(1) See Note 2 to the Consolidated Financial Statements for explanation of the Company's change in method of assessing the recoverability of goodwill.
During 2000, the Company decided to place increased emphasis on other products and services related to real estate transactions. As a result, in October 2000, the Company acquired Primis, Inc., a leading web-based provider of real estate services. The Primis acquisition provides the Company with a sophisticated technology platform on which to deliver title and real estate-related services through its LandAmerica OneStop operations.
Premiums and fees are determined both by competition and by state regulation. Operating revenues from direct title operations are recognized at the time real estate transactions close, which is generally 60 to 90 days after the opening of a title order. Operating revenues from agents are recognized when the issuance of a policy is reported to the Company by an agent. Although agents generally report the issuance of policies on a monthly basis, heightened levels of real estate activity may slow this reporting process. This typically results in delays averaging 90 days from the closing of real estate transactions until the recognition of revenues from agents. As a result, there can be a significant lag between changes in general real estate activity and their impact on the portion of the Company's revenues attributable to agents.
Operating revenues reported for 2000 were $1.8 billion compared to $2.0 billion in 1999 and $1.8 billion in 1998. Due to the higher interest rate environment during most of the year, the Company experienced lower revenue levels in 2000 than in 1999. In 1999, the decrease in direct revenues was offset by an increase in agency revenues, principally the result of the timing effects of the industry's typical time lag in business reported through independent agents. In addition to the inclusion of Commonwealth and Transnation revenues in 1998, the volume in 1998 was a result of increased residential and commercial resale and refinancing transactions, the favorable interest rate environment and the general health of the national real estate markets. During 2000 order volume in direct company offices decreased to 680,000 from 833,600 in 1999 which was a decrease from 1,041,500 in 1998. These decreases were a result of the effect on the residential mortgage markets of interest rate increases in both 2000 and 1999.
Operating Expenses. The Company's expense ratio was 94.3% in 2000 compared to 92.2% in 1999 and 87.6% in 1998. The increase in the expense ratio in 2000 compared to 1999 is primarily due to the effect of significant revenue changes measured against costs that do not vary as rapidly. The increase in the expense ratio in 1999 compared to 1998 resulted from an increase in the amount of agency commissions as the mix of revenues shifted from direct operations to independent agents.
Write Off of Intangibles. In the fourth quarter of 2000, the Company elected to change its accounting policy for assessing the recoverability of goodwill from one based on undiscounted cash flows to one based on discounted cash flows. The Company believes that using the discounted cash flow approach to assess recoverability is a preferable policy as it is consistent with the methodology used by the Company to evaluate investment and acquisition decisions (see Note 2 to Consolidated Financial Statements). In connection with this change, the Company incurred a non-cash pre-tax charge of $172.5 million. No such costs were incurred in 1999 or 1998.
Salaries and Employee Benefits. Personnel-related expenses are a significant portion of total operating expenses in the title insurance industry. These expenses require intensive management through changing real estate cycles. As a percentage of gross title revenues, salary and related expenses were 29.4%, 28.1% and 29.3% in 2000, 1999 and 1998, respectively. Staffing levels have steadily decreased to 7,800, exclusive of the Primis acquisition, by December 2000 as compared to 8,500 and 10,500 in December of 1999 and 1998, respectively.
Provision for Policy and Contract Claims. The Company's claims experience has shown improvement in recent years. The loss ratio (the provision for policy and contract claims as a percentage of operating revenues) was 4.4%, 4.9% and 5.2% in 2000, 1999 and 1998, respectively. Claims paid as a percentage of operating revenues were 4.3%, 3.2% and 2.8% in 2000, 1999 and 1998, respectively.
At December 31, 2000 the Company had recorded gross deferred tax assets of $153.7 million related primarily to policy and contract claims, the write off of intangibles (see Note 2 to Consolidated Financial Statements) and employee benefit plans. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefit, or that future deductibility is uncertain.
The Company recorded a valuation allowance of $1.7 million and $11.5 million at December 31, 2000 and 1999, respectively, related to deferred tax assets created by the unrealized losses associated with the company's investment portfolio. No valuation allowance was recorded at December 31, 1998.
Interest Rate Sensitivity Principal Amount by Expected Maturity Average Interest Rate --------------------- (dollars in thousands)
The Company also has long-term debt of $195.5 million bearing interest at 6.69% at December 31, 2000. A 0.25% change in the interest rate would affect income before income taxes by approximately $0.5 million annually.
Certain information contained in this Annual Report on Form 10-K includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Among other things, these statements relate to the financial condition, results of operation and business of the Company. In addition, the Company and its representatives may from time to time make written or oral forward-looking statements, including statements contained in other filings with the Securities and Exchange Commission and in its reports to shareholders. These forward-looking statements are generally identified by phrases such as "the Company expects," "the Company believes" or words of similar import. These forward-looking statements involve certain risks and uncertainties and other factors that may cause the actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Further, any such statement is specifically qualified in its entirety by the following cautionary statements.