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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, 1998
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.)
114 East Fifth Street, Santa Ana, California 92701-4642
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (714) 558-3211
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 4, 1999, the aggregate market value of voting stock held by non-
affiliates was $1,166,806,506.
On March 4, 1999, there were 60,656,670 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 53 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 financial
service businesses closely related to the real estate transfer and closing
process. The Company is a California corporation and has its executive offices
at 114 East Fifth Street, Santa Ana, California 92701-4642. The Company's
telephone number is (714) 558-3211. 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 real estate-related financial and information services to real
property buyers and mortgage lenders. These services include title insurance,
tax monitoring, mortgage credit reporting, property data services, flood
certification, field inspection services, appraisal services, mortgage loan
origination and servicing systems, mortgage document preparation and home
warranty services. In addition, credit and various database-related services
are provided to automotive dealers, consumer lenders, employers and property
management companies. The Company also provides investment, trust and thrift
services. Financial information regarding each of the Company's primary
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 the largest title insurer 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 Company's
title insurance, tax monitoring, credit reporting, flood zone determination and
property information business results from resales and refinancings of real
estate, including residential and commercial properties, and from the
construction and sale of new properties. The Company's home warranty business
results from residential resales and does not benefit from refinancings or
commercial transactions. Resales and refinancings of residential properties
constitute the major source of the Company's revenues. 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, 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 its
traditional title insurance business.
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
more than 300 branch offices and over 4,000 independent agents. Through its
branch office and agent 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 1997, the Company had the largest or second
largest share of the title insurance market in 29 states and in the District of
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Columbia. In addition, the Company's national market share grew from 20.4% in
1996 to 21.5% in 1997. Industry statistics for 1998 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. Since strengthening its agent selection and audit programs, the
Company's average annual losses resulting from agent defalcations have decreased
by approximately 60%.
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
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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.
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 $11.8 million, $4.9 million and $0.3 million, respectively, as
of December 31, 1998.
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 Chicago Title and Trust
Company (which also includes Ticor Title Insurance Company and Security Union
Title Insurance Company), Land America Title Insurance Company, Stewart Title
Guaranty Company, Old Republic Title Insurance Group and Fidelity National Title
Insurance Company. 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 financial service
businesses closely related to the real estate transfer and closing process. To
date, these businesses include tax monitoring, credit reporting, property data
services, flood certification, field inspection services, appraisal services,
mortgage loan servicing systems, mortgage document preparation and home warranty
services. The development of these businesses has allowed the Company to become
the nation's leading
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company offering a full range of services to real property buyers and mortgage
lenders. The Company also provides investment, trust and thrift services.
The Real Estate Information Service 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.
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., (now named First American Real Estate Information 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 tax service business markets its product through a nationwide
sales staff which calls on servicers and originators of mortgage loans. 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 as the related
servicing costs are estimated to occur. 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. Given the uncertainties related to the
Company's ability, as well as the ability of its significant vendors, suppliers
and customers, to become Year 2000 compliant, losses relating to the Company's
tax monitoring service may increase.
The Company's 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 credit reporting service also provides prequalifying reports,
merged credit data, resident screening services, business reports, credit
scoring tools and personal credit reports. It also has recently branched into
the consumer lending and risk scoring areas, providing credit reporting and
information management services to automobile dealers, consumers and home equity
lenders nationwide. 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
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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
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 Risk Management Business. In 1998 the Company created this
business segment by merging certain operations of the Company's existing
mortgage credit reporting business with the operations of recently acquired CIC,
Inc. and The Registry. This business segment provides non-cyclical, high margin
services to a customer base outside the Company's traditional clientele and is
designed to expand the Company's opportunities for revenue consistency. The
Consumer risk management business markets a variety of services including
automotive credit reporting, direct-to-consumer credit reporting, multi-family
resident screening and pre-employment screening.
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.
The Home Warranty Business. 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, 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.
The Trust Business. 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. As of December 31, 1998,
the trust operation was administering fiduciary and custodial assets having a
market value in excess of $1.8 billion.
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The Thrift Business. 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, 1998, the
Thrift had approximately $67.4 million of demand deposits and $72.0 million of
loans outstanding.
The loans made or acquired by the Thrift currently range in amount from
$6,700 to $1,200,000 with an average loan balance of $270,700. 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 94% 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, 1998, 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 Company believes that many borrowers who
might be eligible for loans from commercial banks use thrift and loan companies,
such as the Thrift, because, in general, thrift and loan companies offer longer
maturity loans than do commercial banks, which typically offer one-year
renewable loans. There is, however, a higher degree of risk associated with
longer term loans than shorter term loans. The Thrift's average loan is 60
months in duration.
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, 1998, if all of such loans had been current in
accordance with their original terms, totaled $96,000. Interest income actually
recognized on these nonaccrual loans for the year ended December 31, 1998, was
$18,000.
The following table sets forth the amount of the Thrift's nonperforming
loans as of the dates indicated.
