Management’s overview. We reported a net loss of $241.9 million for the year ended December 31, 2008 compared with a net loss of $40.2 million for the year 2007. Our net loss was $13.37 per share for the year 2008 compared with a net loss of $2.21 per share for the year 2007. Revenues for the year decreased 26.2% to $1.6 billion from $2.1 billion in 2007.
We recorded only our second full year loss since 1974. Existing home sales in 2008 fell to their lowest level since 1997, according to the National Association of Realtors. New home sales were the lowest since 1963, the year recordkeeping began for this statistic.
The U.S. real estate market, including residential and commercial, faced significant further weakening during 2008. Although average 30-year fixed mortgage interest rates remained relatively low during 2008, there was insufficient demand to offset the effects of the collapsed subprime mortgage lending market, limited availability of credit, increased foreclosures, weakened home sales and falling home prices.
We have continued our aggressive response to the economic challenges of the real estate market with the goal of returning to profitability and reasonable profit margins. We have restructured our management, sales and marketing teams to better serve our existing market segments with improved operational efficiencies. We also closed 167 unprofitable branches and offices in 2008 to align our employee and other operational expenses with revenues.
Many of our other operating expenses have declined at the same rate as revenues. However, some operating expenses are fixed in nature, such as rent and other occupancy costs, and have not declined at the same rate as our revenues. Other operating expenses were negatively impacted by an increase in reserves related to pending legal matters and reserves for uncollectible debt.
Critical accounting estimates. Actual results can differ from our accounting estimates. While we do not anticipate significant changes in our estimates, there is a risk that such changes could have a material impact on our consolidated financial condition or results of operations for future periods.
Our most critical accounting estimate is providing for title loss reserves. Our liability for estimated title losses at December 31, 2008 comprises both known claims ($135.1 million) and our estimate of claims that may be reported in the future ($326.4 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 11.1%, 8.5% and 6.0% for the years ended December 31, 2008, 2007 and 2006, 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 100 basis points in this percentage, a reasonably likely scenario based on our historical loss experience, would have changed our provision for title losses and pretax earnings approximately $15.1 million for the year ended December 31, 2008.
Our method for recording the reserves for title losses on both an interim and annual basis begins with the calculation of our current loss provision rate, which is applied to our current premiums resulting in a title loss expense for the period. This loss provision rate is set to provide for losses on current year policies and is determined using moving average ratios of recent actual policy loss payment experience (net of recoveries) to premium revenues. Large losses (those exceeding $1.0 million on a single claim) are analyzed and reserved for separately due to the higher severity of loss, lower volume of claims reported and sporadic reporting of such claims.
At each quarter end, our recorded reserve for title losses is initially the result of beginning with the prior period’s reserve balance for claim losses, adding the current period provision to that balance and subtracting actual paid claims, resulting in an amount that our management compares to its actuarially-based calculation of the ending reserve balance. The actuarilly-based calculation is a paid loss development calculation where loss development factors are selected based on company data and input from our third-party actuaries. We also obtain input from third-party actuaries in the form of a reserve analysis utilizing generally accepted actuarial methods. While we are responsible for determining our loss reserves, we utilize this actuarial input to assess the overall reasonableness of our reserve estimation. If our recorded reserve amount is within a reasonable range of our actuarially-based reserve calculation and the actuary’s point estimate (+/- 3.0%), but not at the point estimate, our management assesses the major factors contributing to the different reserve estimates in order to determine the overall reasonableness of our recorded reserve, as well as the position of the recorded reserves relative to the point estimate and the estimated range of reserves. The major factors considered can change from period to period and include items such as current trends in the real estate industry (which management can assess although there is a time lag in the development of this data for use by the actuary), the size and types of claims reported and changes in our claims management process. If the recorded amount is not within a reasonable range of our third-party actuary’s point estimate, we will adjust the recorded reserves in the current period and reassess the provision rate on a prospective basis.
