investorstitle_10k.htm
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, 2009
[ ] 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:
|
|
Name of each
exchange on which registered:
|
|
Common Stock, no par
value
|
|
NASDAQ Global
Market
|
|
Rights to Purchase Series A Junior
Participating Preferred Stock
|
|
NASDAQ Global
Market
|
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 [
] 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 [
] 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 [
]
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). Yes [ ] No [
]
Indicate by check mark if disclosure
of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of 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, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one): Large accelerated filer [
] Accelerated filer [
] Non-accelerated filer [
] (Do not check if a smaller reporting company)
Smaller reporting company [X]
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [
] No [X]
The aggregate market value of the
common shares held by non-affiliates was $44,585,368 based on the closing sales
price on the NASDAQ Global Market on the last business day of the registrant’s
most recently completed second fiscal quarter (June 30, 2009).
As of February 22, 2010, there were
2,285,671 common shares of the registrant outstanding.
DOCUMENTS INCORPORATED BY
REFERENCE
Portions of Investors Title Company’s definitive proxy statement for the
Annual Meeting of Shareholders to be held May 19, 2010 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 level of real estate
transactions, the level of mortgage origination volumes (including
refinancing) and changes to the
insurance requirements of the participants in the secondary mortgage market,
and the effect of these factors
on the demand for title insurance;
- changes in general economic,
business, and political conditions, including the performance of the
financial and real estate
markets;
- compliance with government
regulation and significant changes to applicable regulations or in
their application by
regulators;
- the possible inadequacy of
provisions for claims to cover actual claim losses;
- the incidence of fraud-related
losses;
- heightened regulatory scrutiny and
investigations of the title insurance industry;
- 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;
- statutory requirements applicable
to the Company’s insurance subsidiaries which require them to maintain
minimum levels of capital, surplus and
reserves and restrict the amount of dividends that they may pay to
the Company without prior regulatory
approval;
- significant competition that the
Company’s operating subsidiaries face;
- the Company’s business
concentration in the State of North Carolina, the source of approximately 44%
of our title insurance
premiums;
- weakness in the commercial real
estate market and increases in the amount or severity of commercial
real estate claims
and
- other risks detailed elsewhere in
this document and in the Company’s other filings with the SEC.
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 is not under any obligation (and expressly disclaims any
such obligation) and does not undertake to update or alter any forward-looking
statements to reflect circumstances or events that occur after the date the
forward-looking statements are made. You should consider the possibility that
actual results may differ materially from our forward-looking statements.
INVESTORS TITLE COMPANY AND
SUBSIDIARIES
TABLE OF
CONTENTS
| PART I |
|
|
|
| ITEM 1. |
|
BUSINESS |
4 |
|
|
|
EXECUTIVE OFFICERS OF THE
COMPANY |
9 |
| ITEM 1A. |
|
RISK FACTORS |
9 |
| ITEM 1B. |
|
UNRESOLVED STAFF COMMENTS |
13 |
| ITEM 2. |
|
PROPERTIES |
13 |
| ITEM 3. |
|
LEGAL PROCEEDINGS |
13 |
| |
| PART II |
|
|
|
| ITEM 5. |
|
MARKET FOR REGISTRANT’S COMMON EQUITY; RELATED
STOCKHOLDER |
|
|
|
|
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
14 |
| ITEM 6. |
|
SELECTED FINANCIAL DATA |
15 |
| ITEM 7. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND |
|
|
|
|
RESULTS OF OPERATIONS |
16 |
| ITEM 7A. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK |
28 |
| ITEM 8. |
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
29 |
| ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND |
|
|
|
|
FINANCIAL DISCLOSURE |
57 |
| ITEM 9A. |
|
CONTROLS AND PROCEDURES |
57 |
| ITEM 9B. |
|
OTHER INFORMATION |
57 |
| |
| PART III |
|
|
|
| ITEM 10. |
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
58 |
| ITEM 11. |
|
EXECUTIVE COMPENSATION |
58 |
| ITEM 12. |
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT |
|
|
|
|
AND RELATED STOCKHOLDER MATTERS |
58 |
| ITEM 13. |
|
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR |
|
|
|
|
INDEPENDENCE |
58 |
| ITEM 14. |
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
58 |
| |
| PART IV |
|
|
|
| ITEM 15. |
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
59 |
| |
| SIGNATURES |
60 |
| INVESTORS TITLE COMPANY INDEX TO
EXHIBITS |
69 |
3
PART I
ITEM 1. BUSINESS
GENERAL
Investors Title Company (the “Company”) is a holding company that
operates through its subsidiaries and was incorporated in the state of North
Carolina in 1973. The Company became operational on June 24, 1976, when it
acquired Investors Title Insurance Company (“ITIC”), which had itself been
operating since 1972, as a wholly owned subsidiary under a plan of exchange of
shares of common stock. The Company acquired National Investors Title Insurance
Company (“N-ITIC”), formerly Northeast Investors Title Insurance Company, as a
wholly owned subsidiary under a plan of exchange of shares of common stock. The
Company’s executive offices are located at 121 North Columbia Street, Chapel
Hill, North Carolina 27514 and its telephone number is (919) 968-2200. The
Company maintains a website at www.invtitle.com.
OVERVIEW OF THE
BUSINESS
The Company engages in several lines of business. Its primary business
activity, and its only reportable operating segment, is the issuance of
residential and commercial title insurance through ITIC and N-ITIC. Additionally
the Company provides tax-deferred real property exchange services through its
subsidiaries, Investors Title Exchange Corporation (“ITEC”) and Investors Title
Accommodation Corporation (“ITAC”). The Company entered into the business of
providing investment management and trust services to individuals, trusts and
other entities in 2003. The title insurance segment consists of the operations
of ITIC and N-ITIC. Exchange services are conducted through ITEC and ITAC. 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 this
Form 10-K Annual Report for additional information related to the revenues,
income and assets attributable to the Company’s primary operating
segment.
Title
Insurance
Through its two wholly owned title underwriting subsidiaries, ITIC and
N-ITIC, the Company underwrites land title insurance for owners and mortgagees
as a primary insurer. ITIC and N-ITIC offer primary title insurance coverage to
both owners and mortgagees of real estate and also offers the 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 (“ALTA”) approved forms.
Upon a real estate closing, the seller executes a deed to the new owner.
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.
There are numerous kinds of defects 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 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.
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 has to purchase a separate owner’s title
insurance policy to protect their investment. The Company issues title insurance
policies on the basis of a title report. The title report documents the current
status of title to the property.
4
Insured Risk on Policies in Force. Generally, the amount of the insured risk or
“face amount” of insurance under 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
responsible for paying the legal costs associated with eliminating covered title
defects or defending the insured party against covered title defects affecting
the property. The insurer may choose to pay the policy limits to the insured or,
if the loss is less than policy limits, the amount of the insured’s actual loss
due to the title defect, at which time the insurer’s duty to defend the claim
and all other obligations of the insurer with respect to the claim are
satisfied.
At any given time, the insurer’s actual risk of monetary loss under
outstanding policies is only a portion of the aggregate insured risk, or total
face amount, of all policies in force. The lower risk results primarily from the
reissuance of title insurance policies by other underwriters over time 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 of a title
underwriter 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. Title insurance generally serves to protect the
policyholder from the risk of loss from events that predate the issuance of the
policy. Losses on policies typically occur when a title defect is not discovered
during the examination and settlement process or 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. Reserves for claim losses are established based
upon known claims, as well as estimated 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, are
affected by economic and market conditions and may involve uncertainties as to
ultimate exposure, and therefore, reserve estimates are subject to variability.
For a more complete description of the Company’s reserves for claims, see “Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in this Form 10-K Annual Report.
Title Insurance Underwriting Operations. ITIC and N-ITIC issue title insurance
coverage through direct operations or through partially owned or independent
title insurance agents who issue title policies on behalf of ITIC or N-ITIC. The
Company’s title insurance companies determine the terms and conditions upon
which they will insure title to the real property according to their
underwriting standards, policies and procedures. Title insurance premiums
written reflect a one-time premium payment, with no recurring premiums.
Generally, premiums for title insurance 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 directly through a
branch office, the premiums collected are retained by the Company. Where the
policy is issued through a title insurance agent, the agent retains a majority
of the premium as 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.
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.”
Geographic
Operations. ITIC was
incorporated in the State of North Carolina in 1972. At present, ITIC primarily
writes land title insurance in 22 states and the District of Columbia, primarily
in the eastern half of the United States. ITIC is licensed to write title
insurance in 44 states and the District of Columbia.
N-ITIC was incorporated in the State of South Carolina in 1973. It
currently writes title insurance as a primary insurer and as a reinsurer in the
State of New York. N-ITIC is also licensed to write title insurance in 19
additional states and the District of Columbia.
Premiums from title insurance written in the state of North Carolina
represent the largest source of revenue for the title insurance segment. In the
state of North Carolina, ITIC primarily issues title insurance commitments and
policies through branch offices. Title policies are primarily issued through
issuing agents in other states. 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 this Form 10-K
Annual Report.
5
Each state license authorizing ITIC or N-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 write premiums.
Ratings. The
Company’s title insurance subsidiaries are regularly assigned ratings by
independent agencies designed to indicate their financial condition and/or their
claims paying ability. The rating agencies determine ratings primarily by
analyzing financial data.
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 N-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 two years, revenues from reinsurance activities accounted for less
than 1% of total premium volume.
Exchange Services,
Investment Management and Trust Services
The Company’s other lines of business include services offered by wholly
owned subsidiaries ITEC, ITAC, Investors Trust Company (“Investors Trust”),
Investors Capital Management Company (“ICMC”), and Investors Title Management
Services, Inc. (“ITMS”), all wholly owned subsidiaries of the
Company.
In 1988, the Company established 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.
ITAC provides services for accomplishing reverse exchanges when taxpayers
decide to acquire replacement property before selling the relinquished
property.
The services provided by the Company’s exchange division are pursuant to
provisions in the Internal Revenue Code. From time to time, these laws are
subject to review and changes, which may negatively affect the demand for
tax-deferred exchanges in general, and consequently the revenues and
profitability of the Company’s exchange division.
Investors Trust and ICMC work together to provide investment management
and trust services to individuals, companies, banks and trusts. ITMS offers
various consulting services to provide clients with the technical expertise to
start and successfully operate a title insurance agency.
These subsidiaries are not currently a reportable segment for which
separate financial information is presented and are instead included and
reported in the category “All Other” in the Company’s financial statements.
CYCLICALITY AND
SEASONALITY
Real estate activity, home sales and mortgage lending are 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. 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. The Company’s premiums in future periods will continue to be
subject to these and other factors which are beyond management’s control and, as
a result, are likely to fluctuate.
Historically, the title insurance business tends to be seasonal as well
as cyclical. Historically, the first calendar quarter has the least residential
real estate activity because fewer real estate transactions occur, while the
remaining spring and summer quarters are more active.
Refinance activity is generally less seasonal, but it is subject to
interest rate fluctuations. However, fluctuations in mortgage interest rates, as
well as other economic factors, can cause shifts in real estate activity outside
of the normal pattern. The Company anticipates that current market conditions,
including the sub prime lending crisis, rising foreclosures, weakening home
sales, falling home prices and declining commercial real estate prices, will be
the primary influences on the Company’s operations until further stabilization
occurs.
6
MARKETING
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. 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.
ITIC and N-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.
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, reserve requirements,
investments and dividend restrictions, as well as examinations and audits of
title insurers. Both ITIC and N-ITIC meet the statutory premium reserve
requirements and the minimum capital and surplus requirements of the states in
which they are licensed. A substantial portion of the assets of the Company’s
title insurance subsidiaries consists of their portfolios of investment
securities. Both of these subsidiaries are required by various states’ laws to
maintain assets of a defined quality and amount.
The Company’s two insurance subsidiaries are subject to examination at
any time by the insurance regulators in the states where they are licensed.
These and other governmental authorities have the power to enforce state and
federal laws to which the title insurance subsidiaries are subject, including
but not limited to, the Real Estate Settlement Procedures Act (“RESPA”).
The United States Department of Housing and Urban Development (“HUD”)
published final rules regarding RESPA on November 17, 2008. The new rules became
effective on January 1, 2010. Among other reforms, these new rules require loan
originators to provide consumers with a uniform Good Faith Estimate that more
clearly discloses loan terms and closing costs, including title insurance
premiums and charges, and facilitates comparison shopping by home buyers. The
new rules also require the implementation of a new HUD-1 and HUD-1A Settlement
Statement which was redesigned to complement the revised Good Faith Estimate and
provide consumers with clear disclosure of actual settlement costs.
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.
Any material change in the Company’s
regulatory environment may have an adverse effect on its business.
Exchange Services,
Investment Management and Trust Services
Intermediary services are not federally regulated by any regulatory
commissions. ITEC and ITAC both provide services to taxpayers pursuant to
Internal Revenue Service 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. Investors Trust is regulated by the North Carolina
Commissioner of Banks.
7
COMPETITION
The title insurance industry is highly competitive. ITIC’s and N-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 timeliness and
quality of service, price, expertise and, in certain transactions such as those
involving commercial properties, the financial strength and size of the insurer.
Title insurance underwriters also compete for agents based upon 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. 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.
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.
INVESTMENT
POLICIES
The Company and its subsidiaries derive a substantial portion of their
income from investments in municipal and corporate bonds and equity securities.
The Company’s investment policy is designed to maintain a high quality portfolio
and maximize income. The Company invests primarily in short-term investments,
federal and municipal governmental securities and investment grade debt
securities and equity securities. 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. The securities in the Company’s portfolio are
subject to economic conditions and normal market risks. The Company’s equity
securities at December 31, 2009 and 2008 consisted of investments in various
industry groups. There were no significant investments in banks, trust and
insurance companies at December 31, 2009. Short-term investments, which consist
primarily of money market instruments and certificates of deposit which have an
original maturity of one year or less, are carried at amortized cost, which
approximates fair value. In addition, at December 31, 2009 and 2008, the Company
held investments that are accounted for using the equity method (see Note 1 of
Notes to Consolidated Financial Statements in this Form 10-K Annual Report.)
See Note 3 of Notes to Consolidated
Financial Statements in this Form 10-K Annual Report for the major categories of
investments, scheduled maturities, fair values of investment securities and
earnings by category.
ENVIRONMENTAL
MATTERS
The title insurance policies ITIC and N-ITIC currently issue exclude any
liability for environmental risks and contamination unless the Company issues a
specific policy endorsement providing coverage for environmental liens recorded
prior to the date of policy. The Company has not experienced and 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.
EMPLOYEES
The holding company has no paid employees. Officers of the holding
company are full-time paid employees of ITIC. The Company’s subsidiaries had 197
full-time employees and 19 part-time employees as of December 31, 2009. None of
the employees are covered by any collective bargaining agreements. Management
considers its relationship with its employees to be favorable.
8
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 Securities and Exchange Commission filing. The Company makes available
free of charge through 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”), and also makes available the Section
16 reports on Forms 3, 4 and 5 of its insiders no later than the end of the
business day following such filings. The information is free of charge and may
be reviewed and downloaded from the website at any time. 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 “Investor Relations” section of the
Company’s website also includes its code of business conduct and ethics and the
charters of the Audit, Compensation and Nominating Committees of its Board of
Directors.
EXECUTIVE OFFICERS OF THE COMPANY
Following is information regarding the executive officers of the Company
as of February 26, 2010. 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 |
|
75 |
|
Chief Executive Officer and Chairman of
the Board |
| James A. Fine, Jr. |
|
47 |
|
President, Treasurer, Chief Financial Officer, Chief
Accounting |
|
|
|
|
|
Officer and
Director |
| W. Morris Fine |
|
43 |
|
Executive Vice President, Secretary and
Director |
J. Allen Fine has
been Chief Executive Officer and Chairman of the Board of the Company since its
incorporation in 1973. Mr. Fine also served as President of the Company until
May 1997. Mr. Fine is the father of James A. Fine, Jr., President, Treasurer and
Director of the Company, and W. Morris Fine, Executive Vice President, Secretary
and Director of the Company.
James A. Fine, Jr.
was named Vice President of the Company in 1987. In 1997, he was named President
and Treasurer and appointed as a Director of the Company. In 2002, he was
appointed as Chief Financial Officer and Chief Accounting Officer. 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.
ITEM 1A. RISK FACTORS
The risk factors listed in this section and other factors noted herein
could cause actual results to differ materially from those contained in any
forward-looking statements or could result in a significant or material adverse
effect on the Company’s results of operations.
The Company’s results of operations and financial condition are subject
to cyclical demand for title insurance, which depends upon the volume of
residential and commercial real estate transactions and mortgage refinancing
transactions and economic factors.
The demand for the Company’s title insurance and other real estate
transaction products and services varies over time and from year to year and is
dependent upon, among other things, the volume of commercial and residential
real estate transactions and mortgage financing and refinancing transactions.
The volume of these transactions has historically been influenced by factors
such as the state of the overall economy, the average price of real estate
sales, the availability of mortgage financing and mortgage interest rates.
During an economic downturn or recession, such
9
as current conditions in
the United States, or when the availability of credit, including mortgage
financing, is limited or mortgage interest rates are increasing, real estate
activity typically declines. The cyclical nature of the Company’s business has
caused fluctuations in revenue and profitability in the past and is expected to
do so in the future.
The real estate and credit markets have been experiencing significant
volatility and disruption for more than approximately 18 months and have created
a difficult operating environment for the Company and other companies in the
industries in which it operates. The value of residential real estate property
and the volume of new and existing home sales have significantly declined since
the market peak in 2005. In addition, the Company holds investments in entities
which may be negatively impacted by these conditions. The ultimate depth and
duration of the economic downturn are unknown. If the current levels of real
estate and credit market disruption and volatility continue or worsen, there can
be no assurance that the Company will not experience adverse effects, which may
be material, to its results of operations and financial condition.
The overall demand for title insurance also depends in part upon the
requirement by mortgage lenders and participants in the secondary mortgage
market that title insurance policies be obtained on residential and commercial
real property.
The Company may experience material
losses resulting from fraud, defalcation or misconduct.
