FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
[ ] 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 of (I.R.S. Employer Identification No.)
incorporation or organization)
1980 Post Oak Blvd., Houston TX 77056
------------------------------------------------------------
(Address of principal executive offices, including zip code)
(713) 625-8100
----------------------------------------------------
(Registrant's telephone number, including area code)
-------------------------------------------------------------------------------
(Former name,former address and former fiscal year,if changed since last report)
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, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common 6,648,217
Class B Common 525,006
<PAGE>
FORM 10-Q
QUARTERLY REPORT
Quarter Ended March 31, 1999
TABLE OF CONTENTS
Item No. Page
- -------- ----
Part I
1. Financial Statements 1
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5
3. Quantitative and Qualitative Disclosures About
Market Risk 7
Part II
1. Legal Proceedings 9
5. Other Information 9
6. Exhibits and Reports on Form 8-K 8
Signature 10
<PAGE>
STEWART INFORMATION SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED
MARCH 31, 1999 and 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
MAR 31 MAR 31
1999 1998
------- -------
<S> <C> <C>
($000 Omitted)
Revenues
Title premiums, fees and other revenues 227,716 180,984
Real estate information services 15,091 11,716
Investment income 4,907 4,274
Investment gains - net 164 68
------- -------
247,878 197,042
Expenses
Amounts retained by agents 112,134 85,910
Employee costs 69,499 55,074
Other operating expenses 36,461 29,812
Title losses and related claims 9,266 8,215
Depreciation and amortization 3,875 3,270
Interest 286 387
Minority interests 990 902
------- -------
232,511 183,570
------- -------
Earnings before taxes 15,367 13,472
Income taxes 5,767 4,847
------- -------
Net earnings 9,600 8,625
======= =======
Average number of shares outstanding - assuming dilution (000) 7,168 7,015
Earnings per share - basic 1.35 1.25
Earnings per share - diluted 1.34 1.23
======= =======
Comprehensive earnings:
Net earnings 9,600 8,625
Changes in unrealized investment gains, net of taxes of
$(1,190) and $(339) (2,210) (628)
------- -------
Comprehensive earnings 7,390 7,997
======= =======
</TABLE>
-1-
<PAGE>
STEWART INFORMATION SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
MAR 31 DEC 31
1999 1998
---------- ----------
($000 Omitted)
<S> <C> <C>
Assets
Cash and cash equivalents 47,200 44,883
Short-term investments 60,497 59,446
Investments - statutory reserve funds 167,774 164,554
Investments - other 56,848 62,758
Receivables 43,310 46,732
Property and equipment 37,266 36,392
Title plants 24,111 23,608
Goodwill 25,808 23,615
Deferred income taxes 11,915 10,633
Other 22,643 25,860
---------- ----------
497,372 498,481
========== ==========
Liabilities
Notes payable 15,547 16,194
Accounts payable and accrued liabilities 33,692 44,578
Estimated title losses 172,137 171,763
Minority interests 6,468 5,503
Contingent liabilities and commitments
Stockholders' equity
Common and Class B Common Stock and
additional paid-in capital 66,174 63,951
Retained earnings 199,435 190,363
Accumulated other comprehensive earnings 3,919 6,129
---------- -----------
Total stockholders' equity ($37.88 per share at
March 31, 1999) 269,528 260,443
---------- -----------
497,372 498,481
========== ===========
</TABLE>
-2-
<PAGE>
STEWART INFORMATION SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------
MAR 31 MAR 31
1999 1998
-------- --------
($000 Omitted)
<S> <C> <C>
Cash provided by operating activities (Note) 9,858 12,030
Investing activities:
Purchases of property and equipment and title plants - net (4,874) (4,126)
Proceeds from investments matured and sold 8,034 16,900
Purchases of investments (9,469) (28,214)
Increases in notes receivable (1,617) (1,100)
Collections on notes receivable 350 517
Cash received (paid)for the sale or purchase of subsidiaries - net 1,817 (743)
-------- --------
Cash used by investing activities (5,759) (16,766)
Financing activities:
Dividends paid (527) (449)
Distribution to minority interests (530) (535)
Proceeds from issuance of stock 104 354
Proceeds of notes payable 2,346 3,498
