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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-12688
STEWART INFORMATION SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 74-1677330
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1980 POST OAK BLVD., HOUSTON, TEXAS 77056
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 625-8100
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $1 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained in this report, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |X| No | |
The aggregate market value of the Common Stock (based upon the closing
sales price of the Common Stock of Stewart Information Services Corporation, as
reported by the NYSE on June 30, 2003) held by non-affiliates of the Registrant
was approximately $468,922,091.
As of March 5, 2004, 17,050,124 shares of Common Stock, $1 par value, and
1,050,012 shares of Class B Common Stock, $1 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement (the "Proxy Statement"),
relating to the annual meeting of the Registrant's stockholders to be held April
30, 2004, are incorporated by reference in Parts III and IV of this document.
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FORM 10-K
ANNUAL REPORT
YEAR ENDED DECEMBER 31, 2003
TABLE OF CONTENTS
ITEM
NO. PAGE
- ---- ----
PART I
1. Business .................................................................. 1
2. Properties ................................................................ 4
3. Legal Proceedings ......................................................... 5
4. Submission of Matters to a Vote of Security Holders ....................... 5
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters ..... 6
6. Selected Financial Data ................................................... 7
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations ............................................................. 8
7A. Quantitative and Qualitative Disclosures About Market Risk ................ 11
8. Financial Statements and Supplementary Data ............................... 12
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ............................................................. 12
9A. Controls and Procedures ................................................... 12
PART III
10. Directors and Executive Officers of the Registrant ........................ 13
11. Executive Compensation .................................................... 13
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters ............................................ 13
13. Certain Relationships and Related Transactions ............................ 13
14. Principal Accountant Fees and Services .................................... 13
PART IV
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K ........... 14
Signatures ................................................................ 15
Forward-Looking Statements
All statements included in this report, other than statements of historical
facts, addressing activities, events or developments that we expect or
anticipate will or may occur in the future, are forward-looking statements. Such
forward-looking statements are subject to risks and uncertainties including,
among other things, changes in mortgage interest rates, employment levels,
actions of competitors, changes in real estate markets, general economic
conditions, legislation (primarily legislation related to title insurance) and
other risks and uncertainties discussed in our filings with the Securities and
Exchange Commission.
As used in this report, "we", "us", "Stewart" and "our" mean Stewart Information
Services Corporation and our subsidiaries, unless the context indicates
otherwise.
PART I
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
-1-
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):
2003 2002 2001
------ ------ ------
Housing starts - millions ............................ 1.85 1.71 1.60
Housing resales - millions ........................... 6.10 5.56 5.30
Housing resales - median sales price in $ thousands .. 169.9 158.3 147.8
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.
-2-
Title revenues by state. The approximate amounts and percentages of consolidated
title operating revenues for the last three years were:
Amounts ($ millions) Percentages
2003 2002 2001 2003 2002 2001
------ ------ ------ ------ ------ ------
California 416 305 194 19 18 16
Texas 264 234 190 12 14 16
Florida 159 119 88 7 7 7
New York 147 109 78 7 6 7
All others 1,156 918 638 55 55 54
------ ------ ------ ------ ------ ------
2,142 1,685 1,188 100 100 100
====== ====== ====== ====== ====== ======
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
-3-
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. PROPERTIES
We lease or own the following principal properties:
Lease
terminates/property
Location Type Use Size acquired in
- ----------------------- ---------------------- ------------------- -------------- -------------------
Houston, Texas Leased office building Executive office of 240,405 sq. ft. (1)
the Registrant and
Guaranty
Houston, Texas Leased office building Office of Guaranty 53,457 sq. ft. (2)
Houston, Texas Leased office building Office of Guaranty 41,361 sq. ft. (3)
Los Angeles, California Leased office building Office of Guaranty 33,872 sq. ft. (4)
Dallas, Texas Leased office building Office of Guaranty 27,402 sq. ft (5)
Riverside, California Leased office building Office of Guaranty 20,968 sq. ft. (6)
Seattle, Washington Leased office building Office of Guaranty 19,618 sq. ft. (2)
Concord, California Leased office building Office of Guaranty 18,916 sq. ft. (4)
Fairfax, Virginia Leased office building Office of Guaranty 18,852 sq. ft. (4)
San Diego, California Leased office building Office of Guaranty 15,000 sq. ft. (7)
Galveston, Texas Owned office building Office of Guaranty 50,000 sq. ft. 1905
San Antonio, Texas Owned office building Office of Guaranty 26,769 sq. ft. 1980 & 1982
Phoenix, Arizona Owned office building Office of Guaranty 24,459 sq. ft. 1981
Phoenix, Arizona Owned office building Office of Guaranty 17,500 sq. ft. 1985
Yuma, Arizona Owned office building Office of Guaranty 23,000 sq. ft. 2002
- --------------------------
(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.
-4-
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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
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.
HIGH LOW
------- -------
2003:
First quarter.............. $ 23.38 $ 20.76
Second quarter............. 30.20 23.23
Third quarter.............. 32.65 27.40
Fourth quarter............. 41.45 28.20
2002:
First quarter.............. $ 20.23 $ 16.40
Second quarter............. 20.55 17.10
Third quarter.............. 21.50 15.05
Fourth quarter............. 22.50 19.29
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.
