Our leases expire from 2013 through 2021 and have an average term of four years, although our typical lease term ranges from three to five years. We believe we will not have any difficulty obtaining renewals of leases as they expire or, alternatively, leasing comparable properties. The aggregate annual rent expense under all leases was approximately $39.1 million in 2012.
Cash provided by operations improved substantially in 2012 to $120.5 million compared to $23.4 million in 2011.
Mortgage services pretax earnings increased 45.7 percent to $48.6 million in 2012 compared to $33.4 million in 2011. The offerings in our mortgage services segment continue to expand, with new projects within the broad category of servicing support helping drive the increase in revenues over the last two quarters. As the real estate market recovers, the distressed servicing projects naturally retrench, and new service offerings have been introduced which allow our customers to outsource various other aspects of their servicing operations to us. Our focus is on providing mortgage process outsourcing services which are high-quality, flexible, and responsive. We expect these service offerings to be more sustainable over market cycles.
Our most critical accounting estimate is providing for title loss reserves. Our liability for estimated title losses as of December 31, 2012 comprises both known claims ($137.9 million) and our estimate of claims that may be reported in the future ($382.5 million). The amount of the reserve represents the aggregate, non-discounted 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 8.1%, 9.4% and 9.6% for the years ended December 31, 2012, 2011 and 2010, 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 increased or decreased our provision for title losses and pretax operating results approximately $17.3 million for the year ended December 31, 2012.
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 premium revenues 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), including large title losses due to independent agency defalcations, are analyzed and reserved for separately due to the higher dollar amount of loss, lower volume of claims reported and sporadic reporting of such claims. Large title losses due to independent agency defalcations typically occur when the independent agency misappropriates funds from escrow accounts under its control. Such losses are usually discovered when the independent agency fails to pay off an outstanding mortgage loan at closing (or immediately thereafter) from the proceeds of the new loan. Once the previous lender determines that its loan has not been paid off timely, it will file a claim against the title insurer. It is at this point that the title insurance underwriter is alerted to the potential theft and begins its investigation. As is industry practice, these claims are considered a
Our accruals for revenues on unreported policies from agencies were not material to our consolidated assets or stockholders’ equity as of December 31, 2012 and 2011. 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.
Our evaluation of goodwill is normally completed annually in the third quarter using June 30 balances, but an evaluation may also be made whenever 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, or large and unanticipated adjustments to title loss reserves, 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 ownership and corporate governance structure (such as our Class B Common Stock). To the extent that our future operating results are below our projections, or in the event of adverse market conditions, an interim review for impairment may be required, which may result in an impairment of goodwill.
Based on these evaluations, we estimate and expense to current operations any loss in value of these assets. As part of our process, we have an option to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we decide not to use a qualitative assessment or if we fail the qualitative assessment, then 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. We utilized a qualitative assessment for our annual goodwill impairment test and, based on our analysis, determined it was not more-likely-than-not that the fair value of our reporting units were less than their carrying amounts as of June 30, 2012. There were no impairment charges for goodwill or material impairment charges for other long-lived assets during the three years ended December 31, 2012.
Operations. Our business has three main operating segments: title insurance and related services, mortgage services and corporate.
Our primary business is title insurance and settlement-related services. We close transactions and issue title policies on homes, commercial and other real properties located in all 50 states, the District of Columbia and international markets through policy-issuing offices and agencies. We also provide loan origination and servicing support; loan review services; loss mitigation; REO asset management; home and personal insurance services; and technology to streamline the real estate process.
Factors affecting revenues. The principal factors that contribute to changes in operating revenues for our title and mortgage services segments include:
The real estate market experienced increasing home prices in 2012 and is expected to provide an increasing contribution to GDP in 2013 and in coming years. Recent data indicate that the housing recovery has transitioned to a faster upward track, boosted by an improving labor market and low mortgage rates. Overall, home sales, home prices, and home building activity as well as homebuilder confidence appear to be on the upswing, having risen to multi-year highs during 2012.
As a result of the above trends, our direct order levels increased from 2011 to 2012 and decreased from 2010 to 2011, which is consistent with the U.S. real estate market during those same periods.
Title revenues. Revenues from direct title operations increased $91.0 million, or 14.5%, in 2012 and increased $1.1 million, or 0.2%, in 2011. The largest revenue increases in 2012 were in Texas, Utah, Colorado and Washington, partially offset by decreases in Nevada and Georgia. The largest revenue increases in 2011 were in California and Florida, partially offset by decreases in Maryland and Arizona. Revenues from commercial and other large transactions increased $8.5 million to $111.5 million in 2012 and increased $10.3 million to $103.0 million in 2011.
