ITEM 1. BUSINESS
We are a Delaware corporation formed in 1970. We and our predecessors have been engaged in the title business since 1893.
Stewart is a technology driven, strategically competitive, real estate information and transaction management company providing title insurance and related services through more than 7,200 issuing locations in the United States and several international markets. Stewart delivers via e-commerce the services required for settlement by the real estate and mortgage industries - including title reports, flood determinations, credit reports, appraisals and automated valuation models, document preparation, property reports and background checks. Stewart also provides post-closing services to lenders, automated county clerk land records, property ownership mapping, geographic information services for governmental entities and expertise in tax-deferred exchanges.
Our two segments of business are title and real estate information (REI). The segments significantly influence business to each other because of the nature of their operations and their common customers. The segments provide services through a network of offices, including both direct operations and agencies, throughout the United States. The operations in the several international markets in which we do business are insignificant to consolidated results.
The financial information related to these segments is discussed in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations.
TITLE
The title segment includes the functions of searching, examining, closing and insuring the condition of the title to real property.
Examination and closing. The purpose of a title examination is to ascertain the ownership of the property being transferred, debts that are owed on it and the scope of the title policy coverage. This involves searching for and examining documents such as deeds, mortgages, wills, divorce decrees, court judgments, liens, paving assessments and tax records.
At the closing or "settlement", the seller executes and delivers a deed to the new owner. The buyer typically signs new mortgage documents. Closing funds are then disbursed to the seller, the prior mortgage company, real estate brokers, the title company and others. The documents are then recorded in the public records. A title policy is generally issued to both the lender and the new owner.
Title policies. Lenders in the United States generally require title insurance as a condition to making a loan on real estate, including securitized lending. This is to assure lenders of the priority of their lien position. The purchasers of the property want insurance against claims that may arise against the ownership of the property. The face amount of the policy is normally the purchase price or the amount of the related loan.
Title insurance is substantially different from other types of insurance. Fire, auto, health and life insurance protect against losses and events in the future. In contrast, title insurance seeks to eliminate most risks through the examination and settlement process.
Investments. We have established policies and procedures to manage our exposure to changes in the fair value of our investments. These policies include retaining an investment advisory firm, an emphasis upon credit quality, management of portfolio duration, maintaining or increasing investment income through high coupon rates and actively managing profile and security mix based upon market conditions. All of our investments are classified as available-for-sale.
Losses. Losses on policies primarily occur because of a title defect not discovered during the examination and settlement process. Other reasons for losses include forgeries, misrepresentations, unrecorded construction liens, the failure to pay off existing liens, mishandling of settlement funds, issuance by agencies of unauthorized coverages and other legal issues.
Some claimants seek damages in excess of policy limits. Those claims are based on various legal theories usually alleging misrepresentation by an agency. Although we vigorously defend against spurious claims, we have from time to time incurred a loss in excess of policy limits.
Experience shows that most claims against policies and claim payments are made in the first six years after the policy has been issued, although claims may be made many years later. By their nature, claims are often complex, vary greatly in dollar
amounts and are affected by economic and market conditions and the legal environment existing at the time of settlement of the claims. Estimating future title loss payments is difficult because of the complex nature of title claims, the long periods of time over which claims are paid, significantly varying dollar amounts of individual claims and other factors.
Our liability for estimated title losses comprises both known claims and other losses expected to be reported in the future. The amount of our loss reserve represents the aggregate future payments, net of recoveries, that we expect to incur on policy and escrow losses and in costs to settle claims. Provisions are charged to income in the same year the related premium revenues are recognized. The amounts provided are based on reported claims, historical loss experience, title industry averages, current legal environment and types of policies written.
Amounts shown as our estimated liability for future loss payments are continually reviewed for reasonableness and adjusted as appropriate. Independent actuaries also review the adequacy of the liability amounts on an annual basis and found our reserves adequate at each year end. In accordance with industry practice, the amounts have not been discounted to their present values.
Factors affecting revenues. Title revenues are closely related to the level of activity in the real estate markets we serve and the prices at which real estate sales are made. Real estate sales are directly affected by the availability and cost of money to finance purchases. Other factors include demand by buyers, consumer confidence and family incomes. These factors may override the seasonal nature of the title business. Generally, the third quarter is the most active in terms of real estate sales and the first quarter is the least active. In addition, when interest rates decline, the number of refinancing transactions and associated revenues generally increase.
Selected information for the national real estate industry follows (2003 amounts are preliminary):
Customers. The primary sources of title business are attorneys, builders, developers, lenders and real estate brokers. No one customer was responsible for as much as ten percent of our title revenues in any of the last three years. Titles insured included residential and commercial properties, undeveloped acreage, farms, ranches and water rights.
Service, location, financial strength, size and related factors affect customer acceptance. Increasing market share is accomplished primarily by providing superior service. The parties to a closing are concerned with personal schedules and the interest and other costs associated with any delays in the settlement. The rates charged to customers are regulated, to varying degrees, by different states.
Financial strength and stability of the title underwriter are important factors in maintaining and increasing our agency network. Out of the nation's top four title insurers, we earned one of the highest ratings awarded by the title industry's leading rating companies. Our principal underwriter, Stewart Title Guaranty Company (Guaranty) is currently rated A" by Demotech, Inc., A+ by Fitch, A+ by Lace Financial, A2 by Moody's and A- by Standard & Poor's.
Market share. Title insurance statistics are compiled annually by the title industry's national association. Based on unconsolidated statutory net premiums written for 2002 (2003 amounts are not yet available), Guaranty is one of the leading title insurers in America.
Our principal competitors include Fidelity National Financial, Inc., The First American Corporation and LandAmerica Financial Group, Inc. Like most title insurers, we also compete with abstractors, attorneys who issue title opinions and attorney-owned title insurance bar funds. We also compete with issuers of alternative title insurance products, which typically provide more limited coverage and less service for a smaller premium. A number of homebuilders, financial institutions, real estate brokers and others own or control title insurance agencies, some of which issue policies underwritten by Guaranty. This "controlled" business also provides competition for our agencies.
Title revenues by state. The approximate amounts and percentages of consolidated title operating revenues for the last three years were:
Offices. At December 31, 2003, we had 7,211 locations issuing policies, compared with 6,466 a year earlier and 5,829 two years earlier. Of these totals 6,669, 5,979 and 5,373 were independent agencies at December 31, 2003, 2002 and 2001, respectively.
