We lease offices at approximately 540 locations. The average term for all such leases is approximately 4 years. The leases expire from 2003 to 2016. We believe we will not have any difficulty obtaining renewals of leases as they expire or, alternatively, leasing comparable properties. The aggregate annual rental expense under all office leases was approximately $40,663,000 in 2002.
(1) Prior to 1995, segment operations for real estate information services were not reported separately from title operations and were less significant.
(2) Restated for a two-for-one stock split in May 1999 and a three-for-two stock split in April 1994, effected as stock dividends.
Our business has two main segments: title insurance and real estate information (REI). These segments are closely related due to the nature of their operations and common customers. The segments provide services throughout the United States through a network of offices, including both direct operations and agencies. Although we conduct operations in several international markets, at current levels non-USA operations are generally immaterial with respect to our consolidated financial results.
- declining mortgage interest rates, which usually increase home sales and refinancing transactions;
CRITICAL ACCOUNTING POLICIES. We believe the accounting policies that are the most critical to our financial statements, and that are subject to the most judgment, are those relating to title loss reserves, premium revenue recognition and recoverability of long-lived assets, such as goodwill and title plants.
Title loss reserves represent the aggregate future payments, net of recoveries, that we expect to incur on policy and escrow losses and in costs to settle claims. Future title loss payments are difficult to estimate due to the complex nature of title claims, the length of time over which claims are paid, the significantly varying dollar amounts of individual claims and other factors. Loss provision amounts are based on reported claims, historical loss experience, title industry averages, the current legal environment and the types of policies written. The title loss reserves are continually reviewed and adjusted, as appropriate. Independent actuaries review the adequacy of the reserves on an annual basis.
We review the carrying values of title plants and other long-lived assets if certain events occur that may indicate impairment. Impairment is indicated when the projected undiscounted cash flow over the estimated life of an asset is less than its carrying value. If impairment is determined by management and an independent valuation, the book amount is written down to fair value by calculating the discounted value of the projected cash flow. In accordance with SFAS No. 142 "Goodwill and Other Intangible Assets", goodwill for each reporting unit is tested for impairment annually and goodwill determined to be impaired is expensed to current operations.
A comparison of the results of operations of the Company for 2002 with 2001 and 2001 with 2000 follows.
REI REVENUES. Real estate information revenues were $71.1 million in 2002, $63.8 million in 2001 and $50.8 million in 2000. The increases in 2002 and 2001 resulted primarily from providing an increased number of post-closing services, flood determinations and electronic mortgage documents resulting from the large volume of real estate transactions.
INVESTMENTS. Investment income increased 3.9% in 2002 and 4.3% in 2001 primarily because of increases in average balances invested, partially offset by lower yields. Certain investment gains in 2002, 2001 and 2000 were realized as part of the ongoing management of the investment portfolio for the purpose of improving performance. We realized a gain on the sale of investment real estate in 2002, but it was offset by a comparable after-tax loss of $1.2 million on the sale of WorldCom bonds. We also recorded gains in late 2002 when we sold certain investments primarily to maximize tax benefits and manage portfolio duration.
EMPLOYEE COSTS. Employee costs for the combined business segments increased 24.0% in 2002 and 25.1% in 2001. The number of persons we employed at December 31, 2002, 2001 and 2000 was approximately 7,800, 6,900 and 5,600, respectively. The increase in staff in 2002 and 2001 was primarily due to increased title and REI volume and acquisitions of new offices.
In our REI segment, employee costs increased in 2002 and 2001 primarily due to a shift in focus to provide more post-closing services to lenders. These services are considerably more labor intensive than other REI services.
OTHER OPERATING EXPENSES. Other operating expenses for the combined business segments increased 24.0% in 2002 and 16.9% in 2001. The increase in other operating expenses for the combined business segments in 2002 was in search fees, premium taxes, new offices and business promotion. In 2001 the overall increase was in new offices, search fees, premium taxes and rent.
Other operating expenses also include rent, telephone, supplies, title plant expenses, travel and auto. Most of these operating expenses follow, to varying degrees, the changes in transaction volume and revenues.
LIQUIDITY AND CAPITAL RESOURCES. In 2001 and 2000 we financed a portion of the purchase price of certain acquisitions through the issuance of $3.2 million and $4.9 million, respectively, of our Common Stock. Acquisitions during 2002, 2001 and 2000 resulted in additions to our goodwill of $11.7 million, $19.3 million and $7.5 million, respectively.
We filed a registration statement with the Securities and Exchange Commission and in August 2001 issued 2.5 million shares of Common Stock at $19 per share, resulting in net proceeds of $44.5 million.
A substantial majority of consolidated cash and investments is held by Stewart Title Guaranty Company (Guaranty) and its subsidiaries. Cash transfers between Guaranty and its subsidiaries and the Company are subject to certain legal restrictions. See Notes 2 and 3 to the consolidated financial statements.
We consider our capital resources to be adequate. Our capital resources are represented by a low debt-to-equity ratio, in which long-term debt is $7.4 million and stockholders' equity is $493.6 million at December 31, 2002. We are not aware of any trends, either favorable or unfavorable, that would materially affect notes payable or stockholders' equity and we do not expect any material changes to the cost of such resources. However, significant acquisitions in the future could materially affect the notes payable or stockholders' equity balances.