Fraud, defalcation and other misconduct by the Company’s agents, approved
attorneys and employees are risks inherent in the Company’s business. Agents and
approved attorneys typically handle large sums of money in trust pursuant to the
closing of real estate transactions and misappropriation of funds by any of
these parties could result in large title claims. During the recent economic
downturn, the Company has experienced an increase in losses from these factors
as compared to historical experience. If current economic conditions continue or
worsen, the Company could continue to experience greater-than-normal losses from
fraud, defalcation and misconduct.
Differences between actual claims experience and underwriting and
reserving assumptions may adversely affect the Company’s financial
results.
The Company’s net income is affected by 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 actuarial
estimates 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. In addition, the Company may experience unexpected large losses
periodically which require it to increase its title loss reserves.
Poor economic conditions can lead to increased incidences of title
insurance claims, and consequently losses, due to increases in defaults and
foreclosures upon insured properties. The Company has experienced an increase in
the incidence of title claims and losses during the recent economic downturn. If
the current environment continues or deteriorates further, the Company may
continue to experience increased levels of claims and losses, which may have a
material negative effect on its financial condition and results of operations.
Weakness in the commercial real estate market could have an adverse
affect on the Company’s results of operations.
Through the Company’s title insurance subsidiaries, it issues commercial
title insurance policies in connection with real estate transactions. The
commercial real estate market is currently experiencing a credit crisis and
commercial real estate prices are down considerably from their peak two years
ago. According to the MIT Center for Real Estate, nearly half of all United
States commercial real estate mortgage loans come due within the next five
years. With the possibility of further declining values of commercial property,
limited credit availability, increasing defaults and foreclosures on loans
secured by commercial real estate, the Company could see an increase in the
number of claims associated with these policies. An increase in the amount or
severity of claims could adversely affect the Company’s results of operations.
10
A decline in the performance of the Company’s investments could
materially adversely affect net income and cash flows.
Changes in general economic conditions, interest rates, activities in
securities markets and other external factors could adversely affect the value
of the Company’s investment portfolio and, in turn, the Company’s operating
results and financial condition. Recent economic and credit market conditions
have adversely affected the ability of some issuers of investment securities to
repay their obligations and have affected the values of investment securities.
If the carrying value of the Company’s investments exceeds the fair value, and
the decline in fair value is deemed to be other-than-temporary, the Company will
be required to write down the value of its investments, which could materially
harm the Company’s results of operations and financial condition. During the
recent economic downturn, the Company has written down the value of some of its
investment portfolio.
The Company’s insurance subsidiaries
are subject to complex government regulations.
The Company’s title insurance businesses are subject to extensive state
laws and regulations by state insurance authorities in each state in which they
operate. These laws and regulations are primarily intended for the protection of
policyholders and consumers. The nature and extent of these laws and regulations
typically involve, among other matters, licensing and renewal requirements and
trade and marketing practices, including, but not limited to:
- licensing of insurers and
agents;
- capital and surplus
requirements;
- approval of premium rates for
insurance;
- limitations on types and amounts
of investments;
- restrictions on the size of risks
that may be insured by a single company;
- deposits of securities for the
benefit of policy holders;
- filing of annual and other reports
with respect to financial condition;
- approval of policy forms;
and
- regulations regarding the use of
personal information.
These laws and regulations are subject to change and 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 otherwise have a negative impact on
its ability to generate revenue, earnings and cash flows.
Many 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 or make it
more burdensome to conduct them. Revenues from the Company’s exchange services
are closely related to the tax rate on capital gains and other provisions 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 addition, the investment management and trust services division is
regulated by the North Carolina Commissioner of Banks.
Regulation of title insurance rates
could adversely affect the Company’s results of operations.
Title insurance rates are subject to extensive regulation, which varies
from state to state. In many states, the preapproval of the applicable state
insurance regulator is required prior to implementing a rate change. This
regulation could hinder the Company’s ability to promptly adapt to changing
market dynamics through price adjustments, which could affect its results of
operations.
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 quality of service, price
within regulatory parameters, expertise, timeliness 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 information than
the Company. The number and
11
size of competing
companies varies in the different geographic areas in which the Company
operates. Competition among the major providers of title insurance or the
acceptance of new alternatives to traditional title products by the marketplace
could adversely affect the Company’s operations and financial
condition.
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.
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 rely in part on the
independent ratings of their financial strength and claims-paying ability. The
Company’s financial strength ratings are subject to continued periodic review by
rating agencies and subject to change. 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 maintain
licenses necessary to operate as title insurance companies in various states.
Insurance regulations limit the ability of the Company’s insurance
subsidiaries to pay dividends to the holding company.
The Company is an insurance holding company and it 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 state insurance regulatory
approval. These dividend restrictions could limit the Company’s ability to pay
dividends to its shareholders or grow its business. 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 of Financial Condition and Results of Operations” in Item 7 of this
report.
The Company may encounter difficulties managing growth or 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 technology
changes.
The Company relies upon North
Carolina for about 44% of its title insurance premiums.
North Carolina is the largest source of revenue for the title insurance
and, in 2009, North Carolina-based premiums accounted for approximately 44% of
premiums earned by the Company. A decrease in North Carolina business would
negatively impact financial results.
Failures at financial institutions at
which the Company deposits funds could adversely affect the
Company.
The Company deposits substantial funds in financial institutions. These
funds include amounts owned by third parties, such as escrow deposits. Should
one or more of the financial institutions at which the Company maintains
deposits fail, there is no guarantee that the Company would recover the funds it
has deposited, whether through Federal Deposit Insurance Corporation coverage or
otherwise.
12
Certain provisions of the Company’s
shareholder rights plan may make a takeover of the 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
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 28 locations
throughout North Carolina, South Carolina, Michigan and Nebraska. The Company
believes that each of the office facilities occupied by the Company and its
subsidiaries are in good condition, adequately insured and adequate for its
present operations.
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.
13
PART II
| ITEM 5. |
|
MARKET FOR REGISTRANT’S COMMON EQUITY;
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES |
Common Stock Data and
Dividends
The Common Stock of the Company is traded under the symbol “ITIC” on the
NASDAQ Global Market. The number of record holders of common stock at December
31, 2009 was 412. 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 name” or persons, partnerships,
associations, corporations or other entities identified in security position
listings maintained by securities depositories. The following table shows, for
the periods indicated, the high and low sales prices of the Company’s Common
Stock as reported on the NASDAQ Global Market, and cash dividends
declared.
|
|
2009 |
|
2008 |
|
|
High |
|
Low |
|
High |
|
Low |
| First Quarter |
$ |
39.00 |
|
|
$ |
17.14 |
|
|
$ |
49.25 |
|
|
$ |
35.75 |
|
| Second Quarter |
$ |
34.50 |
|
|
$ |
23.93 |
|
|
$ |
50.88 |
|
|
$ |
44.76 |
|
| Third Quarter |
$ |
35.86 |
|
|
$ |
25.40 |
|
|
$ |
49.50 |
|
|
$ |
39.76 |
|
| Fourth Quarter |
$ |
33.00 |
|
|
$ |
28.30 |
|
|
$ |
41.30 |
|
|
$ |
28.35 |
|
The Company paid cash dividends of $0.07 per share in each of the four
quarters in 2009 and 2008, respectively.
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
Company’s ability to pay dividends is also subject to certain regulatory
restrictions on the payment of dividends by its insurance subsidiaries as
described in the “Liquidity and Capital Resources” section of “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” and Note 2 to the consolidated financial statements included in
Item 8 of this Form 10-K.
The following table provides information about purchases by the Company
(and all affiliated purchasers) during the quarter ended December 31, 2009 of
equity securities that are registered by the Company pursuant to Section 12 of
the Exchange Act:
Issuer Purchases of Equity
Securities
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Maximum Number of |
|
|
|
Total Number |
|
|
|
Shares Purchased as |
|
Shares that May Yet Be |
|
|
|
of Shares |
|
Average Price Paid |
|
Part of Publicly |
|
Purchased Under the |
| Period |
|
Purchased |
|
per
Share |
|
Announced
Plan |
|
Plan |
| Beginning of period |
|
|
|
|
|
|
|
|
487,697 |
| 10/01/09 – 10/31/09 |
|
- |
|
$ |
- |
|
- |
|
487,697
|
| 11/01/09 – 11/30/09 |
|
1,760 |
|
|
30.81 |
|
1,760 |
|
485,937 |
| 12/01/09 – 12/31/09 |
|
223 |
|
|
29.72 |
|
223 |
|
485,714 |
| Total |
|
1,983 |
|
$ |
30.69 |
|
1,983 |
|
485,714
|
| |
For the quarter ended December 31, 2009, the Company purchased an
aggregate of 1,983 shares of the Company’s common stock pursuant to the purchase
plan (the “Plan”) that was publicly announced on June 5, 2000. On November 10,
2008, the Board of Directors of the Company approved the purchase of an
additional 394,582 shares pursuant to the Plan, such that there was authority
remaining under the Plan to purchase up to an aggregate of 500,000 shares of the
Company’s common stock pursuant to the Plan immediately after this approval.
Unless terminated earlier by resolution of the Board of Directors, the Plan will
expire when all shares authorized for purchase under the Plan have been
purchased. The Company intends to make further purchases under this Plan. For
more information, please see “Liquidity and Capital Resources” in Item 7 of this
Form 10-K.
14
ITEM 6. SELECTED FINANCIAL
DATA
| (dollars in thousands except per
share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Year |
2009 |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
| Net premiums
written |
$ |
62,155 |
|
$ |
63,662 |
|
$ |
69,984 |
|
$ |
70,196 |
|
$ |
76,522 |
|
|
Revenues |
|
71,308 |
|
|
71,123 |
|
|
84,942 |
|
|
84,662 |
|
|
87,864 |
|
| Investment
income |
|
3,783 |
|
|
4,559 |
|
|
5,197 |
|
|
4,326 |
|
|
3,336 |
|
| Net
income (loss) |
|
4,829 |
|
|
(1,183) |
|
|
8,402 |
|
|
13,185 |
|
|
13,293 |
|
| |
| Per Share Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share |
$ |
2.11 |
|
$ |
(0.50) |
|
$ |
3.39 |
|
$ |
5.22 |
|
$ |
5.19 |
|
| Weighted average
shares outstanding—Basic |
|
2,292 |
|
|
2,364 |
|
|
2,479 |
|
|
2,528 |
|
|
2,560 |
|
|
Diluted earnings (loss) per common share |
$ |
2.10 |
|
$ |
(0.50) |
|
$ |
3.35 |
|
$ |
5.14 |
|
$ |
5.10 |
|
| Weighted average
shares outstanding—Diluted |
|
2,299 |
|
|
2,364 |
|
|
2,509 |
|
|
2,564 |
|
|
2,608 |
|
| Cash
dividends per share |
$ |
.28 |
|
$ |
.28 |
|
$ |
.24 |
|
$ |
.24 |
|
$ |
.16 |
|
| |
| At Year End |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
$ |
146,428 |
|
$ |
139,858 |
|
$ |
149,642 |
|
$ |
143,516 |
|
$ |
128,472 |
|
| Investments in
securities |
|
123,682 |
|
|
115,892 |
|
|
129,026 |
|
|
121,580 |
|
|
95,153 |
|
|
Stockholders’ equity |
|
97,259 |
|
|
89,858 |
|
|
99,276 |
|
|
95,276 |
|
|
84,297 |
|
| Book
value/share |
|
42.56 |
|
|
39.18 |
|
|
41.17 |
|
|
38.00 |
|
|
33.07 |
|
| |
| Performance
Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net
income (loss) to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average stockholders’ equity |
|
5.16% |
|
|
(1.25%) |
|
|
8.64% |
|
|
14.69% |
|
|
16.95% |
|
|
Total revenues |
|
6.77% |
|
|
(1.66%) |
|
|
9.89% |
|
|
15.57% |
|
|
15.13% |
|
15
| ITEM 7. |
|
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
Investors Title Company (the “Company”) is a holding company that engages
primarily in issuing title insurance through two subsidiaries, Investors Title
Insurance Company (“ITIC”) and National Investors Title Insurance
Company (“N-ITIC”) (formerly Northeast Investors Title Insurance Company),
which accounted for 94.5% of the Company’s operating revenues in 2009. Through
ITIC and N-ITIC, the Company underwrites land title insurance for owners and
mortgagees as a primary insurer. Title insurance protects against loss or damage
resulting from title defects that affect real property.
There are two basic types of title insurance policies - one for the
mortgage lender and one for the real estate owner. A lender often requires
property owners to purchase title insurance to protect its position as a holder
of a mortgage loan, but the lender’s title insurance policy does not protect the
property owner. The property owner has to purchase a separate owner’s title
insurance policy to protect their investment. When real property is conveyed
from one party to another, occasionally there is an undisclosed defect in the
title or a mistake or omission in a prior deed, will or mortgage that may give a
third party a legal claim against such property. If a claim is made against real
property, title insurance provides indemnification against insured defects.
ITIC issues title insurance policies through issuing agencies and also
directly through home and branch offices. 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.
Revenues for this segment result from purchases of new and existing
residential and commercial real estate, refinance activity and certain other
types of mortgage lending such as home equity lines of credit.
Volume is a factor in the Company’s profitability due to the existence of
fixed operating costs. 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. The Company’s profitability also depends, in part, upon its
ability to manage its investment portfolio to maximize investment returns and
minimize risks such as interest rate changes or defaults or impairments of
assets.
The Company’s volume of title insurance premiums is affected by the
overall level of residential and commercial real estate activity, which includes
sales, mortgage financing and mortgage refinancing. In turn, real estate
activity is generally affected by a number of factors, including the
availability of mortgage credit, the cost of real estate, consumer confidence,
employment and family income levels and general United States economic
conditions. Another important factor in the level of residential and commercial
real estate activity is the effect of changes in interest rates.
The cyclical nature of the residential and commercial real estate markets
– and consequently, 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. Additionally, there are seasonal influences in real estate
activity and accordingly in revenue levels for title insurers.
Other Services: Operating divisions not required to be reported separately are reported
in a category called All Other. Other services include those offered by the
parent holding company and by its smaller wholly owned subsidiaries, Investors
Title Exchange Corporation (“ITEC”), Investors Title Accommodation Corporation
(“ITAC”), Investors Trust Company (“Investors Trust”), Investors Capital
Management Company (“ICMC”) and Investors Title Management Services, Inc.
(“ITMS”).
Through its Annual Report on Form 10-K for the year ended December 31,
2008 filed on March 9, 2009, the Company’s disclosures included the operations
of exchange services as a separate segment. This business is no longer included
as a separate segment in the Company’s financial information, as it is no longer
required to be reported separately or is considered a significant operation of
the business. The Company’s exchange services division
16
provides customer
services in connection with tax-deferred real property exchanges through its
subsidiaries. ITEC serves as a qualified intermediary in like-kind exchanges of
real or personal property under Section 1031 of the Internal Revenue Code of
1986, as amended. In its role as qualified intermediary, ITEC coordinates the
exchange aspects of the real estate transaction, and its 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.
In conjunction with Investors Trust, ICMC provides investment management
and trust services to individuals, companies, banks and trusts. ITMS offers
consulting services to clients.
Business Trends and Recent
Conditions
During the real estate boom, many lenders loosened their underwriting
guidelines, particularly in the sub prime loan market. These lower underwriting
standards, when combined with new methods of financing loans created a supply of
inexpensive credit which led to a build up in mortgage loans to high risk
borrowers. As a result, there has been a substantial increase in loan defaults
and mortgage foreclosures during the recent downturn in U.S. economic activity.
Lenders are now returning to stricter loan underwriting standards, which results
in lower overall loan volume. Moreover, the depressed economy has contributed to
lower levels of new home purchases, which also negatively affects loan volume.
This lower loan volume has, in turn, resulted in a lower level of title premiums
generated in the marketplace.
In addition, the downturn in housing and related mortgage finance
industries has contributed to higher claims costs. An increase in property
foreclosures tends to reveal title defects. A slowing pace of real estate
activity also triggers the likelihood of certain types of title claims, such as
mechanics’ liens on newly constructed property. These factors have historically
caused title claims to increase in past real estate market cyclical downturns
and the Company has experienced such increases during the current downturn.
Steps taken by the U.S. government to provide economic stimulus during
the past year generally had a positive effect on the Company’s sales of title
insurance. Under the Home Affordable Refinance Program, certain homeowners were
able to get refinancing loans. The Economic Stimulus Bill included an $8,000 tax
credit that would be available for certain first time home buyers for the
purchase of a principal residence on or after January 1, 2009. On November 5,
2009, Congress approved an extension of the first-time homebuyer credit to
persons who sign a binding purchase contract by April 30, 2010 and close on the
purchase of the residence by June 30, 2010. This law also expanded the program
to provide a $6,500 homebuyer credit for buyers who have owned their current
home at least five years.
The low level of mortgage interest rate environment during 2009 spurred
an increase in mortgage refinancing. According to data published by Freddie Mac,
the annual average 30-year fixed mortgage interest rates in the United States
were reported to be 5.04% and 6.03% for the years 2009 and 2008, respectively.
Historically, activity in real
estate markets has varied over the course of market cycles in response to
evolving economic factors. The Company anticipates that current market
conditions, including an elevated pace of foreclosures, weak home sales, falling
home prices, declining commercial real estate prices and tight loan underwriting
standards, will be primary influences on the Company’s operations until further
stabilization occurs. Absent further declines in interest rate levels, the
volume of refinance loan volume will likely return to its historic percentage of
overall mortgage origination, which in turn will increasingly depend on the
strength of the economy and job creation. Additionally, the Company is
monitoring conditions in the commercial real estate market which is widely
believed to be subject to a surge in loan failures over the next few years. Such
an increase in loan failures could impact the Company in different manners,
including an increase in claim volume. Operating results can vary from year to
year based on cyclical market conditions and do not necessarily indicate the
Company’s future operating results and cash flows.
17
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 through December 31, 2009 is represented by the reserve for claims of
$39,490,000 on the accompanying consolidated balance sheet. Of that total,
$6,398,623 was reserved for specific claims, and $33,091,377 was reserved for
claims for which the Company had no notice. The Company’s reserves for claims
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, or “IBNR”).