Regulations. Title insurance companies are subject to extensive state regulations covering premium rates, agency licensing, policy forms, trade practices, reserve requirements, investments and the flow of funds between an insurer and its parent or its subsidiaries and any similar related party transaction. Kickbacks and similar practices are prohibited by various state and federal laws.
REAL ESTATE INFORMATION
The real estate information segment primarily provides electronic delivery of data, products and services related to real estate transactions. Our services related to the mortgage origination process include flood zone determinations, credit reports, traditional and automated property valuations, electronic mortgage documents, property reports and tax services. We also provide post-closing outsourcing services for residential mortgage lenders, including document review, investor delivery, FHA/VA insuring, document retrieval, preparation and recordation of assignments and lien releases, recordation services, collateral reviews and loan pool certifications. In addition, we provide diverse products and services related to I.R.C. Section 1031 tax-deferred exchanges; automated mapping projects and geodetic positioning; real estate database conversion, construction, maintenance and access; automation for government recording and registration; and criminal, credit and motor vehicle background checks and pre-employment screening services.
Factors affecting revenues. As in the title segment, REI revenues, particularly those generated by mortgage information services and tax-deferred exchanges, are closely related to the level of activity in the real estate market. Revenues related to many services are generated on a project basis. Contracts for automating government recording and registration and mapping projects are often awarded through a lengthy bid process.
Our principal competitors vary across the wide range of services. In the mortgage-related products and services area, competitors include the major title underwriters mentioned under "Title", as well as entities known as vendor management companies.
Customers. The primary sources of our REI business are residential mortgage lenders and servicers. Our timeliness and accuracy in providing services are critical to our customers since it directly affects the service they provide to their customer, primarily the borrower. Delays and errors directly impact the cost of originating or servicing the loan or the value of the loan asset. Our other customers include title agencies, county clerks and recorders, municipalities, real estate professionals and attorneys. Our financial strength, marketplace presence and reputation as a technology innovator are important factors in attracting new business.
GENERAL
Technology. Our automation products and services are increasing productivity in the title office and speeding the real estate closing process for lenders, real estate professionals and consumers. Before automation, an order typically required several individuals to search the title, retrieve and review documents and create the title policy commitment. Today, on a normal subdivision file, one person can receive the order electronically and, on the same computer screen, view the prior file, examine the index of documents, retrieve and review electronically stored documents, prepare the title policy commitment and deliver the product.
Trademarks. We have developed numerous automation products and processes that are crucial to both our title and REI segments. These systems automate most facets of the real estate transaction. Among these trademarked products and
processes are AIM(R), E-Title(R), GlobeXplorer(R), Landata Title Office(R), Landata Title Plant(R), LANDSCAN(R), REIMall(R), SureClose(R), Titlelogix(R) and Virtual Underwriter(R). We consider these trademarks, which are perpetual in duration, to be important in our business.
Employees. As of December 31, 2003, we and our subsidiaries employed 8,218 people. We consider our relationship with our employees to be good.
Available Information. We file annual, quarterly and other reports and other information with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934 (the Exchange Act). You may read and copy any material that we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain additional information about the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.
We also make available free of charge on or through our Internet website (http://www.stewart.com) our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other information statements and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
ITEM 2.
ITEM 2. PROPERTIES
We lease or own the following principal properties:
- -------------------------- (1) This lease terminates in 2016.
(2) These leases terminate in 2006.
(3) This lease terminates in 2007.
(4) These leases terminate in 2004.
(5) This lease terminates in 2009.
(6) This lease terminates in 2008.
(7) This lease terminates in 2005.
We lease offices at approximately 580 locations. The average term for all such leases is approximately 4 years. The leases expire from 2004 to 2016. We believe we will not have any difficulty obtaining renewals of leases as they expire or, alternatively, leasing comparable properties. The aggregate annual rental expense under all office leases was approximately $46,511,000 in 2003.
We consider all buildings and equipment that we own or lease to be well maintained, adequately insured and generally sufficient for our purposes.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In November 2002, Stewart was served as a defendant in a New York state class action lawsuit presently pending in the Supreme Court State of New York - Nassau County alleging that Stewart directly and through its agencies routinely collected excess premiums in connection with refinance transactions. Similar actions were brought against seven other underwriters and the matters have been consolidated. Each plaintiff moved for class certification and on January 8, 2004 class certification was granted. The plaintiffs are two individuals on behalf of themselves and others similarly situated against a subsidiary of Stewart. Stewart has engaged counsel and is vigorously defending the action. Stewart denies culpability on a number of grounds. Stewart intends to file a Notice of Appeal on the Class Certification decision. The complaint seeks damages on "amounts yet to be determined" and also seeks reasonable attorney fees and other relief the court deems just and proper. The ultimate resolution of this matter is not expected to have a material adverse effect on the Company's financial position.
In addition, we are a party to a number of lawsuits incurred in connection with our business, most of which are of a routine nature involving disputed policy claims. In many of these suits, the plaintiff seeks exemplary or treble damages in excess of policy limits based on the alleged malfeasance of an issuing agency. We do not expect that any of these proceedings will have a material adverse effect on our consolidated financial condition or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is listed on the New York Stock Exchange (NYSE) under the symbol "STC". The following table sets forth the high and low sales prices of our Common Stock for each fiscal period indicated, as reported by the NYSE.
In March 2001, we filed a registration statement with the Securities and Exchange Commission to sell from time to time up to $75 million of Common Stock. In August 2001, we issued 2.5 million shares at $19 per share resulting in net proceeds of $44.5 million.
We paid regular quarterly cash dividends on our Common Stock from 1972 through 1999. During 1999, our Board of Directors approved a plan to repurchase up to 5% (680,000 shares) of our outstanding Common Stock. The Board also determined that our regular quarterly dividend should be discontinued in favor of returning those and additional funds to stockholders through the stock repurchase plan. Under this plan, we repurchased 116,900 shares of Common Stock during 2000 and none in 2001 and 2002. No cash dividends were paid during 2002 or 2001. Our Certificate of Incorporation provides that no cash dividends may be paid on the Class B Common Stock.
In June 2003, the Board voted to recommence a dividend payout in response to favorable tax law changes. The Board of Directors of Stewart Information Services Corporation declared an annual cash dividend of $0.46 per share, payable December 19, 2003, to Common stockholders of record on December 5, 2003.
An additional 208,769 shares of treasury stock were acquired primarily in the second quarter of 2002. The majority of these shares were acquired as a result of the consolidation of a majority owned subsidiary that was previously held as an equity method investment. All of these shares were held by us as treasury shares at December 31, 2003.