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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 F-1 of this Report. See also Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
2003 2002 2001 2000 1999 1998 1997 1996 1995 1994
------- ------- ------- ------ ------- ------ ------ ------- ------ ------
IN MILLIONS OF DOLLARS
Total revenues ................ 2,243.3 1,779.7 1,271.6 935.5 1,071.3 968.8 708.9 656.0 534.6 611.1
Title segment:
Operating revenues ......... 2,142.5 1,684.9 1,187.5 865.6 993.7 899.7 657.3 609.4 496.0 599.5
Investment income .......... 19.8 20.7 19.9 19.1 18.2 18.5 15.9 14.5 13.6 12.4
Investment gains (losses) .. 2.3 3.0 .4 0 .3 .2 .4 .1 1.0 (.8)
Total revenues ............. 2,164.6 1,708.6 1,207.8 884.7 1,012.2 918.4 673.6 624.0 510.6 611.1
Pretax earnings ............ 187.4 145.1 75.3 5.8 43.6 73.2 29.2 22.5 10.8 13.8
REI segment: (1)
Revenues ................... 78.7 71.1 63.8 50.8 59.0 50.4 35.3 32.0 24.0
Pretax earnings (losses) ... 12.1 8.8 5.3 (4.7) 3.0 3.1 (5.5) .4 (.1)
Title loss provisions ......... 94.8 75.9 51.5 39.0 44.2 39.2 29.8 33.8 29.6 40.2
% of title operating
revenues ................ 4.4 4.5 4.3 4.5 4.4 4.4 4.5 5.6 6.0 6.7
Goodwill expense .............. -- -- 3.0 1.8 1.7 1.2 1.0 .9 .6 .3
Net earnings .................. 123.8 94.5 48.7 .6 28.4 47.0 15.3 14.4 7.0 9.7
Cash flow from operations ..... 193.9 162.6 108.2 31.9 57.9 86.5 36.0 38.3 20.6 27.7
Total assets .................. 1,031.9 844.0 677.9 563.4 535.7 498.5 417.7 383.4 351.4 325.2
Long-term debt ................ 17.3 7.4 7.0 15.4 6.0 8.9 11.4 7.9 7.3 2.5
Stockholders' equity .......... 621.4 493.6 394.5 295.1 284.9 260.4 209.5 191.0 174.9 156.4
PER SHARE DATA (2)
Average shares - diluted
(in millions) .............. 18.0 17.8 16.3 15.0 14.6 14.2 13.8 13.5 12.7 12.5
Net earnings - basic .......... 6.93 5.33 3.01 .04 1.96 3.37 1.12 1.08 .56 .78
Net earnings - diluted ........ 6.88 5.30 2.98 .04 1.95 3.32 1.11 1.07 .55 .77
Cash dividends ................ .46 -- -- -- .16 .14 .13 .12 .11 .10
Stockholders' equity .......... 34.47 27.84 22.16 19.61 19.39 18.43 15.17 14.17 13.68 12.59
Market price:
High ....................... 41.45 22.50 22.25 22.31 31.38 33.88 14.63 11.32 11.25 10.71
Low ........................ 20.76 15.05 15.80 12.25 10.25 14.25 9.38 9.82 7.57 7.19
Year end ................... 40.55 21.39 19.75 22.19 13.31 29.00 14.50 10.38 10.75 7.69
(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.
-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.
-8-
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:
Amounts ($ millions) Percentages
2003 2002 2001 2003 2002 2001
------ ------ ------ ------ ------ ------
California ............... 416 305 194 19 18 16
Texas .................... 264 234 190 12 14 16
Florida .................. 159 119 88 7 7 7
New York ................. 147 109 78 7 6 7
All others ............... 1,156 918 638 55 55 54
------ ------ ------ ------ ------ ------
2,142 1,685 1,188 100 100 100
====== ====== ====== ====== ====== ======
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.
-9-
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.
Employee costs (%) Other operating (%)
2003 2002 2001 2003 2002 2001
------ ------ ------ ------ ------ ------
Title ................ 24.7 24.5 27.6 13.7 13.8 15.6
REI .................. 56.9 57.0 59.6 27.2 26.8 26.1
====== ====== ====== ====== ====== ======
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.
Payments due by period ($ millions)
-----------------------------------------------------
Less than More than
1 year 1-3 years 3-5 years 5 years Total
--------- --------- --------- ---------
Long-term debt ............... 7 6 4 8 25
Operating leases ............. 39 54 32 51 176
--- --- --- --- ---
46 60 36 59 201
=== === === === ===
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.
-10-
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. 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):
Amortized Market
Cost value
--------- -------
($000 Omitted)
In one year or less ............................................. 22,375 22,549
After one year through two years ................................ 26,825 27,462
After two years through three years ............................. 31,507 32,805
After three years through four years ............................ 40,018 41,550
After four years through five years ............................. 59,052 61,874
After five years ................................................ 221,747 231,158
Mortgage-backed securities ...................................... 720 723
--------- -------
402,244 418,121
========= =======
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.
-11-
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. 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 F-1 to F-17, and such information is incorporated in this report by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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.
-12-
PART III
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. EXECUTIVE COMPENSATION
Information regarding executive compensation will be included in the Proxy
Statement and is incorporated in this report by reference.