Direct orders closed increased 16.7%, while the average revenue per file closed (including large commercial policies) decreased 2.3% in 2012 compared to 2011 due to an increase in residential refinancing closings in the same periods. Direct operating revenues, excluding large commercial policies, increased 15.3%, while the average revenue per closing decreased 1.2% in 2012 compared to 2011. On average, refinance premium rates are 60% of the title premium revenue of a similarly priced sale transaction. In 2011 direct orders closed decreased 7.7%, while the average revenue per file closed (including large commercial policies) increased 8.7%
In 2011, other operating expenses for the combined business segments decreased $17.1 million, or 6.2%. Costs fixed in nature decreased $3.6 million, or 3.0%, primarily due to decreases in rent and other occupancy expenses related to office closures and a decrease in telephone expenses. These reductions were offset primarily by an increase in professional fees primarily due to the outsourcing of our internal audit function. Costs that follow, to varying degrees, changes in transaction volumes and revenues decreased $6.6 million, or 6.4%, in 2011 due to decreases in bad debt expense, fee attorney splits and title plant expenses. These decreases were offset by increases in premium taxes and postage. Costs that fluctuate independently of revenues decreased $6.9 million, or 13.6%, in 2011 due to litigation and other expense reductions and were partially offset by an increase in travel costs.
Title losses. Provisions for title losses, as a percentage of title operating revenues, were 8.1%, 9.4% and 9.6% in 2012, 2011 and 2010, respectively.
compared to the year 2010. During the fourth quarter of 2011, we resolved a significant number of large claims from prior policy years. Although some large claims remain outstanding, significant progress was made in resolving existing large claim inventory which will reduce future risk for the company.
The year ended December 31, 2010 included a reserve strengthening adjustment of $4.8 million (0.03% of title operating revenues) relating to policy years 2007 and 2008 due to higher than expected loss payments and incurred loss experience for these policy years. Including this charge, the total strengthening charges recorded for these policy years are $77.0 million, substantially all of which was recorded in 2008 and 2009. Current losses that are higher than previously anticipated for any given policy year are an indication that total losses for such policy year may be higher than originally calculated. Changes in the total estimated future loss for prior policy years are recorded in the period in which the estimate changes, and thus negatively impact the provision for title loss ratios.
Provisions for title losses in 2010 also include charges of $13.3 million (0.09% of title operating revenues) resulting from changes in the estimated legal costs for several existing large title claims. These charges were partially offset by insurance recoveries of $2.8 million (0.01% of title operating revenues) on previously recognized title losses.
Operating leases are primarily for office space and expire over the next nine years. The timing shown above for the payments of estimated title losses is not set by contract. Rather, it is projected based on historical payment patterns. The actual timing of estimated title loss payments may vary materially from the above projection since claims, by their nature, are complex and paid over long periods of time. Title losses paid were $124.0 million, $134.3 million and $158.3 million in 2012, 2011 and 2010, respectively.
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. As of December 31, 2012, our cash and investments, including amounts reserved pursuant to statutory requirements, aggregated $748.8 million. Cash and investments restricted due to statutory requirements aggregated $456.6 million at December 31, 2012.
Cash held at the parent company totaled $10.7 million at December 31, 2012. As noted above, as a holding company, the parent is funded principally by cash from its subsidiaries in the form of dividends, for operating and other administrative expense reimbursements, and pursuant to intercompany tax sharing agreements. The expense reimbursements are paid in accordance with the management agreements among us and our subsidiaries. As the parent company conducts no operations apart from its wholly-owned subsidiaries, the discussion below focuses on consolidated cash flows.
Our principal sources of cash from operations are premiums on title policies and revenue from title service-related transactions, and mortgage servicing support services. 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.
Cash provided by operations in 2012 was $120.5 million, an improvement of $97.1 million from $23.4 million provided by operations in 2011. This improvement is primarily related to the $110.3 million increase in net earnings when comparing the same periods and a $12.9 million improvement in claims paid compared to loss provisions for the same periods. This improvement is partially offset by a $9.4 million increase in receivables relating primarily to the increase in revenues in our mortgage servicing support businesses. We expect to collect these receivables during the first quarter 2013.
