- deliver quality customer service and provide its employees with extensive training and incentive and equity based compensation programs.
Effective July 1, 1997, the Company sold a majority interest (60%) of its subsidiary American Title Company ("ATC"), an underwritten title company, to certain members of ATC's management. ATC functions as an exclusive agent of the Company. The sale price of the 60% interest was $6.0 million resulting in a realized gain of approximately $1.3 million before applicable income taxes. As a result of a tax free reorganization of American National Financial, Inc. ("ANFI"), the parent company of ATC and its subsidiaries, in November 1998, the Company's interest in ATC was converted to an ownership interest of approximately 43% of ANFI. Subsequent to ANFI's initial public offering in February 1999, the Company's ownership interest in ANFI became approximately 31.5%. The Company's investment in ANFI is accounted for under the equity method. Additionally, on March 18, 1998, the Company announced that it had entered into an agreement to sell National Title Insurance of New York Inc. to ATC for $3.25 million, subject to regulatory approval and certain other conditions. The purchase price is structured at a premium to book value.
SFAS 125 prohibits early application. Prior to January 1, 1997, direct financing leases sold prior to that date as part of a securitization to a special-purpose entity that issued debt securities were accounted for as collateralized borrowings. The leases collateralizing the debt are recorded as direct financing leases assigned to lender. The leases and related debt are reflected in the Consolidated Balance Sheets. See Notes D and H.
The Company allocates its basis in the lease receivables between the portion of the lease receivables sold (the Bonds and Certificates) and the portion retained (the Residuals) based on the relative fair values of those portions on the date of the sale.
The implicit interest rate on the lease receivables is relatively high in comparison to the pass through rate on the Bonds and Certificates. In determining the value of the Residuals described above, the Company estimates the future rates of prepayments, delinquencies, defaults and default loss severity as they impact the amount and timing of the estimated cash flows. The Company has used a zero prepayment estimate because the lease contracts generally require the lessee to pay all or a majority of the lease payments due under the remaining lease term. The Company estimates the timing of the receipt of such prepayments in its estimate of cash flows. The Company's loss estimate is 1.5% to 2.0% of the gross lease payment, which is based on historical loss data for comparable leases and the specific characteristics of the leases originated by the Company. The Company's prepayment and default estimates resulted in a weighted average life of the pool of leases of between approximately 1.5 and 2.0 years.
The Company establishes an allowance for losses to provide for expected losses in the Company's existing portfolio of leases and leases transferred on a recourse basis. The allowance for losses is based on the Company's historical and expected loss experience, industry knowledge and other economic factors. The ultimate obligation for defaults and delinquencies related to leases transferred on a recourse basis is measured and recorded at the time of transfer.
The assets acquired, including cost in excess of assets acquired, in the Brazoria acquisition were as follows (dollars in thousands):
Net realized gains included in interest and investment income amounted to $17,190,000, $16,839,000 and $2,476,000 for the years ended December 31, 1998, 1997 and 1996, respectively. 1998 net realized gains include a gain of approximately $9,700,000 related to the conversion of the Company's investment in Data Tree Corporation common stock to common stock of First American Financial Corporation. Included in net realized gains for the year ended December 31, 1997, are net realized gains from the sales of investments of approximately $10,500,000, a net realized gain from the sale of the Company's former home office building of approximately $4,300,000, and net realized gains on the sale of 60% of American Title Company, a former wholly-owned underwritten title company subsidiary, and the sale of FNF Ventures, Inc., a small business investment company subsidiary of approximately $1,300,000 and $800,000, respectively. All amounts are before applicable income taxes.
During the years ended December 31, 1998, 1997 and 1996, gross realized gains on sales of fixed maturity securities considered available for sale were $700,000, $798,000 and $453,000, respectively; and gross realized losses were $268,000, $468,000 and $719,000, respectively. Gross proceeds from the sale of fixed maturity securities considered available for sale amounted to $71,114,000, $143,085,000 and $94,214,000, during the years ended December 31, 1998, 1997 and 1996, respectively.
Notes payable consist of the following (dollars in descriptions in thousands):
Title insurance companies, including underwriters, underwritten title companies and independent agents, are subject to extensive regulation under applicable state laws. Each insurance underwriter is usually subject to a holding company act in its state of domicile which regulates, among other matters, the ability to pay dividends and investment policies. The laws of most states in which the Company transacts business establish supervisory agencies with broad administrative powers relating to issuing and revoking licenses to transact business, regulating trade practices, licensing agents, approving policy forms, accounting principles, financial practices, establishing reserve and capital and surplus requirements, defining suitable investments for reserves, capital and surplus and approving rate schedules. In 1998, the National Association of Insurance Commissioners approved codified accounting practices that changed the definition of what constitutes prescribed statutory accounting practices and will result in changes to the accounting policies that insurance enterprises use to prepare their statutory financial statements commencing in 2001. The Company is currently evaluating the impact of the rules.
In 1994, stockholders approved the adoption of the 1993 Stock Plan ("1993 Plan"). Under the terms of the 1993 Plan, options may be granted to officers, key employees and non-employee directors of the Company. The number of shares of common stock reserved for issuance under the 1993 Plan is 1,098,000. The per share option price is determined at the date of grant, provided that the price for incentive stock options shall not be less than 100% of their market value or award stock shares. The 1993 Plan also contains an automatic grant of non-qualified stock options to non-employee directors at an exercise price equal to 100% of fair value at date of grant, and the right to exercise such options shall vest equally over three years. Stock options granted under the 1993 plan are exercisable subject to the terms and conditions set by the Board of Directors, however, options shall be exercisable no earlier than six months nor later than ten years following the grant date.
For purpose of pro forma disclosures, the estimated fair value of the options is amortized into expense over the options' vesting period. The Company's pro forma information follows:
The Company generates a significant amount of title insurance premiums in California and Texas, 33.1% and 19.6% in 1998, 32.9% and 20.8% in 1997, and 33.1% and 21.1% in 1996, respectively.