Management's overview. We reported a net loss attributable to Stewart of $42.0 million for the three months ended March 31, 2009 compared with a net loss attributable to Stewart of $25.3 million for the same period in 2008. On a diluted per share basis, our net loss attributable to Stewart was $2.31 for the first three months of 2009 compared with a net loss attributable to Stewart of $1.40 for the first three months of 2008. Revenues for the first three months of 2009 decreased 20.5% to $313.5 million from $394.1 million for the same period last year.
The first quarter of 2009 includes pretax charges of $8.9 million relating to the impairment of investment securities and other assets. The first quarter of 2009 also includes pretax credits of $2.6 million relating to a recovery on a previously recognized agency defalcation and $3.0 million relating to the reversal of an accrual for a legal matter resolved in our favor. The first quarter of 2008 includes a pretax charge of $4.6 million relating to an agency defalcation.
We did not recognize an income tax benefit in the first quarter of 2009 relating to its pretax loss before noncontrolling interest due to the recording of a valuation allowance against deferred tax assets. The valuation allowance will be evaluated for reversal when we return to profitability. The income tax expense of $3.2 million recorded in the first quarter of 2009 is related to certain goodwill book/tax differences and taxes in foreign jurisdictions for our international operations.
Our operating results for the first quarter of 2009 primarily resulted from lower revenues due to fewer closed title orders arising from the continuing decline in new and existing home sales, as well as a decline in selling prices and average revenue per file closed. Average revenue per file closed was lower due to a shift in mix of orders, with the first quarter of 2009 experiencing fewer large commercial orders and many more residential refinancing orders than the first quarter of 2008. Title orders declined in the first quarter of 2009 by 6.3% from the same period a year ago, which was the lowest quarterly decline since the fourth quarter of 2005. A significant percentage of title orders opened in the first quarter of 2009 related to the refinancing of existing mortgages. These loans are taking longer to process by lenders than has historically been the case due to tightened standards and internal capacity constraints of the lenders. Even so, our overall closing ratio showed improvement during March 2009.
We continue to reduce costs and improve productivity in our core operations. Total expenses declined 19.4% to $350.8 million in the first quarter of 2009 compared with $435.0 million for the first quarter of 2008. In addition to workforce reductions described below, we continue to pursue the implementation of title search and production efficiencies company-wide through our regional production center initiative, and, as a result, significant savings per order processed are being achieved in operationally mature centers. Our back-office centralization initiatives also remain on target and will begin generating benefits during 2009 in the areas of human resources, finance and accounting, procurement and information technology infrastructure by continuing to reduce costs while providing high quality customer services.
We reduced our employee count during the first quarter of 2009 by approximately 170, or 2.7%, as part of our ongoing efforts to reduce costs. Employee costs declined in the first quarter of 2009 by 24.5% compared with the first quarter of 2008 due to realizing the full benefit of employee count reductions made during 2008 and the reductions made in the first quarter of this year. Since December 31, 2007, we have reduced employee count by 28.2%.
As a result of our aggressive efforts to reduce spending to better match current market conditions, other operating costs declined 21.6% in the first quarter of 2009 compared with the same period in 2008. The decline is consistent with the decrease in revenues. Many of our other operating costs are relatively fixed, such as rent and other occupancy expenses. However, we benefited from decreases in some of these fixed costs in the first quarter of 2009 due to cost reduction efforts in 2008.

According to Fannie Mae and other industry experts, the real estate and related lending markets continue to face challenges. New and existing home sales and prices continue to decline. Purchase originations are expected to decline further in 2009 as compared to 2008. Although purchase originations are projected to decrease in 2009, total mortgage originations are expected to increase in 2009 due to refinance originations, which generate lower revenue per file closed as compared to purchase originations. Not withstanding these market conditions, we experienced increasing new title orders and closings during March and continuing into April 2009. These developments, along with the significant cost reductions we have made, provide us with a positive outlook for our future results of operations.
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. Title loss reserves
Our most critical accounting estimate is providing for title loss reserves. Our liability for estimated title losses at March 31, 2009 comprises both known claims ($132.2 million) and our estimate of claims that may be reported in the future ($313.4 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 7.0% and 8.0% for the three months ended March 31, 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 changed our provision for title losses and pretax loss approximately $3.1 million for the three months ended March 31, 2009.
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 claims (those exceeding $1.0 million on a single claim) are analyzed and reserved for separately due to the higher dollar of loss, lower volume of claims reported and sporadic reporting of such claims.
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. 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 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.