The number of shareholders of record as of March 2, 2004 was 3,358. As of March 8, 2004, the price of one share of our Common Stock was $35.71.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA (Ten year summary)
The following table sets forth, for the periods and at the dates indicated, our selected consolidated financial and data. The financial data was derived from our consolidated financial statements and should be read in conjunction with our audited consolidated financial statements, including the Notes thereto, beginning on page of this Report. See also Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.
(1) Prior to 1995, segment operations for real estate information services were not reported separately from title operations and were less significant.
(2) Restated for a two-for-one stock split in May 1999 and a three-for-two stock split in April 1994, effected as stock dividends.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXECUTIVE SUMMARY. We discuss below our most critical accounting areas that involve significant estimates: (1) accruing title loss reserves, (2) evaluating the possible impairment of goodwill and other intangibles and (3) accruing unreported premium revenues from agencies. We also discuss an important change that has been proposed to the Real Estate Settlement Procedures Act (RESPA) and its potential effect on our industry. We describe what we do - mostly title insurance - and the material effect that changes in mortgage interest rates and other factors can have on our revenues. For the years 2001 through 2003, we summarize the interest rate environment prevailing in those years. We also discuss the reasons for significant increases and decreases in our revenues and expenses. Our major sources of cash flow and our liquidity and capital resources are discussed. Certain legal restrictions that exist on cash transfers from our title insurer subsidiaries to our parent are described.
CRITICAL ACCOUNTING ESTIMATES. Actual results can differ from the estimates we report. However, we believe there is no material risk of a change in our accounting estimates that is likely to have a material impact on our reported financial condition and operating performance for the three years ended December 31, 2003.
Our most critical accounting estimate is providing title loss reserves. Estimating future policy loss payments is difficult because claims, by their nature, are complex and paid over long periods of time. We base our estimates on reported claims, historical loss experience and industry averages. Independent actuaries have reviewed and found our reserves adequate at each year end.
Based on events that may indicate impairment of title plants and other long-lived assets, and our annual evaluation of goodwill, we estimate and expense any loss in value to our current operations. Amounts expensed in the three years ended December 31, 2003 were immaterial. We use independent appraisers to assist us in determining the fair value of goodwill.
We report premium revenues from agencies primarily when policies are reported to us. We also accrue for unreported policies where reasonable estimates can be made. We consider historical reporting patterns, current trends in interest rates and other factors and known information about the agencies. In this accrual, we are not estimating future transactions. We are estimating policies that have already been issued but not received by us.
RESPA. In late December 2003, the Department of Housing and Urban Development (HUD) issued its proposed final rule concerning reforms to RESPA. We believe the new rule provides exemptions to current RESPA prohibitions against kickbacks and rebates. The new rule may result in a bundling of title and other real estate services and placing them under the control of a relatively small number of major lenders. In our view, the new rule will likely increase prices to the ultimate consumer.
If the new rule becomes final, it is likely that a major group of parties in the real estate, mortgage and settlement industries will ask the courts to intervene. We are unable to predict the outcome of these actions. Nor can we estimate the amount of the negative effect of the new rule on our future earnings.
WHAT WE DO. Our primary business is title insurance and settlement-related services. We close transactions and issue policies on homes, commercial properties and other real property located in all 50 states, the District of Columbia and several foreign countries through more than 7,200 issuing locations, including both direct operations and agencies. We also sell electronically delivered real estate services and information, as well as mapping products and geographic information systems, to domestic and foreign governments and private entities. Our current levels of non-USA operations are immaterial with respect to our consolidated financial results.
Our business has two main segments: title insurance-related services and real estate information (REI). These segments are closely related due to the nature of their operations and common customers.
FACTORS AFFECTING REVENUES. The principal factors that contribute to increases in our operating revenues for our title and REI segments include:
- declining mortgage interest rates, which usually increase home sales and refinancing transactions;
- rising home prices;
- higher premium rates;
- increased market share;
- opening of new offices, acquisitions; and
- a higher ratio of commercial transactions that, although relatively few in number, typically yield higher premiums.
These factors may override the seasonal nature of the title business.
RESULTS OF OPERATIONS
A comparison of the results of operations of the Company for 2003 with 2002 and 2002 with 2001 follows.
OPERATING ENVIRONMENT. According to published industry data, interest rates for 30-year fixed-rate mortgages, excluding points, for the year 2003 averaged 5.8% compared to 6.5% in 2002. Comparable rates averaged 7.0% in 2001.
In 2001 rates held steady at close to 7% for most of the year and continued to hold steady at that level until April 2002. Rates then declined through December 2002, reaching a low of 5.9%. In 2003, rates remained relatively steady, just below 6% for the first quarter, reaching a low of 5.6% in mid March. Rates fluctuated in the second quarter but decreased to 5.2% in June. Rates increased in the third quarter to 6.4% in September and then decreased to 5.8% in December.
Operating in these interest rate environments, real estate activity was strong in 2003 and 2002. Nationwide, refinancing transactions remained strong in 2003. The ratio of refinancings to total loan applications was 64.8% for 2003, 58.8% for 2002 and 56.8% for 2001. Existing home sales increased 9.0% in 2003 over 2002 and 5.0% in 2002 from 2001.
Our order levels began to decline in the third quarter of 2003, largely as a result of an increase in interest rates. Increases in rates tend to reduce real estate activity, particularly refinancings. Rates declined slightly in the fourth quarter. Most industry experts project interest rates to continue at current levels or move slightly higher. Due to the large number of refinancings completed in 2003, significantly fewer refinancing transactions are being forecast for 2004.
TITLE REVENUES. Our revenues from direct operations increased 29.5% in 2003 and 31.2% in 2002. The number of direct closings we handled increased 23.8% in 2003 and 31.8% in 2002. The largest revenue increases in 2003 were in California, Texas and Washington. The largest increases in 2002 were in California, Texas and Florida. Direct closings relate only to files closed by our underwriters and subsidiaries and do not include closings by independent agencies.
The average revenue per closing increased 4.2% in 2003 due to a lower ratio of refinancings closed by our direct operations compared to the prior year. The average revenue per closing decreased .8% in 2002. Title insurance premiums on refinancings are typically less than on property sales.
Premium revenues from agencies increased 25.6% in 2003 and 50.4% in 2002. The increases in 2003 and 2002 were primarily due to the increases in both refinancings and property sales. The largest revenue increases in 2003 were in California, New York and Florida. The largest increases in 2002 were in California, Pennsylvania, New York, Virginia and Texas.
