The Registrant leases offices at approximately 328 locations. The average term for all such leases is approximately six years. The leases expire from 1999 to 2005. The Registrant believes it will not have any difficulty obtaining renewals of leases as they expire or, alternatively, leasing comparable property. The aggregate annual rental expense under all leases was approximately $23,131,000.
A comparison of the results of operations of the Company for 1998 with 1997 and 1997 with 1996 follows.
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 7.81% in 1996 to 7.60% in 1997 and to 6.94% in 1998. In the early months of 1997, rates rose but then began a fairly steady decline in May 1997 and fell each month that followed. In 1998, rates rose slightly above 7% during the first half of the year, but stayed just below 7% for the rest of the year.
Operating in these mortgage interest rate environments and a strong general economy, real estate activity began to increase in late 1997. Existing home sales moved to record levels in the last quarter of 1997. Strong activity in home sales continued throughout 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.
Total closings increased 48.9% in 1998 and 3.2% in 1997. The average revenue per closing decreased 1.9% in 1998 and increased 4.4% in 1997. The average rate was increased each year by higher home prices, offset in 1998 by a large number of refinancings with their lower premiums. A 3% reduction in Texas title premiums became effective August 1, 1998. However, the Company is experiencing new home equity business in Texas that did not exist before 1998. There were no other major revenue rate changes in 1998 and 1997.
AGENT RETENTION. Premiums earned from agents were $545.1 million in 1998, $413.0 million in 1997 and $383.7 million in 1996. The amounts retained by agents, as a percentage of premiums, were 80.4%, 81.0% and 81.3%, in the years 1998, 1997 and 1996, respectively.
Amounts retained by title agents are based on contracts between agents and the title underwriters of the Company. The percentage that amounts retained by agents bears to agent revenues may vary from year to year because of the geographical mix of agent operations and the volume of title revenues.
NONRECURRING CHARGE. A subsidiary in the REI segment was sold in early 1998. A pretax writeoff of $1.9 million of goodwill in the subsidiary was recorded in the fourth quarter of 1997. The subsidiary incurred after-tax operating losses of $1.0 million in 1997.
LIQUIDITY AND CAPITAL RESOURCES. Cash provided by operations was $86.5 million, $36.0 million and $38.3 million in 1998, 1997 and 1996, respectively. Internally generated cash flow has been the primary source of funds for additions to property and equipment, expanding operations, dividends to shareholders and other requirements. This source may be supplemented by bank borrowings.
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 quarter of 1999. Implementation is being carried out as remediation is completed, with the implementation expected to be completed early 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, embedded technology, such as fax machines, photocopiers, telephone facilities and other common devices. Assessment of these systems is ongoing and any necessary remediation is scheduled for completion by the second quarter of 1999. Mission critical systems have been given high priority.
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 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 second quarter of 1999.
The Company has spent approximately $0.7 million during 1997 and 1998 directly related to assessing, remediating and testing its information technology systems. These amounts have been funded from operations.
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.
The information required to be provided in this item is included in the Consolidated Financial Statements of the Company, including the Notes thereto, attached hereto as pages to, and such information is incorporated herein by reference.