UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to ________. Commission file number 0-11774 INVESTORS TITLE COMPANY (Exact name of registrant as specified in its charter) North Carolina 56-1110199 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 121 North Columbia Street, Chapel Hill, North Carolina 27514 (Address of principal executive offices) Registrant's telephone number, including area code: (919) 968-2200 Securities registered pursuant to section 12(g) of the Act:
Common Stock, no par value None (Title of each class) (Name of the exchange on which registered)UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549FORM 10-K
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
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
for thepast 90 days. Yes X No --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. ___ On February 28, 2002 the aggregate market value of the voting and nonvoting common equity held by nonaffiliates of the registrant was $36,140,398. On February 28, 2002 the number of common shares outstanding was 2,516,298. DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference ---------- --------------------Portions of Annual Report to Shareholders Part I, Items 1 and 2 forfiscal year ended December 31,20012004TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-11774 INVESTORS TITLE COMPANY (Exact name of registrant as specified in its charter)
North Carolina 56-1110199 (State or other jurisdiction of
incorporation or organization)(I.R.S. Employer
Identification No.)
121 North Columbia Street
Chapel Hill, North Carolina 27514
(919) 968-2200Securities registered pursuant to section 12(b) of the Act:
NoneSecurities registered pursuant to section 12(g) of the Act:
Common Stock, no par value
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
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part
II, Items 5 - 8 Part IV, Item 14III of this Form 10-K or any amendment to this Form 10-K.Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes
No
The aggregate market value of the common shares held by non-affiliates was $59,365,278 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, 2004).
As of February 28, 2005, there were 2,855,744 common shares of the registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of
Proxy Statement (in connection withInvestors Title Company’s Annual Report to Shareholders for the fiscal year ended December 31, 2004 are incorporated by reference in Parts I, II and IV hereof and portions of Investors Title Company’s definitive proxy statement for the Annual MeetingPart III, Items 10 - 13of Shareholders to be held on May15, 2002)18, 2005 are incorporated by reference in Part III hereof.
INVESTORS TITLE COMPANY AND SUBSIDIARIES INDEX
PART I. Item 1. Business .................................................................. 3 Item 2. Properties ................................................................ 9 Item 3. Legal Proceedings ......................................................... 9 Item 4. Submission of Matters to a Vote of Security Holders ....................... 9 Item 4A. Executive OfficersSAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, as well as information included in future filings by the Company with the Securities and Exchange Commission and information contained in written material, press releases and oral statements issued by or on behalf of the Company,
......................................... 9contains, or may contain, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect management’s current outlook for future periods. These statements may be identified by the use of words such as “plan,” “expect,” “aim,” “believe,” “project,” “anticipate,” “intend,” “estimate,” “will,” “should,” “could” and other expressions that indicate future events and trends. All statements that address expectations or projections about the future, including statements about the Company’s strategy for growth, product and service development, market share position, claims, expenditures, financial results and cash requirements, are forward-looking statements. Forward-looking statements are based on certain assumptions and expectations of future events that are subject to a number of risks and uncertainties. Actual future results and trends may differ materially from historical results or those projected in any such forward-looking statements depending on a variety of factors, including, but not limited to, the following: (1) the demand for title insurance will vary due to factors such as interest rate fluctuations, the availability of mortgage funds, the level of real estate transactions, including mortgage refinance activity, the cost of real estate, consumer confidence, employment levels, family income levels and general economic conditions; (2) losses from claims may be greater than anticipated such that reserves for possible claims are inadequate; (3) unanticipated adverse changes in securities markets, including interest rates, could result in material losses on the Company’s investments; (4) the Company’s dependence on key management personnel, the loss of whom could have a material adverse affect on the Company’s business; (5) the Company’s ability to develop and offer products and services that meet changing industry standards in a timely and cost-effective manner and significant changes or additions to applicable government regulations; and (6) state statutes require the Company’s insurance subsidiaries to maintain minimum levels of capital, surplus and reserves and restrict the amount of dividends that the insurance subsidiaries may pay to the Company without prior regulatory approval.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.
INVESTORS TITLE COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS
PART I
GENERAL
Investors Title Company (the “Company”) is a holding company that operates through its subsidiaries and
Related Stockholder Matters ..... 11 Item 6. Selected Financial Data ................................................... 11 Item 7. Management'swas incorporated in the State of North Carolina in February 1973. The Company became operational on June 24, 1976, when it acquired Investors Title Insurance Company (“ITIC”) as a wholly owned subsidiary under a plan of exchange of shares of common stock. On September 30, 1983, the Company acquired Northeast Investors Title Insurance Company (“NE-ITIC”), formerly Investors Title Insurance Company of South Carolina, as a wholly owned subsidiary under a plan of exchange of shares of common stock. Investors Capital Management Company (“ICMC”), a wholly owned subsidiary of the Company, was organized on October 17, 2003. The Company’s most recent subsidiary, Investors Trust Company (“Investors Trust”), was granted a trust charter by the North Carolina Banking Commissioner on February 17, 2004.The Company engages primarily in three lines of business. The main business activity is the issuance of title insurance through ITIC and NE-ITIC. The second line of business provides tax-deferred exchange services through its subsidiaries, Investors Title Exchange Corporation (“ITEC”) and Investors Title Accommodation Corporation (“ITAC”). The Company has also recently entered into a third line of business, which it added to supplement its traditional lines of business, providing investment management and trust services to individuals, trusts and other entities. See Management’s Discussion and Analysis of Financial Condition and Results of Operations
.............................................................and Note 13 of Notes to Consolidated Financial Statements in the 2004 Annual Report to Shareholders incorporated by reference in this Form 10-K Annual Report for additional information related to the revenues, income and assets attributable to the Company’s operating segments.The Company’s executive offices are located at 121 North Columbia Street, Chapel Hill, North Carolina 27514. The Company’s telephone number is (919) 968-2200, its facsimile number is (919) 968-2235, and its Internet address is www.invtitle.com, the contents of which are not and shall not be deemed a part of this document or any other U.S. Securities and Exchange filing. The Company makes available free of charge on its Internet website its annual report on Form 10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K, and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such materials are electronically filed with or furnished to the Securities and Exchange Commission.
Title Insurance
Through its two wholly owned subsidiaries, ITIC and NE-ITIC, the Company underwrites land title insurance for owners and mortgagees as a primary insurer and as a reinsurer for other title insurance companies. Title insurance protects against loss or damage resulting from defects that affect the title to real property. The commitment and policies issued are the standard American Land Title Association approved forms.
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There are two basic types of title insurance policies - one for the mortgage lender and one for the real estate owner. A lender often requires property owners to purchase title insurance to protect its position as a holder of a mortgage loan, but the lender’s title insurance policy does not protect the property owner. The property owner needs to purchase an owner’s title insurance policy to protect his investment.
When real property is conveyed from one party to another, occasionally there is a hidden defect in the title or a mistake in a prior deed, will or mortgage that may give a third party a legal claim against such property. If a claim is made against real property, title insurance provides a corporate guarantee against insured defects, pays all legal expenses to eliminate any title defects, pays any claims arising from errors in title examination and recording, and pays any losses arising from hidden defects in title and defects that are not of record. Title insurance provides an assurance that the insurance holder’s ownership and use of such property will be defended promptly against claims, at no cost, whether or not the claim is valid.
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 assumes and cedes reinsurance with other insurance companies in the normal course of business. Ceded reinsurance is comprised of excess of loss treaties, which protects against losses over certain amounts.
ITIC was incorporated in the State of North Carolina on January 28, 1972, and became licensed to write title insurance in the State of North Carolina on February 1, 1972. At present, ITIC mainly writes land title insurance both as a primary insurer and as a reinsurer throughout the eastern and midwestern United States. ITIC writes title insurance through issuing agents or branch offices 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, West Virginia and Wisconsin. In addition to the states in which ITIC currently writes title insurance, it is also licensed to write title insurance in 17 additional states. Agents issue policies for ITIC and may provide other services such as search and settlement services.
NE-ITIC was incorporated in the State of South Carolina on February 23, 1973, and became licensed to write title insurance in that state on November 1, 1973. It currently writes title insurance as a primary insurer and as a reinsurer in the State of New York. NE-ITIC is also licensed to write title insurance in North Carolina and South Carolina.
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Each state license authorizing ITIC or NE-ITIC to write title insurance must be renewed annually. These licenses are necessary for the companies to operate as a title insurer in each state in which they are held and the loss of a license in any state by either company would prevent the company from issuing title insurance in that state.
In the State of North Carolina, ITIC issues title insurance commitments and policies through its home office and its 27 branch offices that are located throughout North Carolina. The Company also has a branch office in South Carolina and Michigan. Title policies are primarily issued through issuing agents in other states.
In the ordinary course of business, ITIC and NE-ITIC reinsure certain risks with other title insurers for the purpose of limiting their exposure. They also assume reinsurance for certain risks of other title insurers for which they receive additional income. For the last three years, reinsurance activities accounted for less than 1% of total premium volume.
As of December 31, 2004, ITIC had a risk retention limit of $2,750,000, meaning that it assumed primary risks up to $2,750,000. It then reinsured the next $250,000 of risk with NE-ITIC, and all risks above $3,000,000 were reinsured with an unrelated reinsurer.
As of December 31, 2004, NE-ITIC had a risk retention limit of $250,000, meaning that it assumed primary risks up to $250,000. It then reinsured the next $2,750,000 of risk with ITIC, and all amounts above $3,000,000 were reinsured with an unrelated reinsurer.
