Management’s overview. We reported net earnings of $88.8 million for the year ended December 31, 2005 compared with net earnings of $82.5 million for the same period in 2004. On a diluted per share basis, net earnings were $4.86 for the year 2005 compared with net earnings of $4.53 for the year 2004. Revenues for the year increased 11.7% to $2,430.6 million from $2,176.3 million last year.
In comparing 2005 with 2004, pretax earnings (which is calculated before minority interests) were increased by a higher level of commercial transactions and a higher mix of revenues from direct operations compared with lower-margin agency business. Acquisitions increased revenues by $37.3 million and pretax earnings by $8.0 million in 2005. Earnings for 2005 were impacted by higher employee costs and other operating expenses primarily because the Company continues to incur the costs of investment in technology advancements. The Company’s goal is to increase productivity, gain market share and provide superior service to its customers. Profits in 2005 were also impacted by an addition to title loss reserves of $10.5 million in the fourth quarter of 2005 relating to a mortgage fraud and a defalcation. The fourth quarter of 2005 also includes charges relating to corrections of the Company’s accounting for leases and employee vacations of $2.8 million and $2.1 million, respectively. The combined after tax-effect of these two items was $3.2 million, which is immaterial for the year to net earnings, cash flow and stockholders’ equity.
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 or results of operations for the three years ended December 31, 2005.
Our accruals for unreported policies from agencies were not material to our total assets or stockholders’ equity for any of the three years ended December 31, 2005. The differences between the amounts our agencies have subsequently reported to us as compared to our estimated accruals are substantially offset by any difference arising from the prior year’s accrual and have been immaterial to stockholders’ equity during each of the three prior years. We believe our process provides the most reliable estimation of the unreported policies and appropriately reflects the trends in agency policy activity.
Factors affecting revenues. The principal factors that contribute to increases in our operating revenues for our title and REI segments include:
To the extent inflation causes increases in the prices of homes and other real estate, premium revenues are also increased. Premiums are determined in part by the insured values of the transactions we handle. These factors may override the seasonal nature of the title business. Generally, our first quarter is the least active and the fourth quarter is the most active in terms of title revenues.
Industry data. A table of published mortgage interest rates and other selected residential data for the years ended December 31, 2005, 2004 and 2003 follows (amounts shown for 2005 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.
REI revenues. Real estate information revenues were $82.5 million in 2005, $68.9 million in 2004 and $78.7 million in 2003. The increase in 2005 resulted primarily from a greater number of Section 1031 property exchanges and increases in automated mapping services, partially offset by reduced revenues relating to post-closing services and electronic mortgage documents. The decrease in 2004 resulted primarily from a lesser amount of post-closing services and electronic mortgage documents resulting from a reduction in the volume of real estate transactions, offset somewhat by an increase in Section 1031 tax-deferred property exchange services.
Retention by agencies. The amounts retained by agencies, as a percentage of revenues generated by them, were 81.2%, 81.6% and 82.0% in the years 2005, 2004 and 2003, respectively. Amounts retained by title agencies are based on agreements between agencies and our title underwriters. The percentage that amounts retained by agencies bears to agency revenues may vary from year to year because of the geographical mix of agency operations and the volume of title revenues.
Employee costs. Employee costs for the combined business segments increased 17.5% in 2005 and 3.1% in 2004. The number of persons we employed at December 31, 2005, 2004 and 2003 was approximately 9,900, 9,000 and 8,200, respectively. The increases in staff in 2005 and 2004 were primarily due to 552 and 605 employees, and $18.3 million and $26.9 million in employee costs, from acquisitions, respectively. The number of employees and employee costs also increased in 2005 due to the increase in the volume of real estate transactions closed by us.
Other operating expenses also include title plant and travel expenses. Most of our operating expenses follow, to varying degrees, the changes in transaction volume and revenues.
Our employee costs and certain other operating expenses are sensitive to inflation. To the extent inflation causes increases in the prices of homes and other real estate, premium revenues also increase. Premiums are determined in part by the insured values of the transactions we handle.
Title losses. Provisions for title losses, as a percentage of title operating revenues, were 5.5%, 4.8% and 4.4% in 2005, 2004 and 2003, respectively. An increase in the number of larger losses resulted in an increase in our loss ratio in 2005. The increase included a $10.5 million addition to title loss reserves in the fourth quarter of 2005 related to a mortgage fraud and a defalcation. An increase in loss payment experience for prior policy years also resulted in an increase in our loss ratios in 2005 and 2004.
Contractual obligations. Our material contractual obligations at December 31, 2005 were:
The most significant non-operating source of cash was from proceeds of investments matured and sold in the amount of $580.9 million, $405.7 million and $264.3 million in 2005, 2004 and 2003, respectively. We used cash for the purchases of investments in the amounts of $679.0 million, $470.8 million and $416.3 million in 2005, 2004 and 2003, respectively.
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, the change released approximately $25.2 million, or approximately $18.3 million after tax, 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 $70.4 million and stockholders’ equity was $766.3 million at December 31, 2005. We are not aware of any trends, either favorable or unfavorable, that will materially affect notes payable or stockholders’ equity. We do not expect any material changes in the cost of such resources. Significant acquisitions in the future could materially affect the notes payable or stockholders’ equity balances.
Off-balance sheet arrangements. We do not have any material source of liquidity or financing that involves off-balance sheet arrangements.