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.
Number of securities Number of securities
to be issued upon Weighted average remaining available
exercise of exercise price of for future issuance
outstanding options, outstanding options, under equity
Plan category warrants and rights warrants and rights compensation plans
- ------------------------------------------ -------------------- -------------------- --------------------
Equity compensation plans approved by
security holders 342,978 18.75 1,028,068
Equity compensation plans not approved by
security holders(1) -- -- 426,197
------- ----- ---------
Total 342,978 18.75 1,454,265
======= ===== =========
(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. 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. 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.
-13-
PART IV
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 F-1 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.
-14-
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:
/s/ Lloyd Bentsen III Director March 15, 2004 /s/ John P. LaWare Director March 15, 2004
- ------------------------- -------------------------
(Lloyd Bentsen III) (John P. LaWare)
/s/ Max Crisp Director March 15, 2004 /s/ Malcolm S. Morris Director March 15, 2004
- ------------------------- -------------------------
(Max Crisp) (Malcolm S. Morris)
/s/ Nita Hanks Director March 15, 2004 /s/ Stewart Morris, Jr. Director March 15, 2004
- ------------------------- -------------------------
(Nita Hanks) (Stewart Morris, Jr.)
/s/ Paul Hobby Director March 15, 2004 /s/ W. Arthur Porter Director March 15, 2004
- ------------------------- -------------------------
(Paul Hobby) (W. Arthur Porter)
/s/ E. Douglas Hodo Director March 15, 2004
- -------------------------
(E. Douglas Hodo)
-15-
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Stewart Information Services Corporation and Subsidiaries'
Consolidated Financial Statements:
Independent Auditors' Report F-2
Consolidated Statements of Earnings, Retained Earnings and Comprehensive
Earnings for the years ended December 31, 2003, 2002 and 2001 F-3
Consolidated Balance Sheets as of December 31, 2003 and 2002 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001 F-5
Notes to Consolidated Financial Statements F-6
Financial Statement Schedules:
Schedule I - Financial Information of the Registrant (Parent Company) S-1
Schedule II - Valuation and Qualifying Accounts S-5
F-1
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
F-2
CONSOLIDATED STATEMENTS OF EARNINGS, RETAINED EARNINGS AND COMPREHENSIVE
EARNINGS
Years ended December 31 2003 2002 2001
- -------------------------------------------------------- ---------- ---------- ----------
($000 Omitted)
REVENUES
Title insurance:
Direct operations ................................. 892,686 689,588 525,543
Agency operations ................................. 1,249,800 995,283 661,943
Real estate information services ..................... 78,666 71,119 63,821
Investment income .................................... 19,800 20,694 19,922
Investment gains - net ............................... 2,310 3,032 356
---------- ---------- ----------
2,243,262 1,779,716 1,271,585
EXPENSES
Amounts retained by agencies ...................... 1,024,282 814,651 539,369
Employee costs .................................... 573,486 453,304 365,562
Other operating expenses .......................... 311,741 250,933 202,342
Title losses and related claims ................... 94,827 75,920 51,454
Depreciation ...................................... 25,240 21,383 19,637
Goodwill .......................................... -- -- 3,011
Interest .......................................... 721 725 2,216
Minority interests ................................ 13,462 8,940 7,414
---------- ---------- ----------
2,043,759 1,625,856 1,191,005
Earnings before taxes .................................. 199,503 153,860 80,580
Income taxes ........................................... 75,748 59,380 31,894
---------- ---------- ----------
NET EARNINGS ........................................... 123,755 94,480 48,686
Retained earnings at beginning of year ................. 353,226 258,746 210,060
Cash dividends on Common Stock ($.46 per share in 2003). (7,874) -- --
---------- ---------- ----------
Retained earnings at end of year ....................... 469,107 353,226 258,746
========== ========== ==========
Average number of shares outstanding - assuming dilution
(000 omitted) ....................................... 17,980 17,826 16,348
Earnings per share - basic ............................. 6.93 5.33 3.01
EARNINGS PER SHARE - DILUTED ........................... 6.88 5.30 2.98
========== ========== ==========
Comprehensive earnings:
Net earnings ........................................... 123,755 94,480 48,686
Changes in other comprehensive earnings, net of taxes
of $3,056, $2,797 and $1,158 ........................ 5,675 5,195 2,151
---------- ---------- ----------
COMPREHENSIVE EARNINGS ................................. 129,430 99,675 50,837
========== ========== ==========
See notes to consolidated financial statements.