Year Ended December 31
----------------------------------------------------------------------------
(in thousands) 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
Nonperforming Assets:
Loans accounted for on a nonaccrual basis $ 898 $ 287 $ 166 $1,956 $1,741
Accruing loans past due 90 or more days
Troubled debt restructurings
------------ ------------ -------------- ------------ ------------
Total $ 898 $ 287 $ 166 $1,956 $1,741
============ ============ ============== ============ ============
Based on a variety of factors concerning the creditworthiness of its
borrowers, the Thrift determined that it had $1,063,000 of potential problem
loans in existence as of December 31, 1998.
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.
7
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) 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
Allowance for Loan Losses:
Balance at beginning of year $1,185 $1,050 $1,344 $ 950 $ 750
------------ ------------ ------------ ------------ ------------
Charge-Offs:
Real estate-mortgage (164) (136) (766) (194) (311)
Assigned lease payments (34) (5) (9) (9)
(198) (136) (771) (203) (320)
----------- ------------ ------------ ------------ ------------
Recoveries:
Real estate-mortgage 0 6 26 0 55
Assigned lease payments 4 22 18 35 28
4 28 44 35 83
----------- ------------ ------------ ------------ ------------
Net charge-offs (194) (108) (727) (168) (237)
Provision for losses 159 243 433 562 437
----------- ------------ ------------ ------------ ------------
Balance at end of year $1,150 $1,185 $1,050 $1,344 $ 950
----------- ------------ ------------ ------------ ------------
Ratio of net charge-offs during the year to
average loans outstanding during the year .3% .2% 1.4% .4% .6%
=========== ============ ============ ============ ============
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.
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
-------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------------------------------------------------------
(in thousands, except % of % of % of % of % of
percentages) Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
-------------------------------------------------------------------------------------------------------
Loan Categories:
Real estate-mortgage $1,100 100 $1,116 100 $1,015 100 $1,300 99 $ 879 99
Real estate-construction 3 1
Assigned lease payments - 39 34 41 71 1
Other 50 30 1
------ ---- ------ ---- ------ ---- ------ ---- ----- ----
$1,150 100 $1,185 100 $1,050 100 $1,344 100 $ 950 100
------ ---- ------ ---- ------ ---- ------ ---- ----- ----
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-
related financial services. In 1998 the Company launched its Consumer Risk
Management 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.
8
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:
Waco-McLennan County Abstract & Title Company Texas
Evans Title Companies, Inc. Wisconsin
Florida Title & Abstract Company Florida
Real Estate Information Services: (1)
Real Estate Solutions (1) Nationwide
Data Tree Corporation Nationwide
Contour Software, Inc. Nationwide
RELS LLC (2) Nationwide
Consumer Risk Management:
C.I.C., Inc. Nationwide
The Registry, Inc. Nationwide
- --------------------------------------------------------------------------------
(1) On January 1, 1998, the Company formed a limited liability company (FARES
LLC) with Experian Group (Experian). The purpose of FARES LLC is to combine
certain operations of the Company's subsidiary, First American Real Estate
Information Services, Inc., with Experian's Real Estate Solutions division
(RES). FARES LLC is 80% owned by the Company and 20% owned by Experian.
(2) On November 1, 1998, the Company, through FARES LLC, formed a limited
liability company (RELS LLC) with Norwest Mortgage. The purpose of RELS LLC
is to provide appraisal services and specialized credit information to the
real estate mortgage lending industry. RELS LLC is 50% owned by FARES LLC
and 50% owned by Norwest Mortgage.
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.
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, the
Company's trust company is regulated by the California Superintendent of Banks
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.
9
Employees
- ---------
The following table provides a summary of the total number of employees of
the Company as of December 31, 1998:
Business Number of Employees
-------- -------------------
Title insurance 14,277
Real estate information services 4,570
Home warranty 369
Consumer risk management 335
Trust and banking 118
------
Total 19,669
======
Item 2. Properties.
- --------------------
The Company owns two adjacent office buildings in Santa Ana, California,
which house its executive offices, its trust and banking subsidiary and the
Orange County title insurance branch operations. This complex, which contains
approximately 105,000 square feet of floor space and an enclosed parking area,
comprises one city block. The Company has acquired approximately 31 acres of
land at MacArthur Place in Santa Ana, California, to meet its current and
potential future expansion requirements. The Company is currently constructing
three office buildings in a campus environment, totaling approximately 210,000
square feet. The buildings are scheduled to be completed in 1999 and will be
occupied by the Company's executive offices, Orange County title insurance
branch operations and certain other operations. After the move to the new
facility, it is anticipated that the two existing office buildings in Santa Ana,
California, will continue to be occupied by the trust and banking subsidiary
along with certain other operations of the Company. The Company also owns an
18,000 square foot office building located across the street from its main
offices. This building is used primarily for storage.
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. The Company has acquired approximately 17 acres of land in
Poway, California, and is constructing two office buildings totaling
approximately 152,000 square feet. It is anticipated that the buildings will be
completed in March, 1999 and will be occupied primarily by various subsidiaries
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.