TITLE REVENUES BY STATE. The approximate amounts and percentages of consolidated title operating revenues for the last three years were:
REI REVENUES. Real estate information revenues were $78.7 million in 2003, $71.1 million in 2002 and $63.8 million in 2001. The increases in 2003 and 2002 resulted primarily from providing a greater number of post-closing services, electronic mortgage documents and Section 1031 exchange services resulting from the large volume of real estate transactions.
INVESTMENTS. Investment income decreased 4.3% in 2003 because of lower yields, partially offset by increases in average balances invested. Investment income increased 3.9% in 2002 primarily because of increases in average balances invested, partially offset by lower yields. Certain investment gains in 2003, 2002 and 2001 were realized as part of the ongoing management of the investment portfolio for the purpose of improving performance.
AGENCY RETENTION. The amounts retained by agencies, as a percentage of revenues from agency operations, were 82.0%, 81.9% and 81.5% in the years 2003, 2002 and 2001, respectively. Amounts retained by title agencies are based on agreements between agencies and our title underwriters. The percentage that amounts retained by agencies bears to agency revenues may vary from year to year because of the geographical mix of agency operations and the volume of title revenues.
SELECTED COST RATIOS (BY SEGMENT). The following table shows employee costs and other operating expenses as a percentage of related title and real estate information operating revenues for the last three years.
These two categories of expenses are discussed below in terms of year-to-year monetary increases.
EMPLOYEE COSTS. Employee costs for the combined business segments increased 26.5% in 2003 and 24.0% in 2002. The number of persons we employed at December 31, 2003, 2002 and 2001 was approximately 8,200, 7,800 and 6,900, respectively. The increase in staff in 2003 and 2002 was primarily due to increased title and REI volume and acquisitions of new offices.
In our REI segment, employee costs increased in 2003 and 2002 primarily due to our focus to provide more post-closing services to lenders. These services are considerably more labor intensive than other REI services.
OTHER OPERATING EXPENSES. Other operating expenses for the combined business segments increased 24.2% in 2003 and 24.0% in 2002. The increase in other operating expenses in 2003 was primarily in new offices, search fees, premium taxes and business promotion. In 2002 the increase was primarily in search fees, premium taxes, new offices and business promotion.
Other operating expenses also include rent, supplies, telephone, title plant expenses, travel and auto. Most of these operating expenses follow, to varying degrees, the changes in transaction volume and revenues.
Our employee costs and certain other operating costs are sensitive to inflation. To the extent inflation causes increases in the prices of homes and other real estate, premium revenues also increase. Premiums are determined in part by the insured values of the transactions we handle.
TITLE LOSSES. Provisions for title losses, as a percentage of title operating revenues, were 4.4%, 4.5% and 4.3% in 2003, 2002 and 2001, respectively.
INCOME TAXES. The provisions for federal, state and foreign income taxes represented effective tax rates of 38.0%, 38.6% and 39.6% in 2003, 2002 and 2001, respectively.
CONTRACTUAL OBLIGATIONS. The table below describes our contractual obligations existing at December 31, 2003.
Material contractual obligations consist mainly of notes payable and operating leases. All operating leases are for office space and expire over the next 13 years.
LIQUIDITY AND CAPITAL RESOURCES. Acquisitions during 2003, 2002 and 2001 resulted in additions to goodwill of $13.7 million, $11.7 million and $19.3 million, respectively.
Cash provided by operations was $193.9 million, $162.6 million and $108.2 million in 2003, 2002 and 2001, respectively. Cash flow from operations has been the primary source of financing for additions to property and equipment, expanding operations, dividends to shareholders and other requirements. This source may be supplemented by bank borrowings. We do not have any material source of liquidity or financing that involves off-balance sheet arrangements.
The most significant non-operating sources of cash were from proceeds of investments matured and sold in the amount of $264.3 million, $163.7 million and $70.1 million in 2003, 2002 and 2001, respectively. We used cash for the purchases of investments in the amount of $416.3 million, $197.7 million and $135.6 million in 2003, 2002 and 2001, respectively.
In August 2001 we issued 2.5 million shares of Common Stock at $19 per share, resulting in net proceeds of $44.5 million.
A substantial majority of consolidated cash and investments was held by Stewart Title Guaranty Company (Guaranty) and its subsidiaries. Cash transfers between Guaranty and its subsidiaries and the Company are subject to certain legal restrictions. See Notes 2 and 3 to the consolidated financial statements.
Our liquidity at December 31, 2003, excluding Guaranty and its subsidiaries, was comprised of cash and investments aggregating $25.3 million and short-term liabilities of $4.7 million. We know of no commitments or uncertainties that are likely to materially affect our ability to fund cash needs. See Note 17 to the consolidated financial statements.
We consider our capital resources to be adequate. Our capital resources are represented by a low debt-to-equity ratio, in which long-term debt is $17.3 million and stockholders' equity is $621.4 million at December 31, 2003. We are not aware of any trends, either favorable or unfavorable, that would materially affect notes payable or stockholders' equity. We do not expect any material changes in the cost of such resources. Significant acquisitions in the future could materially affect the notes payable or stockholders' equity balances.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The discussion below about our risk management strategies includes forward-looking statements that are subject to risks and uncertainties. Management's projections of hypothetical net losses in the fair value of our market rate sensitive financial instruments, should certain potential changes in market rates occur, is presented below. While we believe that the potential market rate changes are reasonably possible, actual rate changes could differ.
Our only material market risk in investments in financial instruments is our debt securities portfolio. We invest primarily in marketable municipal, U.S. Government, corporate and mortgage-backed debt securities. We do not invest in financial instruments of a hedging or derivative nature.
We have established policies and procedures to manage our exposure to changes in the fair value of our investments. These policies include retaining an investment advisory firm, an emphasis upon credit quality, management of portfolio duration, maintaining or increasing investment income through high coupon rates and actively managing profile and security mix depending upon market conditions. We have classified all of our investments as available-for-sale.
The market value of our investments in debt securities at December 31, 2003 was $418.1 million. Debt securities at December 31, 2003 mature, according to their contractual terms, as follows (actual maturities may differ because of call or prepayment rights):
We believe our investment portfolio is diversified and do not expect any material loss to result from the failure to perform by issuers of the debt securities we hold. Our investments are not collateralized. The mortgage-backed securities are insured by U.S. Government agencies.