Both ITIC’s and NE-ITIC’s risk retention limits are self-imposed and are more conservative than state insurance regulations require. ITIC’s self-imposed retention of $2,750,000 is only 15% of its statutorily permitted retention of $18,371,349. NE-ITIC’s self-imposed retention of $250,000 is only 12.3% of its statutorily permitted retention of $2,025,024.
ITIC has been recognized by two independent Fannie Mae-approved actuarial firms, Demotech, Inc. and LACE Financial Corporation, with rating categories of “A Double Prime” and “A.” NE-ITIC’s financial stability also has been recognized by Demotech, Inc. and LACE Financial Corporation with rating categories of “A Prime” and “A+.” According to Demotech, title insurance underwriters earning a financial stability rating of A’’ (A Double Prime) or A’ (A Prime) possess unsurpassed financial stability related to maintaining positive surplus as regards policyholders, regardless of the severity of a general economic downturn or deterioration in the title insurance cycle. A LACE rating of “A+” or “A” indicates that a title insurance company has a strong overall financial condition that will allow it to meet its future claims and that, generally, the company has good operating earnings, is well capitalized and has adequate reserves.
Exchange Services
In 1988, the Company established Investors Title Exchange Corporation, a wholly owned subsidiary (“ITEC”), to provide services in connection with tax-deferred exchanges of like-kind property. ITEC acts as an intermediary in tax-deferred exchanges of property held for productive use in a trade or business or for investments, and its income is derived from fees for handling exchange transactions.
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The Company established South Carolina Document Preparation Company (“SCDPC”) as a wholly owned subsidiary in 1994. In the first quarter of 2001, SCDPC changed its name to Investors Title Accommodation Corporation (“ITAC”) and began serving as an exchange accommodation titleholder, offering a vehicle for accomplishing a reverse exchange when a taxpayer must acquire replacement property before selling the relinquished property.
Investment Management and Trust Services
The Company organized ICMC, a wholly owned subsidiary, as a North Carolina corporation on October 17, 2003. ICMC is currently licensed as an investment adviser in North Carolina and South Carolina. Investors Trust, also a wholly owned subsidiary of the Company, received its North Carolina trust charter on February 17, 2004. The Company anticipates that ICMC and Investors Trust will work together to provide investment management and trust services to individuals, companies, banks and trusts. These subsidiaries did not have significant activities in 2004, and are not currently a reportable segment for which financial information is presented in the financial statements and there is no assurance that this business will be successful.
OPERATIONS OF SUBSIDIARIES
For a description of net premiums written geographically, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations. See Note 13 of Notes to Consolidated Financial Statements in the 2004 Annual Report to Shareholders incorporated by reference in this Form 10-K Annual Report for additional information related to the Company’s operating segments.
Title Insurance
ITIC and NE-ITIC issues title insurance coverage through its direct operations or through partially owned or independent title insurance agents. ITIC and NE-ITIC offer primary title insurance coverage to owners and mortgagees of real estate and reinsurance of title insurance risks to other title insurance companies. Title insurance premiums written reflect a one-time premium payment, with no recurring premiums. Premiums are recorded and policies or commitments are issued upon receipt of final certificates or preliminary reports with respect to titles. Title insurance commissions earned by the Company’s agents are recognized as expense concurrently with premium recognition.
Exchange Services
ITEC and ITAC provide customer services in connection with tax-deferred real property exchanges pursuant to Section 1031 of the Internal Revenue Code. As a qualified intermediary, ITEC holds the proceeds from sales of relinquished properties until the acquisition of identified replacement properties occurs. ITAC facilitates tax-deferred reverse exchanges pursuant to IRS Revenue Procedure 2000-37. These exchanges require ITAC, using funds borrowed on a non-recourse basis from the customer or his lender, to acquire the designated replacement property on behalf of the customer by taking temporary title to the customer’s property until after the disposition of identified relinquished property occurs.
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SEASONALITY
Title Insurance
Title insurance premiums are closely related to the level of real estate activity and the average price of real estate sales. The availability of funds to finance purchases directly affects real estate sales. Other factors include consumer confidence, economic conditions, supply and demand, mortgage interest rates and family income levels. Historically, the first quarter has the least real estate activity because fewer real estate transactions occur, while the remaining quarters are more active. Refinance activity is generally less seasonal, but it is subject to interest rate volatility. Fluctuations in mortgage interest rates can cause shifts in real estate activity outside of the normal seasonal pattern.
Exchange Services
Seasonal factors affecting the level of real estate activity and the volume of title premiums written will also affect the demand for exchange services.
MARKETING
Title Insurance
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 Michigan. 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, West Virginia and Wisconsin. 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.
ITIC and NE-ITIC strive to provide superior service to their customers and consider this an important factor in attracting and retaining customers. Branch and corporate personnel strive to develop new business and agency relationships to increase market share and ITIC’s Commercial Services Division provides services to commercial clients. The Company’s marketing efforts are also enhanced through advertising in various periodicals.
Exchange Services
Marketing of exchange services offered by ITEC and ITAC has been increasingly incorporated into the marketing of the core title products offered by ITIC and NE-ITIC. The Commercial Services Division of ITIC also markets the services offered by ITEC and ITAC to its clients.
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CUSTOMERS
The Company is not dependent upon any single customer or a few customers, and the loss of any single customer would not have a material adverse effect on the Company.
INSURED RISK ON POLICIES IN FORCE
Generally, the amount of the insured risk on a title insurance policy is equal to the lesser of the purchase price of the insured property or the fair market value of the property. In the event that a claim is made against the property, the insurer is also responsible for paying all legal expenses in connection with defending the insured party and eliminating any title defects affecting the property. The insurer may, however, choose to pay the policy limits to the insured, at which time the insurer’s duty to defend the claim is satisfied.
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 of the Company and its subsidiaries cannot be determined with any precision.
ENVIRONMENTAL MATTERS
The title insurance policies ITIC and NE-ITIC currently issue exclude liability for environmental risks and contamination. Although policies issued prior to 1992 may not specifically exclude such environmental risks, they generally do not provide affirmative coverage for such risks. As a result, the Company does not anticipate that it or its subsidiaries will incur any significant expenses related to environmental claims.
In connection with effecting tax-deferred exchanges of like-kind property, ITEC and ITAC may temporarily hold title to property pursuant to an accommodation titleholder agreement. In such situations, the person or entity for which title is being held must execute an indemnification agreement pursuant to which it agrees to indemnify ITEC or ITAC, as appropriate, for any environmental or other claims which may arise as a result of the arrangement.
REGULATIONS
Title Insurance
The Company is an insurance holding company and therefore it is subject to regulation in the states in which its insurance subsidiaries do business. These regulations, among other things, require insurance holding companies to register and file certain reports and require prior regulatory approval of the payment of dividends and other intercompany transfers.
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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. 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, rates, type and amount of investments, policy forms, financial reporting, 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.
ITIC is domiciled in North Carolina and is subject to North Carolina insurance regulations. The North Carolina Department of Insurance typically schedules financial examinations every five years. ITIC was last examined by the North Carolina Department of Insurance for the period January 1, 1995 through December 31, 1999. No material deficiencies were noted in the report.
NE-ITIC is domiciled in South Carolina and subject to South Carolina insurance regulations. The South Carolina Department of Insurance periodically schedules financial examinations. NE-ITIC was examined by the South Carolina Department of Insurance for the period January 1, 1998 through December 31, 2000. No material deficiencies were noted in the report.
In addition to financial examinations, ITIC and NE-ITIC are subject to market conduct examinations by the North Carolina Department of Insurance and the South Carolina Department of Insurance, respectively. These audits examine domiciled state activity. ITIC’s last market conduct examination commenced on May 3, 2004 for the period January 1, 2001 through December 31, 2003, with no material deficiencies noted. NE-ITIC’s last market conduct examination coincided with its financial examination, which commenced in November 2001 for the period January 1, 1998 through December 31, 2000. No material deficiencies were noted for NE-ITIC by the market conduct examiners.
Both ITIC and NE-ITIC meet the statutory premium reserve requirements and the minimum capital and surplus requirements of the states in which they are licensed.
Exchange Services
Intermediary services are not federally regulated and neither ITEC nor ITAC operate in any states that regulate this industry. ITEC and ITAC both provide services to taxpayers pursuant to Internal Revenue Service (“IRS”) regulations that provide taxpayers a safe harbor by using a qualified intermediary to structure tax-deferred exchanges of property and using an exchange accommodation titleholder to hold property in reverse exchange transactions. Periodically, changes to the tax code provisions affecting like-kind exchanges are considered, which could possibly eliminate the need for the services the exchange segment provides.
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COMPETITION
Title Insurance
ITIC currently operates primarily in North Carolina, Michigan, Pennsylvania, South Carolina, Tennessee and Virginia and NE-ITIC currently operates in New York. ITIC’s and NE-ITIC’s major competitors, which together comprise a majority of the title insurance market on a national level, are Chicago Title Insurance Company, Commonwealth Land Title Insurance Company, Fidelity National Title Insurance Company, First American Title Insurance Company, Lawyers Title Insurance Corporation, Old Republic National Title Insurance Company and Stewart Title Guaranty Company. Key factors that affect competition in the title insurance industry are price, expertise, timeliness and quality of service and the financial strength and size of the insurer. Title insurance underwriters also compete for agents based upon the ratio of premium splits between the underwriter and the agent.
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.
Exchange Services
Competition for ITEC and ITAC comes from other title insurance companies as well as some major banks that offer exchange services. Key elements that affect competition are price, expertise, timeliness and quality of service and the financial strength and size of the company. Exchange services are not a regulated industry; therefore, there is no market data available regarding the Company’s market position in this industry.
