-----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, V10czan5nzXpq+1o+F/iTCOu8hdt+MvTljcR/ojqzTCIEnSWhyo+pyERuPpYJVMM xpZLpA2QXPOKn96BEx2RGw== 0001144204-07-012108.txt : 20070309 0001144204-07-012108.hdr.sgml : 20070309 20070309171922 ACCESSION NUMBER: 0001144204-07-012108 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20070309 DATE AS OF CHANGE: 20070309 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INVESTORS TITLE CO CENTRAL INDEX KEY: 0000720858 STANDARD INDUSTRIAL CLASSIFICATION: TITLE INSURANCE [6361] IRS NUMBER: 561110199 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-11774 FILM NUMBER: 07685449 BUSINESS ADDRESS: STREET 1: 121 N COLUMBIA ST STREET 2: P O DRAWER 2687 CITY: CHAPEL HILL STATE: NC ZIP: 27514 BUSINESS PHONE: 9199682200 MAIL ADDRESS: STREET 1: 121 NORTH COLUMBIA STREET CITY: CHAPEL HILL STATE: NC ZIP: 27514 10-K 1 v067744_10k.htm Unassociated Document
UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended December 31, 2006

o 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
(919) 968-2200
(Address and telephone number of principal executive office)
 
Securities registered pursuant to section 12(b) of the Act:
Common Stock, no par value 

Securities registered pursuant to section 12(g) of the Act:
None

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o  No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes o  No x
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

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 or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer o  Accelerated filer x  Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o  No x

The aggregate market value of the common shares held by non-affiliates was $80,988,845 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, 2006).

As of March 7, 2007, there were 2,796,203 common shares of the registrant outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of Investors Title Company's Annual Report to Shareholders for the fiscal year ended December 31, 2006 are incorporated by reference in Parts I, II and IV hereof and portions of Investors Title Company's definitive proxy statement for the Annual Meeting of Shareholders to be held on May 16, 2007 are incorporated by reference in Part III hereof.
 

SAFE 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, 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 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: 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, 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, could result 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 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; and key accounting and information systems are concentrated in a few locations. For a description of factors that may cause actual results to differ materially from such forward-looking statements, see Item 1A, “Risk Factors” of this annual report on Form 10-K.

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

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INVESTORS TITLE COMPANY AND SUBSIDIARIES

TABLE OF CONTENTS

PART I
    
ITEM 1.
BUSINESS
4
ITEM 1A.
RISK FACTORS
13
ITEM 1B.
UNRESOLVED STAFF COMMENTS
17
ITEM 2.
PROPERTIES
18
ITEM 3.
LEGAL PROCEEDINGS
18
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
18
   
 
PART II
  
 
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
20
ITEM 6.
SELECTED FINANCIAL DATA
21
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
21
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
21
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
21
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
21
ITEM 9A.
CONTROLS AND PROCEDURES
22
ITEM 9B.
OTHER INFORMATION
22
   
 
PART III
  
 
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
23
ITEM 11.
EXECUTIVE COMPENSATION
23
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
23
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
24
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
24
   
 
PART IV
  
 
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
25
   
 
SIGNATURES
26

3

PART I
 
ITEM 1. BUSINESS

Investors Title Company (the "Company") is a holding company that operates through its subsidiaries and was 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's executive offices are located at 121 North Columbia Street, Chapel Hill, North Carolina 27514. The Company's telephone number is (919) 968-2200 and its facsimile number is (919) 968-2235.

GENERAL

  The Company engages in several lines of business. The main business activity is the issuance of residential and commercial 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 entered into another 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 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 13 of Notes to Consolidated Financial Statements in the 2006 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.
 
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. 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 protects against loss or damage resulting from title defects that affect real property. The commitment and policies issued are predominantly the standard American Land Title Association approved forms.

Title Insurance Policies. 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 their investment. Title insurance policies are issued on the basis of a title report. The title report documents the current status of title to the property.
 
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When real property is conveyed from one party to another, occasionally there is an undisclosed 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 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 title risks as defined in the policy.

A title risk is one of any number of things that could jeopardize the property owner's or mortgagee’s interest in the property defined in the title policy. Such risks include title being vested in someone or some entity other than the insured, unmarketable title, lack of a right of access to the property, invalidity or unenforceability of the insured mortgage, or other defects, liens, or encumbrances against the property. Examples of the most common types of covered risks include defects arising from prior unsatisfied mortgages, tax liens or confirmed assessments, judgments against the property or encumbrances against the property arising through easements, restrictions or other existing covenants. Title insurance also generally protects against deeds or mortgages that contain inaccurate legal descriptions, that were forged or improperly acknowledged or delivered, that were executed by spouses without the other spouse’s signature or release of marital interest or that were conveyed by minors or incompetents.

Geographic Operations. 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 primarily writes land title insurance both as a primary insurer and, to a lesser extent, as a reinsurer throughout the eastern and midwestern United States. ITIC writes title insurance through issuing agents or directly through branch offices in the District of Columbia and the States of Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Michigan, Minnesota, Mississippi, Missouri, Nebraska, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia and West Virginia. In addition to the states in which ITIC currently writes title insurance, it is also licensed to write title insurance in 22 additional states.

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 Nebraska. Title policies are primarily issued through issuing agents in other states.

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 the District of Columbia and the States of Arkansas, Delaware, Florida, Georgia, Indiana, Kentucky, Maryland, Minnesota, Missouri, Nebraska, New Jersey, North Carolina, Ohio, Pennsylvania, South Carolina, Texas, Virginia and West Virginia.

For a description of the level of net premiums written geographically by state, refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in the 2006 Annual Report of Shareholders incorporated by reference in this Form 10-K Annual Report.
 
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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.
  
Reinsurance. The Company assumes and cedes reinsurance with other insurance companies in the normal course of business. Reinsurance is a contractual arrangement whereby one insurer assumes some or all of the risk exposure written by another insurer. Ceded reinsurance is comprised of excess of loss treaties, which protects against losses over certain amounts.

In the ordinary course of business, ITIC and NE-ITIC reinsure certain risks with other title insurers for the purpose of limiting their risk exposure and to comply with state insurance regulations. 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.

The Company’s reinsurance policy is more restrictive than state regulators require. As of December 31, 2006, state insurance regulators set a maximum risk retention limit for ITIC. ITIC set its own risk retention limit at $2,750,000, meaning that it limited the net loss on 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 ceded to an unrelated reinsurer pursuant to an automatic treaty.

NE-ITIC set its risk retention limit at $250,000, meaning that it limited the net loss on 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 ceded to an unrelated reinsurer pursuant to an automatic treaty.

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 12.6% of its statutorily permitted retention of $21,860,422. NE-ITIC's self-imposed retention of $250,000 is only 9.4% of its statutorily permitted retention of $2,652,810.

Ratings. The Company’s title insurance subsidiaries are regularly assigned ratings by independent agencies to indicate their financial condition. 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 Double Prime" and "A+." According to Demotech, title insurance underwriters earning a financial stability rating of A'' (A Double 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.
 
6

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 pursuant to Section 1031 of the Internal Revenue Code. 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 and interest earned on client deposits held by the Company. In February 2006, the 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 adversely impact 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. Refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2006 Annual Report to Shareholders incorporated by reference in this Form 10-K Annual Report for additional information regarding IRS regulations.

Investors Title Accommodation Corporation ("ITAC") 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. Investors Trust, also a wholly owned subsidiary of the Company, received its North Carolina trust charter on February 17, 2004, from the North Carolina Commissioner of Banks. ICMC and Investors Trust work together to provide investment management and trust services to individuals, companies, banks and trusts. These subsidiaries are not currently a reportable segment for which financial information is presented in the financial statements and are included and reported in a category called All Other. There is no assurance that this business will be successful.

OPERATIONS OF SUBSIDIARIES

See Note 13 of Notes to Consolidated Financial Statements in the 2006 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 issue title insurance coverage through its direct operations or through partially owned or independent title insurance agents. Title insurance premiums written reflect a one-time premium payment, with no recurring premiums. Generally, premiums are recorded and recognized as revenue at the time of closing of the related transaction as the earnings process is considered complete. Where the policy is issued through a title insurance agent, the agent retains a commission. Title insurance commissions earned by the Company's agents are recognized as expense concurrently with premium recognition. The percentage of the premium retained by agents varies by region to region and is sometimes regulated by the states.
 
7

For a description of the level of net premiums written by direct and agency operations, refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in the 2006 Annual Report to Shareholders incorporated by reference in this Form 10-K Annual Report.

Exchange Services

ITEC and ITAC provide customer services in connection with tax-deferred exchanges pursuant to Section 1031 of the Internal Revenue Code. Acting 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 their lender, to acquire the designated replacement property on behalf of the customer by taking temporary title to their property until after the disposition of identified relinquished property occurs.

SEASONALITY AND CYCLICALITY

Title Insurance

Real estate activity is cyclical in nature. 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 changes in mortgage interest rates, consumer confidence, economic conditions, supply and demand and family income levels. Historically, the winter months have 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 also affect demand for new mortgage loans and 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

The Company markets its title insurance services to a broad range of customers in the residential and commercial market sectors of the real estate industry. ITIC delivers title insurance coverage through a home office, branch offices, and issuing agents. In North Carolina, ITIC issues policies primarily through a home office and 27 branch offices. The Company also has a branch office in South Carolina and Nebraska. ITIC also writes title insurance policies through issuing agents in the District of Columbia and the States of Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Michigan, Minnesota, Mississippi, Missouri, Nebraska, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia and West Virginia. Issuing agents are typically real estate attorneys or subsidiaries of community and regional mortgage lending institutions, depending on local customs and regulations and the Company’s marketing strategy in a particular territory.
 
8

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 general advertising in various trade and professional periodicals.

Exchange Services

Marketing of exchange services offered by ITEC and ITAC has been 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.

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 or “face amount”of insurance 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. The coverage on a lender's title insurance policy is reduced and eventually terminated as the mortgage loan it secures is paid. An owner's policy is effective as long as the insured has an ownership interest in the property or has liability under warranties of title. Due to the variability of these factors, the aggregate contingent liability on outstanding policies of the Company and its subsidiaries cannot be determined with any precision.

LOSSES AND RESERVES

While most other forms of insurance provide for the assumption of risk of loss arising out of unforeseen events, title insurance is based upon a process of loss avoidance. Losses on policies typically occur when a title defect is not discovered during the examination and settlement process and the occurrence of certain hidden risks which cannot be determined from an accurate search of public land records. The maximum amount of liability under a title insurance policy is generally the face amount of the policy plus the cost of defending the insured’s title against an adverse claim.
 
9

Reserves for claim losses are established based upon known claims, as well as losses incurred but not yet reported to the Company based upon historical experience and other factors. Title claims can often be complex, vary greatly in dollar amounts and are affected by economic and market conditions and may involve uncertainties as to ultimate exposure, and therefore, reserve estimates are subject to variability.

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.

REGULATION

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 distributions or transfers.

Title insurance companies are extensively regulated under applicable state laws. All states have requirements for admission to do business as an insurance company, including minimum levels of capital and surplus and establishing reserves. State regulatory authorities monitor the stability and service of insurance companies and possess broad powers with respect to the licensing of title insurers and agents, approving rate schedules and policy forms, financial reporting and accounting practices, defining the types and amounts of investments, 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. Other governmental authorities have the power to enforce state and federal laws to which the title insurance subsidiaries are subject, including the Real Estate Settlement Procedures Act (“RESPA”).

The National Association of Insurance Commissioners (the “NAIC”) has adopted an instruction requiring an annual certification of reserve adequacy by a qualified actuary. Because all of the states in which the Company’s title insurance subsidiaries are domiciled require adherence to NAIC filing procedures, each subsidiary must file an actuarial opinion with respect to the adequacy of its reserves.

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.
 
10

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, 2000 through December 31, 2004. 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, 2000 through December 31, 2005. No material deficiencies were noted.

In addition to financial examinations, ITIC and NE-ITIC are subject to market conduct cap 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 in May 2004 for the period January 1, 2001 through December 31, 2003, with no material deficiencies noted. NE-ITIC's last market conduct examination commenced in November 2001 for the period January 1, 1998 through December 31, 2000, with no material deficiencies noted 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 by any regulatory commissions, 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. In 2006, the 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 adversely impact the exchange services segment and the Company’s net income, since the exchange segment’s revenues include 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, but no official response has been issued by the IRS on whether or not they plan to finalize the regulations as proposed.
 
11

Investment Management and Trust Services

The investment management and trust services division is regulated by the North Carolina Commissioner of Banks. Investors Trust was last examined by the North Carolina Commissioner of Banks for the period ended December 31, 2005. No material deficiencies were noted in the Report of Examination.

COMPETITION 

Title Insurance

The title insurance industry is highly competitive. ITIC currently operates primarily in Kentucky, North Carolina, Michigan, South Carolina, Tennessee, Virginia and West Virginia and NE-ITIC currently operates in New York. ITIC's and NE-ITIC's major competitors together comprise a majority of the title insurance market on a national level. The number and size of competing companies varies in the different geographic areas in which the Company conducts business. 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. Some title insurers currently have greater financial resources, larger distribution networks and more extensive computerized databases of property records and related information than the Company.

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 and agents, banks, attorneys, and other independently-owned qualified intermediaries 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.

INVESTMENT POLICIES

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. The Company manages its investment portfolio and does not utilize third party investment managers.

See Note 3 of Notes to Consolidated Financial Statements in the 2006 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.
 
12

EMPLOYEES

The Company has no paid employees. Officers of the Company are full-time paid employees of ITIC. The Company’s subsidiaries had 229 full-time employees and 25 part-time employees as of December 31, 2006. None of the employees are covered by any collective bargaining agreements. Management considers its relationship with its employees to be favorable.

ADDITIONAL INFORMATION

The Company’s 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 reports 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 (“SEC”). The public may read any material it has filed with the SEC at the SEC’s Public Reference Room at 100 F. Street, N.E., Washington, D.C. 20549. The Investors section of the Company’s website also includes its corporate governance guidelines and code of ethics.
 
ITEM 1A. RISK FACTORS

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

The Company’s results of operations and financial condition are susceptible to the changing level of demand for title insurance which is based on the level of real estate activity, the volume of mortgage refinancing transactions, changes in the requirements of lenders and other participants in the market, and other potential factors.

The demand for the Company’s title insurance and other real estate transaction products and services is dependent upon, among other things, the volume of commercial and residential real estate transactions and mortgage refinancing transactions. The volume of these transactions has historically been influenced by factors such as mortgage interest rates and the state of the overall economy. When mortgage interest rates are increasing or during an economic downturn or recession, real estate activity typically declines and the title insurance industry tends to experience lower revenues and profitability. The cyclical nature of the Company’s business has caused fluctuations in revenues and profitability in the past and is expected to do so in the future. Volume is a key factor in the Company’s profitability due to the existence of fixed costs such as personnel and occupancy expenses associated with the support of the issuance of title insurance policies and of general corporate operations. The volume of real estate transactions also depends in part upon the requirements of mortgage lenders and participants in the secondary mortgage market that title insurance policies be obtained on residential and commercial real property.

Home sales and mortgage lending are highly cyclical businesses. Historically, real estate transactions have produced seasonal revenue levels for title insurers, with residential real estate activity generally slower in the winter, when fewer families move or buy or sell homes. Therefore, the first calendar quarter is typically the weakest quarter in terms of revenue due to the generally low volume of home sales. Fluctuations in mortgage interest rates, as well as other economic factors, can cause shifts in real estate activity outside the normal seasonal pattern.
 
13

Differences between actual claims experience and underwriting and reserving assumptions may adversely affect the Company’s financial results.

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

The Company’s insurance subsidiaries are subject to complex government regulations.

The Company’s title insurance businesses are subject to extensive regulation by state insurance authorities in each state in which they operate. These regulations are primarily intended for the protection of policyholders. The nature and extent of these regulations typically involve, among other matters, licensing and renewal requirements and trade and marketing practices. These regulations may restrict the Company’s ability to implement rate increases or other actions that it may want to take to enhance its operating results or have a negative impact on its ability to generate revenue and earnings.

Insurance regulations limit the ability of the Company’s insurance subsidiaries to pay dividends to it.

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

These dividend restrictions could limit the Company’s ability to pay dividends to its stockholders or grow its business. As of December 31, 2006, approximately $66,180,000 of the consolidated stockholders' equity represented net assets of the Company’s subsidiaries that cannot be transferred in the form of dividends, loans or advances to the parent company under statutory regulations without prior insurance department approval. For further discussion of the regulation of dividend payments and other transactions between affiliates, see “Liquidity and Capital Resources” under Management’s Discussion and Analysis in Item 7 of this report.
 
14

The Company’s non-insurance subsidiaries are also subject to state and federal regulations.

Some of the Company’s other businesses operate within state and federal guidelines. Any changes in the applicable regulatory environment or changes in existing regulations could restrict its existing or future operations. Revenues from the Company’s exchange services segment are closely related to the level of real estate transactions, the tax rate on capital gains and other changes in the Internal Revenue Code. The Company’s revenues in future periods will continue to be subject to these and other factors which are beyond its control. In February 2006, the IRS proposed new regulations which, if adopted, may negatively affect the ability of qualified intermediaries to retain interest earned on exchange funds they are holding. If passed as proposed, these regulations would materially adversely impact 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.

In addition, the investment management and trust services division is regulated by the North Carolina Commissioner of Banks.

The performance of the Company’s investments depends on conditions that are outside its control.

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

The Company may encounter difficulties managing growth or rapid technology changes, which could adversely affect its results.

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

Competition in the Company’s business affects its revenues.

The title insurance industry is highly competitive. Key factors that affect competition in the title insurance business are price, expertise, timeliness and quality of service and the financial strength and size of the insurer. Title companies compete for premiums by choosing various distribution channels which may include company-owned operations and issuing agency relationships with attorneys, lenders, realtors, builders and other settlement service providers. Title insurance underwriters compete for agents on the basis of service and commission levels. Some title insurers currently have greater financial resources, larger distribution networks and more extensive computerized databases of property records and related information than the Company. The number and size of competing companies varies in the different geographic areas in which we operate. Competition among the major providers of title insurance, new entrants to the industry or the introduction and acceptance of new alternatives to traditional title products by the marketplace could adversely affect the Company’s operations and financial condition.
 
15

The Company’s success relies on its ability to attract and retain key personnel and agents.

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

The Company may experience significant claims relating to its title insurance operations which would adversely affect its results.

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

A downgrade or a potential downgrade in one of the Company’s financial strength ratings could result in a loss of business.

The competitive positions of insurance companies, in general, have come to depend increasingly on independent ratings of their financial strength and claims-paying ability. A significant downgrade in the ratings of either of the Company’s policy-issuing subsidiaries could negatively impact its ability to compete for new business and retain existing business and lead to a decrease in the Company’s stock price, the loss of certain licenses ITIC and NE-ITIC need to operate as title insurance companies in various states and adversely affect results of operations.

Regulatory and legal actions may result in financial losses and or harm to the Company’s reputation.

The title insurance industry has recently been, and continues to be, under regulatory scrutiny in a number of states with respect to pricing practices, and possible Real Estate Settlement Procedures Act (“RESPA”) violations and unlawful rebating practices. The regulatory investigations have resulted in settlements and fines for other underwriters and could lead to industry-wide reductions in premium rates and escrow fees, the inability to get rate increases when necessary, as well as changes that could adversely affect the Company’s ability to compete for or retain business or raise the costs of additional regulatory compliance. The Department of Housing and Urban Development (HUD) is responsible for enforcing RESPA. While timing and content are uncertain, HUD continues to indicate that it would like to revise RESPA regulations which would result in changes to the existing industry regulatory framework that could have a material impact on the Company’s marketing and operations.

