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EXHIBIT 13
MANAGEMENT DISCUSSION AND ANALYSIS
A comparison of the results of operations of the Company for 1997 with 1996 and
1996 with 1995 follows.
General. The Company's dominant segment of operations is the land title
business. In general, the principal factors that contribute to increases in
title revenues include declining mortgage interest rates (which usually increase
home sales and refinancing transactions), rising home prices, higher premium
rates, increased market share, additional revenues from new offices and
increased revenues from nonresidential, commercial transactions. Although
relatively few in number, large commercial transactions usually yield higher
premiums.
Mortgage interest rates, on the average, fell from 7.95% in 1995 to 7.81%
1996 to 7.60% in 1997. Rates begin in early 1995 at a little over 9% and then
trended downward to end the year slightly over 7%. In 1996, rates rose in the
first half of the year and fell in the second half. In the early months of 1997,
rates rose again, but then began a fairly steady decline in May 1997 and fell
each month that followed. At year end 1997, rates were approximately at or below
the 7% level.
Operating in these mortgage interest environments, together with a good
general economy, real estate activity began to increase in the last part of
1997. Existing home sales moved to record levels in the last quarter.
Refinancing transactions in the last month of 1997 and in early 1998 also rose
to record levels.
Title revenues. The Company's revenues from premiums, fees and other revenues
increased 7.9% in 1997 over 1996 and 22.9% in 1996 over 1995. The number of
title orders opened and closed by the Company and the average revenue per order
closed follow (agent operations and certain other income have been excluded).
- -------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
Number of orders opened (000s) . . . . . . . 331 319 278
Number of orders closed (000s) . . . . . . . 247 239 206
Average revenue per order closed . . . . . . $ 979 $ 938 $ 907
- -------------------------------------------------------------------------------
Total closings increased 3.2% in 1997 and 16.0% in 1996. The average
revenue per closing increased 4.4% in 1997 and 3.4% in 1996. The average rate
was increased each year by higher home prices. There were no major revenue rate
increases in 1997 or 1996.
Title revenues by state. The approximate amounts and percentages of Stewart's
consolidated title revenues by state for the last three years were:
- -----------------------------------------------------------------------------------------------
Amounts ($ millions) Percentages
1997 1996 1995 1997 1996 1995
- -----------------------------------------------------------------------------------------------
California . . . . . . . . . . . . . . . . . 123 119 97 19 20 20
Texas . . . . . . . . . . . . . . . . . . . 116 111 93 18 18 19
New York . . . . . . . . . . . . . . . . . . 51 50 35 8 8 7
Florida . . . . . . . . . . . . . . . . . . 47 40 29 7 7 6
Colorado . . . . . . . . . . . . . . . . . . 20 18 16 3 3 3
Nevada . . . . . . . . . . . . . . . . . . . 19 18 14 3 3 3
Arizona . . . . . . . . . . . . . . . . . . 19 17 14 3 3 3
All others . . . . . . . . . . . . . . . . . 262 236 198 39 38 39
- -----------------------------------------------------------------------------------------------
657 609 496 100 100 100
- -----------------------------------------------------------------------------------------------
REI revenues. Real estate information revenues were $35.3 million in 1997,
$32.0 million in 1996 and $24.0 million in 1995. The increases in 1997 and 1996
were primarily due to a significant number of new businesses started in those
two years and additional income earned from operations existing in 1995. The
Company terminated an unprofitable business in late 1996 which reduced the
amount of the revenue increase in 1997 over 1996.
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The Company is engaged in negotiations to sell an unprofitable REI company
in England. If the results of this company were excluded, the pretax loss for
the REI segment would have been $2.5 million in 1997. The Company believes the
losses incurred in starting its REI companies will yield significant earnings in
future years.
Investments. Investment income increased 10.2% in 1997 and 6.5% in 1996,
primarily because of increases in yields and average balances invested.
Investment gains in 1997, 1996 and 1995 were realized as part of the ongoing
management of the investment portfolio for the purpose of improving performance.
Agent retention. Amounts retained by title agents are based on contracts between
the agents and the underwriters of the Company, Contractual rates, closing
practices, remittance rates and agent retentions vary across the country.
The percentage that amounts retained by agents bears to agent revenues may
vary from year to year because of the geographical mix of agent operations and
title revenues.
