Item
2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The
Company's 2006 Annual Report on
Form 10-K should be read in conjunction with the following discussion since
they
contain important information for evaluating the Company's operating results
and
financial condition.
Overview
Title
Insurance
: Investors Title Company (the "Company") engages
primarily in two segments of business. Its primary business activity
is the issuance of title insurance through two subsidiaries, Investors Title
Insurance Company ("ITIC") and Northeast Investors Title Insurance Company
("NE-ITIC"), which accounted for 91.8% of the Company’s operating revenues in
the nine months ended September 30, 2007. Through ITIC and NE-ITIC, the Company
underwrites land title insurance for owners and mortgagees as a primary insurer.
Title insurance protects against loss or damage resulting from title defects
that affect real property.
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 has to purchase a separate owner's
title insurance policy to protect their investment. When real
property is conveyed from one party to another, occasionally there is an
undisclosed defect in the title or a mistake or omission 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 indemnification against insured defects. The title insurer
has the option to retain counsel and pay the legal expenses to eliminate
or
defend against any title defects, pay any third party claims arising from
errors
in title examination and recording or pay the insured’s actual losses, up to
policy limits, arising from errors in title as defined in the
policy.
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. ITIC also has branch
offices in South Carolina and Nebraska. In other states, title
policies are issued primarily through issuing agents. 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. The
ability to attract and retain issuing agents is a key determinant of the
Company’s growth in premiums written.
The
Company's overall level of premiums written is affected by real estate
activity. In turn, real estate activity is affected by a number of
factors, including the level of interest rates, the availability of mortgage
funds, the level of real estate transactions and mortgage refinancing, the
cost
of real estate, employment levels, family income levels and general economic
conditions. Generally, real estate activity declines as a result of
higher interest rates or an economic downturn, thus leading to a corresponding
decline in title insurance premiums written and profitability of the
Company. The cyclical nature of the land title insurance industry has
historically caused fluctuations in revenues and profitability and it is
expected to continue to do so in the future. This segment also
experiences yearly seasonality in premiums written.
Revenues
for this segment result from refinance activity, purchases of new and existing
residential and commercial real estate, and certain other types of mortgage
lending such as home equity lines of credit.
Volume
is
a factor in the Company's profitability due to the existence of certain
relatively fixed costs such as personnel and occupancy expenses associated
with
the support of the issuance of title insurance policies and of general corporate
operations. These expenses will be incurred by the Company regardless of the
level of premiums written. The resulting operating leverage has
historically tended to amplify the impact of changes in volume on the Company’s
profitability.
Since
the
title insurance business generally is closely related to the overall level
of
real estate activity, and title insurance volumes generally fluctuate based
on
the effect changes in interest rates have on the level of real estate activity,
any substantial increases in interest rates will likely have a negative impact
on mortgage originations.
In
recent
years, many lenders loosened their underwriting guidelines, particularly in
the
sub prime loan market. These lower underwriting standards, when
combined with new methods of financing loans created a supply of cheap credit
which led to a build up in mortgage loans to high
risk borrowers. As a result, there has been a substantial
increase in loan defaults and mortgage foreclosures. Lenders are now
returning to stricter loan underwriting standards, which will likely result
in
lower overall loan volume. This lower loan volume will, in turn,
result in a lower level of title premiums generated in the
marketplace.
In
addition, an increase in property foreclosures tends to surface title
defects. A slowing pace of real estate activity also triggers the
likelihood of certain types of title claims, such as mechanics’ liens on newly
constructed property. These factors have historically caused title
claims to increase in past real estate market cyclical downturns.
Operating
results for the nine months ended September 30, 2007, should not be viewed
as
indicative of the Company’s future operating results. While
continuing to search for opportunity to profitably expand, the Company is
maintaining its focus on cost control and improving efficiency.
While
timing and content are uncertain, the United States Department of Housing and
Urban Development (“HUD”) continues to indicate that it would like to make
modifications to the Real Estate Settlement Procedures Act and associated
regulations. In April 2007, the Government Accountability Office
(“GAO”) released a report on the title insurance industry in which it
recommended that HUD and state insurance regulators take actions to improve
consumers’ ability to comparison shop for title insurance and strengthen the
regulation and oversight of the title insurance market, among other
measures. Based on the information known to management at this time,
it is not possible to predict the outcome of any of the GAO recommendations
for
the title insurance industry’s market and other matters, or the market’s
response to them. However, any material change in the Company’s
regulatory environment may have an adverse effect on its business.