 
16

The Company may experience losses resulting from regulatory noncompliance, fraud, defalcation or misconduct.

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

The Company relies upon North Carolina for about 50% of its title insurance premiums.

North Carolina is the largest source of revenue for the title insurance segment and, in 2006, North Carolina-based premiums accounted for approximately 50% of premiums earned by the Company. A decrease in North Carolina business would negatively impact financial operations.

Key accounting and information systems are concentrated in a few locations.

The Company’s home office, accounting and technology operations are concentrated in North Carolina. These critical business operations are subject to interruption by natural disasters, fire, power shortages and other events beyond the Company’s control. A catastrophic event that results in the destruction or disruption of any of the Company’s critical business operations or systems could severely affect its ability to conduct normal business operations and, as a result, there could be a material and adverse effect on the Company’s business, operating results and financial condition.

Provisions of the Company’s shareholder rights plan may make a takeover of our company difficult.

The Company has a shareholders rights plan which could discourage transactions involving actual or potential changes of control, including transactions that otherwise could involve payment of a premium over prevailing market prices to the Company’s shareholders for their common shares.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None

17

ITEM 2. PROPERTIES

The Company owns two adjacent office buildings and property located on the corner of North Columbia and West Rosemary Streets in Chapel Hill, North Carolina, which serve as the Company's corporate headquarters. The main building contains approximately 23,000 square feet and has on-site parking facilities. The Company's principal subsidiary, ITIC, leases office space in 33 locations throughout North Carolina, South Carolina, Michigan and Nebraska. NE-ITIC leases office space in one location in New York. Each of the office facilities occupied by the Company and its subsidiaries are in good condition and adequate for present operations. In November 2005, the Company purchased approximately 7,000 square feet of additional office space in Chapel Hill, North Carolina that was previously leased for ITEC, ITAC, ITIC’s Commercial Services Division and ITIC’s Settlement Services Division.

ITEM 3. LEGAL PROCEEDINGS

The Company and its subsidiaries are involved in various legal proceedings that are incidental to their business. In the Company's opinion, based on the present status of these proceedings, any potential liability of the Company or its subsidiaries with respect to these legal proceedings will not, in the aggregate, be material to the Company's consolidated financial condition or results of operations.

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, 2006.

EXECUTIVE OFFICERS OF THE COMPANY 

Following is information regarding the executive officers of the Company as of February 28, 2007. 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 and qualified.
 
Name
  
Age
  
Position with Registrant
         
J. Allen Fine
  
72
 
Chief Executive Officer and Chairman of the Board
         
James A. Fine, Jr.
  
44
  
President, Treasurer, Chief Financial Officer, Chief Accounting Officer and Director
         
W. Morris Fine
  
40
  
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.
 
18

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.

19

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The high and low sales prices for the Company's common stock, as reported on the NASDAQ National Market System, the dividends paid per common share for each quarter in the last two fiscal years and the approximate number of shareholders of record are set forth under the caption "Common Stock Data" in the 2006 Annual Report to Shareholders and are incorporated by reference in this Form 10-K Annual Report. For a discussion of factors that may limit the Company's ability to pay dividends on its common stock, refer to the subsection of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations entitled "Liquidity and Capital Resources" in the 2006 Annual Report to Shareholders, incorporated by reference in this Form 10-K Annual Report.  Additional information required by this item is incorporated by reference in the 2006 Annual Report to Shareholders.
 
The following table provides information about purchases by the Company (and all affiliated purchasers) during the quarter ended December 31, 2006 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 Purchased
  
Average Price
 Paid per Share
  
Total Number of Shares Purchased as Part of Publicly Announced Plan
  
Maximum Number of Shares that May Yet Be Purchased Under the Plan
  
Beginning of period
                      
349,115
  
10/01/06 - 10/31/06
    
-
   
-
    
-
    
349,115
  
11/01/06 - 11/30/06
    
-
    
-
    
-
    
349,115
  
12/01/06 - 12/31/06
    
2,342
  
$
53.33
    
2,342
    
346,773
  
Total:
    
2,342
  
$
53.33
    
2,342
   
346,773
 
 
 
(1)
For the quarter ended December 31, 2006, ITC purchased an aggregate of 2,342 shares of the Company’s common stock pursuant to the purchase plan (the “Plan”) that was publicly announced on June 5, 2000.

 
(2)
In 2000, 2004 and 2005, the Board of Directors of ITIC and ITC approved the purchase by ITIC or ITC of up to an aggregate of 500,000 and 125,000 shares of the Company’s common stock pursuant to the Plan. Unless terminated earlier by resolution of the Board of Directors, the Plan will expire when ITC has purchased all shares authorized for purchase thereunder.

 
(3)
ITC intends to make further purchases under this Plan.
 
20
 
ITEM 6. SELECTED FINANCIAL DATA

The selected financial data for the last five fiscal years of the Company and its subsidiaries is set forth under the caption "Financial Highlights" in the 2006 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, Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations in the 2006 Annual Report to Shareholders, which are 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 2006 Annual Report to Shareholders is incorporated by reference in this Form 10-K Annual Report.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 

The subsection entitled "Quantitative and Qualitative Disclosures about Market Risk" in Management's Discussion and Analysis of Financial Condition and Results of Operations in the 2006 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 2006 Annual Report to Shareholders are incorporated by reference in this Form 10-K Annual Report.

The financial statements meeting the requirements of Regulation S-X are attached hereto as Schedules I, II, III, IV and V.

The supplementary financial information set forth in the section entitled "Selected Quarterly Financial Data" in Management's Discussion and Analysis of Financial Condition and Results of Operations in the 2006 Annual Report to Shareholders is incorporated by reference in this Form 10-K Annual Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

21

ITEM 9A. CONTROLS AND PROCEDURES

DISCLOSURE CONTROLS AND PROCEDURES

The Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 (the "Act") was recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission's rules and forms. An evaluation was performed under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of December 31, 2006. In reaching this conclusion, the Company's Chief Executive Officer and Chief Financial Officer determined that the Company's disclosure controls and procedures were effective in ensuring that such information was accumulated and communicated to the Company's management as appropriate to allow timely decisions regarding required disclosure.

INTERNAL CONTROL OVER FINANCIAL REPORTING

(a) Management’s report on internal control over financial reporting.
 
The Company’s management report on internal financial reporting is set forth in the Company’s 2006 Annual Report under the heading Management’s Report on Internal Control over Financial Reporting and is incorporated herein by reference.

(b) Attestation report of the registered public accounting firm.
 
The report of Dixon Hughes PLLC, the Company’s independent registered public accounting firm, on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and the effectiveness of the Company’s internal control over financial reporting is set forth in the Company’s 2006 Annual Report under the heading Report of Independent Registered Public Accounting Firm on Internal Control and is incorporated herein by reference.
 
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

During the quarter ended December 31, 2006, there was no change in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

There was no information required to be disclosed in a report on Form 8-K during the fourth quarter of the year that has not been reported.

22

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF THE REGISTRANT
 
The information called for by this item is incorporated by reference to the material under the captions “Proposal Requiring Your Vote - Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Corporate Governance - Board of Directors and Committees - the Audit Committee” and “Corporate Governance - Code of Business Conduct and Ethics” in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 16, 2007. Other information with respect to the executive officers of the Company is included at the end of Part I of this Form 10-K Annual Report under the separate caption "Executive Officers of the Company."

ITEM 11. EXECUTIVE COMPENSATION

The information called for by this item is set forth under the captions “Executive Compensation,” “Compensation of Directors,” “Corporate Governance - Compensation Committee Interlocks on Insider Participation” and “Compensation Committee Report” in the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 16, 2007 and is incorporated by reference in this Form 10-K Annual Report.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information pertaining to securities ownership of certain beneficial owners and management is set forth under the caption “Stock Ownership of 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 16, 2007 and is incorporated by reference in this Form 10-K Annual Report.
 
23

The following table provides information about the Company’s compensation plans under which equity securities are authorized for issuance as of December 31, 2006. The Company does not have any equity compensation plans that have not been approved by its shareholders.

 
 
 
 
Plan Category
  
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights
  
 
 
Weighted Average Price of Outstanding Options, Warrants and Rights
  
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans
  
Equity compensation plans approved by shareholders
    
74,051
  
$
21.82
    
238,470
  
Equity compensation plans not approved by shareholders
    
-
   
-
    
-
  
Total
    
74,051
 
$
21.82
    
238,470
  
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information called for by this item is set forth under the captions “Certain Relationships and Related Transactions” and “Corporate Governance — Independent Directors” set forth in the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 16, 2007 and is incorporated by reference in this Form 10-K Annual Report.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information pertaining to principal accountant fees and services is set forth under the caption “Independent Registered Public Accounting Firm” in the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 16, 2007 is incorporated by reference in this Form 10-K Annual Report.

24

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
(a)(1) Financial Statements.

The following financial statements in the 2006 Annual Report to Shareholders are hereby incorporated by reference in this Form 10-K Annual Report:

Consolidated Balance Sheets as of December 31, 2006 and 2005
 
   
Consolidated Statements of Income for the Years Ended December 31, 2006, 2005 and 2004
 
   
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2006, 2005 and 2004
 
   
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2006, 2005 and 2004
 
   
Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004
 
   
Notes to Consolidated Financial Statements
  
   
Report of Independent Registered Public Accounting Firm
  
   
Management’s Report on Internal Control over Financial Reporting
  
   
Report of Independent Registered Public Accounting Firm on Internal Control
  

(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 Qualifying 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 10-K.
 
25

SIGNATURES

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
(Registrant)
 
 		  
 		  
 
By:   /s/ J. Allen Fine
 
J. Allen Fine, Chairman and Chief Executive
 
Officer (Principal Executive Officer)
 
March 9, 2007

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 9th day of March, 2007.

/s/ J. Allen Fine
  
/s/ James R. Morton
J. Allen Fine, Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
  
James R. Morton, Director
     
     
/s/ James A. Fine, Jr.
  
/s/ A. Scott Parker III
James A. Fine, Jr., President, Treasurer and
Director (Principal Financial Officer and
Principal Accounting Officer)
  
A. Scott Parker III, Director
     
     
/s/ W. Morris Fine
  
/s/ H. Joe King, Jr.
W. Morris Fine, Executive Vice President,
Secretary and Director
  
H. Joe King, Jr., Director
     
     
/s/ David L. Francis
  
/s/ R. Horace Johnson
David L. Francis, Director
  
R. Horace Johnson, Director
     
     
/s/ Loren B. Harrell, Jr.
    
Loren B. Harrell, Jr., Director
    

26

 SCHEDULE I
  
               
INVESTORS TITLE COMPANY AND SUBSIDIARIES
  
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
  
As of December 31, 2006
  
    
 
  
 
  
 
  
Amount at
  
           
which shown
  
           
in the
  
Type of Investment
  
Cost(1)
  
Market Value
  
Balance Sheet (2)
  
               
Fixed Maturities:
              
Bonds:
              
States, municipalities and political
              
subdivisions
  
$
97,164,741
  
$
97,972,214
  
$
97,930,218
  
Public utilities
    
199,918
   
201,712
   
201,712
 
All other corporate bonds
    
4,810,783
   
5,017,979
   
5,017,979
 
Short-term investments
    
4,098,503
   
4,098,503
   
4,098,503
 
Certificates of deposit
    
362,408
   
362,408
   
362,408
 
Total fixed maturities
    
106,636,353
   
107,652,816
   
107,610,820
 
                     
Equity Securities:
                    
Common Stocks:
                    
Public utilities
    
174,489
   
256,841
   
256,841
 
Banks, trust and insurance companies
    
70,990
   
498,360
   
498,360
 
Industrial, miscellaneous and all other
    
7,989,499
   
11,126,897
   
11,126,897
 
Nonredeemable preferred stocks
    
418,025
   
613,825
   
613,825
 
Total equity securities
    
8,653,003
   
12,495,923
   
12,495,923
 
                     
Other Investments
    
1,473,303
         
1,473,303
 
Total investments per the consolidated balance sheet
  
$
116,762,659
        
$
121,580,046
  
                     
                     

(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, 2006 AND 2005
           
 
   
2006
 
2005
 
Assets
          
Cash and cash equivalents
  
$
194,391
  
$
1,755,372
  
Investments in fixed maturities, available-for-sale
   
19,951,713
   
12,249,500
 
Investments in equity securities, available-for-sale
    
127,750
   
130,800
 
Short term investments
    
1,464,032
   
4,482
 
Investments in affiliated companies
   
68,973,229
   
65,072,364
 
Other investments
    
703,296
   
919,486
 
Other receivables
    
410,018
   
204,258
 
Income taxes receivable
    
876,666
   
1,233,462
 
Accrued interest, dividends, and other assets
    
261,793
   
108,201
 
Property, net
    
3,151,099
   
3,256,978
 
Deferred income taxes, net
    
55,551
   
-
 
               
Total Assets
  
$
96,169,538
  
$
84,934,903
  
               
Liabilities and Stockholders' Equity
              
Liabilities:
              
Accounts payable and accrued liabilities
  
$
893,875
  
$
633,407
  
Deferred income taxes, net
    
-
   
4,240
 
Total liabilities
    
893,875
   
637,647
 
               
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; 2,507,325
              
and 2,549,434 shares issued and outstanding 2006 and 2005,
              
respectively, excluding 291,676 and 297,783 shares 2006 and
              
2005, respectively, of common stock held by the Company's subsidiary)
    
1
   
1
 
Retained earnings
    
92,134,608
   
81,477,022
 
Accumulated other comprehensive income
    
3,141,054
   
2,820,233
 
Total stockholders' equity
    
95,275,663
   
84,297,256
 
               
Total Liabilities and Stockholders' Equity
  
$
96,169,538
  
$
84,934,903
  




 SCHEDULE II
 
INVESTORS TITLE COMPANY (PARENT COMPANY)
  
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
  
STATEMENTS OF INCOME
  
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
  
               
               
   
2006
 
2005
 
2004
 
Revenues:
              
Investment income-interest and dividends
  
$
561,400
  
$
280,145
  
$
124,421
  
Net realized gain (loss) on sales of investments
    
-
   
18,464
   
(12,500
)
Rental income
    
735,431
   
553,222
   
519,991
 
Miscellaneous income (loss)
    
(115,883
)
  
70,147
   
69,274
 
Total
    
1,180,948
   
921,978
   
701,186
 
Operating Expenses:
                    
Office occupancy and operations
    
349,645
   
299,388
   
285,903
 
Business development
    
69,372
   
51,110
   
42,953
 
Taxes-other than payroll and income
    
79,871
   
90,004
   
75,649
 
Professional fees
    
141,501
   
68,245
   
60,161
 
Other expenses
    
110,453
   
78,304
   
59,738
 
Total
    
750,842
   
587,051
   
524,404
 
                     
Equity in Net Income of Affiliated Cos.*
    
12,710,328
   
12,984,996
   
10,583,384
 
Income Before Income Taxes
    
13,140,434
   
13,319,923
   
10,760,166
 
Provision (Benefit) for Income Taxes
    
(45,000
)
  
27,000
   
41,000
 
Net Income
 
$
13,185,434
  
$
13,292,923
  
$
10,719,166
  
Basic Earnings per Common Share
  
$
5.22
  
$
5.19
  
$
4.29
  
Weighted Average Shares Outstanding-Basic
    
2,527,927
   
2,560,418
   
2,496,711
 
Diluted Earnings Per Common Share
  
$
5.14
  
$
5.10
  
$
4.09
  
Weighted Average Shares Outstanding-Diluted
    
2,564,216
   
2,607,633
   
2,620,916
 
 
                     
                     
* 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, 2006, 2005 AND 2004
  
               
   
2006
 
2005
 
2004
 
Operating Activities:
              
Net income
  
$
13,185,434
  
$
13,292,923
  
$
10,719,166
  
Adjustments to reconcile net income to net cash provided
                   
by operating activities:
                    
Equity in net earnings of subsidiaries
   
(12,710,329
)
  
(12,984,996
)
  
(10,583,384
)
Depreciation
    
124,030
   
80,129
   
73,452
 
Amortization (accretion), net
    
(820
)
  
(1,391
)
  
5,719
 
Issuance of common stock in payment of bonuses and fees
    
5,013
   
-
   
-
 
Net realized (gain) loss on sales of investments
   
-
   
(18,464
)
  
12,500
 
Provision (benefit) for deferred income taxes
    
(55,000
)
  
33,000
   
59,000
 
(Increase) decrease in receivables
    
(205,760
)
  
33,540
   
1,519,069
 
(Increase) decrease in income taxes receivable-current
    
356,796
   
890,455
   
(796,461
)
Increase in prepaid expenses
    
(153,592
)
  
(62,488
)
  
(28,786
)
Increase (decrease) in accounts payable and accrued liabilities
    
260,468
   
(290,719
)
  
(5,357
)
Net cash provided by operating activities
    
806,240
   
971,989
   
974,918
 
                     
Investing Activities:
                    
Capital contribution to subsidiaries
    
(115,000
)
  
(1,178,000
)
  
(1,783,000
)
Return of capital contributions from subsidiaries
    
80,000
   
-
   
-
 
Dividends received from subsidiaries
    
9,446,950
   
7,291,120
   
5,050,819
 
Purchases of available-for-sale securities
    
(21,310,774
)
  
(9,435,060
)
  
(19,518,900
)
Purchases of short-term securities
    
(1,459,550
)
  
-
   
(1,012,182
)
Purchases of and net earnings from other investments
    
-
   
(150,000
)
  
-
 
Proceeds from sales and maturities of available-for-sale securities
    
13,600,000
   
6,024,040
   
13,267,500
 
Proceeds from sales of short-term securities
    
-
   
1,007,700
   
2,494,742
 
Proceeds from sales and distributions from other investments
    
216,190
   
68,915
   
9,187
 
Purchases of property
    
(18,151
)
  
(1,251,285
)
  
(50,326
)
Net change in pending trades
    
- 
    
(1,027,929
)
  
1,027,929
 
Net cash provided by (used in) investing activities
    
439,665
   
1,349,501
   
(514,231
)
                     
Financing Activities:
                    
Retirement of common stock
    
(2,255,735
)
  
(363,765
)
  
-
  
Exercise of options
    
55,272
   
-
    
-
  
Dividends paid (net dividends paid to subsidiary of $70,401, $46,717 and $53,936
          
 
    
 
  
in 2006, 2005 and 2004, respectively)
    
(606,423
)
  
(410,202
)
  
(374,425
)
Net cash used in financing activities
    
(2,806,886
)
  
(773,967
)
  
(374,425
)
               
Net Increase (Decrease) in Cash and Cash Equivalents
    
(1,560,981
)
  
1,547,523
   
86,262
 
Cash and Cash Equivalents, Beginning of Year
    
1,755,372
   
207,849
   
121,587
 
Cash and Cash Equivalents, End of Year
  
$
194,391
  
$
1,755,372
  
$
207,849
  
                     
Supplemental Disclosures:
                    
Cash Paid During the Year For:
                    
Income Taxes
  
$
342,938
  
$
896,000
  
$
781,000
  
Non cash net unrealized gain/loss on investment
  
$
(12,431
)
$
11,489
  
$
(80,263
)
 
             
             
See notes to condensed financial statements.
            




 SCHEDULE II
 
INVESTORS TITLE COMPANY AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO THE 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 subsidiaries were as follows:

Subsidiaries
  
2006
 
2005
 
2004
 
               
Investors Title Insurance Company, net*
  
$
4,976,950
  
$
4,546,120
  
$
3,950,819
  
Investors Title Exchange Corporation
    
4,125,000
   
2,250,000
   
1,100,000
 
Investors Title Accomodation Corporation
    
170,000
   
195,000
   
-
 
Investors Title Management Services, Inc.
    