- ---------------------------
The Company is involved in numerous routine legal proceedings incidental to
the businesses described in Item 1 above. Some of these proceedings involve
claims for damages in material amounts. At this time, however, the Company does
not anticipate that the resolution of any of these proceedings will have a
materially adverse effect on its financial condition.
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.
10
PART II
Item 5. Market for the 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
February 25, 1999, was 3,345.
High and low stock prices and dividends for the last two years were (Note
A):
1998 1997
---------------------------- ----------------------------
Cash Cash
Quarter Ended High-Low Range Dividends High-Low Range Dividends
- ------------- ---------------- --------- ---------------- ---------
March 31 $22.88 - $16.08 $.05 $ 9.92 - $ 8.36 $.037
June 30 $30.75 - $21.08 $.05 $ 8.86 - $ 6.97 $.037
September 30 $41.25 - $25.75 $.06 $13.40 - $ 8.67 $.043
December 31 $36.06 - $24.94 $.06 $16.42 - $13.28 $.043
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 in the acquisitions listed below.
The exemptions relied upon for these issuances were Section 4(2) of the
Securities Act and Rule 506 of Regulation D. Sellers were either accredited
investors or were sophisticated as to business or financial matters.
Number of
Shares Consideration
Date of Sale (Note A) Received
- --------------------------------------------------------------------------------
September 13, 1996 294,189 $ 2,173,719
December 10, 1996 752,145 $ 5,417,149
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
All consolidated results have been restated to reflect the 1998 acquisitions
accounted for under the pooling-of-interests method of accounting.
Note A -- After adjustment for 3-for-1 stock split effected July 17, 1998
11
Item 6. Selected Financial Data.
- ---------------------------------
The selected consolidated financial data for the Company for the five-year
period ended December 31, 1998, 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, Year Ended December 31
per share amounts and employee data) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
Revenues $2,877,328 $1,908,923 $1,614,293 $1,257,267 $1,381,971
Net income $ 198,710 $ 64,499 $ 54,492 $ 7,798 $ 19,698
Total assets $1,784,790 $1,153,635 $ 963,444 $ 855,156 $ 805,350
Notes and contracts payable $ 130,193 $ 42,119 $ 71,428 $ 77,430 $ 89,631
Mandatorily redeemable preferred securities
(Note A) $ 100,000 $ 100,000
Stockholders' equity $ 731,915 $ 415,003 $ 356,379 $ 305,778 $ 293,056
Return on average stockholders' equity 34.7% 16.7% 16.5% 2.8% 6.9%
Cash dividends on common shares $ 12,628 $ 8,931 $ 7,928 $ 6,850 $ 6,869
Per share of common stock (Notes B & C)--
Net income
Basic $ 3.46 $ 1.18 $ 1.01 $ .16 $ .37
Diluted $ 3.32 $ 1.16 $ 1.00 $ .16 $ .37
Stockholders' equity $ 12.13 $ 7.62 $ 6.56 $ 5.69 $ 5.46
Cash dividends $ .22 $ .16 $ .15 $ .13 $ .13
Number of common shares outstanding (Note B)--
Weighted average during the year
Basic 57,450 54,448 53,899 53,677 53,875
Diluted 59,822 55,717 54,337 53,677 53,875
End of year 60,332 54,484 54,355 53,713 53,641
Title orders opened (Note D) 1,585 1,173 1,027 894 873
Title orders closed (Note D) 1,210 886 775 667 723
Number of employees 19,669 13,156 11,611 10,149 9,033
All consolidated results have been restated to reflect the 1998 acquisitions
accounted for under the pooling-of-interests method of accounting.
Note A -- Mandatorily redeemable preferred securities of First American Capital
Trust I, a Delaware business trust controlled by the Company, whose
sole assets are $100,000,000 aggregate principal amount of the
Company's 8.5% deferrable interest debentures due 2012.
Note B -- After adjustment for 3-for-1 stock split effected July 17, 1998.
Note C -- Per share information relating to net income is based on the 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.
12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations.
--------------
Any statements in this document looking 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; the demand for and the
acceptance of the Company's products; and contingencies associated with the Year
2000 issue.
Results of Operations
- ---------------------
Overview - As with all providers of real estate-related information
products and services, the Company's revenues depend, in large part, upon the
level of real estate activity and the cost and availability of mortgage funds.
The majority of the Company's revenues for the 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. Revenues for the Company's home warranty
segment result primarily from residential resale activity and do not benefit
from refinancings. Traditionally, the greatest volume of real estate activity,
particularly residential resale, has occurred in the spring and summer months.