F-3
CONSOLIDATED BALANCE SHEETS
December 31 2003 2002
- -------------------------------------------------------------------------------- ---------- ----------
($000 Omitted)
ASSETS
Cash and cash equivalents .................................................. 114,202 139,156
Short-term investments ..................................................... 153,322 50,673
Investments in debt and equity securities, at market:
Statutory reserve funds ................................................ 375,421 306,501
Other .................................................................. 59,035 69,260
---------- ----------
434,456 375,761
Receivables:
Notes .................................................................. 6,155 5,817
Premiums from agencies ................................................. 36,672 34,311
Income taxes receivable ................................................ 7,198 --
Other .................................................................. 35,260 34,221
Less allowance for uncollectible amounts ............................... (6,260) (5,308)
---------- ----------
79,025 69,041
Property and equipment, at cost:
Land ................................................................... 5,785 5,785
Buildings .............................................................. 10,647 9,672
Furniture and equipment ................................................ 192,648 169,483
Less accumulated depreciation and amortization ......................... (134,906) (123,099)
---------- ----------
74,174 61,841
Title plants, at cost ...................................................... 43,216 40,307
Real estate, at lower of cost or net realizable value ...................... 2,306 1,349
Investments in investees, on an equity basis ............................... 16,194 10,674
Goodwill, less accumulated amortization of $13,479 ......................... 79,084 66,885
Other assets ............................................................... 35,888 28,299
---------- ----------
1,031,867 843,986
========== ==========
LIABILITIES
Notes payable, including $17,329 and $7,354 long-term portion .............. 24,583 14,195
Accounts payable and accrued liabilities ................................... 82,147 83,961
Estimated title losses ..................................................... 268,089 230,058
Deferred income taxes ...................................................... 22,440 11,284
Minority interests ......................................................... 13,219 10,896
Contingent liabilities and commitments
STOCKHOLDERS' EQUITY
Common - $1 par, authorized 30,000,000, issued and outstanding
16,976,010 and 16,681,212 .............................................. 17,302 17,007
Class B Common - $1 par, authorized 1,500,000, issued and outstanding
1,050,012 .............................................................. 1,050 1,050
Additional paid-in capital ................................................. 122,816 116,870
Retained earnings .......................................................... 469,107 353,226
Accumulated other comprehensive earnings:
Unrealized investment gains ............................................ 12,086 9,039
Foreign currency translation adjustments ............................... 2,933 305
Treasury stock - 325,669 Common shares, at cost ............................ (3,905) (3,905)
Total stockholders' equity .......................................... 621,389 493,592
---------- ----------
1,031,867 843,986
========== ==========
See notes to consolidated financial statements.
F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31 2003 2002 2001
- -------------------------------------------------------------------------- -------- -------- --------
($000 Omitted)
CASH PROVIDED BY OPERATING ACTIVITIES (NOTE) ............................. 193,940 162,551 108,186
Investing activities:
Proceeds from investments matured and sold ........................... 264,318 163,737 70,074
Purchases of investments ............................................. (416,258) (197,748) (135,579)
Purchases of property and equipment, title plants and real estate -
net ............................................................... (37,236) (30,165) (23,452)
Increases in notes receivable ........................................ (1,329) (3,198) (3,208)
Collections on notes receivable ...................................... 1,352 6,305 11,531
Cash paid for equity investees and related intangibles ............... (7,000) -- --
Cash paid for acquisitions of subsidiaries - net (see below) ......... (15,952) (12,502) (13,016)
-------- -------- --------
CASH USED BY INVESTING ACTIVITIES ........................................ (212,105) (73,571) (93,650)
Financing activities:
Dividends paid ....................................................... (7,874) -- --
Distributions to minority interests .................................. (11,433) (7,713) (5,926)
Proceeds from exercise of stock options .............................. 3,878 467 337
Proceeds from stock offering - net ................................... -- -- 44,509
Proceeds from notes payable .......................................... 15,748 4,259 6,597
Payments on notes payable ............................................ (7,108) (7,543)
(35,852)
-------- -------- --------
CASH (USED) PROVIDED BY FINANCING ACTIVITIES ............................. (6,789) (10,530) 9,665
-------- -------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ......................... (24,954) 78,450 24,201
======== ======== ========
Note: Reconciliation of net earnings to the above amounts
Net earnings .......................................................... 123,755 94,480 48,686
Add (deduct):
Depreciation and amortization ...................................... 25,240 21,383 22,648
Provisions for title losses in excess of payments .................. 36,849 27,306 11,483
Increase in receivables - net ...................................... (9,848) (18,785) (1,660)
(Decrease) increase in payables and accrued liabilities - net ....... (3,317) 21,878 18,450
Minority interest expense .......................................... 13,462 8,940 7,414
Net earnings from equity investees ................................. (6,586) (3,420) (1,345)
Dividends received from equity investees ........................... 6,579 2,892 2,275
Provision for deferred income taxes ................................ 9,375 12,775 1,897
Other - net ........................................................ (1,569) (4,898) (1,662)
-------- -------- --------
Cash provided by operating activities .................................... 193,940 162,551 108,186
======== ======== ========
Supplemental information:
Assets acquired (purchase method):
Goodwill ........................................................... 13,655 11,739 19,312
Title plants ....................................................... 1,830 537 5,056
Other .............................................................. 5,400 4,580 4,830
Liabilities assumed ................................................... (4,933) (6,574) (4,023)
Debt issued ........................................................... -- -- (8,939)
Common Stock issued ................................................... -- -- (3,220)
Treasury stock acquired ............................................... -- 2,220 --
-------- -------- --------
Cash paid for acquisitions of subsidiaries - net ...................... 15,952 12,502 13,016
======== ======== ========
Income taxes paid ..................................................... 76,720 23,645 14,615
Interest paid ......................................................... 618 730 1,649
======== ======== ========
See notes to consolidated financial statements.
F-5
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.
F-6
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.