60,000
   
275,000
   
-
 
Investors Title Commercial Agency
    
115,000
   
25,000
   
-
 
                     
   
$
9,446,950
  
$
7,291,120
  
$
5,050,819
  
 
                     
                     
*
Total dividends of $5,047,351, $4,592,837 and $4,004,755 paid to the Parent Company in 2006, 2005 and 2004, respectively, netted with dividends of $70,401, $46,717 and $53,936 received from the Parent in 2006, 2005 and 2004, respectively.




           
SCHEDULE III
 
INVESTORS TITLE COMPANY AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
For the Years Ended December 31, 2006, 2005 and 2004
 
                                           
 
  
 
  
Future
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
       
Policy
      
Other
          
Benefits
              
       
Benefits,
      
Policy
          
Claims,
  
Amortization
          
   
Deferred
  
Losses,
      
Claims
          
Losses
 
of Deferred
          
   
Policy
  
Claims
      
and
      
Net
  
and
  
Policy
  
Other
      
   
Acquisition
  
and Loss
  
Unearned
  
Benefits
  
Premium
  
Investment
  
Settlement
  
Acquisition
  
Operating
  
Premiums
  
Segment
  
Cost
  
Expenses
  
Premiums
  
Payable
  
Revenue
  
Income
  
Expenses
  
Costs
  
Expenses
  
Written
  
                                           
Year Ended
                                          
December 31, 2006
                                          
Title Insurance
    
---
  
$
36,906,000
    
---
  
$
470,468
  
$
70,196,467
  
$
3,688,966
  
$
7,405,211
    
---
  
$
55,557,492
    
N/A
  
Exchange Services
    
---
    
---
    
---
    
---
    
---
    
18,138
   
---
    
---
    
1,346,743
   
N/A
  
All Other
    
---
    
---
    
---
    
---
    
---
    
619,231
   
---
    
---
    
3,022,836
   
N/A
  
 
    
---
  
$
36,906,000
    
---
  
$
470,468
  
$
70,196,467
  
$
4,326,335
  
$
7,405,211
    
---
  
$
59,927,071
        
                                                               
Year Ended
                                                              
December 31, 2005
                                                              
Title Insurance
    
---
  
$
34,857,000
    
---
  
$
442,098
  
$
76,522,266
  
$
2,993,149
  
$
8,164,783
    
---
  
$
57,850,106
    
N/A
  
Exchange Services
    
---
    
---
    
---
    
---
    
---
    
18,463
   
---
    
---
    
907,414
   
N/A
  
All Other
    
---
    
---
    
---
    
---
    
---
    
324,155
   
---
    
---
    
2,358,652
   
N/A
  
 
    
---
  
$
34,857,000
    
---
  
$
442,098
  
$
76,522,266
  
$
3,335,767
  
$
8,164,783
    
---
  
$
61,116,172
        
                                                               
Year Ended
                                                              
December 31, 2004
                                                              
Title Insurance
    
---
  
$
31,842,000
    
---
  
$
551,662
  
$
71,843,445
  
$
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
  
$
71,843,445
  
$
2,752,838
  
$
7,984,339
    
---
  
$
56,354,671
        



               
  SCHEDULE IV
  
                   
 
  
INVESTORS TITLE COMPANY AND SUBSIDIARIES
  
REINSURANCE
  
For the Years Ended December 31, 2006, 2005 and 2004
  
 
 
  
 
  
Ceded to
  
Assumed from
  
 
  
Percentage of
  
   
Gross
  
Other
  
Other
  
Net
  
Amount
  
 
  
Amount
  
Companies
  
Companies
  
Amount
  
Assumed to Net
  
                       
YEAR ENDED
                      
DECEMBER 31, 2006
                      
Title Insurance
 
$
70,615,891
  
$
441,582
  
$
22,158
  
$
70,196,467
    
0.03
%
                                 
YEAR ENDED
                                
DECEMBER 31, 2005
                                
Title Insurance
 
$
76,817,423
  
$
316,133
  
$
20,976
  
$
76,522,266
    
0.03
%
                                 
YEAR ENDED
                                
DECEMBER 31, 2004
                                
Title Insurance
 
$
72,132,121
  
$
294,639
  
$
5,963
  
$
71,843,445
    
0.01
%


 
 
 SCHEDULE V
 
INVESTORS TITLE COMPANY AND SUBSIDIARIES
  
VALUATION AND QUALIFYING ACCOUNTS
  
For the Years Ended December 31, 2006, 2005 and 2004
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
   
Balance at
  
Additions
Charged to
  
Additions Charged
to Other
              
   
Beginning
  
Costs and
  
Accounts -
 
Deductions-
      
Balance at
  
Description
  
of Period
  
Expenses
  
Describe
  
describe*
  
 
  
End of Period
  
                           
2006
                         
Premiums Receivable
                          
Valuation Provision
  
$
2,444,000
  
$
4,927,691
  
$
-
  
$
(5,243,691
)
  (a)
 
$
2,128,000
  
                                       
Reserves for
                                     
Claims
  
$
34,857,000
  
$
7,405,211
  
$
-
  
$
(5,356,211
)
  (b)
 
$
36,906,000
  
                                       
                                       
2005
                                     
Premiums Receivable
                                      
Valuation Provision
  
$
2,240,000
  
$
5,399,734
  
$
-
  
$
(5,195,734
)
  (a)
 
$
2,444,000
  
                                       
Reserves for
                                     
Claims
  
$
31,842,000
  
$
8,164,783
  
$
-
  
$
(5,149,783
)
  (b)
 
$
34,857,000
  
                                       
                                       
2004
                                     
Premiums Receivable
                                      
Valuation Provision
  
$
2,474,000
  
$
5,745,114
  
$
-
  
$
(5,979,114
)
  (a)
 
$
2,240,000
  
                                       
Reserves for
                                     
Claims
  
$
30,031,000
  
$
7,984,339
  
$
-
  
$
(6,173,339
)
  (b)
 
$
31,842,000
  


(a) Cancelled premiums
  
(b) Payments of claims, net of recoveries
  
 


INDEX TO EXHIBITS
 
Exhibit
Number
  
Description
     
3(i)
  
Articles of Incorporation dated January 22, 1973, incorporated by reference to Exhibit 1 to Form 10 dated June 12, 1984
     
3(ii)
  
Bylaws - Restated and Amended as of May 21, 2003, incorporated by reference to Exhibit 3(ii) to Form 10-K for the year ended December 31, 2003
     
4
  
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)
  
1997 Stock Option and Restricted Stock Plan, incorporated by reference to Exhibit 10(viii) to Form 10-K for the year ended December 31, 1996
     
10(ii)
  
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(iii)
  
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(iv)
  
Form of Incentive Stock Option Agreement under 1997 Stock Option and Restricted Stock Plan, incorporated by reference to Exhibit 10(xi) to Form 10-K for the year ended December 31, 1997
     
10(v)
  
Form of Amendment to Incentive Stock Option Agreement between Investors Title Company and George Abbitt Snead,  incorporated by reference to Exhibit 10(xii) to Form 10-Q for the quarter ended June 30, 2000
     
10(vi)
  
2001 Stock Option and Restricted Stock Plan, incorporated by reference to Exhibit 10(xiii) to Form 10-K for the year ended December 31, 2000
     
10(vii)
  
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(viii)
  
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(ix)
  
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(x)
  
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(xi)
  
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(xii)
  
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(xiii)
  
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 2006 Annual Report to Shareholders incorporated by reference in this report as set forth in Parts I, II and IV hereof
     
14
  
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, incorporated by reference to Exhibit 21 to Form 10-K for the year ended December 31, 2003
     
23
 
Consent of Dixon Hughes PLLC
     
31(i)
  
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
31(ii)
  
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32
  
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 



 EX-13 2 v067744_ex13.htm Unassociated Document
Exhibit 13
Common Stock Data
The Common Stock of the Company is traded under the symbol "ITIC" in the over-the-counter market and is quoted on the National Market System of the National Association of Securities Dealers Automated Quotation System ("NASDAQ"). The number of record holders of common stock at December 31, 2006 was 481. The number of record holders is based upon the actual number of holders registered on the books of the Company at such date and does not include holders of shares in “street names” or persons, partnerships, associations, corporations or other entities identified in security position listings maintained by depository trust companies. The following table shows the high and low sales prices reported on the NASDAQ National Market System.

   
2006
  
2005
  
   
High
  
Low
  
High
  
Low
  
First Quarter
  
$
48.99
  
$
40.17
  
$
42.00
  
$
35.50
  
Second Quarter
  
$
47.88
  
$
40.02
  
$
38.92
  
$
34.27
  
Third Quarter
  
$
48.99
  
$
42.94
  
$
42.99
  
$
34.94
  
Fourth Quarter
  
$
54.76
  
$
45.50
  
$
44.75
  
$
37.77
  

The Company paid cash dividends of $0.06 per share in each of the four quarters in 2006. The Company paid cash dividends of $0.04 per share in each of the four quarters in 2005.

The Company’s current dividend policy anticipates the payment of quarterly dividends in the future. The declaration and payment of dividends will be in the discretion of the Board of Directors and will be dependent upon the Company’s future earnings, financial condition and capital requirements. The payment of dividends is subject to the restrictions described in Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Liquidity and Capital Resources.”

Market Makers for 2006  
 
The Archipelago Exchange
Davenport & Company LLC
Nasdaq Execution Services LLC
Automated Trading Desk
E*Trade Capital Markets LLC
UBS Securities LLC
Citadel Derivatives Group LLC
Ferris, Baker Watts, Inc.
  
Citigroup Global Markets Inc.
Knight Equity Markets , L.P.
  

Financial Highlights

For the Year
  
2006
  
2005
  
2004
  
2003
  
2002
  
Net premiums written
  
$
70,196,467
  
$
76,522,266
  
$
71,843,445
  
$
83,944,955
  
$
67,298,617
  
Revenues
    
84,661,716
    
87,863,878
    
79,841,176
    
90,829,871
    
72,852,340
  
Investment income
    
4,326,335
    
3,335,767
    
2,752,838
    
2,691,687
    
2,806,808
  
Net income
    
13,185,434
    
13,292,923
    
10,719,166
    
10,965,014
    
8,108,842
  
                                 
Per Share Data
     
Basic earnings per common share
  
$
5.22
  
$
5.19
  
$
4.29
  
$
4.38
  
$
3.22
  
Weighted average shares outstanding—Basic
    
2,527,927
    
2,560,418
    
2,496,711
    
2,503,659
    
2,517,328
  
Diluted earnings per common share
 
$
5.14
  
$
5.10
  
$
4.09
  
$
4.18
  
$
3.12
  
Weighted average shares outstanding—Diluted
    
2,564,216
    
2,607,633
    
2,620,916
    
2,624,473
    
2,597,979
  
Cash dividends per share
 
$
.24
  
$
.16
  
$
.15
  
$
.12
  
$
.12
  
                                 
At Year End
     
Assets
  
$
143,516,378
  
$
128,471,528
  
$
113,186,752
  
$
100,471,811
  
$
84,637,146
  
Investments in securities
    
121,580,046
    
95,152,573
    
93,260,545
    
79,842,183
    
65,336,439
  
Stockholders' equity
    
95,275,663
    
84,297,256
    
72,507,271
    
63,188,746
    
52,668,184
  
Book value/share
    
38.00
    
33.07
    
29.22
    
25.24
    
20.93
  
                                 
Performance Ratios
     
Net income to:
                                
Average stockholders' equity
    
14.69
%
  
16.95
%
  
15.80
%
  
18.93
%
  
16.73
%
Total revenues (profit margin)
    
15.57
%
  
15.13
%
  
13.43
%
  
12.07
%
  
11.13
%




 
 
Investors Title Company
 
 

 

   
Period Ending
  
Index
  
12/31/01
  
12/31/02
  
12/31/03
  
12/31/04
  
12/31/05
  
12/31/06
  
Investors Title Company
    
100.00
    
148.86
    
202.97
    
243.29
    
278.49
    
354.53
  
Custom Peer Group*
    
100.00
    
133.48
    
200.10
    
249.26
    
309.80
    
248.21
  
NASDAQ Composite
    
100.00
    
68.76
    
103.67
    
113.16
    
115.57
    
127.58
  

             
             
             
             
             
             
*The Custom Peer Group consists of Fidelity National Financial, Inc., First American Corporation, LandAmerica Financial
Group, Inc., and Stewart Information Services Corporation.
        
             

 
 
Investors Title Company and Subsidiaries
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion should be read in conjunction with the consolidated financial statements and the related notes in this report.

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 90% of the Company’s operating revenues in 2006. Through ITIC and NE-ITIC, the Company underwrites land title insurance for real estate 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 the lender’s 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 defects 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. The Company 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 refinance activity, 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. The Company’s title business also experiences seasonality in addition to cyclicality. 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 key factor in the Company's profitability due to the existence of 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.
 
Premiums are determined by competition and state regulation. In addition, revenue from the Company’s title insurance segment is affected by its marketing efforts. While timing and content are uncertain, the Department of Housing and Urban Development continues to indicate that it would like to revise Real Estate Settlement Procedures Act regulations, which would result in changes to the existing industry regulatory framework that could have a material impact on the Company’s marketing and operations. In addition, premium rate hearings will be conducted by the New York State Insurance Department in 2007 where rates will be considered industry wide. 
 
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 §1031 like-kind exchanges of real or personal property. 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 segment are pursuant to provisions in the Internal Revenue Code. From time to time, these provisions are subject to review and proposed changes.
 
On February 3, 2006, the 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 adversely impact 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, but no official response has been issued by the IRS on whether or not they plan to finalize the regulations as proposed.
 
1
 
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 Investors Trust, ICMC provides investment management and trust services to individuals, companies, banks and trusts. ITMS offers a variety of consulting services to provide partners with the technical expertise to start and successfully operate a title insurance agency.
 
Operating Results: As noted previously, since the title insurance business is closely related to the overall level of real estate activity and the cost and availability of mortgage funds, 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. During all quarters of 2006, net premiums declined primarily as a result of a softening real estate market and an overall higher interest rate environment, causing lower levels of real estate activity in the Company’s operating territories. According to data published by Freddie Mac, the annual average thirty-year fixed mortgage interest rates in the United States were reported to be 6.41%, 5.87% and 5.84% in 2006, 2005 and 2004, respectively.
 
During 2006, the quarterly average thirty-year fixed mortgage interest rates were 6.24%, 6.60%, 6.56% and 6.25% for the first, second, third and fourth quarters, respectively. Total refinancing volume in the United States for 2006 was approximately $1.11 trillion, which was $0.4 trillion less than the preceding year according to the Mortgage Bankers Association of America.
 
In recent years, the Company and the title insurance industry have experienced significant increases in premiums written related to the strength of the United States real estate economy and increases in mortgage refinancing. In 2006 and 2005, refinance activity was lower than prior years due to moderate increases in the interest rate environment that began in 2005. Existing home sales, which represent the majority of all real estate transactions, reached a new record high in 2005 for the fifth year in a row. After this five-year housing boom, the market has slowed during 2006. Historically, activity in real estate markets has varied over the course of market cycles in response to evolving economic factors. Operating results for the years ended 2004, 2005 and 2006, therefore, should not be viewed as indicative of the Company's future operating results. The Company continues to monitor and strives to manage operating expenses with knowledge of the potential for further declines in title insurance revenues if interest rates continue to rise or the economy slows.

Credit Rating
 
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 (“LACE”) with rating categories of "A Double Prime" and "A+." According to Demotech, title insurance underwriters earning a financial stability rating of A Double 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. Since ITIC's and NE-ITIC's ratings are either at the highest rank or next-to-highest rank, any increase in such ratings would have a negligible impact on the business or finances of the Company. A significant decline in these ratings may, among other things, lead to a decrease in the Company's stock price, the loss of certain licenses ITIC and NE-ITIC need to operate as title insurance companies in various states and the Company's ability to maintain strong relationships with its customers and agents.

Critical Accounting Estimates and Policies
 
This discussion and analysis of the Company’s financial condition and results of operations is based upon the Company’s accompanying Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The Company's management makes various estimates and judgments when applying policies affecting the preparation of the Consolidated Financial Statements. Actual results could differ from those estimates. Significant accounting policies of the Company are discussed in Note 1 to the accompanying Consolidated Financial Statements. Following are those accounting estimates and policies considered critical to the Company.
 
Reserves for Claim Losses
 
The total reserve for all reported and unreported losses the Company incurred on its income statement through December 31, 2006 is represented by the reserve for claims of $36,906,000 on the consolidated balance sheet. Of that total, $5,684,431 was reserved for specific claims, and $31,221,569 was reserved for claims for which the Company had no notice. The Company's reserves for unpaid losses and loss adjustment expenses are established using estimated amounts required to settle claims for which notice has been received (reported) and the amount estimated to be required to satisfy incurred claims of policyholders which may be reported in the future (incurred but not reported).
 
In accordance with the requirements of paragraph 17 of Statement of Financial Accounting Standards No. 60, a provision for estimated future claims payments is recorded at the time policy revenue is recorded. The Company records the claims provision as a percentage of premium income. By their nature, title claims can often be complex, vary greatly in dollar amounts, and are affected by economic and market conditions; and may involve uncertainties as to ultimate exposure, and therefore, reserve estimates are subject to variability. The payment experience of the title insurance industry may extend for more than 20 years after the issuance of a policy. In addition, some claims may require a number of years to settle and determine the final liability for indemnity and loss adjustment expense. The nature of title insurance makes its claims experience particularly sensitive to economic conditions or events such as changes in interest rates or declines in home sales. Events such as fraud, defalcation and multiple property defects can substantially and unexpectedly cause increases in estimates of losses. Due to the length of time over which claim payments are made, and regularly occurring changes in underlying economic and market conditions, these estimates are subject to variability.
 
2
 
The Company utilizes an independent actuary to analyze its claims reserves. The methods used by the actuary to establish reserves are loss development methods, expected loss methods and Cape Cod methods, all of which are accepted actuarial methods for estimating ultimate losses and, therefore, loss reserves. In the loss development method, each policy year’s paid or incurred losses are projected to an “ultimate” level using loss development factors. The selected loss development factors are based on a combination of the Company’s historical loss experience and title industry loss experience. In the Cape Cod method, expected losses for one policy year are estimated based on the loss results for the other policy years, trended to the level of the policy year being estimated. Expected loss methods produce more stable ultimate loss estimates than do loss development methods, which are more responsive to the current loss data.
 
The Cape Cod method, a special case of the Bornhuetter-Ferguson method, blends the results of the loss development and expected loss methods. For the more recent policy years, more weight is given to the results of the expected loss methods. For the older policy years, more weight is given to the loss development method results.
 
Management considers factors such as the Company’s historical claims experience, case reserve estimates on reported claims, large claims and other relevant factors in determining loss provision rates and the aggregate recorded expected liability for claims. In establishing reserves, management compares the independent actuary’s projections with the reserves recorded by the Company to evaluate the adequacy of such recorded claims reserves and any necessary adjustments are then recorded in current operations. The Company’s recorded claims reserves are consistent with the independent actuary’s reserve estimates.
 
If one or more of the variables or assumptions used changed such that the Company’s recorded loss ratio, or loss provision as a percentage of net title premiums, increased or decreased two loss ratio percentage points, the impact on after-tax income for the year ended December 31, 2006, would be as follows. Company management believes that using a sensitivity of two loss percentage points for the loss ratio provides a reasonable benchmark for analysis of the calendar year loss provision of the Company based on historical loss ratios by year.