However, in recent years, interest rate adjustments by the Federal Reserve
Board, as well as other economic factors, have caused fluctuations in the
traditional pattern of real estate activity. Mortgage interest rates peaked in
January 1995 and decreased throughout the remainder of the year prompted by
Federal Reserve Board actions to stimulate the economy. This resulted in a
resurgence of real estate activity in the last half of 1995, and generated a
high inventory of open transactions going into 1996. This, together with an
improving national real estate economy (including the beginnings of a recovery
in California) and the Company's successful integration of its diverse
businesses, resulted in strong revenues and profits for 1996. These favorable
conditions continued throughout 1997. Stability in the real estate marketplace
coupled with increasing prices 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
business segments, culminated in a record-setting 1997. 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 in 1998. These factors, including
a particularly strong California real estate market, contributed to record-
setting revenues and net income for the Company in 1998.
Operating revenues - A summary by segment of the Company's operating revenues is
as follows:
(in thousands, except percentages) 1998 % 1997 % 1996 %
-----------------------------------------------------------
Title Insurance:
Direct Operations $1,097,989 39 $ 761,774 41 $ 626,314 40
Agency Operations 965,228 35 700,193 37 641,919 40
-----------------------------------------------------------
2,063,217 74 1,461,967 78 1,268,233 80
Real Estate Information 598,832 21 311,838 17 239,434 15
Home Warranty 58,204 2 46,859 2 38,351 2
Consumer Risk 57,186 2 40,995 2 24,038 2
Trust and Banking 24,751 1 20,007 1 17,839 1
-----------------------------------------------------------
$2,802,190 100 $1,881,666 100 $1,587,895 100
===========================================================
Operating revenues from direct title operations increased 44.1% in 1998
over 1997 and 21.6% in 1997 over 1996. These increases were attributable to
increases in the number of title orders closed by the Company's direct
operations as well as increases in the average revenues per order closed. The
Company's direct operations closed 1,210,200, 885,600 and 775,100 title orders
during 1998, 1997 and 1996, respectively, representing increases of 36.7% in
1998 over 1997 and 14.3% in 1997 over 1996. These increases were 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 national
market share. The average revenues per order closed were $907, $860 and $808
for 1998, 1997 and 1996, respectively, representing increases of 5.5% in 1998
over 1997 and 6.4% in 1997 over 1996. 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 operations increased 37.9% in 1998 over 1997 and 9.1% in 1997 over
1996. 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.
13
Real estate information operating revenues increased 92.0% in 1998 over
1997 and 30.2% in 1997 over 1996. These increases were primarily attributable
to the same factors affecting title insurance mentioned above and $144.5 million
and $53.8 million of operating revenues contributed by new acquisitions in 1998
and 1997, respectively. Effective January 1, 1999, the Company will implement a
change to its revenue recognition accounting policy for tax service contracts.
The new policy provides for a more ratable recognition of revenues, reducing the
amount recognized at the inception of the contract and recognizing it over the
expected service period. The Company estimates that adoption of this new policy
will reduce the revenue recognized in 1999 from new tax service orders by
approximately 50%. See Note 1 to the consolidated financial statements for a
more detailed description of the accounting change.
Home warranty operating revenues increased 24.2% in 1998 over 1997 and
22.2% in 1997 over 1996. These increases were primarily attributable to
improvements in certain of the residential resale markets in which this segment
operates, successful geographic expansion, increased consumer awareness and
increases in the number of annual renewals.
Consumer risk management operating revenues increased 39.5% in 1998 over
1997 and 70.5% in 1997 over 1996. These increases were primarily attributable
to an increased awareness and acceptance of this business segment's products as
well as increased market share.
Investment and other income - Investment and other income increased $47.9
million in 1998 over 1997. This increase was primarily attributable to an
investment gain of $32.4 million recognized in the first quarter of 1998
relating to the joint venture agreement with Experian, 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). Investment and other income increased a marginal 3.3% in 1997 over
1996. This increase was primarily attributable to a 4.8% increase in the
average investment portfolio balance and increased equity in earnings of
unconsolidated subsidiaries, offset in part by an increase of $0.9 million in
losses from the sales of fixed assets. See Note 9 to the consolidated financial
statements for further details of the composition of investment and other
income.
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) 1998 % 1997 % 1996 %
-----------------------------------------------------
Title Insurance $659,289 72 $498,424 76 $413,164 77
Real Estate Information 201,398 22 117,350 18 92,905 17
Home Warranty 13,765 2 11,430 2 9,075 2
Consumer Risk 18,323 2 14,081 2 6,389 1
Trust and Banking 7,721 1 7,061 1 6,621 1
Corporate 13,562 1 10,979 1 11,831 2
-----------------------------------------------------
$914,058 100 $659,325 100 $539,985 100
=====================================================
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,
the Company'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 32.3% in 1998 over 1997 and
20.6% in 1997 over 1996. These increases were primarily attributable to the
costs incurred servicing the increasing volume of title orders at the Company's
direct operations and, to a lesser extent, acquisition activity and salary
increases, offset in part by productivity gains as measured by new orders per
person. Contributing to the increases for 1998 and 1997 was an increased volume
of labor intensive residential resale transactions. The Company's direct
operations opened 1,585,400, 1,173,300 and 1,026,900 title orders in 1998, 1997,
and 1996, respectively, representing increases of 35.1% in 1998 over 1997 and
14.3% in 1997 over 1996.