F-7
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:
2003 2002 2001
-------- ------- -------
($000 Omitted)
Net earnings:
As reported .................................... 123,755 94,480 48,686
Stock-based employee compensation
determined under fair value method .......... (718) (616) (630)
-------- ------- -------
Pro forma ...................................... 123,037 93,864 48,056
======== ======= =======
Earnings per share:
Net earnings - basic ............................ 6.93 5.33 3.01
Pro forma - basic ............................... 6.89 5.29 2.97
Net earnings - diluted .......................... 6.88 5.30 2.98
Pro forma - diluted ............................. 6.84 5.27 2.94
-------- ------- -------
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.
F-8
NOTE 4
INVESTMENTS. The amortized costs and market values of debt and equity securities
at December 31 follow:
2003 2002
------------------- -------------------
AMORTIZED MARKET Amortized Market
COST VALUE cost value
--------- ------- --------- -------
($000 Omitted)
Debt securities:
Municipal .............................................. 180,294 187,205 152,808 159,453
Corporate and utilities ................................ 137,829 145,273 127,265 132,502
U.S. Government ........................................ 28,660 28,795 38,741 39,798
Foreign bonds .......................................... 54,741 56,125 33,008 34,748
Mortgage-backed ........................................ 720 723 1,324 1,360
Equity securities .......................................... 13,619 16,335 8,709 7,900
------- ------- ------- -------
415,863 434,456 361,855 375,761
======= ======= ======= =======
Gross unrealized gains and losses at December 31 were:
2003 2002
--------------- ---------------
GAINS LOSSES Gains Losses
------ ------ ------ ------
($000 Omitted)
Debt securities:
Municipal .............................................. 7,167 256 6,797 152
Corporate and utilities ................................ 7,596 152 6,472 1,235
U.S. Government ........................................ 358 223 1,057 --
Foreign bonds .......................................... 1,498 114 1,742 2
Mortgage-backed ........................................ 17 14 36 --
Equity securities .......................................... 2,759 43 295 1,104
------ ---- ------ ------
19,395 802 16,399 2,493
====== ==== ====== ======
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):
Amortized Market
cost value
--------- -------
($000 Omitted)
In one year or less ........................................ 22,375 22,549
After one year through five years .......................... 157,402 163,691
After five years through ten years ......................... 157,474 164,266
After ten years ............................................ 64,273 66,892
Mortgage-backed securities ................................. 720 723
--------- -------
402,244 418,121
========= =======
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.
F-9
NOTE 5
INVESTMENT INCOME. Income from investments and realized gains and losses for the
three years follow:
2003 2002 2001
------ ------ ------
($000 Omitted)
Income:
Debt securities ..................................... 17,802 17,484 15,614
Short-term investments, cash equivalents and other .. 1,998 3,210 4,308
------ ------ ------
19,800 20,694 19,922
====== ====== ======
Realized gains and losses:
Gains ............................................... 5,239 7,966(1) 1,308
Losses .............................................. (2,929) (4,934) (952)
------ ------ ------
2,310 3,032 356
====== ====== ======
(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:
2003 2002
------- -------
($000 Omitted)
Deferred tax assets:
Accruals not currently deductible ............. 1,446 1,313
Net operating loss carryforwards .............. 171 213
Allowance for uncollectible amounts ........... 1,251 963
Book over tax depreciation and amortization ... 516 2,314
Investments in partnerships ................... 1,498 1,222
Foreign tax credit carryforwards .............. 1,490 1,409
Other ......................................... 2,545 1,711
------- -------
8,917 9,145
Less valuation allowance ...................... (1,292) (1,292)
------- -------
7,625 7,853
Deferred tax liabilities:
Tax over book title loss provisions ........... (20,552) (13,051)
Unrealized gains on investments ............... (6,507) (4,867)
Other ......................................... (3,006) (1,219)
------- -------
(30,065) (19,137)
------- -------
Net deferred income taxes ........................ (22,440) (11,284)
======= =======
F-10
The following reconciles federal income taxes computed at the statutory
rate with income taxes as reported.
2003 2002 2001
------ ------ ------
($000 Omitted)
Expected income taxes at 35% ............ 69,826 53,851 28,203
State income taxes - net ................ 4,073 3,268 1,976
Foreign taxes - net of tax credits ...... 864 1,761 528
Tax effect of permanent differences:
Tax-exempt interest ................. (2,052) (2,009) (1,966)
Meals and entertainment ............. 1,680 1,140 1,079
Goodwill ............................ -- -- 933
Net earnings from equity investees .. (2,305) (1,197) (471)
Minority interests .................. 2,003 1,201 997
Non-taxable income .................. (1,609) (1,303) (1,434)
Other - net ......................... 3,268 2,668 2,049
------ ------ ------
Income taxes ............................ 75,748 59,380 31,894
Effective income tax rate (%) ........... 38.0 38.6 39.6
====== ====== ======
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:
2003 2002 2001
------ ------ ------
($000 Omitted)
For the year:
Revenues ............................ 72,997 47,723 51,318
Net earnings ........................ 13,443 7,635 3,617
At December 31:
Total assets ........................ 18,422 18,255
Notes payable ....................... 2,597 3,566
Stockholders' equity ................ 12,429 12,423
====== ====== ======
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.
F-11
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.