Increase in Loss Ratio of two percentage points
  
$
(927,000
)
Decrease in Loss Ratio of two percentage points
  
$
927,000
  
 
Despite the variability of such estimates, management believes based on historical claims experience and independent actuarial analysis that the reserves are adequate to cover claim losses resulting from pending and future claims for policies issued through December 31, 2006. The Company continually reviews and adjusts its reserve estimates to reflect its loss experience and any new information that becomes available.
 
Premiums Written and Commissions to Agents
 
Generally, title insurance premiums are recorded and recognized as revenue at the time of closing of the related transaction as the earnings process is then considered complete. 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.
 
Valuation of Investments in Securities
 
Securities for which the Company has the intent and ability to hold to maturity are classified as held-to-maturity and are reported at cost, adjusted for amortization of premiums or accretion of discounts and other-than-temporary declines in fair value. Securities held principally for resale in the near term are classified as trading securities and recorded at fair values. Realized and unrealized gains and losses on trading securities are included in other income. Securities not classified as either trading or held-to-maturity are classified as available-for-sale and reported at fair value, adjusted for other-than-temporary declines in fair value, with unrealized gains and losses reported as accumulated other comprehensive income. Securities are regularly reviewed for differences between the cost and estimated fair value of each security for factors that may indicate that a decline in fair value is other-than-temporary. Some factors considered in evaluating whether or not a decline in fair value is other-than-temporary include the duration and extent to which the fair value has been less than cost and the Company’s ability and intent to retain the investment for a period of time sufficient to allow for a recovery in value. Such reviews are inherently uncertain and the value of the investment may not fully recover or may decline in future periods resulting in a realized loss. Fair values of all investments are based on quoted market prices. Realized gains and losses are determined on the specific identification method.
 
3
 
Deferred Tax Asset
 
The Company recorded net deferred tax assets at December 31, 2006 and 2005 related primarily to reserves for claims, allowance for doubtful accounts and employee benefits, related to employment agreements and accruals related to uncompensated balances. Based upon the Company's historical results of operations, the existing financial condition of the Company and management's assessment of all other available information, management believes that it is more likely than not that the benefit of these assets will be realized.
 
Results of Operations
 
Operating Revenues
 
Operating revenues include net premiums written plus fee income as well as gains and losses on the disposal of fixed assets. Investment income and realized gains/losses are not included in operating revenues for the purpose of this summary schedule. Following is a summary by segment of the Company's operating revenues. Intersegment eliminations have been netted with each segment; therefore, the individual segment amounts will not agree to Note 13 in the accompanying Consolidated Financial Statements.
 
   
2006
  
2005
  
2004
  
Title Insurance
  
$
71,733,763
    
89.9%
 
$
78,046,368
    
92.5%
 
$
72,750,874
    
94.5%
 
Exchange Services
    
5,980,027
    
7.5%
 
  
4,543,049
    
5.4%
 
  
2,801,888
    
3.6%
 
All Other
    
2,070,533
    
2.6%
 
  
1,819,679
    
2.1%
 
  
1,441,920
    
1.9%
 
   
$
79,784,323
    
100%
 
$
84,409,096
    
100%
 
$
76,994,682
    
100%
 

Title Insurance
 
Net Premiums: Net premiums written decreased 8.3% in 2006 from 2005 and increased 6.5% in 2005 over 2004. During 2006, revenues were primarily impacted by the decline in net premiums written due to lower levels of real estate sales and mortgage refinancing activity compared with the prior year, primarily as a result of higher mortgage interest rates. During 2005, revenues were primarily impacted by the increase in premiums written as compared with 2004 due to the ongoing strength in real estate activity.
 
Policies and Commitments: The volume of business decreased in 2006, as 248,341 policies and commitments were issued in 2006, which is a decrease of 9.3% compared with 273,857 policies and commitments issued in 2005. In 2005, although net premiums written increased, the number of policies declined slightly from 2004 due to the slowdown in refinancing activity, which typically has lower premiums per transaction compared with other rates. The number of policies and commitments issued decreased by 3.5% compared with 283,696 policies and commitments issued in 2004.
 
Following is a schedule of net premiums written in all states where ITIC and NE-ITIC currently underwrite title insurance:
 
State
  
2006
  
2005
  
2004
  
Illinois
  
$
1,115,890
  
$
1,000,273
  
$
948,022
  
Kentucky
    
2,292,194
    
2,115,579
    
1,710,387
  
Maryland
    
1,532,915
    
1,754,867
    
1,494,686
  
Michigan
    
3,488,984
    
4,591,639
    
4,896,239
  
Minnesota
    
1,055,214
    
1,076,155
    
1,063,819
  
New York
    
2,436,563
    
3,248,635
    
3,495,587
  
North Carolina
    
35,200,769
    
36,269,649
    
32,515,123
  
Pennsylvania
    
1,472,615
    
1,687,410
    
2,634,407
  
South Carolina
    
7,177,871
    
7,011,099
    
6,464,495
  
Tennessee
    
2,466,956
    
2,767,576
    
2,954,957
  
Virginia
    
6,734,698
    
7,740,671
    
7,038,474
  
West Virginia
    
2,132,330
    
2,246,142
    
1,864,216
  
Other States
    
3,508,892
    
5,307,728
    
5,051,709
  
Direct Premiums
    
70,615,891
    
76,817,423
    
72,132,121
  
Reinsurance Assumed
    
22,158
    
20,976
    
5,963
  
Reinsurance Ceded
    
(441,582
)
  
(316,133
)
  
(294,639
)
Net Premiums Written
  
$
70,196,467
  
$
76,522,266
  
$
71,843,445
  
 
 Branch Office Net Premiums: Branch office net premiums written as a percentage of total net premiums written were 46.1%, 44.6% and 44.0% in 2006, 2005 and 2004, respectively. Net premiums written from branch operations decreased 5.1% in 2006 compared with 2005 and increased 7.9% in 2005 compared with 2004. Of the Company's 29 branch locations that underwrite title insurance policies, 27 are located in North Carolina and, as a result, branch net premiums written primarily represent North Carolina business.
 
4
 
Agency Net Premiums: Agency net premiums written as a percentage of total net premiums written were 53.9%, 55.4% and 56.0% in 2006, 2005 and 2004, respectively. Net premiums written from agency operations decreased 10.8% in 2006 compared with 2005 and increased 5.4% in 2005 compared with 2004. The majority of the decrease in agency net premiums written in 2006 can be attributed to the general slowdown in real estate activity and the rise in mortgage interest rates. Agent business is also affected by the number of agents issuing policies and by the amount of business agents generate. The majority of the increase in agency net premiums written in 2005 could be attributed to the general ongoing strength in real estate activity in 2005.

Exchange Services
 
Operating revenues from the Company's two subsidiaries that provide tax-deferred exchange services (ITEC and ITAC) increased 31.6% from 2005 to 2006 and 62.1% from 2004 to 2005. The increase in 2006 compared with 2005 was primarily due to higher levels of interest income earned on exchange fund deposits held by the Company, resulting from higher current interest rates. The Company has also focused on increased marketing and education efforts. The increase in 2005 was primarily due to increased interest income earned on deposits held by the Company and an increased demand for qualified intermediary services. Also, see Overview section for discussion of proposed IRS rules.

Cyclicality and 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. Home sales and mortgage lending are highly cyclical businesses. Other factors include mortgage interest rates, consumer confidence, economic conditions, supply and demand, and family income levels. Historically, residential real estate activity has been generally slower in the winter because fewer real estate transactions occur, while the spring and summer are more active. Refinance activity is generally less seasonal, but it is subject to interest rate volatility. Fluctuations in mortgage interest rates, as well as other economic factors, 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. Slowing real estate sales led to a decline in average balances of deposits held at year-end.
 
Other Revenues
 
 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 in 2006 compared with the prior year primarily due to increases in investment management fee income generated by the Company’s trust division, partially offset by a decrease in the closing fee income.

Nonoperating Revenues
 
Investment Income
 
The Company derives a substantial portion of its income from investments in bonds (municipal and corporate) and equity securities. The Company's title insurance subsidiaries are required by statute to maintain minimum levels of investments in order to protect the interests of policyholders. Bonds totaling approximately $5,724,000 and $3,847,000 at December 31, 2006 and 2005, respectively, are deposited with the insurance departments of the states in which business is conducted. In formulating its investment strategy, the Company has emphasized after-tax income. Investments in marketable securities have increased from Company profits. The investments are primarily in fixed maturity securities and, to a lesser extent, equity securities. The effective maturity of the majority of the fixed income investments is within 15 years.
 
As new funds become available, they are invested in accordance with the Company's investment policy and corporate goals. Securities purchased may include a combination of taxable fixed-income securities, tax-exempt securities and equities. The Company strives to maintain a high quality investment portfolio.
 
Investment income was $4,326,335 in 2006, compared with $3,335,767 in 2005 and $2,752,838 in 2004. Investment income increased 29.7% from 2005 to 2006 and 21.2 % from 2004 to 2005. The increases in 2006 and 2005 were primarily attributable to increases in the average investment portfolio balance and higher rates of interest earned on short-term investments.

Net Realized Gain on Sales of Investments
 
 Net realized gain on the sales of investment securities totaled $551,058 in 2006, $119,015 in 2005 and $93,656 for 2004. The increase in net realized investment gain in 2006 was primarily the result of capital gains realized on the sale of equity securities sold during the first quarter of 2006 primarily due to a repositioning of the Company’s investment portfolio.
 
Expenses
 
The Company’s operating expenses consist primarily of commissions to agents, salaries, employee benefits and payroll taxes, provisions for claims and office occupancy and operations. Operating expenses decreased 2.8% compared with 2005 primarily due to a decline in commissions paid to agents and a lower claims provision. Partially offsetting these decreases were increases in compensation expenses, office occupancy expenses, and professional and contract labor fees. Following is a summary by segment of the Company's operating expenses. Intersegment eliminations have been netted with each segment; therefore, the individual segment amounts will not agree to Note 13 in the accompanying Consolidated Financial Statements.
 
5
 
   
2006
  
2005
  
2004
  
Title Insurance
  
$
62,962,703
    
93.5%
 
$
66,014,889
    
95.3%
 
$
61,440,491
    
95.5%
 
Exchange Services
    
1,346,743
    
2.0%
 
  
907,414
    
1.3%
 
  
640,183
    
1.0%
 
All Other
    
3,022,836
    
4.5%
 
  
2,358,652
    
3.4%
 
  
2,258,336
    
3.5%
 
   
$
67,332,282
    
100%
 
$
69,280,955
    
100%
 
$
64,339,010
    
100%
 
 
On a combined basis, profit margins were 15.6%, 15.1% and 13.4% in 2006, 2005 and 2004, respectively. Total revenues decreased 3.6% in 2006, while operating expenses decreased only 2.8%. The provision for income taxes decreased 21.7% contributing to a more favorable combined profit margin for 2006. Total revenues increased 10.0% in 2005, while operating expenses increased 7.7%, contributing to a favorable combined profit margin for 2005.
 
Title Insurance
 
Profit Margins: The Company’s title insurance profit margins vary according to a number of factors, including the volume and type of real estate activity. Profit margins for the title insurance segment were 12.7%, 13.1% and 13.0% in 2006, 2005 and 2004, respectively. The decline in the profit margin for 2006 was affected by the decrease in premiums written. In order to maintain and improve margins, the Company strives to manage discretionary costs carefully and be vigilant for opportunities to improve processes and efficiencies.
 
Commissions: Commissions to agents decreased 11.9% from 2005 to 2006 primarily due to decreased premiums from agency operations in 2006 and increased 4.0% from 2004 to 2005 primarily due to increased premiums from agency operations in 2005. Commission expense as a percentage of net premiums written by agents was 70.6%, 71.5% and 72.5% for 2006, 2005 and 2004, respectively. Commission rates vary geographically and may be influenced by state regulations.
 
Provisions for Claims: The provision for claims as a percentage of net premiums written was 10.5% in 2006, 10.7% in 2005 and 11.1% in 2004. Loss provision rates are subject to variability, and are reviewed and adjusted as 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 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. Payments of claims, net of recoveries, were $5,356,211, $5,149,783 and $6,173,339 in 2006, 2005 and 2004, respectively. The decrease in 2005 compared with 2004 was primarily attributable to timing issues. Claim payments are likely to trend higher in 2007 and beyond, given the high levels of premiums written in recent years.
 
Reserves for Claims: At December 31, 2006, the total reserves for claims were $36,906,000. Of that total, $5,684,431 was reserved for specific claims, and $31,221,569 was reserved for claims for which the Company had no notice.  Because of the uncertainty of future claims, changes in economic conditions, and the fact that many claims do not materialize for several years, reserve estimates are subject to variability. Management analyzes historical claims experience, case reserve estimates on reported claims, large claims and other relevant factors in establishing loss provision rates. Claims reserves are reviewed as to their reasonableness by an independent actuary. The Company’s claims reserves are consistent with the independent actuary’s reserve estimates. Actuarial projections are compared with recorded reserves and any necessary adjustments are included in current operations. There are no known claims that are expected to have a materially adverse effect on the Company's financial position or operating results.
 
Salaries and Employee Benefits: On a consolidated basis, salaries and employee benefits as a percentage of net premiums written were 28.5%, 25.0% and 22.7% in 2006, 2005 and 2004, respectively. The increase in these costs in 2006 and 2005 was attributable to several factors, including salary increases, certain employee benefits associated with key executive employment agreements entered into in late 2003, additional personnel costs related to staff hired by the recently formed Investors Trust Company, and other staff additions. The title insurance segment's total salaries and employee benefits accounted for 85.3%, 89.1% and 89.0% of total salaries for 2006, 2005, and 2004, respectively.
 
In November 2003, ITIC, a wholly owned subsidiary of the Company, entered into employment agreements with the Chief Executive Officer, Chief Financial Officer and the Chief Operating Officer of ITIC. These individuals also serve as the Chief Executive Officer, President and Executive Vice President, respectively, of the Company. The agreements provide postemployment compensation and life, health, dental and vision benefits upon the occurrence of specific events, including death, disability, retirement, termination without cause or upon a change in control. The agreements also prohibit each of these executives from competing with ITIC and its parent, subsidiaries and affiliates in the state of North Carolina while employed by ITIC and for a period of two years following termination of their employment. In addition, during the second quarter of 2004, ITIC entered into nonqualified deferred compensation plan agreements with these executives. The amount accrued for these agreements at December 31, 2006 and 2005 was calculated based on the terms of the contract.
 
6
 
Office Occupancy and Operations: Overall office occupancy and operations as a percentage of net premiums was 8.1%, 6.6% and 6.8% in 2006, 2005 and 2004, respectively. The increase in office occupancy and operations expense in 2006 compared with 2005 was primarily due to telecommunications and depreciation expense and investments in infrastructure and technology. The increase in office occupancy and operations expense in 2005 and 2004 compared with 2003 was primarily due to an increase in telecommunications and rent. The title insurance segment's total office occupancy and operations accounted for 90.8%, 90.9% and 90.7% in 2006, 2005 and 2004, respectively, of total office occupancy and operations.
 
Premium and Retaliatory Taxes: 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 1.9%, 2.0% and 2.0% for the years ended December 31, 2006, 2005 and 2004, respectively.
 
Professional Fees: Professional fees for 2006 compared with 2005 increased primarily due to investments in infrastructure and technology, contract labor fee increases and costs associated with the implementation of provisions of Section 404 of the Sarbanes-Oxley Act of 2002, which included increased costs associated with the Company’s independent registered public accounting firm. Professional fees for 2005 and 2004 compared with 2003 increased primarily due to the costs associated with anticipated compliance with Section 404 of the Sarbanes-Oxley Act of 2002, which included increased costs associated with outside consultants, along with an increase in various professional and legal fees.
 
Exchange Services
 
The exchange services segment's total operating expenses as a percentage of the Company's total expenses were 2.0%, 1.3% and 1.0% for 2006, 2005 and 2004, respectively. The principal operating expenses of this segment are salaries, employee benefits and payroll taxes.
 
Income Taxes
 
The provision for income taxes was 23.9%, 28.5% and 30.9% of income before income taxes for the years ended December 31, 2006, 2005 and 2004, respectively. The decreases in the effective rate for the years ended December 31, 2006 and 2005 were primarily due to a higher mix of tax-exempt investment income relative to taxable income. Information regarding the components of the income tax expense can be found in Note 8 to the accompanying Consolidated Financial Statements. 
 
Net Income (Loss)
 
A summary by segment of the Company's net income (loss) follows:
 
   
2006
  
2005
  
2004
  
Title Insurance
  
$
9,619,084
    
73.0%
 
$
10,641,180
    
80.1%
 
$
9,803,893
    
91.5%
 
Exchange Services
    
3,840,423
    
29.1%
 
  
2,878,098
    
21.7%
 
  
1,471,527
    
13.7%
 
All Other
    
(274,073
)
  
(2.1%)
 
  
(226,355
)
  
(1.8%)
 
  
(556,254
)
  
(5.2%)
 
   
$
13,185,434
    
100%
 
$
13,292,923
    
100%
 
$
10,719,166
    
100%
 

On a consolidated basis, the Company reported a decrease in net income of 0.8% from 2005 to 2006 and an increase in net income of 24.0% from 2004 to 2005. Lower net income in 2006 is primarily a reflection of downward trends in home sales and mortgage lending resulting primarily from a higher interest rate environment. The decline in premiums written was partially offset by increases in investment income and revenue in the 1031 exchange services segment. Operating expenses decreased compared with the 2005 period primarily due to a decline in commissions paid to agents and a lower claims provision amount. Partially offsetting these decreases were higher compensation expenses, increases in office occupancy and operations expenses and various professional and contract labor fees. The increase in net income in 2005 was primarily due to higher premiums written and increased net income in the exchange segment. The decrease in 2004 was primarily due to lower premiums written, partially offset by the increase in the exchange services segment income.
 
Title Insurance
 
Net income for the title insurance segment decreased 9.6% from 2005 to 2006 and was primarily attributed to decreased premiums written and increases in salaries and employee benefits, office occupancy and operations, and professional and contract labor fees. Net income for the title insurance segment increased 8.5% from 2004 to 2005 and was primarily attributed to increased premiums written.
 
Exchange Services
 
Net income for the exchange services segment increased 33.4% from 2005 to 2006 and 95.6% from 2004 to 2005. Net income increased in 2006 primarily due to increased interest income earned on deposits held by the Company, resulting from higher current interest rates. The increase in 2005 compared with 2004 was primarily attributable to increased interest income earned on deposits held by the Company due to increases in the average investment portfolio balance, and partially to higher rates of interest earned on short-term investments, in addition to an increased demand for qualified intermediary services.
 
Liquidity and Capital Resources
 
Liquidity: Due to the Company’s consistent ability to generate positive cash flows from its operations and investment income, management believes that funds generated from operations will enable the Company to adequately meet its operating needs and is unaware of any trend that is likely to result in material adverse liquidity changes. The Company’s cash requirements include general operating expenses, taxes, capital expenditures and dividends on its common stock. 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.
 
7
 
The majority of the Company’s investment portfolio is considered as available for sale. The Company reviews the status of each of its securities quarterly to determine whether an other-than-temporary impairment has occurred. The Company’s criteria include the degree to which the fair value of a security is less than 80% of its amortized cost and the investment grade of the security, as well as how long the security has been in an unrealized loss position. All of the Company’s securities that have had an unrealized loss in excess of one year are investment-grade, long-term bonds and equities that the Company has the ability and intent to hold until a recovery of fair value, which may be until maturity.
 