Exchange
Services
: The Company's second business segment provides
customer services in connection with tax-deferred real property exchanges
through its subsidiaries, Investors Title Exchange Corporation ("ITEC") and
Investors Title Accommodation Corporation ("ITAC"). ITEC serves as a
qualified intermediary in like-kind exchanges of real or personal property
under
Section 1031 of the Internal Revenue Code of 1986, as amended. In its
role as qualified intermediary, ITEC coordinates the exchange aspects of the
real estate transaction with the closing agents. ITEC's duties
include drafting standard exchange documents, holding the exchange funds between
the sale of the old property and the purchase of the new property, and accepting
the formal identification of the replacement property within the required
identification period. ITAC serves as exchange accommodation
titleholder in reverse exchanges. As exchange accommodation titleholder, ITAC
offers a vehicle for accommodating a reverse exchange when the taxpayer must
acquire replacement property before selling the relinquished
property.
Factors
that influence the title insurance industry will also generally affect the
exchange services industry. In addition, the services
provided by the Company’s exchange services are pursuant to provisions in the
Internal Revenue Code. From time to time, these exchange provisions
are subject to review and proposed changes.
On
February 3, 2006, the Internal Revenue Service (“IRS”) proposed new regulations
which, if adopted, may negatively affect the ability of qualified intermediaries
to retain a portion of the interest earned on exchange funds held during
exchange transactions. If passed as proposed, these regulations would
materially and adversely affect the exchange services segment and the Company’s
net income, since a significant portion of the exchange segment’s revenues are
based on retaining a portion of the interest income earned on deposits held
by
the Company. A public hearing on the proposed regulations was held on
June 6, 2006, and as a result the IRS agreed to revise its initial regulatory
flexibility analysis on the impact of the proposed regulations to small
businesses. In March 2007, the IRS issued a revised regulatory
flexibility analysis and requested more specific information to help in
determining the impact the rules would have on small businesses. The
proposed regulations have still not been finalized.
Other
Services
: Other services include those offered by Investors
Trust Company ("Investors Trust"), Investors Capital Management Company
(“ICMC”), and Investors Title Management Services, Inc. (“ITMS”), wholly owned
subsidiaries of the Company. In conjunction with ICMC, Investors
Trust provides investment management and trust services to individuals,
companies, banks and trusts. ITMS offers various consulting services
to provide partners with the technical expertise to start and successfully
operate a title insurance agency.
Critical
Accounting Estimates and Policies
The
preparation of the Company’s
financial statements requires management to make estimates and judgments that
affect the reported amounts of certain assets, liabilities, revenue, expenses
and related disclosures surrounding contingencies and
commitments. During the quarter and nine months ended September 30,
2007, the Company made no material changes in its critical accounting policies
as previously disclosed in Management’s Discussion and Analysis in the Company's
Annual Report on Form 10-K for the year ended December 31, 2006 as filed with
the Securities and Exchange Commission. Actual results could differ
from these estimates.
Results
of Operations
For
the third quarter ended September
30, 2007, net premiums written increased 4.1% to $18,994,453, investment income
increased 25.6% to $1,301,878, total revenues increased 6.2% to $23,058,983
and
net income increased 5.1% to $3,857,892, all compared with the third quarter
of
2006. Net income per basic and diluted common share increased 6.8%
and 6.9%, respectively, to $1.56 and $1.54, compared with the prior year
quarter. For the third quarter of 2007, the title insurance segment's
operating revenues increased 5.1% compared with the third quarter of 2006,
while
the exchange services segment's operating revenues decreased 35.1% for the
third
quarter of 2007 compared with the third quarter of 2006.
