Our combined direct and REI operations posted a pretax profit for the full year. In the REI segment, we focused on increasing revenues from existing major product offerings (such as loan loss mitigation solutions, distressed borrower contact services and loan servicing support) and also from expanding services into short sale support and REO (Real Estate Owned) solutions, county government support services and international land record enhancement. With the goal of driving additional revenues and supporting the evolving lending and real estate markets, we continue to develop innovative new services in the REI segment to drive additional revenues to these high margin operations.
Our Regional Production Centers now account for 65% of all affiliated title searches and commitments for our direct title business, up from 47% in December 2009. In addition to reducing costs, we expect the improved utilization of our most skilled people in these centers to reduce claims related to the search and examination process.
Losses from title policy claims decreased 18.8% for the year 2010 compared to 2009. We recorded a $4.8 million reserve strengthening charge in 2010 relating primarily to policy years 2007 and 2008 due to continuing adverse claims development for those policy years. This adverse experience also resulted in an increase in the loss provision related to revenues recognized on policies issued in 2010, and, accordingly, a $2.6 million catch-up adjustment was recorded in 2010. For the years 2010 and 2009, title losses as a percentage of title revenues were 9.6% and 11.3%, respectively. Charges related to reserve strengthening, including large losses and defalcations, fell 71%, from $52.6 million in 2009 to $15.3 million in 2010. We had no agency defalcation losses exceeding $1.0 million in the fourth quarter 2010 and only five such claims reported (averaging less than $1.5 million each) in the previous six quarters. Excluding the impact of the reserve strengthening charges, large losses, and defalcations (net of recoveries) in both years, title losses were 8.6% of title revenues in 2010 and 8.0% in 2009.
Cash claims payments remained elevated for the year 2010, and consequently, we have maintained a relatively high provisioning rate for title losses. Nonetheless, we believe we are on track to return to a normal loss ratio by the end of 2012. Losses incurred on known claims in 2010 decreased 15.7% compared to 2009. The loss ratio on known claims from the independent agencies cancelled in recent years was 9.2% in 2010 while the loss ratio on the current independent agency network was 2.9%. More than 70% of independent agency claim payments were for agencies cancelled in recent years.
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.
Provisions for title losses, as a percentage of title operating revenues, were 9.6%, 11.3% and 11.2% for the years ended December 31, 2010, 2009 and 2008, 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 increased or decreased our provision for title losses and pretax operating results approximately $15.5 million for the year ended December 31, 2010.
At each quarter end, our recorded reserve for title losses begins with the prior period’s reserve balance for claim losses, adds the current period provision to that balance and subtracts actual paid claims, resulting in an amount that our management compares to its actuarially-based calculation of the ending reserve balance to provide for future title losses. The actuarially-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 (+/- 3.0%) of our actuarially-based reserve calculation and the actuary’s point estimate, 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. Once our reserve for title losses is recorded, it is reduced in future periods as a result of claims payments and may be increased or reduced by revisions to our estimate of the overall level of required reserves.
Our primary business is title insurance and settlement-related services. We close transactions and issue title policies on homes and commercial and other real properties located in all 50 states, the District of Columbia and international markets through policy-issuing offices and agencies. We also provide electronic delivery of data, products and services related to real estate and mortgage services, loss mitigation, default services, post-closing services, automated county clerk land records, property ownership mapping, geographic information systems, property information reports, document preparation, background checks and expertise in Internal Revenue Code Section 1031 tax-deferred property exchanges.
Industry data. Published mortgage interest rates and other selected residential data for the years ended December 31, 2010, 2009 and 2008 follow (amounts shown for 2010 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.
The real estate market has not seen a consistent recovery, although several economic indicators have shown improvements, such as improving consumer confidence and easing lending standards for business and consumer loans. The easing of lending standards has not extended to the real estate market where commercial and residential lending volume has decreased. Most industry experts project mortgage interest rates to increase and refinancing mortgage originations to decrease in 2011. They also expect the total number of mortgage originations to decrease in 2011 despite modest improvements in home sales in 2011.
As a result of the above trends, our direct order levels were relatively unchanged from 2008 to 2009 and decreased from 2009 to 2010, which is consistent with the U.S. real estate market during those same periods.
A comparison of our results of operations for 2010 with 2009 and 2009 with 2008 follows. Factors contributing to fluctuations in 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 year-to-year discussions. When relevant, we have discussed our REI segment’s results separately.
Title revenues. Revenues from direct title operations decreased $40.3 million, or 6.0%, in 2010 and $29.9 million, or 4.2%, in 2009. The largest revenue decreases in 2010 were in Texas, California and Utah, partially offset by increases in Canada. The largest revenue decreases in 2009 were in foreign operations (excluding Canada), Texas, Canada, New York, and California, partially offset by increases in Arizona. Revenues from commercial and large transactions increased $18.7 million to $92.7 million in 2010 and decreased $43.0 million to $74.0 million in 2009.