A provision for estimated future claims payments is recorded at the time
the related policy revenue is recorded. The Company records the claims provision
as a percentage of net premiums written. This loss provision rate is set to
provide for losses on current year policies. By their nature, title claims can
often be complex, vary greatly in dollar amounts, vary in number due to economic
and market conditions such as an increase in mortgage foreclosures and involve
uncertainties as to ultimate exposure. In addition, some claims may require a
number of years to settle and determine the final liability for indemnity and
loss adjustment expense. The payment experience may extend for more than twenty
years after the issuance of a policy. 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.
Management considers factors such as the Company’s historical claims
experience, case reserve estimates on reported claims, large claims, actuarial
projections and other relevant factors in determining its loss provision rates
and the aggregate recorded expected liability for claims. In establishing
reserves, actuarial projections are compared with recorded reserves to evaluate
the adequacy of such recorded claims reserves and any necessary adjustments are
then recorded in current operations. As the most recent claims experience
develops and new information becomes available, the loss reserve estimate
related to prior periods will change to more accurately reflect updated and
improved emerging data. The Company reflects any adjustments to reserves in the
results of operations in the period in which new information (principally claims
experience) becomes available.
The Company initially reserves for each known claim based upon an
assessment of specific facts and updates the reserve amount as necessary over
the course of administering each claim. Loss ratios for earlier years tend to be
more reliable than recent policy years as they are more fully developed. In
making loss estimates, management determines a loss provision rate, which it
then applies to net premiums written.
There are key assumptions that materially affect the reserve estimates.
The Company assumes the aggregate reported liability for known claims and IBNR,
in the aggregate, will be comparable to its historical claims experience unless
factors, such as loss experience, change significantly. The factors the Company
considered for the recently completed fiscal year did not cause any of its key
assumptions to change from assumptions used in the immediately preceding period.
Also affecting the Company’s assumptions are large losses related to fraud and
defalcation, as these can cause significant variances in loss emergence
patterns. Management defines a large loss as one where incurred losses exceed
$250,000. Due to the small volume of large claims, the long-tail nature of title
insurance claims and the inherent uncertainty in loss emergence patterns, large
claim activity can vary significantly between policy years. The estimated
development of large claims by policy year is therefore subject to significant
changes as experience develops. The Company has generally followed the same
methodology for estimating loss reserves. The loss provision rate is set to
provide for losses on current year policies and to provide for estimated
positive or negative development on prior year loss estimates.
18
Management also considers actuarial analyses in evaluating claims
reserves. The actuarial methods used to evaluate 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. 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 more recent policy years, more weight is given to the
results of the expected loss methods; for older policy years, more weight is
given to the loss development method results.
The key actuarial assumptions are principally loss development factors
and expected loss ratios. The selected loss development factors are based on a
combination of the Company’s historical loss experience and title industry loss
experience. Expected loss ratios are estimated for each policy year based on the
Company’s own experience and title industry loss ratios. When updated data is
incorporated into the actuarial models, the resulting loss development factors
and expected loss ratios will likely change from the prior values. Changes in
these values from 2008 through 2009 have been the result of actual Company and
industry experience during the calendar year and not changes in
assumptions.
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, 2009, 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 |
$ |
(820,000 |
) |
| Decrease in Loss Ratio of two percentage points |
$ |
820,000 |
|
Despite the variability of such estimates, management believes based on
historical claims experience and actuarial analysis that the reserves are
adequate to cover claim losses resulting from pending and future claims for
policies issued through December 31, 2009. The ultimate settlement of policy and
contract claims will likely vary from the reserve estimates included in the
Company’s consolidated financial statements. The Company continually reviews and
adjusts its reserve estimates to reflect its loss experience and any new
information that becomes available. There are no known claims that are expected
to have a materially adverse effect on the Company’s financial position or
operating results.
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
expenses concurrently with premium recognition.
Valuation and Impairment 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 with unrealized gains and
losses, adjusted for other-than-temporary declines in fair value, reported as
accumulated other comprehensive income. As of December 31, 2009 and 2008,
substantially all the Company’s invested assets were classified as
available-for-sale. Realized gains and losses on the sale of investments are
determined on the specific identification method.
19
Securities are regularly evaluated and 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. When, in the opinion of
management, a decline in the fair value of an investment is considered to be
other-than-temporary, such investment is written down to its fair value. Some
factors considered in evaluating whether or not a decline in fair value is
other-than-temporary include, but are not limited to:
- the duration and extent to which
the fair value has been less than cost;
- with respect to equity securities,
whether the Company’s ability and intent to retain the investment for a
period of time sufficient to allow for
a recovery in value; and
- with respect to fixed maturity
securities, whether the Company has the intent to sell or will more likely
than not be required to sell a
particular security before recovery in value.
These factors are reviewed quarterly and any material degradation in the
prospect for recovery will be considered in the other-than-temporary impairment
analysis. 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. The fair values of the majority of the Company’s investments are based on
quoted market prices from independent pricing services.
Deferred Tax Asset
The Company recorded net deferred tax assets at December 31, 2009 and
2008 related primarily to reserves for claims, allowance for doubtful accounts,
employee benefits and other-than-temporary impairment of assets. 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 other fee income,
trust income and exchange services income. Investment income and realized
investment gains and losses are not included in operating revenues and are
discussed separately following operating revenues. Following is a summary 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.
|
|
|
2009 |
|
2008 |
| Title Insurance |
|
$ |
64,303,556 |
|
94.5 |
% |
|
$ |
65,507,644 |
|
94.3 |
% |
| All
Other |
|
|
3,719,577 |
|
5.5 |
% |
|
|
3,979,258 |
|
5.7 |
% |
|
|
|
$ |
68,023,133 |
|
100 |
% |
|
$ |
69,486,902 |
|
100 |
% |
Title Insurance
Net Premiums: Net
premiums written decreased 2.4% in 2009 from 2008. The decrease was primarily
due to the weak housing market and ongoing general declines in real estate
activity.
Title Orders:
Although net premiums written in 2009 decreased over 2008, the volume or total
number of title orders increased in 2009, as 213,824 title orders were issued in
2009, which is an increase of 6.5% over the 200,791 title orders issued in 2008,
reflecting a surge in mortgage refinancing transactions. While the level of
mortgage refinance transactions insured declined from the first half of the
year, refinance transactions remained a significant block of business in the
second half.
Title insurance companies typically issue title insurance policies
directly through branch offices or through title agencies. Following is a
breakdown of premiums generated by branch and agency operations for the years
ended December 31:
|
|
|
2009 |
|
% |
|
2008 |
|
% |
| Branch |
|
$ |
21,474,082 |
|
35 |
|
$ |
24,312,013 |
|
38 |
| Agency |
|
|
40,681,169 |
|
65 |
|
|
39,350,174 |
|
62 |
| Total |
|
$ |
62,155,251 |
|
100 |
|
$ |
63,662,187 |
|
100 |
| |
|
|
|
|
|
|
|
|
|
|
20
Branch Office Net Premiums: In the Company’s branch operations, the title insurer issues the
insurance policy and retains the entire premium paid in connection with the
transaction. Branch office net premiums written as a percentage of total net
premiums written were 35% and 38% in 2009 and 2008, respectively. Net premiums
written from branch operations decreased 11.7% in 2009 compared with 2008. The
decrease in 2009 primarily reflects the downturn in the real estate market. Of
the Company’s 29 branch locations that underwrite title insurance policies, 27
are located in North Carolina, and as a result, branch premiums written
primarily represent North Carolina business.
Agency Net Premiums: Agents retain the majority of the title premium collected, with the
balance remitted to the title underwriter for bearing the risk of loss in the
event that a claim is made under the title insurance policy. Agency net premiums
written as a percentage of total net premiums written were 65% and 62% in 2009
and 2008, respectively. Net premiums written from agency operations increased
3.4% in 2009 compared with 2008. The increase in 2009 was primarily due to an
increase in refinance activity, growth in the customer base through agents,
increases in the percentage of Company policies originated by established
agencies, as well as the addition of new agencies to the Company’s network.
Following is a schedule of net premiums written in all states where the
Company’s two insurance subsidiaries ITIC and N-ITIC currently underwrite title
insurance:
| State |
|
2009 |
|
2008 |
| Illinois |
|
$ |
2,878,781 |
|
|
$ |
2,140,440 |
|
| Kentucky |
|
|
3,194,530 |
|
|
|
2,957,744 |
|
| Michigan |
|
|
4,382,209 |
|
|
|
3,326,904 |
|
| New York |
|
|
2,825,762 |
|
|
|
2,106,033 |
|
| North Carolina |
|
|
27,134,685 |
|
|
|
30,527,923 |
|
| Pennsylvania |
|
|
2,664,037 |
|
|
|
1,762,444 |
|
| South Carolina |
|
|
5,755,790 |
|
|
|
7,556,153 |
|
| Tennessee |
|
|
2,416,019 |
|
|
|
2,063,411 |
|
| Virginia |
|
|
5,015,185 |
|
|
|
5,789,337 |
|
| West Virginia |
|
|
2,239,908 |
|
|
|
2,077,603 |
|
| Other |
|
|
3,732,218 |
|
|
|
3,462,391 |
|
| Direct Premiums |
|
|
62,239,124 |
|
|
|
63,770,383 |
|
| Reinsurance
Assumed |
|
|
11,650 |
|
|
|
166,893 |
|
| Reinsurance Ceded |
|
|
(95,523 |
) |
|
|
(275,089 |
) |
| Net
Premiums Written |
|
$ |
62,155,251 |
|
|
$ |
63,662,187 |
|
Exchange Services and Other
Revenues
Exchange services revenues were $910,828 and $1,166,141 in 2009 and 2008,
respectively. Operating revenues from the Company’s two subsidiaries that
provide tax-deferred exchange services (ITEC and ITAC) decreased 21.9% from 2008
to 2009. Demand for tax-deferred exchange services has declined significantly
due to weak appreciation or actual declines in value for many types of
investment property. The decline in 2009 revenues compared with 2008 resulted
primarily from decreases in transactional volume and related lower levels of
interest-spread income earned on exchange fund deposits held by the Company due
to declines in the average balances of deposits held and lower interest rates
during 2009.
In July 2008, the Internal Revenue Service (“IRS”) finalized its proposed
regulations regarding treatment of funds held by qualified intermediaries. As
originally proposed, these rules would have negatively affected the ability of
qualified intermediaries to retain a portion of the interest income earned on
exchange fund deposits held by the Company during exchange transactions, which
could have had a material adverse effect upon the profitability of the Company’s
exchange business. As adopted however, the new regulations apply only to
individual exchange account balances over $2 million. The Company has had only
limited experience under this new regime; it is possible that these new
regulations may have unanticipated consequences on the revenues and
profitability of the Company’s exchange services business.
21
Other revenues also primarily include investment management fee income,
income related to the Company’s other equity method investments and agency
service fees, as well as search fee and other ancillary fees. These revenues
were $4,957,054 in 2009 compared with $4,658,574 in 2008, due primarily to
increases from equity in earnings of unconsolidated affiliates.
Cyclicality and
Seasonality
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. The Company’s premiums in future periods will continue to be
subject to these and other factors which are beyond management’s control and, as
a result, are likely to fluctuate.
Historically, real estate transactions have produced seasonal premium
levels for title insurers. Residential real estate activity has been generally
slower in the fall and winter months because fewer real estate transactions
occur, while the spring and summer months are more active. Refinance activity is
generally less seasonal, but it is subject to interest rate volatility. However,
fluctuations in mortgage interest rates, as well as other economic factors, can
cause shifts in real estate activity outside of the normal traditional seasonal
pattern.
Seasonal factors affecting the level of real estate activity and the
volume of title premiums written will also affect the demand for exchange
services.
Nonoperating Revenues
Investment income and realized gains
and losses from investments are included in nonoperating revenues.
Investment Income
The Company derives a substantial portion of its income from investments
in municipal and corporate bonds 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 $6,960,000 and $6,540,000 at December 31, 2009 and 2008,
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 10 years. The Company’s invested assets
are managed in consideration of enterprise-wide objectives intended to assure
solid funding of its obligations, as well as evaluations of their long-term
effect on stability of capital accounts.
As new funds become available, they are invested in accordance with the
Company’s investment policy and corporate goals. The Company’s investment
policies have been designed to balance multiple investment goals, including to
assure a stable source of income from interest and dividends, protect capital,
provide sufficient liquidity to meet insurance underwriting and other
obligations as they become payable in the future and capital appreciation.
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. Interest and investment income levels are
primarily a function of general market performance, interest rates and the
amount of cash available for investment.
Investment income was $3,783,116 in 2009 compared with $4,558,735 in
2008. The decline in investment income in 2009 was due primarily to lower levels
of interest earned on short-term funds. See Note 3 in the accompanying
Consolidated Financial Statements for the major categories of investments,
scheduled maturities, amortized cost, fair values of investment securities and
earnings by security category.
22
Net Realized Loss on
Investments
Dispositions of equity securities at a realized gain or loss reflect such
factors as industry sector allocation decisions, ongoing assessments of issuers’
business prospects and tax planning considerations. Additionally, the amount of
net realized investment gains and losses are affected by assessments of
securities’ valuation for other-than-temporary impairment. As a result of the
interaction of these factors and considerations, net realized investment gains
or losses can vary significantly from period to period.
Net realized loss on investments totaled $498,089 in 2009 and $2,922,376
in 2008. The 2009 net loss included impairment charges totaling $758,661 on
certain equity and equity method investments in the Company’s portfolio that
were deemed to be other-than-temporarily impaired. The 2008 net loss included
impairment charges totaling $1,226,932 on certain equity and fixed income
securities in the Company’s portfolio that were deemed to be
other-than-temporarily impaired and net realized losses on sales related to tax
planning of $1,695,444. Management believes that unrealized losses on remaining
fixed income and equity securities at December 31, 2009 are temporary in
nature.
The securities in the Company’s portfolio are subject to economic
conditions and market risks. The Company considers relevant facts and
circumstances in evaluating whether a credit or interest-rate related impairment
of a security is other-than-temporary. Relevant facts and circumstances include
the extent and length of time the fair value of an investment has been below
cost.
There are a number of risks and uncertainties inherent in the process of
monitoring impairments and determining if an impairment is other-than-temporary.
These risks and uncertainties include the risk that the economic outlook will be
worse than expected or have more of an impact on the issuer than anticipated,
the risk that the Company’s assessment of an issuer’s ability to meet all of its
contractual obligations will change based on changes in the characteristics of
that issuer, the risk that information obtained by the Company or changes in
other facts and circumstances leads management to change its intent to hold the
equity security until it recovers in value or its intent to sell the debt
security, and the risk that management is making decisions based on misstated
information in the financial statements provided by issuers.
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 in 2009 decreased 12.0%
compared with 2008 primarily due to decreases in the provision for claims and in
salaries employee benefits and payroll taxes partially offset by an increase in
commissions. Following is a summary of the Company’s operating expenses.
Intersegment eliminations have been netted; therefore, the individual segment
amounts will not agree to Note 13 in the accompanying Consolidated Financial
Statements.
|
|
|
2009 |
|
2008 |
| Title Insurance |
|
$ |
61,152,624 |
|
93.5 |
% |
|
$ |
69,226,504 |
|
93.1 |
% |
| All Other |
|
|
4,239,757 |
|
6.5 |
% |
|
|
5,113,556 |
|
6.9 |
% |
|
|
|
$ |
65,392,381 |
|
100 |
% |
|
$ |
74,340,060 |
|
100 |
% |
On a combined basis, profit margin was 6.8% in 2009 and loss margin was
(1.7%) in 2008. Total revenues increased 0.3% in 2009 and operating expenses
decreased, contributing to a higher combined profit margin for 2009.
Title Insurance
Profit (Loss) Margin: The Company’s title insurance profit margin varies according to a number
of factors, including the volume and type of real estate activity. Profit (loss)
margins for the title insurance segment were 7.7% and (1.4%) in 2009 and 2008,
respectively.
Commissions: Agent
commissions represent the portion of premiums retained by agents pursuant to the
terms of their respective agency contracts. Commissions to agents increased 5.5%
from 2008 to 2009 primarily due to increased premiums from agency operations in
2009. Commission expense as a percentage of net premiums written by agents was
71.9% and 70.4% in 2009 and 2008, respectively. Commission rates vary by the
geographic area in which the commission is paid and may be influenced by state
regulations.
23
Provisions for Claims: The provision for claims as a percentage of net premiums written was
13.6% and 23.9% in 2009 and 2008, respectively. The change in the loss provision
rate for calendar year 2009 compared with 2008 was favorable primarily because
2008 was impacted by two large claims related to fraud and one large mechanic’s
lien claim totaling in the aggregate approximately $6.8 million. The decrease in
the loss provision rate for calendar year 2009 compared with 2008 was partially
offset by unfavorable experience for policy years 2006 and 2007.
In 2008, the Company incurred unfavorable experience for claims related
to policy year 2006 totaling approximately $1.9 million. Partially offsetting
the change in the loss provision estimate for calendar year 2008 was favorable
experience for policy year 2007 because of a reduction in large claim activity.
The decrease in the loss provision in 2009 from the 2008 level resulted
in approximately $6.4 million less in reserves than would have been recorded at
the higher 2008 level. If material occurrences of mortgage-related fraud,
mechanic lien claims and other similar types of claims continue, the Company’s
ultimate loss estimates for recent policy years could increase.
Title claims are typically reported and paid within the first several
years of policy issuance. The provision for claims reflects actual payments of
claims, net of recovery amounts, plus adjustments to the specific and incurred
but not reported claims reserves, the latter of which are actuarially determined
based on historical claims experience. Payments of claims, net of recoveries,
were $8,213,123 and $12,943,637 in 2009 and 2008, respectively.
Reserves for Claims: At December 31, 2009, the total reserves for claims were $39,490,000. Of
that total, $6,398,623 was reserved for specific claims, and $33,091,377 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.