For
the
nine-month period ended September 30, 2007, net premiums written increased
0.8%
to $54,413,174, investment income increased 23.4% to $3,783,240, exchange
services revenue decreased 30.5%, revenues increased 0.7% to $65,500,285 and
net
income decreased 32.5% to $7,334,255, all compared with the first nine months
of
2006. Net income per basic and diluted common share decreased 31.2%
to $2.95 and $2.91, respectively, compared with the same nine-month period
ended
September 30, 2006. For the nine months ended September 30, 2007, the
title insurance segment's operating revenues increased 1.0% compared with the
same period in 2006, while the exchange services segment's operating revenues
decreased 30.5% for the nine months ended September 30, 2007 compared with
the
first nine months of 2006.
Year-to-date
results were negatively impacted by lower revenue in fee income generated in
the
Company’s tax-deferred exchange services segment and an increase in the claims
reserve provision due to the occurrence of two large fraud claims during the
second quarter of 2007. The decline in revenue related to a decrease in
interest income earned on exchange funds and demand. Partially
offsetting these items were an increase in premiums written through agents,
along with a higher level of investment income positively impacting the
Company’s operating results. The Company’s title premiums trended
lower over the course of the third quarter, along with declining business
nationwide related to real estate market conditions, and its net earnings may
be
further adversely affected to the extent that title losses increase as a result
of conditions in the current real estate market, including declining transaction
volume and an increase in the numbers of mortgage foreclosures.
Also
favorably impacting net income was a lower effective tax rate resulting from
a
higher mix of tax-exempt income from investments relative to taxable
income. The Company’s effective income tax rate decreased to 20.4%
from 24.5% of income before income taxes for the respective nine-month
periods. The reduction in taxable income primarily resulted from the
increase in the provision for claims and commissions to agents.
Operating
revenues
: Operating revenues include premiums written plus other
fee income, exchange segment income as well as gains and losses on the disposal
of fixed assets. Investment income and realized gains and losses are
not included in operating revenues and are discussed separately following
operating revenues.
T
itle
premiums
trended lower over the course of the third quarter, along with declining
business nationwide related to real estate market conditions.
Following is a
breakdown
of branch and agency premiums written
for
the three and nine
months ended September 30, 2007 and 2006:
|
|
Three
Months Ended
September
30,
|
|
|
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
%
|
|
|
2006
|
|
|
%
|
|
|
2007
|
|
|
%
|
|
|
2006
|
|
|
%
|
Branch
|
|
$
|
8,310,859
|
|
|
|
44
|
|
|
$
|
8,602,081
|
|
|
|
47
|
|
|
$
|
23,351,770
|
|
|
|
43
|
|
|
$
|
25,333,046
|
|
|
|
47
|
Agency
|
|
|
10,683,594
|
|
|
|
56
|
|
|
|
9,640,595
|
|
|
|
53
|
|
|
|
31,061,404
|
|
|
|
57
|
|
|
|
28,664,847
|
|
|
|
53
|
Total
|
|
$
|
18,994,453
|
|
|
|
100
|
|
|
$
|
18,242,676
|
|
|
|
100
|
|
|
$
|
54,413,174
|
|
|
|
100
|
|
|
$
|
53,997,893
|
|
|
|
100
|
Net
premiums written from branch
operations decreased 3.4% for the three months ended September
30, 2007 compared with the same period in the prior year. Net
premiums written from branch operations decreased 7.8% for the nine months
ended
September 30, 2007 from the same period in the prior year. Of the
Company’s 29 branch locations that underwrite title insurance policies, 27 are
located in North Carolina, and as a result, branch premiums written primarily
represent North Carolina business. Although year-to-date total
premiums written in North Carolina decreased, premiums written by North Carolina
agents increased approximately $1.5 million for the nine months ended September
30, 2007 compared with the same period in the prior year.
Agency
net premiums increased 10.8%
for the quarter ended September 30, 2007 compared with the same period in the
prior year. Agency net premiums increased 8.4% for the nine months
ended September 30, 2007 compared with the same period in the prior year as
a
result of enhancing existing agencies with improved marketing strategies and
resources and adding new agencies.