2003 2002
------ ------
($000 Omitted)
Banks
Primarily unsecured and at LIBOR (1) plus .75%, varying payments ............ 21,479 9,759
Other than banks ............................................................... 3,104 4,436
------ ------
24,583 14,195
====== ======
(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:
2003 2002 2001
------- ------- -------
($000 Omitted)
Balances at January 1 .................. 230,058 202,544 190,298
Provisions ......................... 94,827 75,920 51,454
Payments ........................... (57,978) (48,441) (39,721)
Reserve balances acquired .......... 1,182 35 763
Decreases in salvage ............... -- -- (250)
------- ------- -------
Balances at December 31 ................ 268,089 230,058 202,544
======= ======= =======
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.
F-12
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.
COMMON
AND CLASS B ADDITIONAL OTHER
COMMON PAID-IN COMPREHENSIVE TREASURY
STOCK CAPITAL EARNINGS STOCK
----------- ---------- ------------- --------
($000 Omitted)
Balances at December 31, 2000 ............... 15,168 69,375 1,998 (1,512)
Stock offering .......................... 2,500 42,009 -- --
Acquisitions ............................ 198 3,022 -- --
Stock bonuses and other ................. 25 474 -- --
Exercise of stock options ............... 27 310 -- --
Tax benefit of stock options exercised .. -- 49 -- --
Unrealized investment gains ............. -- -- 2,135 --
Realized gain reclassification .......... -- -- (180) --
Foreign currency translation ............ -- -- 196 --
----------- ---------- ------------- --------
Balances at December 31, 2001 ............... 17,918 115,239 4,149 (1,512)
Stock bonuses and other ................. 44 747 -- --
Exercise of stock options ............... 95 372 -- --
Tax benefit of stock options exercised .. -- 512 -- --
Unrealized investment gains ............. -- -- 7,205 --
Realized gain reclassification .......... -- -- (2,009) --
Foreign currency translation ............ -- -- (1) --
Common stock repurchased ................ -- -- -- (2,220)
Common stock forfeited .................. -- -- -- (173)
----------- ---------- ------------- --------
Balances at December 31, 2002 ............... 18,057 116,870 9,344 (3,905)
Stock bonuses and other ................. 43 1,053 -- --
Exercise of stock options ............... 252 3,626 -- --
Tax benefit of stock options exercised .. -- 1,267 -- --
Unrealized investment gains ............. -- -- 3,446 --
Realized gain reclassification .......... -- -- (399) --
Foreign currency translation ............ -- -- 2,628 --
----------- ---------- ------------- --------
BALANCES AT DECEMBER 31, 2003 ............... 18,352 122,816 15,019 (3,905)
=========== ========== ============= ========
In August 2001 the Company issued 2,500,000 shares of Common Stock in an
offering at a price of $19 per share.
F-13
NOTE 13
STOCK OPTIONS. A summary of the status of the Company's fixed stock option plans
for the three years follows:
Exercise
Shares prices (1)
-------- ----------
($)
December 31, 2000 ...................... 470,200 12.83
Granted ............................ 84,100 19.37
Exercised .......................... (27,100) 12.43
Forfeited .......................... (11,000) 18.81
-------- ----------
December 31, 2001 ...................... 516,200 13.79
Granted ............................ 86,100 19.02
Exercised .......................... (94,800) 4.98
Forfeited .......................... (2,800) 20.22
-------- ----------
December 31, 2002 ...................... 504,700 16.31
Granted ............................. 89,700 23.16
Exercised ........................... (251,422) 15.42
Forfeited ........................... -- --
-------- ----------
DECEMBER 31, 2003 ...................... 342,978 18.75
======== ==========
(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
$11.53, respectively.
The following summarizes information about fixed stock options outstanding
and exercisable at December 31, 2003:
Range of exercise prices ($)
9.75 to 19.10 to
18.94 26.87 Total
---------- ---------- ----------
Shares ........................................... 119,978 223,000 342,978
Remaining contractual life - years (1) ........... 5.1 7.9 6.9
Exercise price ($)(1) ............................ 14.75 20.90 18.75
========== ========== ==========
(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.
F-14
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):
2004................................................ 39,152
2005................................................ 30,098
2006................................................ 23,390
2007................................................ 17,821
2008................................................ 13,912
2009 and after...................................... 51,317
-------
175,690
=======
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.
F-15
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.
Title REI Total
--------- --------- ---------
($000 Omitted)
2003:
Revenues ................................ 2,164,596 78,666 2,243,262
Intersegment revenues ................... 1,843 3,752 5,595
Depreciation and amortization ........... 21,535 3,705 25,240
Pretax earnings ......................... 187,377 12,126 199,503
Identifiable assets ..................... 988,384 43,483 1,031,867
2002:
Revenues ................................ 1,708,597 71,119 1,779,716
Intersegment revenues ................... 2,063 1,398 3,461
Depreciation and amortization ........... 18,545 2,838 21,383
Pretax earnings ......................... 145,059 8,801 153,860
Identifiable assets ..................... 799,567 44,419 843,986
2001:
Revenues ................................ 1,207,764 63,821 1,271,585
Intersegment revenues ................... 2,023 3,787 5,810
Depreciation and amortization ........... 18,389 4,259 22,648
Pretax earnings ......................... 75,294 5,286 80,580
========= ========= =========
NOTE 19
QUARTERLY FINANCIAL INFORMATION (UNAUDITED).
