Investors Title Company - 10-K annual report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

for the fiscal year ended December 31, 2005

 

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-11774

(Exact name of registrant as specified in its charter)

Securities registered pursuant to section 12(b) of the Act:

None

Securities registered pursuant to section 12(g) of the Act:

YesoNox

Yeso No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

The aggregate market value of the common shares held by non-affiliates was $67,185,216 based on the closing sales price on the NASDAQ National Market System on the last business day of the registrant's most recently completed second fiscal quarter (June 30, 2005).

 

 

Portions of Investors Title Company's Annual Report to Shareholders for the fiscal year ended December 31, 2005 are incorporated by reference in Parts I, II and IV hereof and portions of Investors Title Company's definitive proxy statement for the Annual Meeting of Shareholders to be held on May 17, 2006 are incorporated by reference in Part III hereof.

 

These and other risks and uncertainties may be described from time to time in the Company's other reports and filings with the Securities and Exchange Commission. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.

 

 

TABLE OF CONTENTS

 

Through its two wholly owned subsidiaries, ITIC and NE-ITIC, the Company underwrites land title insurance for owners and mortgagees as a primary insurer. Title insurance protects against loss or damage resulting from title defects that affect real property. The commitment and policies issued are predominantly the standard American Land Title Association approved forms.

A title defect is one of any number of things that could jeopardize the property owner's interest. It could be an unsatisfied mortgage, lien, judgment or other unrecorded claim against the property. It could arise through easements, use restrictions or other existing covenants, or it could be a hidden risk. Title insurance generally protects against four kinds of hidden risks -- errors in the public records such as incorrect information in deeds and mortgages regarding names, signatures and legal descriptions; judgments, liens and mortgages or any other claims against the property or the seller which become the new owner's responsibility after closing, such as unpaid taxes, assessments and other debts to creditors; claims to ownership by the spouse of a former owner or by the “missing heir” of a deceased owner who did not receive his share of the estate; and invalid deeds or other transfers by sellers who did not actually own the property or by previous owners who were minors or not mentally competent.

The Company markets its title insurance services to a broad range of customers. ITIC delivers title insurance coverage through a home office, branch offices, and issuing agents. In North Carolina, ITIC issues policies primarily through a home office and 27 branch offices. The Company also has a branch office in South Carolina and Nebraska. ITIC also writes title insurance policies through issuing agents in the District of Columbia and the States of Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Kentucky, Louisiana, Maryland, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia and West Virginia. Issuing agents are typically real estate attorneys or subsidiaries of community and regional mortgage lending institutions, depending on local customs and regulations and the Company’s marketing strategy in a particular territory.

NE-ITIC currently operates through agency offices in the State of New York.

At any given time, the insurer's actual financial risk is only a portion of the aggregate insured risk of all policies in force. The reduction in risk results in part from the reissuance of title insurance policies by other underwriters when the property is conveyed or refinanced. An owner's policy is effective only as long as the insured has an ownership interest in the property or has liability under warranties of title. Furthermore, the coverage on a lender's title insurance policy is reduced and eventually terminated as the loan it secures is paid. Due to the variability of these factors, the aggregate contingent liability on outstanding policies of the Company and its subsidiaries cannot be determined with any precision.

 

Title insurance companies are extensively regulated under applicable state laws. All states have requirements for admission to do business as an insurance company, including minimum levels of capital and surplus and establishing reserves. State regulatory authorities monitor the stability and service of insurance companies and possess broad powers with respect to the licensing of title insurers and agents, rate schedules, type and amount of investments, policy forms, financial reporting and practices, reserve requirements, and dividend restrictions, as well as examinations and audits of title insurers. The Company's two insurance subsidiaries are subject to examination at any time by the insurance regulators in the states where they are licensed.

Proposals to change the laws and regulations governing insurance holding companies and the title insurance industry are often introduced in Congress, in the state legislatures and before the various insurance regulatory agencies. The Company regularly monitors such proposals and legislation, although the likelihood and timing of them and the impact they may have on the Company and its subsidiaries cannot be determined at this time.

 

In addition, there are numerous industry-related regulations and statutes that set out conditions and requirements to conduct business. Changes to or the removal of such regulations and statutes could result in additional competition from alternative title insurance products or new entrants into the industry that could materially affect the Company's business operations and financial condition.

The risk factors listed in this section and other factors noted herein or incorporated by reference could cause actual results to differ materially from those contained in any forward-looking statements.

The demand for the Company’s title insurance and other real estate transaction products and services is dependent upon, among other things, the volume of commercial and residential real estate transactions, including mortgage refinancing transactions. The volume of these transactions has historically been influenced by factors such as mortgage interest rates and the state of the overall economy. When mortgage interest rates are high or increasing or during an economic downturn or recession, real estate activity typically declines and the title insurance industry tends to experience lower revenues and profitability. The cyclical nature of the Company’s business can cause fluctuations in revenues and profitability.

Revenues from the Company’s exchange services segment may also be closely related to the level of real estate transactions, such as real estate sales and mortgage refinancing transactions. The Company’s revenues in future periods will continue to be subject to these and other factors which are beyond its control and, as a result, are likely to fluctuate.

Historically, real estate transactions have produced seasonal revenue levels for title insurers, with residential real estate activity generally slower in the winter, when fewer families move or buy or sell homes. Therefore, the first calendar quarter is typically the weakest quarter in terms of revenue due to the generally low volume of home sales. Fluctuations in mortgage interest rates, as well as other economic factors, can cause shifts in real estate activity outside the normal seasonal pattern.