Cash Flows: Net cash flows provided by operating activities were $17,856,793, $17,383,090 and $14,658,038 in 2006, 2005 and 2004, respectively. Cash flows from operations has been the primary source of financing for expanding operations, additions to property and equipment, dividends to shareholders, and other requirements. The net increase in cash flow from operations in 2006 was primarily the result of a decrease in receivables and other assets, partially offset by a decrease in current income taxes payable and a decrease in the provision for claims. The net increase in cash flow from operations in 2005 was primarily the result of the increase in net income and lower payments of claims, partially offset by an increase in receivables and other assets and an increase in the deferred tax benefit.
 
The principal non-operating uses of cash and cash equivalents for the three-year period ended December 31, 2006 were primarily for additions to the investment portfolio and, to a lesser extent, capital expenditures and repurchases of common stock. The most significant non-operating sources of cash and cash equivalents were the proceeds from the sales and maturities of certain investments. The net effect of all activities on total cash and cash equivalents was a decrease of $11,150,049 for 2006, an increase of $9,882,038 for 2005 and a decrease of $398,913 for 2004. As of December 31, 2006, the Company held cash and cash equivalents of $3,458,432, short-term investments of $4,460,911 and fixed maturities securities of $103,149,909.
 
As noted previously, the Company’s operating results and cash flows are heavily dependent on the real estate market, particularly in the title insurance segment. A significant downturn in the real estate market could adversely impact the Company’s cash flows. The Company’s business has fixed costs such as personnel, and changes in the real estate market are monitored closely and operating expenses such as staffing levels are managed and adjusted accordingly. The Company believes that its significant working capital position and management of operating expenses, along with its product diversification efforts will aid its ability to manage cash resources through declines in the real estate market.
 
Payment of Dividends: The Company believes that all anticipated cash requirements for current operations will be met from internally generated funds, through cash dividends and distributions from subsidiaries and cash generated by investment securities. The Company’s significant sources of funds are dividends and distributions from its subsidiaries. The holding company receives cash from its subsidiaries in the form of dividends and as reimbursements for operating and other administrative expenses. The reimbursements are executed within the guidelines of management agreements between the holding company and its subsidiaries. The Company's ability to pay dividends and operating expenses is dependent on funds received from the insurance subsidiaries, which are subject to regulation in the states in which they do business. As of December 31, 2006, approximately $66,180,000 of the consolidated stockholders' equity represented net assets of the Company's subsidiaries that cannot be transferred in the form of dividends, loans or advances to the parent company under statutory regulations without prior insurance department approval. These regulations, among other things, require prior regulatory approval of the payment of dividends and other intercompany transfers. The Company believes, however, that amounts available for transfer from the insurance and other subsidiaries are adequate to meet the Company's operating needs.
 
In the Company’s Quarterly Report filed on Form 10-Q for the period ended September 30, 2006, the Company reported that subsequent to September 30, 2006 it retired 291,676 shares of its common stock that it received as a dividend from one of its subsidiaries. Such dividend was in fact never approved by the board of directors of the subsidiary and as a result was never declared. This had no impact on the Company’s financial position or results of operations.
 
Purchase of Company Stock: In 2000 and 2005, the Board of Directors of ITIC and ITC, respectively approved ITIC or ITC's purchase of 500,000 shares of the Company's common stock. Subsequently, the Board of Directors approved the purchase of an additional 125,000 shares of the Company’s common stock pursuant to the plan. Pursuant to this approval, ITIC purchased 51,949 shares in the twelve months ended December 31, 2006, 96,150 shares in the twelve months ended December 31, 2005 and 37,635 shares in the twelve months ended December 31, 2004 at an average per share price of $43.85, $33.32 and $31.42, respectively.
 
Capital Expenditures: During 2007, the Company has plans for various capital improvement projects, including hardware purchases and several software development projects. The Company anticipates capital expenditures of approximately $1,200,000 in connection with these purchases of electronic data processing equipment and software projects. All anticipated capital expenditures are subject to periodic review and revision and may vary depending on a number of factors.

Quantitative and Qualitative Disclosures About Market Risk
 
The Company's primary exposure to market risk relates to the impact of adverse changes in interest rates and market prices of its investment portfolio. Increases in interest rates diminish the value of fixed income securities and preferred stock, and decreases in stock market values diminish the value of common stocks held.
 
8
 
Corporate Oversight
 
The Company generates substantial investable funds from its two insurance subsidiaries. In formulating and implementing policies for investing new and existing funds, the Company has emphasized maximizing total after-tax return on capital and earnings while ensuring the safety of funds under management and adequate liquidity. The Company's Board of Directors oversees investment risk management processes. The Company seeks to invest premiums and other income to create future cash flows that will fund future claims, employee benefits and expenses, and earn stable margins across a wide variety of interest rate and economic scenarios. The Board of Directors has established specific investment policies that define the overall framework for managing market and other investment risks, including the accountabilities and controls over these activities. The Company may rebalance its existing asset portfolios or change the character of future investments from time to time to manage its exposure to market risk within defined tolerance ranges.

Interest Rate Risk
 
Interest rate risk is the risk that the Company will incur economic losses due to adverse changes in interest rates. This risk arises from the Company's investments in interest-sensitive debt securities. These securities are primarily fixed rate municipal bonds and corporate bonds. The Company does not purchase such securities for trading purposes. At December 31, 2006, the Company had approximately $77 million in fixed rate bonds. The Company manages the interest rate risk inherent in its assets by monitoring its liquidity needs and by targeting a specific range for the portfolio's duration or weighted average maturity.
 
To determine the potential effect of interest rate risk on interest-sensitive assets, the Company calculates the effect of a 10% change in prevailing interest rates ("rate shock") on the fair market value of these securities considering stated interest rates and time to maturity. Based upon the information and assumptions the Company uses in its calculation, management estimates that a 10% immediate, parallel increase in prevailing interest rates would decrease the net fair market value of its fixed rate debt securities by approximately $1.8 million. The selection of a 10% immediate parallel increase in prevailing interest rates should not be construed as a prediction by the Company's management of future market events, but rather, to illustrate the potential impact of such an event. To the extent that actual results differ from the assumptions utilized, the Company's rate shock measures could be significantly impacted. Additionally, the Company's calculation assumes that the current relationship between short-term and long-term interest rates (the term structure of interest rates) will remain constant over time. As a result, these calculations may not fully capture the impact of nonparallel changes in the term structure of interest rates and/or large changes in interest rates.

Equity Price Risk
 
Equity price risk is the risk that the Company will incur economic losses due to adverse changes in a particular stock or stock index. At December 31, 2006, the Company had approximately $11.9 million in common stocks. Equity price risk is addressed in part by varying the specific allocation of equity investments over time pursuant to management's assessment of market and business conditions and ongoing liquidity needs analysis. The Company's largest equity exposure is declines in the S&P 500; its portfolio of equity instruments is similar to those that comprise this index. Based upon the information and assumptions the Company used in its calculation, management estimates that an immediate decrease in the S&P 500 of 10% would decrease the net fair value of the Company's assets identified above by approximately $1,190,000. The selection of a 10% immediate decrease in the S&P 500 should not be construed as a prediction by the Company's management of future market events, but rather, to illustrate the potential impact of such an event. Since this calculation is based on historical performance, projecting future price volatility using this method involves an inherent assumption that historical volatility and correlation relationships will remain stable. Therefore, the results noted above may not reflect the Company's actual experience if future volatility and correlation relationships differ from such historical relationships.
 
Off-Balance Sheet Arrangements and Contractual Obligations
 
As a service to its customers, the Company, through ITIC, administers escrow and trust deposits representing earnest money received under real estate contracts, undisbursed amounts received for settlement of mortgage loans and indemnities against specific title risks. Cash held by the Company for these purposes was approximately $15,828,000 and $12,753,000 as of December 31, 2006 and 2005, respectively. These amounts are not considered assets of the Company and, therefore, are excluded from the accompanying consolidated balance sheets. However, the Company remains contingently liable for the disposition of these deposits.
 
In addition, in administering tax-deferred property exchanges, ITEC serves as a qualified intermediary for exchanges, holding the net sales proceeds from relinquished property to be used for purchase of replacement property. ITAC serves as exchange accommodation titleholder and, through LLCs that are wholly owned subsidiaries of ITAC, holds property for exchangers in reverse exchange transactions. Like-kind exchange deposits and reverse exchange property held by the Company for the purpose of completing such transactions totaled $186,579,000 and $205,613,000 as of December 31, 2006 and 2005, respectively. These amounts are not considered assets of the Company for accounting purposes and, therefore, are excluded from the accompanying consolidated balance sheets. Exchange services revenues include earnings on these deposits; therefore, investment income is shown as exchange services revenue, rather than investment income. The Company remains contingently liable to customers for the transfers of property, disbursements of proceeds, and the return on the proceeds of the agreed upon rate.
 
9
 
External assets managed by the Investors Trust Company totaled $284,362,000 and $235,885,000 for the years ended December 31, 2006 and 2005, respectively. Theses amounts are not considered assets of the Company and, therefore, are excluded from the accompanying consolidated balance sheets.
 
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 following table summarizes the Company’s future estimated cash payments under existing contractual obligations at December 31, 2006, including payments due by period:

   
Payments due by period
  
Contractual Obligations
  
Total
  
Less than 1 year
  
1 - 3 years
  
3 - 5 years
  
More than 5 years
  
Operating lease obligations
  
$
1,637,758
  
$
750,615
  
$
728,750
  
$
158,393
  
$
-
  
Reserves for claims
    
36,906,000
    
7,156,000
    
11,980,000
    
7,036,000
    
10,734,000
  
Other obligations
    
732,212
    
421,352
    
310,860
    
-
    
-
  
Obligations under executive employment
                               
plans and agreements
   
3,947,834
    
-
    
-
    
-
    
3,947,834
  
Total
  
$
43,223,804
  
$
8,327,967
  
$
13,019,610
  
$
7,194,393
  
$
14,681,834
  
 
As of December 31, 2006, the Company had a claims reserve of $36,906,000. The amounts and timing of these obligations are estimated and are not set contractually. Nonetheless, based on historical insurance claim experience, the Company anticipates the above payment patterns.

Recent Accounting Standards
 
In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that the Company recognize in its financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of the Company’s 2007 fiscal year, with the cumulative effect, if any, of the change in accounting principle recorded as an adjustment to beginning retained earnings. The Company is currently evaluating the impact of adopting FIN 48 on its consolidated financial position and results of operations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 establishes a common definition for fair value to be applied to accounting principles generally accepted in the United States of America ("GAAP") guidance requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 17, 2007. The Company is currently assessing the impact of SFAS No. 157 on its consolidated financial position and results of operations.

Selected Quarterly Financial Data

2006
  
 March 31
  
 June 30
  
 September 30
  
 December 31
  
Net premiums written
  
$
16,631,626
  
$
19,123,591
  
$
18,242,676
  
$
16,198,574
  
Net income
    
2,874,941
    
4,315,537
    
3,672,069
    
2,322,887
  
Basic earnings per common share
    
1.13
    
1.70
    
1.46
    
.93
  
Diluted earnings per common share
    
1.11
    
1.68
    
1.44
    
.91
  

2005
  
 March 31
  
June 30
  
September 30
  
December 31
  
Net premiums written
  
$
17,106,958
  
$
20,006,395
  
$
20,986,100
  
$
18,422,813
  
Net income
    
1,580,494
    
3,861,998
    
4,329,529
    
3,520,902
  
Basic earnings per common share
    
.62
    
1.51
    
1.69
    
1.38
  
Diluted earnings per common share
    
.60
    
1.48
    
1.67
    
1.36
  
 
 
10
 
Investors Title Company and Subsidiaries
Consolidated Balance Sheets
 
As of December 31,
  
2006
  
2005
  
Assets
          
Cash and cash equivalents (Note 15)
  
$
3,458,432
  
$
14,608,481
  
Investments in securities (Notes 2 and 3):
              
Fixed maturities
              
Held-to-maturity, at amortized cost (fair value: 2006: $1,237,613; 2005: $1,719,190)
    
1,195,617
    
1,648,708
  
Available-for-sale, at fair value (amortized cost: 2006: $100,979,825; 2005: $74,418,394)
    
101,954,292
    
75,472,342
  
Equity securities, available-for-sale at fair value (cost: 2006: $8,653,003; 2005: $6,221,347)
    
12,495,923
    
9,437,678
  
Short-term investments
    
4,460,911
    
7,257,734
  
Other investments
    
1,473,303
    
1,336,111
  
Total investments
    
121,580,046
    
95,152,573
  
               
Premium and fees receivable (less allowance for doubtful accounts: 2006: $2,128,000; 2005: $2,444,000)
    
6,582,237
    
7,818,558
  
Accrued interest and dividends
    
1,336,790
    
1,010,198
  
Prepaid expenses and other assets
    
1,590,835
    
1,592,326
  
Property acquired in settlement of claims
    
303,538
    
359,980
  
Property, net (Note 4)
    
6,134,304
    
5,466,765
  
Deferred income taxes, net (Note 8)
    
2,530,196
    
2,462,647
  
Total Assets
  
$
143,516,378
  
$
128,471,528
  
               
Liabilities and Stockholders’ Equity
              
Liabilities
              
Reserves for claims (Note 6)
  
$
36,906,000
  
$
34,857,000
  
Accounts payable and accrued liabilities (Note 10)
    
10,537,992
    
7,928,384
  
Commissions and reinsurance payable (Note 5)
    
470,468
    
442,098
  
Current income taxes payable
    
326,255
    
946,790
  
Total liabilities
    
48,240,715
    
44,174,272
  
               
Commitments and Contingencies (Notes 5, 9, 10 and 11)
              
Stockholders’ Equity (Notes 2, 3, 7, 12 and 14)
              
Class A Junior Participating preferred stock (shares authorized 100,000; no shares issued)
    
-
    
-
  
Common stock-no par value (shares authorized 10,000,000; 2,507,325 and 2,549,434 shares issued and outstanding 2006 and 2005, respectively, excluding 291,676 and 297,783 shares 2006 and 2005, respectively of common stock held by the Company’s subsidiary)
   
1
    
1
  
Retained earnings
    
92,134,608
    
81,477,022
  
Accumulated other comprehensive income (net unrealized gain on investments, Note 8;
net unrealized loss on postretirement benefits, Note 10)
    
3,141,054
    
2,820,233
  
Total stockholders’ equity
    
95,275,663
    
84,297,256
  
Total Liabilities and Stockholders’ Equity
  
$
143,516,378
  
$
128,471,528
  

See notes to the Consolidated Financial Statements.

11

Investors Title Company and Subsidiaries
Consolidated Statements of Income

For the Years Ended December 31,
  
2006
  
2005
  
2004
  
Revenues
              
Underwriting income
              
Premiums written (Note 5)
  
$
70,638,049
  
$
76,838,399
  
$
72,138,084
  
Less-premiums for reinsurance ceded (Note 5)
    
441,582
    
316,133
    
294,639
  
Net premiums written
    
70,196,467
    
76,522,266
    
71,843,445
  
Investment income-interest and dividends (Note 3)
    
4,326,335
    
3,335,767
    
2,752,838
  
Net realized gain on sales of investments (Note 3)
    
551,058
    
119,015
    
93,656
  
Exchange services revenue
    
5,980,027
    
4,543,049
    
2,801,888
  
Other
    
3,607,829
    
3,343,781
    
2,349,349
  
Total Revenues
    
84,661,716
    
87,863,878
    
79,841,176
  
                     
Operating Expenses
                    
Commissions to agents
    
26,714,784
    
30,309,405
    
29,152,645
  
Provision for claims (Note 6)
    
7,405,211
    
8,164,783
    
7,984,339
  
Salaries, employee benefits and payroll taxes (Notes 7 and 10)
    
19,981,166
    
19,136,098
    
16,303,351
  
Office occupancy and operations (Note 9)
    
5,672,275
    
5,080,829
    
4,849,944
  
Business development
    
2,302,739
    
2,073,518
    
1,899,315
  
Filing fees and taxes, other than payroll and income
    
576,733
    
523,464
    
453,354
  
Premium and retaliatory taxes
    
1,348,850
    
1,556,529
    
1,406,083
  
Professional and contract labor fees
    
2,633,948
    
1,937,233
    
2,074,520
  
Other
    
696,576
    
499,096
    
215,459
  
Total Operating Expenses
    
67,332,282
    
69,280,955
    
64,339,010
  
                     
Income before Income Taxes
    
17,329,434
    
18,582,923
    
15,502,166
  
Provision for Income Taxes (Note 8)
    
4,144,000
    
5,290,000
    
4,783,000
  
Net Income
  
$
13,185,434
  
$
13,292,923
  
$
10,719,166
  
Basic Earnings per Common Share (Note 7)
  
$
5.22
  
$
5.19
  
$
4.29
  
Weighted Average Shares Outstanding - Basic
    
2,527,927
    
2,560,418
    
2,496,711
  
Diluted Earnings per Common Share (Note 7)
  
$
5.14
  
$
5.10
  
$
4.09
  
Weighted Average Shares Outstanding - Diluted
    
2,564,216
    
2,607,633
    
2,620,916
  
 
See notes to the Consolidated Financial Statements.

12
 
Investors Title Company and Subsidiaries
Consolidated Statements of Stockholders’ Equity

For the Years Ended  
Common Stock
  
Retained
 
Accumulated
Other Comprehensive
 
Total
Stockholders’
  
December 31, 2004, 2005 and 2006
  
Shares
 
Amount
 
Earnings
 
Income
 
Equity
  
Balance, January 1, 2004
    
2,503,923
  
$
1
  
$
59,756,927
  
$
3,431,818
  
$
63,188,746
  
Net income
                
10,719,166
          
10,719,166
  
Dividends ($.15 per share)
                
(374,425
)
        
(374,425
)
Shares of common stock repurchased
    
(37,635
)
        
(1,182,654
)
        
(1,182,654
)
Issuance of common stock in payment of bonuses and fees
    
876
          
28,217
          
28,217
  
Stock options exercised
    
13,860
          
324,861
          
324,861
  
Net unrealized loss on investment
                      
(196,640
)
  
(196,640
)
Balance, December 31, 2004
    
2,481,024
  
$
1
  
$
69,272,092
  
$
3,235,178
    
72,507,271
  
Net income
                
13,292,923
          
13,292,923
  
Dividends ($.16 per share)
                
(410,202
)
        
(410,202
)
Shares of common stock repurchased
    
(87,623
)
        
(2,839,697
)
        
(2,839,697
)
Shares of common stock repurchased and retired
    
(8,527
)
        
(363,765
)
        
(363,765
)
Issuance of common stock in payment of bonuses and fees
    
1,140
          
43,090
          
43,090
  
Stock options exercised
    
163,420
          
2,482,581
          
2,482,581
  
Net unrealized loss on investment
                      
(414,945
)
  
(414,945
)
Balance, December 31, 2005
    
2,549,434
  
$
1
  
$
81,477,022
  
$
2,820,233
  
$
84,297,256
  
Net income
                
13,185,434
          
13,185,434
  
Dividends ($.24 per share)
                
(606,423
)
        
(606,423
)
Shares of common stock repurchased
    
(500
)
        
(22,445
)
        
(22,445
)
Shares of common stock repurchased and retired
    
(51,449
)
        
(2,255,735
)
        
(2,255,735
)
Issuance of common stock in payment of bonuses and fees
    
500
          
21,826
          
21,826
  
Stock options exercised
    
9,340
          
219,342
          
219,342
  
Share-based compensation expense
                
91,209
          
91,209
  
Change in investment accounting method
                
24,378
          
24,378
  
Adjustment to initially apply FASB Statement No. 158, 
net of tax
                      
(40,810
)
  
(40,810
)
Net unrealized gain on investment
                      
361,631
    
361,631
  
Balance, December 31, 2006
    
2,507,325
  
$
1
  
$
92,134,608
  
$
3,141,054
  
$
95,275,663
  
 
See notes to the Consolidated Financial Statements.
 