Our evaluation of goodwill is completed annually in the third quarter using June 30 balances or when events may indicate impairment. This evaluation is based on a combination of a discounted cash flow analysis (DCF) and market approaches that incorporate market multiples of comparable companies and our own market capitalization. The DCF model utilizes historical and projected operating results and cash flows, initially driven by estimates of changes in future revenue levels, and risk-adjusted discount rates. Our projected operating results are primarily driven by anticipated mortgage originations, which we obtain from projections by industry experts. Fluctuations in revenues, followed by our ability to appropriately adjust our headcount and other operating expenses, are the primary reasons for increases or decreases in our projected operating results. For example, in our current projections, a change of 5% in revenues in year one of our projections would result in an estimated $4.1 million change in pretax operating results and could potentially change the fair value of our title reporting unit by $23.2 million. Our market-based valuation methodologies utilize (i) market multiples of earnings and/or other operating metrics of comparable companies and (ii) our market capitalization and a control premium based on market data and factors specific to our corporate governance structure. As a result of current market conditions, overall market volatility, including our market capitalization and our operating results, we updated our evaluation of goodwill through December 31, 2008. Based upon our updated evaluation, we have concluded that our goodwill is not impaired as of December 31, 2008. However, to the extent that our future operating results are below our projections, or in the event of continued adverse market conditions, a future review for impairment may be required.
We evaluate goodwill based on two reporting units (Title and REI). Goodwill is assigned to these reporting units at the time the goodwill is initially recorded. Once assigned to a reporting unit, the goodwill is pooled and no longer attributable to a specific acquisition. All activities within a reporting unit are available to support the carrying value of the goodwill. The following reflects our conclusions relating to our goodwill reporting units at December 31, 2008:
Based on these evaluations, we estimate and expense to current operations any loss in value of these assets. As part of our process, we obtain input from third-party appraisers regarding the fair value of our reporting units. While we are responsible for assessing whether an impairment of goodwill exists, we utilize the input from third-party appraisers to assess the overall reasonableness of our conclusions. In June 2008, the Company’s REI segment incurred an impairment charge of $6.0 million, included in depreciation and amortization in our consolidated statement of earnings, relating to its internally developed software that we subsequently determined will not be deployed into production. There were no impairment write-offs of goodwill or other long-lived assets during 2007 or 2006.
Although mortgage originations are expected to increase in 2009, Fannie Mae and The Mortgage Bankers Association anticipate continued difficulties for the real estate market due to the tightened credit market, decreased housing prices and low housing starts. Therefore, our financial condition and results of operations will continue to be adversely affected by the current market conditions.
The number of direct title orders we opened follows (in thousands):
Regulatory and legal developments. In June 2008, the California Department of Insurance released for public notice and comment revised regulations that place certain limits on payments by title insurance marketing representatives to agents and brokers, eliminate a previously proposed interim rate reduction and a maximum rate formula, and substantially scale back the proposed financial data requirements on title insurance companies. The final regulations are expected to be issued by July 1, 2009.
On January 12, 2009, a lawsuit was filed against four defendants, including our subsidiaries, Stewart Title Guaranty Company and Stewart Title of California, Inc., entitled Wooldridge, et al v. Stewart Title Guaranty Co., et al, Superior Court of the State of California for the County of San Luis Obispo. The plaintiffs allege that they suffered damages relating to loans or interests in loans they made in connection with several properties in San Luis Obispo County. The plaintiffs assert causes of action against our subsidiaries for breach of contract, negligence, and violation of fair claims settlement practices and breach of covenants of good faith and fair dealings. Although we cannot predict the outcome of this action, we intend to vigorously defend ourselves against the allegations and do not believe that the outcome will materially affect our consolidated financial condition or results of operations.
We are also subject to lawsuits incidental to our business, most of which involve disputed policy claims. In many of these lawsuits, the plaintiff seeks exemplary or treble damages in excess of policy limits based on the alleged malfeasance of an issuing agency. We do not expect that any of these proceedings will have a material adverse effect on our consolidated financial condition or results of operations. Along with the other major title insurance companies, we are party to a number of class action lawsuits concerning the title insurance industry. We believe that we have adequate reserves for the various litigation matters and contingencies discussed above and that the likely resolution of these matters will not materially affect our consolidated financial condition or results of operations.
A comparison of our results of operations for 2008 with 2007 and 2007 with 2006 follows. Factors contributing to fluctuations in our results of operations are presented in the order of their monetary significance and we have quantified, when necessary, significant changes. Results from our REI segment are included in our year-to-year discussions as those amounts are immaterial in relation to consolidated totals. When relevant, we have discussed our REI segment’s results separately.
REI revenues. Real estate information services operating revenues were $44.5 million in 2008, $66.0 million in 2007 and $81.2 million in 2006. The decrease in 2008 resulted primarily from the reduction in residential lending volume, which impacts our real estate-related transactions, and the reduction in number of Section 1031 tax-deferred property exchanges caused by the continued decline in the real estate markets.
