsidiaries,
was 36.7%, 35.2% and 37.5% for 1999, 1998 and 1997, respectively. The
differences in the effective tax rate were primarily due to changes in the ratio
of permanent differences to income before income taxes and minority interests
and changes in state income and franchise taxes resulting from fluctuations in
the Company's non insurance subsidiaries' contribution to pretax profits.
Information regarding items included in the reconciliation of the effective rate
with the federal statutory rate is contained in Note 10 to the consolidated
financial statements.
Minority interests -Minority interests in net income of consolidated
subsidiaries decreased $16.0 million in 1999 from 1998 and increased $31.3
million in 1998 over 1997. These fluctuations were primarily due to the
relative change in the operating results of the Company's joint venture with
Experian.
Net income - Net income and per share information are summarized as follows:
(in thousands, except per share amounts) 1999 1998 1997
------- -------- -------
Income before cumulative effect
of a change in accounting
for tax service contracts $88,643 $201,527 $67,765
======= ======== =======
Net income $33,003 $201,527 $67,765
======= ======== =======
Per share of common stock:
Income before cumulative effect
of a change in accounting:
for tax service contracts
Basic $ 1.37 $ 3.35 $ 1.19
======= ======== =======
Diluted $ 1.34 $ 3.21 $ 1.16
======= ======== =======
Net income:
Basic $ 0.51 $ 3.35 $ 1.19
======= ======== =======
Diluted $ 0.50 $ 3.21 $ 1.16
======= ======== =======
Weighted average shares:
Basic 64,669 60,194 57,092
======= ======== =======
Diluted 66,351 62,720 58,482
======= ======== =======
Liquidity and Capital Resources
- -------------------------------
Cash provided by operating activities amounted to $173.2 million, $361.6
million and $117.4 million for 1999, 1998 and 1997, respectively, after net
claim payments of $119.3 million, $100.9 million and $88.1 million,
respectively. The principal nonoperating uses of cash and cash equivalents for
the three-year period ended December 31, 1999, were for capital expenditures,
additions to the investment portfolio, company acquisitions in 1999 and 1997,
dividends and the repayment of debt. The most significant nonoperating sources
of cash and cash equivalents were proceeds from the sales and maturities of
certain investments, proceeds in 1999 from the sale-leaseback of certain
18
property and equipment, proceeds in 1998 from the issuance of senior debentures
and proceeds in 1997 from the issuance of mandatorily redeemable preferred
securities. The net effect of all activities on total cash and cash equivalents
was a decrease of $31.3 million for 1999, an increase of $197.9 million for 1998
and an increase of $8.3 million for 1997.
On April 7, 1998, the Company issued and sold $100.0 million of 7.55%
senior debentures, due April 1, 2028. The Company used a portion of the net
proceeds from the sale to repay certain obligations and purchase land for the
Company's new corporate facilities. The remaining proceeds were invested in
debt and equity securities.
On July 2, 1999, the Company increased its lines of credit to $175.0
million. Pursuant to the terms of the credit agreements, the Company is
required to maintain minimum levels of capital and earnings and meet
predetermined debt-to-capitalization ratios. The lines of credit are currently
unused.
Notes and contracts payable, as a percentage of total capitalization, was
16.4%, as of December 31, 1999, as compared with 13% as of the prior year end.
This increase was primarily attributable to debt incurred in connection with
company acquisitions, offset, in part, by an increase in the capital base
primarily due to shares issued in connection with company acquisitions and net
income for the period. Notes and contracts payable are more fully described in
Note 8 to the consolidated financial statements.
Pursuant to various insurance and other regulations, the maximum amount of
dividends, loans and advances available to the Company in 2000 from its
insurance subsidiaries is $133.1 million. Such restrictions have not had, nor
are they expected to have, an impact on the Company's ability to meet its cash
obligations.
During the latter part of 1999, the Company successfully completed its Y2K
plan. The plan, which was created with the help of an outside consulting firm
in January 1997, was completed at a total cost of $40.0 million.