13

Investors Title Company and Subsidiaries
Consolidated Statements of Comprehensive Income

For the Years Ended December 31,
  
2006
  
2005
  
2004
  
Net income
  
$
13,185,434
  
$
13,292,923
  
$
10,719,166
  
Other comprehensive income (loss), before tax:
                   
Unrealized loss related to initial application of FASB Statement No. 158
    
(61,834
)
  
-
    
-
  
Unrealized gains (losses) on investments arising during the year
    
1,098,165
    
(509,330
)
  
(208,014
)
Less: reclassification adjustment for gains realized in net income
    
(551,058
)
  
(119,015
)
  
(93,656
)
Other comprehensive income (loss), before tax
    
485,273
    
(628,345
)
  
(301,670
)
Income tax expense related to initial application of FASB Statement No. 158
    
(21,024
)
  
-
    
-
  
Income tax expense (benefit) related to unrealized gains (losses) on
                   
investments arising during the tax year
    
372,836
    
(172,935
)
  
(73,187
)
Income tax expense related to reclassification adjustment for gains
                    
realized in net income
    
(187,360
)
  
(40,465
)
  
(31,843
)
Net income tax expense (benefit) on other comprehensive income
    
164,452
    
(213,400
)
  
(105,030
)
Other comprehensive income (loss)
    
320,821
    
(414,945
)
  
(196,640
)
Comprehensive income
  
$
13,506,255
  
$
12,877,978
  
$
10,522,526
  
 
See notes to the Consolidated Financial Statements.

14

Investors Title Company and Subsidiaries
Consolidated Statements of Cash Flows
 
For the Years Ended December 31,
  
2006
  
2005
  
2004
  
Operating Activities
              
Net income
  
$
13,185,434
  
$
13,292,923
  
$
10,719,166
  
Adjustments to reconcile net income to net cash provided by operating activities:
                    
Depreciation
    
1,146,509
    
1,010,366
    
968,914
  
Amortization, net
    
197,972
    
79,525
    
44,303
  
Issuance of common stock in payment of bonuses and fees
    
21,826
    
43,090
    
28,217
  
Share-based compensation expense related to stock options
    
91,209
    
-
    
-
  
Provision (benefit) for losses on premiums receivable
    
(316,000
)
  
204,000
    
(234,000
)
Net (gain) loss on disposals of property
    
22,650
    
(24,831
)
  
(4,395
)
Net realized gain on sales of investments
    
(551,058
)
  
(119,015
)
  
(93,656
)
Provision for claims
    
7,405,211
    
8,164,783
    
7,984,339
  
Provision (benefit) for deferred income taxes
    
(232,000
)
  
(809,000
)
  
150,000
  
Changes in assets and liabilities:
                    
(Increase) decrease in receivables and other assets
    
1,283,662
    
(1,818,329
)
  
987,079
  
Increase in accounts payable and accrued liabilities
    
1,549,754
    
2,038,303
    
371,739
  
Increase (decrease) in commissions and reinsurance payable
    
28,370
    
(109,564
)
  
(174,529
)
Increase (decrease) in current income taxes payable
    
(620,535
)
  
580,622
    
84,200
  
Payments of claims, net of recoveries
    
(5,356,211
)
  
(5,149,783
)
  
(6,173,339
)
Net cash provided by operating activities
    
17,856,793
    
17,383,090
    
14,658,038
  
                     
Investing Activities
                    
Purchases of available-for-sale securities
    
(55,092,700
)
  
(42,380,220
)
  
(61,955,609
)
Purchases of short-term securities
    
(1,934,879
)
  
(3,041,163
)
  
(9,537,040
)
Purchases of and net earnings (losses) from other investments
    
(780,273
)
  
(653,873
)
  
(518,467
)
Proceeds from sales and maturities of available-for-sale securities
    
26,428,538
    
36,566,880
    
41,648,634
  
Proceeds from maturities of held-to-maturity securities
    
461,000
    
562,000
    
283,000
  
Proceeds from sales and maturities of short-term securities
    
4,731,702
    
5,917,750
    
16,146,292
  
Proceeds from sales and distributions from other investments
    
749,331
    
547,743
    
262,511
  
Other investment transactions
    
(65,622
)
  
-
    
-
  
Purchases of property
    
(1,902,619
)
  
(1,897,230
)
  
(1,504,787
)
Proceeds from disposals of property
    
42,236
    
37,714
    
46,727
  
Other property transactions
    
23,685
    
-
    
-
  
Net change in pending trades
    
998,020
    
(2,029,570
)
  
1,304,006
  
Net cash used in investing activities
    
(26,341,581
)
  
(6,369,969
)
  
(13,824,733
)
                     
Financing Activities
                    
Repurchases of common stock
    
(2,278,180
)
  
(3,203,462
)
  
(1,182,654
)
Exercise of options
    
219,342
    
2,482,581
    
324,861
  
Dividends paid
    
(606,423
)
  
(410,202
)
  
(374,425
)
Net cash used in financing activities
    
(2,665,261
)
  
(1,131,083
)
  
(1,232,218
)
                     
Net Increase (Decrease) in Cash and Cash Equivalents
    
(11,150,049
)
  
9,882,038
    
(398,913
)
Cash and Cash Equivalents, Beginning of Year
    
14,608,481
    
4,726,443
    
5,125,356
  
Cash and Cash Equivalents, End of Year
  
$
3,458,432
  
$
14,608,481
  
$
4,726,443
  
                     
Supplemental Disclosures
                    
Cash Paid During the Year for
                    
Income Taxes (net of refunds)
  
$
4,989,000
  
$
5,537,000
  
$
4,553,000
  
Non cash net unrealized gain/loss on investment
  
$
547,107
  
$
(628,345
)
$
(301,670
)
Non cash adjustment to initially apply FASB Statement No. 158
  
$
61,834
  
$
-
  
$
-
  
 
See notes to the Consolidated Financial Statements.
 
15
Investors Title Company and Subsidiaries
Notes to Consolidated Financial Statements

1. Basis of Presentation and Summary of Significant Accounting Policies
 
Description of Business—Investors Title Company's (the "Company") two primary business segments are title insurance and exchange services. The Company's title insurance segment, through its two subsidiaries, Investors Title Insurance Company ("ITIC") and Northeast Investors Title Insurance Company ("NE-ITIC"), is licensed to insure titles to residential, institutional, commercial and industrial properties. The Company issues title insurance policies primarily through approved attorneys from underwriting offices in North Carolina and South Carolina, and primarily through independent issuing agents in Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia, West Virginia and the District of Columbia. The majority of the Company's business is concentrated in Kentucky, Michigan, New York, North Carolina, South Carolina, Tennessee, Virginia and West Virginia. Investors Title Exchange Corporation ("ITEC") acts as an intermediary in tax-deferred exchanges of property held for productive use in a trade or business or for investments, while Investors Title Accommodation Corporation ("ITAC") serves 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.

Principles of Consolidation and Basis of Presentation—The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

Reclassification—Certain 2005 and 2004 amounts in the accompanying consolidated financial statements have been reclassified to conform to the 2006 classifications. These reclassifications had no effect on stockholders’ equity or net income as previously reported.

Significant Accounting Policies—The significant accounting policies of the Company are summarized below.
 
Cash and Cash Equivalents
 
For the purpose of presentation in the Company's statements of cash flows, cash equivalents are highly liquid instruments with original maturities of three months or less. The carrying amount of cash and cash equivalents is a reasonable estimate of fair value due to the short-term maturity of these instruments.

Investments in Securities
 
Securities for which the Company has the intent and ability to hold to maturity are classified as held-to-maturity and reported at cost, adjusted for amortization of premiums or accretion of discounts, and other-than-temporary declines in fair value. Securities held principally for resale in the near term are classified as trading securities and recorded at fair values. Realized and unrealized gains and losses on trading securities are included in other income. Securities not classified as either trading or held-to-maturity are classified as available-for-sale and reported at fair value, adjusted for other-than-temporary declines in fair value, with unrealized gains and losses, net of tax, reported as accumulated other comprehensive income. Securities are regularly reviewed for differences between the cost and estimated fair value of each security for factors that may indicate that a decline in fair value is other-than-temporary. Some factors considered in evaluating whether or not a decline in fair value is other-than-temporary include the duration and extent to which the fair value has been less than cost and the Company’s ability and intent to retain the investment for a period of time sufficient to allow for a recovery in value. Such reviews are inherently uncertain and the value of the investment may not fully recover or may decline in future periods resulting in a realized loss. Fair values of all investments are based on quoted market prices. Realized gains and losses are determined on the specific identification method.
 
Short-term Investments
 
Short-term investments comprise money market accounts, time deposits with banks and savings and loan associations, and other investments expected to have maturities or redemptions greater than three months and less than twelve months. The Company did not identify any events or changes in circumstances that may have had a significant adverse effect on the fair value of these investments.
 
Other Investments
 
Other investments consist primarily of investments through LLC structures, which are accounted for under the equity or cost method of accounting. The aggregate cost of the Company’s cost method investments totaled $854,296 at December 31, 2006. The Company did not identify any events or changes in circumstances that may have had a significant adverse effect on the fair value of these investments.
 
Property Acquired in Settlement of Claims
 
Property acquired in settlement of claims is held for sale and valued at the lower of cost or market. Adjustments to reported estimated realizable values and realized gains or losses on dispositions are recorded as increases or decreases in claim costs.
 
Property and Equipment
 
Property and equipment are recorded at cost and are depreciated principally under the straight-line method over the estimated useful lives (three to 25 years) of the respective assets. Maintenance and repairs are charged to operating expenses and improvements are capitalized.
 
16
Reserves for Claims
 
The total reserve for all reported and unreported losses the Company incurred through December 31, 2006 is represented by the reserves for claims. The Company's reserves for unpaid losses and loss adjustment expenses are established using estimated amounts required to settle claims for which notice has been received (reported) and the amount estimated to be required to satisfy incurred claims of policyholders which may be reported in the future. Despite the variability of such estimates, management believes that the reserves are adequate to cover claim losses resulting from pending and future claims for policies issued through December 31, 2006. The Company continually reviews and adjusts its reserve estimates as necessary to reflect its loss experience and any new information that becomes available. Adjustments resulting from such reviews may be significant.
 
Claims and losses paid are charged to the reserves for claims. Although claims losses are typically paid in cash, occasionally claims are settled by purchasing the interest of the insured or the claimant in the real property. When this event occurs, the acquiring company carries assets at the lower of cost or estimated realizable value, net of any indebtedness on the property.
 
Deferred Income Taxes
 
The Company provides for deferred income taxes (benefits) for the tax consequences on future years on temporary differences between the financial statements' carrying values and the tax bases of assets and liabilities using currently enacted tax rates.
 
Premiums Written and Commissions to Agents
 
Premiums are recorded and recognized as revenue at the time of closing of the related transaction as the earnings process is considered complete. Title insurance commissions earned by the Company's agents are recognized as expense concurrently with premium recognition.
 
Fair Values of Financial Instruments
 
Fair values for investment securities are based on quoted market prices. The carrying amounts reported in the consolidated balance sheets for short-term investments, premiums receivable, accrued interest and dividends, accounts payable, commissions and reinsurance payable and current income taxes payable approximates cost, which is what is reflected on the balance sheets due to the short-term nature of these assets and liabilities.
 
Comprehensive Income
 
The Company's accumulated other comprehensive income is comprised of unrealized holding gains on available-for-sale securities, net of tax, and the adjustment to initially apply FASB Statement No. 158 related to postretirement benefit liabilities, net of tax.
 
Stock-Based Compensation Disclosure
 
In December 2004, the Financial Accounting Standards Board (“FASB”) revised Statement of Financial Accounting Standards No. 123 (“SFAS 123R”), “Share-Based Payment,” which establishes accounting for share-based awards exchanged for employee services and requires companies to expense the estimated fair value of these awards over the requisite employee service period. On April 14, 2005, the Securities and Exchange Commission adopted a new rule amending the effective date for SFAS 123R. In accordance with the new rule, the Company adopted the accounting provisions of SFAS 123R beginning in the first quarter of 2006.

Under SFAS 123R, share-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the employee’s requisite service period. The Company has no awards with market or performance conditions. The Company adopted the provisions of SFAS 123R on January 1, 2006, the first day of the Company’s fiscal year 2006, using a modified prospective application, which provides for certain changes to the method for valuing share-based compensation. Under the modified prospective application, prior periods are not revised for comparative purposes. The valuation provisions of SFAS 123R apply to new awards and to awards that are outstanding on the effective date and subsequently modified or cancelled. Estimated compensation expense for awards outstanding at the effective date will be recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”).

As share-based compensation expense recognized in the consolidated statements of income for the twelve months ended December 31, 2006 is based on awards ultimately expected to vest, it should be reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the Company’s pro forma information required under SFAS 123 for the periods prior to fiscal 2006, the Company accounted for forfeitures as they occurred.

Prior to adopting the provisions of SFAS 123R, the Company recorded estimated compensation expense for employee stock options based upon their intrinsic value on the date of grant pursuant to Accounting Principles Board Opinion No. 25, (“APB 25”), “Accounting for Stock Issued to Employees,” and provided the required pro forma disclosures of SFAS 123. Because the Company established the exercise price based on the fair market value of the Company’s stock at the date of grant, the stock options had no intrinsic value upon grant, and therefore no estimated expense was recorded prior to adopting SFAS 123R. Each accounting period, the Company reported the potential dilutive impact of stock options in its diluted earnings per common share using the treasury-stock method. Out-of-the-money stock options (i.e., the average stock price during the period was below the exercise price of the stock option) were not included in diluted earnings per common share as their effect was anti-dilutive.

17
Pro forma net earnings for 2005 and 2004, including effects of expensing stock options follows:

 
For the Years Ended December 31,
  
2005
  
2004
  
Net Income, as reported
  
$
13,292,923
  
$
10,719,166
  
Add back issuance of common stock in payment of bonuses and fees, net of tax
    
28,439
    
18,623
  
Deduct - total stock-based compensation expense under fair value method for
             
all awards, net of tax
   
(175,531
)
  
(171,851
)
Pro forma net income
  
$
13,145,831
  
$
10,565,938
  
Basic earnings per common share:
              
As reported
  
$
5.19
  
$
4.29
  
Pro forma net earnings
    
5.13
    
4.23
  
Diluted earnings per common share:
              
As reported
  
$
5.10
  
$
4.09
  
Pro forma net earnings
    
5.06
    
4.03
  

As a result of adopting SFAS 123R, the Company’s income before income taxes for 2006 was lower by $91,209 than if it had continued to account for share-based compensation under APB 25. The net income for 2006 was lower by $78,550 than if it had continued to account for share-based compensation under APB 25. Basic and diluted earnings per share for the year 2006 would have increased $0.03 per share basic and $0.03 per share diluted.

Prior to the adoption of SFAS 123R, all tax benefits resulting from share-based compensation were presented as operating activities in the consolidated statements of cash flows. SFAS 123R requires cash flows resulting from tax deductions in excess of the grant date fair value of share-based awards to be included in cash flows from financing activities.
 
Escrows and Like-Kind Exchanges
 
As a service to its customers, the Company, through ITIC, administers escrow and trust deposits representing earnest money received under real estate contracts, undisbursed amounts received for settlement of mortgage loans and indemnities against specific title risks. Cash held by the Company for these purposes was approximately $15,828,000 and $12,753,000 as of December 31, 2006 and 2005, respectively. In administering tax-deferred exchanges, ITEC serves as a qualified intermediary for exchanges, holding the net sales proceeds from relinquished property to be used for purchase of replacement property. ITAC serves as exchange accommodation titleholder and, through LLCs that are wholly owned subsidiaries of ITAC, holds property for exchangers in reverse exchange transactions. Like-kind exchange deposits and reverse exchange property totaled $186,579,000 and $205,613,000 as of December 31, 2006 and 2005, respectively. These amounts are not considered assets of the Company and, therefore, are excluded from the accompanying consolidated balance sheets. Exchange services revenues include earnings on these deposits; therefore, investment income is shown as exchange services revenue, rather than investment income. The Company remains contingently liable for the disposition of these deposits and for the transfers of property, disbursements of proceeds and the return on the proceeds at the agreed upon rate.
 
Recent Accounting Standards
 
In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. FIN 48 specifies how tax benefits for uncertain tax positions are to be recognized, measured and derecognized in financial statements; requires certain disclosures of uncertain tax matters; specifies how reserves for uncertain tax positions should be classified on the balance sheets; and provides transition and interim period guidance, among other provisions. The interpretation requires that the Company recognize in its financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of the Company’s 2007 fiscal year, with the cumulative effect, if any, of the change in accounting principle recorded as an adjustment to beginning retained earnings. The Company will implement FIN 48 in the first quarter of 2007, and is currently evaluating the impact of adopting FIN 48 on its consolidated financial position and results of operations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 establishes a common definition for fair value to be applied to accounting principles generally accepted in the United States of America (“GAAP”) requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of SFAS No. 157 on its consolidated financial position and results of operations.
 
18
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS No. 158”). SFAS No. 158 requires that employers recognize on a prospective basis the funded status of their defined benefit pension and other postretirement plans on their consolidated balance sheets, and recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost. SFAS No. 158 also requires additional disclosures in the notes to financial statements. The effect of adopting SFAS No. 158 on the Company’s financial condition at December 31, 2006 has been included in the accompanying consolidated financial statements. SFAS No. 158 did not have an effect on the Company’s consolidated financial condition at December 31, 2005 or 2004. See Note 10 for further discussion. 

In September 2006, the SEC staff issued Staff Accounting Bulletin 108 “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 requires that public companies utilize a “dual-approach” to assessing the quantitative effects of financial misstatements. This dual approach includes both an income statement focused and a balance sheet focused assessment. The guidance in SAB 108 must be applied to annual financial statements for fiscal years ending after November 15, 2006. SAB 108 did not have a material effect on the Company’s consolidated financial position or results of operations.

Use of Estimates and Assumptions
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period and accompanying notes. Actual results could differ from those estimates and assumptions used.

2. Statutory Restrictions on Consolidated Stockholders' Equity and Investments
 
The Company has designated approximately $38,108,000 and $36,140,000 of retained earnings as of December 31, 2006 and 2005, respectively, as appropriated to reflect the required statutory premium reserve. See Note 8 for the tax treatment of the statutory premium reserve.
 
As of December 31, 2006 and 2005, approximately $66,180,000 and $63,412,000, respectively, of consolidated stockholders' equity represents net assets of the Company's subsidiaries that cannot be transferred in the form of dividends, loans or advances to the parent company under statutory regulations without prior insurance department approval.
 
Bonds totaling approximately $5,724,000 and $3,847,000 at December 31, 2006 and 2005, respectively, are deposited with the insurance departments of the states in which business is conducted. These investments are restricted as to withdrawal as required by law.