Changes in the expected liability for claims for prior periods reflect
the uncertainty of the claim environment, as well as the limited predicting
power of historical data. The Company continually updates and refines its
reserve estimates as current experience develops and credible data emerges.
Adjustments may be required as new information develops which often varies from
past experience.
Movements in the reserves related to prior periods were primarily the
result of changes to estimates to better reflect the latest reported loss data,
rather than as a result of material changes to underlying key actuarial
assumptions or methodologies. Such changes include payments on claims closing
during the year, new details that emerge on still-open cases that cause claims
adjusters to increase or decrease the case reserve and the impact that these
types of changes have on the Company’s total loss provision. See “Critical
Accounting Estimates” for further discussion relating to the Company’s reserve
for claim losses and the related charges.
Salaries, Employee Benefits and Payroll Taxes: Personnel costs include base salaries,
benefits and bonuses paid to employees. Salaries, employee benefits and payroll
taxes were $18,189,483 and $19,605,500 for 2009 and 2008, respectively. Salaries
and related costs decreased $1.4 million, or 7.2% in 2009 compared with 2008.
The decrease in 2009 was primarily due to a reduction in headcount and a
reduction in employee benefit expenses. On a consolidated basis, salaries and
employee benefits as a percentage of total revenues were 25.5% and 27.6% in 2009
and 2008, respectively.
Office Occupancy and Operations: Overall office occupancy and operations as a
percentage of total revenues was 6.1% and 7.2% in 2009 and 2008, respectively.
The decrease in office occupancy and operations expense in 2009 compared with
2008 was due to a decrease in various items, including depreciation.
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, as defined by statute. Premium tax
rates vary from state to state; accordingly, the total premium tax burden is
dependent upon the geographical mix of operating revenues. Premium and
retaliatory taxes as a percentage of net premiums written remained constant at
2.0% for both the years ended December 31, 2009 and 2008.
Professional and Contract Labor Fees: Professional and contract labor fees for 2009
decreased $0.4 million compared with 2008 primarily due to decreases in contract
labor fees associated with investments in infrastructure and technology compared
with 2008.
Other Expenses:
Other operating expenses primarily include miscellaneous operating expenses of
the trust division and other miscellaneous expenses of the title segment. These
amounts typically fluctuate in relation with transaction volume of the title
segment and the trust division.
24
Income Taxes
The provision (benefit) for income taxes was $1,087,000 and $(2,034,000)
for the years ended December 31, 2009 and 2008, respectively. The income tax
benefit in 2008 was a result of the Company’s net loss from operations and
reflects a lower effective tax rate, primarily due to an increase in the
proportion of tax-exempt investment income to pre-tax loss. Income tax expense
(benefit) as a percentage of earnings (loss) before income taxes was 18.4% and
63.2%, for the years ended December 31, 2009 and 2008, respectively. The
effective income tax rate for 2009 was below the U.S. federal statutory income
tax rate (34%), primarily due to the proportion of tax-exempt investment income
to pre-tax income. Generally, when pretax income is recognized, tax-exempt
income has the effect of lowering the effective tax rate. Since a pretax loss
was recognized in 2008, tax-exempt income had the effect of increasing the 2008
effective tax rate.
The Company believes it is more likely than not that the tax benefits
associated with recognized, impairment and unrecognized losses recorded through
December 31, 2009 will be realized. However, this judgment could be impacted by
further market fluctuations. Information regarding the components of the income
tax expense and items included in the reconciliation of the effective rate with
the federal statutory rate can be found in Note 8 to the accompanying
Consolidated Financial Statements.
Net Income (Loss)
The Company reported net income for 2009 of $4,828,779 and a net loss for
2008 of $1,182,799, or $2.10 and $(0.50) per share on a diluted basis. Total
revenues for 2009 increased 0.3% to $71,308,160 from $71,123,261 in 2008, while
expenses for 2009 decreased 12.0% to $65,392,381 from $74,340,060. In the past
year, the Company’s premiums written benefited from a surge in mortgage
refinancing which occurred primarily in the first six months of 2009.
Operational expenses compared favorably to the prior year period primarily due
to the increase in fraud and mechanic lien claims experienced at the end of
2008. The Company’s claims experience greatly improved from the prior year. The
net loss in 2008 primarily resulted from the increase in the provision for
claims.
Liquidity and Capital
Resources
Liquidity: Cash
flow generated from operating activities increased from 2008 to 2009, primarily
due to the increase in net income in 2009 and a net operating loss carryback
from 2008 that the Company used to reduce taxes for 2009. Cash and cash
equivalents at year end increased $3.6 million from the prior year to
approximately $8.7 million, due to cash provided by operating activities in
2009.
Due to the Company’s historical
consistent ability to generate positive cash flows from its consolidated
operations and investment income, management believes that funds generated from
operations will enable the Company to adequately meet its current operating
needs for the foreseeable future. However, there can be no assurance that future
experience will be similar to historical experience, since it is influenced by
such factors as the interest rate environment, the Company’s claims-paying
ability and its financial strength ratings. The Company is unaware of any trend
that is likely to result in material adverse liquidity changes, but continually
assesses its capital allocation strategy, including decisions relating to
repurchasing the Company’s stock and/or conserving cash. The Company’s current
cash requirements include general operating expenses, income taxes, capital
expenditures, dividends on its common stock declared by the Board of Directors
and share repurchases of 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.
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.
Cash Flows: Net
cash flows provided by operating activities were $7,381,269 and $1,309,473 in
2009 and 2008, respectively. Cash flows from operations have been the primary
source of financing for expanding operations, additions to property and
equipment, dividends to shareholders, and operating requirements. Cash used in
operations in 2008 included payments of claims totaling
$12,943,637.
The principal non-operating use of cash and cash equivalents in 2009 was
for purchases of securities to the investment portfolio and, to a lesser extent,
dividends paid and repurchases of common stock. The principal non-operating use
of cash and cash equivalents in 2008 was for repurchases of common stock. The
net effect of all
25
activities on total cash
and cash equivalents was an increase of $3,578,175 for 2009 and $2,154,284 for
2008. As of December 31, 2009, the Company held cash and cash equivalents of
$8,733,221, short-term investments of $20,717,434 and fixed maturity securities
of $88,803,186.
As noted previously, the Company’s operating results and cash flows are
heavily dependent on the real estate market. The Company’s business has certain
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 will aid its ability to manage
cash resources through declines in the real estate market.
Receipt of Dividends from Subsidiaries: 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 that it incurs.
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. Each state of domicile
regulates the extent to which the Company’s title underwriters can pay dividends
or make distributions. As of December 31, 2009, approximately $62,822,000 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
current operating needs.
The maximum dividend permitted by law is not necessarily indicative of an
insurer’s actual ability to pay dividends, which may be constrained by
regulatory and business considerations, such as the impact of dividends on
surplus, which could affect an insurer’s ratings. Further, depending on
regulatory and business conditions, the Company may in the future need to retain
cash in its underwriters in order to maintain their ratings or their statutory
capital position. Such a requirement could be the result of adverse operating
conditions in the current economic environment, changes in interpretation of
statutory accounting requirements by regulators, reserve charges or investment
losses.
Purchase of Company Stock: On November 10, 2008, the Board of Directors of the Company approved the
purchase of an additional 394,582 shares pursuant to the Company’s stock
repurchase plan, such that there was authority remaining under the plan to
purchase up to an aggregate of 500,000 shares of the Company’s common stock
pursuant to the plan immediately after the approval. Pursuant to this approval,
the Company purchased 13,754 shares in the twelve months ended December 31, 2009
and 130,450 shares in the twelve months ended December 31, 2008 at an average
per share price of $31.11 and $45.78, respectively.
Capital
Expenditures: During 2010,
the Company has plans for various capital improvement projects, including
hardware purchases and several software development projects that are
anticipated to be funded via cash flows from operations. All material
anticipated capital expenditures are subject to periodic review and revision and
may vary depending on a number of factors.
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 $19,947,000 and $14,492,000 as of December 31, 2009
and 2008, 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 limited liability
companies that
26
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 $16,518,000
and $88,125,000 as of December 31, 2009 and 2008, respectively. These exchange
deposits are held at third-party financial institutions. 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 at the agreed upon
rate.
External assets managed by the Investors Trust Company totaled over
$500,000,000 for the years ended December 31, 2009 and 2008. These 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, 2009, including
payments due by period:
|
|
|
Payments due by period |
| Contractual Obligations Including |
|
|
|
|
Less than |
|
|
|
|
|
|
More than |
|
Off-Balance Sheet Arrangements |
|
Total |
|
1
year |
|
1 - 3
years |
|
3 - 5
years |
|
5
years |
| Operating lease obligations |
|
$ |
754,795 |
|
$ |
495,814 |
|
$ |
258,981 |
|
$ |
- |
|
$ |
- |
| Reserves for claims |
|
|
39,490,000 |
|
|
7,950,000 |
|
|
12,178,000 |
|
|
7,161,000 |
|
|
12,201,000 |
| Other obligations |
|
|
2,106,503 |
|
|
951,374 |
|
|
1,115,477 |
|
|
39,652 |
|
|
- |
| Obligations under executive |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| employment plans and
agreements |
|
|
4,826,000 |
|
|
- |
|
|
- |
|
|
- |
|
|
4,826,000 |
| Total |
|
$ |
47,177,298 |
|
$ |
9,397,188 |
|
$ |
13,552,458 |
|
$ |
7,200,652 |
|
$ |
17,027,000 |
| |
As of December 31, 2009, the Company had a claims reserve of $39,490,000.
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 payments. Events such as fraud, defalcation and
multiple property title defects can substantially and unexpectedly cause
increases in both the amount and timing of estimated title insurance loss
payments and loss cost trends whereby increases or decreases in inflationary
factors (including the value of real estate) will influence the ultimate amount
of title insurance loss payments and could increase total obligations and
influence claim payout patterns.
Recent Accounting
Standards
In January 2010, the Financial Accounting Standards Board (“FASB”)
updated the requirements for fair value measurements and disclosures to provide
for additional disclosure related to transfers in and out of securities
valuation hierarchy Levels 1 and 2 and to require companies to present activity
in Level 3 fair value measurements, purchases, sales, issuances and settlements,
on a gross basis rather than as one net number. The new disclosures are
clarifications of existing disclosures and are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances and settlements in the roll forward of
activity in Level 3 fair value, which are effective for fiscal years beginning
after December 15, 2010. The Company does not expect this update to have a
material impact on its financial condition or results of
operations.
On September 30, 2009, the FASB provided guidance on measuring the fair
value of certain alternative investments that calculate net asset value per
share. This update was effective for the first reporting period (including
interim periods) ending after December 15, 2009. This update did not have an
impact on the Company’s financial condition or results of operations.
27
In June 2009, the FASB changed the methodology used to determine whether
or not an entity is a primary beneficiary with respect to a variable interest
entity and introduced a requirement to reassess on an ongoing basis whether an
entity is the primary beneficiary of a variable interest entity. This update is
effective for annual reporting periods beginning after November 15, 2009, and
for interim periods during the first annual reporting period. The Company does
not expect this update to have a material impact on its financial condition or
results of operations.
In June 2009, the FASB changed the hierarchy of U.S. generally accepted
accounting principles (“GAAP”) such that the newly released FASB Accounting
Standards Codification (“ASC”) replaced other sources of authoritative GAAP,
with the exception of rules and interpretive releases of the Securities and
Exchange Commission, which will continue to be authoritative. The issuance of
this statement was not intended to significantly change GAAP, but requires ASC
citations in place of references to previous authoritative accounting
literature.
In May 2009, the FASB set forth (1) the period after the balance sheet
date during which management should evaluate events of transactions for
potential recognition or disclosure in the financial statements, (2)
circumstances under which an entity should recognize in its financial statements
events or transactions occurring after the balance sheet date, and (3) the
related disclosures that an entity should make.
In April 2009, a new model for evaluating other-than-temporary impairment
(“OTTI”) for debt securities was established. If the Company intends to sell a
debt security, or cannot assert it is more likely than not that it will not have
to sell the security before recovery, OTTI must be taken. If the Company does
not intend to sell the debt security before recovery, but the entity does not
expect to recover the entire amortized cost basis (i.e., present value of
expected cash flows is less than amortized cost), then OTTI must be taken, but
the amount of impairment is bifurcated between impairment due to credit (which
is recorded through earnings) and noncredit impairment (which becomes a
component of other comprehensive income (“OCI”) for both available-for-sale
(“AFS”) and held to maturity (“HTM”) securities). For HTM securities, the amount
in OCI will be amortized prospectively over the security’s remaining life. Upon
adoption of the Position, a cumulative effect adjustment must be made to opening
retained earnings in the period adopted that reclassifies the noncredit portion
of previously taken OTTI from retained earnings to accumulated OCI. The Company
did not have any cumulative effect adjustment at the time of adoption.
In April 2009, the FASB provided additional guidance for estimating fair
value when the volume and level of activity for the asset or liability has
significantly decreased and also included guidance on identifying circumstances
that indicated a transaction was not orderly. This Position was effective for
interim and annual reporting periods. The Company has implemented this standard
with no material impact.
ITEM 7A. QUALITATIVE AND QUANTITATIVE
DISCLOSURES ABOUT MARKET RISK
The Company is a smaller reporting company as defined by Rule 12b-2 under
the Exchange Act and is not required to provide the information required under
this item.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
|
|
1. |
|
Report of Independent Registered Public
Accounting Firm |
|
30 |
|
|
2. |
|
Management’s Report on Internal Control Over Financial
Reporting |
|
31 |
|
|
3. |
|
Report of Independent Registered Public
Accounting Firm |
|
32 |
|
|
4. |
|
Consolidated Balance Sheets |
|
33 |
|
|
5. |
|
Consolidated Statements of Income
(Loss) |
|
34 |
|
|
6. |
|
Consolidated Statements of Stockholders’ Equity |
|
35 |
|
|
7. |
|
Consolidated Statements of Comprehensive
Income (Loss) |
|
36 |
|
|
8. |
|
Consolidated Statements of Cash Flows |
|
37 |
|
|
9. |
|
Notes to Consolidated Financial
Statements |
|
38 |
Certain additional financial information is attached hereto as Schedules
I, II, III, IV and V.
Selected Quarterly Financial
Data
| 2009 |
|
March 31 |
|
June 30 |
|
September 30 |
|
December 31 |
|
| Net
premiums written |
|
$ |
16,409,820 |
|
$ |
18,912,388 |
|
$ |
14,282,615 |
|
$ |
12,550,428 |
|
|
Net income |
|
|
1,434,963 |
|
|
2,115,473 |
|
|
969,043 |
|
|
309,300 |
|
| Basic
earnings per common share |
|
|
.63 |
|
|
.92 |
|
|
.42 |
|
|
.14 |
|
|
Diluted earnings per common share |
|
|
.62 |
|
|
.92 |
|
|
.42 |
|
|
.14 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2008 |
|
March 31 |
|
June 30 |
|
September 30 |
|
December 31 |
|
| Net
premiums written |
|
$ |
17,813,360 |
|
$ |
18,127,982 |
|
$ |
15,331,820 |
|
$ |
12,389,025 |
|
|
Net income (loss) |
|
|
2,124,380 |
|
|
(273,934) |
|
|
917,033 |
|
|
(3,950,278) |
|
| Basic
earnings (loss) per common share |
|
|
.88 |
|
|
(.11) |
|
|
.39 |
|
|
(1.72) |
|
|
Diluted earnings (loss) per common share |
|
|
.87 |
|
|
(.11) |
|
|
.39 |
|
|
(1.72) |
|
29
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, 2009 and 2008, and the related consolidated
statements of income (loss), comprehensive income (loss), stockholders’ equity
and cash flows for the years ended December 31, 2009 and 2008. 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 consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
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, 2009 and 2008, and the results of their
operations and their cash flows for each of the years ended December 31, 2009
and 2008, 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), Investors Title Company’s internal control over financial
reporting as of December 31, 2009, 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 5, 2010 expressed an
unqualified opinion.
/s/ Dixon Hughes PLLC
March 5, 2010
High Point, North Carolina
30
Management’s Report on
Internal Control Over Financial Reporting
Management of Investors
Title Company and Subsidiaries 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 the Company’s internal control over financial
reporting was effective as of December 31, 2009.
The Company’s internal
control over financial reporting as of December 31, 2009 has been audited by
Dixon Hughes PLLC an independent registered public accounting firm, as stated in
their report which follows.
31
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of
Directors and Stockholders
Investors Title Company
Chapel Hill, North
Carolina
We have audited
Investors Title Company and Subsidiaries’ (the “Company”) internal control over
financial reporting as of December 31, 2009, based on criteria established in
Internal Control—Integrated
Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The 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, included in the accompanying Management’s
Annual Report on Internal Control Over Financial Reporting. Our responsibility
is to express an opinion on 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, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audit also included 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 accounting
principles generally accepted in the United States of America (“GAAP”). 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 GAAP, 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,
Investors Title Company and Subsidiaries maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We also have audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheet of Investors Title Company and
Subsidiaries as of and for the year ended December 31, 2009, and the related
consolidated statements of income (loss), comprehensive income (loss),
stockholders’ equity, and cash flows for the year then ended and our report
dated March 5, 2010, expressed an unqualified opinion on those consolidated
financial statements.