Following
is a schedule of premiums
written for the three and nine months ended September 30, 2007 and 2006 in
all
states in which the Company’s two insurance subsidiaries ITIC and NE-ITIC
currently underwrite insurance:
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
State
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Alabama
|
|
$
|
106,753
|
|
|
$
|
185,318
|
|
|
$
|
397,431
|
|
|
$
|
759,499
|
|
Florida
|
|
|
116,530
|
|
|
|
359,531
|
|
|
|
1,406,575
|
|
|
|
965,822
|
|
Illinois
|
|
|
431,878
|
|
|
|
291,810
|
|
|
|
1,281,366
|
|
|
|
819,718
|
|
Kentucky
|
|
|
654,399
|
|
|
|
618,829
|
|
|
|
1,879,543
|
|
|
|
1,775,866
|
|
Maryland
|
|
|
340,011
|
|
|
|
344,598
|
|
|
|
937,203
|
|
|
|
1,126,272
|
|
Michigan
|
|
|
771,564
|
|
|
|
825,711
|
|
|
|
2,349,750
|
|
|
|
2,584,541
|
|
Minnesota
|
|
|
131,796
|
|
|
|
200,469
|
|
|
|
401,013
|
|
|
|
842,538
|
|
Mississippi
|
|
|
204,671
|
|
|
|
225,319
|
|
|
|
739,748
|
|
|
|
526,996
|
|
Nebraska
|
|
|
176,385
|
|
|
|
172,005
|
|
|
|
553,477
|
|
|
|
503,451
|
|
New
York
|
|
|
641,631
|
|
|
|
602,667
|
|
|
|
1,807,065
|
|
|
|
1,815,458
|
|
North
Carolina
|
|
|
9,733,783
|
|
|
|
9,185,274
|
|
|
|
26,865,540
|
|
|
|
27,400,208
|
|
Pennsylvania
|
|
|
409,063
|
|
|
|
373,498
|
|
|
|
1,141,953
|
|
|
|
1,100,005
|
|
South
Carolina
|
|
|
2,177,495
|
|
|
|
2,045,816
|
|
|
|
5,751,099
|
|
|
|
4,984,670
|
|
Tennessee
|
|
|
652,157
|
|
|
|
686,497
|
|
|
|
2,034,008
|
|
|
|
1,967,589
|
|
Virginia
|
|
|
1,713,647
|
|
|
|
1,515,282
|
|
|
|
4,846,803
|
|
|
|
5,087,324
|
|
West
Virginia
|
|
|
531,815
|
|
|
|
577,884
|
|
|
|
1,545,567
|
|
|
|
1,673,725
|
|
Other
|
|
|
241,609
|
|
|
|
135,101
|
|
|
|
676,116
|
|
|
|
373,945
|
|
Direct
Premiums
|
|
|
19,035,187
|
|
|
|
18,345,609
|
|
|
|
54,614,257
|
|
|
|
54,307,627
|
|
Reinsurance
Assumed
|
|
|
-
|
|
|
|
1,733
|
|
|
|
11,667
|
|
|
|
8,159
|
|
Reinsurance
Ceded
|
|
|
(40,734
|
)
|
|
|
(104,666
|
)
|
|
|
(212,750
|
)
|
|
|
(317,893
|
)
|
Net
Premiums
|
|
$
|
18,994,453
|
|
|
$
|
18,242,676
|
|
|
$
|
54,413,174
|
|
|
$
|
53,997,893
|
|
According
to data published by Freddie Mac, the quarterly average 30-year fixed mortgage
interest rates in the United States decreased to 6.38% for the nine months
ended
September 30, 2007, compared with 6.47% for the nine months ended September
30,
2006.
While
total net premiums written increased slightly, the total number of policies
and
commitments issued in the nine months ended September 30, 2007
declined. In the nine months ended September 30, 2007 total policies
and commitments issued decreased to 179,446, which is a decrease of 6.7%
compared with 192,382 policies and commitments issued in the same period
in
2006. The continued downturn in the mortgage and real estate markets
was the primary reason for title business declining. In addition,
premium rates vary by the state in which the policies are
written.
Operating
revenues from the Company’s two subsidiaries that provide tax-deferred exchange
services (ITEC and ITAC) decreased 35.1% compared with the third
quarter of 2006. For the first nine months ended September 30, 2007, operating
revenues from ITEC and ITAC decreased 30.5% compared with the first nine
months
of 2006. The decreases in 2007 were primarily due to lower levels of
interest income earned on exchange fund deposits held by the Company due
to a
decrease in the average balances of deposits held and a decline in transaction
volume. E
xchange
services
revenues were impacted by conditions in the real estate market which led
to a
decrease in demand for tax deferred exchanges. Also, s
ee
“Overview” for discussion of proposed IRS rules.