INVESTMENTS
The Company and its subsidiaries derive a substantial portion of their income from investments in bonds (municipal and corporate) and equity securities. The investment policy is designed to maintain a high quality portfolio and maximize income. Some state laws impose restrictions upon the types and amounts of investments that can be made by the Company’s insurance subsidiaries.
See Note 3 of Notes to Consolidated Financial Statements in the 2004 Annual Report to Shareholders incorporated by reference in this Form 10-K Annual Report for the major categories of investments, earnings by investment categories, scheduled maturities, amortized cost, and market values of investment securities.
EMPLOYEES
The Company has no paid employees. Officers of the Company are full-time paid employees of ITIC. The Company’s subsidiaries had 214 full-time employees and 13 part-time employees as of December 31, 2004.
None of the employees of the Company or its subsidiaries are subject to a collective bargaining agreement. Management considers its relationship with its employees to be favorable.
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Item
12
Name Age Position with Registrant J. Allen Fine 70 Chief Executive Officer and Chairman of the Board James A. Fine, Jr. 42 President, Treasurer, Chief Financial Officer, Chief
Accounting Officer and DirectorW. Morris Fine 38 Executive Vice President, Secretary and Director
J. Allen Fine has been Chief Executive Officer and Chairman of the Board of the Company since its incorporation in 1973. Mr. Fine also served as President of the Company until May 1997. Mr. Fine is the father of James A. Fine, Jr., President, Treasurer and Director of the Company, and W. Morris Fine, Executive Vice President, Secretary and Director of the Company.
James A. Fine, Jr. was named Vice President of the Company in 1987. In 1997, he was named President and Treasurer and appointed as a Director of the Company. He is the son of J. Allen Fine, Chief Executive Officer and Chairman of the Board of the Company, and the brother of W. Morris Fine, Executive Vice President, Secretary and Director of the Company.
W. Morris Fine was named Vice President of the Company in 1992. In 1993, he was named Treasurer of the Company and served in that capacity until 1997. In 1997, he was named Executive Vice President and Secretary of the Company. In 1999, he was appointed as a Director of the Company. W. Morris Fine is the son of J. Allen Fine, Chief Executive Officer and Chairman of the Board of the Company, and the brother of James A. Fine, Jr., President, Treasurer and Director of the Company.
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Plan Category Number of Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants and RightsWeighted Average
Price of Outstanding
Options, Warrants
and RightsNumber of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation PlansEquity compensation plans
approved by shareholders246,781 $ 16.45 196,300 Equity compensation plans not
approved by shareholders— — — Total 246,781 $ 16.45 196,300
The following table provides information about purchases by the Company (and all affiliated purchasers) during the quarter ended December 31, 2004 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act:
Issuer Purchases of Equity Securities
Period Total Number of
Shares
PurchasedAverage Price
Paid per ShareTotal Number of
Shares Purchased as
Part of Publicly
Announced PlanMaximum Number of
Shares that May Yet Be
Purchased Under the
PlanBeginning of period 505,855 10/01/04 - 10/31/04 2,052 $ 31.30 2,052 503,803 11/01/04 - 11/30/04 236 $ 33.87 236 503,567 12/01/04 - 12/31/04 8,695 $ 34.81 8,695 494,872 Total: 10,983 $ 34.13 10,983 494,872
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(1) For the quarter ended December 31, 2004, ITIC purchased an aggregate of 10,983 shares of the Company’s common stock pursuant to the purchase plan (the “Plan”) that was publicly announced on June 5, 2000. (2) On June 5, 2000, the Board of Directors of ITIC approved the purchase by ITIC of up to an aggregate of 500,000 shares of the Company’s common stock pursuant to the Plan. Subsequently, the Board of Directors of ITIC approved the purchase of an additional 125,000 shares of the Company’s common stock pursuant to the Plan. Unless terminated earlier by resolution of the Board of Directors of ITIC, the Plan will expire when ITIC has purchased all shares authorized for purchase thereunder. (3) ITIC intends to make further purchases under this Plan.
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PART
IV. Item 14. Exhibits,IV
(a)(1) Financial Statements. The following financial statements in the 2004 Annual Report to Shareholders are hereby incorporated by reference in this Form 10-K Annual Report: Consolidated Balance Sheets as of December 31, 2004 and 2003 Consolidated Statements of Income for the Years Ended December 31, 2004, 2003 and 2002 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2004, 2003 and 2002 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2004, 2003 and 2002 Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002 Notes to Consolidated Financial Statements Report of Independent Auditors (a)(2) Financial Statement Schedules. Following is a list of financial statement schedules filed as part of this Form 10-K Annual Report:
Schedule Number Description I Summary of Investments - Other Than Investments in Related Parties II Condensed Financial Information of Registrant III Supplementary Insurance Information IV Reinsurance V Valuation and ReportsQualifying Accounts
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.
(a)(3) Exhibits.
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
8-K ..........10-K.
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Pursuant to the requirements of Section 13
Signatures .......................................................................... 16or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.2
INVESTORS TITLE COMPANY (Registrant) By: /s/ J. Allen Fine ——————————————————— J. Allen Fine, Chairman and Chief Executive Officer(Principal Executive Officer)
March 16, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 16th day of March, 2005.
/s/ J. Allen Fine ——————————————————— ———————————————— J. Allen Fine, Chairman of the Board and James R. Morton, Director Chief Executive Officer (Principal Executive Officer) /s/ James A. Fine, Jr. /s/ A. Scott Parker III ——————————————————— ———————————————— James A. Fine, Jr., President, Treasurer and A. Scott Parker III, Director Director(Principal Financial Officer and Principal Accounting Officer) /s/ W. Morris Fine /s/ H. Joe King, Jr. ——————————————————— ———————————————— W. Morris Fine, Executive Vice President, H. Joe King, Jr., Director Secretary and Director /s/ David L. Francis /s/ William J. Kennedy III ——————————————————— ———————————————— David L. Francis, Director William J. Kennedy III, Director /s/ Loren B. Harrell, Jr. ——————————————————— Loren B. Harrell, Jr., Director
19
PART I ITEM 1. BUSINESS GENERAL - ------- Investors Title Company ("the Company") is a holding company which was incorporated in the State
SCHEDULE I INVESTORS TITLE COMPANY AND SUBSIDIARIES
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
As of December 31, 2004Type of Investment Cost(1) Market Value Amount at
which shown
in the
Balance Sheet (2)Fixed Maturities: Bonds: States, municipalities and political
subdivisions$ 65,034,361 $ 66,617,609 $ 66,490,115 Public utilities 199,662 216,346 216,346 All other corporate bonds 7,339,755 7,967,940 7,967,940 Short term investments 9,106,643 9,106,643 9,106,643 Certificates of deposit 1,027,678 1,027,678 1,027,678 Total fixed maturities 82,708,099 84,936,216 84,808,722 Equity Securities: Common Stocks: Public utilities 143,440 196,350 196,350 Banks, trust and insurance companies 70,991 442,590 442,590 Industrial, miscellaneous and all other 3,334,183 5,506,916 5,506,916 Nonredeemable preferred stocks 893,690 1,094,450 1,094,450 Total equity securities 4,442,304 7,240,306 7,240,306 Other Investments 1,211,517 1,211,517 Total investments per the consolidated balance sheet $ 88,361,920 $ 93,260,545
(1) Fixed maturities are shown at amortized cost and equity securities are shown at original cost. (2) Bonds of states, municipalities and political subdivisions are shown at amortized cost for held-to-maturity bonds and fair value for available-for-sale bonds. Equity securities are shown at fair value.
SCHEDULE II INVESTORS TITLE COMPANY (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
AS OF DECEMBER 31, 2004 AND 2003
2004 2003 Assets Cash and cash equivalents $ 207,849 $ 121,587 Investments in fixed maturities, available-for-sale 8,956,400 773,483 Investments in equity securities — 2,030,000 Short term investments 1,012,182 2,494,742 Investments in affiliated companies 58,936,521 52,597,051 Other investments 819,936 829,123 Other receivables 237,798 1,756,867 Deferred income taxes, net 33,189 62,046 Income taxes receivable 2,123,917 1,327,456 Prepaid expenses and other assets 45,713 16,927 Property, net 2,085,822 2,108,948 Total Assets $ 74,459,327 $ 64,118,230 Liabilities and Stockholders’ Equity
Liabilities:Accounts payable and accrued liabilities $ 1,952,056 $ 929,484 Stockholders’ Equity: Class A Junior Participating preferred stock - no par value
(shares authorized 100,000; no shares issued)— — Common stock-no par (shares authorized 10,000,000; 2,481,024
and 2,503,923 shares issued and outstanding 2004 and 2003,
respectively, excluding 374,720 and 351,821 shares 2004 and
2003, respectively, of common stock held by the Company’s subsidiary)1 1 Retained earnings 69,272,092 59,756,927 Accumulated other comprehensive income
(net of deferred taxes: 2004: $1,663,447; 2003: $1,768,477)3,235,178 3,431,818 Total stockholders’ equity 72,507,271 63,188,746 Total Liabilities and Stockholders’ Equity $ 74,459,327 $ 64,118,230
See notes to condensed financial statements.
