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.
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/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
</TABLE>