Payments on notes payable (3,175) (1,096)
-------- --------
Cash (used) provided by financing activities (1,782) 1,772
-------- --------
Increase (decrease) in cash and cash equivalents 2,317 (2,964)
========= =========
</TABLE>
NOTE: Reconciliation of net earnings to the above amounts -
<TABLE>
<S> <C> <C>
Net earnings 9,600 8,625
Add (deduct):
Depreciation and amortization 3,875 3,270
Provision for title losses in excess of payments 374 4,265
Provision for uncollectible amounts - net (160) (508)
Decrease (increase) in accounts receivable - net 9,070 (2,889)
Decrease in accounts payable and accrued liabilities - net (12,802) (637)
Minority interest expense 990 902
Equity in net earnings of investees (274) (320)
Realized investment gains - net (164) (68)
Stock bonuses 527 342
Increase in other assets (1,224) (91)
Other, net 46 (861)
-------- --------
Cash provided by operating activities 9,858 12,030
======== ========
</TABLE>
-3-
<PAGE>
STEWART INFORMATION SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Interim Financial Statements
The financial information contained in this report for the three month periods
ended March 31, 1999 and 1998, and as at March 31, 1999, is unaudited. In the
opinion of management, all adjustments necessary for a fair presentation of this
information for all unaudited periods, consisting only of normal recurring
accruals, have been made. The results of operations for the interim periods are
not necessarily indicative of results for a full year.
Certain amounts in the 1998 consolidated financial statements have been
reclassified for comparative purposes. Net earnings, as previously reported,
were not affected.
Note 2: Segment Information
The Company's two reportable segments are title and real estate information.
Selected financial information related to these segments follows:
<TABLE>
<CAPTION>
Real Estate
Title information Total
----- ----------- -----
(000's omitted)
<S> <C> <C>
Revenues:
- ---------
Three months ended
3/31/99 232,787 15,091 247,878
3/31/98 185,326 11,716 197,042
Pretax Earnings:
- ----------------
Three months ended
3/31/99 13,805 1,562 15,367
3/31/98 12,835 637 13,472
Identifiable Assets:
- --------------------
3/31/99 454,344 43,028 497,372
12/31/98 463,030 35,451 498,481
</TABLE>
-4-
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
GENERAL
The Company's two segments of operations are land titles and real estate
information. In general, the principal factors that contribute to increases in
the Company's operating revenues include declining mortgage interest rates
(which usually increase home sales and refinancing transactions), rising home
prices, higher premium rates, increased market share, additional revenues from
new offices and increased revenues from commercial transactions. Although
relatively few in number, large commercial transactions typically yield higher
premiums.
Mortgage interest rates, on the average, fell from 7.6% in 1997 to 6.94% in 1998
and hovered around 7% in the first quarter of 1999. In the first half of 1998
rates rose slightly above 7% and stayed just below 7% for the rest of the year
and into the first three months of 1999.
Operating in these mortgage interest rate environments and a strong general
economy, real estate activity began to increase in late 1997. Strong activity in
home sales continued through 1998. Refinancing transactions rose in the last
month of 1997 and in the first quarter of 1998 to record levels, decreased in
the second and third quarters and then increased dramatically to still another
record level in the fourth quarter of 1998.
A good housing market continued into 1999. According to published data, sales of
existing and new homes, along with housing starts, were up in the first two
months of 1999 when compared to the same period last year. Refinance activity
dropped from representing 54 percent of total applications in the first three
months of 1998 to 50 percent in the same period of 1999, as reported by the
National Mortgage Banker's Association. Refinance activity represented
approximately 40 percent of application volume in the first two weeks of April
1999.
A comparison of the results of operations of the Company for the first three
months of 1999 with the first three months of 1998 follows.
