-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QuqICC0ViBHlJnHg5Ayy8dzLWV4CyHDwfGg9M02u+QBXz/awWl/OdweewUq2N3aJ Bc1eKI5ZvOhJYophh38p2g== 0001002105-98-000007.txt : 19980122 0001002105-98-000007.hdr.sgml : 19980122 ACCESSION NUMBER: 0001002105-98-000007 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19980121 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LAWYERS TITLE CORP CENTRAL INDEX KEY: 0000877355 STANDARD INDUSTRIAL CLASSIFICATION: TITLE INSURANCE [6361] IRS NUMBER: 541589611 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-13990 FILM NUMBER: 98510141 BUSINESS ADDRESS: STREET 1: 6630 W BROAD ST STREET 2: PO BOX 27567 CITY: RICHMOND STATE: VA ZIP: 23230 BUSINESS PHONE: 8042816700 MAIL ADDRESS: STREET 1: 6630 WEST BROAD ST STREET 2: PO BOX 27567 CITY: RICRICHMOND STATE: VA ZIP: 23230 10-K/A 1 10-K/A FILED BY LAWYERS TITLE CORPORATION SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A AMENDMENT NO. 1 TO [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] For the Fiscal Year Ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] COMMISSION FILE NO. 1-13990 LAWYERS TITLE CORPORATION (Exact name of registrant as specified in its charter) Virginia 54-1589611 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 6630 West Broad Street Richmond, Virginia 23230 (Address of principal executive offices) (Zip Code) (804) 281-6700 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Common Stock, no par value Preferred Stock Purchase Rights Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ The aggregate market value of voting stock held by non-affiliates of the registrant on January 16, 1998 was approximately $306,306,000. Directors of registrant are considered affiliates for purposes of this calculation but should not necessarily be deemed affiliates for any other purpose. The number of shares of Common Stock, no par value, outstanding on January 16, 1998, was 8,983,020. 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 this Form 10-K. [ X ] DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive proxy statement for the 1997 Annual Meeting of Shareholders (to be filed) are incorporated by reference into Part III hereof. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Overview - Lawyers Title Corporation reported improved earnings in 1996 compared to 1995 which had been a significant improvement over 1994. The Company's primary business is the insurance of titles to real property which is greatly influenced by the real estate economy. Underlying economic factors adversely affected 1994 results due to upward pressures on mortgage loan interest rates as the Federal Reserve responded to inflationary fears. Mortgage interest rates averaged 7.8% in 1996, 8.0% in 1995 and 8.4% in 1994. Housing starts were 1.5 million, 1.35 million and 1.4 million in 1996, 1995 and 1994, respectively. Resales of existing homes were at 4.1 million, 3.8 million and 4.0 million in 1996, 1995 and 1994, respectively. During the three year period from 1994 to 1996, the Company benefited from three distinct portions of its business strategy. Operations were expanded through the acquisition of title insurance agents and underwriters, expenses were tightly monitored and controlled, and claims experience improved due to quality control efforts and an improved claims environment. Revenues - The Company's operating revenues are dependent on overall levels of real estate activity which are influenced by a number of factors including interest rates, access to capital, housing starts, housing resales, and the general state of the economy. In addition, the Company's revenues are affected by the Company's sales and marketing efforts, its acquisition program and its strategic decisions based on the rate structure and claims environment in particular markets. Premiums and related fees are determined both by competition and by state regulation. Operating revenues from direct title operations are recognized at the time real estate transactions close, which is generally 60 to 90 days after the opening of a title order. Operating revenues from agents are recognized when the issuance of a policy is reported to the Company by an agent. Although agents generally report the issuance of policies on a monthly basis, heightened levels of real estate activity may slow this reporting process. This typically results in delays of 30 to 60 days from the closing of real estate transactions until the recognition of revenues from agents. In addition to the premiums and related fees, the Company has historically earned investment income from its portfolio of fixed- maturity and equity securities. Investment income includes dividends and interest as well as realized capital gains or losses on the portfolio. The Company regularly reexamines its portfolio strategies in light of changing earnings or tax situations. In the fourth quarter of 1996 the Company shifted its investment strategy, eliminating its investment in equity securities and beginning to move all of its investment portfolio into fixed-maturity securities. The repositioning of the portfolio will eliminate the exposure of the regulated surplus of the Company's insurance subsidiaries to market fluctuations inherent in equity portfolios. Additionally, the commensurate increase in fixed-maturity securities will increase the level of more stable, predictable interest income earned. Factors Affecting Profit Margins and Pre-Tax Profits - The Company's profit margins are affected by several