/s/ Dixon Hughes PLLC March 5, 2010
High Point, North Carolina
32
Investors Title Company and Subsidiaries
Consolidated Balance
Sheets
|
|
As of December 31, |
2009 |
|
2008 |
|
|
|
Assets |
|
|
|
|
|
|
|
|
Investments in
securities |
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
Held-to-maturity, at amortized cost (fair value: 2009: $2,000; 2008:
$462,580) |
$ |
2,000 |
|
$ |
451,681 |
|
|
|
Available-for-sale, at fair value (amortized cost: 2009: $85,047,483;
2008: $85,923,583) |
|
88,801,186 |
|
|
87,708,500 |
|
|
|
Equity securities, available-for-sale at fair value (cost: 2009:
$8,241,767; 2008: $9,158,785) |
|
11,854,301 |
|
|
9,965,297 |
|
|
|
Short-term investments |
|
20,717,434 |
|
|
15,725,513 |
|
|
|
Other investments |
|
2,307,220 |
|
|
2,040,962 |
|
|
|
Total investments |
|
123,682,141 |
|
|
115,891,953 |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
8,733,221 |
|
|
5,155,046 |
|
|
|
Premium and fees
receivable (less allowance for doubtful accounts: |
|
|
|
|
|
|
|
|
2009:
$1,486,000; 2008: $1,297,000) |
|
5,170,476 |
|
|
4,933,797 |
|
|
|
Accrued interest and dividends |
|
1,122,806 |
|
|
1,225,070 |
|
|
|
Prepaid expenses and other assets |
|
1,815,653 |
|
|
1,215,146 |
|
|
|
Property acquired in settlement of claims |
|
175,476 |
|
|
395,734 |
|
|
|
Property, net |
|
3,894,724 |
|
|
4,422,318 |
|
|
|
Current income taxes receivable |
|
- |
|
|
2,777,829 |
|
|
|
Deferred income taxes,
net |
|
1,833,207 |
|
|
3,841,295 |
|
|
|
Total Assets |
$ |
146,427,704 |
|
$ |
139,858,188 |
|
|
|
|
|
|
|
Liabilities and Stockholders’
Equity |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Reserves for claims |
$ |
39,490,000 |
|
$ |
39,238,000 |
|
|
|
Accounts payable and
accrued liabilities |
|
8,688,712 |
|
|
10,294,912 |
|
|
|
Commissions and reinsurance payable |
|
319,625 |
|
|
467,388 |
|
|
|
Current income taxes
payable |
|
670,290 |
|
|
- |
|
|
|
Total
liabilities |
|
49,168,627 |
|
|
50,000,300 |
|
|
|
|
|
|
|
Commitments and
Contingencies |
|
|
|
|
|
|
|
|
Stockholders’ Equity |
|
|
|
|
|
|
|
|
Class A Junior Participating preferred stock (shares authorized
100,000; no shares issued) |
|
- |
|
|
- |
|
|
|
Common stock-no par
value (shares authorized 10,000,000; 2,285,289 and 2,293,268 shares
issued |
|
|
|
|
|
|
|
|
and outstanding 2009 and 2008, respectively, excluding 291,676
shares for 2009 and 2008, |
|
|
|
|
|
|
|
|
respectively of common stock held by the Company’s
subsidiary) |
|
1 |
|
|
1 |
|
|
|
Retained earnings |
|
92,528,818 |
|
|
88,248,452 |
|
|
|
Accumulated other comprehensive
income |
|
4,730,258 |
|
|
1,609,435 |
|
|
|
Total
stockholders’ equity |
|
97,259,077 |
|
|
89,857,888 |
|
|
|
Total Liabilities and Stockholders’
Equity |
$ |
146,427,704 |
|
$ |
139,858,188 |
|
See notes to the
Consolidated Financial Statements.
33
Investors Title Company and Subsidiaries
Consolidated Statements of Income
(Loss)
| |
For the Years Ended December
31, |
|
2009 |
|
2008 |
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
Underwriting income: |
|
|
|
|
|
|
|
|
|
Premiums written |
|
$ |
62,250,774 |
|
$ |
63,937,276 |
|
|
|
Less-premiums for reinsurance ceded |
|
|
95,523 |
|
|
275,089 |
|
| |
Net premiums written |
|
|
62,155,251 |
|
|
63,662,187 |
|
|
|
Investment income-interest and
dividends |
|
|
3,783,116 |
|
|
4,558,735 |
|
|
|
Net
realized loss on investments |
|
|
(498,089) |
|
|
(2,922,376) |
|
|
|
Exchange services
revenue |
|
|
910,828 |
|
|
1,166,141 |
|
|
|
Other |
|
|
4,957,054 |
|
|
4,658,574 |
|
|
|
Total Revenues |
|
|
71,308,160 |
|
|
71,123,261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
Commissions to
agents |
|
|
29,254,311 |
|
|
27,717,807 |
|
|
|
Provision for claims |
|
|
8,465,123 |
|
|
15,206,637 |
|
|
|
Salaries, employee benefits
and payroll taxes |
|
|
18,189,483 |
|
|
19,605,500 |
|
|
|
Office occupancy and operations |
|
|
4,333,579 |
|
|
5,107,843 |
|
|
|
Business development |
|
|
1,398,057 |
|
|
2,104,935 |
|
|
|
Filing fees and taxes, other than payroll and income |
|
|
571,677 |
|
|
587,235 |
|
|
|
Premium and retaliatory
taxes |
|
|
1,268,301 |
|
|
1,281,297 |
|
|
|
Professional and contract labor fees |
|
|
1,362,706 |
|
|
1,731,550 |
|
|
|
Other |
|
|
549,144 |
|
|
997,256 |
|
|
|
Total Operating Expenses |
|
|
65,392,381 |
|
|
74,340,060 |
|
|
|
Income (Loss) before Income Taxes |
|
|
5,915,779 |
|
|
(3,216,799) |
|
|
|
Provision
(Benefit) for Income Taxes |
|
|
1,087,000 |
|
|
(2,034,000) |
|
|
|
Net Income (Loss) |
|
$ |
4,828,779 |
|
$ |
(1,182,799) |
|
|
|
Basic Earnings (Loss) per Common
Share |
|
$ |
2.11 |
|
$ |
(0.50) |
|
|
|
Weighted Average Shares Outstanding –
Basic |
|
|
2,291,816 |
|
|
2,364,361 |
|
|
|
Diluted Earnings (Loss) per Common
Share |
|
$ |
2.10 |
|
$ |
(0.50) |
|
|
|
Weighted Average Shares Outstanding –
Diluted |
|
|
2,299,429 |
|
|
2,364,361 |
|
|
|
Cash Dividends Paid per Common
Share |
|
$ |
0.28 |
|
$ |
0.28 |
|
See notes to the
Consolidated Financial Statements.
34
Investors Title Company and Subsidiaries
Consolidated Statements of Stockholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
Total |
|
|
|
|
|
Common
Stock |
|
Retained |
|
Comprehensive |
|
Stockholders’ |
|
| |
For the Years Ended
December 31, 2008 and 2009 |
|
Shares |
|
Amount |
|
Earnings |
|
Income |
|
Equity |
|
|
|
Balance, January 1,
2008 |
|
2,411,318 |
|
$ |
1 |
|
$ |
95,739,827 |
|
$ |
3,536,012 |
|
$ |
99,275,840 |
|
|
|
Net loss |
|
|
|
|
|
|
|
(1,182,799) |
|
|
|
|
|
(1,182,799) |
|
|
|
Dividends ($.28 per share) |
|
|
|
|
|
|
|
(661,862) |
|
|
|
|
|
(661,862) |
|
|
|
Shares of common stock
repurchased and retired |
|
(130,450) |
|
|
|
|
|
(5,972,043) |
|
|
|
|
|
(5,972,043) |
|
|
|
Issuance of common stock in payment of bonuses and fees |
|
40 |
|
|
|
|
|
1,946 |
|
|
|
|
|
1,946 |
|
|
|
Stock options
exercised |
|
12,360 |
|
|
|
|
|
230,801 |
|
|
|
|
|
230,801 |
|
|
|
Share-based compensation expense |
|
|
|
|
|
|
|
92,582 |
|
|
|
|
|
92,582 |
|
|
|
Amortization related to
postretirement health benefits |
|
|
|
|
|
|
|
|
|
|
13,456 |
|
|
13,456 |
|
|
|
Accumulated postretirement benefit obligation adjustment |
|
|
|
|
|
|
|
|
|
|
(67,221) |
|
|
(67,221) |
|
| |
Net unrealized loss on
investments |
|
|
|
|
|
|
|
|
|
|
(1,872,812) |
|
|
(1,872,812) |
|
|
|
Balance, December 31,
2008 |
|
2,293,268 |
|
$ |
1 |
|
$ |
88,248,452 |
|
$ |
1,609,435 |
|
$ |
89,857,888 |
|
|
|
Net income |
|
|
|
|
|
|
|
4,828,779 |
|
|
|
|
|
4,828,779 |
|
|
|
Dividends ($.28 per share) |
|
|
|
|
|
|
|
(641,577) |
|
|
|
|
|
(641,577) |
|
|
|
Shares of common stock
repurchased and retired |
|
(13,754) |
|
|
|
|
|
(427,875) |
|
|
|
|
|
(427,875) |
|
|
|
Stock options exercised |
|
5,775 |
|
|
|
|
|
91,873 |
|
|
|
|
|
91,873 |
|
|
|
Share-based compensation
expense |
|
|
|
|
|
|
|
429,166 |
|
|
|
|
|
429,166 |
|
|
|
Amortization related to postretirement health benefits |
|
|
|
|
|
|
|
|
|
|
14,783 |
|
|
14,783 |
|
|
|
Accumulated postretirement
benefit obligation adjustment |
|
|
|
|
|
|
|
|
|
|
(10,094) |
|
|
(10,094) |
|
|
|
Net unrealized gain on
investments |
|
|
|
|
|
|
|
|
|
|
3,116,134 |
|
|
3,116,134 |
|
|
|
Balance, December 31,
2009 |
|
2,285,289 |
|
$ |
1 |
|
$ |
92,528,818 |
|
$ |
4,730,258 |
|
$ |
97,259,077 |
|
See notes to the
Consolidated Financial Statements.
35
Investors Title Company and
Subsidiaries
Consolidated Statements of Comprehensive
Income (Loss)
| |
For the Years Ended December
31, |
|
2009 |
|
2008 |
|
|
|
Net income
(loss) |
|
$ |
4,828,779 |
|
$ |
(1,182,799) |
|
|
|
Other comprehensive income (loss), before tax: |
|
|
|
|
|
|
|
|
|
Amortization related to prior year service cost |
|
|
20,388 |
|
|
20,388 |
|
|
|
Amortization of unrecognized
loss |
|
|
2,014 |
|
|
- |
|
|
|
Accumulated postretirement benefit obligation adjustment |
|
|
(15,295) |
|
|
(101,850) |
|
|
|
Unrealized gains (losses) on
investments arising during the year |
|
|
4,276,719 |
|
|
(5,782,291) |
|
|
|
Reclassification adjustment
for net losses realized in net income (loss) |
|
|
498,089 |
|
|
2,922,376 |
|
|
|
Other comprehensive
income (loss), before tax |
|
|
4,781,915 |
|
|
(2,941,377) |
|
| |
Income tax expense (benefit) related to postretirement health
benefits |
|
|
2,418 |
|
|
(27,696) |
|
|
|
Income tax expense (benefit)
related to unrealized gains (losses) on |
|
|
|
|
|
|
|
|
|
investments arising during the year |
|
|
1,476,426 |
|
|
(1,992,602) |
|
|
|
Income tax expense related to reclassification adjustment for |
|
|
|
|
|
|
|
|
|
losses realized in net income (loss) |
|
|
182,248 |
|
|
1,005,498 |
|
|
|
Net income tax expense
(benefit) on other comprehensive income (loss) |
|
|
1,661,092 |
|
|
(1,014,800) |
|
|
|
Other
comprehensive income (loss) |
|
|
3,120,823 |
|
|
(1,926,577) |
|
|
|
Comprehensive income
(loss) |
|
$ |
7,949,602 |
|
$ |
(3,109,376) |
|
See notes to the
Consolidated Financial Statements.
36
Investors Title Company and Subsidiaries
Consolidated Statements of Cash
Flows
| |
For the Years Ended December
31, |
|
2009 |
|
2008 |
|
|
|
Operating Activities |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
4,828,779 |
|
$ |
(1,182,799) |
|
|
|
Adjustments to reconcile net income
(loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
658,136 |
|
|
920,840 |
|
|
|
Amortization, net |
|
|
291,283 |
|
|
313,377 |
|
|
|
Amortization related to
postretirement benefits obligation |
|
|
22,402 |
|
|
20,388 |
|
|
|
Issuance of common stock in payment of bonuses and fees |
|
|
- |
|
|
1,946 |
|
|
|
Share-based compensation
expense related to stock options |
|
|
429,166 |
|
|
92,582 |
|
|
|
Allowance (benefit) for doubtful accounts on premiums receivable |
|
|
189,000 |
|
|
(873,000) |
|
|
|
Net loss on disposals of
property |
|
|
27,992 |
|
|
221,148 |
|
|
|
Other property transactions |
|
|
- |
|
|
200,000 |
|
|
|
Net realized loss on
investments |
|
|
498,089 |
|
|
2,922,376 |
|
|
|
Net
earnings from other investments |
|
|
(1,137,771) |
|
|
(694,570) |
|
|
|
Provision for claims |
|
|
8,465,123 |
|
|
15,206,637 |
|
|
|
Provision (benefit) for deferred income taxes |
|
|
347,000 |
|
|
(201,000) |
|
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
(Increase) decrease in receivables and other assets |
|
|
(703,668) |
|
|
2,761,823 |
|
|
|
Decrease (increase) in current
income taxes receivable |
|
|
2,777,829 |
|
|
(2,777,829) |
|
|
|
Decrease in accounts payable and accrued liabilities |
|
|
(1,621,495) |
|
|
(991,398) |
|
|
|
(Decrease) increase in
commissions and reinsurance payable |
|
|
(147,763) |
|
|
60,466 |
|
|
|
Increase (decrease) in current income taxes payable |
|
|
670,290 |
|
|
(1,747,877) |
|
|
|
Payments of claims, net of
recoveries |
|
|
(8,213,123) |
|
|
(12,943,637) |
|
|
|
Net cash provided by operating activities |
|
|
7,381,269 |
|
|
1,309,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
Purchases of
available-for-sale securities |
|
|
(8,939,050) |
|
|
(17,461,053) |
|
|
|
Purchases of short-term securities |
|
|
(9,121,249) |
|
|
(2,396,338) |
|
|
|
Purchases of other
investments |
|
|
(561,186) |
|
|
(565,271) |
|
|
|
Proceeds from sales and maturities of available-for-sale
securities |
|
|
10,206,464 |
|
|
18,764,347 |
|
|
|
Proceeds from maturities of
held-to-maturity securities |
|
|
460,000 |
|
|
611,000 |
|
|
|
Proceeds from sales and maturities of short-term securities |
|
|
4,129,328 |
|
|
7,893,358 |
|
|
|
Proceeds from sales and
distributions of other investments |
|
|
1,158,712 |
|
|
887,287 |
|
|
|
Purchases of property |
|
|
(171,050) |
|
|
(493,681) |
|
|
|
Proceeds from disposals of
property |
|
|
12,516 |
|
|
8,266 |
|
|
|
Net cash (used in) provided by investing activities |
|
|
(2,825,515) |
|
|
7,247,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
|
Repurchases of common
stock |
|
|
(427,875) |
|
|
(5,972,043) |
|
|
|
Exercise of options |
|
|
91,873 |
|
|
230,801 |
|
|
|
Dividends paid |
|
|
(641,577) |
|
|
(661,862) |
|
|
|
Net cash used in financing activities |
|
|
(977,579) |
|
|
(6,403,104) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase in Cash and Cash
Equivalents |
|
|
3,578,175 |
|
|
2,154,284 |
|
|
|
Cash and Cash Equivalents, Beginning of
Year |
|
|
5,155,046 |
|
|
3,000,762 |
|
|
|
Cash and Cash Equivalents, End of
Year |
|
$ |
8,733,221 |
|
$ |
5,155,046 |
|
|
|
Supplemental
Disclosures |
|
|
|
|
|
|
|
|
|
Cash Paid During the Year
for |
|
|
|
|
|
|
|
|
|
Income Taxes, (refunds)
payments, net |
|
$ |
(2,708,000) |
|
$ |
2,775,000 |
|
|
|
Non
cash net unrealized (gain) loss on investments, net of deferred
tax |
|
|
|
|
|
|
|
|
|
(provision) benefit of ($1,658,674) and $987,103 for 2009 and 2008,
respectively |
|
$ |
(3,116,134) |
|
$ |
1,872,812 |
|
|
|
Adjustments to postretirement benefits obligation, net of deferred
tax |
|
|
|
|
|
|
|
|
|
provision of ($5,201) and ($34,629) for 2009 and 2008,
respectively |
|
$ |
10,094 |
|
$ |
67,221 |
|
See notes to the
Consolidated Financial Statements.
37
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”) primary business, and
only reportable segment, is title insurance. The title insurance segment,
through its two subsidiaries, Investors Title Insurance Company (“ITIC”) and
National Investors Title Insurance Company (“N-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 and through independent issuing agents in 23 states
and the District of Columbia primarily in the eastern half of the United States.
The majority of the Company’s business is concentrated in Illinois, Kentucky,
Michigan, New York, North Carolina, Pennsylvania, South Carolina, Tennessee,
Virginia and West Virginia.
Principles of
Consolidation and Basis of Presentation—The accompanying consolidated
financial statements include the accounts of the Company and its wholly owned
subsidiaries and are prepared in accordance with smaller reporting company
filing requirements. All significant intercompany balances and transactions have
been eliminated.
Reclassification—Certain
2008 amounts in the accompanying consolidated financial statements have been
reclassified to conform to the 2009 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 consolidated 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 with unrealized gains and
losses, net of tax, adjusted for other-than-temporary declines in fair value,
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 the majority of investments are based on quoted
market prices. Realized gains and losses are determined on the specific
identification method. Refer to Note 3.
Short-term Investments
Short-term investments comprise money market accounts which are invested
in short-term funds, 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 monitors any events or
changes in circumstances that may have a significant adverse effect on the fair
value of these investments.
38
Other Investments
Other investments consist primarily of investments in title insurance
agencies structured as limited liability companies (“ LLCs”), which are
accounted for under the equity or cost method of accounting. The aggregate cost
of the Company’s cost method investments totaled $902,022 and $821,617 at
December 31, 2009 and December 31, 2008, respectively. The Company monitors any
events or changes in circumstances that may have had a significant adverse
effect on the fair value of these investments and makes any necessary
adjustments.
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 twenty-five years) of the respective assets. Maintenance and repairs
are charged to operating expenses and improvements are capitalized.