SCHEDULE II INVESTORS TITLE COMPANY (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002 Revenues: Investment income-interest and dividends $ 124,421 $ 96,952 $ 91,619 Net realized loss on sales of investments (12,500 ) —
—
Rental income 519,991 503,031 516,018 Miscellaneous income 69,274 11,000 5,017 Total 701,186 610,983 612,654 Operating Expenses: Office occupancy and operations 285,903 242,861 247,244 Business development 42,953 31,098 24,077 Taxes-other than payroll and income 75,649 65,461 61,107 Professional fees 60,161 52,758 63,490 Other expenses 59,738 47,635 45,332 Total 524,404 439,813 441,250 Equity in Net Income of Affiliated Cos.* 10,583,384 10,850,844 7,991,438 Income Before Income Taxes 10,760,166 11,022,014 8,162,842 Provision for Income Taxes 41,000 57,000 54,000 Net Income $ 10,719,166 $ 10,965,014 $ 8,108,842 Basic Earnings per Common Share $ 4.29 $ 4.38 $ 3.22 Weighted Average Shares Outstanding-Basic 2,496,711 2,503,659 2,517,328 Diluted Earnings Per Common Share $ 4.09 $ 4.18 $ 3.12 Weighted Average Shares Outstanding-Diluted 2,620,916 2,624,473 2,597,979
* Eliminated in consolidation See notes to condensed financial statements.
SCHEDULE II INVESTORS TITLE COMPANY (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002 Operating Activities: Net income $ 10,719,166 $ 10,965,014 $ 8,108,842 Adjustments to reconcile net income to net cash provided
by operating activities:Equity in net earnings of subsidiaries (10,583,384 ) (10,850,843 ) (7,991,439 ) Depreciation 73,452 70,944 72,467 Amortization, net 5,719 10,601 11,977 Net gain on disposals of property — — (532 ) Net realized loss on sales of investments 12,500 — — Provision (benefit) for deferred income taxes 59,000 (12,000 ) (6,000 ) (Increase) decrease in receivables 1,519,069 (1,446,089 ) 4,567 Increase in income taxes receivable-current (796,461 ) (1,327,456 ) — (Increase) decrease in prepaid expenses (28,786 ) 2,714 32,884 Increase (decrease) in accounts payable and accrued liabilities (5,357 ) 454,097 138,300 Decrease in income taxes payable-current — (232,325 ) (157,772 ) Net cash provided by (used in) operating activities 974,918 (2,365,343 ) 213,294 Investing Activities: Capital contribution to subsidiaries (1,783,000 ) (325,000 ) — Dividends received from subsidiaries 5,050,819 3,782,400 3,177,772 Purchases of available-for-sale securities (19,518,900 ) (2,000,000 ) — Purchases of short term securities (1,012,182 ) — (3,599,095 ) Purchases of and net earnings from other investments — (486,000 ) (385,195 ) Proceeds from sales and maturities of available-for-sale securities 13,267,500 250,000 597,962 Proceeds from sales of short term securities 2,494,742 1,486,879 — Proceeds from sales and distributions from other investments 9,187 42,072 — Purchases of property (50,326 ) (105,048 ) (8,157 ) Proceeds from sales of property — — 10,000 Net change in pending trades 1,027,929 — — Net cash provided by (used in) investing activities (514,231 ) 2,645,303 (206,713 ) Financing Activities: Dividends paid (net dividends paid to subsidiary of $53,936 in 2004 and $42,278 in 2003) (374,425 ) (300,411 ) (300,557 ) Net cash used in financing activities (374,425 ) (300,411 ) (300,557 ) Net Increase (Decrease) in Cash and Cash Equivalents 86,262 (20,451 ) (293,976 ) Cash and Cash Equivalents, Beginning of Year 121,587 142,038 436,014 Cash and Cash Equivalents, End of Year $ 207,849 $ 121,587 $ 142,038 Supplemental Disclosures: Cash Paid During the Year For: Income Taxes $ 781,000 $ 1,639,000 $ 218,000
See notes to condensed financial statements.
SCHEDULE II
INVESTORS TITLE COMPANY (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
1.
The accompanying condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto of Investors Title Company and Subsidiaries.
2.
Cash dividends paid to Investors Title Company by its wholly owned subsidiary were as follows:
Subsidiaries
2004
2003
2002
Investors Title Insurance Company, net *
$3,950,819
$3,307,400
$2,857,772
Investors Title Exchange Corporation
1,100,000
175,000
160,000
Investors Title Accommodation Corporation
-
100,000
100,000
Investors Title Management Services, Inc.
-
200,000
60,000
$ 5,050,819
$ 3,782,400
$ 3,177,772
*Total dividends of
North Carolina in February 1973. The Company became operational June 24, 1976 when it acquired as a wholly owned subsidiary Investors Title Insurance Company, a North Carolina corporation ("ITIC"), under a plan of exchange of shares of common stock. On September 30, 1983, the Company acquired as a wholly owned subsidiary Northeast Investors Title Insurance Company ("NE-ITIC"), formerly Investors Title Insurance Company of South Carolina, a South Carolina corporation, under a plan of exchange of shares of common stock. In 1988, the Company established Investors Title Exchange Corporation, a wholly owned subsidiary ("ITEC"). In 1994, the Company established South Carolina Document Preparation Company, a wholly owned subsidiary ("SCDP"). In the first quarter of 2001, SCDP was renamed Investors Title Accommodation Corporation ("ITAC"). The Company's executive offices are at 121 North Columbia Street, Chapel Hill, North Carolina 27514. The Company's telephone number is (919) 968-2200. The Company engages primarily in two segments of business. The main business activity is the issuance of title insurance through two title insurance subsidiaries, ITIC$4,004,755 andNE-ITIC. The second segment provides tax-free exchange services through the Company's subsidiaries, ITEC and ITAC. See Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 13 of Notes to Consolidated Financial Statements in the 2001 Annual Report to Shareholders incorporated by reference in this Form 10-K Annual Report for additional information related$3,349,678 paid to theCompany's operating segments. Title Insurance --------------- Through its two wholly owned title insurance subsidiaries, ITIC and NE-ITIC, the Company underwrites land title insurance for owners and mortgagees as a primary insurer and as a reinsurer for other title insurance companies. ITIC was incorporated in the State of North Carolina on January 28, 1972, and became licensed to write title insurance in the State of North Carolina on February 1, 1972. Since that date it has primarily written land title insurance as a primary insurer and as a reinsurer in the States of North Carolina and South Carolina. ITIC is the leading title insurer of North Carolina property and has held this position of most premiums written for eighteen years based on amounts reported to the North Carolina Department of Insurance. In addition, the Company writes title insurance through issuing agents or branch offices in the States of Alabama, Florida, Georgia, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Mississippi, Nebraska, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and Wisconsin. Agents issue policies for ITIC and may also perform other services such as acting as escrow agents. ITIC is also licensed to write title insurance in the District of Columbia and the States of Arizona, Arkansas, Colorado, Connecticut, Delaware, Idaho, Illinois, Kansas, Louisiana, Maine, 3Massachusetts, Missouri, Montana, Nevada, New Jersey, North Dakota, Oklahoma, Rhode Island, Texas, Utah, Vermont and Wyoming. NE-ITIC was incorporated in the State of South Carolina on February 23, 1973, and became licensed to write title insurance in that State on November 1, 1973. It currently writes title insurance as a primary insurer and as a reinsurer in the State of New York. Title insurance guarantees owners, mortgagees, and others with a lawful interest in real property against loss by reason of encumbrances and defective title to such property. The commitments and policies issued are the standard American Land Title Association approved forms. Title insurance policies do not insure against future risks. Most other types of insurance protect against losses and events in the future. In the State of North Carolina, ITIC issues title insurance commitments and policies through its home office and branch offices. ITIC has 27 branch offices in North Carolina. In the ordinary course of business, ITIC and NE-ITIC reinsure certain risks with other title insurers for the purpose of limiting their exposure and also assume reinsurance for certain risks of other title insurers for which they receive additional income. For the last three years, reinsurance activities accounted for less than 1% of total premium volume. ITIC currently has a risk retention limit of $2,000,000, meaning it assumes primary risks up to $2,000,000. It then reinsures the next $250,000 of risk with NE-ITIC, and all risks above $2,250,000 are then reinsured with a non-related reinsurer. NE-ITIC currently has a risk retention limit of $250,000, meaning it assumes primary risks up to $250,000. It then reinsures the next $2,000,000 of risk with ITIC, and reinsures all amounts above $2,250,000 with a non-related reinsurer. Both ITIC and NE-ITIC's risk retention limits are self-imposed and are more conservative than state insurance regulations require. ITIC's self-imposed retention of $2,000,000 is only 17.2% of its statutorily permitted retention of $11,599,621. NE-ITIC's self-imposed retention of $250,000 is only 16.4% of its statutorily permitted retention of $1,520,039. ITIC's financial stability has been recognized by two Fannie Mae approved actuarial firms with rating categories of "A Double Prime - unsurpassed financial stability" and "A - strong overall financial condition." NE-ITIC's financial stability has been recognized by two Fannie Mae approved actuarial firms with rating categories of "A Prime - unsurpassed financial stability" and "A - strong overall financial condition." Exchange Services ----------------- In 1988, the Company established Investors Title Exchange Corporation, a wholly owned subsidiary ("ITEC"), to provide services in connection with tax-free exchanges of like-kind property. ITEC acts as an intermediary in tax-free exchanges of property held for 4productive use in a trade or business or for investments, and its income is derived from fees for handling exchange transactions. In the first quarter of 2001, South Carolina Document Preparation Company, a wholly owned subsidiary, changed its name to Investors Title Accommodation Corporation ("ITAC"). ITAC serves as exchange accommodation titleholder, offering a vehicle for accomplishing a reverse exchange when a taxpayer must acquire