We own an office building and adjacent real estate in Richmond, Virginia that is currently used for our corporate offices. This property consists of approximately 128,000 square feet of office space and parking facilities. We issued a press release on January 18, 2006 announcing our intent to sell that property and to relocate and consolidate our national headquarters and other shared resources operations into a larger leased facility in the Richmond metropolitan area. See Note 18 to the accompanying Consolidated Financial Statements. In addition, we and our subsidiary, LandAmerica Tax and Flood, Inc. (“LATF”), own certain properties that, in the aggregate, are not material to our business taken as a whole. Our subsidiaries conduct their business operations primarily in leased office space. As of December 31, 2005, we had numerous leases for our branch offices and subsidiaries throughout the states in which we operate.
many of the areas in which we operate, although certain offices utilize title plants jointly owned and maintained with other title insurers. We capitalize only the initial cost of title plants. The cost of maintaining such plants is charged to expense as incurred. The title plants and title examination procedures have been automated and computerized to a large extent in many areas.
The information set forth in the following table should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the accompanying Consolidated Financial Statements and Notes thereto.
(2) See Note 1 to the accompanying Consolidated Financial Statements for the nature of the error in 2002 and 2001; the cumulative effect of the error as of December 31, 2001, was an increase to shareholders’ equity of $13.8 million.
(7) In 2001, we reassessed the carrying value of intangibles and capitalized software which resulted in charges to earnings of $51.4 million, or $32.9 million after taxes.
Our long-term goal is to enhance our position as one of the largest providers of real estate transaction services. To accomplish this objective, we have expanded our operations through internal growth and selective strategic acquisitions. Our business operations are organized under three primary business segments: Title Operations, Lender Services and Financial Services. Other operating business segments not required to be reported separately are reported in a category called Corporate and Other. These groupings of business operations are consistent with the way we view our business results and consistent with Financial Accounting Standards Board Release No. 131, Disclosures about Segments of an Enterprise and Related Information.
Our dominant business operation continues to be our Title Operations segment which accounted for 92.4 percent and 93.9 percent of our operating revenue in 2005 and 2004, respectively.
Our Title Operations segment is influenced by the level of real estate activity and the cost and availability of mortgage funds. The demand for our title insurance products and services is dependent upon, among other things, the volume of residential and commercial real estate transactions, including mortgage refinancing transactions. The volume of these transactions has historically been influenced by factors such as interest rates and the state of the overall economy. For example, when interest rates are increasing or the economy is experiencing a downturn or recession, real estate activity typically declines and we experience lower revenue and profitability. The cyclical nature of our business has caused fluctuations in revenue and profitability in the past and is expected to do so in the future. In addition to cyclicality in our title business, we also generally experience seasonality. In 2002, 2003 and 2004, our results did not follow their typical seasonal pattern due to an unusually low interest rate environment. Results for 2005 are more in line with our normal seasonality. See “Cyclicality and Seasonality” below.
Revenue from our Title Operations segment includes title premiums, escrow fees and fees for other ancillary services. Premiums and fees are determined both by competition and by state regulation. In addition, revenue
from our Title Operations segment is affected by our sales and marketing efforts. Revenue from title operations owned by us is recognized at the time the real estate transaction closes. There can be a several month delay between the time that a title order is opened and the real estate transaction closes. Consequently, expenses may be incurred related to a direct title order in advance of revenue being recognized. Operating revenue from independent agents is recognized when we receive notification from the agent that a policy has been issued. Agent notification typically occurs later than the closing of the real estate transaction. The delay in notification varies from year to year, from agent to agent and between regions of the country. During 2005, we experienced an average delay between closing and reporting by agents of approximately 112 days. The delay in notification by agents defers revenue recognition and may also create a lag between changes in general real estate activity and the impact of such changes on the portion of our Title Operations segment revenue attributable to agents.