Reserves for Claims
The total reserve for all reported and unreported losses the Company
incurred through December 31, 2009 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, 2009. 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.
Income Taxes
The Company makes certain estimates and judgments in determining income
tax expense (benefit) for financial statement purposes. These estimates and
judgments occur in the calculation of certain tax assets and liabilities which
arise from differences in the timing of recognition of revenue and expense for
tax and financial statement purposes. The Company provides for deferred income
taxes (benefits) for the tax consequences in future years of temporary
differences between the financial statements’ carrying values and the tax bases
of assets and liabilities using currently enacted tax rates. The Company
establishes valuation allowances if it believes that it is more likely than not
that some or all of its deferred tax assets will not be realized. Refer to Note
8.
Premiums Written and Commissions to Agents
Premiums are generally recorded and recognized as revenue at the time of
closing of the related transaction as the earnings process is then considered
complete. Title insurance commissions earned by the Company’s agents are
recognized as expense concurrently with premium recognition.
Exchange Services Revenue
Fees are recognized at the signing of a binding agreement and investment
earnings are recognized as they are earned.
39
Fair Values of Financial Instruments
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, short-term investments, premiums receivable, accrued
interest and dividends, accounts payable, commissions and reinsurance payable
and current income taxes payable approximate fair value due to the short-term
nature of these assets and liabilities. Fair values for the majority of
investment securities are based on quoted market prices. Auction rate
securities, (“ARS”) are valued using discounted cash flow models to determine
the estimated fair value of these investments. Some of the inputs to determining
the fair value of ARS are unobservable in the securities markets and are
significant.
Comprehensive Income
The Company’s accumulated other comprehensive income is comprised of
unrealized holding gains on available-for-sale securities, net of tax, and
unrecognized prior service cost and unrealized gains/losses associated with
postretirement benefit liabilities, net of tax.
Share-Based Compensation
The Company accounts for share-based compensation in accordance with the
fair value based principles required by the Financial Accounting Standards
Board’s (“FASB”). The Company adopted these provisions 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 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 are recognized over their remaining service
period using the compensation cost. Share-based compensation cost is generally
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.
As share-based compensation expense recognized in the consolidated
statements of income (loss) is based on awards ultimately expected to vest, it
has been reduced for estimated forfeitures. Forfeitures are estimated at the
time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates.
Subsequent Events
The Company has evaluated and concluded that there were no material
subsequent events through March 5, 2010, which is the date of financial
statement issuance, requiring adjustment to or disclosure in its consolidated
financial statements.
Recent Accounting Standards
In January 2010, the FASB updated the requirements for fair value
measurements and disclosures to provide for additional disclosure related to
transfers in and out of securities valuation hierarchy Levels 1 and 2 and to
require companies to present activity in Level 3 fair value measurements,
purchases, sales, issuances, and settlements, on a gross basis rather than as
one net number. Refer to Note 3 for a discussion of valuation hierarchy levels.
The new disclosures are clarifications of existing disclosures and are effective
for interim and annual reporting periods beginning after December 15, 2009,
except for the disclosures about purchases, sales, issuances, and settlements in
the roll forward of activity in Level 3 fair value which are effective for
fiscal years beginning after December 15, 2010. The Company does not expect this
update to have a material impact on its financial condition or results of
operations.
On September 30, 2009, the FASB provided guidance on measuring the fair
value of certain alternative investments that calculate net asset value per
share. This update is effective for the first reporting period (including
interim periods) ending after December 15, 2009. This update did not have an
impact on the Company’s financial condition or results of operations.
In June 2009, the FASB changed the methodology used to determine whether
or not an entity is a primary beneficiary with respect to a variable interest
entity and introduced a requirement to reassess on an ongoing basis whether an
entity is the primary beneficiary of a variable interest entity. This update was
effective for annual reporting periods beginning after November 15, 2009, and
for interim periods during the first annual reporting period. The Company does
not expect this update to have a material impact on its financial condition or
results of operations.
40
In June 2009, the FASB changed the hierarchy of U.S. generally accepted
accounting principles such that the newly released FASB Codification replaced
other sources of authoritative GAAP, with the exception of rules and
interpretive releases of the SEC, which will continue to be authoritative.
In May 2009, the FASB set forth (1) the period after the balance sheet
date during which management should evaluate events of transactions for
potential recognition or disclosure in the financial statements, (2) the
circumstances under which an entity should recognize in its financial statements
events or transactions occurring after the balance sheet date and (3) the
related disclosures that an entity should make. The Company has implemented this
standard. The Company has concluded that there were no material subsequent
events through March 5, 2010, which is the date of financial statement
issuance.
In April 2009, a new model for evaluating other-than-temporary impairment
(“OTTI”) for debt securities was established. If the Company intends to sell a
debt security, or cannot assert it is more likely than not that it will not have
to sell the security before recovery, OTTI must be taken. If the Company does
not intend to sell the debt security before recovery, but the entity does not
expect to recover the entire amortized cost basis, then OTTI must be taken, but
the amount of impairment is bifurcated between impairment due to credit (which
is recorded through earnings) and noncredit impairment, which becomes a
component of other comprehensive income (“OCI”) for both available-for-sale
(“AFS”) and held-to-maturity (“HTM”) securities. Upon adoption of the Position,
a cumulative effect adjustment must be made to opening retained earnings in the
period adopted that reclassifies the noncredit portion of previously taken OTTI
from retained earnings to accumulated OCI. The Company did not have any
cumulative effect adjustment at the time of adoption.
In April 2009, the FASB provided additional guidance for estimating fair
value when the volume and level of activity for the asset or liability has
significantly decreased and also included guidance on identifying circumstances
that indicated a transaction was not orderly. This Position was effective for
interim and annual reporting periods. The Company has implemented this standard
with no material impact on its financial position or results of
operations.
In April 2009, the FASB required summarized disclosures about fair value
of financial instruments for interim reporting periods of publicly traded
companies. This standard was effective for interim reporting periods ending
after June 15, 2009. The Company included additional disclosures in its
10-Qs.
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 materially from those estimates and assumptions used. The more
significant of these estimates and assumptions include the
following:
Claims
The Company’s reserves for claims 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, or “IBNR”). A
provision for estimated future claims payments is recorded at the time policy
revenue is recorded as a percentage of premium income. By their nature, title
claims can often be complex, vary greatly in dollar amounts, vary in number due
to economic and market conditions such as an increase in mortgage foreclosures,
and involve uncertainties as to ultimate exposure. In addition, some claims may
require a number of years to settle and determine the final liability for
indemnity and loss adjustment expense. The payment experience may extend for
more than 20 years after the issuance of a policy. 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.
Management considers factors such as the Company’s historical claims
experience, case reserve estimates on reported claims, large claims, actuarial
projections and other relevant factors in determining loss provision rates and
the aggregate recorded expected liability for claims. In establishing reserves,
actuarial projections are compared with recorded reserves to evaluate the
adequacy of such recorded claims reserves and any necessary adjustments are then
recorded in current operations. As the most recent claims experience develops
and new information becomes
41
available, the loss
reserve estimate related to prior periods will change to more accurately reflect
updated and improved emerging data. The Company reflects any adjustments to
reserves in the results of operations in the period in which new information
(principally claims experience) becomes available.
Impairments
Securities are regularly evaluated and 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. When, in the opinion of
management, a decline in the fair value of an investment is considered to be
other-than-temporary, such investment is written down to its fair value. 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, the probability that the Company will be unable to collect
all amounts due under the contractual terms of the security; with respect to
equity securities, whether the Company’s ability and intent to retain the
investment for a period of time sufficient to allow for a recovery in value;
with respect to fixed maturity securities, whether the Company has the intent to
sell or will more likely than not be required to sell a particular security
before recovery in value; and the financial condition and prospects of the
issuer (including credit ratings). These factors are reviewed quarterly and any
material degradation in the prospect for recovery will be considered in the
other-than-temporary impairment analysis. 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. The fair values of the majority of the
Company’s investments are based on quoted market prices from independent pricing
services.
2. Statutory Restrictions on Consolidated
Stockholders’ Equity and Investments
The Company has designated approximately $41,474,000 and $40,638,000 of
retained earnings as of December 31, 2009 and 2008, 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, 2009 and 2008 approximately $62,822,000 and
$55,987,000, 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 $6,960,000 and $6,540,000 at December 31,
2009 and 2008 respectively, are deposited with the insurance departments of the
states in which business is conducted.
42
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 |
|
|
|
December 31, 2009 |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
|
|
Fixed Maturities- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity, at amortized
cost- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political
subdivisions |
|
$ |
2,000 |
|
$ |
- |
|
$ |
- |
|
$ |
2,000 |
|
|
|
Total |
|
$ |
2,000 |
|
$ |
- |
|
$ |
- |
|
$ |
2,000 |
|
|
|
Fixed Maturities- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale, at fair
value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political
subdivisions |
|
$ |
70,311,741 |
|
$ |
3,373,339 |
|
$ |
676,038 |
|
$ |
73,009,042 |
|
|
|
Corporate debt
securities |
|
|
14,735,742 |
|
|
1,056,402 |
|
|
- |
|
|
15,792,144 |
|
|
|
Total |
|
$ |
85,047,483 |
|
$ |
4,429,741 |
|
$ |
676,038 |
|
$ |
88,801,186 |
|
|
|
Equity Securities, available-for-sale at fair value- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks and
nonredeemable preferred stocks |
|
$ |
8,241,767 |
|
$ |
3,643,832 |
|
$ |
31,298 |
|
$ |
11,854,301 |
|
|
|
Total |
|
$ |
8,241,767 |
|
$ |
3,643,832 |
|
$ |
31,298 |
|
$ |
11,854,301 |
|
|
|
Short-term investments- |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Certificates of deposit and
other |
|
$ |
20,717,434 |
|
$ |
- |
|
$ |
- |
|
$ |
20,717,434 |
|
|
|
Total |
|
$ |
20,717,434 |
|
$ |
- |
|
$ |
- |
|
$ |
20,717,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
Gross |
|
Estimated |
|
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
|
|
December 31,
2008 |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
|
|
Fixed Maturities- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity, at amortized
cost- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political
subdivisions |
|
$ |
451,681 |
|
$ |
10,899 |
|
$ |
- |
|
$ |
462,580 |
|
|
|
Total |
|
$ |
451,681 |
|
$ |
10,899 |
|
$ |
- |
|
$ |
462,580 |
|
|
|
Fixed Maturities- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale, at fair
value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political
subdivisions |
|
$ |
72,818,413 |
|
$ |
2,178,686 |
|
$ |
986,503 |
|
$ |
74,010,596 |
|
|
|
Corporate debt
securities |
|
|
13,105,170 |
|
|
606,001 |
|
|
13,267 |
|
|
13,697,904 |
|
|
|
Total |
|
$ |
85,923,583 |
|
$ |
2,784,687 |
|
$ |
999,770 |
|
$ |
87,708,500 |
|
|
|
Equity Securities, available-for sale at fair value- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks and
nonredeemable preferred stocks |
|
$ |
9,158,785 |
|
$ |
1,446,389 |
|
$ |
639,877 |
|
$ |
9,965,297 |
|
|
|
Total |
|
$ |
9,158,785 |
|
$ |
1,446,389 |
|
$ |
639,877 |
|
$ |
9,965,297 |
|
|
|
Short-term investments- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit and
other |
|
$ |
15,725,513 |
|
$ |
- |
|
$ |
- |
|
$ |
15,725,513 |
|
|
|
Total |
|
$ |
15,725,513 |
|
$ |
- |
|
$ |
- |
|
$ |
15,725,513 |
|
The scheduled maturities of fixed maturity securities at December 31,
2009 were as follows:
| |
|
|
Available-for-Sale |
|
Held-to-Maturity |
|
|
|
|
|
Amortized |
|
Fair |
|
Amortized |
|
Fair |
|
| |
|
|
Cost |
|
Value |
|
Cost |
|
Value |
|
|
|
Due in one year or less |
|
$ |
8,077,093 |
|
$ |
8,216,779 |
|
$ |
2,000 |
|
$ |
2,000 |
|
|
|
Due after one year through five years |
|
|
24,465,295 |
|
|
26,099,121 |
|
|
- |
|
|
- |
|
|
|
Due five years through ten
years |
|
|
35,484,243 |
|
|
37,445,716 |
|
|
- |
|
|
- |
|
|
|
Due after ten
years |
|
|
17,020,852 |
|
|
17,039,570 |
|
|
- |
|
|
- |
|
|
|
Total |
|
$ |
85,047,483 |
|
$ |
88,801,186 |
|
$ |
2,000 |
|
$ |
2,000 |
|
43
Earnings on investments for the years ended December 31 were as
follows:
| |
|
|
2009 |
|
2008 |
|
|
|
Fixed maturities |
|
$ |
3,459,975 |
|
$ |
3,415,009 |
|
|
|
Equity securities |
|
|
249,932 |
|
|
266,860 |
|
| |
Invested cash and other short-term
investments |
|
|
68,563 |
|
|
779,468 |
|
|
|
Miscellaneous
interest |
|
|
4,646 |
|
|
97,398 |
|
|
|
Investment income |
|
$ |
3,783,116 |
|
$ |
4,558,735 |
|
Gross realized gains and losses on sales of available-for-sale securities
for the years ended December 31 are summarized as follows:
| |
|
|
2009 |
|
2008 |
|
|
|
Gross realized gains: |
|
|
|
|
|
|
|
|
|
Obligations of states and
political subdivisions |
|
$ |
5,496 |
|
$ |
25,203 |
|
|
|
Common stocks and
nonredeemable preferred stocks |
|
|
438,982 |
|
|
295,992 |
|
|
|
Total |
|
|
444,478 |
|
|
321,195 |
|
|
|
Gross realized losses: |
|
|
|
|
|
|
|
|
|
Obligations of states and
political subdivisions |
|
|
(38,000) |
|
|
(363,633) |
|
|
|
Common stocks and
nonredeemable preferred stocks |
|
|
(630,581) |
|
|
(2,759,845) |
|
| |
Total |
|
|
(668,581) |
|
|
(3,123,478) |
|
|
|
Net realized
loss |
|
$ |
(224,103) |
|
$ |
(2,802,283) |
|
Also included in net realized loss on investments in the Consolidated
Statements of Income (Loss) for the years ended December 31, 2009 and 2008 is
($273,986) and ($120,093), respectively, of losses from the sale of other
investments.
The following table presents the 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, 2009 and 2008.
| |
|
|
Less than 12
Months |
|
12 Months or
Longer |
|
Total |
|
|
|
December 31, 2009 |
|
Fair
Value |
|
Unrealized
loss |
|
Fair
Value |
|
Unrealized
loss |
|
Fair
Value |
|
Unrealized
loss |
|
|
|
Obligations of states and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
political subdivisions |
|
$ |
4,343,398 |
|
$ |
(87,703) |
|
$ |
- |
|
$ |
- |
|
$ |
4,343,398 |
|
$ |
(87,703) |
|
|
|
Auction rate
securities |
|
|
- |
|
|
- |
|
|
7,283,395 |
|
|
(588,335) |
|
|
7,283,395 |
|
|
(588,335) |
|
|
|
Total Fixed Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Securities |
|
$ |
4,343,398 |
|
$ |
(87,703) |
|
$ |
7,283,395 |
|
$ |
(588,335) |
|
$ |
11,626,793 |
|
$ |
(676,038) |
|
|
|
Equity
Securities |
|
|
494,367 |
|
|
(15,284) |
|
|
285,874 |
|
|
(16,014) |
|
|
780,241 |
|
|
(31,298) |
|
|
|
Total temporarily |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
impaired
securities |
|
$ |
4,837,765 |
|
$ |
(102,987) |
|
$ |
7,569,269 |
|
$ |
(604,349) |
|
$ |
12,407,034 |
|
$ |
(707,336) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
political subdivisions |
|
$ |
7,783,709 |
|
$ |
(221,100) |
|
$ |
777,257 |
|
$ |
(15,590) |
|
$ |
8,560,966 |
|
$ |
(236,690) |
|
|
|
Auction rate
securities |
|
|
7,596,920 |
|
|
(763,080) |
|
|
- |
|
|
- |
|
|
7,596,920 |
|
|
(763,080) |
|
|
|
Total Fixed Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
$ |
15,380,629 |
|
$ |
(984,180) |
|
$ |
777,257 |
|
$ |
(15,590) |
|
$ |
16,157,886 |
|
$ |
(999,770) |
|
|
|
Equity
Securities |
|
|
3,002,004 |
|
|
(559,410) |
|
|
337,970 |
|
|
(80,467) |
|
|
3,339,974 |
|
|
(639,877) |
|
|
|
Total temporarily |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
impaired
securities |
|
$ |
18,382,633 |
|
$ |
(1,543,590) |
|
$ |
1,115,227 |
|
$ |
(96,057) |
|
$ |
19,497,860 |
|
$ |
(1,639,647) |
|
44
As of December 31, 2009, the Company held $11,626,793 in fixed maturity
securities with unrealized losses of $676,038. As of December 31, 2008, the
Company held $16,157,886 in fixed maturity securities with unrealized losses of
$999,770. Due to the credit market disruption in 2008 which reduced liquidity
and led to wider credit spreads, the Company saw an increase in unrealized
losses in its securities portfolio. The maturity duration of the debt securities
range from less than one to more than ten years. The decline in fair value of
the fixed maturity securities can be attributed primarily to changes in market
interest rates and changes in credit spreads over treasury securities. Because
the Company does not have the intent to sell these securities and will likely
maintain them until a recovery of the cost basis, the Company does not consider
these investments to be other-than-temporarily impaired.
The unrealized losses related to holdings of equity securities were
caused by market changes that the Company considers to be temporary. Since the
Company has the intent and ability to hold these equity securities until a
recovery of fair value, the Company does not consider these investments
other-than-temporarily impaired at December 31, 2009.
Factors considered in determining whether a loss is temporary include the
length of time and extent to which fair value has been below cost, the financial
condition and prospects of the issuer (including credit ratings and analyst
reports) and macro-economic changes. A total of 31 and 67 securities had
unrealized losses at December 31, 2009 and December 31, 2008, respectively.