Due to the inherent uncertainty in predicting future title policy losses, significant judgment is required by both our management and our third party actuaries in estimating reserves. As a consequence, our ultimate liability may be materially greater or less than current reserves and/or our third party actuary's calculation.
Agency revenues
We recognize revenues on title insurance policies written by independent agencies (agencies) when the policies are reported to us. In addition, where reasonable estimates can be made, we accrue for revenues on policies issued but not reported until after period end. We believe that reasonable estimates can be made when recent and consistent policy issuance information is available. Our estimates are based on historical reporting patterns and other information about our agencies. We also consider current trends in our direct operations and in the title industry. In this accrual, we are not estimating future transactions. We are estimating revenues on policies that have already been issued by agencies but not yet reported to or received by us. We have consistently followed the same basic method of estimating unreported policy revenues for more than 10 years.
Our accruals for revenues on unreported policies from agencies were not material to our total assets or stockholders' equity at March 31, 2009 and December 31, 2008. The differences between the amounts our agencies have subsequently reported to us compared to our estimated accruals are substantially offset by any differences arising from prior years' accruals and have been immaterial to consolidated assets and stockholders' equity during each of the three prior years. We believe our process provides the most reliable estimate of the unreported revenues on policies and appropriately reflects the trends in agency policy activity.
Goodwill and other long-lived assets
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 employee count and other operating expenses, are the primary reasons for increases or decreases in our projected operating results. 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. To the extent that our future operating results are below our projections, or in the event of continued adverse market conditions, our interim 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. At each quarter end, we also consider the carrying value of our stockholders' equity as compared with our market capitalization and the implied control premium to reconcile these amounts. We also evaluate the carrying values of title plants and other long-lived assets when events occur that may indicate impairment. The process of determining impairment for our goodwill and other long-lived assets relies on projections of future cash flows, operating results, discount rates and overall market conditions, including our market capitalization. Uncertainties exist in these projections and are subject to changes relating to factors such as interest rates and overall real estate and financial market conditions, our market capitalization and overall stock market performance. Actual market conditions and operating results may vary materially from our projections.

Based on this evaluation, 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. There were no impairment write-offs of goodwill or other long-lived assets during the quarters ended March 31, 2009 or 2008.
Operations. Our business has two operating segments: title insurance-related services and real estate information (REI). These segments are closely related due to the nature of their operations and common customers.
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 in international markets. We also provide post-closing lender 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 exchanges. Factors affecting revenues. The principal factors that contribute to changes in operating revenues for our title and REI segments include:
• mortgage interest rates;

• ratio of purchase transactions compared with refinance transactions;

• ratio of closed orders to open orders;

• home prices;

• consumer confidence;

• demand by buyers;

• number of households;

• availability of loans for borrowers;

• premium rates;

• market share;

• opening of new offices and acquisitions; and

• number of commercial transactions, which typically yield higher premiums.

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 insurance business. Generally, our first quarter is the least active and our third and fourth quarters are the most active in terms of title insurance revenues.
RESULTS OF OPERATIONS
A comparison of our results of operations for the three months ended March 31, 2009 with the three months ended March 31, 2008 follows. Factors contributing to fluctuations in results of operations are presented in order of monetary significance, and we have quantified, when necessary, significant changes. Results from our REI segment are included in our discussions regarding the three months ended March 31, 2009, as those amounts are immaterial in relation to consolidated totals. When relevant, we have discussed our REI segment's results separately.
Our statements on home sales and loan activity are based on published industry data from sources including Fannie Mae, the National Association of Realtorsฎ, the Mortgage Bankers Association and Freddie Mac. We also use information from our direct operations.