Based on our debt securities portfolio and interest rates at December 31, 2003, a 100 basis point increase (decrease) in interest rates would result in a decrease (increase) of approximately $20.0 million, or 4.8%, in the fair value of our portfolio. Changes in interest rates may affect the fair value of the debt securities portfolio and may result in unrealized gains or losses. Gains or losses would only be realized upon the sale of the investments. Any other than temporary declines in market values of securities are charged to earnings.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required to be provided in this item is included in our Consolidated Financial Statements, including the Notes thereto, attached hereto as pages to, and such information is incorporated in this report by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Our principal executive officers and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2003, have concluded that, as of such date, our disclosure controls and procedures are adequate and effective to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities.
During the fourth quarter of 2003, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, those internal controls subsequent to the date of the evaluation. As a result, no corrective actions were required or undertaken.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding our directors will be included in our proxy statement for our 2004 Annual Meeting of Stockholders (the "Proxy Statement"), to be filed within 120 days after December 31, 2003, and is incorporated in this report by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation will be included in the Proxy Statement and is incorporated in this report by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information regarding beneficial ownership of our Common Stock will be included in the Proxy Statement and is incorporated in this report by reference.
The table below describes our compensation plans under which equity securities are authorized for issuance, as of December 31, 2003.
(1) The Company has a Service Award Program under which shares may be granted to employees who achieve specified length of service milestones. No specific number of shares have been reserved for issuance under this program.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding Certain Relationships and Related Transactions will be included in the Proxy Statement and is incorporated in this report by reference.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding fees paid to our independent public accountants will be included in the Proxy Statement and is incorporated in this report by reference.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules
The financial statements and financial statement schedules filed as part of this report are listed in the "Index to Consolidated Financial Statements" on Page of this document. All other schedules are omitted, as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes.
(b) Reports on Form 8-K
During the three months ended December 31, 2003, we filed a report on Form 8-K dated October 24, 2003, reporting financial results for the three and nine months ended September 30, 2003.
(c) Exhibits
Those exhibits required to be filed by Item 601 of Regulation S-K are listed in the Index to Exhibits immediately preceding the exhibits filed herewith and such listing is incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, we have duly caused this report to be signed on our behalf by the undersigned, thereunto duly authorized.
STEWART INFORMATION SERVICES CORPORATION (Registrant)
By: /s/ Malcolm S. Morris --------------------------------------- Malcolm S. Morris, Co-Chief Executive Officer and Chairman of the Board of Directors
By: /s/ Stewart Morris, Jr. --------------------------------------- Stewart Morris, Jr., Co-Chief Executive Officer, President and Director
By: /s/ Max Crisp --------------------------------------- Max Crisp, Executive Vice President and Chief Financial Officer, Secretary-Treasurer, Director and Principal Financial and Accounting Officer
Dated: March 15, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been signed by the following persons on our behalf and in the capacities and on the dates indicated:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Stewart Information Services Corporation and Subsidiaries' Consolidated Financial Statements:
Independent Auditors' Report
To the Stockholders and Board of Directors of Stewart Information Services Corporation
We have audited the consolidated financial statements of Stewart Information Services Corporation and subsidiaries as listed in the accompany index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Stewart Information Services Corporation and subsidiaries at December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedules when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As discussed in Note 7 to the consolidated financial statements, the Company changed its method of accounting for goodwill and intangibles in 2002.
KPMG LLP
Houston, Texas February 17, 2004
CONSOLIDATED STATEMENTS OF EARNINGS, RETAINED EARNINGS AND COMPREHENSIVE EARNINGS
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Three years ended December 31, 2003)
NOTE 1
GENERAL. Stewart Information Services Corporation, through its subsidiaries (collectively, the Company), is primarily engaged in the title insurance business. The Company also provides real estate information services. The Company operates through a network of direct and agency offices throughout the United States. Approximately 31 percent of consolidated title revenues are generated in California and Texas. The operations in the international markets in which the Company does business are immaterial to consolidated results.
A. MANAGEMENT RESPONSIBILITY. The accompanying financial statements were prepared by management, which is responsible for their integrity and objectivity. The statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP), including management's best judgments and estimates. Actual results could differ from estimates.
B. NEW SIGNIFICANT ACCOUNTING PRONOUNCEMENTS. The Company adopted SFAS No. 142 "Goodwill and Other Intangible Assets" effective January 1, 2002, as required, and no longer amortizes goodwill. Instead, goodwill and other intangibles are reviewed no less than annually and amounts determined to be impaired are expensed to current operations.
In accordance with SFAS No. 141 "Business Combinations", the Company has used the purchase method of accounting for business combinations occurring after June 30, 2001.
The Company adopted the stock-based compensation disclosure requirements of SFAS No. 148. See Note 1S. The impact the on the Company's consolidated financial position or results of operations for the change in the fair value method of accounting for stock-based compensation is expected to be immaterial.
The Company adopted the disclosure requirements for guarantees required by FIN 45 effective December 31, 2002 and expanded its disclosure on guarantees. The Company adopted the initial recognition and measurement provisions of the non-contingent aspects of guarantees issued or modified after December 31, 2002. The effect on the Company's consolidated financial position or results of operations was immaterial.
The Company adopted the requirements of consolidation of variable interest entities created or obtained after January 31, 2003 required by FIN 46 and related disclosures required by FIN 46 and FIN 46R, effective June 15, 2003. The effect on the Company's consolidated financial position or results of operations was immaterial.
C. RECLASSIFICATIONS. Certain prior year amounts in the consolidated financial statements have been reclassified for comparative purposes. Net earnings, as previously reported, were not affected.
D. CONSOLIDATION. The consolidated financial statements include all subsidiaries in which the Company owns more than 50% voting rights in electing directors. In general, unconsolidated investees, owned 20% through 50% and where the Company exercises significant influence, are accounted for by the equity method. All significant intercompany accounts and transactions are eliminated and provisions are made for minority interests.
E. STATUTORY ACCOUNTING. Stewart Title Guaranty Company (Guaranty) and other title insurance underwriters owned by the Company prepare financial statements in accordance with statutory accounting practices prescribed or permitted by regulatory authorities.
In restating to GAAP, the statutory premium reserve and the reserve for reported title losses are eliminated and, in substitution, amounts are established for estimated title losses (see Note 1G). The net effect, after providing for deferred income taxes, is included in consolidated retained earnings.