REVENUES
Revenues from title premiums and fees increased $46.7 million, or 25.8%, from a
year ago. Mortgage interest rates, on average, were slightly lower in the early
part of 1999 than in the same period a year ago, increasing real estate
transactions. Strong order counts in the last few months of 1998 and a healthy
real estate market in the first quarter of 1999 generated additional first
quarter revenues.
The number of closings handled by the Company increased 15.7%. Closings
increased in California, Texas, Arizona and most other states. The average
revenue per closing increased slightly in 1999 due, in part, to a fewer number
of refinancings with their lower premiums. Increases in revenues from agents and
commercial transactions contributed to higher revenues in 1999.
Other revenues in the first quarter of 1999 included a $1.1 million pretax gain
resulting from a settlement of a lawsuit and a related sale of an equity
ownership in a title agency.
Real estate information revenues were $15.1 million in 1999 and $11.7 million in
1998. The increase was primarily due to a healthy real estate environment and
new businesses started or acquired in 1998.
Investment income increased 14.8% in 1999 due to an increase in the average
balances invested.
EXPENSES
Amounts retained by agents increased $26.2 million, or 30.5%, over the
comparable period in 1998. The percentage of retention by agents to the amounts
of revenues from agents was 80.9% and 80.0% for the three months ended March 31,
1999 and March 31, 1998, respectively.
Employee expenses increased $14.4 million, or 26.2%, in 1999 primarily because
of a higher average number of employees during the first quarter of 1999
compared to a year ago and increased average rates of compensation.
The Company continued to maintain higher staff levels in comparison with a year
ago. Increases were in areas of automating services rendered to customers and
improving its own processes, real estate information services that are being
developed and sold to customers and the expansion of its national marketing
efforts.
-5-
<PAGE>
The Company believes the development and sale of new products and services is
important to its future. Through automated operating processes, the Company
expects to add customer services and revenues while reducing operating expenses
and title losses in the future.
Other operating expenses increased by $6.6 million, or 22.3%, primarily because
of the increase in transaction volume. Expenses that increased include REI
expenses, rent, computer costs and business promotion. Other operating expenses
also include title plant expenses, supplies, telephone, travel, premium taxes,
policy forms, search fees and delivery costs. Most of these expenses follow, to
varying degrees, the changes in transaction volume and revenues.
Provisions for title losses and related claims were up $1.1 million, or 12.8% in
1999. As a percentage of title premiums, fees and related revenues, the
provision in the first quarter of 1999 decreased to 4.1% versus 4.5% in 1998.
The continued improvement in industry trends in claims and the Company's
improved experience in claims have led to lower loss ratios. An overall increase
in refinancing transactions in recent years, which results in lower loss
exposure, also reduced loss ratios.
The provision for income taxes represented effective tax rates of 37.5% and
36.0% in 1999 and 1998, respectively.
YEAR 2000 ISSUE
Information technology is a crucial part of the Company's business. The Company
recognizes the technological challenges associated with the Year 2000 Issue
("Y2K"). It has established a formal compliance plan to address these challenges
and a Y2K Team to carry out this plan. The plan includes several distinct
phases: (1) assessment, (2) remediation, (3) testing and (4) implementation. The
progress of the work of the Y2K Team is monitored by the Company's senior
management and the audit committee of the Company's board of directors.
Computer software is used in the title and real estate information segments of
the Company's business. The uses of software in the title segment include
searching and examining titles, closing transactions, accounting for agent
policies and claims. In the real estate information segment, software is used in
providing mortgage services, such as flood determinations, appraisals and
assignments.
Most of this software was developed by the Company in recent years with Y2K
issues in mind. The Company has substantially completed its assessment and
remediation of this software. All remaining remediation and testing is scheduled
to be completed during the second and third quarters of 1999. Implementation is
being carried out as remediation is completed, with all implementation expected
to be completed in the third quarter of 1999. In addition to its work on
internally-developed computer software, the Company has conducted an inventory
of its systems worldwide. This inventory includes software and hardware acquired
from third parties for use by the Company. The inventory also includes critical
non-information technology systems which may house non-compliant, imbedded
technology, such as fax machines, photocopiers, telephone facilities and other
common devices. Assessment of these systems is on-going, and any necessary
remediation is scheduled for completion by the end of the second quarter of
1999. Mission-critical systems have been given high priority.
Certain subsidiaries that have been acquired by the Company and still operate
with different systems from the Company's have been given high priority under
the Company's Y2K plan. The Company expects to complete all phases of Y2K
compliance for these subsidiaries during the second quarter of 1999.