Operating environment. Data as of March 2009 compared with the same period in 2008 indicates annualized sales of new and existing homes, seasonally adjusted, decreased 30.6% and 7.1%, respectively. March 2009 existing home sales were a seasonally adjusted annual rate of 4.57 million versus 4.92 million a year earlier. One-to-four family residential lending declined from an estimated $523 billion in the first three months of 2008 to $511 billion in the first three months of 2009. The decline in lending volume was primarily a result of decreasing home sales, lower home prices and reduced financing activity primarily due to tightening of mortgage lending practices and issues in the credit market. The decline in lending volume was partially offset by an increase in refinancing activities by lenders. Commercial lending activity industry-wide declined by 80% during the fourth quarter of 2008 (most recent data available) compared with the same period of 2007.
According to Fannie Mae and other industry experts, the real estate and related lending markets continue to face challenges. New and existing home sales and prices continue to decline. Purchase originations are expected to decline further in 2009 as compared to 2008. Although purchase originations are projected to decrease in 2009, total mortgage originations are expected to increase in 2009 due to refinance originations, which generate lower revenue per file closed as compared to purchase originations. Not withstanding these market conditions, we experienced increasing new title orders and closings during March and continuing into April 2009. These developments, along with the significant cost reductions we have made, provide us with a positive outlook for our future results of operations.
Title revenues. Our revenues from direct operations decreased $38.0 million, or 21.1%, in the first quarter of 2009 compared with the first quarter of 2008. The largest revenue decreases were in Texas, Canada and California. Revenues from commercial and other large transactions in the first quarter of 2009 decreased 55.7% over prior-year levels to $15.1 million.
Our direct orders closed decreased 6.3% in the first quarter of 2009 compared with the first quarter of 2008. This revenue decline was due to fewer closed title orders resulting from the continuing decline in new and existing home sales, declining selling prices and average revenue per file closed. The average revenue per closing decreased 16.4% in the first quarter of 2009 compared with the first quarter of 2008 primarily due to a shift in mix of orders, with the first quarter of 2009 experiencing fewer large commercial orders and many more residential refinancing orders than the first quarter of 2008. Refinance premium rates are typically 60% of the title premium revenue of a similarly priced sales transaction.
Revenues from agencies decreased $24.3 million, or 12.7%, for the three months ended March 31, 2009 compared with the three months ended March 31, 2008. This decrease largely follows the decline in our direct revenues but, to a lesser extent, due to the impact of international and commercial transactions on our direct operations noted above, which are not a factor in our agency business. The largest decreases in revenues from agencies during the three months ended March 31, 2009 were in Florida, Virginia and Texas.
REI revenues. Real estate information operating revenues were $7.4 million and $14.7 million in the first quarters of 2009 and 2008, respectively. The decrease from 2008 resulted primarily from the reduction in residential lending volume, which impacts our real estate-related transactions, and the reduction in the number of Section 1031 tax-deferred property exchanges caused by the continued decline in the real estate market.
Investments. Investment income decreased $2.5 million, or 30.7%, in the first quarter of 2009 compared with the first quarter of 2008, due primarily to decreases in average balances invested and yields. Certain investment gains and losses, which are included in our results of operations in investment and other losses - net, were realized as part of the ongoing management of our investment portfolio for the purpose of improving performance. In the first quarter of 2009, investment and other losses - net included $7.6 million related to the impairment of other assets and $1.3 million related to the impairment of equity securities available-for-sale.