Real estate information personnel expenses increased 71.6% in 1998 over
1997 and 26.3% in 1997 over 1996. These increases were primarily attributable
to costs incurred servicing the increase in business volume, $63.0 million and
$20.7 million of costs attributable to company acquisitions for 1998 and 1997,
respectively, as well as higher overhead costs attributable to the integration
of new acquisitions and transitioning new accounts. Contributing to the
increases were costs associated with in-house development of new electronic
communication delivery systems for information-based products to interface with
customer needs.
Home warranty personnel expenses increased 20.4% in 1998 over 1997 and
26.0% in 1997 over 1996. These increases were primarily due to the additional
personnel required to service the increased business volume in the states this
segment currently services, as well as new geographic expansion and modest
salary increases.
14
Consumer risk management personnel expenses increased 30.1% in 1998 over
1997 and 120.4% in 1997 over 1996. These increases were primarily attributable
to additional personnel required to service the increased business volume.
Premiums retained by agents - A summary of agent retention and agent revenues is
as follows:
(in thousands, except percentages) 1998 1997 1996
-------- -------- --------
Agent Retention $773,030 $563,137 $516,593
======== ======== ========
Agent Revenues $965,228 $700,193 $641,919
======== ======== ========
% Retained by Agents 80.1% 80.4% 80.5%
======== ======== ========
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) 1998 % 1997 % 1996 %
-------- ------- -------- ------ -------- ------
Title Insurance $307,055 50 $247,579 59 $216,514 66
Real Estate Information 251,376 41 132,927 32 83,489 25
Home Warranty 3,726 1 2,071 - 1,323 -
Consumer Risk 25,481 4 19,795 5 14,576 5
Trust and Banking 9,270 2 8,093 2 6,982 2
Corporate 14,424 2 10,591 2 6,641 2
-------- ------- -------- ------ -------- ------
$611,332 100 $421,056 100 $329,525 100
======== ======= ======== ====== ======== ======
Title insurance other operating expenses (principally direct operations)
increased 24.0% in 1998 over 1997 and 14.3% in 1997 over 1996. These increases
were primarily the result of the impact created by the changes in incremental
costs (i.e., office supplies, document reproduction, messenger services, plant
maintenance and title search costs) associated with the relative changes in
title order volume. Also contributing to the increases were marginal price
level increases and acquisitions, offset in part by successful cost-containment
programs.
Real estate information other operating expenses increased 89.1% in 1998
over 1997 and 59.2% in 1997 over 1996. These increases were primarily
attributable to costs incurred servicing the increased business activity, as
well as $62.4 million and $33.5 million of other operating costs relating to
acquisitions in 1998 and 1997, respectively, offset in part by cost-containment
programs. Contributing to the increases were costs associated with assimilating
and expanding this segment's increased operations.
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) 1998 % 1997 % 1996 %
-------- ----- ------- ----- ------- -----
Title Insurance $ 68,697 58 $52,924 59 $58,909 68
Real Estate Information 17,428 15 9,874 11 4,453 5
Home Warranty 32,686 27 27,338 30 23,055 27
Trust and Banking (48) - 187 - 70 -
-------- ----- ------- ----- ------- -----
$118,763 100 $90,323 100 $86,487 100
======== ===== ======= ===== ======= =====
The provision for title insurance losses expressed as a percentage of
title insurance operating revenues was 3.3% in 1998, 3.6% in 1997 and 4.6% in
1996. These decreases reflect ongoing improvement in the Company's claims
experience. The provision for home warranty losses as a percentage of home
warranty operating revenues was 56.2% in 1998, 58.3% in 1997 and 60.1% in 1996.
These fluctuations were primarily attributable to the relative changes in the
average number of claims per contract experienced during these periods.
Depreciation and amortization - Depreciation and amortization as well as capital
expenditures are summarized in Note 18 to the consolidated financial statements.
15
Premium taxes - A summary by pertinent segment of the Company's premium taxes is
as follows:
(in thousands, except percentages) 1998 % 1997 % 1996 %
-------- ----- -------- ----- ------- -----
Title Insurance $19,959 95 $16,034 95 $15,927 96
Home Warranty 953 5 870 5 749 4
------- ----- -------- ----- ------- -----
$20,912 100 $16,904 100 $16,676 100
======= ===== ======== ===== ======= =====
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 title insurance and home warranty operating revenues. The Company's
underwritten title company (non-insurance) 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 as a percentage of title insurance operating
revenues were 1.0% in 1998, 1.1% in 1997 and 1.3% in 1996. These decreases were
attributable to changes in the geographical mix of title insurance revenues, as
well as changes in the Company's non-insurance subsidiaries' contribution to
revenues.