Due to the Company's significant liquid asset position and its consistent
ability to generate cash flows from operations, management believes that its
resources are sufficient to satisfy its anticipated operational cash
requirements. The Company's strong financial position will enable management to
react to future opportunities for acquisitions or other investments in support
of the Company's continued growth and expansion.
19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------
The Company's primary exposure to market risk relates to interest rate risk
associated with certain other financial instruments. Although the Company
monitors its risk associated with fluctuations in interest rates, it does not
currently use derivative financial instruments to hedge these risks. The table
below provides information about certain assets and liabilities that are
sensitive to changes in interest rates and presents cash flows and the related
weighted average interest rates by expected maturity dates. The Company is also
subject to equity price risk as related to its equity securities. At December
31, 1999, the Company had equity securities with a book value of $25.2 million
and fair value of $39.3 million. Although the Company has operations in certain
foreign countries, these operations, in the aggregate, are not material to the
Company's financial condition or results of operations.
Fair
(in thousands) 2000 2001 2002 2003 2004 Thereafter Total Value
- ------------------------------------------------------------------------------------------------------------- ---------------------
Interest-Rate Sensitive Assets
- ------------------------------
Deposits with Savings and
Loan Associations and Banks
Book Value $32,225 $ 32,225 $ 32,225
Average Interest Rate 4.12% 100.00%
Debt Securities
Book Value $15,476 $38,736 $13,217 $16,168 $6,507 $143,175 $233,279 $226,369
Average Interest Rate 5.97% 6.16% 5.95% 5.84% 6.06% 5.66% 97.04%
Loans Receivable
Book Value $ 2,867 $ 4,744 $ 2,580 $ 2,892 $ 1,924 $ 72,331 $ 87,338 $ 87,714
Average Interest Rate 7.24% 10.25% 9.54% 8.81% 10.12% 9.32% 100.43%
Interest-Rate Sensitive Liabilities
- -----------------------------------
Variable Rate Demand Deposits
Book Value $11,117 $ 11,117 $ 11,117
Average Interest Rate 4.45% 100.00%
Fixed Rate Demand Deposits
Book Value $51,976 $12,038 $ 2,777 $ 2,253 $ 682 $ 69,726 $ 69,510
Average Interest Rate 5.98% 5.94% 5.80% 5.83% 6.03% 99.69%
Notes and Contracts Payable
Book Value $23,004 $21,203 $13,982 $12,260 $ 9,893 $116,473 $196,815 $195,700
Average Interest Rate 7.63% 7.63% 7.88% 7.98% 7.66% 7.52% 99.41%
Mandatorily Redeemable
Preferred Securities
Book Value $100,000 $100,000 $100,000
Average Interest Rate 8.50% 100.00%
20
Item 8. Financial Statements and Supplementary Data.
- ----------------------------------------------------
Separate financial statements for subsidiaries not consolidated and 50% or less
owned persons accounted for by the equity method have been omitted because, if
considered in the aggregate, they would not constitute a significant subsidiary.
INDEX
-----
Page No.
-------
Report of Independent Accountants 22
Financial Statements:
Consolidated Balance Sheets 23
Consolidated Statements of Income 25
Consolidated Statements of Stockholders' Equity 26
Consolidated Statements of Cash Flows 27
Notes to Consolidated Financial Statements 28
Unaudited Quarterly Financial Data 44
Financial Statement Schedules:
I. Summary of Investments - Other than Investments in Related Parties 45
III. Supplementary Insurance Information 46
IV. Reinsurance 48
V. Valuation and Qualifying Accounts 49
Financial statement schedules not listed are either omitted because they
are not applicable or the required information is shown in the consolidated
financial statements or in the notes thereto.
21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
The First American Financial Corporation:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of The
First American Financial Corporation and its subsidiaries at December 31, 1999
and 1998, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. In addition, in
our opinion, the financial statement schedules listed in the accompanying index
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedules are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States which require that we plan and perform
the audit 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 1 to the financial statements, the Company changed its
method of recognizing revenue for tax service contracts in 1999.