The Company is an insurance holding company and has no substantial operations of its own. The Company’s ability to pay dividends and meet its obligations is dependent among other things on the ability of its subsidiaries to pay dividends or repay funds to it. The Company’s insurance subsidiaries are subject to insurance and other regulations that limit the amount of dividends, loans or advances to it based on the amount of adjusted unassigned surplus and net income and require these subsidiaries to maintain minimum amounts of capital, surplus and reserves. In general, dividends in excess of prescribed limits are deemed “extraordinary” and require prior insurance regulatory approval.

 

The Company’s other businesses operate within state and federal guidelines. Any changes in the applicable regulatory environment or changes in existing regulations could restrict its existing or future operations. Exchange services are provided pursuant to provisions in the Internal Revenue Code. In February 2006, the IRS proposed new regulations which, if adopted, may negatively affect the ability of qualified intermediaries to retain interest earned on exchange funds they are holding.

A majority of the Company’s investments consist of fixed-maturity securities. Changes in interest rates may have an adverse impact on the market value of the Company’s investment portfolio and its return on invested cash and could reduce the value of its investment portfolio and adversely affect its results of operations and financial condition. A smaller percentage of total investments are in equities. A change in general economic conditions, the stock market, or many other external factors could adversely affect the value of these investments and, in turn, the Company’s results and financial condition.

The Company has historically achieved growth through a combination of developing related new products or services and increasing its market share for existing products. A portion of the Company’s growth may be in services or geographic areas with which management is less familiar than with its core business and geographic areas. The expansion of the Company’s business, particularly in new services or geographic areas, may subject it to associated risks, such as the diversion of management’s attention and lack of substantial experience in operating such businesses.

The title insurance industry is highly competitive. Title companies compete by choosing various distribution network channels which may include affiliations with lenders, builders, and settlement providers. Key factors that affect competition in the title insurance business are price, expertise, timeliness and quality of service and the financial strength and size of the insurer. Title insurance underwriters also compete for agents on the basis of service and commission levels. Some title insurers currently have greater financial resources, larger distribution networks and more extensive computerized databases than the Company. The number and size of competing companies varies in the different geographic areas in which it operates. Competition among the major providers of title insurance, new entrants to the industry or the introduction and acceptance of new alternatives to traditional title products by the marketplace could adversely affect the Company’s operations and financial condition.

Competition for skilled and experienced personnel and agents in the Company’s industry is high. The Company may have difficulty hiring the necessary marketing, sales and management personnel to support any future growth. The loss of any key employee or the failure of any key employee to perform in their current position could prevent the Company from realizing future growth. Also, the Company cannot provide assurance that it will succeed in attracting or retaining new agents. Its results of operations and financial condition could be adversely affected if it is unsuccessful in attracting and retaining agents.

The Company’s earnings depend upon the extent to which its actual claims experience is consistent with the assumptions used in establishing reserves for claims. Reserves for claims are established in part based on estimates by an independent actuary of how much the Company will need to pay for reported as well as incurred, but not yet reported claims. In addition, management considers factors such as the Company's historical claims experience, case reserve estimates on reported claims, large claims and other relevant factors in determining loss provision rates and the aggregate recorded expected liability for claims. Due to the nature of the underlying risks and the high degree of uncertainty associated with the determination of reserves for claims, the Company cannot determine precisely the amounts which it will ultimately pay to settle its claims. Such amounts may vary from the estimated amounts, particularly when those payments may not occur until well into the future. To the extent that actual claims experience is less favorable than the underlying assumptions used in establishing such liabilities, the Company could be required to increase reserves.

A significant component of the Company’s revenue arises from issuing title insurance policies which typically provides coverage for the real property mortgage lender and the buyer of the property. The Company also may be subject to a legal claim arising from the handling of escrow transactions. The occurrence of a significant title or escrow claim in any given period could have a material adverse effect on the Company’s financial condition and results of operations during that period.

The competitive positions of insurance companies, in general, have come to depend increasingly on independent ratings of their financial strength and claims-paying ability. A significant downgrade in the ratings of either of the Company’s major policy-issuing subsidiaries could negatively impact their ability to compete for new business and retain existing business and adversely affect their results of operations.

Regulation is also a risk factor for title insurers. The title insurance industry has recently been, and continues to be, under intense regulatory scrutiny in a number of states with respect to pricing practices, and possible Real Estate Settlement Procedures Act (“RESPA”) violations and unlawful rebating practices. The regulatory investigations have resulted in settlements and fines for other underwriters and could lead to industry-wide reductions in premium rates and escrow fees, the inability to get rate increases when necessary, as well as to changes that could adversely affect the Company’s ability to compete for or retain business or raise the costs of additional regulatory compliance.

Fraud, defalcation and misconduct by agents and approved attorneys are risks inherent in the Company’s business. Agents and approved attorneys typically handle large sums of money in trust pursuant to the closing of real estate transactions and a misappropriation of funds by any of these parties could result in title claims.

 

 

 

 

 

 

 

 

 

The following financial statements in the 2005 Annual Report to Shareholders are hereby incorporated by reference in this Form 10-K Annual Report:

Following is a list of financial statement schedules filed as part of this Form 10-K Annual Report:

All other schedules are omitted, as the required information either is not applicable, is not required, or is presented in the consolidated financial statements or the notes thereto.

 

The exhibits filed as a part of this report and incorporated herein by reference to other documents are listed in the Index to Exhibits to this Annual Report on Form 10-K.