Cash payments on title claims in 2012, 2011 and 2010 were $124.0 million, $134.3 million and $158.3 million, respectively. Claim payments made, net of insurance recoveries, during 2012, 2011, and 2010 include $28.8 million, $34.9 million and $32.8 million, respectively, on large title claims. As these losses are paid and newly reported prior policy year claims begin to decline, we expect the overall amount of cash paid on title claims to continue to decline.
The insurance regulators of the states in which our underwriters are domiciled require our statutory premium reserves to be fully funded, segregated and invested in high-quality securities and short-term investments. As of December 31, 2012, cash and investments funding the statutory premium reserve aggregated $456.6 million and our statutory estimate of claims that may be reported in the future totaled $382.4 million. In addition to this restricted cash and investments, we had unrestricted cash and investments (excluding equity method investments) of $147.1 million, which are available for underwriter operations, including claims payments.
Capital expenditures were $16.8 million, $17.7 million, and $16.3 million in 2012, 2011, and 2010, respectively. We maintain investment in capital expenditures at a level that enables us to implement technologies for increasing our operational and back-office efficiencies. Notwithstanding this, we also continue to aggressively manage cash flow and, therefore, overall capital spending will continue to be at reduced levels relative to our historical norms. During the year ended 2012, we sold assets and subsidiaries resulting in cash receipts of $5.1 million.
Total debt and stockholders’ equity were $71.2 million and $580.4 million, respectively, as of December 31, 2012. In 2012 and 2011, we repaid $5.7 million and $6.0 million, respectively, of debt in accordance with the underlying terms of the debt instruments. Included in total debt are $64.7 million of 6% Convertible Senior Notes due October 2014 (Notes), if not converted into shares of common stock. We also have available a $10.0 million bank line of credit commitment, which expires in June 2013, under which no borrowings were outstanding at December 31, 2012. Subsequent to December 31, 2012, we exchanged an aggregate of $20.7 million of Notes for an aggregate of 1,691,074 shares of common stock plus cash for accrued and unpaid interest. Following these transactions, an aggregate of $44.3 million of convertible debt remains outstanding.
We paid $1.8 million and $0.9 million, respectively, in cash dividends to our shareholders representing $0.10 in 2012 and $0.05 in 2011 and 2010 per common share outstanding. Our dividend has remained relatively low due to our operating performance and our desire to conserve cash. In addition, the maximum dividend allowed under the terms of the Notes is $0.10 per share for as long as the Notes remain outstanding. The declaration of any future dividend is at the discretion of our Board of Directors.
Other comprehensive earnings (loss). Unrealized gains and losses on investments and changes in foreign currency exchange rates are reported net of deferred taxes in accumulated other comprehensive earnings, a component of stockholders’ equity, until realized. In 2012, net unrealized investment gains of $7.0 million, which increased our other comprehensive earnings, were primarily related to temporary increases in market values of corporate bond investments. Changes in foreign currency exchange rates, primarily related to our Canadian operations, increased other comprehensive earnings by $2.9 million, net of taxes, in 2012.
Forward-looking statements. Certain statements in this report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to future, not past, events and often address our expected future business and financial performance. These statements often contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “will,” “foresee” or other similar words. Forward-looking statements by their nature are subject to various risks and uncertainties that could cause our actual results to be materially different than those expressed in the forward-looking statements. These risks and uncertainties include, among other things, the tenuous economic conditions; adverse changes in the level of real estate activity; changes in mortgage interest rates, existing and new home sales, and availability of mortgage financing; our ability to respond to and implement technology changes, including the completion of the implementation of our enterprise systems; the impact of unanticipated title losses on the need to strengthen our policy loss reserves; any effect of title losses on our cash flows and financial condition; the impact of vetting our agency operations for quality and profitability; changes to the participants in the secondary mortgage market and the rate of refinancings that affect the demand for title insurance products; regulatory non-compliance, fraud or defalcations by our title insurance agents or employees; our ability to timely and cost-effectively respond to significant industry changes and introduce new products and services; the outcome of pending litigation; the impact of changes in governmental and insurance regulations, including any future reductions in the pricing of title insurance products and services; our dependence on our operating subsidiaries as a source of cash flow; the continued realization of expense savings from our continual focus on aligning our operations to quickly adapt our costs to transaction volumes and market conditions; our ability to access the equity and debt financing markets when and if needed; our ability to grow our international operations; and our ability to respond to the actions of our competitors. We expressly disclaim any obligation to update any forward-looking statements contained in this report to reflect events or circumstances that may arise after the date hereof, except as may be required by applicable law.