Our leases expire from 2007 to 2016 and have an average term of four years, although our typical lease term ranges from three to five years. We believe we will not have any difficulty obtaining renewals of leases as they expire or, alternatively, leasing comparable properties. The aggregate annual rent expense under all leases was approximately $66.1 million in 2006.
Management’s overview. We reported net earnings of $43.3 million for the year ended December 31, 2006 compared with net earnings of $88.8 million for the year 2005. On a diluted per share basis, net earnings were $2.36 for the year 2006 compared with net earnings of $4.86 for the year 2005. Revenues for the year increased 1.7% to $2.47 billion from $2.43 billion in 2005.
Critical accounting estimates. Actual results can differ from the accounting estimates we report. However, we believe there is no material risk of a change in our estimates that is likely to have a material impact on our reported financial condition and results of operations for the three years ended December 31, 2006.
Our most critical accounting estimate is providing for title loss reserves. Our liability for estimated title losses at December 31, 2006 comprises both known claims ($80.3 million) and claims expected to be reported in the future ($304.1 million). The amount of the reserve represents the aggregate future payments (net of recoveries) that we expect to incur on policy and escrow losses and in costs to settle claims.
Provisions for title losses, as a percentage of title operating revenues, were 6.0%, 5.5% and 4.8% for the years ended December 31, 2006, 2005 and 2004, respectively. Actual loss payment experience, including the impact of large losses, is the primary reason for increases or decreases in our loss provision. A change of 0.5% in this percentage, a reasonably likely scenario based on our historical loss experience, would have changed our provision for title losses and pretax earnings by approximately $11.8 million for the year ended December 31, 2006.
Factors affecting revenues. The principal factors that contribute to increases in operating revenues for our title and REI segments include:
declining mortgage interest rates, which usually increase home sales and refinancing transactions;
Industry data. A table of published mortgage interest rates and other selected residential data for the years ended December 31, 2006, 2005 and 2004 follows (amounts shown for 2006 are preliminary and subject to revision). The amounts below may not relate directly to or provide accurate data for forecasting our operating revenues or order counts.
Trends and order counts. Mortgage interest rates (30-year, fixed-rate) have fluctuated from a monthly low of 5.45% in the first quarter of 2004 to a high of 6.76% in the third quarter of 2006 and were 6.14% in December 2006. Mortgage originations increased during 2005 compared with 2004 as a result of the favorable interest rate environment, but decreased during 2006 due to a significant increase in average mortgage interest rates. Sales of new and existing homes for 2004 through 2006 have generally followed the trends of mortgage interest rates and originations.
As a result of the above trends, our order levels increased overall from 2004 to 2005, although orders for the fourth quarter of 2005 were lower than the comparable period in 2004. Some of the increases in 2005 and 2004 were due to acquisitions. Our order levels for 2006 compared with 2005 decreased significantly as a result of a softening real estate market resulting primarily from the higher interest rate environment noted above. The decline in order counts for 2006 was partially offset by acquisitions.
The rates charged by title insurance underwriters in Florida, from which we derive a significant portion of our revenues, are currently under review with proposals to enact premium rate decreases. The California Insurance Commissioner filed a rate reduction order that would have reduced title insurance rates in California by 26% commencing in 2009. On February 21, 2007, this rate reduction order was rejected by the California Office of Administrative Law. California’s Insurance Commissioner has announced plans to submit a revised rate reduction proposal in the future. We believe that California law requires rates to be established competitively and not by administrative order. We cannot predict the outcome of these proposals and, to the extent that rate decreases are enacted in the future, our financial condition and results of operations could be materially adversely affected.
Title revenues. Our revenues from direct title operations decreased 1.3% in 2006 and increased 18.3% in 2005. The largest revenue decreases in 2006 were in California and Florida, partially offset by increases in Texas, including the results of acquisitions made in that state, and Canada. The decreases were due to a softening real estate market resulting primarily from the higher interest rate environment that has impacted certain major markets and an overall reduction in home sales. The largest revenue increases in 2005 were in Texas, Florida, California and Arizona. Acquisitions added revenues of $51.7 million and $71.8 million in 2006 and 2005, respectively. Revenues from commercial and other large transactions increased $42.8 million and $6.3 million in 2006 and 2005, respectively.
Revenues from agencies increased 3.9% in 2006 and 5.9% in 2005. The increase in 2006 was due to new agencies and additional revenues from existing agencies, partially offset by the impact of a reduction in home sales and our acquisition of some agencies that were formerly independent. The increase in 2005 was primarily due to a decrease in the ratio of refinancing transactions compared to property sales, partially offset by our acquisitions of some agencies that were formerly independent.
Agency business increased in 2006 due in part to new agencies added by us in Florida in 2006 and 2005 and due to the acquisition of a New York title insurance underwriter with agency operations. These increases were partially offset by decreases in transaction volumes in California and Pennsylvania. The largest increases in revenues from agencies in 2005 were primarily in Florida, New Jersey, Georgia and Maryland, partially offset by decreases in California and Texas.
Our statements above on sales and loan activity are based on published industry data from sources including Fannie Mae, the Mortgage Bankers Association, the National Association of Realtors® and Freddie Mac. We also use information from our direct operations.