PricewaterhouseCoopers LLP
Costa Mesa, California
February 15, 2000
22
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
1999 1998
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 350,010,000 $ 381,293,000
- ------------------------------------------------------------------------------------------------------------
Accounts and accrued income receivable,
less allowances ($13,669,000 and $10,715,000) 180,824,000 201,165,000
- ------------------------------------------------------------------------------------------------------------
Income taxes receivable 8,606,000
- ------------------------------------------------------------------------------------------------------------
Investments:
Deposits with savings and loan associations and banks 32,225,000 39,480,000
Debt securities 226,369,000 235,628,000
Equity securities 39,266,000 32,573,000
Other long-term investments 86,686,000 63,244,000
- ------------------------------------------------------------------------------------------------------------
384,546,000 370,925,000
- ------------------------------------------------------------------------------------------------------------
Loans receivable 87,338,000 72,035,000
- ------------------------------------------------------------------------------------------------------------
Property and equipment, at cost:
Land 41,662,000 34,578,000
Buildings 145,204,000 112,664,000
Furniture and equipment 379,975,000 356,338,000
Less - accumulated depreciation (173,527,000) (181,489,000)
- ------------------------------------------------------------------------------------------------------------
393,314,000 322,091,000
- ------------------------------------------------------------------------------------------------------------
Title plants and other indexes 250,723,000 216,711,000
- ------------------------------------------------------------------------------------------------------------
Assets acquired in connection with claim settlements 24,196,000 17,051,000
- ------------------------------------------------------------------------------------------------------------
Deferred income taxes 48,284,000 16,324,000
- ------------------------------------------------------------------------------------------------------------
Goodwill and other intangibles, less accumulated
amortization ($27,707,000 and $20,434,000) 284,390,000 187,106,000
- ------------------------------------------------------------------------------------------------------------
Other assets 104,183,000 68,030,000
- ------------------------------------------------------------------------------------------------------------
$2,116,414,000 $1,852,731,000
See Notes to Consolidated Financial Statements
23
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31
1999 1998
- --------------------------------------------------------------------------------------------------------------------
Demand deposits $ 80,843,000 $ 67,404,000
- --------------------------------------------------------------------------------------------------------------------
Accounts payable and accrued liabilities:
Accounts payable 38,899,000 21,887,000
Salaries and other personnel costs 78,803,000 88,579,000
Pension costs 65,796,000 50,100,000
Other 97,200,000 104,268,000
- --------------------------------------------------------------------------------------------------------------------
280,698,000 264,834,000
- --------------------------------------------------------------------------------------------------------------------
Deferred revenue 279,766,000 119,202,000
- --------------------------------------------------------------------------------------------------------------------
Reserve for known and incurred but not reported claims 273,724,000 272,921,000
- --------------------------------------------------------------------------------------------------------------------
Income taxes payable 22,734,000
- --------------------------------------------------------------------------------------------------------------------
Notes and contracts payable 196,815,000 143,466,000
- --------------------------------------------------------------------------------------------------------------------
Minority interests in consolidated subsidiaries 88,577,000 99,905,000
- --------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 13)
- --------------------------------------------------------------------------------------------------------------------
Mandatorily Redeemable Preferred Securities of the Company's
Subsidiary Trust Whose Sole Assets Are the Company's $100,000,000
8.5% Deferrable Interest Subordinated Notes Due 2012 (Note 14) 100,000,000 100,000,000
- --------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $1 par value
Authorized - 500,000 shares; Outstanding - None
Common stock, $1 par value (Note 15)
Authorized - 108,000,000 shares
Outstanding - 65,068,000 and 63,120,000 shares 65,068,000 63,120,000
Additional paid-in capital 184,759,000 146,624,000
Retained earnings 561,946,000 544,783,000
Accumulated other comprehensive income (Note 16) 4,218,000 7,738,000
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 815,991,000 762,265,000
- --------------------------------------------------------------------------------------------------------------------
$2,116,414,000 $1,852,731,000
See Notes to Consolidated Financial Statements
24
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Revenues
Operating revenues $ 2,936,196,000 $ 2,867,107,000 $ 1,932,905,000