We continually evaluate our cost structure in relation to anticipated changes in business levels. In response to declining mortgage volumes, we implemented a cost reduction program begun in the fourth quarter of 2003 aimed at reducing staffing and cost levels within existing operations to a level more consistent with anticipated transaction volumes. As a result, in the first quarter of 2004, we announced plans to further reduce our cost structure within existing operations by at least $70 million on an annualized basis. At June 30, 2004, we had implemented reductions to achieve at least the targeted cost savings. Although our staffing and cost levels were reduced as a result of the aforementioned plans, we saw an overall increase in salaries and employee benefits and general and administrative expenses during 2004 and 2005. During 2004, the increases were primarily due to our acquisitions. During 2005, the increase in salaries and employee benefits was attributable to the increase in business volume and the increase in general and administrative expenses was due to legal and settlement costs discussed above.
The Lender Services segment currently realizes approximately half of its reported revenue through service revenue associated with tracking and reporting of real estate tax payments and flood zone certifications related to mortgage loans for lending institutions. Our servicing agreements typically call for us to service the mortgage loan until cancellation or sale. The lenders pay for these services at the time they add a loan to their servicing portfolio. We defer a significant portion of the revenue received for these services to account for the life of loan servicing aspects of the contracts. As a result, revenue reported in the financial statements represents the amortization of both current and prior service fees and is not representative of new contract sales levels. Expenses on the other hand are charged to the income statement as incurred and are not deferred. Thus, an understanding of the levels of deferred revenue or new contract cash received in this area is critical to understanding the relative strength of the underlying business related to tax and flood services. The estimated life of loans is reviewed regularly to determine if there have been changes in contract lives and/or changes in the number or timing of prepayments, and adjusted to reflect current trends. We are required in certain instances to reimburse part of the fees should the lender sell the loan to another party. See further discussion in “Critical Accounting Estimates” below.
Revenue in mortgage credit reporting, default management services and loan subservicing are recognized when the report or service is delivered to the customer.
The Lender Services segment has the opportunity to leverage our Title Operations segment business relationships to cross-sell services to other financial institutions. A significant challenge for these businesses is their integration into our overall structure without jeopardizing their current business relationships. During 2004 we began offering a bundled product solution, primarily to our national lender customers, which includes
The business reported in this segment includes Centennial, a California industrial bank acquisition we made in November 2003.
This group includes businesses that are not significant enough in size to be reported as separate segments as well as the unallocated portion of the corporate expenses related to our corporate offices in Richmond, Virginia and unallocated interest expense. The businesses reported in this group provide commercial and residential inspections, commercial appraisals, valuations and due diligence services, and home warranties.
Our commercial and residential inspection services are run by our subsidiary LandAmerica Property Inspection Services, Inc., formerly known as Inspectech, Inc. This business is highly dependent on the real estate industry and the levels of residential home sales and refinancing transactions. A flat fee is charged for each transaction which is generally collected at the time of service.
Policy and Contract Claims-Our recorded liability for claim losses includes reserves for known claims and for losses that have been incurred but have not yet been reported, net of recoveries. Reserves for known claims include the estimated amount of the claim and the costs required to settle the claim. A provision for estimated claims that are incurred but not yet reported is established at the time premium revenue is recognized based on reported claims, historical loss experience and other factors, including industry trends.
Effective January 1, 2002, we adopted SFAS No. 142, Goodwill and Other Intangibles, which required that we discontinue amortizing goodwill and begin assessing the recoverability of goodwill for each of our reporting units. Reporting units are business components of an operating segment, and goodwill is assigned to the reporting unit which benefits from the synergies arising from each business acquisition. We test for the recoverability of goodwill annually or sooner if events or changes in circumstances indicate that the carrying amount of our reporting units, including goodwill, may exceed their fair values. The fair value of the reporting units is determined using cash flow analysis which projects the future cash flows produced by the reporting units and discounts those cash flows to the present value. The projection of future cash flows is necessarily dependent upon assumptions on the future levels of income as well as business trends, prospects and market and economic conditions. When the fair value is less than the carrying value for the net assets of the reporting unit, including goodwill, impairment loss may be charged to operations. Based on our annual analysis, no impairment was identified for the year ending December 31, 2005.