Other
revenues primarily include investment management fee income and agency service
fees, as well as search fee and other ancillary fees and income related to
the
Company’s other equity method investments. Other revenues increased
34.1% in the third quarter of 2007 compared with the third quarter of the prior
year and 11.0% in the nine months ended September 30, 2007 compared with the
first nine months of 2006, primarily due to increases in investment management
fee income generated by the Company’s Trust division and in income from the
Company’s equity method investments.
Non-operating
revenues
: Investment income and realized gains and losses from
sales of investments are included in non-operating revenues.
Investment
income increased 25.6% for the three months ended September 30, 2007 compared
with the same period in 2006 and 23.4% for the nine months ended September
30,
2007 compared with the same period in 2006. The increase was
attributable to increases in the average investment portfolio balance and to
an
increase in higher rates of interest earned on short-term investments and cash
balances.
Net
realized gains on the sale of investment securities totaled $887,211 for the
nine months ended September 30, 2007, compared with net realized gains of
$488,527 for the corresponding period in 2006. The increase was the
result of the Company’s share of capital gains realized on partnership interests
and equity securities sold during 2007.
Operating
Expenses
:
The Company’s operating expenses consist primarily
of commissions to agents, salaries, employee benefits and payroll taxes,
provision for claims and office occupancy and operations. Total
operating expenses increased 8.2% and 11.1% for the three and nine months ended
September 30, 2007, respectively, compared with the same periods in
2006. The year-to-date increase was due primarily to increases in the
provision for claims and commissions to agents. A summary by segment
of the Company’s operating expenses follows for the three and the nine months
ended September 30:
|
|
Three
Months Ended
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
September
30,
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
%
|
|
|
2006
|
|
|
%
|
|
|
2007
|
|
|
%
|
|
|
2006
|
|
|
%
|
|
Title
insurance
|
|
$
|
16,916,228
|
|
|
|
93
|
|
|
$
|
15,725,740
|
|
|
|
94
|
|
|
$
|
52,672,529
|
|
|
|
94
|
|
|
$
|
47,492,639
|
|
|
|
94
|
|
Exchange
services
|
|
|
326,927
|
|
|
|
2
|
|
|
|
378,574
|
|
|
|
2
|
|
|
|
1,062,364
|
|
|
|
2
|
|
|
|
888,578
|
|
|
|
2
|
|
All
other
|
|
|
872,936
|
|
|
|
5
|
|
|
|
642,921
|
|
|
|
4
|
|
|
|
2,556,137
|
|
|
|
4
|
|
|
|
2,263,039
|
|
|
|
4
|
|
Total
|
|
$
|
18,116,091
|
|
|
|
100
|
|
|
$
|
16,747,235
|
|
|
|
100
|
|
|
$
|
56,291,030
|
|
|
|
100
|
|
|
$
|
50,644,256
|
|
|
|
100
|
|
Agent
commissions represent the portion of premiums retained by agents pursuant to
the
terms of their respective agency contracts. Commissions to agents
increased 8.2% from the prior nine-month period primarily due to an increasing
percentage of premiums originating from agency operations in 2007 as noted
previously. Although commissions paid to agents increased, the commissions
as a percentage of agency premiums remained relatively stable in the third
quarter and first nine months of 2007 when compared with the respective previous
year periods.
The
provision for claims as a percentage of net premiums written was 12.4% for
the
third quarter of 2007, versus 10.9% for the same period in 2006. For
the first nine months of 2007 and 2006, the provision for claims as a percentage
of net premiums written was 15.7% and 10.9%, respectively. The
respective increases in the loss percentages in 2007 compared with 2006 reflect
the negative impact of two large claims resulting from mortgage fraud and theft
which occurred in the second quarter of 2007. The additional
provision as a result of these two claims, in addition to the Company’s recent
historical provision, was approximately $2.34 million. Currently, it
is unknown to the Company if there will be any recovery related to these
claims. If material occurrences of mortgage-related fraud and other
similar types of claims continue, the Company’s ultimate loss estimates for
recent policy years could increase. Loss provision rates are subject
to variability and are reviewed and adjusted as claims experience
develops.