Interest - Interest expense increased 79.8% in 1998 over 1997 and 108.3% in 1997
over 1996. The increase for 1998 was primarily due to $5.5 million of interest
expense related to the senior debentures as well as incremental interest expense
of $2.8 million related to the mandatorily redeemable preferred securities
(outstanding for full year). The increase in 1997 was primarily due to $5.7
million of interest expense related to the mandatorily redeemable preferred
securities (outstanding for eight months), offset in part by a 23.7% reduction
in the average outstanding debt balance. See Note 8 to the consolidated
financial statements for a description of the Company's borrowings under its
bank credit agreement and its senior debentures and Note 14 to the consolidated
financial statements for the description of the mandatorily redeemable preferred
securities.
Income before income taxes and minority interests - A summary by segment of the
Company's income before income taxes and minority interests is as follows:
(in thousands, except percentages) 1998 % 1997 % 1996 %
-------- ----- -------- ----- -------- -----
Title Insurance $227,906 63 $ 79,602 58 $ 50,129 44
Real Estate Information 103,057 28 38,139 28 50,531 44
Home Warranty 11,406 3 8,871 6 7,429 6
Consumer Risk 13,276 4 6,968 5 2,953 3
Trust and Banking 7,156 2 4,062 3 3,728 3
-------- ---- -------- ---- -------- ----
362,801 100 137,642 100 114,770 100
======== ==== ======== ==== ======== ====
Corporate (1,379) (27,967) (22,054)
-------- -------- --------
$361,422 $109,675 $ 92,716
======== ======== ========
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 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.
Home warranty profits improve as the volume of residential resales increases.
16
Consumer risk management profits increase as the volume of transactions
increase. 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 decrease in corporate expenses for 1998 from 1997 was primarily due to
an investment gain of $32.4 million (see Note 17 to the consolidated financial
statements). The increase in corporate expense for 1997 over 1996 was primarily
attributable to increased costs associated with supporting the overall growth of
the Company's businesses, as well as additional unallocated interest expense
associated with the Company's mandatorily redeemable preferred securities.
Income taxes - The Company's effective income tax rate, which includes a
provision for state income and franchise taxes for non-insurance subsidiaries,
was 35.3%, 37.8% and 38.4% for 1998, 1997 and 1996, respectively. The
differences in effective 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 increased $31.3 million in 1998 over 1997 and $1.1 million in 1997
over 1996. The increase for 1998 was primarily due to the strong operating
results of the Company's joint venture with Experian.
Net income - Net income and per share information, which has been restated for
the 3-for-1 stock split effected July 17, 1998, are summarized as follows:
(in thousands, except per share amounts) 1998 1997 1996
-------- ------- -------
Net income $198,710 $64,499 $54,492
======== ======= =======
Net income per share:
Basic $ 3.46 $ 1.18 $ 1.01
======== ======= =======
Diluted $ 3.32 $ 1.16 $ 1.00
======== ======= =======
Weighted average shares:
Basic 57,450 54,448 53,899
======== ======= =======
Diluted 59,822 55,517 54,337
======== ======= =======
Liquidity and Capital Resources
- -------------------------------
Cash provided by operating activities amounted to $361.6 million, $112.4
million and $114.3 million for 1998, 1997 and 1996, respectively, after claim
payments of $95.4 million, $81.6 million and $78.0 million, respectively. The
principal nonoperating uses of cash and cash equivalents for the three-year
period ended December 31, 1998, were for additions to the investment portfolio,
capital expenditures, company acquisitions in 1997 and 1996 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
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 were increases of $193.2 million,
$8.4 million and $27.5 million for 1998, 1997 and 1996, respectively.
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.
Notes and contracts payable as a percentage of total capitalization as of
December 31, 1998, was 12.3% as compared with 7.2% as of the prior year end.
This increase was primarily attributable to the issuance and sale of the $100.0
million senior debentures, offset in part by an increase in the capital base
primarily due to shares issued in connection with company acquisitions,
increased minority interests and net income for the period. The Company
maintains a $75.0 million line of credit which remained unused as of December
31, 1998. 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 1999 from its
principal subsidiary, First American Title Insurance Company, is $158.5
17
million. Such restrictions have not had, nor are they expected to have, an
impact on the Company's ability to meet its cash obligations.
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.
Year 2000 Issue
- ---------------
Overview - With the help of an outside consulting firm, in January 1997 the
Company created a Year 2000 Program Management Office and adopted a five-step
plan to address the Year 2000 Problem. The five steps of the plan are: (1)
awareness, (2) inventory/assessment, (3) renovation, (4) testing, and (5)
implementation. To implement the plan, the Company was divided into business
units comprised of: (a) the reporting regions of the title insurance
subsidiaries, (b) the subsidiary companies of the real estate information
services business, (c) the home warranty subsidiaries, (d) the trust and banking
subsidiaries and (e) various other subsidiaries.