Our intangible assets primarily include capitalized customer relations and non-competition arrangements which are amortized over their useful lives. Pursuant to SFAS No. 142, tests for impairment must be performed for intangible assets that are amortizable with definite lives if conditions exist that indicate the carrying value may not be recoverable. Such conditions may include a loss of a significant customer or a change in the assessment of future operations. During 2005, LATF ceased providing future tax services in two states, California and Colorado, for one of its largest tax and flood customers. As a result of the loss of business, we conducted an impairment test of LATF’s long-lived assets in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, using estimated future cash flows. We determined that LATF’s customer relationship intangible was impaired by $37.6 million, which has
been reflected in our results of operations for the year ended December 31, 2005. See further details in Note 11 to the accompanying Consolidated Financial Statements.
Pension and Other Postretirement Benefits-We have pension and other retirement benefit plans covering a portion of our employees. These plans are valued annually by an actuary who employs significant assumptions that are particularly important when determining our projected liabilities for pension and other postretirement benefits. Payments related to these benefits will be made by us over a lengthy period and the projected liability will be impacted by assumptions which include inflation, investment returns and market interest rates, changes in the benefit obligations and laws and regulations covering the benefit obligations.
Additionally, assumed health care cost trend rates have a significant effect on the amounts reported for the other postretirement benefits. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
Effective December 31, 2004, we ceased future accruals to the retirement plan accounts of all plan participants in our Cash Balance Pension Plan (the “Plan”), other than annual interest credits on account balances, which caused the accrued benefits of participants to be fully vested as of December 31, 2004 and limited participation in the Plan to those individuals who were participants of December 31, 2004. These were conforming changes to our Benefit Restoration Plan. See further information in Note 10 to the accompanying Consolidated Financial Statements. As a result of the change, we adopted curtailment accounting for the Plan as specified under FAS No. 88. The curtailment resulted in a one-time gain of approximately $4.8 million and increased the minimum pension liability by $1.1 million at December 31, 2004.
Deferred Service Arrangements-When we acquired the tax and flood and home warranty companies, all of their assets and liabilities were adjusted to fair value in accordance with purchase method accounting. In making these adjustments, each entity’s deferred revenue account, representing amounts which had been deferred and would have been amortized over the remaining lives of the contracts for the provision of real estate tax monitoring, flood certification services, and home warranty services existing at the acquisition date, was eliminated. The deferred revenue account was replaced with an account called deferred service obligations representing the estimated fair value of the obligation to provide the required services over the remaining life of the subject contracts. This account, established as of the acquisition date, is being amortized over the remaining lives of existing contracts.
The estimated remaining contractual life for real estate tax monitoring services and flood certification services can vary depending on a number of factors, including but not limited to, type of loan, lender, credit quality of the borrower, interest rates, and portfolio turnover. We evaluate the portfolio of loans under service quarterly to determine the appropriate portfolio life for loans under service. An increase/decrease of six months in the average service life for all loans serviced would result in the following approximate changes to revenue recognized for real estate tax and flood monitoring revenue:
Title Operations-Operating revenue from direct title operations increased $217.4 million, or 15.6 percent, in 2005 over 2004. Acquisitions completed during 2005 and 2004 contributed approximately $41.8 million to the increase in operating revenue from direct operations for 2005. During 2005, we continued to experience strong commercial and buy/sell activity. Title insurance revenue from commercial operations, which we have typically defined as being premiums from policies providing coverage over $1 million in liability, was $988.3 million for 2005, an increase of 33.0 percent over 2004. Refinance activity was lower year over year due to moderate increases in the interest rate environment in 2005.