Declining
economic conditions and/or declines in transaction volumes have historically
been factors in increased claim expenses due to increased mechanics liens,
defalcations and other matters which may be discovered during property
foreclosures. Title claims are typically reported and paid within the
first several years of policy issuance. The provision for claims
reflects actual payments of claims, net of recovery amounts, plus adjustments
to
the specific and incurred but not reported claims reserves, the latter of which
are actuarially determined based on historical claims experience. At
September 30, 2007, the total reserves for claims were
$38,577,000. Of that total, $4,949,735 was reserved for specific
claims and $33,627,265 was reserved for claims for which the Company has no
notice.
On
a
consolidated basis, salaries, employee benefits and payroll taxes as a
percentage of total revenues were 22.3% and 22.6% for the third quarter of
2007
and 2006, respectively. For the first nine months of the year, salaries,
employee benefits and payroll taxes as a percentage of total revenues were
23.7%
and 22.9% for 2007 and 2006, respectively. Personnel costs increased
compared with the first nine months of last year due to increases in salaries
and related compensation expenses.
The
title insurance
segment’s total salaries, employee benefits and payroll taxes accounted for
85.2% and 86.4% of the consolidated total amount for the third quarter of 2007
and 2006, respectively and 85.3% and 86.3% for the nine months ended September
30, 2007, and 2006, respectively.
Overall
office occupancy and operations as a percentage of total revenues was 5.6%
and
5.7% for the third quarter of 2007 and 2006, respectively and 6.4% and 6.0%
for
the first nine months of 2007 and 2006, respectively. The nine month
increase in office occupancy and operations was due to an increase in various
items, including depreciation expense and printing.
Title
insurance companies are generally not subject to state income or franchise
taxes. However, in most states they are subject to premium and
retaliatory taxes. Premium and retaliatory taxes as a percentage of
premiums written were 2.2% and 2.0% for the nine months ended September 30,
2007
and 2006, respectively.
Professional
and contract labor fees for the three and nine months ended September 30, 2007
compared with the same periods in 2006 increased primarily due to an increase
in
contract labor fees incurred, mostly related to investments in infrastructure
and technology.
Other
expenses primarily include search fee expenses and other miscellaneous expenses
of the title segment and miscellaneous operating expenses of the Trust
division. Other expenses for the three and nine months ended
September 30, 2007 compared with the same periods in 2006 increased primarily
as
a result of increased other revenues.
Income
Taxes
:
The provision for income taxes was 22.0% and 26.2% of income before income
taxes
for the three months ended September 30, 2007 and 2006, respectively. For the
nine months ended September 30, 2007 and 2006, the provision for income taxes
was 20.4% and 24.5%, respectively, of income before income taxes. The
declines in the effective tax rates for the quarter and the nine months ended
September 30, 2007 resulted primarily from a higher mix of tax-exempt investment
income relative to taxable income. The reduction in taxable income
primarily resulted from the increase in the provision for claims and commissions
to agents.
Net
Income:
On a
consolidated basis, the Company reported a decrease in net income of 32.5%
for
the nine months ended September 30, 2007 compared with the prior year
period. Operating expenses increased compared with the 2006 period
primarily due to the increases in the provision for claims and commissions
to
agents.
Liquidity
and Capital Resources
Cash
flows
:
Net cash provided by operating activities for the
nine months ended September 30, 2007, decreased to $8,426,631 compared with
$13,276,891 for the nine months ended September, 30, 2006. Cash flow
from operations has been the primary source of financing for operations,
additions to property and equipment, dividends to shareholders and other
requirements. The net decrease in net cash provided by operating
activities is primarily the result of the decrease in net income and the
increased payments of claims in the second quarter, partially offset by the
increase in the provision for claims. The principal non-operating
uses of cash and cash equivalents for the three and nine-month periods ended
September 30, 2007 and 2006 were additions to the investment
portfolio.
Payment
of
dividends
: The Company’s significant sources of funds are
dividends and distributions from its subsidiaries, which are subject to
regulation in the states in which they do business. These
regulations, among other things, require prior regulatory approval of the
payment of dividends and other intercompany transfers. The Company
believes that amounts available for transfer from the insurance subsidiaries
are
adequate to meet the Company’s operating needs.