The awareness phase involves communicating the nature and scope of the Year
2000 Problem to the management of the business units in order to engender strong
management support for its resolution. The inventory/assessment phase involves
the identification of information systems and non-information systems that
require renovation or replacement to become Year 2000 compliant. The renovation
phase involves the repair and/or replacement of the systems identified in the
prior phase. The testing phase involves the testing of repaired and replaced
systems. The implementation phase involves the integration of tested systems
into daily operations.
All phases of the plan are currently active. The awareness phase will
continue throughout 1999. June 30, 1998 was the target date for completion of
the inventory/assessment phase; that phase is substantially complete. However,
all of the phases of the plan must be revisited each time the Company acquires a
new business. Accordingly, the inventory/assessment phase remains active.
December 31, 1998 was the initial target date for completion of renovation. As
of such date, 79% of the business units had completed 80% or more of their
renovations, 61% of the business units had completed 90% or more of their
renovations and 24% had met the target date and completed 100% of their
renovations. The Company plans to complete the renovation phase as soon as
practicable. Based on current knowledge, the Company has established the
following general target dates for the remaining phases: April 30, 1999 for
completion of testing and June 30, 1999 for completion of implementation. In
each case, completion of the applicable phase is subject to the limitation noted
above for newly acquired businesses. Additionally, a limited number of business
units have target dates for renovation, testing and implementation that are
later than the general dates described above. The Company makes no assurance
that it will be able to meet these target dates.
The Company's efforts to survey the Year 2000 readiness of its significant
vendors, suppliers and customers continues. To date, the Company has not
received sufficient information from these parties about their Year 2000 plans
to predict the outcome of their efforts. Even after responses are received,
there can be no assurance that the systems of significant vendors, suppliers and
customers will be timely renovated.
Costs for the year 2000 problem - To date the Company has spent approximately
$11.6 million in implementing the Year 2000 plan. The Company expects to incur
an additional $15 million to $25 million in completing the Year 2000 plan.
About half the costs will be for hardware and software replacement and about
half will be for labor. The costs for hardware and software will be capitalized
and amortized over their estimated useful lives. Labor costs will be expensed
as incurred. Year 2000 plan costs are being funded through operating cash flow.
Contingency plans - Company-wide and business unit contingency plans for
unexpected systems failures as a result of the Year 2000 problem were targeted
to be in effect by the end of 1998. The company-wide plan and the contingency
plans for 82% of the Company's business units have been completed. The Company
is currently working to complete the balance of the business unit contingency
plans.
Review of the year 2000 plan - The Company engaged a consultant to review its
Year 2000 plan. Under the terms of this engagement, the consultant (1) reviewed
the operations of the Year 2000 Program Management Office, (2) reviewed the
Company's Year 2000 plan, and (3) reviewed the implementation of the Year 2000
plan at selected locations. From time to time during the review, the consultant
reported its findings to the Audit Committee of the Company's Board of Directors
and appropriate actions were taken by the Company in response.
Assurances - The costs to implement the Year 2000 plan and the target dates for
completion of the various phases of the Year 2000 plan are based on current
estimates. These estimates reflect numerous assumptions about future events,
including the continued availability of certain resources, the timing and
effectiveness of third party renovation plans and
18
other factors. The Company can give no assurance that these estimates will be
achieved, and actual results could differ materially from these estimates.
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, 1998, the Company had equity securities with a book value of $18.8 million
and a fair value of $27.3 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, except percentages) 1999 2000 2001 2002 2003 Thereafter Total Value
- ----------------------------------------------------------------------------------------------- ---------------------
Interest-Rate Sensitive Assets
- ------------------------------
Deposits with Savings and
Loan Associations and Banks
Book Value $28,028 $ 4,946 $ 32,974 $ 32,974
Average Interest Rate 4.01% 4.67% 100%
Debt Securities
Book Value $19,284 $22,008 $10,940 $23,553 $29,385 $117,481 $222,651 $227,685
Average Interest Rate 6.53% 5.69% 5.88% 5.95% 5.61% 5.93% 102.26%
Loans Receivable
Book Value $ 3,707 3,415 5,214 2,825 3,097 55,942 $ 72,035 $ 72,200
Average Interest Rate 10.34% 9.71% 10.64% 9.48% 9.30% 9.78% 100.23%
Interest-Rate Sensitive Liabilities
- -----------------------------------
Variable Rate Demand Deposits
Book Value $12,502 $ 12,502 $ 12,502
Average Interest Rate 4.60% 100.90%
Fixed Rate Demand Deposits
Book Value $33,980 $12,964 $ 3,852 $ 1,629 $ 2.477 $ 54,902 $ 55.400
Average Interest Rate 5.93% 6.06% 6.10% 6.49% 6.20% 100.90%
Notes and Contracts Payable
Book Value $12,664 $ 6,484 $ 5,001 $ 1,750 $ 629 $103,665 $130,193 $130,900
Average Interest Rate 7.51% 7.53% 7.57% 7.60% 7.65% 7.65% 100.54%
Mandatorily Redeemable
Preferred Securities
Book Value $100,000 $100,000 $100,000
Average Interest Rate 8.50% 100.00%
19
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 21
Financial Statements:
Consolidated Balance Sheets 22
Consolidated Statements of Income 24
Consolidated Statements of Stockholders' Equity 25
Consolidated Statements of Cash Flows 26
Notes to Consolidated Financial Statements 27
Unaudited Quarterly Financial Data 42
Financial Statement Schedules:
I. Summary of Investments - Other than Investments in Related Parties 43
III. Supplementary Insurance Information 44
IV. Reinsurance 46
V. Valuation and Qualifying Accounts 47
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.