Certain investment gains and losses were realized as part of the ongoing management of our investment portfolio for the purpose of improving performance and are included in our results of operations in investment and other gains - net in our consolidated statements of earnings, retained earnings and comprehensive earnings. Investment and other (losses) gains - net included realized investment losses relating to impairments totaling $12.4 million for equity method and cost-basis investments, $10.4 million from the sales and write-offs of investments in consolidated subsidiaries, $8.9 million for office closure costs and $4.7 million for other-than-temporary impairments of equity securities held for investment.
In addition to the gain on the sale of subsidiaries noted above (see REI revenues), our 2007 investment and other gains - net includes a $5.6 million gain from the sale of real estate. The real estate was owned by a consolidated subsidiary, which has significant minority interest shareholders. After considering the effects of minority interests and taxes, the sale of real estate resulted in a net gain of approximately $2.0 million in 2007.
Excluding the effects of acquisitions and divestitures, we reduced our employee headcount company-wide approximately 2,200, or 25.7%, in 2008 and approximately 4,000, or 40.4%, since December 31, 2005. In 2008 and 2007, employee costs were reduced to better align our operating costs with revenues but were offset somewhat by normal increases. Also, in 2007 compared to 2006, employee costs were approximately $8.0 million lower due to a high level of major medical claims in 2006, both in terms of number and cost.
Other operating expenses. Most of our operating expenses are fixed in nature, although some follow, to varying degrees, the changes in transaction volume and revenues. Other operating expenses for the combined business segments decreased $46.5 million, or 11.4%, in 2008 and increased $4.0 million, or 1.0%, in 2007. Acquisitions increased other operating expenses approximately $1.4 million and $5.3 million in 2008 and 2007, respectively. The remaining fluctuation in other operating expenses in 2008 resulted from decreases in our outside search fees, business promotions, rent including other occupancy costs, technology costs and certain REI expenses, offset by increases in litigation, insurance and bad debts. The remaining fluctuation in other operating expenses in 2007 resulted from increases in our international business, outside search fees due to the growth in our commercial business, rent including other occupancy costs, and bad debt expenses, offset by decreases in certain REI expenses, general supplies, business promotion, premium taxes and technology costs.
Title losses. Provisions for title losses, as a percentage of title operating revenues, were 11.1%, 8.5% and 6.0% in 2008, 2007 and 2006, respectively. An increase in loss payment experience for recent policy years resulted in an increase in our loss ratios in 2008 and 2007. Title loss reserves in 2008 increased due to a $32.0 million provision for strengthening policy loss reserves for policy years 2005, 2006 and 2007 related to higher than expected loss payment and incurred loss experience for these policy years. This brings the total strengthening charges for these policy years to $37.4 million. We do not currently anticipate future reserve strengthening for these policy years. Our policy loss reserves in 2008 also reflect charges of $41.7 million relating to large title losses primarily attributable to independent agency defalcations and fraud, as well as mechanic lien claims. These charges were partially offset by insurance recoveries of $11.6 million received during the year.
Contractual obligations. Our material contractual obligations at December 31, 2008 were:
Based upon contractual maturities of the notes. At December 31, 2008, $52.0 million of the amount due more than 1 year from December 31, 2008 would be due on demand upon notice from our lenders.
Liquidity. Our liquidity and capital resources represent our ability to generate cash flow to meet our obligations to our shareholders, customers (payments to satisfy claims on title policies), vendors, employees, lenders and others. At December 31, 2008, our cash and investments, including amounts reserved pursuant to statutory requirements, was $654.1 million.
A summary of our net consolidated cash flows for the year ended December 31 follows:
Cash from investing activities was generated principally by proceeds from investments matured and sold in the amounts of $668.5 million, $449.2 million and $435.5 million in 2008, 2007 and 2006, respectively. We used cash for the purchases of investments in the amounts of $570.3 million, $391.9 million and $405.9 million in 2008, 2007 and 2006, respectively. The cash generated from sales and maturities not reinvested was used principally to fund operations and capital expenditures.
During the years ended 2008, 2007 and 2006, acquisitions resulted in additions to goodwill of $2.1 million, $13.7 million and $48.7 million, respectively.
The most significant financing activity in 2008 was the borrowing under the line of credit described in the preceding paragraph.
During 2007, we acquired $9.5 million of our common shares under a Board of Directors’ approved stock repurchase program. No such purchases were made in 2008 or 2006, or are anticipated for 2009.
Other-than-temporary impairments of investments. We recorded an other-than-temporary charge of $4.7 million in 2008 relating to equity securities held for investment. For the years ended December 31, 2007 and 2006, we have not recorded material other-than-temporary impairments of our investments.