replacement property before selling the relinquished property. OPERATIONS OF SUBSIDIARIES - -------------------------- For a description of Net Premiums Written geographically, refer to the Management's Discussion and Analysis of Financial Condition and Results of Operations in the 2001 Annual Report to Shareholders incorporated by reference in this Form 10-K Annual Report. Title Insurance --------------- ITIC and NE-ITIC offer primary title insurance coverage to owners and mortgagees of real estate and reinsurance of title insurance risks to other title insurance companies. Title insurance premiums written are for a one-time initial payment, with no recurring premiums. See Note 13 of Notes to Consolidated Financial Statements in the 2001 Annual Report to Shareholders incorporated by reference in this Form 10-K Annual Report for additional information related to the Company's operating segments. Exchange Services ----------------- ITEC and ITAC offer services in connection with tax-free exchanges. See Note 13 of Notes to Consolidated Financial Statements in the 2001 Annual Report to Shareholders incorporated by reference in this Form 10-K Annual Report for additional information related to the Company's operating segments. SEASONALITY - ----------- Title Insurance --------------- Title insurance premiums are closely related to the level of real estate activity and the average price of real estate sales. The availability of funds to finance purchases directly affects real estate sales. Other factors include consumer confidence, economic conditions, supply and demand, mortgage interest rates and family income levels. Historically, the first quarter has the least real estate activity, while the remaining quarters are more active. Fluctuations in mortgage interest rates can cause shifts in real estate activity outside of the normal seasonal pattern. Exchange Services ----------------- Seasonal factors affecting the level of real estate activity and the volume of title premiums written will also affect the demand for exchange services. 5MARKETING - --------- Title Insurance --------------- ITIC's marketing plan is based upon providing fast and efficient service in the delivery of title insurance coverage through a home office, branch offices, and issuing agents. In North Carolina, ITIC operates through a home office and 27 branch offices. In South Carolina, ITIC operates through a branch office and issuing agents located conveniently to customers throughout the State. ITIC also writes title insurance policies through issuing agents and branch offices in Alabama, Florida, Georgia, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Mississippi, Nebraska, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and Wisconsin. NE-ITIC currently operates through agency offices in the State of New York. ITIC and NE-ITIC strive to provide superior service to their customers and consider this an important factor in attracting and retaining customers. Branch and corporate personnel strive to develop new business relationships to increase market share. A Commercial Services Division established in the first quarter of 2001 provides services to commercial clients. The Company's marketing efforts are also enhanced through advertising in various periodicals. Exchange Services ----------------- Marketing of exchange services offered by ITEC and ITAC has been increasingly incorporated into the marketing of the core title products offered by ITIC and NE-ITIC. ITEC and ITAC are also promoted through the marketing efforts of this division. The Commercial Services Division, established through ITIC, also markets the services offered by ITEC and ITAC to their commercial clients. CUSTOMERS - --------- The Company is not dependent upon any single customer, the loss of which could have a material effect on the Company. RESERVES - -------- The reserves for claims for financial reporting purposes are established based on criteria discussed in Notes 1 and 6 of Notes to Consolidated Financial Statements in the 2001 Annual Report to Shareholders incorporated by reference in this Form 10-K Annual Report. REGULATIONS - ----------- Title insurance companies are extensively regulated under applicable state laws. The regulatory authorities possess broad powers with respect to the licensing of title insurers and agents, rates, investments, policy forms, financial reporting, reserve requirements, 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 6they are licensed. ITIC is domiciled in North Carolina and subject to North Carolina state insurance regulations. Financial examinations are scheduled every five years by the North Carolina Department of Insurance. ITIC was last examined by the North Carolina Department of Insurance for the period January 1, 1995 through December 31, 1999. The final report is still pending. NE-ITIC is domiciled in South Carolina and subject to South Carolina state insurance regulations. Financial examinations are scheduled periodically by the South Carolina Department of Insurance. NE-ITIC was examined by the South Carolina Department of Insurance for the period January 1, 1998 through December 31, 2000. No material deficiencies were noted in the report dated December 19, 2001. In addition to financial examinations, both ITIC and NE-ITIC are subject to market conduct examinations. These audits examine domiciled state activity. ITIC's last market conduct examination commenced on April 19, 1999 for the period January 1, 1996 through December 31, 1998 with no material deficiencies noted. NE-ITIC's last market conduct examination coincided with the financial examination, which commenced on November 19, 2001 for the period January 1, 1998 through December 31, 2000. No material deficiencies were noted for NE-ITIC by the market conduct examiners. In accordance with the insurance laws and regulations applicable to title insurance in the State of North Carolina, ITIC has established and maintains a statutory premium reserve for the protection of policyholders. For years prior to 1999, ITIC reserved an amount equal to 10% of current year premiums written and reduced such amounts annually by 5%. For years after 1998, 10% of direct premiums written plus premiums for reinsurance assumed less premiums for reinsurance ceded is reserved and reduced annually, over a period of 20 years, as follows: 20% the first year, 10% the second and third year, 5% for years four through ten, 3% for years eleven through fifteen, and 2% for years sixteen through twenty. NE-ITIC has established and maintains a statutory premium reserve as required by the insurance laws and regulations of the State of New York. A $1.50 for each risk assumed under a policy or commitment plus one-eightieth of one percent of the face amount of each commitment or policy, reduced by that portion of the reserve established 15 years earlier are accumulated in a statutory premium reserve for years up to 1985. In subsequent years, the addition to the reserve is calculated in the same manner but is reduced annually by 5%. These statutory premium reserve additions are not charged to operations for financial reporting purposes and changes in the statutory premium reserve have no effect on net income of the Company or its subsidiaries for financial reporting purposes. The Company is an insurance holding company, and is also subject to regulation in the states in which its insurance subsidiaries do business. These regulations, among other things, require insurance holding companies to register and file certain reports and require prior regulatory approval of intercorporate transfers including, in some instances, the payment of shareholders' dividends by the insurance subsidiaries. All states set requirements for admission 7to do business, including minimum levels of capital and surplus. State insurance departments have broad administrative powers and monitor the stability and service of insurance companies. In addition to the financial statements which are required to be filed as part of this report and are prepared on the basis of generally accepted accounting principles, the Company's insurance subsidiaries also prepare financial statements in accordance with statutory accounting principles prescribed or permitted by state regulations. Based upon the latter principles, as of December 31, 2001, ITIC reported $28,999,052 of capital and surplus, and net income of $4,601,747; and NE-ITIC reported $3,040,078 of capital and surplus, and net income of $166,820. Both ITIC and NE-ITIC meet the minimum capital and surplus requirements of the states in which they are licensed. COMPETITION - ----------- Title Insurance --------------- ITIC currently operates primarily in Michigan, North Carolina, Pennsylvania, South Carolina and Virginia. ITIC's major competitors are Chicago Title Insurance Company, Commonwealth Land Title Insurance Company, Fidelity National Title Insurance Company, First American Title Insurance Company, Lawyers Title Insurance Corporation, Old Republic National Title Insurance Company and Stewart Title Guaranty Company. Key elements that affect competition are price, expertise, timeliness and quality of service and the financial strength and size of the insurer. Exchange Services ----------------- Competition for ITEC and ITAC comes from other title insurance companies as well as some major banks that offer exchange services. INVESTMENTS - ----------- The Company and its subsidiaries derive a substantial portion of their income from investments in bonds (municipal and corporate) and equity securities. The investment policy is designed to maintain a high quality portfolio and maximize income. Some state laws impose restrictions upon the types and amounts of investments that can be made by the Company's insurance subsidiaries. See Note 3 of Notes to Consolidated Financial Statements in the 2001 Annual Report to Shareholders incorporated by reference in this Form 10-K Annual Report for the major categories of investments, earnings by investment categories, scheduled maturities, amortized cost, and market values of investment securities. EMPLOYEES - --------- The Company has no paid employees. NE-ITIC had one full-time paid employee as of 8December 31, 2001. Officers of the Company are full-time paid employees of ITIC, which had 179 full-time employees and 16 part-time employees as of December 31, 2001. TRADEMARK - --------- The Company's subsidiary, ITIC, registered its logo with the U.S. Patent-Trademark Office in February 1987. The loss of that registration, in the Company's opinion, would not materially affect its business. ITEM 2. PROPERTIES The Company owns the office building and property located on the corner of North Columbia and West Rosemary Streets in Chapel Hill, North Carolina, which serves as the Company's corporate headquarters. The building contains approximately 23,000 square feet. The Company's principal subsidiary, ITIC, leases office space in 29 locations throughout North Carolina, South Carolina and Michigan. NE-ITIC leases office space in one location in New York. The Company also owns several parcels and one building adjacent to the Company's facility. See Note 9 of Notes to Consolidated Financial Statements in the 2001 Annual Report to Shareholders incorporated by reference in this Form 10-K Annual Report for the amounts of future minimum lease payments. Each of the office facilities occupied by the Company and its subsidiaries are in good condition and adequate for present operations. ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries are involved in litigation on a number of claims which arise in the normal course of business, none of which, in the opinion of management are expected to have a material adverse effect on the Company's consolidated financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2001. ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY IDENTIFICATION OF EXECUTIVE OFFICERS - ------------------------------------ The following table sets forth the executive officers of the Company as of December 31, 2001. Each officer is appointed at the annual meeting of the Board of Directors to serve until the next annual meeting of the board or until his or her respective successor has been elected. 9Position with Officer Name Age Registrant Since - ---- --- ---------- ----- J. Allen Fine 67 Chairman, 1973 Director and CEO James A. Fine, Jr. 39 President, Director 1987 and Treasurer W. Morris Fine 35 Executive Vice 1992 President, Director and Secretary J. Allen Fine, Chief Executive Officer and Chairman of the Board of Directors, is the father of James A. Fine, Jr., President, Treasurer and Director of the Company, and W. Morris Fine, Executive Vice President, Secretary and Director of the Company. The business experience of the Executive Officers of the Company is set forth below: J. Allen Fine has been Chief Executive Officer and Chairman of the Board of the - ------------- Company since its incorporation. Mr. Fine also served as President of the Company until May 1997. Mr. Fine is the father of James A. Fine, Jr., President, Treasurer and Director of the Company, and W. Morris Fine, Executive Vice President, Secretary and Director of the Company. James A. Fine, Jr. was named Vice President of theParent Company in1987. In 1997, Mr. - ------------------ Fine was named President2004 andTreasurer2003, respectively, netted with dividends of $53,936 andappointed a Director of$42,278 received from theCompany. James A. Fine, Jr. is the son of J. Allen Fine, Chief Executive OfficerParent in 2004 andChairman of the Board of the Company, and brother of W. Morris Fine, Executive Vice President, Secretary and Director of the Company. W. Morris Fine was named Vice President of the Company in 1992. In 1993, Mr. - -------------- Fine was named Treasurer of the Company and served in that capacity until 1997. In 1997, Mr. Fine was named Executive Vice President and Secretary of the Company. In 1999, he was appointed Director of the Company. Morris Fine is the son of J. Allen Fine, Chief Executive Officer and Chairman of the Board of the Company, and brother of James A. Fine, Jr., President, Treasurer and Director of the Company. 102003, respectively.PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The high and low sales prices for the common stock on NASDAQ and the dividends paid per common share for each quarter in the last two fiscal years are indicated under "Shareholder Information" in the 2001 Annual Report to Shareholders incorporated by reference in this Form 10-K Annual Report. ITEM 6. SELECTED FINANCIAL DATA The selected financial data for the five years ended December 31, 2001 is set forth under the caption "Financial Highlights" in the 2001 Annual Report to Shareholders and is incorporated by reference in this Form 10-K Annual Report. The information should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements and the Management's Discussion and Analysis of Financial Condition and Results of Operations in the 2001 Annual Report to Shareholders incorporated by reference in this Form 10-K Annual Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations in the 2001 Annual Report to Shareholders is incorporated by reference in this Form 10-K Annual Report. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Management's Discussion and Analysis of Quantitative and Qualitative Disclosures about Market Risk in the 2001 Annual Report to Shareholders is incorporated by reference in this Form 10-K Annual Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data in the 2001 Annual Report to Shareholders are incorporated by reference in this Form 10-K Annual Report. The financial statement schedules meeting the requirements of Regulation S-X are shown as Schedules I, II, III, IV and V. The supplementary financial information (Selected Quarterly Financial Data) in the 2001 Annual Report to Shareholders is incorporated by reference in this Form 10-K Annual Report. 11
SCHEDULE III INVESTORS TITLE COMPANY AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
For the Years Ended December 31, 2004, 2003 and 2002
Segment Deferred
Policy
Acquisition
CostFuture
Policy
Benefits,
Losses,
Claims
and Loss
ExpensesUnearned
PremiumsOther
Policy
Claims
and
Benefits
PayablePremium
RevenueNet
Investment
IncomeBenefits
Claims,
Losses and
Settlement
ExpensesAmortization
of Deferred
Policy
Acquisition
CostsOther
Operating
ExpensesPremiums
WrittenYear Ended December 31, 2004 Title Insurance — $ 31,842,000 — $ 551,662 $ 71,775,157 $ 2,597,355 $ 7,984,339 — $ 53,456,152 N/A Exchange Services — — — — — 7,821 — — 640,183 N/A All Other — — — — — 147,662 — — 2,258,336 N/A — $ 31,842,000 — $ 551,662 $ 71,775,157 $ 2,752,838 $ 7,984,339 — $ 56,354,671 Year Ended December 31, 2003 Title Insurance — $ 30,031,000 — $ 726,191 $ 83,927,312 $ 2,589,228 $ 9,292,739 — $ 63,495,050 N/A Exchange Services — — — — — 2,818 — — 495,119 N/A All Other — — — — — 99,641 — — 1,375,949 N/A — $ 30,031,000 — $ 726,191 $ 83,927,312 $ 2,691,687 $ 9,292,739 — $ 65,366,118 Year Ended December 31, 2002 Title Insurance — $ 25,630,000 — $ 401,040 $ 67,298,617 $ 2,706,887 $ 6,871,822 — $ 52,772,680 N/A Exchange Services — — — — — 6,114 — — 441,386 N/A All Other — — — — — 93,807 — — 1,097,610 N/A — $ 25,630,000 — $ 401,040 $ 67,298,617 $ 2,806,808 $ 6,871,822 — $ 54,311,676
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in, nor disagreements with, accountants on accounting and financial disclosure. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT IDENTIFICATION OF DIRECTORS - ---------------------------- Information pertaining to Directors of the Company under the heading "Election of Directors" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 15, 2002 is incorporated by reference in this Form 10-K Annual Report. Other information with respect to executive officers is contained in Part I - Item 4(a) under the caption "Executive Officers of the Company". ITEM 11. EXECUTIVE COMPENSATION Information pertaining to executive compensation under the heading "Executive Compensation" in the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 15, 2002 is incorporated by reference in this Form 10-K Annual Report. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information pertaining to securities ownership of certain beneficial owners and management under the heading "Ownership of Stock by Executive Officers and Certain Beneficial Owners" in the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 15, 2002 is incorporated by reference in this Form 10-K Annual Report. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information pertaining to certain relationships and related transactions under the heading "Compensation Committee Interlocks and Insider Participation" in the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 15, 2002 is incorporated by reference in this Form 10-K Annual Report. 12
SCHEDULE IV INVESTORS TITLE COMPANY AND SUBSIDIARIES
REINSURANCE
For the Years Ended December 31, 2004, 2003 and 2002
Gross
AmountCeded to
Other
CompaniesAssumed from
Other
CompaniesNet
AmountPercentage of
Amount
Assumed to NetYEAR ENDED DECEMBER 31, 2004 Title Insurance $ 72,063,833 $ 294,639 $ 5,963 $ 71,775,157 0.01 % YEAR ENDED DECEMBER 31, 2003 Title Insurance $ 84,359,310 $ 438,229 $ 6,231 $ 83,927,312 0.01 % YEAR ENDED DECEMBER 31, 2002 Title Insurance $ 67,626,272 $ 348,395 $ 20,740 $ 67,298,617 0.03 %
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) The following documents are filed as part of this report: - ------------------------------------------------------------- 1. Financial Statements - ----------------------- The following financial statements in the 2001 Annual Report to Shareholders are hereby incorporated by reference in this Form 10-K Annual Report: Report of Independent Accountants Consolidated Balance Sheets as of December 31, 2001 and 2000 Consolidated Statements of Income for the Years Ended December 31, 2001, 2000 and 1999 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2001, 2000 and 1999 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2001, 2000 and 1999 Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements 2. Financial Statement Schedules - -------------------------------- The following is a list of financial statement schedules filed as part of this report on Form 10-K Annual Report: Investors Title Company and Subsidiaries: Schedule Number Description - --------------- ----------- I Summary of Investments - Other Than Investments in Related Parties II Condensed Financial Information of Registrant III Supplementary Insurance Information IV Reinsurance V Valuation and Qualifying Accounts All other schedules are omitted, as the required information is not applicable or required, or the information is presented in the consolidated financial statements or the notes thereto. 13
SCHEDULE V INVESTORS TITLE COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2004, 2003 and 2002
