The demand for our title insurance products and services is dependent upon, among other things, the volume of commercial and residential 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 during an economic downturn or recession, real estate activity typically declines and we experience lower revenues and profitability. The cyclical nature of our business has caused fluctuations in revenues and profitability in the past and is expected to do so in the future.
Operating revenues in 2002 and the early part of 2003 increased primarily due to a favorable residential mortgage interest rate environment and a large volume of mortgage refinancing transactions. However, the Company began to experience a decline in refinancing transactions during the third quarter of 2003 and the level of refinancing transactions continued to decline during the fourth quarter of 2003. For fiscal year 2004, the Company expects that the level of refinancing transactions will be substantially below that experienced in recent years. This decline in the volume of refinancing transactions is the result of an extended period of declining mortgage interest rates followed by recent increases in those rates.
The Company’s commercial appraisal operations are run by the Company’s LandAmerica Valuation Corporation. Its business is highly dependent on the Commercial real estate market. They charge a fee based on the type and complexity of work performed.
Lender Services - Operating revenues in the Lender Services segment increased substantially in 2003 and 2002 as compared to prior years. The primary reason for the increase in 2003 was the purchase of INFO1 in August 2003 and LERETA in October 2003. The real estate tax processing and flood certification business receives cash in advance for products that require them to provide service over the life of the loan. In the last quarter of 2003, the Company’s real estate tax processing services had gross receipts of $26.6 million dollars and deferred revenue recognition for $21.1 million of these receipts. The Company amortized approximately $15.4 million of its deferred service obligation related to pre and post acquisition life of loan services of LERETA during the fourth quarter of 2003. This deferred service obligation represents the amount of revenue that will be recognized over the anticipated service life of contracts acquired with LERETA. The Company began operations in the default management services area in 2002.
Corporate and Other - Corporate and Other general and administrative expenses increased in 2003 by over 2002 and decreased in 2002 from 2001. The increase in these expenses in 2003 over 2002 is primarily related to the increased support particularly in the Information Technology area required to service the Company’s increased national operations. The decrease in expenses in 2002 over 2001 relate primarily to the Company’s Primis operations which were discontinued in 2002.
Income Taxes. The Company’s effective income tax rate, which includes a provision for state income and franchise taxes for non-insurance subsidiaries, was 35.3%, 35% and 36% for the years ended December 31, 2003, 2002 and 2001, respectively. The differences in the effective tax rate were primarily due to changes in the ratio of permanent differences to income before taxes. Information related to the items included in the effective tax rate can be found in Note 10 to the Consolidated Financial Statements.
A summary of the Company’s contractual obligations and commercial commitments is as follows:
The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company.