F. REVENUE RECOGNITION. Operating revenues from direct title operations are considered earned at the time of the closing of the related real estate transaction. Premium revenues on title insurance policies written by agencies are recognized primarily when policies are reported to the Company. The Company accrues for unreported policies where reasonable estimates can be made based on historical reporting patterns of agencies, current trends and known information about agencies.
Revenues from real estate information services are considered earned at the time the service is performed or the work product is delivered to the customer.
G. TITLE LOSSES AND RELATED CLAIMS. Estimating future title loss payments is difficult because of the complex nature of title claims, the length of time over which claims are paid, the significantly varying dollar amounts of individual claims and other factors.
The Company's liability for estimated title losses comprises both known claims and other losses expected to be reported in the future. The amount of the reserves represents the aggregate future payments, net of recoveries, that the Company expects to incur on policy and escrow losses and in costs to settle claims. Provisions are charged to income in the same year the related premium revenues are recognized. The amounts provided are based on reported claims, historical loss experience, title industry averages, current legal environment and types of policies written.
Amounts shown as the Company's estimated liability for future loss payments are continually reviewed for reasonableness and adjusted as appropriate. Independent actuaries also review the adequacy of the liability amounts on an annual basis. In accordance with industry practice, the amounts have not been discounted to their present values.
H. CASH EQUIVALENTS. Cash equivalents are highly liquid investments that are convertible to cash or mature on a daily basis as part of the Company's management of day-to-day operating cash.
I. SHORT-TERM INVESTMENTS. Short-term investments comprise time deposits with banks and savings and loan associations, federal government obligations, money market accounts and other investments maturing in less than one year.
J. INVESTMENTS. The Company has classified its investment portfolio as available-for-sale. Realized gains and losses on sales of investments are determined using the specific identification method. Net unrealized gains and losses on securities, net of applicable deferred taxes, are included in stockholders' equity. Any other than temporary declines in fair values of securities are charged to earnings.
K. PROPERTY AND EQUIPMENT. Depreciation is computed principally using the straight-line method at the following rates: buildings - 30 to 40 years and furniture and equipment - 3 to 10 years. Maintenance and repairs are expensed as incurred while improvements are capitalized. Gains and losses are recognized at disposal.
L. TITLE PLANTS. Title plants include compilations of a county's official land records, prior examination files, copies of prior title policies, maps and related materials that are geographically indexed to a specific property. The costs of acquiring existing title plants and creating new ones, prior to the time such plants are placed in operation, are capitalized. Such costs are not amortized because there is no indication of any loss of value. The costs of maintaining and operating title plants are expensed as incurred. Gains and losses on sales of copies of title plants or interests in title plants are recognized at the time of sale.
M. GOODWILL. Goodwill is the excess of the purchase price over the fair value of net assets acquired. Prior to January 1, 2002 goodwill was amortized using the straight-line method by charges to earnings generally over 20 to 40 years. Effective January 1, 2002, goodwill is not amortized but is reviewed no less than annually and, if determined to be impaired, is expensed to current operations.
N. OTHER ACQUIRED INTANGIBLES. The Company does not have any material acquired intangible assets, other than title plants and goodwill.
O. OTHER LONG-LIVED ASSETS. The Company reviews the carrying values of title plants and other long-lived assets if certain events occur that may indicate impairment. Impairment of these long-lived assets is indicated when projected undiscounted cash flows over the estimated lives of the assets are less than carrying values. If impairment is determined by management, the book amounts are written down to fair values by calculating the discounted values of projected cash flows. See Note 1B.
P. FAIR VALUES. The fair values of financial instruments, including cash and cash equivalents, short-term investments, notes receivable, notes payable and accounts payable, are determined by references to various market data and other valuation techniques, as appropriate. The fair values of these financial instruments approximate their carrying values. Investments in debt and equity securities are carried at their fair values. See Note 4.
Q. DERIVATIVES AND HEDGING. The Company does not invest in hedging or derivative instruments. Accordingly, SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities", which was effective January 1, 2001 for the Company, had no impact on the consolidated financial statements.
R. INCOME TAXES. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the tax bases and the book carrying values for certain assets and liabilities. Valuation allowances are provided as may be appropriate. Enacted tax rates are used in calculating amounts.
S. STOCK-BASED COMPENSATION. The Company has two fixed stock-based employee compensation plans. The Company accounts for the plans under the intrinsic value method. Accordingly, no stock-based employee compensation cost is reflected in net earnings, as all options granted under the plans had an exercise price equal to the market value of the underlying Common Stock on the date of grant. See Note 13.
The Company applies APB No. 25 and related Interpretations in accounting for its plans. Under SFAS No. 123, compensation cost would be recognized for the fair value of the employees' purchase rights, which is estimated using the Black-Scholes model. The Company assumed a dividend yield of 0%, an expected life of ten years for each option, expected volatility of 33.8% to 41.6% and a risk-free interest rate of 4.3% to 6.0% for the three years ended December 31, 2003.
Had compensation cost for the Company's plans been determined consistent with SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:
NOTE 2
RESTRICTIONS ON CASH AND INVESTMENTS. Statutory reserve funds are maintained to comply with legal requirements for statutory premium reserves and state deposits. These funds are not available for any other purpose.
A substantial majority of consolidated investments and cash at each year end was held by the Company's title insurer subsidiaries. Generally, the types of investments a title insurer can make are subject to legal restrictions. Furthermore, the transfer of funds by a title insurer to its parent or subsidiary operations, as well as other related party transactions, are restricted by law and generally require the approval of state insurance authorities.
NOTE 3
DIVIDEND RESTRICTIONS. Surplus as regards policyholders for Guaranty was $374,796,000 and $309,342,000 at December 31, 2003 and 2002, respectively. Statutory net income for Guaranty was $35,645,000, $21,816,000 and $11,195,000 in 2003, 2002 and 2001, respectively.
Substantially all of the consolidated retained earnings at each year end was represented by Guaranty, which owns directly or indirectly substantially all of the subsidiaries included in the consolidation.
Guaranty cannot pay a dividend in excess of certain limits without the approval of the Texas Insurance Commissioner. The maximum dividend which can be paid without such approval in 2004 is $74,959,000. Guaranty paid dividends of $33,790,000, $90,000 and $1,390,000 in 2003, 2002 and 2001, respectively.
Dividends from Guaranty are also voluntarily restricted primarily to maintain statutory surplus and liquidity at competitive levels. The ability of a title insurer to pay claims can significantly affect the decision of lenders and other customers when buying a policy from a particular insurer.