factors, including volume, policy amount and type of real estate activity. Volume is an important determinant of profitability because Lawyers Title, like any other title insurance company, has a significant level of fixed costs arising from personnel, occupancy costs and maintenance of title plants. Because a premium is based on the face amount of the policy, larger policies generate higher premiums although expenses of issuance do not necessarily increase in proportion to policy size. Profit margins are -2- lower on refinancings than on sales due to premium discounts and higher cancellation rates generally experienced on refinancings. Cancellations affect profitability because costs are incurred both in opening and in processing orders. The Company's principal variable expense is commissions paid to independent agents. The Company regularly reviews the profitability of its agency revenues; contracting in unprofitable markets and expanding where acceptable levels of profitability are available. The Company continually monitors its operating margin, which is the percentage of operating revenues less salaries and employee benefits, agency commissions and other expenses to operating revenues. Claims - Generally, title insurance claim rates are lower than for other types of insurance because title insurance policies insure against prior events affecting the quality of real estate titles, rather than against unforeseen, and therefore less predictable, future events. A provision is made for estimated future claim payments at the time revenue is recognized. Both the Company's experience and industry data indicate that claims activity continues through 20 years after the policy is issued. Management uses actuarial techniques to estimate future claims by analyzing past claim payment patterns. Management has continued to emphasize and strengthen claims prevention and product quality programs. In the fourth quarter of 1996 the Company made a change from reporting policy and contract claims on a discounted to an undiscounted basis. This change was made to conform with industry practice and because it is considered preferable by rating agencies and investment analysts. The effect of the change for 1996 was to increase the provision for policy and contract claims by $76 million and decrease net income by $49 million and net income per share by $5.51. In addition, during the fourth quarter of 1996 the Company changed its estimate of the ultimate net cost of all reported and unreported losses incurred through September 30, 1996 to reflect favorable experience. Under the Company's reserving methodology the provision for losses on policies issued in each year is based on historical experience determined over a period of years. As a result, the very high incidence of losses on policies issued in the 1980's had the effect of pushing up the rate at which losses were provided in the 1990's. The early 1990's were also affected by a high volume of residential refinance business which time has proven is experiencing a lower incidence of losses. The Company began to see favorable development indications on the 1991-1994 policy years as those years began to develop some meaningful experience, i.e. 3-4 years. However, because title losses are paid over a long period of time and experience has shown that significant losses can be reported and paid more than 20 years out, the Company chose to proceed cautiously with respect to projecting its favorable experience over these early years to the projected ultimate losses for the subject policy years. The Company monitored development of these years very closely through 1995 and the first three quarters of 1996, and while indications continued to be favorable for the 1991-1994 policy years, the Company as of September 30, 1996 did not believe that the limited development of those years was sufficient to justify a significant reduction in the projected ultimate losses for those years. In the fourth quarter of 1996 in connection with the performance of initial due diligence procedures related to the negotiation of the acquisition of Transnation Title Insurance Company and Commonwealth Land Title Insurance Company, the Company had the opportunity to see how the experience of these two major title underwriters compared to its own experience. The information gained from this experience along with extensive actuarial studies of the Company's book of business resulted in a determination that the projected ultimate losses for certain policy year business should be reduced to give greater weight to the favorable development on those years through December 31, 1996. The effect of the change in estimate -3- was to decrease the provision for policy and contract claims by $78 million and to increase net income by $50.7 million and net income per share by $5.70. Both the change in reserve estimate and the change from discounting to not discounting reserves were contemplated by the Company as a result of the shift in the business that now reflects a higher amount of refinance transactions and an increase in frequency of housing resales. Because the change in accounting principle to no longer discount policy and contract claims is inseparable from the change in estimate, both have been accounted for as a change in estimate. Accordingly, the net effect of the two changes, a decrease of $2 million in the provision for policy and contract claims, has been included in operations for the fourth quarter. The above changes were both made