3. Investments in Securities
 
The aggregate fair value, gross unrealized holding gains, gross unrealized holding losses, and amortized cost for securities by major security type at December 31 were as follows:
 
       
Gross
  
Gross
  
Estimated
  
   
Amortized
  
Unrealized
  
Unrealized
  
Fair
  
   
Cost
  
Gains
  
Losses
  
Value
  
December 31, 2006
                  
Fixed Maturities-
                  
Held-to-maturity, at amortized cost-
                  
Obligations of states and political subdivisions
  
$
1,195,617
  
$
41,996
  
$
-
  
$
1,237,613
  
Total
  
$
1,195,617
  
$
41,996
  
$
-
  
$
1,237,613
  
Fixed Maturities-
                          
Available-for-sale, at fair value:
                          
Obligations of states and political subdivisions
  
$
95,969,124
  
$
935,898
  
$
170,421
  
$
96,734,601
  
Corporate debt securities
  
 
5,010,701
    
209,005
  
 
15
    
5,219,691
  
Total
  
$
100,979,825
  
$
1,144,903
  
$
170,436
  
$
101,954,292
  
Equity Securities, available-for-sale at fair value-
                          
Common stocks and nonredeemable preferred stocks
  
$
8,653,003
  
$
3,953,710
  
$
110,790
  
$
12,495,923
  
Total
  
$
8,653,003
  
$
3,953,710
  
$
110,790
  
$
12,495,923
  
Short-term investments-
                         
Certificates of deposit and other
  
$
4,460,911
  
$
-
  
$
-
  
$
4,460,911
  
Total
  
$
4,460,911
  
$
-
  
$
-
  
$
4,460,911
  
 
19
 
       
Gross
  
Gross
  
Estimated
  
   
Amortized
  
Unrealized
  
Unrealized
  
Fair
  
   
Cost
  
Gains
  
Losses
  
Value
  
December 31, 2005
                  
Fixed Maturities-
                  
Held-to-maturity, at amortized cost-
                  
Obligations of states and political subdivisions
  
$
1,648,708
  
$
70,482
  
$
-
  
$
1,719,190
  
Total
  
$
1,648,708
  
$
70,482
  
$
-
  
$
1,719,190
  
Fixed Maturities-
                          
Available-for-sale, at fair value:
                          
Obligations of states and political subdivisions
  
$
67,895,958
  
$
947,334
  
$
213,343
  
$
68,629,949
  
Corporate debt securities
    
6,522,436
    
319,957
    
-
    
6,842,393
  
Total
  
$
74,418,394
  
$
1,267,291
  
$
213,343
  
$
75,472,342
  
Equity Securities, available-for sale at fair value -
                          
Common stocks and nonredeemable preferred stocks
  
$
6,221,347
  
$
3,307,088
  
$
90,757
  
$
9,437,678
  
Total
  
$
6,221,347
  
$
3,307,088
  
$
90,757
  
$
9,437,678
  
Short-term investments-
                         
Certificates of deposit and other
  
$
7,257,734
  
$
-
  
$
-
  
$
7,257,734
  
Total
  
$
7,257,734
  
$
-
  
$
-
  
$
7,257,734
  
 
The scheduled maturities of fixed maturity securities at December 31, 2006 were as follows:
  
 
   
Available-for-Sale
  
Held-to-Maturity
  
   
Amortized
  
Fair
  
Amortized
  
Fair
  
   
Cost
  
Value
  
Cost
  
Value
  
Due in one year or less
  
$
3,751,018
  
$
3,741,539
  
$
45,000
  
$
45,253
  
Due after one year through five years
    
19,168,540
    
19,427,450
    
18,996
    
20,625
  
Due five years through ten years
    
36,042,691
    
36,535,836
    
490,006
    
505,210
  
Due after ten years
    
42,017,576
    
42,249,467
    
641,615
    
666,525
  
Total
  
$
100,979,825
  
$
101,954,292
  
$
1,195,617
  
$
1,237,613
  

Earnings on investments for the years ended December 31 are as follows:

   
2006
  
2005
  
2004
  
Fixed maturities
  
$
3,784,337
  
$
2,714,441
  
$
2,396,282
  
Equity securities
    
254,110
    
160,439
    
220,773
  
Invested cash and other short-term investments
    
277,006
    
454,358
    
128,204
  
Miscellaneous interest
    
10,882
    
6,529
    
7,579
  
Investment Income
  
$
4,326,335
  
$
3,335,767
  
$
2,752,838
  

Gross realized gains and losses on sales of available-for-sale securities for the years ended December 31 are summarized as follows:

   
2006
  
2005
  
2004
  
Gross realized gains:
              
Obligations of states and political subdivisions
  
$
20,380
  
$
29,130
  
$
9,633
  
Debt securities of domestic corporations
    
-
    
18,464
    
25,994
  
Common stocks and nonredeemable preferred stocks
    
611,906
    
261,380
    
147,042
  
Total
    
632,286
    
308,974
    
182,669
  
                     
Gross realized losses:
                    
Obligations of states and political subdivisions
    
-
    
(1,529
)
  
(407
)
Common stocks and nonredeemable preferred stocks
    
(97,478
)
  
(188,430
)
  
(88,606
)
Total
    
(97,478
)
  
(189,959
)
  
(89,013
)
Net realized gain
  
$
534,808
  
$
119,015
  
$
93,656
  

20

Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous loss position at December 31, 2006 and 2005, were as follows:

   
Less than 12 Months
  
12 Months or Longer
  
Total
  
   
Fair
  
Unrealized
  
Fair
  
Unrealized
  
Fair
  
Unrealized
  
December 31, 2006
  
Value
  
Losses
  
Value
  
Losses
  
Value
  
Losses
  
Obligations of states and political
subdivisions
  
$
10,897,630
  
$
(57,795
)
$
6,642,342
  
$
(112,626
)
$
17,539,972
  
$
(170,421
)
Debt securities of domestic
corporations
    
600,253
    
(15
)
  
-
    
-
    
600,253
    
(15
)
Total Fixed Securities
  
$
11,497,883
  
$
(57,810
)
$
6,642,342
  
$
(112,626
)
$
18,140,225
  
$
(170,436
)
Equity Securities
    
778,529
    
(69,491
)
  
254,480
    
(41,299
)
  
1,033,009
    
(110,790
)
Total temporarily impaired securities
  
$
12,276,412
  
$
(127,301
)
$
6,896,822
  
$
(153,925
)
$
19,173,234
  
$
(281,226
)
 
   
Fair
  
Unrealized
  
Fair
  
Unrealized
  
Fair
  
Unrealized
  
December 31, 2005
  
Value
  
Losses
  
Value
  
Losses
  
Value
  
Losses
  
Obligations of states and political
subdivisions
  
$
10,063,915
  
$
(124,575
)
$
5,557,548
  
$
(88,768
)
$
15,621,463
  
$
(213,343
)
Debt securities of domestic
corporations
    
-
    
-
    
-
    
-
    
-
    
-
  
Total Fixed Securities
  
$
10,063,915
  
$
(124,575
)
$
5,557,548
  
$
(88,768
)
$
15,621,463
  
$
(213,343
)
Equity Securities
    
2,048,249
    
(86,022
)
  
97,500
    
(4,735
)
  
2,145,749
  
 
(90,757
)
Total temporarily impaired securities
  
$
12,112,164
  
$
(210,597
)
$
5,655,048
  
$
(93,503
)
$
17,767,212
  
$
(304,100
)

A total of 45 and 67 securities had unrealized losses at December 31, 2006 and December 31, 2005, respectively, and the duration of these securities range from less than one to more than ten years. The majority of the Company’s unrealized losses relate to its portfolio of fixed securities. The Company’s unrealized losses on its fixed securities were caused by interest rate increases. Since the decline in fair value was attributable to changes in interest rates and not credit quality, and the Company has the intent and ability to hold these securities until a recovery of fair value, the Company does not consider these investments other-than-temporarily impaired. Reviews of securities are inherently uncertain and the value of the investment may not fully recover or may decline in future periods resulting in a realized loss.

4. Property and Equipment
 
Property and equipment and estimated useful lives at December 31 are summarized as follows:
 
   
2006
  
2005
  
Land
  
$
1,107,582
  
$
1,107,582
  
Title plant
    
200,000
    
200,000
  
Office buildings and improvements (25 years)
    
3,125,077
    
3,099,943
  
Furniture, fixtures and equipment (3 to 10 years)
    
7,285,097
    
6,930,165
  
Automobiles (3 years)
    
559,265
    
527,134
  
Total
    
12,277,021
    
11,864,824
  
Less accumulated depreciation
    
(6,142,717
)
  
(6,398,059
)
Property and equipment, net
  
$
6,134,304
  
$
5,466,765
  
 
21
5. Reinsurance
 
The Company assumes and cedes reinsurance with other insurance companies in the normal course of business. Premiums assumed and ceded were approximately $22,000 and $442,000, respectively, for 2006, $21,000 and $316,000, respectively, for 2005 and $6,000 and $295,000, respectively, for 2004. Ceded reinsurance is comprised of excess of loss treaties, which protects against losses over certain amounts. The Company remains liable to the insured for claims under ceded insurance policies in the event that the assuming insurance companies are unable to meet their obligations under these contracts. The Company has not paid or recovered any reinsured losses during the three years ended December 31, 2006.
 
6. Reserves for Claims
 
Changes in the reserves for claims for the years ended December 31 are summarized as follows based on the year in which the policies were written:
 
   
2006
  
2005
  
2004
  
Balance, beginning of year
  
$
34,857,000
  
$
31,842,000
  
$
30,031,000
  
Provisions related to:
                    
Current year
    
9,226,811
    
9,816,189
    
8,171,579
  
Prior years
    
(1,821,600
)
  
(1,651,406
)
  
(187,240
)
Total provision charged to operations
    
7,405,211
    
8,164,783
    
7,984,339
  
Claims paid, net of recoveries, related to:
                    
Current year
    
(618,965
)
  
(253,922
)
  
(167,882
)
Prior years
    
(4,737,246
)
  
(4,895,861
)
  
(6,005,457
)
Total claims paid, net of recoveries
    
(5,356,211
)
  
(5,149,783
)
  
(6,173,339
)
Balance, end of year
  
$
36,906,000
  
$
34,857,000
  
$
31,842,000
  
 
In management's opinion, the reserves are adequate to cover claim losses which might result from pending and possible claims.
 
22
7. Earnings Per Share and Stock Options
 
Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per common share is computed by dividing net income by the combination of dilutive common share equivalents, comprised of shares issuable under the Company’s share-based compensation plans and the weighted-average number of common shares outstanding during the reporting period. Dilutive common share equivalents include the dilutive effect of in-the-money shares, which is calculated based on the average share price for each period using the treasury stock method. Under the treasury stock method, the exercise price of a share, the amount of compensation cost, if any, for future service that the Company has not yet recognized, and the amount of estimated tax benefits that would be recorded in additional paid-in capital, if any, when the share is exercised are assumed to be used to repurchase shares in the current period. The incremental dilutive common share equivalents, calculated using the treasury stock method were 36,289, 47,215 and 124,205 for 2006, 2005 and 2004, respectively.
 
The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31:

For the Years Ended December 31,
  
2006
  
2005
  
2004
  
Net Income
  
$
13,185,434
  
$
13,292,923
  
$
10,719,166
  
Weighted average common shares outstanding - Basic
    
2,527,927
    
2,560,418
    
2,496,711
  
Incremental shares outstanding assuming
                   
the exercise of dilutive stock options and SARS
    
36,289
    
47,215
    
124,205
  
Weighted average common shares outstanding - Diluted
    
2,564,216
    
2,607,633
    
2,620,916
  
Basic earnings per common share
 
$
5.22
  
$
5.19
  
$
4.29
  
Diluted earnings per common share
  
$
5.14
  
$
5.10
  
$
4.09
  

All outstanding options and Stock Appreciation Rights (“SARS”) during 2006, 2005 and 2004 were included in the computation of diluted earnings per share because the options’ exercise prices were less than or equal to the average market price of the common shares.
 
The Company has adopted Employee Stock Option Purchase Plans (the "Plans") under which options or SARS to purchase shares (not to exceed 500,000 shares) of the Company's stock may be granted to key employees of the Company at a price not less than the market value on the date of grant. SARS and options, which are predominantly incentive stock options, are exercisable and vest immediately or within one year or at 10% to 20% per year beginning on the date of grant and generally expire in five to ten years. There were not any SARS exercised in 2006.

A summary of stock option transactions for all stock option plans follows:

       
Weighted
  
Average
      
       
Average
  
Remaining
  
Aggregate
  
   
Number
  
Exercise
  
Contractual
  
Intrinsic
  
   
of Shares
  
Price
  
Term (years)
  
Value
  
Outstanding as of January 1, 2004
    
264,891
  
$
16.09
              
Options granted
    
7,200
  
 
28.92
              
Options exercised
    
(13,860
)
 
16.38
              
Options cancelled/forfeited/expired
    
(11,450
)
 
15.99
              
Outstanding as of December 31, 2004
    
246,781
  
$
16.45
              
Options granted
    
3,000
  
 
36.79
              
Options exercised
    
(163,420
)
 
14.85
              
Options cancelled/forfeited/expired
    
(4,360
)
 
14.26
              
Outstanding as of December 31, 2005
    
82,001
  
$
20.50
              
SARS granted
    
3,000
  
 
43.78
              
Options exercised
    
(9,340
)
 
17.21
              
Options cancelled/forfeited/expired
    
(1,610
)
 
22.12
                    
Outstanding as of December 31, 2006
    
74,051
  
$
21.82
    
4.34
  
$
2,338,246
  
                           
Exercisable as of December 31, 2006
    
43,111
  
$
23.15
    
4.21
  
$
1,304,253
  
                           
Unvested as of December 31, 2006
    
30,940
  
$
19.98
    
4.53
  
$
1,033,993
  
 
23
 
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock at December 31, 2006. There were no options or SARS excluded from the calculation as all options and SARS were in the money. The intrinsic value of options exercised during 2006 was approximately $270,000.

The following tables summarize information about fixed stock options outstanding at December 31, 2006:

 
 
 
 
 
 
Options Outstanding at Year-End
 
Options Exercisable at Year-End
 
 
 
 
 
 
 
 
 
Weighted
 
Weighted
 
 
 
Weighted
 
 
 
 
 
 
 
 
 
Average
 
Average
 
 
 
Average
 
 
 
 
 
 
 
Number
 
Remaining
 
Exercise
 
Number
 
Exercise
 
Range of Exercise Prices
  
Outstanding
  
Contractual Life
  
Price
  
Exercisable
  
Price
  
$ 10.00
 
-
 
$ 12.00
 
15,840
 
3.4
 
$ 11.24
 
7,095
 
$ 10.97
 
13.06
 
-
 
15.58
 
9,250
 
3.6
 
14.77
 
5,850
 
14.64
 
17.25
 
-
 
19.35
 
2,660
 
5.1
 
18.88
 
710
 
19.07
 
20.00
 
-
 
22.75
 
18,296
 
5.0
 
21.16
 
8,546
 
20.77
 
25.28
 
-
 
36.79
 
25,005
 
4.4
 
29.30
 
18,660
 
29.20
 
$ 10.00
 
-
 
$ 36.79
 
71,051
 
4.3
 
$ 20.90
 
40,861
 
$ 22.01
 


 
 
 
 
 
 
SARS Outstanding at Year-End
 
SARS Exercisable at Year-End
 
 
 
 
 
 
 
 
 
Weighted
 
Weighted
 
 
 
Weighted
 
 
 
 
 
 
 
 
 
Average
 
Average
 
 
 
Average
 
 
 
 
 
 
 
Number
 
Remaining
 
Exercise
 
Number
 
Exercise
 
Range of Exercise Prices
  
Outstanding
  
Contractual Life
  
Price
  
Exercisable
  
Price
  
$ 43.78
 
-
 
$ 43.78
 
3,000
 
6.4
 
$ 43.78
 
2,250
 
$ 43.78
 
 
During the second quarter of 2006, the Company issued 3,000 SARS to the directors of the Company. SARS give the holder the right to receive stock in the appreciation in the value of shares of stock from the grant date for a specified period of time, and as a result, are accounted for as equity instruments. As such, these were valued using the Black-Scholes option valuation model. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the weighted-average assumptions noted in the following table. Expected volatilities are based on both the implied and historical volatility of the Company’s stock. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options represents the period of time that options granted are expected to be outstanding. The interest rate for periods during the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The weighted-average fair value for the SARS issued was $13.96 and was estimated using the following weighted-average assumptions:

   
2006
  
Expected Life in Years
    
5.0
  
Volatility
    
27.16
%
Interest Rate
    
4.97
%
Yield Rate
    
0.55
%

The estimated weighted-average grant-date fair value of options and SARS granted for the years ended December 31 was as follows:

For the Years Ended December 31,
  
2006
  
2005
  
2004
  
Exercise price equal to market price on date of grant:
                    
Weighted-average market price
  
$
43.78
  
$
36.79
  
$
28.92
  
Weighted-average grant-date fair value
  
 
13.96
    
17.03
    
13.47
  

There are no stock options or SARS granted where the exercise price is less than the market price on the date of grant.
 
24

The fair value of each option or SAR granted is estimated on the date of grant using the Black-Scholes option pricing method with the following weighted-average assumptions:

   
2006
  
2005
  
2004
  
Expected Life in Years
    
5.0
    
10.0
    
10.0
  
Volatility
    
27
%
  
30
%
  
31
%
Interest Rate
    
5.0
%
  
4.1
%
  
4.2
%
Yield Rate
    
0.6
%
  
0.4
%
  
0.5
%

There was approximately $91,000 of compensation expense relating to shares vesting on or before December 31, 2006 included in salaries, employee benefits and payroll taxes of the consolidated statements of income. As of December 31, 2006, there was approximately $259,000 of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the Company’s stock awards plans. That cost is expected to be recognized over a weighted-average period of 4.53 years.

8. Income Taxes
 
The components of income tax expense for the years ended December 31 are summarized as follows:
 
For the Years Ended December 31,
  
2006
  
2005
  
2004
  
Current:
              
Federal
  
$
4,042,000
  
$
5,818,000
  
$
4,442,000
  
State
   
334,000
    
281,000
    
191,000
  
Total
    
4,376,000
    
6,099,000
    
4,633,000
  
Deferred expense (benefit):
                    
Federal
    
(210,552
)
  
(779,617
)
  
196,956
  
State
    
(21,448
)
  
(29,383
)
  
(46,956
)
Total
    
(232,000
)
  
(809,000
)
  
150,000
  
Total
 
$
4,144,000
  
$
5,290,000
  
$
4,783,000
  
 
For state income tax purposes, ITIC and NE-ITIC generally pay only a gross premium tax.

At December 31, the approximate effect on each component of deferred income taxes and liabilities is summarized as follows:
 
For the Years Ended December 31,
  
2006
 
2005
  
Deferred income tax assets:
          
Recorded reserves for claims, net of statutory premium reserves
  
$
1,197,635
  
$
1,566,686
  
Accrued benefits and retirement services
    
2,023,905
    
1,514,201
  
Reinsurance and commissions payable
    
59,644
    
61,740
  
Allowance for doubtful accounts
    
723,520
    
830,960
  
Adjustment to initially apply FASB Statement No. 158
   
21,024
    
-
  
Net operating loss carryforward
    
68,000
    
70,000
  
Other
    
248,116
    
171,346
  
Total
    
4,341,844
    
4,214,933
  
Deferred income tax liabilities:
              
Net unrealized gain on investments
    
1,635,145
    
1,449,670
  
Excess of tax over book depreciation
    
51,689
    
138,157
  
Discount accretion on tax-exempt obligations
    
40,398
    
26,276
  
Other
    
84,416
    
138,183
  
Total
    
1,811,648
    
1,752,286
  
Net deferred income tax assets
  
$
2,530,196
  
$
2,462,647
  

At December 31, 2006 and 2005, no valuation allowance was recorded. Based upon the Company’s historical results of operations, the existing financial condition of the Company and management’s assessment of all other available information, management believes that it is more likely than not that the benefit of these net deferred income tax assets will be realized.
 