Operating revenue from agency title operations increased by $120.5 million, or 6.6 percent, in 2005 compared to 2004. This increase was due to growth in the agency business, particularly in certain southeastern and northeastern markets, partially offset by acquisitions of title agencies reflected as direct revenue in the first half of 2005 and reduced levels of refinancing activity. An additional factor is the timing in the reporting of transactions by agents. The timing of policy reporting, and therefore revenue reporting by agents, varies from year to year, from agent to agent and between regions of the country.
Operating revenue from direct title operations increased $23.6 million, or 1.7 percent in 2004 over 2003. Acquisitions completed during 2004 and 2003 in this segment contributed $181.5 million in 2004 over 2003. Before the impact of acquisitions, increased levels of commercial activity were more than offset by a reduction in residential refinancing transactions.
Lender Services-Operating revenue in the Lender Services segment increased $34.2 million, or 22.9 percent in 2005 compared to 2004. Acquisitions completed during 2004 contributed approximately $21.5 million to the increase in operating revenue for 2005. The real estate tax processing and flood zone certification business receives cash in advance to provide service over the life of the loan. We are required to defer a significant portion of the revenue received for these services over the anticipated service life of contracts. As a result, revenue reported in the financial statements represents the amortization of both current and prior service fees. In 2005, real estate tax processing and flood certification services revenue was made up of gross receipts of $95.8 million, reduced by deferred recognition of revenue for $73.9 million of these receipts and increased by the recognition into revenue of approximately $68.3 million of our previously deferred service arrangements. When customers terminate their contracts early, the deferred revenue related to those contracts is recognized immediately. The recognition of deferred revenue from terminated tax servicing contracts in our tax and flood business contributed approximately $33.8 million to the increase in operating revenue for 2005. The service life of our portfolio has not significantly increased compared to 2004. The expected service life of the portfolio increases with an
increasing mortgage interest rate environment because loans tend to be outstanding longer in periods when interest rates increase. This reduces the amount of deferred service arrangements that is amortized into revenue for each period on our life of loan products. If interest rates vary from the current expected trend, the estimated service life is expected to increase or decrease inversely to changes in interest rates. In addition, operating revenue for 2005 was negatively impacted by lower volume in the credit services and tax and flood businesses as a result of the loss, of certain customers partially offset by increased volume in the default services business.
Operating revenue in the Lender Services segment increased $100.6 million, or 205.3 percent in 2004 compared to 2003. This increase was primarily driven by the purchase of our tax and flood business, LATF, in October 2003, and the purchase of our credit services business LACS in August 2003. Our tax and flood revenue increased $52.0 million in 2004 over 2003. Revenue from our credit services business increased $42.3 million in 2004 over 2003 reflecting a full year of operating revenue from our original acquisition in August 2003 and the impact of acquisitions we made to this business in 2004. In 2004, our real estate tax processing and flood certification services revenue was made up of gross receipts of $100.1 million, reduced by deferred recognition of revenue for $83.4 million of these receipts and increased by the recognition into revenue of approximately $57.2 million of our previously deferred service arrangements. The service life of our portfolio increased 40.9 percent compared to 2003.
Corporate and Other-Operating revenue in Corporate and Other increased by approximately $49.6 million, or 84.6 percent, from 2005 over 2004. Acquisitions completed during 2005 and 2004 contributed approximately $28.3 million to the increase in operating revenue in 2005. Before the impact of these acquisitions, operating revenue increased due to stronger volume in the home warranty, commercial appraisal and assessment businesses.
We anticipate that investment and other income will increase in 2006 over 2005 due to higher loan balances, increased deposits of our escrow accounts at Centennial and higher interest rates.
The commission rate paid to agents varies by geographic area in which the commission was paid and by individual agent agreement. During 2005, we experienced an increase in agency revenue concentrated in states where the agency commission rates are lower than our average rate.