to conform with general industry practice. The changes are included in the provision for policy and contract claims and no prior amounts have been restated. Contingencies - Refer to "Legal Proceedings" for a discussion of pending legal proceedings. Management believes that amounts, if any, recovered by plaintiffs in these actions will not have a material adverse effect on the Company's financial position or operating results. Other Expenses - The most significant components of other expenses are rent for office space, outside costs of title production, travel, communications and taxes levied by states on premiums. Seasonality - Historically, real estate activity has been generally slower in the winter months with volumes showing significant improvements in the spring and summer months. The percentage of title orders closed to title orders opened is typically lower in the first six months than at year end because of this seasonal variance. See "Business-Seasonality; Backlog." In recent years low levels of mortgage interest rates have caused fluctuations in real estate activity levels outside of the usual, seasonal pattern. The Company cannot predict whether or when the historical seasonal pattern of real estate activity will resume. Results of Operations Comparison of Years Ended December 31, 1996, December 31, 1995 and December 31, 1994 Operating Revenues - Revenues from operations improved 19.3% to $557.8 million in 1996 compared to $467.4 million in 1995. This 1995 level was a 4.0% reduction from the 1994 amount. The 1996 year benefited from a favorable economic environment. Average mortgage rates were 7.0% in January 1996 and, although fluctuating, never exceeded 8.3% for any month in 1996. The favorable economic environment led to increased levels of housing starts and housing resales in 1996 compared to 1995. Business volumes for direct and agency business improved approximately 18% from 670,000 transactions in 1995 to 790,000 in 1996. Conversely, revenue fell for the full year of 1995 compared to 1994 as a result of interest rate pressures. Average mortgage rates stood at 9.2% at the beginning of 1995, fell gradually to 7.6% by the end of the first half of 1995, averaged 7.5% in the second half of the year and stood at 7.2% at year end. Interest rate related business volume reductions were offset in part by revenue from acquisitions of $68 million. -4- The volume of orders for title insurance opened in Company offices increased 14.2% in 1996 compared to 1995 after improving 16.2% between 1994 and 1995. Exclusive of recent acquisitions, orders in 1995 would have fallen 9.9% compared to 1994. Investment Income - Investment income increased significantly to $36.4 million in 1996 compared to $15.5 million in 1995 after increasing from $14.1 million in 1994. The increase was due principally to increased levels of capital gains which were $23.4 million in 1996, $3.0 million in 1995 and $1.7 million in 1994. In the fourth quarter of 1996 the Company changed its investment strategy, selling all of its equity portfolio and beginning to move the proceeds into fixed-maturity securities. This sale resulted in capital gains of $17.4 million. The remaining components of investment income, dividends and interest, amounted to $14.2 million, $14.0 million and $13.2 million in 1996, 1995 and 1994, respectively. Expenses - Salaries and Employee Benefits: Personnel related expenses are a significant portion of total operating expenses in the title insurance industry. These expenses require management through the often rapidly changing conditions in the real estate economy. Salaries and employee benefits increased 18.2% in 1996 compared to 1995. This increase was largely tied to higher business volumes which necessitated increased staffing levels to meet customer service demands, incentive increases and normal merit raises. Salaries and employee benefits increased 8.4% in 1995 over 1994. In the fourth quarter of 1994, in response to a severe fall in order counts, a special staff and salary reduction program was implemented that lasted through the second quarter of 1995. As an offset to these reductions, staffing levels increased between 1994 and 1995 due to the Company's acquisition program. Operating revenue net of agents' commissions improved on a per employee basis in both 1996 and 1995 compared to the prior year. Agents' Commissions: Commissions paid to title insurance agents are the largest single expense incurred by the Company. The commission rate varies by geographic area in which the commission was earned. Commissions as a percentage of agency revenue were 74.2%, 73.9% and 75.4% in 1996, 1995 and 1994, respectively. General, Administrative and Other Expenses: The most significant components of other expenses are rent for office space, outside costs of title production, travel, communications and taxes levied by states on premiums. Portions of these expenses vary with the volume of business transacted by the Company. Provision for Policy and Contract Claims: The Company's claims experience has shown improvement in recent years. As a percentage of its operating revenues, the provision for policy and contract claims was 5.2%, 5.2% and 9.6% in 1996, 1995 and 1994, respectively. As previously discussed, the Company changed its method of reporting policy and contract claims in the fourth quarter of 1996. Income Taxes - The Company pays U.S. federal and state income taxes based on laws in the jurisdictions in which it operates. The effective