Description Balance at
Beginning
of PeriodAdditions
Charged to
Costs and
ExpensesAdditions
Charged
to Other
Accounts -
DescribeDeductions-
describe*Balance at
End of Period2004 Premiums Receivable
Valuation Provision$ 2,474,000 $ 5,745,114 $ — $ (5,979,114 ) $ 2,240,000 Reserves for Claims $ 30,031,000 $ 7,984,339 $ — $ (6,173,339 ) $ 31,842,000 2003 Premiums Receivable
Valuation Provision$ 1,800,000 $ 5,477,324 $ — $ (4,803,324 ) $ 2,474,000 Reserves for Claims $ 25,630,000 $ 9,292,739 $ — $ (4,891,739 ) $ 30,031,000 2002 Premiums Receivable
Valuation Provision$ 1,405,000 $ 4,600,806 $ — $ (4,205,806 ) $ 1,800,000 Reserves for Claims $ 21,460,000 $ 6,871,822 $ — $ (2,701,822 ) $ 25,630,000
*Cancelled premiums and change in allowance for bad debts *Payments of claims, net of recoveries
3. Exhibits - -----------
INDEX TO EXHIBITS
Exhibit Incorporated by
NumberDescription Reference to - ------ ----------- ------------(3)(i)3(i) Articles of Incorporation dated January 22, 1973, incorporated by reference to Exhibit 1 to Form 10 dated June 12, 1984 (3)(ii)3(ii) Bylaws -– Restated and Amended as of May 21, 2003, incorporated by reference to Exhibit 3(ii)to Form 10-K through February 12, 2001 for the year ended December 31, 2000 Management contracts or compensatory plans or arrangements (Exhibits (10)(i) - (10)(xiii)) (10)(i) 1988 Incentive Stock Option Plan Exhibit 10to Form 10-K for the year ended December 31,1989 (10)(ii)20034 Rights Agreement, dated as of November 12, 2002, between Investors Title Company and Central Carolina Bank, a division of National Bank of Commerce, incorporated by reference to Exhibit 1 to Form 8-A filed November 15, 2002 10(i) 1993 Incentive Stock Option Plan, incorporated by reference to Exhibit 10 to Form 10-K for the year ended December 31, 1993 (10)(iii)
10(ii) Form of Incentive Stock Option Agreement under 1993 Incentive Stock Option Plan-Plan, incorporated by reference to Exhibit1010(v) to Form 10-KW. Morris Finefor the year ended December 31,1993 (10)(iv) Employment Agreement dated Exhibit 10 to Form 10-K February 9, 1984 with for the year ended J. Allen Fine, Chairman December 31, 1985 (10)(v) Form of Incentive Stock Option Exhibit 10(v) to Form 10-K Agreement under 1993 Incentive for the year ended Stock Option Plans December 31,1994(10)(vi) Form of Amendment dated Exhibit 10(vi) to Form 10-Q November 8, 1994 to Stock Option for the quarter ended Agreement dated as of November 13, 1989 March 31, 1995 (10)(vii) Form of Stock Option Agreement Exhibit 10(vii) to Form 10-Q dated November 13, 1989 for the quarter ended March 31, 1995 (10)(viii) 1997 Stock Option and Restricted Exhibit 10(viii) to Form 10-K Stock Plan for the year ended December 31, 199614
Exhibit Incorporated by Number Description Reference to - ------ ----------- ------------(10)(ix) Form of Nonqualified Stock Option Exhibit 10(ix) to Form 10-Q Agreement to Non-employee Directors dated for the quarter ended May 13, 1997 under the 1997 June 30,10(iii) 1997 Stock Option and Restricted Stock Plan, (10)(x)incorporated by reference to Exhibit 10(viii) to Form 10-K for the year ended December 31, 199610(iv) Form of Nonqualified Stock Option Agreement to Non-employee Directors dated May 13, 1997 under the 1997 Stock Option and Restricted Stock Plan, incorporated by reference to Exhibit 10(ix) to Form 10-Q for the quarter ended June 30, 1997 10(v) Form of Nonqualified Stock Option Agreement under 1997 Stock Option and Restricted Stock Plan, incorporated by reference to Exhibit 10(x) to Form 10-K for the year ended December 31, 1997 10(vi) Form of Incentive Stock Option Agreement under 1997 Stock Option for the year endedand Restricted Stock Plan,December 31, 1997 (10)(xi) Form of Incentive Stock Optionincorporated by reference to Exhibit 10(xi) to Form 10-KAgreement under 1997 Stock Optionfor the year endedand Restricted Stock PlanDecember 31, 1997(10)(xii)10(vii) Form of Amendment to Incentive Exhibit 10(xii) to Form 10-QStock Option Agreement betweenfor the quarter endedInvestors Title Company and JamesJune 30, 2000Allen Fine, James Allen Fine, Jr., William Morris Fine, George Abbitt Snead, Ralph Nichols Strayhorn, III and Raeford Wilder Wall, Jr., respectively,(10)(xiii)incorporated by reference to Exhibit 10(xii) to Form 10-Q for the quarter ended June 30, 200010(viii) 2001 Stock Option and Restricted Stock Plan, incorporated by reference to Exhibit 10(xiii) to Form 10-K Stock Planfor the year ended December 31, 2000(13)10(ix) Form of Employment Agreement dated November 17, 2003 with each of J. Allen Fine, James A. Fine, Jr. and W. Morris Fine, incorporated by reference to Exhibit 10(ix) to Form 10-K for the year ended December 31, 2003
10(x) Amended and Restated Employment Agreement dated June 1, 2004 with J. Allen Fine, incorporated by reference to Exhibit 10(x) to Form 10-Q for the quarter ended June 30, 2004 10(xi) Form of Amended and Restated Employment Agreement dated June 1, 2004 with each of James A. Fine, Jr. and W. Morris Fine, incorporated by reference to Exhibit 10(xi) to Form 10-Q for the quarter ended June 30, 2004 10(xii) Nonqualified Deferred Compensation Plan dated June 1, 2004, incorporated by reference to Exhibit 10(xii) to Form 10-Q for the quarter ended June 30, 2004 10(xiii) Nonqualified Supplemental Retirement Benefit Plan dated November 17, 2003, incorporated by reference to Exhibit 10(xiii) to Form 10-Q for the quarter ended June 30, 2004 10(xiv) Death Benefit Plan Agreement dated April 1, 2004 with J. Allen Fine, incorporated by reference to Exhibit 10(xiv) to Form 10-Q for the quarter ended June 30, 2004 10(xv) Death Benefit Plan Agreement dated May 19, 2004 with James A. Fine, Jr., incorporated by reference to Exhibit 10(xv) to Form 10-Q for the quarter ended June 30, 2004 13 Portions of 20012004 AnnualIncluded herewithReport to Shareholders incorporated by reference in this report as set forth in Parts I, II andII hereof. (21)IV hereof14 Code of Business Conduct and Ethics, incorporated by reference to Exhibit 14 to Form 10-K for the year ended December 31, 2003
16 Letter regarding Change in Certifying Accountant, incorporated by reference to Exhibit 16 to Form 8-K dated September 24, 2004 21 Subsidiaries of Registrant, Included herewith (23)incorporated by reference to Exhibit 21 to Form 10-K for the year
ended December 31, 200323 (a) Consent of Independent Auditors Included herewith(B) Reports on Form 8-K No reports were filed on Form 8-K during the fourth quarterDixon Hughes PLLC23 (b) Consent of Deloitte & Touche LLP 31(i) Certification of Chief Executive Officer pursuant to Section 302 of 2001. 15SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INVESTORS TITLE COMPANY By: /s/ J. Allen Fine ----------------- J. Allen Fine Chairman and Chief Executive Officer Date: March 29, 2002 -------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities on the 29th day of March, 2002. ------ ----- ---- /s/ J. Allen Fine - -------------------------------------------- J. Allen Fine, Chairman and Chief Executive Officer /s/ James A. Fine, Jr. - -------------------------------------------- James A. Fine, Jr., President, Treasurer and Director (Principal Financial Officer and Principal Accounting Officer) /s/ W. Morris Fine - --------------------------------------------- W. Morris Fine, Executive Vice President, Secretary and Director /s/ David L. Francis - --------------------------------------------- David L. Francis, Director /s/ Loren B. Harrell, Jr. - --------------------------------------------- Loren B. Harrell, Jr., Director /s/ William J. Kennedy III - --------------------------------------------- William J. Kennedy III, Director /s/ H. Joe King, Jr. - --------------------------------------------- H. Joe King, Jr., Director /s/ James R. Morton - --------------------------------------------- James R. Morton, Director _____________________________________________ Lillard H. Mount, Director /s/ A. Scott Parker III - --------------------------------------------- A. Scott Parker III, Director 16SCHEDULE I ---------- INVESTORS TITLE COMPANY AND SUBSIDIARIES SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES As of December 31, 2001
- ------------------------------------------------------------------------------------------------------------- Amount at which shown intheTypeSarbanes-Oxley Act ofInvestment Cost(1) Market Value Balance Sheet (2) - -------------------------------------------------------------------------------------------------------------Fixed Maturities: Bonds: States, municipalities200231(ii) Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification of Chief Executive Officer and political subdivisions $28,539,054 $29,317,715 $29,214,544 Public utilities 199,339 213,823 213,823 All other corporate bonds 14,617,546 15,246,963 15,246,963 CertificatesChief Financial Officer pursuant to Section 906 ofdeposit 2,915,396 2,915,396 2,915,396 -------------- -------------- -------------- Total fixed maturities 46,271,335 47,693,897 47,590,726 -------------- -------------- -------------- Equity Securities: Common Stocks: Public utilities 349,967 637,499 637,499 Banks, trust and insurance companies 317,190 1,142,096 1,142,096 Industrial, miscellaneous and all other 1,381,811 2,404,661 2,404,661 Nonredeemable preferred stocks 1,153,117 1,249,301 1,249,301 -------------- -------------- -------------- Total equity securities 3,202,085 5,433,557 5,433,557 -------------- -------------- -------------- Total investments pertheconsolidated balance sheet 49,473,420 53,024,283 -------------- -------------- Cash equivalents 1,616,777 1,616,777 -------------- -------------- Total investments $51,090,197 $54,641,060 ============== ==============(1) Fixed maturities are shown at amortized cost and equity securities are shown at original cost. (2) Bonds of states, municipalities and political subdivisions are shown at amortized cost for held-to-maturity bonds and fair value for available-for-sale bonds. Equity securities are shown at fair value. 17SCHEDULE II ----------- INVESTORS TITLE COMPANY (PARENT COMPANY) CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS AS OF DECEMBER 31, 2001 AND 2000