25
A reconciliation of income tax as computed for the years ended December 31 at the U.S. federal statutory income tax rate (34%) to income tax expense follows:
 
For the Years Ended December 31,
  
2006
  
2005
  
2004
  
Anticipated income tax expense
  
$
5,892,008
  
$
6,318,194
  
$
5,270,736
  
Increase (reduction) related to:
                
State income taxes, net of federal income tax benefit
    
220,400
    
185,460
    
126,060
  
Tax-exempt interest income (net of amortization)
   
(2,044,576
)
  
(1,407,055
)
  
(638,049
)
Other, net
    
76,168
    
193,401
    
24,253
  
Provision for income taxes
  
$
4,144,000
  
$
5,290,000
  
$
4,783,000
  

9. Leases
 
The Company leases certain office facilities and equipment under operating leases. Rental expense also includes occasional rental of automobiles. Rent expense totaled approximately $889,000, $846,000 and $746,000 in 2006, 2005 and 2004, respectively. The future minimum lease payments under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2006, are summarized as follows:
 
Year Ended:
      
2007
  
$
750,615
  
2008
    
469,922
  
2009
    
258,828
  
2010
    
147,853
  
2011
    
10,540
  
Total
  
$
1,637,758
  
 
10. Retirement and Other Postretirement Benefit Plans
 
After three years of service, employees are eligible to participate in a Simplified Employee Pension Plan. Contributions, which are made at the discretion of the Company, are based on the employee's salary, but in no case will such contribution exceed $44,000 annually per employee. All contributions are deposited in Individual Retirement Accounts for participants. Contributions expensed under this plan were approximately $712,000, $602,000 and $572,000 for 2006, 2005 and 2004, respectively.
 
In November 2003, ITIC, a wholly owned subsidiary of the Company, entered into employment agreements with the Chief Executive Officer, Chief Financial Officer and the Chief Operating Officer of ITIC. These individuals also serve as the Chief Executive Officer, President and Executive Vice President, respectively, of the Company. The agreements provide compensation and life, health, dental and vision benefits upon the occurrence of specific events, including death, disability, retirement, termination without cause or upon a change in control. The agreements provide for annual salaries to be fixed by the Compensation Committee and, among other benefits, ITIC shall make quarterly contributions pursuant to a supplemental executive retirement plan on behalf of each executive equal to 22% of the base salary and bonus paid to each during such quarter. The agreements also prohibit each of these executives from competing with ITIC and its parent, subsidiaries and affiliates in the state of North Carolina while employed by ITIC and for a period of two years following termination of their employment. In addition, during the second quarter of 2004, ITIC entered into nonqualified deferred compensation plan agreements with these executives. The amount accrued for these plans at December 31, 2006 and 2005 was approximately $3,948,000 and $2,491,000, respectively, which includes postretirement compensation and health benefits, and was calculated based on the terms of the contract. These executive contracts are accounted for on an individual contract basis.
 
On November 17, 2003, ITIC entered into employment agreements with key executives that provide for the continuation of certain employee benefits upon retirement. The executive employee benefits include health insurance, dental insurance, vision insurance and life insurance. The plan is unfunded. Estimated future benefit payouts expected to be paid for each of the next five years are $2,024 in 2007, $2,105 in 2008, $2,369 in 2009, $2,423 in 2010, $2,469 in 2011 and $24,987 in the next five years thereafter.
 
26
Cost of the Company’s postretirement benefit plan included the following components:

   
2006
 
2005
 
2004
  
Net periodic benefit cost
              
Service cost - benefits earned during the year
  
$
14,227
  
$
14,366
  
$
14,051
  
Interest cost on projected benefit obligation
    
14,061
    
13,675
    
15,499
  
Amortization of unrecognized prior service cost
    
20,388
    
20,388
    
14,485
  
Amortization of unrecognized gains
    
(1,665
)
  
(591
)
  
-
  
Net periodic benefit cost at end of year
  
$
47,011
  
$
47,838
  
$
44,035
  

On December 31, 2006, the Company adopted the recognition and disclosure provisions of SFAS 158. SFAS 158 required the Company to recognize the funded status (i.e., the difference between the fair value of the plan assets and the projected benefit obligations) of its benefit plan in the December 31, 2006 consolidated balance sheet, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The net adjustment to accumulated other comprehensive income at adoption of $61,834 ($40,810, net of tax) represents the net unrecognized actuarial losses and unrecognized prior service costs. The effects of adopting the provisions of SFAS 158 on the Company’s consolidated balance sheets at December 31, 2006 and 2005 are presented in the following table:

   
2006
 
2005
  
Funded status
          
Actuarial present value of future benefits:
          
Fully eligible active employee
 
$
(28,486
)
$
(27,846
)
Non-eligible active employees
    
(227,232
)
  
(217,671
)
Funded status of accumulated pension benefit obligation
    
(255,718
)
  
(245,517
)
Unrecognized prior service cost
    
134,739
    
155,127
  
Unrecognized gain
    
(72,905
)
  
(56,483
)
Comprehensive income
    
(61,834
)
  
-
  
Funded status of accumulated pension benefit obligation at end of year
  
$
(255,718
)
$
(146,873
)

Development of the accumulated postretirement benefit obligation for the years ended December 31, 2006 and 2005 includes the following:

   
2006
 
2005
  
Accumulated benefit obligation at beginning of year
  
$
146,873
  
$
99,035
  
Service cost - benefits earned during the year
    
14,227
    
14,366
  
Interest cost on projected benefit obligation
    
14,061
    
13,675
  
Amortization cost, net
    
18,723
    
19,797
  
Accumulated benefit obligation at end of year
  
$
193,884
  
$
146,873
  

Weighted-average actuarial assumptions used to determine benefit obligations at December 31 were:
 
   
2006
 
2005
  
Discount rate
    
5.75
%
  
5.75
%
Expected return on plan assets
    
N/A
    
N/A
  
Expected medical cost increase
    
5-10
%
  
5-12
%
Expected dental and vision cost increase
    
5
%
  
5
%
 
27
Assumed health care cost trend rates do have an effect on the amounts reported for the postretirement benefit plan. The following illustrates the effects on the net periodic postretirement benefit cost (NPPBC) and the accumulated postretirement benefit obligation (APBO) of a one percentage point increase and one percentage point decrease in the assumed health care cost trend rate as of December 31, 2006:
 
   
One-Percentage Point Increase
 
One-Percentage Point Decrease
  
1. NPPBC
         
Effect on the service cost component
  
$
3,548
  
$
(2,695
)
Effect on interest cost
   
3,350
    
(2,573
)
Total effect on the net periodic postretirement benefit cost
  
$
6,898
  
$
(5,268
)
2. APBO (including active employees who are not fully eligible)
              
Effect on those currently receiving benefits (retirees and spouses)
  
$
-
  
$
-
  
Effect on active fully eligible
    
2,310
    
(2,064
)
Effect on actives not yet eligible
    
55,959
    
(42,685
)
Total effect on the accumulated postretirement benefit obligation
  
$
58,269
  
$
(44,749
)

11. Commitments and Contingencies
 
The Company and its subsidiaries are involved in various routine legal proceedings that are incidental to their business. In the Company’s opinion, based on the present status of these proceedings, any potential liability of the Company or its subsidiaries with respect to these legal proceedings, will not, in the aggregate, be material to the Company’s consolidated financial condition or operations.

12. Statutory Accounting
 
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America which differ in some respects from statutory accounting practices prescribed or permitted in the preparation of financial statements for submission to insurance regulatory authorities.
 
Stockholders' equity on a statutory basis was $88,828,480 and $78,017,870 as of December 31, 2006 and 2005, respectively. Net income on a statutory basis was $11,684,065, $12,657,658 and $9,292,197 for the twelve months ended December 31, 2006, 2005 and 2004, respectively.

13. Segment Information
 
Consistent with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” the Company has aggregated its operating segments into two reportable segments: 1) title insurance services; and 2) tax-deferred exchange services.
 
The title insurance segment primarily issues title insurance policies through approved attorneys from underwriting offices and through independent issuing agents. Title insurance policies insure titles to residential, institutional, commercial and industrial properties.
 
The tax-deferred exchange services segment acts as an intermediary in tax-deferred exchanges of property held for productive use in a trade or business or for investments and serves as exchange accommodation titleholder, holding property for exchangers in reverse exchange transactions. Revenues are derived from fees for handling exchange transactions.

Provided below is selected financial information about the Company's operations by segment for the three years ended December 31, 2006, 2005 and 2004:

   
Title
 
Exchange
 
All
 
Intersegment
 
 
 
2006
 
Insurance
 
Services
 
Other
 
Elimination
 
Total
  
Operating revenues
  
$
71,733,764
  
$
5,980,027
  
$
2,915,065
  
$
(844,533
)
$
79,784,323
  
Investment income
    
3,759,367
    
18,138
    
619,231
    
(70,401
)
  
4,326,335
  
Net realized gain on sales of investments
    
551,058
    
-
    
-
    
-
    
551,058
  
Total revenues
  
$
76,044,189
  
$
5,998,165
  
$
3,534,296
  
$
(914,934
)
$
84,661,716
  
Operating expenses
    
63,667,391
    
1,419,923
    
3,089,501
    
(844,533
)
  
67,332,282
  
Income before taxes
  
$
12,376,798
  
$
4,578,242
  
$
444,795
  
$
(70,401
)
$
17,329,434
  
Assets
  
$
114,599,621
  
$
1,087,383
  
$
27,829,374
  
$
-
  
$
143,516,378
  
 
28

   
Title
 
Exchange
 
All
 
Intersegment
 
 
 
2005
 
Insurance
 
Services
 
Other
 
Elimination
 
Total
  
Operating revenues
  
$
78,184,904
  
$
4,543,049
  
$
2,411,446
  
$
(730,303
)
$
84,409,096
  
Investment income
    
3,041,553
    
18,463
    
324,154
    
(48,403
)
  
3,335,767
  
Net realized gain on sales of investments
    
100,550
    
-
    
18,465
    
-
    
119,015
  
Total revenues
  
$
81,327,007
  
$
4,561,512
  
$
2,754,065
  
$
(778,706
)
$
87,863,878
  
Operating expenses
    
66,700,267
    
949,407
    
2,363,270
    
(731,989
)
  
69,280,955
  
Income before taxes
  
$
14,626,740
  
$
3,612,105
  
$
390,795
  
$
(46,717
)
$
18,582,923
  
Assets
  
$
106,407,203
  
$
1,502,799
  
$
20,561,526
  
$
-
  
$
128,471,528
  

2004
 
 
 
 
 
 
 
 
 
 
  
Operating revenues
  
$
72,874,630
  
$
2,801,888
  
$
1,921,114
  
$
(602,950
)
$
76,994,682
  
Investment income
    
2,651,291
    
7,821
    
147,662
    
(53,936
)
  
2,752,838
  
Net realized gain(loss) on sales of investments
    
106,156
    
-
   
(12,500
)
  
-
    
93,656
  
Total revenues
  
$
75,632,077
  
$
2,809,709
  
$
2,056,276
  
$
(656,886
)
$
79,841,176
  
Operating expenses
    
62,035,935
    
646,758
    
2,259,267
    
(602,950
)
  
64,339,010
  
Income (loss) before taxes
  
$
13,596,142
  
$
2,162,951
  
$
(202,991
)
$
(53,936
)
$
15,502,166
  
Assets
  
$
96,880,761
  
$
1,316,413
  
$
14,989,578
  
$
-
  
$
113,186,752
  

14. Stockholders' Equity
 
On November 12, 2002, the Company's Board of Directors amended the Company's Articles of Incorporation, creating a series of Class A Junior Participating Preferred Stock (the "Class A Preferred Stock"). There are 1,000,000 shares of Preferred Stock authorized and 100,000 of these shares have been designated Series A Junior Participating Preferred Stock. The Class A Junior Participating Preferred Stock is senior to common stock in dividends or distributions of assets upon liquidations, dissolutions or winding up of the Company. Dividends on the Class A Preferred Stock are cumulative and accrue from the quarterly dividend payment date. Each share of Class A Preferred Stock entitles the holder thereof to 100 votes on all matters submitted to a vote of shareholders of the Company. These shares were reserved for issuance under the Shareholder Rights Plan (the "Plan"), which was adopted on November 21, 2002, by the Company's Board of Directors. Under the terms of the Plan, the Company's common stock acquired by a person or a group buying 15% or more of the Company's common stock would be diluted, except in transactions approved by the Board of Directors.
 
In connection with the Plan, the Company's Board of Directors declared a dividend distribution of one right (a "Right") for each outstanding share of the Company's common stock paid on December 16, 2002, to shareholders of record at the close of business on December 2, 2002. Each Right entitles the registered holder to purchase from the Company a unit (a "Unit") consisting of one one-hundredth of a share of Class A Preferred Stock at a purchase price of $80 per Unit. Under the Plan, the Rights detach and become exercisable upon the earlier of (a) ten (10) days following public announcement that a person or group of affiliated or associated persons has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the outstanding shares of the Company's common stock, or (b) ten (10) business days following the commencement of, or first public announcement of the intent of a person or group to commence, a tender offer or exchange offer that would result in a person or group beneficially owning 15% or more of such outstanding shares of the Company's common stock. The exercise price, the kind and the number of shares covered by each right are subject to adjustment upon the occurrence of certain events described in the Plan.
 
If the Company is acquired in a merger or consolidation in which the Company is not the surviving corporation, or the Company engages in a merger or consolidation in which the Company is the surviving corporation and the Company's common stock is changed or exchanged, or more than 50% of the Company's assets or earning power is sold or transferred, the Rights entitle a holder (other than the acquiring person or group) to buy, at the exercise price, stock of the acquiring company having a market value equal to twice the exercise price. Following an acquisition by such person or group of 50% or more of the outstanding common stock, the Company's Board of Directors may exchange the Rights (other than the Rights owned by such person or group), in whole or in part, at an exchange ratio of one share of the Company's common stock, or one one-hundredth of a share of Preferred Stock, per Right.
 
29
 
The Rights expire on November 11, 2012, and are redeemable upon action by the Board of Directors at a price of $0.01 per right at any time before they become exercisable. Until the Rights become exercisable, they are evidenced only by the common stock certificates and are transferred with and only with such certificates.
 
15. Concentration of Risk
 
 Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company invests its cash and cash equivalents into high credit quality security instruments. Deposits which exceed $100,000 at each institution are not insured by the Federal Deposit Insurance Corporation. Of the $3.5 million in cash and cash equivalents on hand at December 31, 2006, $2.4 million was not insured by the Federal Deposit Insurance Corporation.
 
The Company generates a significant amount of title insurance premiums in North Carolina. In 2006, 2005 and 2004, North Carolina accounted for 49.8%, 47.2% and 45.1% of total direct title premiums, respectively.

30
 
Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders
Investors Title Company
Chapel Hill, North Carolina

We have audited the accompanying consolidated balance sheets of Investors Title Company and Subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Investors Title Company and Subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Investors Title Company’s internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 9, 2007 expressed unqualified opinions on both management’s assessment of the company’s internal control over financial reporting and the effectiveness of the company’s internal control over financial reporting.

/s/ Dixon Hughes PLLC
 
Dixon Hughes PLLC
High Point, North Carolina
 
March 9, 2007
 

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Investors Title Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Exchange Act Rules 13a-15(f) and 15(d)-15-(f). The Company’s internal control over financial reporting has been designed to provide reasonable assurance regarding the reliability of the Company’s financial reporting and the preparation of published financial statements in accordance with generally accepted accounting principles.

The Company’s internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures are being made only in accordance with authorization of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s consolidated financial statements.

Because of its inherent limitation, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the framework in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and concluded that internal controls over financial reporting are effective as of December 31, 2006.

Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006 has been audited by Dixon Hughes PLLC as independent registered public accounting firm, as stated in their report which follows.
 
 
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL
 
To the Board of Directors and Stockholders
Investors Title Company
Chapel Hill, North Carolina
 
We have audited management’s assessment, included in the accompanying Investors Title Company and Subsidiaries Management Report on Internal Control over Financial Reporting, that Investors Title Company maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Investors Title Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, management’s assessment that Investors Title Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Investors Title Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Investors Title Company and Subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended, and our report dated March 9, 2007, expressed an unqualified opinion on those consolidated financial statements.
 
/s/ Dixon Hughes PLLC
 
Dixon Hughes PLLC
High Point, North Carolina
 
March 9, 2007
 
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M_&'_`$->N?\`@QF_^*H_X3OQA_T->N?^#&;_`.*H`^O_`/A!/!__`$*FA_\` M@NA_^)H_X03P?_T*FA_^"Z'_`.)KY`_X3OQA_P!#7KG_`(,9O_BJ/^$[\8?] M#7KG_@QF_P#BJ`/K_P#X03P?_P!"IH?_`(+H?_B:/^$$\'_]"IH?_@NA_P#B M:^0/^$[\8?\`0UZY_P"#&;_XJC_A._&'_0UZY_X,9O\`XJ@#Z_\`^$$\'_\` M0J:'_P""Z'_XFC_A!/!__0J:'_X+H?\`XFOD#_A._&'_`$->N?\`@QF_^*H_ MX3OQA_T->N?^#&;_`.*H`^O_`/A!/!__`$*FA_\`@NA_^)K4TW2=-T:W:WTO M3[2Q@9R[1VL*Q*6P!DA0!G``S["OBS_A._&'_0UZY_X,9O\`XJC_`(3OQA_T M->N?^#&;_P"*H`^WZY_Q#_R'/"?_`&%9/_2*ZKY`_P"$[\8?]#7KG_@QF_\` IBJ[3X2>)=>UGXK:!;ZIK>I7T"O.ZQW5T\JAOL\HR`Q(S@D9]S0!__]D_ ` end EX-23 4 v067744_ex23.htm Unassociated Document
 
Exhibit 23
 
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To The Board of Directors and Stockholders
Investors Title Company
Chapel Hill, North Carolina

We consent to the incorporation by reference in the registration statement No. 333-33903 of Investors Title Company (the “Company”) and Subsidiaries on Form S-8 of our report dated March 9, 2007, with respect to the consolidated financial statements of Investors Title Company, management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which reports appear in Investors Title Company’s 2006 Annual Report on Form 10-K.

Our audits of the consolidated financial statements referred to in our aforementioned report also included the financial statement schedules of the Company, listed in item 15. These financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects, the information set forth herein.

/s/ Dixon Hughes PLLC
 
Dixon Hughes PLLC
High Point, North Carolina
March 9, 2007

 EX-31.I 5 v067744_ex31i.htm Unassociated Document
Exhibit 31(i)
Certification

I, J. Allen Fine, certify that:

1.
I have reviewed this annual report on Form 10-K of Investors Title Company;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a)  designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b)  designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and 

d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of this annual report) that has materially affected, or is reasonably likely to materially affect the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:

a)  all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 9, 2007

/s/ J. Allen Fine
J. Allen Fine
Chief Executive Officer
 
 
 EX-31.II 6 v067744_ex31ii.htm Unassociated Document
Exhibit 31(ii)
 
Certification

I, James A. Fine, Jr., certify that:

1.
I have reviewed this annual report on Form 10-K of Investors Title Company;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a)  designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b)  designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of this annual report) that has materially affected, or is reasonably likely to materially affect the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:

a)  all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 9, 2007

/s/ James A. Fine, Jr.
James A. Fine, Jr.
Chief Financial Officer
 
 
 EX-32 7 v067744_ex32.htm
Exhibit 32

Certifications
Pursuant to 18 U.S.C. Section 1350,
As adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 
In connection with the Annual Report of Form 10-K of Investors Title Company, a North Carolina corporation (the "Company") for the year ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the Company does hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(i)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and

(ii) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
     
 
 		  
 		  
 
Dated: March 9, 2007   /s/ J. Allen Fine
 
J. Allen Fine
 
Chief Executive Officer

   
Dated: March 9, 2007 /s/  James A. Fine, Jr.
 
James A. Fine, Jr.
 
Chief Financial Officer
 
 
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