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Operating
revenues
Title insurance
— Title premiums on policies issued directly by the Company are
recognized on the effective date of the title policy and escrow fees are
recorded upon close of the escrow. Revenues from title policies issued
by independent agents are recorded when notice of issuance is received
from the agent.
Real estate information
— In December 1999, the Company adopted Staff Accounting Bulletin
No. 101 (SAB), “Revenue Recognition in Financial Statements.”
The SAB, which became effective January 1, 1999, applies to the Company’s
tax service operations and requires the deferral of the tax service fee
and the recognition of that fee as revenue ratably over the expected service
period. The amortization rates applied to recognize the revenues assume
a 10-year contract life and are adjusted to reflect prepayments. The Company
periodically reviews its tax service contract portfolio to determine if
there have been changes in contract lives and/ or changes in the number
and/ or timing of prepayments. Accordingly, the Company may adjust the
rates to reflect current trends. The SAB finalizes a series of changes
instituted by the Securities and Exchange Commission concerning revenue
recognition policies. As a result of adopting the SAB, in 1999, the Company
reported a charge of $55.6 million, net of income taxes and minority interests,
as a cumulative change in accounting principle, reduced net income by
$10.9 million, or $0.16 per diluted share and restated its quarterly information.
During the year ended December 31, 2000, the Company recognized $38.6
million in revenues that were included in the cumulative effect adjustment.
Revenues earned by the other products in the real estate information segment
are recognized at the time of delivery, as the Company has no significant
ongoing obligation after delivery.
Consumer Information
— Revenues from home warranty contracts are recognized ratably
over the 12-month duration of the contracts. Revenues from property and
casualty insurance policies are recognized ratably over the 12-month duration
of the policies. Interest on loans with the Company’s thrift subsidiary
is recognized on the outstanding principal balance on the accrual basis.
Loan origination fees and related direct loan origination costs are deferred
and recognized over the life of the loan. Revenues earned by the other
products in the consumer information segment are recognized at the time
of delivery, as the Company has no significant ongoing obligation after
delivery.
Premium
taxes
Title insurance,
property and casualty insurance and home warranty companies, like other
types of insurers, are generally not subject to state income or franchise
taxes. However, in lieu thereof, most states impose a tax based primarily
on insurance premiums written. This premium tax is reported as a separate
line item in the consolidated statements of income in order to provide
a more meaningful disclosure of the taxation of the Company.
Income
taxes
Taxes are based on
income for financial reporting purposes and include deferred taxes applicable
to temporary differences between the financial statement carrying amount
and the tax basis of certain of the Company’s assets and liabilities.
Earnings
per share
Basic earnings per
share are computed by dividing net income available to common stockholders
by the weighted-average number of common shares outstanding. The computation
of diluted earnings per share is similar to the computation of basic earnings
per share, except that the weighted-average number of common shares outstanding
is increased to include the number of additional common shares that would
have been outstanding if potential dilutive common shares had been issued.
The Company’s
potential dilutive common shares are stock options and convertible debt
(see Notes 12 and 8, respectively, to the consolidated financial statements).
Stock options are reflected in diluted earnings per share by application
of the treasury-stock method and convertible debt is reflected in diluted
earnings per share by application of the if-converted method. Certain
of the stock options and all of the convertible debt are antidilutive
and have been excluded when calculating diluted earnings per share. The
dilutive effect of stock options was 2,370,000, 1,682,000 and 2,526,000
for the three years ended December 31, 2000, 1999 and 1998, respectively.
Risk
of real estate market
Real estate activity
is cyclical in nature and is affected greatly by the cost and availability
of long-term mortgage funds. Real estate activity and, in turn, the Company’s
revenues can be adversely affected during periods of high interest rates
and/ or limited money supply.
Use
of estimates
The preparation of
financial statements in accordance with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the statements. Actual results could differ from the estimates
and assumptions used.
Fiduciary
assets and liabilities
Assets and liabilities
of the trusts and escrows administered by the Company are not included
in the consolidated balance sheets.
Statutory Restrictions on Investments and Stockholders’ Equity:
Investments carried
at $16.1 million were on deposit with state treasurers in accordance with
statutory requirements for the protection of policyholders at December
31, 2000.
Pursuant to insurance
and other regulations of the various states in which the Company’s
insurance subsidiaries operate, the amount of dividends, loans and advances
available to the Company is limited, principally for the protection of
policyholders. Under such statutory regulations, the maximum amount of
dividends, loans and advances available to the Company from its insurance
subsidiaries in 2001 is $138.2 million.
The Company’s
title insurance subsidiary, First American Title Insurance Company, maintained
statutory capital and surplus of $406.8 million and $394.2 million at
December 31, 2000 and 1999, respectively. Statutory net income for the
years ended December 31, 2000, 1999 and 1998 was $54.8 million, $71.2
million and $137.3 million, respectively.
The National Association
of Insurance Commissioners (NAIC) has established some new statutory accounting
practices, which became effective January 1, 2001. Adoption of the new
practices will not have a material impact on the Company’s statutory
financial condition or results of operations.
Debt and Equity Securities:
The amortized cost
and estimated fair value of investments in debt securities are as follows:
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