Title revenues by state. The approximate amounts and percentages of consolidated title operating revenues for the last three years were as follows:
The increase in revenues in 2005 resulted primarily from a greater number of tax-deferred property exchanges and increases in automated mapping services due to an acquisition in the second half of 2005, partially offset by reduced revenues related to post-closing services and electronic mortgage documents.
Acquisitions increased staff in 2006 and 2005 by 523 and 552 employees, and $23.3 million and $36.3 million in employee costs, respectively. Employee costs were also impacted by the competitive market for key employees in California and other states and by a significant increase in health insurance claims and related premiums during 2006 compared with 2005.
Other operating expenses. Our employee costs and certain other operating expenses are sensitive to inflation. Other operating expenses for the combined business segments increased $32.8 million, or 8.8%, in 2006 and $48.3 million, or 14.9%, in 2005. The increase in other operating expenses in 2006 was partially due to acquisitions, which contributed approximately $13.7 million of the increase. Other 2006 increases included technology costs, outside search fees, business promotion and litigation costs. The increase in other operating expenses in 2005 was partially due to acquisitions, which contributed approximately $18.9 million of the increase. Other 2005 increases included rent of $10.0 million, outside search fees, business promotion and technology costs. Other operating expenses also include title plant and travel expenses. Included in the increase in rent expense in 2005 was a $2.8 million charge related to our accounting for leases.
Title losses. Provisions for title losses, as a percentage of title operating revenues, were 6.0%, 5.5% and 4.8% in 2006, 2005 and 2004, respectively. An increase in loss payment experience for recent policy years resulted in an increase in our loss ratio in 2006 compared with 2005. Additions to title loss reserves of $4.9 million and $4.3 million in the second and fourth quarters of 2006, respectively, related primarily to agency defalcations, also contributed to the increase in our title loss ratio in the current year. Included in 2005 was an addition to title loss reserves of $10.5 million in the fourth quarter related to a mortgage fraud and an agency defalcation. An increase in loss payment experience also resulted in an increase in our loss provision in 2005 compared with 2004.
Contractual obligations. Our material contractual obligations at December 31, 2006 were:
Liquidity. Cash provided by operations was $99.7 million, $173.5 million and $170.4 million in 2006, 2005 and 2004, respectively. Cash provided by operations was reduced due to decreases in earnings and taxes payable and increases in title loss payments and receivables. Cash flow from operations has been the primary source of financing for additions to property and equipment, expanding operations, dividends to stockholders and other requirements. This source is supplemented by bank borrowings, typically in connection with acquisitions.
Unrealized gains and losses on investments, net of taxes, are reported in accumulated other comprehensive earnings, a component of stockholders’ equity, until realized. For 2006, unrealized investment gains increased comprehensive earnings by $0.8 million, net of taxes. During the first six months of 2006, unrealized investment losses reduced comprehensive earnings by $6.5 million, net of taxes. These unrealized investment losses were primarily related to changes in bond values caused by interest rate increases. The increase in comprehensive income related to unrealized investment gains during the last six months of 2006 of $7.3 million, net of taxes, was primarily related to changes in bond values caused by interest rate decreases.
A substantial majority of our consolidated cash and investments at December 31, 2006 was held by Guaranty and its subsidiaries. The use and investment of these funds, dividends to us, and cash transfers between Guaranty and its subsidiaries and us are subject to certain legal restrictions. See Notes 2 and 3 to the accompanying consolidated financial statements.
Our liquidity at December 31, 2006, excluding Guaranty and its subsidiaries, was comprised of cash and investments aggregating $55.4 million and short-term liabilities of $6.7 million. We know of no commitments or uncertainties that are likely to materially affect our ability to fund cash needs. See Note 17 to the accompanying consolidated financial statements.
Loss reserves. Our loss reserves are fully funded, segregated and invested in high-quality securities and short-term investments as required by the insurance regulators of the states in which our underwriters are domiciled. At December 31, 2006, these investments aggregated $457.0 million and our estimated title loss reserves were $384.4 million.
Effective September 1, 2005 and retroactive to the start of the year, the Texas Legislature reduced statutory reserve requirements for our major title insurer. The change does not directly impact reported earnings or loss reserves under U.S. generally accepted accounting principles. However, in the year 2005 the change released approximately $25.2 million, or approximately $18.3 million after taxes, of low-yielding statutory reserve investments, making that portion available for other uses.
Capital resources. We consider our capital resources to be adequate. We expect external capital resources will be available, if needed, because of our low debt-to-equity ratio. Long-term debt was $92.5 million and stockholders’ equity was $802.3 million at December 31, 2006. We are not aware of any trends, either favorable or unfavorable, that would materially affect notes payable or stockholders’ equity. We do not expect any material changes in the mix and relative cost of such resources. Significant acquisitions in the future could materially affect the notes payable or stockholders’ equity balances.
Forward-looking statements. All statements included in this report, other than statements of historical facts, addressing activities, events or developments that we expect or anticipate 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, adverse changes in the levels of real estate activity, technology changes, unanticipated title losses, adverse changes in governmental regulations, actions of competitors, general economic conditions and other risks and uncertainties discussed under Item 1A - Risk Factors included elsewhere in this report.