Mar 31 June 30 Sept 30 Dec 31
------- ------- ------- -------
($000 Omitted, except per share)
Revenues:
2003 .................................... 440,924 558,075 629,388 614,875
2002 .................................... 347,974 407,128 473,345 551,269
Net earnings:
2003 .................................... 19,875 41,030 42,068 20,782
2002 .................................... 11,344 17,711 21,597 43,828
Earnings per share - diluted:
2003 .................................... 1.11 2.28 2.34 1.15
2002 .................................... .63 .99 1.22 2.46
======= ======= ======= =======
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.
F-16
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
Stewart Title Stewart Title
December 31, 2003 Guaranty Company Insurance Company
- -------------------------------------------------------------------------------- ---------------- -----------------
($000 Omitted)
Admitted assets
Bonds ...................................................................... 342,129 40,317
Stocks - investments in affiliates ......................................... 313,100 --
Stocks - other ............................................................. 16,274 --
Cash and short-term investments ............................................ 64,819 5,948
Title plants ............................................................... 3,734 67
Title insurance premiums and fees receivable ............................... 27,670 1,627
Other ...................................................................... 24,178 1,682
------- ------
791,904 49,641
======= ======
Liabilities, surplus and other funds
Reserve for title losses ................................................... 41,541 9,490
Statutory premium reserve .................................................. 333,098 15,957
Other ...................................................................... 42,469 8,201
------- ------
417,108 33,648
Surplus as regards policyholders (Note) ........................................ 374,796 15,993
------- ------
791,904 49,641
======= ======
Consolidated stockholder's equity (unaudited), based on accounting principles
generally accepted in the United States of America (GAAP), for Stewart Title
Guaranty Company at December 31, 2003 (000 omitted) ............................ $ 542,541
=========
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.
F-17
SCHEDULE I
STEWART INFORMATION SERVICES CORPORATION
(PARENT COMPANY)
EARNINGS AND RETAINED EARNINGS INFORMATION
Years Ended December 31,
---------------------------------
2003 2002 2001
--------- --------- ---------
(In thousands)
REVENUES
Investment income ........................................ $ 245 $ 532 $ 471
Other income ............................................. 36 418 80
--------- --------- ---------
281 950 551
EXPENSES
Employee costs ........................................... 846 284 220
Other operating expenses ................................. 3,971 3,531 2,913
Depreciation ............................................. 243 70 39
--------- --------- ---------
5,060 3,885 3,172
Loss before taxes and earnings from equity investees ........ (4,779) (2,935) (2,621)
Income tax benefit .......................................... 1,012 772 678
Earnings from equity investees .............................. 127,522 96,643 50,629
--------- --------- ---------
NET EARNINGS................................................. 123,755 94,480 48,686
Retained earnings at beginning of year ...................... 353,226 258,746 210,060
Cash dividends on Common Stock ($.46 per share in 2003) ..... (7,874) -- --
--------- --------- ---------
Retained earnings at end of year ............................ $ 469,107 $ 353,226 $ 258,746
========= ========= =========
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
December 31,
----------------------
2003 2002
--------- ---------
(In thousands)
ASSETS
Cash and cash equivalents ...................................................... 3,145 $ 933
Short-term investments ......................................................... 100 200
Investments in debt securities, at market ...................................... 22,018 9,756
Receivables:
Notes, including $16,399 and $23,399 from affiliate .......................... 16,663 23,595
Other, including $12,526 and $554 from affiliates ............................ 13,154 631
Less allowance for uncollectible amounts ..................................... (71) (20)
--------- ---------
29,746 24,206
Land ........................................................................... 2,857 2,857
Buildings ...................................................................... 455 455
Furniture and equipment, at cost ............................................... 3,031 1,149
Less accumulated depreciation .................................................. (421) (205)
--------- ---------
5,922 4,256
Title plants, at cost .......................................................... 48 48
Investments in investees, on an equity basis ................................... 559,765 451,380
Other assets ................................................................... 7,686 4,577
--------- ---------
$ 628,430 $ 495,356
========= =========
LIABILITIES
Notes payable ................................................................ $ 196 $ 265
Accounts payable and accrued liabilities ..................................... 6,845 1,499
Contingent liabilities and commitments
STOCKHOLDERS' EQUITY
Common - $1 par, authorized 30,000,000, issued and outstanding 16,976,010
and 16,681,212 .............................................................. 17,302 17,007
Class B Common - $1 par, authorized 1,500,000, issued and outstanding 1,050,012. 1,050 1,050
Additional paid-in capital ..................................................... 122,816 116,870
Retained earnings(1) ........................................................... 469,107 353,226
Accumulated other comprehensive earnings:
Unrealized investment gains ................................................ 12,086 9,039
Foreign currency translations adjustments .................................. 2,933 305
Treasury stock - 325,669 Common shares, at cost ................................ (3,905) (3,905)