In addition to addressing the Company's own systems, as described above, the Y2K
Team must assess the state of readiness of the systems of other entities with
which it does business. These include independent title insurance agents and
other business partners, such as county courthouses and lenders, whose condition
or operational capability is important to the Company. Failure by these third
parties to resolve adequately their Y2K problems could have a material adverse
effect on the Company's operations.
The Company believes its success in being Y2K compliant will not be conclusively
known until the year 2000 is actually reached. Failure by one or more of the
Company's own systems could result in lost revenues and additional expenses
required to carry out manual processing of transactions. The magnitude of the
failure of external forces on the business of the Company cannot be predicted.
Failures by the telecommunications industry, banking institutions and others
could have far-reaching, materially adverse effects on the Company, the title
insurance industry and the entire economy.
The Company expects to complete its Y2K program in a timely manner. However, the
Company believes that it is not possible to determine with certainty that all
Y2K issues have been identified or corrected. The number of devices that could
be affected and the interactions among these devices are simply too numerous. In
addition, the Company cannot accurately predict how many failures related to the
-6-
<PAGE>
Y2K problem will occur or the severity, duration or financial consequences of
such failures. The Company has hired an outside Y2K consultant to assist the
Company in meeting its goals and in developing contingency plans to define and
address the worst-case scenario likely to be faced. The plan is expected to be
in place by the end of the second quarter of 1999.
The Company has spent approximately $1.3 million from 1997 through the first
quarter of 1999 directly related to assessing, remediating and testing its
information technology systems. These amounts have been funded from operations.
The Company currently estimates that the total cost of its Y2K compliance
program will not exceed $3.5 million. A significant portion of the remaining
costs are expected to be incurred during the second and third quarters of 1999.
This entire section ("Year 2000 Issue") is hereby designated a "Year 2000
Readiness Disclosure", as defined in the Year 2000 Information and Readiness
Disclosure Act.
LIQUIDITY AND CAPITAL RESOURCES
Operating margins represent the primary source of financing for the Company, but
this may be supplemented by bank borrowings. The capital resources of the
Company, and the present debt-to-equity relationship, are considered
satisfactory.
FORWARD LOOKING STATEMENTS
All statements included in this report, other than statements of historical
facts, which address activities, events or developments that the Company expects
or anticipates 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 and legislation (primarily legislation related to insurance) and
other risks and uncertainties discussed in the Company's filings with the
Securities and Exchange Commission.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the Company's investment strategies,
types of financial instruments held or the risks associated with such
instruments which would materially alter the market risk disclosures made in the
Company's Annual Statement on Form 10-K for the year ended December 31, 1998.
-7-
<PAGE>
PART II
Page
----------
Item 1. Legal Proceedings 9
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K
(a) Index to exhibits
(b) There were no reports on Form 8-K filed during the quarter ended
March 31, 1999.
-8-
<PAGE>
ITEM 1. LEGAL PROCEEDINGS
The Registrant is a party to routine lawsuits incidental to its
business, most of which involve 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 agent of the Registrant. The Registrant
does not expect that any of these proceedings will have a material adverse
effect on its financial condition.
ITEM 5. OTHER INFORMATION
On March 15, the Registrant's Board of Directors approved a two-for-one
split of the Registrant's Common Stock, $1.00 par value ("Common Stock"), and
Class B Common Stock, $1.00 par value, to be effected in the form of a stock
dividend. The stock split was contingent on approval of an amendment to the
Certificate of Incorporation of the Registrant by its stockholders, increasing
the number of authorized shares of Common Stock from 15 million to 30 million.