Revenues from independent agencies decreased $30.9 million, or 3.3%, in 2010 and increased $142.3 million, or 17.7%, in 2009. The decrease in 2010 was primarily related to a decline in refinancing closings in 2010, resulting in decreases in revenues from agencies in many states including Pennsylvania, Ohio and Virginia. The decreases were partially offset by significant increases in California, New York and Texas, primarily related to the increase in commercial closings. The increase in 2009 was largely due to the addition of new higher-remitting, lower-risk agencies, as well as significant increases in revenues from existing agencies, which experienced an increase in transaction volumes. In 2009, the largest increases in revenues from agencies were in California, Pennsylvania, Michigan and New Jersey, partially offset by decreases in Florida and Texas.
Retention by agencies. Amounts retained by title agencies are based on agreements between agencies and our title underwriters. This retention percentage may vary from year-to-year due to the geographical mix of agency operations, the volume of title revenues and, in some states, laws or regulations. On average, amounts retained by independent agencies, as a percentage of revenues generated by them, were 82.4%, 82.9% and 81.9% in the years 2010, 2009 and 2008, respectively. We actively increased remittance rates with many of our independent agencies, increasing the amount of premiums remitted by our independent agencies to our underwriters in 2010. As these efforts were ongoing during most of the year, we have not yet realized a full year of increased remittances. The fluctuations in 2010 and 2009 are also affected by the uneven recovery of real estate markets across the nation; those states with higher agency retention percentages had experienced a disproportionate increase in transaction activity in 2009. As real estate markets continue to stabilize nationally, we expect the mix of agency business to normalize, resulting in lower average retention percentages in the aggregate.
In 2009, we reduced our employee headcount company-wide approximately 200, or 3.2%, excluding the effects of acquisitions and divestitures. During this period, employee costs were reduced through ongoing cost savings initiatives to better align our operating costs with revenues, partially offset by increases in bonuses due to the improved results of our direct operations.
In our REI segment, total employee costs increased $2.2 million, or 7.9%, in 2010, primarily due to increases in staffing driven by increased demand for our loan modification services. In 2009, total employee costs decreased $5.7 million, or 16.5%, primarily in our lender services and property information businesses due to staffing reductions related to lower transaction volumes, which were partially offset by increases in staffing relating to our loan modification services.
In 2008, an increase in loss payment experience for recent policy years resulted in an increase in our loss ratios. 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. 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, 2010 were:
Operating leases are primarily for office space and expire over the next 10 years. The timing shown above for the payments of estimated title losses is not set by contract. Rather, it is projected based on historical payment patterns. The actual timing of estimated title loss payments may vary materially from the above projection since claims, by their nature, are complex and paid over long periods of time. Title losses paid were $158.3 million, $149.3 million and $136.8 million in 2010, 2009 and 2008, respectively.
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. As of December 31, 2010, our cash and investments, including amounts reserved pursuant to statutory requirements, aggregated $638.3 million.
A substantial majority of our consolidated cash and investments as of December 31, 2010 was held by Stewart Title Guaranty Company (Guaranty) and its subsidiaries. The use and investment of these funds, dividends to the holding company, and cash transfers between Guaranty and its subsidiaries and the holding company are subject to certain legal and regulatory restrictions. In general, Guaranty may use its cash and investments in excess of its legally-mandated statutory premium reserve (established in accordance with requirements under Texas law) to fund its insurance operations, including claims payments. Guaranty may also, subject to certain limitations and upon regulatory approval, pay dividends to the holding company and/or provide funds to its subsidiaries (whose operations consist principally of field title offices) for their operating and debt service needs.
Our improved cash flow from operations for 2010 compared to 2009 was primarily due to the receipt of a $50.9 million income tax refund, which was reflected as a receivable at December 31, 2009, and cash receipts from loan modification services in 2010.
Cash payments on title claims in 2010, 2009 and 2008 were $158.3 million, $149.3 million and $136.8 million, respectively. Claims payments remain elevated compared to historical norms as payments are made on previously accrued title losses. Claim payments made, net of insurance recoveries, during 2010, 2009, and 2008 include $32.8 million, $17.5 million and $21.4 million, respectively, on large title claims. Also, more than 70% and 60% of the amount of total claim payments relating to independent agencies made in 2010 and 2009, respectively, were for losses arising from independent agencies cancelled in recent years. As the losses from those agencies are paid and newly reported prior policy year claims begin to decline, we expect the overall amount of cash paid on title claims to decline significantly. The increase in claims payments since 2008 is also consistent with our historical experience that title claims are filed more quickly and there is a higher incidence of agency defalcations in declining real estate markets. The insurance regulators of the states in which our underwriters are domiciled require our statutory premium reserves to be fully funded, segregated and invested in high-quality securities and short-term investments. As of December 31, 2010, cash and investments funding the statutory premium reserve aggregated $406.2 million and our estimate of claims that may be reported in the future totaled $351.6 million. In addition to this restricted cash and investments, we had unrestricted cash and investments (excluding cost-basis and equity method investments) of $124.8 million, which are available for underwriter operations, including claims payments.