--------- ---------
Total stockholders' equity .............................................. 621,389 493,592
--------- ---------
$ 628,430 $ 495,356
========= =========
(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
Years Ended December 31,
-----------------------------------
2003 2002 2001
--------- --------- ---------
(In thousands)
CASH USED BY OPERATING ACTIVITIES (NOTE) ................. $ (3,205) $ (1,685) $ (279)
Investing activities:
Proceeds from investments matured and sold ............ 15,951 19,799 3,484
Purchases of investments .............................. (28,205) (11,686) (16,902)
Purchases of property and equipment - net ............. (1,882) (4,209) (70)
Increases in notes receivables ........................ (100) (93) (29,603)
Collections on notes receivables ...................... 7,032 9,529 1,440
Dividends received from subsidiary .................... 22,290 90 1,390
Cash paid for acquisitions of subsidiaries - net ...... (5,604) (11,382) (4,067)
--------- --------- ---------
CASH PROVIDED (USED) BY INVESTING ACTIVITIES ............. 9,482 2,048 (44,328)
--------- --------- ---------
Financing activities:
Dividends paid ........................................ (7,874) -- --
Proceeds from exercise of stock options ............... 3,878 467 337
Proceeds from stock offering - net .................... -- -- 44,509
Payments on notes payable ............................. (69) (64) (448)
--------- --------- ---------
CASH (USED) PROVIDED BY FINANCING ACTIVITIES ............. (4,065) 403 44,398
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ......... $ 2,212 $ 766 $ (209)
========= ========= =========
Note: Reconciliation of net earnings to the above amounts
Net earnings .......................................... $ 123,755 $ 94,480 $ 48,686
Add (deduct):
Depreciation and amortization ...................... 243 70 39
(Increase) decrease in receivables - net ........... (12,523) 2 1,606
Increase (decrease) in payables and accrued
liabilities - net ................................ 5,345 (705) 36
Net earnings from equity investees ................. (127,522) (96,643) (50,629)
Provision for deferred income taxes ................ 1,403 (281) 170
Other - net ........................................ 6,094 1,392 (187)
--------- --------- ---------
Cash used by operating activities ..................... $ (3,205) $ (1,685) $ (279)
========= ========= =========
Supplemental information:
Income taxes paid ................................... -- -- --
Interest paid ....................................... -- -- --
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
Col. C
Col. A Col. B Additions Col. D Col. E
- -------------------------------------- ------------- ------------ ----------- ------------ -------------
Balance Charged Charged to
at to other Balance
beginning costs and accounts Deductions at end
Description of period expenses (described) (described) of period
- -------------------------------------- ------------- ------------ ----------- ------------ -------------
Stewart Information Services
Corporation and subsidiaries:
Year ended December 31, 2001:
Estimated title losses............. $ 190,298,141 $ 51,453,895 $ 763,000(C) $ 39,970,656(A) $ 202,544,380
Allowance for uncollectible
amounts......................... 5,126,818 1,600,000 -- 2,062,348(B) 4,664,470
Year ended December 31, 2002:
Estimated title losses............. 202,544,380 75,920,324 35,000(C) 48,442,030(A) 230,057,674
Allowance for uncollectible
amounts......................... 4,664,470 2,223,000 -- 1,579,908(B) 5,307,562
Year ended December 31, 2003:
Estimated title losses............. 230,057,674 94,826,566 1,182,000(C) 57,977,311(A) 268,088,929
Allowance for uncollectible
amounts......................... 5,307,562 2,522,000 -- 1,569,738(B) 6,259,824
Stewart Information Services
Corporation - Parent:
Year ended December 31, 2001:
Allowance for uncollectible amounts $ 20,000 -- -- -- $ 20,000
Year ended December 31, 2002:
Allowance for uncollectible amounts 20,000 -- -- $ 294(B) 19,706
Year ended December 31, 2003:
Allowance for uncollectible amounts 19,706 $ 53,415 -- 1,975(B) 71,146
(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
Exhibit
- -------
3.1 - Certificate of Incorporation of the Registrant, as amended March
19, 2001 (incorporated by reference in this report from Exhibit
3.1 of the Annual Report on Form 10-K for the fiscal year ended
December 31, 2000)
3.2 - By-Laws of the Registrant, as amended March 13, 2000 (incorporated
by reference in this report from Exhibit 3.2 of the Annual Report
on Form 10-K for the fiscal year ended December 31, 2000)
4. - Rights of Common and Class B Common Stockholders (incorporated by
reference to Exhibits 3.1 and 3.2 hereto)
10.1 - Summary of agreements as to payment of bonuses to certain
executive officers
10.2 - Deferred Compensation Agreements dated March 10, 1986, amended
July 24, 1990 and October 30, 1992, between the Registrant and
certain executive officers (incorporated by reference in this
report from Exhibit 10.2 of the Annual Report on Form 10-K for the
fiscal year ended December 31, 1997)
10.3 - Stewart Information Services Corporation 1999 Stock Option Plan
(incorporated by reference in this report from Exhibit 10.3 of the
Annual Report on Form 10-K for the fiscal year ended December 31,
1999)
10.4 - Stewart Information Services Corporation 2002 Stock Option Plan
for Region Managers (incorporated by reference in this report from
Exhibit 10.4 of the Quarterly Report on Form 10-Q for the quarter
ended March 31, 2002)
21. - Subsidiaries of the Registrant
23. - Consent of Independent Certified Public Accountant, including
consent to incorporation by reference of their reports into
previously filed Securities Act registration statements
31.1 - Certification of Co-Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 - Certification of Co-Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.3 - Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 - Certification of Co-Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 - Certification of Co-Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.3 - Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002