NOTE 4
INVESTMENTS. The amortized costs and market values of debt and equity securities at December 31 follow:
Gross unrealized gains and losses at December 31 were:
Of the above total unrealized losses of $802,000, the amount in a loss position in excess of twelve months was only $113,000, which was comprised of municipal debt, foreign bonds and equity securities. The unrealized loss positions were caused by normal market fluctuations and represented 47 investments.
Because the Company has the intent and ability to hold these investments until maturity or a market price recovery, and no significant credit risk is deemed to exist, the investments are not considered other-than-temporarily impaired.
Debt securities at December 31, 2003 mature, according to their contractual terms, as follows (actual maturities may differ because of call or prepayment rights):
The Company believes its investment portfolio is diversified and expects no material loss to result from the failure to perform by issuers of the debt securities it holds. Investments made by the Company are not collateralized. The mortgage-backed securities are insured by U.S. Government agencies.
NOTE 5
INVESTMENT INCOME. Income from investments and realized gains and losses for the three years follow:
(1) Includes gains on sales of real estate of $2,376,000.
The sales of securities resulted in proceeds of $131,707,000 in 2003, $118,106,000 in 2002 and $41,694,000 in 2001.
Expenses assignable to investment income were insignificant. There were no significant investments at December 31, 2003 that did not produce income during the year.
NOTE 6
INCOME TAXES. Deferred income taxes at December 31, 2003 and 2002 were as follows:
The following reconciles federal income taxes computed at the statutory rate with income taxes as reported.
The Company has $1,042,000 and $448,000 foreign tax credit carryforwards that expire in 2006 and 2008, respectively. The valuation allowance relates to certain foreign tax credit carryforwards and other deferred tax assets.
Deferred tax expense was $9,375,000, $12,775,000 and $1,897,000 in 2003, 2002 and 2001, respectively.
NOTE 7
GOODWILL. The carrying amount of goodwill for the title reporting unit was $69,167,000 (of $79,084,000) and $56,916,000 (of $66,885,000) at December 31, 2003 and 2002, respectively. The remaining goodwill was attributable to the REI segment's two reporting units.
During the three years ended December 31, 2003, goodwill was increased by acquisitions. Goodwill was decreased by amortization in 2001. Net earnings, excluding goodwill amortization, was $51,697,000 compared with $48,686,00 as reported for the year 2001. Basic earnings per share in 2001 would have been $3.19 compared with $3.01 as reported and diluted earnings per share would have been $3.16 compared with $2.98 as reported. In accordance with SFAS No. 142, amortization of goodwill was stopped effective January 1, 2002.
During 2003, $1,955,000 of goodwill attributed to a subsidiary held for sale was written off and is included in other operating expenses in the consolidated financial statements. There were no impairment write-offs of goodwill during the year ended December 31, 2002. Goodwill impairment write-offs in 2001 were $675,000 in the REI segment of $28,000 in the title segment.
NOTE 8
EQUITY INVESTEES. Certain summarized aggregate financial information for equity investees follows:
Net premium revenues earned from policies issued by equity investees were $10,424,000, $9,092,000 and $7,705,000 in 2003, 2002 and 2001, respectively.
The amount of earnings from equity investees was $6,586,000, $3,420,000 and $1,345,000 in 2003, 2002 and 2001, respectively. These amounts are included in title insurance - direct operations in the consolidated financial statements.
Goodwill relating to equity investees was $12,258,000 and $5,480,000 at December 31, 2003 and 2002, respectively, and was not amortized in accordance with SFAS No. 142. Goodwill relating to equity investees was amortized for the year ended December 31, 2001 on a basis similar to other goodwill. Equity investments will continue to be reviewed for impairment. See Note 1B.
NOTE 9
NOTES PAYABLE.
(1) 1.12% and 1.38% at December 31, 2003 and 2002, respectively.
The notes are due $7,254,000 in 2004, $3,370,000 in 2005, $2,104,000 in 2006, $2,012,000 in 2007, $2,029,000 in 2008 and $7,814,000 subsequent to 2008.
NOTE 10
ESTIMATED TITLE LOSSES. Provisions accrued, payments made and liability balances for the three years follow:
Provisions include amounts related to the current year of approximately $94,578,000, $75,626,000 and $51,085,000 for 2003, 2002 and 2001, respectively. Payments related to the current year, including escrow and other loss payments, were approximately $16,484,000, $10,688,000 and $11,817,000 in 2003, 2002 and 2001, respectively.
NOTE 11
COMMON STOCK AND CLASS B COMMON STOCK. Holders of Common and Class B Common Stock have the same rights, except no cash dividends may be paid on Class B Common Stock. The two classes of stock vote separately when electing directors and on any amendment to the Company's certificate of incorporation that affects the two classes unequally.
A provision of the by-laws requires an affirmative vote of at least two-thirds of the directors to elect officers or to approve any proposal that may come before the directors. This provision cannot be changed without a majority vote of each class of stock.
Holders of Class B Common Stock may, with no cumulative voting rights, elect four directors if 1,050,000 or more shares of Class B Common Stock are outstanding; three directors if between 600,000 and 1,050,000 shares are outstanding; and none if less than 600,000 shares of Class B Common Stock are outstanding. Holders of Common Stock, with cumulative voting rights, elect the balance of the nine directors.
Class B Common Stock may, at any time, be converted by its shareholders into Common Stock on a share-for-share basis, but all of the holders of Class B Common Stock have agreed among themselves not to convert their stock. The agreement may be extended or terminated by them at any time. Such conversion is mandatory on any transfer to a person not a lineal descendant (or spouse, trustee, etc. of such descendant) of William H. Stewart.
At December 31, 2003 and 2002, there were 145,820 shares of Common Stock held by a subsidiary of the Company. These shares are considered retired but may be issued from time to time in lieu of new shares.
NOTE 12
CHANGES IN STOCKHOLDERS' EQUITY.
In August 2001 the Company issued 2,500,000 shares of Common Stock in an offering at a price of $19 per share.
NOTE 13
STOCK OPTIONS. A summary of the status of the Company's fixed stock option plans for the three years follows:
(1) Weighted average
At December 31, 2003, 2002 and 2001 there were 342,978, 504,700 and 516,200 options, respectively, exercisable. The weighted average fair values of options granted during the years 2003, 2002 and 2001 were $12.31, $11.01 and $11.53, respectively.