During the years ended 2009 and 2008, acquisitions resulted in additions to goodwill of $1.9 million and $2.1 million, respectively. We made no acquisitions in 2010.
We repaid $16.3 million and $54.8 million of debt in accordance with the underlying terms of the debt instruments for 2010 and 2009, respectively. We also have available a $10.0 million bank line of credit, which expires in June 2011, under which no borrowings were outstanding at December 31, 2010.
We paid $0.9 million, $0.9 million and $1.7 million in cash dividends to our shareholders representing $0.05, $0.05 and $0.10 per common share outstanding in 2010, 2009 and 2008, respectively. Our dividend remained relatively low in 2010, 2009 and 2008 due to our operating performance and our desire to conserve cash. The declaration of any future dividend is at the discretion of our Board of Directors.
On January 14, 2011, we filed a registration statement, which became effective January 18, 2011, with the Securities Exchange Commission registering the resale of up to 660,000 shares (Settlement Shares) of our Common Stock. The issuance of the shares to the claims administrator was used to settle four “wage and hour” class action lawsuits filed in California state and federal courts against our subsidiary, Stewart Title of California, Inc. These lawsuits generally claimed, among other things, that (i) the plaintiffs were misclassified as exempt employees and were not paid overtime, (ii) the overtime payments made to non-exempt employees were miscalculated and (iii) the plaintiffs worked overtime hours but were not paid. The plaintiffs sought compensatory damages, statutory compensation, penalties and restitution, exemplary and punitive damages, declaratory relief, interest and attorneys’ fees. A settlement agreement of $7.6 million with respect to the “wage and hour” class action lawsuits was approved by the courts on October 27, 2010. We did not receive any of the proceeds from the sale of the Settlement Shares by the Claims Administrator.
Other-than-temporary impairments of investments. We recorded an other-than-temporary impairment of $1.3 million and $4.7 million in 2009 and 2008, respectively, relating to equity securities held for investment.
The 2008 net unrealized investment losses of $1.0 million, which increased our comprehensive loss, were related to temporary declines in market values of equity, municipal bond and corporate bond investments and partially offset by increases in the government bond investments. Changes in foreign currency exchange rates, primarily related to our Canadian operations, increased comprehensive loss by $18.5 million, net of taxes, in 2008.
Forward-looking statements. Certain statements in this report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to future, not past, events and often address our expected future business and financial performance. These statements often contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “will” or other similar words. Forward-looking statements by their nature are subject to various risks and uncertainties that could cause our actual results to be materially different than those expressed in the forward-looking statements. These risks and uncertainties include, among other things, the severity and duration of current financial and economic conditions; continued weakness or further adverse changes in the level of real estate activity; changes in mortgage interest rates and availability of mortgage financing; our ability to respond to and implement technology changes, including the completion of the implementation of our enterprise systems; the impact of unanticipated title losses on the need to further strengthen our policy loss reserves; any effect of title losses on our cash flows and financial condition; the impact of our increased diligence and inspections in our agency operations; changes to the participants in the secondary mortgage market and the rate of refinancings that affect the demand for title insurance products; our ability to successfully consummate acquisitions, and our ability to successfully integrate and manage acquired businesses should opportunities arise; regulatory non-compliance, fraud or defalcations by our title insurance agencies or employees; our ability to timely and cost-effectively respond to significant industry changes and introduce new products and services; the outcome of litigation claims by large classes of claimants; the ultimate outcome of the Citigroup case discussed herein; the impact of changes in governmental and insurance regulations, including any future reductions in the pricing of title insurance products and services; our dependence on our operating subsidiaries and underwriters as a source of cash flow; the continued realization of expected expense savings resulting from our expense reduction steps taken since 2008; our ability to access the equity and debt financing markets when and if needed; our ability to grow our international operations; our ability to respond to the actions of our competitors; failure to comply with financial covenants contained in our debt instruments; and inability to make scheduled payments on or refinance our indebtedness. We expressly disclaim any obligation to update any forward-looking statements contained in this report to reflect events or circumstances that may arise after the date hereof, except as may be required by applicable law.