Liquidity
:
Due
to the Company’s historical ability to generate positive cash flows from its
operations, management believes that funds generated from operations will enable
the Company to adequately meet its anticipated cash needs and is unaware of
any
trend or occurrence that is likely to result in adverse liquidity
changes. The Company’s cash requirements include operating expenses,
taxes, capital expenditures and dividends on its common stock declared by the
Board of Directors.
In
addition to operational liquidity,
the Company maintains a high degree of liquidity within its investment portfolio
in the form of short-term investments and other readily marketable
securities. As of September 30, 2007, the Company held cash and cash
equivalents of $2,855,600, short-term investments of $9,474,707 and various
other readily marketable securities.
Capital
expenditures
:
During 2007, the Company has plans for various
capital improvement projects, including software development projects. The
Company anticipates capital expenditures of approximately $200,000 during the
remainder of 2007 in connection with these projects.
Off-Balance
Sheet Arrangements and
Contractual Obligations
:
It is not the general practice of
the Company to enter into off-balance sheet arrangements, nor is it the policy
of the Company to issue guarantees to third parties. Off-balance
sheet arrangements are generally limited to the future payments under
noncancelable operating leases, payments due under various agreements with
third-party service providers, and unaccrued obligations pursuant to certain
executive employment agreements.
The
total reserve for all reported and
unreported losses the Company incurred through September 30, 2007 is represented
by the reserves for claims. Information regarding the claims reserve can be
found in Note 2 to the consolidated financial statements of this Form
10-Q. Further information on contractual obligations related to the
reserves for claims can be found in the Company’s Annual Report on Form 10-K for
the year ended December 31, 2006 as filed with the Securities and Exchange
Commission.
Equity
Investments
: The Company’s equity investments are in public
companies whose security prices are subject to volatility. Should the
fair value of these investments fall below the Company’s cost bases and the
financial condition or prospects of these companies deteriorate, the Company
may
determine in a future period that this decline in fair value is other than
temporary, requiring that an impairment loss be recognized.
New
Accounting Standards
In
September 2006, the Financial
Accounting Standards Board (“FASB”) issued Statement of Accounting Standards
(“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157
establishes a common definition for fair value to be applied to GAAP guidance
requiring use of fair value, establishes a framework for measuring fair value,
and expands disclosure about such fair value measurements. SFAS 157
is effective for fiscal years beginning after November 15, 2007. The
Company is currently assessing the impact of SFAS 157 on its consolidated
financial position and results of operations.
In
February 2007, the FASB issued SFAS
No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(“SFAS 159”). This statement, which is expected to expand fair value
measurement, permits entities to choose to measure many financial instruments
and certain other items at fair value. SFAS 159 is effective for
fiscal years beginning after November 15, 2007. The Company is
currently assessing the impact of SFAS 159 on its consolidated financial
position and results of operations.
Safe
Harbor Statement
This
Quarterly Report on Form 10-Q, 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, contains, 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," "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 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: varying demand for title insurance due to factors
such as interest rate fluctuations, the availability of mortgage funds, the
level of real estate transactions, mortgage refinance activity, the cost of
real
estate, consumer confidence, employment levels, family income levels and general
economic conditions; changes to the insurance requirements of the participants
in the secondary mortgage market; losses from claims may be greater than
anticipated such that reserves for possible claims are inadequate; unanticipated
adverse changes in securities markets including interest rates, resulting in
material losses on the Company’s investments; the Company’s dependence on key
management personnel, the loss of whom could have a material adverse affect
on
the Company’s business; the Company’s ability to develop and offer products and
services that meet changing industry standards in a timely and cost-effective
manner; significant changes to applicable government regulations; state statutes
requiring the Company’s insurance subsidiaries to maintain minimum levels of
capital, surplus and reserves and restricting the amount of dividends that
the
insurance subsidiaries may pay to the Company without prior regulatory approval;
and the concentration of key accounting and information systems in a few
locations. 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. For more details on factors that could affect expectations,
see the Company’s Annual Report on Form 10-K for the year ended December 31,
2006. The Company does not undertake to update forward-looking
statements to reflect circumstances or events that occur after the date the
forward-looking statements are made.