- ------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------
($000 Omitted)
Amounts retained by agents ........................ 334,653 311,937 252,064
Agent revenues .................................... 412,970 383,676 307,645
Retained by agents (%) ............................ 81.0 81.3 81.9
- ------------------------------------------------------------------------------------
Employee and other expenses. Employee costs for the combined segments of
business increased 10.2% in 1997 and 21.4% in 1996. The average number of
employees increased in both years. The number of persons employed by the
Company at December 31, 1997, 1996 and 1995 was 4,569, 4,111 and 3,757,
respectively. The increase in staff in 1997 and 1996 was primarily in
automation, real estate information areas, new offices and field service
centers.
The Company has chosen to increase cost levels in automation and real
estate information areas because it believes the development and sale of new
products and services to new and existing customers is important to its future.
Through automating operating processes, the Company expects to add customer
revenues and reduce operating expenses and title losses in the future.
Other operating expenses increased 11.3% in 1997 and 14.9% in 1996.
Excluding the effect of new offices, the increase was 10.4% in 1997 and 12.8% in
1996. The overall increase for each year was caused primarily by changes in
transaction volume. Expenses that increased in 1997 were rent, premium taxes,
business promotion and delivery costs. Expenses that increased in 1996 included
business promotion, supplies, rent and premium taxes. Other operating expenses
also include policy forms, title plant expenses, telephone and travel. Most of
these expenses follow, to varying degrees, the changes in transaction volume and
revenues.
Provisions for title losses, as a percentage of title premiums, fees and
other revenues, were 4.5%, 5.6% and 6.0% in 1997, 1996 and 1995, respectively.
The continued improvement in industry trends in claims and the Company's
improved experience in claims have also led to smaller provisions for title
losses.
The Company's labor and certain other operating costs are sensitive to
inflation. Increases in consumer prices are considered in granting pay raises.
To the extent inflation causes increases in the prices of homes and other real
estate, premium revenues are also increased. Premiums are determined in part by
the insured values of the transactions handled by the Company.
Nonrecurring charge. A pretax writeoff of $1.9 million of goodwill in a
subsidiary in England that may be sold under current negotiations was recorded
in the fourth quarter of 1997. The subsidiary incurred after-tax operating
losses of $1.0 million in 1997. This subsidiary has been included in the REI
segment of the Company's operations.
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Income taxes. The provisions for federal and state income taxes represented
effective tax rates of 35.4%, 36.9% and 34.7% in 1997, 1996 and 1995,
respectively. The 1996 effective tax rate was higher primarily because
nontaxable income from municipal bonds was significantly less in relation to
pretax profits.
The Year 2000 issue. Currently, significant attention is being given by
companies to the problem of how their computer operations may be adversely
affected by the rollover of the calendar to the year 2000. The Company has
taken steps to make software programs substantially compliant with the
upcoming demands of the change. The Company is testing and reviewing the
electronic data transfers conducted with business partners. The Company
expects to substantially complete its work in this area in 1998. The related
costs are being expensed as incurred and additional costs are expected to be
insignificant.
Liquidity and capital resources. Cash provided by operations was $33.8
million, $36.8 million and $20.6 million in 1997, 1996 and 1995, respectively.
Internally-generated cash flow has been the primary source of funds for
additions to property and equipment, expanding operations, dividends to
shareholders and other requirements. This source may be supplemented by bank
borrowings.
A substantial majority of consolidated cash and investments is held by
Stewart Title Guaranty Company (Guaranty), Stewart Title Insurance Company
and other title insurer subsidiaries. Cash transfers between Guaranty and its
subsidiaries and the Company are subject to certain legal restrictions. See
Notes 5 and 6 to the financial statements.
The liquidity of the Company itself, excluding Guaranty and its
subsidiaries and excluding notes receivable from affiliates, consisted of cash
and investments of $9.0 million, a dividend receivable of $7.5 million from
Guaranty (received in early 1998) and short-term liabilities of $1.1 million
at December 31, 1997.
The Company knows of no commitments or uncertainties which are likely to
materially affect the ability of the Company and its subsidiaries to fund their
cash needs. See Note 16 to the financial statements.
The Company's capital resources, represented primarily by long-term debt of
$11.4 million and stockholders' equity of $209.5 million at December 31, 1997,
are considered adequate.