Reviews of the values 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. During 2009, the Company recorded an other-than-temporary
impairment charge in the amount of $758,661 related to securities. During 2008,
the Company recorded an other-than-temporary impairment charge in the amount of
approximately $1.2 million related to securities.
Valuation
Hierarchy. The FASB
establishes a valuation hierarchy for disclosure of the inputs to valuation used
to measure fair value. This hierarchy categorizes the inputs into three broad
levels as follows. Level 1 inputs to the valuation methodology are quoted prices
(unadjusted) in active markets for identical assets or liabilities. Level 2
inputs to the valuation methodology are quoted prices for similar assets and
liabilities in active markets or inputs that are observable for the asset or
liability, either directly or indirectly through market corroboration, for
substantially the full term of the financial instrument. Level 3 inputs are
unobservable inputs based on the Company’s own assumptions used to measure
assets and liabilities at fair value.
The following table presents, by level, the financial assets carried at
fair value measured on a recurring basis as of December 31, 2009 and 2008. The
table does not include cash on hand and also does not include assets which are
measured at historical cost or any basis other than fair value.
| |
Available-for-sale
securities |
|
Carrying
Balance |
|
Level
1 |
|
Level
2 |
|
Level
3 |
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fixed maturities |
|
$ |
88,801,186 |
|
$ |
- |
|
$ |
78,703,391 |
|
$ |
10,097,795 |
|
|
|
Equity |
|
|
11,854,301 |
|
|
11,854,301 |
|
|
- |
|
|
- |
|
|
|
Total |
|
$ |
100,655,487 |
|
$ |
11,854,301 |
|
$ |
78,703,391 |
|
$ |
10,097,795 |
|
|
|
December 31,
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
87,708,500 |
|
$ |
- |
|
$ |
80,111,580 |
|
$ |
7,596,920 |
|
|
|
Equity |
|
|
9,965,297 |
|
|
9,965,297 |
|
|
- |
|
|
- |
|
|
|
Total |
|
$ |
97,673,797 |
|
$ |
9,965,297 |
|
$ |
80,111,580 |
|
$ |
7,596,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents a reconciliation of the Company’s assets
measured at fair value using significant unobservable inputs (Level 3) as
defined for the year ended December 31, 2009:
| Changes in fair value during the year
ended December 31: |
|
2009 |
|
2008 |
|
| Beginning balance at January 1 |
|
$ |
7,596,920 |
|
|
$ |
- |
|
| Transfers into Level 3 |
|
|
3,708,280 |
|
|
|
8,087,630 |
|
| Redemptions |
|
|
(1,200,000) |
|
|
|
- |
|
| Unrealized loss - included in other comprehensive income |
|
|
(7,405) |
|
|
|
(490,710) |
|
| Ending balance at
December 31 |
|
$ |
10,097,795 |
|
|
$ |
7,596,920 |
|
| |
|
|
|
|
|
|
|
|
45
Valuation Techniques. A financial instrument’s classification within the valuation hierarchy
is based upon the lowest level of input that is significant to the fair value
measurement-consequently, if there are multiple significant valuation inputs
that are categorized in different levels of the hierarchy, the instrument’s
hierarchy level is the lowest level within which any significant input
falls.
Equity securities are measured at fair value using quoted active market
prices and are classified within Level 1 of the valuation hierarchy. The fair
value of fixed maturity investments included in the Level 2 category was based
on the market values obtained from pricing services.
The Level 2 category generally includes corporate bonds, U.S. government
corporations and agency bonds and municipal bonds. The fair value of fixed
maturity investments included in the Level 2 category was based on the market
values obtained from pricing services. A number of the Company’s investment
grade corporate bonds are frequently traded in active markets and traded market
prices for these securities existed at December 31, 2009. However, these
securities were classified as Level 2 at December 31, 2009, because the third
party pricing services from which the Company has obtained fair values for such
instruments also use valuation models, which use observable market inputs, in
addition to traded prices. Substantially all of these model input assumptions
are observable in the marketplace or can be derived or supported by observable
market data.
The Company’s investments in student loan auction rate securities (“ARS”)
are its only Level 3 assets, and were transferred from Level 2 because quoted
prices from broker-dealers were unavailable due to the failure of auctions.
Valuations using discounted cash flow models were used to determine the
estimated fair value of these investments as of December 31, 2009. Some of the
inputs to this model are unobservable in the market and are significant.
ARS were structured to provide purchase and sale liquidity through a
Dutch auction process. Due to the increasingly stressed and
liquidity-constrained environment in money markets, the auction process for ARS
began failing in February 2008 as broker-dealers ceased supporting auctions with
their own capital. The credit quality of the ARS the Company holds is high, as
all are rated investment grade and are comprised entirely of student loan ARS,
substantially guaranteed by government-sponsored enterprises, and the Company
continues to receive interest income.
4. Property and Equipment
Property and equipment and estimated
useful lives at December 31 are summarized as follows:
| |
|
|
2009 |
|
2008 |
|
|
|
Land |
|
$ |
1,107,582 |
|
$ |
1,107,582 |
|
|
|
Office buildings and improvements (25 years) |
|
|
3,186,567 |
|
|
3,173,432 |
|
|
|
Furniture, fixtures and equipment (3 to
10 years) |
|
|
4,926,727 |
|
|
5,476,101 |
|
|
|
Automobiles (3
years) |
|
|
636,157 |
|
|
667,659 |
|
| |
Total |
|
|
9,857,033 |
|
|
10,424,774 |
|
|
|
Less accumulated
depreciation |
|
|
(5,962,309) |
|
|
(6,002,456) |
|
|
|
Property and
equipment, net |
|
$ |
3,894,724 |
|
$ |
4,422,318 |
|
5. Reinsurance
The Company assumes and cedes reinsurance with other insurance companies
in the normal course of business. Premiums assumed and ceded were approximately
$12,000 and $96,000, respectively, for 2009 and $167,000 and $275,000,
respectively, for 2008. 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 two years ended December 31, 2009.
46
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:
| |
|
|
2009 |
|
2008 |
|
|
|
Balance, beginning of year |
|
$ |
39,238,000 |
|
$ |
36,975,000 |
|
|
|
Provisions related to: |
|
|
|
|
|
|
|
|
|
Current year |
|
|
7,726,693 |
|
|
15,564,722 |
|
| |
Prior years |
|
|
738,430 |
|
|
(358,085) |
|
|
|
Total provision charged to
operations |
|
|
8,465,123 |
|
|
15,206,637 |
|
|
|
Claims paid, net of recoveries, related to: |
|
|
|
|
|
|
|
|
|
Current year |
|
|
(424,364) |
|
|
(5,937,616) |
|
|
|
Prior years |
|
|
(7,788,759) |
|
|
(7,006,021) |
|
|
|
Total claims paid, net of
recoveries |
|
|
(8,213,123) |
|
|
(12,943,637) |
|
|
|
Balance, end of year |
|
$ |
39,490,000 |
|
$ |
39,238,000 |
|
The Company continually refines its reserve estimates as current loss
experience develops and credible data emerges. Movements in the reserves related
to prior periods were primarily the result of changes to estimates to better
reflect the latest reported loss data.
The provision for claims as a percentage of net premiums written was
13.6% and 23.9% in 2009 and 2008, respectively. The change in estimate for
calendar year 2009 from 2008 resulted from 2008 being impacted by two large
fraud related claims and one unusually large mechanic’s lien claim totaling
approximately $6,800,000. Calendar year 2009 experienced unfavorable development
of approximately $740,000, of which $500,000 was related to a large claim
associated with policy year 2006. The favorable development in 2008 versus prior
years was primarily related to policy years 2004, 2005 and 2007 experiencing
lower claim volumes, offset by unfavorable development in 2006 related to large
fraud claims and a mechanic’s lien. Due to variances between actual and expected
loss payments, loss development is subject to significant variability.
A large claim is defined as a claim with incurred losses exceeding
$250,000. Due to the small volume of large claims, the long-tail nature of title
insurance claims and the inherent uncertainty in loss emergence patterns, large
claim activity can vary significantly between policy years. The estimated
development of large claims by policy year is therefore subject to significant
changes as experience develops.
A summary of the Company’s loss reserves, broken down into its components
of known title claims and IBNR claims follows:
| |
|
|
2009 |
|
Percentage |
|
2008 |
|
Percentage |
|
|
|
Known title claims |
|
$ |
6,398,623 |
|
16.2% |
|
$ |
6,447,345 |
|
16.4% |
|
|
|
IBNR |
|
|
33,091,377 |
|
83.8% |
|
|
32,790,655 |
|
83.6% |
|
|
|
Total loss
reserves |
|
$ |
39,490,000 |
|
100.0% |
|
$ |
39,238,000 |
|
100.0% |
|
In management’s opinion, the reserves are adequate to cover claim losses
which might result from pending and future claims.
7. Earnings (Loss) Per Share and Stock
Options
Basic earnings per common share is computed by dividing net income (loss)
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 potential common stock, 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 includes the dilutive effect of in-the-money share-based
awards, which are 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-based award, 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-based awards are exercised are assumed to be used to
repurchase shares in the current period. The incremental dilutive potential
common shares, calculated using the
47
treasury stock method
was 7,613 for 2009. Due to a net loss in 2008, the treasury stock method for the
calculation of diluted shares was antidilutive. 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, |
|
2009 |
|
2008 |
|
|
|
Net income
(loss) |
|
$ |
4,828,779 |
|
$ |
(1,182,799) |
|
|
|
Weighted average common shares outstanding - Basic |
|
|
2,291,816 |
|
|
2,364,361 |
|
| |
Incremental shares outstanding
assuming |
|
|
|
|
|
|
|
|
|
the exercise of dilutive stock options
and SARs (share settled) |
|
|
7,613 |
|
|
- |
|
|
|
Weighted average
common shares outstanding - Diluted |
|
|
2,299,429 |
|
|
2,364,361 |
|
|
|
Basic earnings per
common share |
|
$ |
2.11 |
|
$ |
(0.50) |
|
|
|
Diluted earnings per
common share |
|
$ |
2.10 |
|
$ |
(0.50) |
|
In 2009, 17,200 awards were excluded from the computation of diluted
earnings per share because their exercise price was greater than the stock price
and therefore considered anti-dilutive.
The Company has adopted Employee stock award plans (the “Plans”) under
which restricted stock, and options or stock appreciation rights (“SARs”) to
purchase shares (not to exceed 500,000 shares) of the Company’s stock may be
granted to key employees or directors of the Company at a price not less than
the market value on the date of grant. SARs and options (which have
predominantly been incentive stock options) awarded under the Plans thus far 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. All
SARs issued to date have been share settled only. No SARs were exercised in 2009
or 2008.
A summary of share-based award
transactions for all share-based award plans follows:
|
|
|
|
|
|
Weighted |
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
Remaining |
|
Aggregate |
|
|
|
Number |
|
Exercise |
|
Contractual |
|
Intrinsic |
|
|
|
of Shares |
|
Price |
|
Term (years) |
|
Value |
| Outstanding as of January 1,
2008 |
|
60,480 |
|
|
$ |
22.77 |
|
|
4.11 |
|
|
$ |
1,377,390 |
|
| SARs granted |
|
3,000 |
|
|
|
47.88 |
|
|
|
|
|
|
|
|
| Options exercised |
|
(12,360) |
|
|
|
18.67 |
|
|
|
|
|
|
|
|
| Options/SARs cancelled/forfeited/expired |
|
(4,050) |
|
|
|
29.96 |
|
|
|
|
|
|
|
|
| Outstanding as of December 31,
2008 |
|
47,070 |
|
|
$ |
24.83 |
|
|
3.67 |
|
|
$ |
666,079 |
|
| SARs granted |
|
78,000 |
|
|
|
28.13 |
|
|
|
|
|
|
|
|
| Options exercised |
|
(5,775) |
|
|
|
15.91 |
|
|
|
|
|
|
|
|
| Options/SARs cancelled/forfeited/expired |
|
(2,050) |
|
|
|
20.61 |
|
|
|
|
|
|
|
|
| Outstanding as of December 31, 2009
|
|
117,245 |
|
|
$ |
27.54 |
|
|
5.10 |
|
|
$ |
541,543 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Unvested as of December 31,
2009 |
|
39,342 |
|
|
$ |
27.35 |
|
|
5.76 |
|
|
$ |
140,637 |
|
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, 2009. The intrinsic value of options exercised
during 2009 was approximately $89,000.
48
The following tables summarize
information about fixed stock options outstanding at December 31, 2009:
|
|
|
|
|
|
|
|
|
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 |
|
5,895 |
|
0.3 |
|
$ |
11.21 |
|
5,895 |
|
$ |
11.21 |
|
|
|
13.06 |
|
- |
|
|
15.58 |
|
5,000 |
|
1.2 |
|
|
14.93 |
|
4,300 |
|
|
14.91 |
|
|
|
17.25 |
|
- |
|
|
19.35 |
|
2,050 |
|
2.3 |
|
|
19.05 |
|
1,350 |
|
|
19.07 |
|
|
|
20.00 |
|
- |
|
|
22.75 |
|
9,100 |
|
2.9 |
|
|
21.28 |
|
6,600 |
|
|
21.20 |
|
|
|
25.28 |
|
- |
|
|
27.96 |
|
3,000 |
|
3.9 |
|
|
26.25 |
|
3,000 |
|
|
26.25 |
|
|
|
27.97 |
|
- |
|
|
31.99 |
|
3,700 |
|
4.4 |
|
|
31.08 |
|
2,340 |
|
|
31.08 |
|
|
|
32.00 |
|
- |
|
|
36.79 |
|
2,500 |
|
5.4 |
|
|
36.79 |
|
2,500 |
|
|
36.79 |
|
| $ |
10.00 |
|
- |
|
$ |
36.79 |
|
31,245 |
|
2.6 |
|
$ |
21.09 |
|
25,985 |
|
$ |
20.75 |
|
| |
|
|
|
|
|
|
|
|
|
|
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 |
| $ |
27.97 |
|
- |
|
$ |
27.97 |
|
75,000 |
|
6.17 |
|
$ |
27.97 |
|
41,668 |
|
$ |
27.97 |
|
|
|
32.00 |
|
- |
|
|
32.00 |
|
3,000 |
|
6.39 |
|
|
32.00 |
|
2,250 |
|
|
32.00 |
|
|
|
43.78 |
|
- |
|
|
49.04 |
|
8,000 |
|
4.44 |
|
|
46.96 |
|
8,000 |
|
|
46.96 |
|
| $ |
27.97 |
|
- |
|
$ |
49.04 |
|
86,000 |
|
6.02 |
|
$ |
29.88 |
|
51,918 |
|
$ |
31.07 |
|
In 2009, 50,353 options and SARs
vested with a fair value of approximately $399,419.
During the first and second quarter of 2009, the Company issued 78,000
share settled SARs to the select officers and directors of the Company. SARs
give the holder the right to receive stock equal to 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 award is
estimated on the date of grant using the Black-Scholes option valuation 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 awards
represents the period of time that options granted are expected to be
outstanding. The interest rate for periods during the expected life of the award
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 $8.50 and was estimated
using the following weighted-average assumptions:
| |
|
2009 |
|
|
Expected Life in Years |
5.0 |
|
|
Volatility |
32.8-38.8 |
|
|
Interest Rate |
1.87% |
|
|
Yield Rate |
0.92% |
The fair value of each SAR granted is estimated on the date of grant
using the Black-Scholes option pricing method with the following
weighted-average assumptions:
| |
|
2009 |
|
2008
|
|
|
Expected Life in Years |
|
5.0 |
|
|
|
5.0 |
|
|
|
Volatility |
|
34% |
|
|
|
24% |
|
|
|
Interest Rate |
|
1.9% |
|
|
|
3.1% |
|
|
|
Yield Rate |
|
0.9% |
|
|
|
0.6% |
|
49
There was approximately $429,000 and $93,000 of compensation expense
relating to shares vesting on or before December 31, 2009 and December 31, 2008,
respectively, included in salaries, employee benefits and payroll taxes of the
Consolidated Statements of Income (Loss). As of December 31, 2009, there was
approximately $389,000 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 1.1 years.
The estimated weighted-average grant-date fair value of SARs granted for
the years ended December 31 was as follows:
| For the Years Ended
December 31, |
|
2009 |
|
2008 |
| Exercise
price equal to market price on date of grant: |
|
|
|
|
|
|
|
|
Weighted-average market price |
|
$ |
28.13 |
|
$ |
47.88 |
|
|
Weighted-average grant-date fair
value |
|
|
8.50 |
|
|
12.26 |
|
There are no stock options or SARs
granted where the exercise price is less than the market price on the date of
grant.
8. Income Taxes
The components of income tax expense
(benefit) for the years ended December 31 are summarized as
follows:
| For the Years Ended
December 31, |
2009 |
|
2008 |
|
Current: |
|
|
|
|
|
|
|
Federal |
$ |
717,000 |
|
$ |
(1,857,000) |
|
|
State |
|
23,000 |
|
|
24,000 |
|
|
Total |
|
740,000 |
|
|
(1,833,000) |
|
|
Deferred: |
|
|
|
|
|
|
|
Federal |
|
329,203 |
|
|
(147,097) |
|
|
State |
|
17,797 |
|
|
(53,903) |
|
|
Total |
|
347,000 |
|
|
(201,000) |
|
|
Total |
$ |
1,087,000 |
|
$ |
(2,034,000) |
|
For state income tax purposes, ITIC and N-ITIC generally pay only a gross
premium tax found in premium and retaliatory taxes in the Consolidated
Statements of Income (Loss).