Lender Services-Lender Services personnel costs tend to increase during periods of increased sales volume and decrease when sales volume is lower. This is the case because a significant amount of work is required to set up new accounts. Once accounts are established, monitoring and maintenance activities are less labor intensive. Salaries and employee benefit expenses in the Lender Services segment increased $10.1 million, or 15.5 percent in 2005. Acquisitions completed during 2004 contributed approximately $10.8 million to the increase during 2005. Before the impact of these acquisitions, salaries and employee benefit expenses decreased due to reductions in FTE counts in the credit services and tax and flood businesses as a result of lower business volumes partially offset by increased FTEs in the default services business. Salaries and employee benefit expenses increased $42.6 million, or 188.5 percent in 2004 over 2003 due to acquisitions made in 2003 and early 2004.
Financial Services-Salary and employee benefit expenses for the Financial Services segment were essentially flat from 2004 to 2005. Financial services salaries and benefit expenses increased $2.0 million in 2004 over 2003 due to our acquisition of Centennial in December 2003.
The provision for title policy and contract claims includes an estimate of known and anticipated claims. A provision for estimated claims that are incurred but not yet reported is established at the time premium revenue is recognized based on reported claims, historical loss experience and other factors, including industry trends.
Provisions for title losses as a percentage of title operating revenues were 5.2 percent for 2005, 4.3 percent for 2004, and 5.3 percent for 2003. The loss percentage increase in 2005 compared to the loss percentage in 2004 reflects a higher estimated loss rate for the 2005 policy year and the negative impact of two large claims totaling approximately $15.6 million, partially offset by a favorable adjustment to prior year loss reserves. In 2004, a favorable adjustment to the loss rate was attributable to a favorable adjustment to prior year loss reserves. The prior year favorable adjustments in 2004 and 2005 resulted from lower than expected payment levels on policies issued in prior years that included a high proportion of refinance business. Adverse development on prior year loss reserves during 2003 was attributable to a few large claims. We review our loss provision rates periodically and adjust the rates as experience develops or new information becomes known.
In 2005, we wrote off a portion of the customer relationship intangible related to the acquisition of our tax and flood business in 2003 and a non solicitation intangible related to one of our title acquisitions. For further details, see Note 11, “Impairment and Exit and Termination Charges” to the accompanying Consolidated Financial Statements.
We identified 17 title plants in 2004 and 21 title plants and 2003 that will not continue to be used or maintained. As a result, we took charges to earnings of $5.0 million in 2004 and $4.9 million in 2003 to reflect the diminution in value associated with these plants. We did not have any material charges related to title plants in 2005. We anticipate that a result of the trend toward automation of property records by municipalities and courts, we will continue to record charges related to diminution of value of our title plants in future periods.
Interest expense increased by $7.0 million in 2005 over 2004 and by $13.7 million in 2004 over 2003. The increase in interest expense in 2005 was due to increases in interest-bearing deposits and borrowings at Centennial and convertible debt issued in May 2004. The increase in interest expense in 2004 was related to our acquisition of Centennial in December 2003 of $7.2 million and the remainder of the increase in 2004 was related to our issuance in November 2003 of $115.0 million of our 3.125 percent Senior Convertible Debentures due 2033 used to fund a portion of the acquisitions in 2004 and our issuance of $125.0 million of our 3.25 percent Senior Convertible Debentures due 2034 issued in May 2004 used in part to repay amounts borrowed to fund our acquisition of County Title Holding Corp., the parent company of Southland Title Corporation.
Title Operations-General and administrative expenses for the Title Operations segment increased by $86.4 million or 20.2 percent in 2005 compared to 2004. Incremental costs from acquisitions completed during 2005 and 2004 contributed $8.5 million of the increase in 2005. Before the impact of these acquisitions, the increase in general and administrative expenses for 2005 was due to increased order volume and increased legal costs of $26.1 million. The increased legal costs included previously announced charges for legal reserves for regulatory matters of $12.3 million.
Financial Services-General and administrative expenses for the Financial Services segment decreased by $0.4 million in 2005 from 2004 and increased $1.6 million in 2004 from 2003 due to the acquisition of Centennial in November 2003.
