The following table sets forth, for the periods and at the dates indicated, our selected consolidated financial and data. The financial data was derived from our consolidated financial statements and should be read in conjunction with our audited consolidated financial statements, including the Notes thereto, beginning on page of this Report. See also Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.
EXECUTIVE SUMMARY. We discuss below our most critical accounting areas that involve significant estimates: (1) accruing title loss reserves, (2) evaluating the possible impairment of goodwill and other intangibles and (3) accruing unreported premium revenues from agencies. We also discuss an important change that has been proposed to the Real Estate Settlement Procedures Act (RESPA) and its potential effect on our industry. We describe what we do - mostly title insurance - and the material effect that changes in mortgage interest rates and other factors can have on our revenues. For the years 2001 through 2003, we summarize the interest rate environment prevailing in those years. We also discuss the reasons for significant increases and decreases in our revenues and expenses. Our major sources of cash flow and our liquidity and capital resources are discussed. Certain legal restrictions that exist on cash transfers from our title insurer subsidiaries to our parent are described.
We report premium revenues from agencies primarily when policies are reported to us. We also accrue for unreported policies where reasonable estimates can be made. We consider historical reporting patterns, current trends in interest rates and other factors and known information about the agencies. In this accrual, we are not estimating future transactions. We are estimating policies that have already been issued but not received by us.
If the new rule becomes final, it is likely that a major group of parties in the real estate, mortgage and settlement industries will ask the courts to intervene. We are unable to predict the outcome of these actions. Nor can we estimate the amount of the negative effect of the new rule on our future earnings.
WHAT WE DO. Our primary business is title insurance and settlement-related services. We close transactions and issue policies on homes, commercial properties and other real property located in all 50 states, the District of Columbia and several foreign countries through more than 7,200 issuing locations, including both direct operations and agencies. We also sell electronically delivered real estate services and information, as well as mapping products and geographic information systems, to domestic and foreign governments and private entities. Our current levels of non-USA operations are immaterial with respect to our consolidated financial results.
Our business has two main 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.
FACTORS AFFECTING REVENUES. The principal factors that contribute to increases in our operating revenues for our title and REI segments include:
A comparison of the results of operations of the Company for 2003 with 2002 and 2002 with 2001 follows.
Operating in these interest rate environments, real estate activity was strong in 2003 and 2002. Nationwide, refinancing transactions remained strong in 2003. The ratio of refinancings to total loan applications was 64.8% for 2003, 58.8% for 2002 and 56.8% for 2001. Existing home sales increased 9.0% in 2003 over 2002 and 5.0% in 2002 from 2001.
Our order levels began to decline in the third quarter of 2003, largely as a result of an increase in interest rates. Increases in rates tend to reduce real estate activity, particularly refinancings. Rates declined slightly in the fourth quarter. Most industry experts project interest rates to continue at current levels or move slightly higher. Due to the large number of refinancings completed in 2003, significantly fewer refinancing transactions are being forecast for 2004.
TITLE REVENUES. Our revenues from direct operations increased 29.5% in 2003 and 31.2% in 2002. The number of direct closings we handled increased 23.8% in 2003 and 31.8% in 2002. The largest revenue increases in 2003 were in California, Texas and Washington. The largest increases in 2002 were in California, Texas and Florida. Direct closings relate only to files closed by our underwriters and subsidiaries and do not include closings by independent agencies.
The average revenue per closing increased 4.2% in 2003 due to a lower ratio of refinancings closed by our direct operations compared to the prior year. The average revenue per closing decreased .8% in 2002. Title insurance premiums on refinancings are typically less than on property sales.
Premium revenues from agencies increased 25.6% in 2003 and 50.4% in 2002. The increases in 2003 and 2002 were primarily due to the increases in both refinancings and property sales. The largest revenue increases in 2003 were in California, New York and Florida. The largest increases in 2002 were in California, Pennsylvania, New York, Virginia and Texas.
TITLE REVENUES BY STATE. The approximate amounts and percentages of consolidated title operating revenues for the last three years were:
REI REVENUES. Real estate information revenues were $78.7 million in 2003, $71.1 million in 2002 and $63.8 million in 2001. The increases in 2003 and 2002 resulted primarily from providing a greater number of post-closing services, electronic mortgage documents and Section 1031 exchange services resulting from the large volume of real estate transactions.
INVESTMENTS. Investment income decreased 4.3% in 2003 because of lower yields, partially offset by increases in average balances invested. Investment income increased 3.9% in 2002 primarily because of increases in average balances invested, partially offset by lower yields. Certain investment gains in 2003, 2002 and 2001 were realized as part of the ongoing management of the investment portfolio for the purpose of improving performance.
EMPLOYEE COSTS. Employee costs for the combined business segments increased 26.5% in 2003 and 24.0% in 2002. The number of persons we employed at December 31, 2003, 2002 and 2001 was approximately 8,200, 7,800 and 6,900, respectively. The increase in staff in 2003 and 2002 was primarily due to increased title and REI volume and acquisitions of new offices.
Other operating expenses also include rent, supplies, telephone, title plant expenses, travel and auto. Most of these operating expenses follow, to varying degrees, the changes in transaction volume and revenues.
INCOME TAXES. The provisions for federal, state and foreign income taxes represented effective tax rates of 38.0%, 38.6% and 39.6% in 2003, 2002 and 2001, respectively.
CONTRACTUAL OBLIGATIONS. The table below describes our contractual obligations existing at December 31, 2003.
Material contractual obligations consist mainly of notes payable and operating leases. All operating leases are for office space and expire over the next 13 years.
Cash provided by operations was $193.9 million, $162.6 million and $108.2 million in 2003, 2002 and 2001, respectively. Cash flow from operations has been the primary source of financing for additions to property and equipment, expanding operations, dividends to shareholders and other requirements. This source may be supplemented by bank borrowings. We do not have any material source of liquidity or financing that involves off-balance sheet arrangements.
In August 2001 we issued 2.5 million shares of Common Stock at $19 per share, resulting in net proceeds of $44.5 million.
Our liquidity at December 31, 2003, excluding Guaranty and its subsidiaries, was comprised of cash and investments aggregating $25.3 million and short-term liabilities of $4.7 million. We know of no commitments or uncertainties that are likely to materially affect our ability to fund cash needs. See Note 17 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 $17.3 million and stockholders' equity is $621.4 million at December 31, 2003. We are not aware of any trends, either favorable or unfavorable, that would materially affect notes payable or stockholders' equity. We do not expect any material changes in the cost of such resources. Significant acquisitions in the future could materially affect the notes payable or stockholders' equity balances.