20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
The First American Financial Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of The First
American Financial Corporation and its subsidiaries at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards 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.
/s/ PricewaterhouseCoopers LLP
Costa Mesa, California
February 9, 1999
21
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
1998 1997
- ---------------------------------------------------------------------------------------------
Cash and Cash Equivalents $ 375,440,000 $ 182,234,000
- ---------------------------------------------------------------------------------------------
Accounts and Accrued Income Receivable,
less allowances ($10,715,000 and $7,602,000) 191,122,000 130,863,000
- ---------------------------------------------------------------------------------------------
Investments:
Deposits with savings and loan associations and banks 32,974,000 29,029,000
Debt securities 227,685,000 151,503,000
Equity securities 27,338,000 13,904,000
Other long-term investments 63,244,000 35,047,000
- ---------------------------------------------------------------------------------------------
351,241,000 229,483,000
- ---------------------------------------------------------------------------------------------
Loans Receivable 72,035,000 63,378,000
- ---------------------------------------------------------------------------------------------
Property and Equipment, at cost:
Land 34,578,000 17,059,000
Buildings 110,133,000 84,935,000
Furniture and equipment 335,342,000 222,897,000
Less - accumulated depreciation (166,414,000) (123,462,000)
- ---------------------------------------------------------------------------------------------
313,639,000 201,429,000
- ---------------------------------------------------------------------------------------------
Title Plants and Other Indexes 216,711,000 100,626,000
- ---------------------------------------------------------------------------------------------
Assets Acquired in Connection with Claim Settlements 17,051,000 21,119,000
- ---------------------------------------------------------------------------------------------
Deferred Income Taxes 12,859,000 31,563,000
- ---------------------------------------------------------------------------------------------
Goodwill and Other Intangibles, less accumulated
amortization ($19,017,000 and $13,093,000) 171,790,000 132,361,000
- ---------------------------------------------------------------------------------------------
Other Assets 62,902,000 60,579,000
- ---------------------------------------------------------------------------------------------
$1,784,790,000 $1,153,635,000
See Notes to Consolidated Financial Statements
22
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31
1998 1997
- -------------------------------------------------------------------------------------------------------
Demand Deposits $ 67,404,000 $ 62,475,000
- -------------------------------------------------------------------------------------------------------
Accounts Payable and Accrued Liabilities:
Accounts payable 21,249,000 12,550,000
Salaries and other personnel costs 88,314,000 55,973,000
Pension costs 50,100,000 39,431,000
Other 97,044,000 61,633,000
- -------------------------------------------------------------------------------------------------------
256,707,000 169,587,000
- -------------------------------------------------------------------------------------------------------
Deferred Revenue 105,496,000 84,424,000
- -------------------------------------------------------------------------------------------------------
Reserve for Known and Incurred But Not Reported Claims 270,436,000 250,826,000
- -------------------------------------------------------------------------------------------------------
Income Taxes Payable 22,734,000 3,987,000
- -------------------------------------------------------------------------------------------------------
Notes and Contracts Payable 130,193,000 42,119,000
- -------------------------------------------------------------------------------------------------------
Minority Interests in Consolidated Subsidiaries 99,905,000 25,214,000
- -------------------------------------------------------------------------------------------------------
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 - 60,332,000 and 54,484,000 shares 60,332,000 54,484,000
Additional paid-in capital 129,664,000 6,864,000
Retained earnings 534,297,000 348,215,000
Accumulated other comprehensive income (Note 16) 7,622,000 5,440,000
- -------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 731,915,000 415,003,000
- -------------------------------------------------------------------------------------------------------
$1,784,790,000 $1,153,635,000
See Notes to Consolidated Financial Statements
23
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
Revenues
Operating revenues $2,802,190,000 $1,881,666,000 $1,587,895,000
Investment and other income 75,138,000 27,257,000 26,398,000
- -------------------------------------------------------------------------------------------------------------
2,877,328,000 1,908,923,000 1,614,293,000
- -------------------------------------------------------------------------------------------------------------
Expenses
Salaries and other personnel costs 914,058,000 659,325,000 539,985,000
Premiums retained by agents 773,030,000 563,137,000 516,593,000
Other operating expenses 611,332,000 421,056,000 329,525,000
Provision for title losses and other claims 118,763,000 90,323,000 86,487,000
Depreciation and amortization 59,804,000 38,489,000 27,503,000
Premium Taxes 20,912,000 16,904,000 16,676,000
Interest