Gary L. Kermott, chief operating officer
First American Title Insurance Company

    The title group ended the first quarter, a traditionally slow period for real estate activity, with a 9 percent increase in operating revenues over first quarter 1996. The year's first quarter profits were less than half that of last year's due to the cost of increased staffing needed to service the high level of orders opened during the last quarter of 1996 and the first quarter of 1997. Many of those orders then closed during the second quarter, helping the title division to realize a 9 percent gain in pretax income over the second quarter 1996. And, despite the Federal Reserve Board's rate increase in March, orders opened during the second quarter increased to 307,000 from 259,000 in second quarter 1996.

    By the third quarter, stabilized interest rates spurred increased home sales and prompted a rise in refinance activity. This translated into increased title orders and an 86 percent jump in pretax income over the same period in 1996. The resurgence of resales and refinancing was especially evident by the end of the year, as the orders opened during the last quarter were nearly 25 percent higher than in the last quarter of 1996. The title company ended 1997 with $1.46 billion in operating revenues, up from $1.27 billion in 1996.

    Our title company's 'A-' rating was reaffirmed in 1997 by Duff & Phelps Credit Rating Co. (DCR). The rating implies high claims-paying ability and is based on the strength of our title and related services, continued favorable operating results, adequate capitalization and loss reserves, and conservative investment portfolio. Our title company has also received strong rankings from rating services including A.M. Best Company, which gave us an A (Excellent) rating, Demotech, Inc., which assigned an A' (Unsurpassed) rating, and Moody's Investors Service which credited us with an A3 (Exceptional) rating.

    The title company introduced the nation to a new title insurance product in 1997 when it debuted the EAGLE Policy. The policy was developed to offer customers additional coverages, many of which had never been issued through any standard policy. By year's end, the EAGLE Policy was available in 29 states. Efforts by our underwriting team should result in adoption of the policy in more states throughout 1998.

     Our international expansion continued in 1997 as First American became the first title insurer in Australia. We still do extremely well in Canada as well, where we hold more than a 90 percent share of the market. We remain the leading title company in England, and began offering our services in Ireland and Scotland during the year.

    Title office additions within the U.S. flourished in 1997, continuing four decades of strategic national expansion. Our commercial market presence was strengthened with our purchase of Settlers Abstract in Philadelphia, a leader in commercial activity. Our acquisition of Hillam Title Agency gave us two new offices in Utah. We purchased Klamath County Title Company, a presence in the Oregon market since 1905. In September we announced the acquisition of Illini Title Services, Inc., Pekin Abstract & Title Company and Woodford County Abstract & Title, enhancing our services throughout central Illinois. Operations in the Midwest were expanded with our acquisition of 140-year-old Miller Abstract in Kansas City. Two new offices in Texas came to us through our acquisition of Donegan Abstract. First American expanded its business in the U.S. Virgin Islands with the purchase of Service Standard, which serves the islands of St. Thomas, St. John and St. Croix. We also acquired operations in California, Hawaii, Ohio and South Carolina. In all, First American added 22 title offices nationally throughout the year.

    First American divested its 17 percent interest in North American Asset Development when Lennar Homes bought that company in 1997. We retained a 50 percent interest in North American Title Insurance Company. The other 50 percent is now owned by Lennar. North American Title Company, which operates throughout California and in Arizona and Colorado, is the primary agent for North American Title Insurance Company. This has been a successful venture for all concerned.

    Plans for 1998 include the integration of several of our systems with those of SMS and Experian, two new members of the First American team. The title company's ability to deliver its products more efficiently, for example, will be enhanced as we directly access Experian's title plant and imaged document capabilities. The title and closing operations of SMS will also merge with those of First American.