Title Operations-The Title Operations segment reported pretax income of $348.8 million in 2005, $345.4 million in 2004, and $388.1 million in 2003. Pretax income in this segment from 2005 compared to 2004 was positively impacted by increased operating revenue from higher buy/sell and commercial volumes and from our growth through acquisitions during 2005 and 2004. These increases were partially offset by increases in litigation costs. Pretax income in this segment from 2004 compared to 2003 was positively impacted by growth through acquisitions during 2004 offset by increases in litigation, and personnel and administrative costs. Personnel and administrative costs did not decrease as rapidly as transaction volumes decreased due both to our inability to reduce headcount in proportion to volume changes and the acquisitions of agents throughout 2004 and during the latter portion of 2003. Additionally, the Title Operations segment reported reduced income in 2004 from its investment portfolio due primarily to the liquidation of securities in the third quarter to fund in part the acquisition of LATF and LACS. See “Net Realized Investment Gains” on page 41.
activities, which have been prepared in accordance with GAAP. PRBDA and PRBDA margin, as presented, may not be comparable to the calculation of similarly titled measures reported by other companies. We believe that PRBDA and PRBDA margins provide useful information to investors because they are indicators of operating and cash flow performance for those businesses where we have life of loan servicing requirements, which have been burdened in the short run with amortization expense related to intangibles acquired with the businesses. While amortization expense is an operating expense under GAAP, this expense represents the non-current allocation of intangible assets acquired in prior periods. Additionally, while net revenue deferrals are a reduction of revenue and profits in the current period, these reductions represent a non-cash allocation of revenue to future periods for ongoing monitoring of certain of our flood and tax servicing products. Reconciliations of these financial measures to Lender Services operating results are as follows:
Corporate and Other-The Corporate and Other segment reported pretax losses of $(87.4) million in 2005, $(92.1) million in 2004 and $(75.0) million in 2003. The Corporate and Other segment includes unallocated corporate expenses and our home warranty, residential inspection, and commercial appraisal and assessment businesses. The decrease in pretax losses from 2004 to 2005 was primarily due to the impact of acquisitions completed during 2005 and 2004. The increase in pretax losses from 2003 to 2004 was due to increased interest expense as a result of debt issuances in May 2004 and November 2003 and due to increased salary and employee benefit expenses from infrastructure growth and compliance with the Sarbanes-Oxley Act.
Our effective income tax rate, which includes a provision for state income and franchise taxes for non-insurance subsidiaries, was 36.6 percent for 2005, 35.2 percent for 2004 and 35.3 percent for 2003. The differences in the effective tax rate were primarily due to changes in the ratio of permanent differences to income before taxes and the mix of state taxes related to our non-insurance subsidiaries.
We reported net income for 2005 of $165.6 million or $9.29 per share on a diluted basis, compared to $171.6 million, or $9.39 per share on a diluted basis, for 2004, and $202.8 million, or $10.88 per share on a diluted basis, for 2003. Adjusted net income for 2005 was $184.2 million, or $10.34 per share on a diluted basis, compared to $180.7 million for 2004, or $9.89 per share on a diluted basis, and $206.0 million for 2003, or $11.05 per share on a diluted basis.
To supplement our consolidated financial statements presented on a GAAP basis, we use additional non-GAAP measures of operating revenue, income before income taxes, net income, and earnings per common share assuming dilution, adjusted to exclude certain costs, expenses, gains or losses we believe appropriate to enhance an overall understanding of our past financial performance and also our prospects for the future. These adjustments to our GAAP results are made with the intent of providing both management and investors a more complete understanding of our underlying operational results and trends and our marketplace performance. In addition, these non-GAAP results are among the primary indicators management uses as a basis for planning and forecasting future periods. Adjusted operating revenue, income before income taxes, adjusted net income, and adjusted earnings per common share assuming dilution are not measures of performance defined by GAAP and should not be considered in isolation or as a substitute for operating revenue, income before income taxes, net income, or earnings per common share assuming dilution, which have been prepared in accordance with GAAP. Reconciliations of these financial measures to consolidated operating results are as follows:
We do not match maturities of our investments with anticipated claims payments, which may result in our having periods in which cash flows from operations are positively or negatively impacted by the difference between the liability for claims being established and the actual payment stream. As opposed to insurance companies where claims account for a substantial portion of premiums, our title insurance claims typically average approximately 4 percent to 5 percent of title insurance operating revenue. Additionally, the time period in which we are liable for a claim is long, with potential claims being paid over 20 years after a title policy is issued and the timing of claims payments may vary from period to period. Over the past several years, exclusive of our operating cash flows, our investment income returns plus maturities of fixed obligation securities have resulted in a maturity and investment income to claims payment ratio in excess of two times.