2001 2000Assets Cash and cash equivalents $ 818,540 $ 886,928 Investments in equity securities 30,000 75,000 Investments in fixed maturities,available-for-sale 1,643,222 - Investments in affiliated companies 42,928,301 37,977,363 Income taxes receivable - 404,548 Other receivables 315,345 111,476 Deferred income taxes, net 44,318 38,608 Prepaid expenses and other assets 52,525 11,927 Property, net 2,148,622 2,213,753 ---------------- ---------------- Total Assets $ 47,980,873 $ 41,719,603 ================ ================ Liabilities and Stockholders' Equity Liabilities: Accounts payable and accrued liabilities $ 337,087 $ 143,266 Income taxes payable 390,097 - ---------------- ---------------- Total liabilities 727,184 143,266 ---------------- ---------------- Stockholders' Equity: Common stock-no par (shares authorized, 6,000,000; 2,855,744 and 2,855,744 shares issued and 2,516,298 and 2,566,859 shares outstanding 2001 and 2000, respectively) 1,650,350 1,650,350 Retained earnings 45,592,295 39,925,987 Accumulated other comprehensive income (netSarbanes-Oxley Act ofdeferred taxes: 2001: $5,689; 2000: $0) 11,044 - ------------------------------------ Total stockholders' equity 47,253,689 41,576,337 ------------------------------------ Total Liabilities and Stockholders' Equity $ 47,980,873 $ 41,719,603 ====================================2002See notes to condensed financial statements. 18SCHEDULE II ----------- INVESTORS TITLE COMPANY (PARENT COMPANY) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999Revenues: Investment income-interest and dividends $ 96,624 $ 74,105 $ 103,349 Rental income 510,132 482,267 445,440 Miscellaneous income 1,000 45 70 ------------- ------------- ------------- Total 607,756 556,417 548,859 ------------- ------------- ------------- Operating Expenses: Office occupancy and operations 170,445 148,750 161,061 Business development 15,383 14,116 13,886 Taxes-other than payroll and income 65,917 66,948 46,117 Professional fees 30,191 40,311 30,398 Other expenses 49,760 48,939 44,599 ------------- ------------- ------------- Total 331,696 319,064 296,061 ------------- ------------- ------------- Equity in Net Income of Affiliated Cos.* 5,850,938 2,988,984 4,241,630 ------------- ------------- ------------- Income Before Income Taxes 6,126,998 3,226,337 4,494,428 ------------- ------------- ------------- Provision for Income Taxes 118,000 85,874 74,034 ------------- ------------- ------------- Net Income $ 6,008,998 $ 3,140,463 $ 4,420,394 ============= ============= ============= Basic Earnings per Common Share $ 2.35 $ 1.21 $ 1.59 ============= ============= ============= Weighted Average Shares Outstanding-Basic 2,554,204 2,594,891 2,776,878 ============= ============= ============= Diluted Earnings Per Common Share $ 2.31 $ 1.21 $ 1.59 ============= ============= ============= Weighted Average Shares Outstanding-Diluted 2,599,714 2,601,283 2,786,282 ============= ============= =============* Eliminated in consolidation See notes to condensed financial statements. 19SCHEDULE II ----------- INVESTORS TITLE COMPANY (PARENT COMPANY) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999Operating Activities: Net income $ 6,008,998 $ 3,140,463 $ 4,420,394 Adjustments to reconcile net income to net cash provided by operating activities: Equity in net earnings of subsidiaries less dividends received of $900,000, $625,000 and $700,000 in 2001, 2000 and 1999, respectively, plus $600,000 and $50,000 investment in subsidiary in 2000 and 1999, respectively (4,950,938) (2,963,984) (3,591,630) Depreciation 76,206 72,517 60,608 Provision (benefit) for deferred income taxes (11,400) (1,081) 72,498 Increase in receivables (203,869) (8,465) (8,878) Decrease in income taxes receivable-current 404,548 442,536 324,464 (Increase) decrease in prepaid expenses (40,598) 8,270 (17,774) Increase (decrease) in accounts payable and accrued liabilities 193,821 (5,310) 28,750 Increase in income taxes payable-current 390,097 - - ----------- ----------- ----------- Net cash provided by operating activities 1,866,865 684,946 1,288,432 ----------- ----------- ----------- Investing Activities: Purchases of available-for-sale bonds (1,626,489) - - Proceeds from the sale of equity securities 45,000 - - Purchases of land - - (325,000) Purchases of furniture and equipment and building (11,075) (34,387) (250,000) ----------- ----------- ----------- Net cash used in investing activities (1,592,564) (34,387) (575,000) ----------- ----------- ----------- Financing Activities: Dividends paid (342,689) (342,689) (342,689) ----------- ----------- ----------- Net cash used in financing activities (342,689) (342,689) (342,689) ----------- ----------- ----------- Net Increase (Decrease) in Cash and Cash Equivalents (68,388) 307,870 370,743 Cash and Cash Equivalents, Beginning of Year 886,928 579,058 208,315 ----------- ----------- ----------- Cash and Cash Equivalents, End of Year $ 818,540 $ 886,928 $ 579,058 =========== =========== =========== Supplemental Disclosures: Cash Paid (Refunded) During the Year For: Income Taxes $ (109,359) $ 490,592 $ (308,503) =========== =========== ===========See notes to condensed financial statements. 20SCHEDULE II ----------- INVESTORS TITLE COMPANY (PARENT COMPANY) CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTES TO CONDENSED FINANCIAL STATEMENTS 1. The accompanying condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto of Investors Title Company and Subsidiaries. 2. Cash dividends paid to Investors Title Company by its wholly owned subsidiary, Investors Title Insurance Company, were $350,000, $350,000 and $350,000 in 2001, 2000 and 1999, respectively. Cash dividends paid to Investors Title Company by its wholly owned subsidiary, Investors Title Exchange Corporation, were $550,000, $275,000 and $350,000 in 2001, 2000 and 1999, respectively. 21SCHEDULE III ------------ INVESTORS TITLE COMPANY AND SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION For the Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------------------------------------------------------- Future Policy Other Benefits, Policy Benefits Amortization Deferred Losses, Claims Claims, of Deferred Policy Claims and Net Net Losses and Policy Acquisition and Loss Unearned Benefits Premium Investment Settlement Acquisition Segment Cost Expenses Premiums Payable Revenue Income Expenses Costs - ---------------------------------------------------------------------------------------------------------------------------------Year Ended December 31, 2001 - ----------------- Title Insurance --- $21,460,000 --- $ 281,961 $59,480,545 $ 2,626,053 $ 6,786,263 --- Exchange Services --- --- --- --- --- 16,245 --- --- All Other --- --- --- --- --- 97,982 --- --- -------------------------------------------------------------------------------------------------------------- --- $21,460,000 --- $ 281,961 $59,480,545 $ 2,740,280 $ 6,786,263 --- ============================================================================================================== Year Ended December 31, 2000 - ----------------- Title Insurance --- $17,944,665 --- $ 222,748 $37,690,752 $ 2,436,561 $ 5,865,355 --- Exchange Services --- --- --- --- --- 17,478 --- --- All Other --- --- --- --- --- 74,104 --- --- -------------------------------------------------------------------------------------------------------------- --- $17,944,665 --- $ 222,748 $37,690,752 $ 2,528,143 $ 5,865,355 --- ============================================================================================================== Year Ended December 31, 1999 - ----------------- Title Insurance --- $15,864,665 --- $ 208,605 $43,819,565 $ 2,061,360 $ 6,026,064 --- Exchange Services --- --- --- --- --- 10,962 --- --- All Other --- --- --- --- --- 103,349 --- --- -------------------------------------------------------------------------------------------------------------- --- $15,864,665 --- $ 208,605 $43,819,565 $ 2,175,671 $ 6,026,064 --- ==============================================================================================================----------------------- Other Operating Premiums Expenses Written -----------------------Year Ended December 31, 2001 - ----------------- Title Insurance $47,449,615 N/A Exchange Services 433,810 N/A All Other 1,063,759 N/A ----------- $48,947,184 =========== Year Ended December 31, 2000 - ----------------- Title Insurance $31,060,289 N/A Exchange Services 225,330 N/A All Other 818,331 N/A ----------- $32,103,950 =========== Year Ended December 31, 1999 - ----------------- Title Insurance $34,342,012 N/A Exchange Services 178,627 N/A All Other 358,462 N/A ----------- $34,879,101 ===========22SCHEDULE IV ----------- INVESTORS TITLE COMPANY AND SUBSIDIARIES REINSURANCE For the Years Ended December 31, 2001, 2000 and 1999
- ------------------------------------------------------------------------------------------------------------ Ceded to Assumed from Percentage of Gross Other Other Net Amount Amount Companies Companies Amount Assumed to Net - ------------------------------------------------------------------------------------------------------------YEAR ENDED DECEMBER 31, 2001 - ----------------- Title Insurance $59,799,379 $340,228 $21,394 $59,480,545 0.04% YEAR ENDED DECEMBER 31, 2000 - ----------------- Title Insurance $38,020,917 $362,528 $32,363 $37,690,752 0.09% YEAR ENDED DECEMBER 31, 1999 - ----------------- Title Insurance $44,098,045 $325,212 $46,732 $43,819,565 0.11%23SCHEDULE V ---------- INVESTORS TITLE COMPANY AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------------------------------------------------------- Balance at Additions Additions Charged Beginning Charged to to Other Deductions- Balance at Description of Period Costs and Expenses Accounts - Describe describe* End of Period - ---------------------------------------------------------------------------------------------------------------------------------2001 - ---- Premiums Receivable Valuation Provision $ 725,000 $ 3,484,380 $ - $ (2,804,380) $ 1,405,000 Reserves for Claims $ 17,944,665 $ 6,786,263 $ - $ (3,270,928) $ 21,460,000 2000 - ---- Premiums Receivable Valuation Provision $ 775,000 $ 2,219,190 $ - $ (2,269,190) $ 725,000 Reserves for Claims $ 15,864,665 $ 5,865,355 $ - $ (3,785,355) $ 17,944,665 1999 - ---- Premiums Receivable Valuation Provision $ 775,000 $ 2,793,975 $ - $ (2,793,975) $ 775,000 Impairment of Building Plans $ 218,122 $ - $ - $ (218,122) $ - Reserves for Claims $ 13,362,665 $ 6,026,064 $ - $ (3,524,064) $ 15,864,665 Provision for Equipment Disposal $ 280,000 $ - $ - $ (280,000) $ -*Cancelled premiums and reduction to allowance for bad debts *Wrote off building plans *Payments of claims *Disposed of impaired equipment 24