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of Stewart Information Services
Corporation
We have audited the accompanying consolidated balance sheets of Stewart
Information Services Corporation and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of earnings and retained earnings
and cash flows for each of the years in the three-year period ended December
31, 1997. 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 generally accepted auditing
standards. 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 financial position of Stewart
Information Services Corporation and subsidiaries as of December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1997 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
February 13, 1998
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CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
- ---------------------------------------------------------------------------------------------------------
Years ended December 31 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
($000 Omitted)
REVENUES
Title premiums, fees and other revenues . . . . . . . . . . . . 657,298 609,408 496,034
Real estate information services. . . . . . . . . . . . . . . . . 35,320 32,030 24,015
Investment income . . . . . . . . . . . . . . . . . . . . . . . . 15,929 14,451 13,564
Investment gains - net . . . . . . . . . . . . . . . . . . . . . 363 129 956
- ---------------------------------------------------------------------------------------------------------
708,910 656,018 534,569
EXPENSES
Amounts retained by agents . . . . . . . . . . . . . . . . . . . 334,563 311,937 252,064
Employee costs . . . . . . . . . . . . . . . . . . . . . . . . 188,385 170,944 140,795
Other operating expenses . . . . . . . . . . . . . . . . . . . 114,422 102,768 89,408
Title losses and related claims . . . . . . . . . . . . . . . . 29,794 33,830 29,591
Depreciation and amortization . . . . . . . . . . . . . . . . . 12,115 11,007 9,855
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,343 1,140 1,194
Minority interests . . . . . . . . . . . . . . . . . . . . . . 2,614 1,514 933
Nonrecurring charge . . . . . . . . . . . . . . . . . . . . . . 1,905 - -
- ---------------------------------------------------------------------------------------------------------
685,231 633,140 523,840
Earnings before taxes . . . . . . . . . . . . . . . . . . . . . . 23,679 22,878 10,729
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 8,391 8,441 3,722
- ---------------------------------------------------------------------------------------------------------
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,288 14,437 7,007
Retained earnings at beginning of year . . . . . . . . . . . . . . 131,496 118,547 112,754
Cash dividends on Common Stock ($.26, $.24 and $.21 per share) . . (1,644) (1,488) (1,214)
- ---------------------------------------------------------------------------------------------------------
Retained earnings at end of year . . . . . . . . . . . . . . . . . 145,140 131,496 118,547
- ---------------------------------------------------------------------------------------------------------
Average number of shares outstanding - assuming dilution
(000 omitted) . . . . . . . . . . . . . . . . . . . . . . . . . 6,897 6,766 6,348
Earnings per share - basic . . . . . . . . . . . . . . . . . . . . 2.24 2.15 1.11
Earnings per share - diluted . . . . . . . . . . . . . . . . . . . 2.22 2.13 1.10
- ---------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
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CONSOLIDATED BALANCE SHEETS
- - -------------------------------------------------------------------------------------------------------
December 31 1997 1996
- - -------------------------------------------------------------------------------------------------------
($000 Omitted)
Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,391 18,484
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,761 31,946
Investments in debt securities, at market:
Statutory reserve funds . . . . . . . . . . . . . . . . . . . . . . . . . . . 141,769 127,057
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,737 73,456
- - -------------------------------------------------------------------------------------------------------
209,506 200,513
Receivables:
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,329 5,686
Premiums from agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,315 10,107
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,776 22,493
Less allowance for uncollectible amounts . . . . . . . . . . . . . . . . . . (5,552) (6,670)
- - -------------------------------------------------------------------------------------------------------
31,868 31,616
Property and equipment, at cost:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,266 2,432
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,372 6,354
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,804 71,239
Less accumulated depreciation and amortization . . . . . . . . . . . . . . . (59,027) (51,840)
- - -------------------------------------------------------------------------------------------------------
30,415 28,185
Title plants, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,778 21,096
Real estate, at lower of cost or net realizable value . . . . . . . . . . . . . 1,583 1,866
Investments in investees, on an equity basis . . . . . . . . . . . . . . . . . 7,231 5,639