We consider our investment portfolio as available for sale. We review the status of each security quarterly to determine whether an other-than-temporary impairment (“OTTI”) has occurred. Our criteria include whether the fair value of the security is less than 80 percent of its amortized cost, the investment grade of the security and how long the security has been in an unrealized loss position. All of our securities that have had an unrealized loss in excess of 1 year are investment-grade, long-term bonds that we have the ability and intent to hold to recovery. Consequently, we recorded no OTTI loss in 2005 or 2004.
We slowed our acquisition pace in 2005 compared to the two previous years. We focused on deepening rather than broadening our service offerings and completed only three acquisitions with an aggregate purchase price of approximately $24.0 million in new title operations and six acquisitions with an aggregate purchase price of approximately $2.1 million in expanded services. The 2005 purchases were funded through a mixture of cash, invested cash and investments. We will continue to selectively evaluate additional acquisitions should attractive candidates be identified.
In 2004 and 2003, we issued Convertible Senior Debentures totaling $125.0 million and $115.0 million, respectively. These Debentures are convertible only upon the occurrence of certain events, which we currently
In 2006, certain senior notes will mature in August 2006. It is our intention to refinance these notes at prevailing market rates.
In 2004, we amended our employee retirement savings plans. The changes to our employee retirement savings program included:
Amendments to our Savings and Stock Ownership Plan effective January 1, 2005 to comply with the safe harbor provisions of Sections 401(k)(12) and 401(m)(11) of the Internal Revenue Code of 1986, as amended. The amendment provided immediate vesting on all of our matching contributions made after January 1, 2005, removed the one-year waiting period for new participants to receive matching contributions and increased the matching contributions that we will make to employee accounts under the plan.
Adoption of a new Employee Stock Purchase Plan was approved by our shareholders at the 2005 Annual Meeting of Shareholders and became effective July 1, 2005. The plan replaced our previous employee stock purchase plan and permits employees to purchase stock at a discount of 15 percent of the fair market value of our common stock. The plan initially authorizes the purchase of 1,500,000 shares of our common stock.
We maintain an Executive Voluntary Deferral Plan and an Outside Directors Deferral Plan. These plans allow executives and directors to defer eligible compensation into deferred stock units or a cash account bearing interest at a fixed rate of return. We funded the purchase of 40,580 shares of common stock related to these plans in 2005. The shares are held in a trust to be used for payments to participants under the plans. The trustee held 237,400 shares at December 31, 2005. Further information on these plans can be found in Note 9 to the accompanying Consolidated Financial Statements.
In the ordinary course of business, we enter into business arrangements that fall within the scope of FIN No. 45, Guarantors Accounting and Disclosure Requirements Including Guarantees of Indebtedness of Others, and FIN No. 46, Variable Interest Entities, both of which we adopted in 2003. There were no arrangements in these categories that are reasonably likely to have a material impact on our current or future operations, financial condition or results of operations. Required disclosures are in Notes 12 and 13 to the accompanying Consolidated Financial Statements.
A summary of our contractual obligations and commercial commitments is as follows:
Our policy and contract claims loss reserve projected annual payments as of December 31, 2005 were as follows:
We also have long-term debt of $479.3 million bearing interest at an average rate of 4.7 percent at December 31, 2005. Our debt portfolio is primarily fixed rate obligations and not subject to variability.