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RESULTS OF OPERATIONS
Critical accounting policies — The Company's
management considers the accounting policies described
below to be critical in preparing the Company's consolidated
financial statements. These policies require management
to make estimates and judgments that affect the reported
amounts of certain assets, liabilities, revenues, expenses
and related disclosures of contingencies. See Note 1 to
the consolidated financial statements for a more detailed
description of the Company's accounting policies.
Revenue recognition. Title premiums on policies issued
directly by the Company are recognized on the effective date
of the title policy, and for policies issued by independent
agents, when notice of issuance is received from the agent.
The Company's tax service division, which is included in the
mortgage information segment, defers its tax service fee and
recognizes that fee as revenue ratably over the expected
service period. The amortization rates applied to recognize the
revenues assume a 10-year contract life and are adjusted to
reflect prepayments. The Company reviews its tax service
contract portfolio on a quarterly basis to determine if there
have been changes in contract lives and/or changes in the
number and/or timing of prepayments and adjusts the rates
accordingly to reflect current trends. For all other products,
revenues are generated at the time of delivery, as the
Company has no significant ongoing obligation after delivery.
Provision for title losses. The Company provides for title
insurance losses by a charge to expense when the related
premium revenue is recognized. The amount charged to
expense (the loss rate), as well as the adequacy of the ending
reserves, is determined by the Company based on historical
experience and other factors, including changes and trends in
the type of title insurance policies issued, the real estate market
and the interest rate environment. Management monitors the
adequacy of the estimated loss reserves on a quarterly basis
using a variety of techniques, including actuarial models,
and adjusts the loss rate as necessary.
Purchase accounting and impairment testing for goodwill
and other intangible assets. Pursuant to Statement of Financial
Standards No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142), the Company is now required to perform an annual
impairment test for goodwill and other intangible assets. This
test is performed utilizing a variety of valuation techniques,
all of which require management to make estimates and
judgments, and includes discounted cash flow analysis, market
approach valuations and the use of third-party valuation
advisors. Certain of these valuation techniques are also
utilized by the Company in accounting for business
combinations, primarily in the determination of the fair value
of acquired assets and liabilities.
Income taxes. The Company estimates its quarterly effective
income tax rate based upon a variety of factors including, but
not limited to, the expected revenues and resulting pretax
income for the year, the composition and geographic mix of
the pretax income and the ratio of permanent differences to
pretax income. Any changes to the estimated rate are made
prospectively in accordance with Accounting Principles Board
Opinions No. 28, "Interim Financial Reporting." Additionally,
management makes estimates as to the amount of reserves, if
any, that are necessary for known and potential tax exposures.
Depreciation and amortization lives for assets. Management
is required to estimate the useful lives
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of several assets
classes, including capitalized data, internally developed
software and other intangible assets. The estimation of useful
lives requires a significant amount of judgment related to
matters such as future changes in technology, legal issues
related to allowable uses of data and other matters.
Overview — The majority of the revenues in the Company's
title insurance and mortgage information segments depend,
large part, upon the level of real estate activity and the cost
and availability of mortgage funds. Revenues for these
segments result primarily from resales and refinancings of
residential real estate and, to a lesser extent, from commercial
transactions and the construction and sale of new housing.
Over one-half of the revenues in the Company's property
information and credit information segments also depend on
real estate activity. The remaining portion of the property
information and credit information revenues, as well as the
revenues for the Company's specialty insurance, trust and
other services, and screening information segments, are
isolated from the volatility of real estate transactions.
Traditionally, the greatest volume of real estate activity,
particularly residential resale, has occurred in the spring
and summer months. However, changes in interest rates, as
well as other economic factors, can cause fluctuations in the
traditional pattern of real estate activity.
Mortgage interest rates, which had been decreasing
throughout 1997 and 1998, began to increase in the second
quarter of 1999, causing a significant decline in refinance
activity and residential resale orders. This, coupled with fourth
quarter seasonal factors and Y2K concerns, resulted in a low
inventory of open orders going into the first quarter of 2000.
As a result of the low inventory of open orders going into the
first quarter of 2000, and the relatively weak real estate
economy present during the first half of 2000, revenues and
profits during this period decreased significantly when
compared with the same period of 1999. During the second
half of 2000, real estate activity began to increase as a result
of declining mortgage interest rates. New order counts in the
latter part of the third quarter began to show favorable
comparisons with the same period of 1999. This trend
continued into the fourth quarter of 2000 and resulted in a
significant increase in revenues and profits in the second half
of 2000 when compared with the same period of 1999.
In 2001, mortgage interest rates decreased to levels
comparable to rates experienced in 1998. Refinance activity
reached record levels and the demand
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