Goodwill, less accumulated amortization of $5,840 and $4,828 . . . . . . . . . 18,427 16,535
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,632 15,155
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,099 12,337
- - -------------------------------------------------------------------------------------------------------
417,691 383,372
- - -------------------------------------------------------------------------------------------------------
Liabilities
Notes payable, including $11,442 and $7,935 long-term portion . . . . . . . . . 19,087 12,324
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . 26,553 25,033
Estimated title losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156,791 150,331
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,364 419
Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,392 4,275
Contingent liabilities and commitments
Stockholders' equity
Common - $1 par, authorized 15,000,000, issued and outstanding
6,381,046 and 6,216,441 . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,381 6,216
Class B Common - $1 par, authorized 1,500,000, issued and outstanding 525,006 . 525 525
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . 52,922 50,833
Net unrealized investment gains, net of deferred taxes . . . . . . . . . . . . 4,536 1,920
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145,140 131,496
- - -------------------------------------------------------------------------------------------------------
Total stockholders' equity ($30.34 and $28.33 per share) . . . . . . . . . . 209,504 190,990
- - -------------------------------------------------------------------------------------------------------
417,691 383,372
- - -------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
- - -------------------------------------------------------------------------------------------------------
Years ended December 31 1997 1996 1995
- - -------------------------------------------------------------------------------------------------------
($000 Omitted)
Cash provided by operating activities (Note) . . . . . . . . . . . 33,828 36,750 20,568
Investing activities:
Purchases of property and equipment and title plants - net . . (13,209) (12,670) (6,700)
Proceeds from investments matured and sold . . . . . . . . . . 40,133 47,724 59,897
Purchases of investments . . . . . . . . . . . . . . . . . . . (48,554) (69,213) (68,608)
Increases in notes receivable . . . . . . . . . . . . . . . . . (2,644) (1,340) (1,081)
Collections on notes receivable . . . . . . . . . . . . . . . . 1,006 2,833 2,069
Cash paid for the acquisition of subsidiaries - net . . . . . . . (3,592) (493) (5,175)
Proceeds from issuance of stock . . . . . . . . . . . . . . . . 135 11 --
- - -------------------------------------------------------------------------------------------------------
Cash used by investing activities . . . . . . . . . . . . . . . . (26,725) (33,148) (19,598)
Financing activities:
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . (1,644) (1,488) (1,214)
Proceeds of notes payable . . . . . . . . . . . . . . . . . . . 10,688 4,366 7,937
Payments on notes payable . . . . . . . . . . . . . . . . . . . (4,240) (4,694) (7,209)
- - -------------------------------------------------------------------------------------------------------
Cash provided (used) by financing activities . . . . . . . . . . . 4,804 (1,816) (486)
- - -------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents . . . . . . . . . . . . . . 11,907 1,786 484
- - -------------------------------------------------------------------------------------------------------
Note: Reconciliation of net earnings to the above amounts
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . 15,288 14,437 7,007
Add (deduct):
Depreciation and amortization . . . . . . . . . . . . . . . . 12,115 11,007 9,855
Provisions for title losses in excess of payments . . . . . . 6,460 12,019 3,996
Provision for uncollectible amounts - net . . . . . . . . . . (1,118) 171 376
Decrease (increase) in accounts receivable - net . . . . . . 2,660 (2,419) 2,814
Increase (decrease) in accounts payable and accrued
liabilities - net . . . . . . . . . . . . . . . . . . . . . . 1,419 4,195 (1,834)
Provision (benefit) for deferred income taxes . . . . . . . . . (1,886) 596 1,344
Increase (decrease) in income tax payable . . . . . . . . . . . 945 (1,184) (708)
Minority interest expense . . . . . . . . . . . . . . . . . . 2,614 1,514 933
Equity in net earnings of investees . . . . . . . . . . . . . (1,964) (980) (700)
Realized investment gains - net . . . . . . . . . . . . . . . (363) (129) (956)
Stock bonuses . . . . . . . . . . . . . . . . . . . . . . . . 409 328 303
Increase in other assets . . . . . . . . . . . . . . . . . . (2,963) (1,151) (846)
Nonrecurring charge . . . . . . . . . . . . . . . . . . . . . . 1,905 -- --
Other - net . . . . . . . . . . . . . . . . . . . . . . . . . (1,693) (1,654) (1,016)
- - -------------------------------------------------------------------------------------------------------
Cash provided by operating activities . . . . . . . . . . . . . 33,828 36,750 20,568
- - -------------------------------------------------------------------------------------------------------
Supplemental information:
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . 7,636 9,004 3,283
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . 1,222 1,092 1,199
See notes to consolidated financial statements.
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