Retention by agencies. The amounts retained by title agencies, as a percentage of revenues generated by them, were 82.4% and 81.4% in the first quarters of 2009 and 2008, respectively. 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.
Employee costs. Our employee costs and certain other operating expenses are sensitive to inflation. Employee costs for the three months ended March 31, 2009 decreased $37.3 million, or 24.5%, to $114.7 million from $152.0 million for the three months ended March 31, 2008. We reduced our employee count company-wide by approximately 170 during the first quarter of 2009 and approximately 2,375 since the beginning of 2008. This decrease in employee count is the primary reason for the decline in employee costs.
In our REI segment, total employee costs for the first three months of 2009 decreased $4.5 million, or 44.8%, from the same period in 2008 primarily in our lender services and property information businesses due to lower transaction volumes.
Other operating expenses. Other operating expenses decreased $18.8 million, or 21.6%, in the first quarter of 2009 compared with the first quarter of 2008 primarily due to lower business promotion costs, rent and other occupancy expenses, technology costs, certain REI expenses, outside search fees, premium taxes and delivery fees. These decreases were offset somewhat by an increase in bad debt expense. Other operating expenses were favorably impacted by a $3.0 million credit relating to a reversal of an accrual for a legal matter resolved in our favor. The remaining decreases in other operating expenses were due to the benefits from office closures and expense reduction efforts. Other operating expenses also include travel, auto and airplane expenses, general supplies, telephone, insurance, copy supplies, equipment rental, repairs and maintenance, postage, title plant expenses, litigation, title plant rent, professional fees and attorney fees. Most of our operating expenses are fixed in nature, although some follow, to varying degrees, the changes in transaction volume and revenues.
Title losses. Provisions for title losses, as a percentage of title operating revenues, were 7.0% and 8.0% for the first quarter of 2009 and 2008, respectively. The first quarter of 2009 included a $2.6 million insurance recovery on a previously recognized agency defalcation. The first quarter of 2008 included an addition to title loss reserves of $4.6 million related to an agency defalcation. Adjusting for these items, our provisions for title losses were 7.8% and 6.8% for the first quarter of 2009 and 2008, respectively. The provision level recorded in the first quarter of 2009 is consistent with the 2008 annual rate.
Income taxes. Our effective tax rates, based on losses before taxes and after deducting noncontrolling interests (losses of $38.8 million and $42.1 million for the three months ended March 31, 2009 and 2008, respectively), were (8.3%) and 39.9% for the quarters ended March 31, 2009 and 2008, respectively. Our effective income tax rate for the first quarter of 2009 was significantly impacted by a valuation allowance of $15.1 million against our deferred tax assets. The valuation allowance will be evaluated for reversal, subject to certain potential limitations, as we return to profitability. The income tax expense of $3.2 million recorded in the first quarter of 2009 is related to certain goodwill book/tax differences and taxes in foreign jurisdictions for our profitable international operations.
Our effective tax rate for the first quarter of 2008 was primarily due to the level of our quarterly operating losses compared with our significant permanent differences, such as tax-exempt interest, which were relatively fixed in amount, and the ratio of earnings from our international operations compared with our consolidated operating losses. Our 2008 annual effective tax rate was (0.9%). 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 March 31, 2009, our cash and investments, including amounts reserved pursuant to statutory requirements, was $586.0 million.

A substantial majority of our consolidated cash and investments at March 31, 2009 was held by Stewart Title Guaranty Company (Guaranty) and its subsidiaries. The use and investment of these funds, payment of dividends to the parent company, and cash transfers between Guaranty and its subsidiaries and the parent 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 legal requirements under Texas regulatory requirements) to fund its insurance operations, including claims payments. Guaranty may also, subject to certain limitations and with regulatory approval, pay dividends to the parent company and/or provide funds to its subsidiaries (whose operations consist principally of field title agency offices) for their operating and debt service needs.
A summary of our net consolidated cash flows for the three months ended March 31 follows:

                                                             2009        2008
                                                              ($000 omitted)

       Net cash used by operating activities                 (27.8 )     (31.4 )
       Net cash provided by investing activities              41.2         8.2
       Net cash (used) provided by financing activities.     (30.8 )       5.2

Operating activities
Our principal sources of cash from operations are premiums on title policies and title service-related receipts. Our independent agencies remit cash to us net of their contractual retention. Our principal cash expenditures for operations are employee costs, operating costs, and title claims payments.
Our negative cash flow from operations for the three months ended March 31, 2009 was primarily due to our net loss attributable to Stewart, which was driven by declining revenues from lower home sales combined with falling sales prices and decreases in commercial real estate transactions.
Although we have made significant progress in automating our services, our . . .