tax rates reflected in the income statement for 1996, 1995 and 1994 differ from the U.S. federal statutory rate principally due to non-taxable interest, dividend deductions, travel and entertainment and company-owned life insurance. At December 31, 1996 the Company had recorded deferred tax assets of $32.2 million related primarily to policy and contract claims and employee benefit plans. Substantially all of this deferred tax asset balance could be realized in the future through the reversal of existing temporary taxable differences. -5- Accordingly, it is more likely than not that the income tax benefits will be realized for all the temporary deductible differences existing at December 31, 1996. The Company reassesses the realization of deferred assets quarterly and, if necessary, adjusts its valuation allowance accordingly. Net Income - Net income was $36.5 million in 1996, $17.1 million in 1995 and $6.8 million in 1994. Earnings per share were $4.11, $1.92 and $0.80 in 1996, 1995 and 1994, respectively. The increase in 1996 over 1995 was due to favorable results from operations and capital gains attributable to a shift in the Company's investment portfolio discussed under Investment Income. Liquidity and Capital Resources - Cash provided by operating activities was $33.2 million for 1996, $22.0 million for 1995 and $6.4 million for 1994. The Company believes that it can meet both its short- and long-term capital needs. In addition to $95.6 million of cash and invested cash on hand at December 31, 1996, the Company has no long-term debt and maintains a $35.0 million working capital line of credit of which $34.0 million was unused at December 31, 1996. Forward-Looking and Cautionary Statements - The Company and its representatives may from time to time make written or oral forward-looking statements, including statements contained in the Company's filings with the Securities and Exchange Commission and in its reports to shareholders. In connection with the "safe harbor" provision of the Private Securities Litigation Reform Act of 1995, the Company is hereby identifying important factors that could cause actual results to differ materially from those contained in any forward-looking statements made by or on behalf of the Company; any such statement is qualified by reference to the following cautionary statements. The title insurance business is characterized by low profit margins due to the high cost of producing title evidence whereas premium revenues are subject to regulatory and competitive restraints. The amount of title insurance business available is influenced by housing starts, housing resales and commercial real estate transactions. Real estate activity levels have historically been cyclical and are influenced by such factors as interest rates and the health of the overall economy. The value of the Company's investment portfolio is subject to fluctuation based on similar factors. The title insurance industry may be exposed to substantial claims, such as claims of Indian tribes. The industry is regulated by state laws which require the maintenance of minimum levels of capital and surplus and which restrict the amount of dividends which may be paid without prior regulatory approval. Developments in any of these areas, which are more fully described elsewhere in Parts I and II hereof, each of which is incorporated into this section by reference, could cause the Company's results to differ materially from results that have been or may be projected by or on behalf of the Company. The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward- looking statement that may be made from time to time by or on behalf of the Company. -6- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LAWYERS TITLE CORPORATION Date: January 20, 1998 By: /s/ Charles H. Foster, Jr. ---------------------------------- Charles H. Foster, Jr. Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Charles H. Foster, Jr. Chairman and January 20, 1998 - ------------------------------------------- Chief Executive Officer and Director Charles H. Foster, Jr. (Principal Executive Officer) /s/ G. William Evans Vice President and Treasurer January 20, 1998 - ------------------------------------------- (Principal Financial Officer) G. William Evans /s/ John R. Blanchard - ------------------------------------------- Controller January 20, 1998 John R. Blanchard (Principal Accounting Officer) /s/ Janet A. Alpert - ------------------------------------------- President and January 20, 1998 Janet A. Alpert Chief Operating Officer and Director /s/ Theodore L. Chandler, Jr. - ------------------------------------------- Director January 20, 1998 Theodore L. Chandler, Jr. /s/ Michael Dinkins - ------------------------------------------- Director January 20, 1998 Michael Dinkins - ------------------------------------------- Director January , 1998 James Ermer /s/ John P. McCann - ------------------------------------------- Director January 20, 1998 John P. McCann /s/ J. Garnett Nelson - ------------------------------------------- Director January 20, 1998 J. Garnett Nelson /s/ Robert F. Norfleet, Jr. - ------------------------------------------- Director January 20, 1998 Robert F. Norfleet, Jr. /s/ Eugene P. Trani - ------------------------------------------- Director January 20, 1998 Eugene P. Trani /s/ Marshall B. Wishnack - ------------------------------------------- Director January 20, 1998 Marshall B. Wishnack
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