The following summarizes information about fixed stock options outstanding and exercisable at December 31, 2003:
(1) Weighted average
NOTE 14
EARNINGS PER SHARE. The Company's basic earnings per share was calculated by dividing net earnings by the weighted average number of shares of Common Stock and Class B Common Stock outstanding during the reporting period.
To calculate diluted earnings per share, the number of shares determined above was increased by assuming the issuance of all dilutive shares during the same reporting period. The treasury stock method was used in calculating the additional number of shares. The only potentially dilutive effect on earnings per share for the Company is related to its stock option plans.
In calculating the effect of the options and determining diluted earnings per share, the average number of shares used in calculating basic earnings per share was increased by 118,000 in 2003, 90,000 in 2002 and 153,000 in 2001.
NOTE 15
REINSURANCE. As is the industry practice, the Company cedes risks to other title insurance underwriters and reinsurers. However, the Company remains liable if the reinsurer should fail to meet its obligations. The Company also assumes risks from other underwriters. Payments and recoveries on reinsured losses were insignificant during the three years ended December 31, 2003. The total amount of premiums for assumed and ceded risks was less than one percent of title revenues in each of the last three years.
NOTE 16
LEASES. The Company's expense for leased office space was $46,511,000 in 2003, $40,663,000 in 2002 and $37,181,000 in 2001. These are noncancelable, operating leases expiring over the next 13 years. The future minimum lease payments are summarized as follows (stated in thousands of dollars):
NOTE 17
CONTINGENT LIABILITIES AND COMMITMENTS. The Company is contingently liable for disbursements of escrow funds held by agencies in certain cases where specific insured closing guarantees have been issued.
The Company routinely holds funds in segregated escrow accounts pending the closing of real estate transactions. These accounts are not included in the consolidated balance sheets. This resulted in a contingent liability to the Company of approximately $929,983,000 at December 31, 2003.
The Company is a qualified intermediary in tax-deferred property exchanges for customers pursuant to Section 1031 of the Internal Revenue Code. The Company holds the proceeds from transactions until a qualifying exchange can occur. This resulted in a contingent liability to the Company of approximately $497,722,000 at December 31, 2003.
At December 31, 2003 the Company was contingently liable for guarantees of indebtedness owed primarily to banks and others by unconsolidated equity investees and other third parties. The guarantees relate primarily to business expansion and generally expire no later than 2010. The maximum potential future payments on the guarantees amount to $1,691,000 for equity investees and $9,585,000 for other third parties. Management believes that the related underlying assets and the collateral available, primarily title plants and the corporate stock, would enable the Company to recover the amounts paid under the guarantees. The Company believes no provision for losses is needed because no loss is expected on these guarantees.
In the ordinary course of business the Company guarantees the third party indebtedness of its consolidated subsidiaries. At December 31, 2003 the maximum potential future payments on the guarantees is not more than the notes payable recorded on the consolidated balance sheets.
In the normal conduct of its business, the Company is subject to lawsuits, regulatory investigations and other legal proceedings that may involve substantial amounts. Such matters are not predictable with complete assurance. The Company believes the probable resolution of such contingencies will not materially affect the consolidated financial condition of the Company.
NOTE 18
SEGMENT INFORMATION. The Company's two reportable segments are title and real estate information (REI). Both segments serve each other and the real estate and mortgage industries.
The title segment provides services needed in transferring the title in a real estate transaction. These services include searching, examining and closing the title to real property and insuring the condition of the title.
The REI segment primarily provides services related to real estate transactions using electronic delivery. These services include title reports, flood determinations, credit reports, property appraisals, document preparation, property reports and background checks. This segment also provides post-closing services to lenders. In addition, the REI segment provides services related to Section 1031 tax-deferred exchanges, mapping, and construction and maintenance of title plants for county clerks, tax assessors and title agencies.
Under the Company's internal reporting system, most general corporate expenses are incurred by and charged to the title segment. Technology operating costs are also charged to the title segment, except for direct expenditures related to the REI segment. All investment income is included in the title segment as it is generated primarily from the investments of the title underwriting operations.
NOTE 19
QUARTERLY FINANCIAL INFORMATION (UNAUDITED).
Computations of per share amounts for quarters are made independently. Therefore, the sum of per share amounts above may not agree with per share amounts for the year as a whole.
STEWART TITLE GUARANTY COMPANY STEWART TITLE INSURANCE COMPANY Principal Underwriters of Stewart Information Services Corporation
UNCONSOLIDATED STATUTORY BALANCE SHEETS (UNAUDITED) From statutory Annual Statements as filed
Note: The amount shown above for stockholder's equity exceeds policyholders surplus primarily because under GAAP the statutory premium reserve and reserve for reported title losses are eliminated and estimated title loss reserves are substituted, net of applicable income taxes.
SCHEDULE I
STEWART INFORMATION SERVICES CORPORATION (PARENT COMPANY)
EARNINGS AND RETAINED EARNINGS INFORMATION
See accompanying note to financial statement information.
(Schedule continued on following page.)
S-1
SCHEDULE I (CONTINUED)
STEWART INFORMATION SERVICES CORPORATION (PARENT COMPANY)
BALANCE SHEET INFORMATION
(1) Includes undistributed earnings of subsidiaries of $480,726 in 2003 and $361,077 in 2002.
See accompanying note to financial statement information.
(Schedule continued on following page.)
S-2
SCHEDULE I (CONTINUED)
STEWART INFORMATION SERVICES CORPORATION (PARENT COMPANY)
CASH FLOW INFORMATION
See accompanying note to financial statement information.
(Schedule continued on following page.)
S-3
SCHEDULE I (CONTINUED)
STEWART INFORMATION SERVICES CORPORATION (PARENT COMPANY)
NOTE TO FINANCIAL STATEMENT INFORMATION
We operate as a holding company transacting substantially all business through our subsidiaries. Our consolidated financial statements are included in Part II, Item 8 of Form 10-K. The Parent Company financial statements should be read in conjunction with the aforementioned consolidated financial statements and notes thereto and financial statement schedules.
Certain amounts in the 2001 Parent Company financial statements have been reclassified for comparative purposes. Net earnings, as previously reported, was not affected.
Dividends received from subsidiaries for 2003, 2002 and 2001 were $33,790,000, $90,000 and $1,390,000, respectively.
S-4
SCHEDULE II
STEWART INFORMATION SERVICES CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 2003
(A) Represents primarily payments of policy and escrow losses and loss adjustment expenses during the year.
(B) Represents uncollectible accounts written off.
(C) Represents estimated title loss reserve balances acquired.
S-5
INDEX TO EXHIBITS