Such amendment was approved by the Registrant's stockholders on April 30, 1999.
Accordingly, each stockholder of record of the Registrant at the close of
business on May 7, 1999 will receive one additional share for each share owned
on that date. The stock dividend will be paid on May 21, 1999.
-9-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Stewart Information Services Corporation
----------------------------------------
(Registrant)
May 12, 1999
- ------------
Date
/S/ MAX CRISP
-----------------------------------------------
Max Crisp
(Vice President-Finance, Secretary-Treasurer,
Director and Principal Financial and
Accounting Officer)
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<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
4. - Rights of Common and Class B Common Stockholders
27.0 - Financial data schedule
28.2 - Details of investments as reported in the
Quarterly Report to Shareholders
EXHIBIT 4
STEWART INFORMATION SERVICES CORPORATION
RIGHTS OF COMMON AND CLASS B COMMON STOCKHOLDERS
March 31, 1999
Common and Class B Common stockholders have the same rights, except (1)
no cash dividend may be paid on Class B Common Stock and (2) the two classes of
stock are voted separately in electing directors. A provision in the by-laws
requires an affirmative vote of at least two-thirds of the directors to approve
any proposal which may come before the directors. This by-law provision cannot
be changed without majority vote of each class of stock.
Common stockholders, with cumulative voting rights, may elect five or
more of the nine directors. Class B Common stockholders may, with no cumulative
voting rights, elect four directors, if 350,000 or more shares of Class B Common
stock are outstanding; three directors, if between 200,000 and 350,000 shares of
Class B Common Stock are outstanding; if less than 200,000 shares of Class B
Common Stock are outstanding, the Common Stock and the Class B Common Stock
shall be voted as a single class upon all matters, with the right to cumulate
votes for the election of directors.
No change in the Certificate of Incorporation which would affect the
Common Stock and the Class B Common Stock unequally shall be made without the
affirmative vote of at least a majority of the outstanding shares of each class,
voting as a class.
Class B Common Stock may, at any time, be converted by its holders into
Common Stock on ashare-for-share basis. 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.
Exhibit 28.2
STEWART INFORMATION SERVICES CORPORATION
DETAILS OF INVESTMENTS
MARCH 31, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
MAR 31 DEC 31
1999 1998
-------- --------
($000 Omitted)
<S> <C> <C>
Investments, at market, partially restricted:
Short-term investments 60,497 59,446
U. S. Treasury and agency obligations 20,365 24,086
Municipal bonds 133,778 133,533
Mortgage-backed securities 4,145 4,233
Corporate bonds 60,907 59,796
Equity securities 5,427 5,664
-------- --------
TOTAL INVESTMENTS 285,119 286,758
======== ========
</TABLE>
NOTE: The total appears as the sum of three amounts on the balance sheet
presented on page 2: (1) short-term investments, (2)`investments - statutory
reserve funds' and (3)`investments - other'.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
STEWART INFORMATION SERVICES CORPORATION
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF MARCH 31, 1999 AND THE RELATED STATEMENT OF EARNINGS FOR THE THREE
MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 224,622
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 285,119 <F1>
<CASH> 47,200
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 497,372
<POLICY-LOSSES> 172,137
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 15,547
<COMMON> 7,116
0
0
<OTHER-SE> 262,412
<TOTAL-LIABILITY-AND-EQUITY> 497,372
227,716
<INVESTMENT-INCOME> 4,907
<INVESTMENT-GAINS> 164
<OTHER-INCOME> 15,091
<BENEFITS> 9,266
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 15,367
<INCOME-TAX> 5,767
<INCOME-CONTINUING> 9,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,600
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.34
<RESERVE-OPEN> 171,763
<PROVISION-CURRENT> 7,995
<PROVISION-PRIOR> 1,271
<PAYMENTS-CURRENT> (1,599)
<PAYMENTS-PRIOR> (7,293)
<RESERVE-CLOSE> 172,137
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1> Includes short-term investments.
</FN>
</TABLE>