At December 31, the approximate tax effect of each component of deferred
income tax assets and liabilities is summarized as follows:
| For the Years Ended
December 31, |
2009 |
|
2008 |
| Deferred
income tax assets: |
|
|
|
|
|
|
|
Recorded reserves for claims, net
of statutory premium reserves |
$ |
612,740 |
|
$ |
847,755 |
|
|
Accrued benefits and retirement
services |
|
2,122,144 |
|
|
2,568,958 |
|
|
Postretirement benefit
obligation |
|
56,605 |
|
|
59,022 |
|
|
Other-than-temporary impairment of
assets |
|
459,662 |
|
|
428,609 |
|
|
Reinsurance and commissions
payable |
|
2,610 |
|
|
18,263 |
|
|
Allowance for doubtful
accounts |
|
505,240 |
|
|
440,980 |
|
|
Net operating loss
carryforward |
|
55,000 |
|
|
83,000 |
|
|
AMT |
|
35,000 |
|
|
- |
|
|
Capital loss
carryforward |
|
166,763 |
|
|
- |
|
|
Excess of book over tax
depreciation |
|
99,183 |
|
|
73,594 |
|
|
Other |
|
378,560 |
|
|
260,205 |
|
|
Total |
|
4,493,507 |
|
|
4,780,386 |
|
|
Deferred income tax liabilities: |
|
|
|
|
|
|
|
Net unrealized gain on
investments |
|
2,525,717 |
|
|
867,044 |
|
|
Discount accretion on tax-exempt
obligations |
|
20,204 |
|
|
18,984 |
|
|
Other |
|
114,379 |
|
|
53,063 |
|
|
Total |
|
2,660,300 |
|
|
939,091 |
|
| Net
deferred income tax assets |
$ |
1,833,207 |
|
$ |
3,841,295 |
|
50
At December 31, 2009 and 2008, 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.
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, |
2009 |
|
2008 |
| Anticipated
income tax expense |
$ |
2,011,365 |
|
$ |
(1,093,712) |
|
|
Increase (decrease) related to: |
|
|
|
|
|
|
|
State income taxes, net of federal income tax benefit |
|
15,180 |
|
|
15,840 |
|
|
Tax-exempt interest income (net of amortization) |
|
(822,274) |
|
|
(970,303) |
|
|
Other, net |
|
(117,271) |
|
|
14,175 |
|
| Provision
(benefit) for income taxes |
$ |
1,087,000 |
|
$ |
(2,034,000) |
|
In accounting for uncertainty in income taxes, the Company is required to
recognize in its financial statements the impact of a tax position if that
position is more likely than not of being sustained on an audit, based on the
technical merits of the position. As a result of the implementation, the Company
made a comprehensive review of its uncertain tax positions in accordance with
recognition standards. In this regard, an uncertain tax position represents the
Company’s expected treatment of a tax position taken in a filed tax return, or
planned to be taken in a future tax return, that has not been reflected in
measuring income tax expense for financial reporting purposes.
The amount of unrecognized tax benefit or liability may increase or
decrease in the future for various reasons, including adding amounts for current
tax year positions, expiration of open income tax returns due to the expiration
of the applicable statute of limitations, changes in management’s judgment about
the level of uncertainty, status of examinations, litigation and legislative
activity and the additions or eliminations of uncertain tax
positions.
The Company’s policy is to report interest and penalties related to
unrecognized tax benefits or liabilities in the Consolidated Statements of
Income (Loss).
The Company, or one of its subsidiaries, files income tax returns in the
U.S. federal jurisdiction and various states. With few exceptions, the Company
is no longer subject to U.S. federal or state and local examinations by taxing
authorities for years before 2006.
The following table sets forth the
total amounts of unrecognized tax benefits.
| Balance January 1,
2008 |
$ |
123,605 |
|
|
Additions related to prior years |
|
10,437 |
|
| Reductions
related to prior years |
|
(47,540) |
|
|
Settlements |
|
- |
|
| Balance December 31,
2008 |
$ |
86,502 |
|
|
Additions related to prior years |
|
52 |
|
| Reductions
related to prior years |
|
(87,646) |
|
|
Settlements |
|
- |
|
| Balance at December 31,
2009 |
$ |
(1,092) |
|
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 $887,000 and $964,000 in 2009 and 2008,
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, 2009, are summarized as follows:
| Year
Ended: |
|
|
|
| 2010 |
$ |
495,814 |
|
| 2011 |
|
202,743 |
|
| 2012 |
|
56,238 |
|
| 2013 |
|
- |
|
|
2014 |
|
- |
|
|
Total |
$ |
754,795 |
|
51
10. Retirement Agreements and Other
Postretirement Benefit Plan
In 2008, the Company adopted a 401(k) savings plan. To participate,
individuals must be employed for one full year and work at least 1,000 hours
annually. The Company makes a 3% Safe Harbor contribution and also has the
option annually to make a discretionary profit share contribution. Individuals
may elect to make contributions up to the maximum deductible amount as
determined by the Internal Revenue Code. Expenses related to the 401(k) were
$443,000 and $513,000 for 2009 and 2008, 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, required ITIC to make
quarterly contributions pursuant to a supplemental executive retirement account
on behalf of each executive equal to 22% of the base salary and bonus paid to
each during each quarter through September 30, 2008. The obligation to make
contributions to the supplemental executive retirement agreements has expired
and has been removed from the amended employment agreement effective January 1,
2009. The employment 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, 2009 and 2008 was
approximately $4,826,000 and $6,574,000, 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 December 24, 2008, the executive contracts were
amended effective January 1, 2009 to bring them into compliance with Section
409A of the Internal Revenue Code, and to permit a special 2008 distribution
election as permitted under Section 409A. The special distribution election
provided that each participant may elect, no later than December 31, 2008, to
receive a one-time lump sum distribution on January 15, 2009 of all amounts in
the participant’s account. Payouts in January 2009 associated with this
distribution were approximately $2,456,000. In addition, the nonqualified
deferred compensation agreement was amended and restated to terminate all
Company contributions to this plan beginning January 1, 2009. In connection with
such termination, the employment agreements were amended and restated to provide
for an annual cash payment to the officers equal to the amounts the Company
would have contributed to their accounts under its 401(k) Plan if such
contributions were not limited by the federal tax laws, less the amount of any
contributions that the Company actually makes to their accounts under the
Company’s 401(k) Plan.
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 benefits are unfunded.
Estimated future benefit payouts expected to be paid for each of the next five
years are $3,752 in 2010, $3,976 in 2011, $5,161 in 2012, $6,579 in 2013, $7,199
in 2014 and $71,847 in the next five years thereafter.
Cost of the Company’s postretirement
benefits included the following components:
|
|
2009 |
|
2008 |
| Net periodic benefit
cost |
|
|
|
|
|
|
|
Service cost – benefits earned
during the year |
$ |
23,832 |
|
$ |
17,335 |
|
|
Interest cost on projected benefit
obligation |
|
26,970 |
|
|
19,044 |
|
|
Amortization of unrecognized prior
service cost |
|
20,388 |
|
|
20,388 |
|
|
Amortization of unrecognized
loss |
|
2,014 |
|
|
- |
|
|
Net periodic benefit cost at end
of year |
$ |
73,204 |
|
$ |
56,767 |
|
52
The Company is required to recognize the funded status (i.e., the
difference between the fair value of the assets and the accumulated
postretirement benefit obligations of its postretirement benefits) in its
consolidated balance sheet, with a corresponding adjustment to accumulated other
comprehensive income, net of tax. The net amount in accumulated other
comprehensive income is $166,487 ($109,881 net of tax) and $173,594 ($114,573
net of tax) for December 31, 2009 and 2008, respectively, and represents the net
unrecognized actuarial losses and unrecognized prior service costs. The effects
of the funded status on the Company’s consolidated balance sheets at December
31, 2009 and 2008 are presented in the following table:
|
|
2009 |
|
2008 |
| Funded
status |
|
|
|
|
|
|
|
Actuarial present value of future benefits: |
|
|
|
|
|
|
|
Fully eligible active
employee |
$ |
(44,089) |
|
$ |
(41,001) |
|
|
Non-eligible active
employees |
|
(492,657) |
|
|
(429,648) |
|
|
Plan assets |
|
- |
|
|
- |
|
|
Funded status of accumulated postretirement benefit obligation,
recognized in |
|
|
|
|
|
|
|
other liabilities |
$ |
(536,746) |
|
$ |
(470,649) |
|
Development of the accumulated postretirement benefit obligation for the
years ended December 31, 2009 and 2008 includes the following:
|
|
2009 |
|
2008 |
| Accrued
postretirement benefit obligation at beginning of year |
$ |
(297,055) |
|
$ |
(240,288) |
|
|
Service cost – benefits earned during the year |
|
(23,832) |
|
|
(17,335) |
|
| Interest
cost on projected benefit obligation |
|
(26,970) |
|
|
(19,044) |
|
|
Amortization cost, net |
|
(20,388) |
|
|
(20,388) |
|
|
Amortization of loss, net |
|
(2,014) |
|
|
- |
|
|
Unrecognized prior service cost |
|
(73,575) |
|
|
(93,963) |
|
|
Unrecognized loss |
|
(92,912) |
|
|
(79,631) |
|
| Funded
status of accumulated postretirement benefit obligation at end of
year |
$ |
(536,746) |
|
$ |
(470,649) |
|
The changes in amounts related to
accumulated other comprehensive income, pre-tax, are as
follows:
|
|
2009 |
|
2008 |
| Balance at
beginning of year |
$ |
173,594 |
|
$ |
92,132 |
|
|
Components of Accumulated Other Comprehensive Income |
|
|
|
|
|
|
|
Unrecognized prior service
cost |
$ |
(20,388) |
|
$ |
(20,388) |
|
|
Unrecognized loss |
|
(2,014) |
|
|
- |
|
|
Unrecognized gain |
|
15,295 |
|
|
101,850 |
|
| Balance at
end of year |
$ |
166,487 |
|
$ |
173,594 |
|
For 2010, the amounts in accumulated other comprehensive income, pre-tax,
to be recognized as components of net periodic benefit costs are:
|
|
Projected |
|
|
2010 |
|
Amortization of unrecognized prior service cost |
$ |
20,388 |
|
Amortization of unrecognized loss |
|
2,572 |
| Net
periodic benefit cost at end of year |
$ |
22,960 |
53
Assumed health care cost trend rates do have an effect on the amounts
reported for the postretirement benefit obligations. 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, 2009:
|
|
One- |
|
One- |
|
|
Percentage |
|
Percentage |
|
|
Point |
|
Point |
|
|
Increase |
|
Decrease |
| 1. Net periodic
postretirement benefit cost |
|
|
|
|
|
|
| Effect on the service cost
component |
$ |
6,304 |
|
$ |
(4,792) |
|
| Effect on interest cost |
|
6,873 |
|
|
(5,341) |
|
| Total effect on the net periodic postretirement
benefit cost |
$ |
13,177 |
|
$ |
(10,133) |
|
| 2. Accumulated
postretirement benefit obligation (including active |
|
|
|
|
|
|
| employees who are not fully
eligible) |
|
|
|
|
|
|
| Effect on those currently receiving benefits
(retirees and spouses) |
$ |
- |
|
$ |
- |
|
| Effect on active fully
eligible |
|
2,929 |
|
|
(2,672) |
|
| Effect on actives not yet
eligible |
|
116,595 |
|
|
(90,209) |
|
| Total effect on the accumulated postretirement
benefit obligation |
$ |
119,524 |
|
$ |
(92,881) |
|
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.
The Company’s title insurance and trust subsidiaries are regulated by
various federal, state and local governmental agencies and are subject to
various audits and inquiries. It is the opinion of management that these audits
and inquiries will not have a material impact on the Company’s consolidated
financial condition or operations.
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 $19,947,000 and $14,492,000 as of December 31, 2009
and 2008, respectively. These amounts are not considered assets of the Company
and are excluded from the accompanying consolidated balance sheets. However, the
Company remains contingently liable for the disposition of these
deposits.
In administering tax-deferred property exchanges, the Company’s
subsidiary, ITEC, serves as a qualified intermediary for exchanges, holding the
net proceeds from sales transactions from relinquished property to be used for
purchase of replacement property. Another Company subsidiary, ITAC, serves as
exchange accommodation titleholder and, through limited liability companies
(“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 approximately $16,518,000 and $88,125,000 as
of December 31, 2009 and 2008, 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 the transfers of property, disbursements of proceeds and
the return on the proceeds at the agreed upon rate. Exchange services revenues
include earnings on these deposits; therefore, investment income is shown as
exchange services revenue, rather than investment income. These like-kind
exchange funds are primarily invested in money market and other short-term
investments, including approximately $1 million of auction rate securities, as
of December 31, 2009. The Company does not believe the current illiquidity of
the ARS will impact its operations, as it believes it has sufficient capital to
provide continuous and immediate liquidity as necessary.
54
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.
Consolidated capital and surplus on a statutory basis was $87,278,340 and
$82,305,151 as of December 31, 2009 and 2008, respectively. Net income (loss) on
a statutory basis was $5,180,443 and $(3,148,117) for the twelve months ended
December 31, 2009 and 2008.
13. Segment Information
Consistent with the requirements of reporting segment information, the
Company has one reportable segment, title insurance services. The remaining
immaterial segments have been combined into a group called “All
Other.”
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.
Provided below is selected financial information about the Company’s
operations by segment for the two years ended December 31, 2009 and
2008:
|
|
Title |
|
All |
|
Intersegment |
|
|
|
|
| 2009 |
Insurance |
|
Other |
|
Elimination |
|
Total |
| Operating
revenues |
$ |
64,303,556 |
|
$ |
4,496,493 |
|
$ |
(776,916) |
|
$ |
68,023,133 |
|
|
Investment income |
|
3,155,822 |
|
|
776,454 |
|
|
(149,160) |
|
|
3,783,116 |
|
| Net
realized loss on investments |
|
(214,627) |
|
|
(283,462) |
|
|
- |
|
|
(498,089) |
|
|
Total revenues |
$ |
67,244,751 |
|
$ |
4,989,485 |
|
$ |
(926,076) |
|
$ |
71,308,160 |
|
| Operating
expenses |
|
61,843,530 |
|
|
4,393,258 |
|
|
(844,407) |
|
|
65,392,381 |
|
|
Income before
taxes |
$ |
5,401,221 |
|
$ |
596,227 |
|
$ |
(81,669) |
|
$ |
5,915,779 |
|
|
Assets |
$ |
109,380,484 |
|
$ |
37,047,220 |
|
$ |
- |
|
$ |
146,427,704 |
|
| |
|
|
Title |
|
All |
|
Intersegment |
|
|
| 2008 |
Insurance |
|
Other |
|
Elimination |
|
Total |
| Operating
revenues |
$ |
65,507,644 |
|
$ |
4,758,263 |
|
$ |
(779,005) |
|
$ |
69,486,902 |
|
|
Investment income |
|
3,576,758 |
|
|
1,063,646 |
|
|
(81,669) |
|
|
4,558,735 |
|
| Net
realized loss on investments |
|
(2,661,018) |
|
|
(261,358) |
|
|
- |
|
|
(2,922,376) |
|
|
Total revenues |
$ |
66,423,384 |
|
$ |
5,560,551 |
|
$ |
(860,674) |
|
$ |
71,123,261 |
|
| Operating
expenses |
|
69,901,591 |
|
|
5,217,474 |
|
|
(779,005) |
|
|
74,340,060 |
|
|
(Loss) Income before
taxes |
$ |
(3,478,207) |
|
$ |
343,077 |
|
$ |
(81,669) |
|
$ |
(3,216,799) |
|
|
Assets |
$ |
102,408,285 |
|
$ |
37,449,903 |
|
$ |
- |
|
$ |
139,858,188 |
|
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 Class A Junior Participating Preferred Stock. The Class A
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.
55
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.
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 $250,000 at each institution are not
insured by the Federal Deposit Insurance Corporation (“FDIC”). Of the $8.7
million in cash and cash equivalents on the Consolidated Balance Sheets at
December 31, 2009, $4.7 million was not insured by the FDIC. Of the $5.2 million
in cash and cash equivalents at December 31, 2008, $5.4 million was not insured
by FDIC. The total amount not insured in 2008 is higher than cash and cash
equivalents due to larger bank than book balances.
The Company generates a significant amount of title insurance premiums in
North Carolina. In 2009 and 2008, North Carolina accounted for 43.6% and 47.9%
of total direct title premiums, respectively.
16. Related Party
Transactions
During 2008, the Company repurchased 106,000 shares of common stock at a
value of approximately $4,922,000 from a non-employee director and family member
of that director. The shares were repurchased in three separate transactions
pursuant to the purchase plan that was publicly announced on June 5, 2000. The
shares were purchased at the current bid price on the day of each
transaction.
The Company does business with unconsolidated LLCs that it has
investments in that are accounted for under the equity method of accounting.
These unconsolidated companies are primarily title insurance agencies. The
following table sets forth the approximate values by year found within each
financial statement classification:
| Financial Statement Classification, |
|
|
|
|
|
|
| Consolidated Balance
Sheets |
|
2009 |
|
2008 |
| Other investments |
|
$ |
1,305,000 |
|
$ |
1,146,000 |
| Premium and fees receivable |
|
|
545,000 |
|
|
432,000 |
| |
| Financial Statement Classification, |
|
|
|
|
|
|
| Consolidated
Statements of Income (Loss) |
|
2009 |
|
2008 |
| Other income |
|
$ |
1,708,000 |
|
$ |
1,175,000 |
56
| ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE |
None
ITEM 9A. CONTROLS AND
PROCEDURES
Disclosure Controls and
Procedures
An evaluation was performed by 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, 2009 for the purpose of providing reasonable
assurance that the information required to be disclosed in the reports the
Company files or submits under the Securities Exchange Act of 1934 (the “Act”)
(i) is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules and forms and (ii)
is accumulated and communicated to the Company’s management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosures.
Changes in Internal Control Over Financial
Reporting
During the quarter ended December 31, 2009, there were no changes in the
Company’s internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
Reports of Management and Independent
Registered Public Accounting Firm on Internal Control Over Financial
Reporting
Management has assessed, and the Company’s independent registered public
accounting firm, Dixon Hughes PLLC, has audited, the Company’s internal control
over financial reporting as of December 31, 2009. The unqualified reports of
management and Dixon Hughes PLLC thereon are included in Item 8 of this Annual
Report on Form 10-K and are incorporated by reference herein.
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.
57
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE
The information called for by this item is incorporated by reference to
the material under the captions “Proposals Requiring Your Vote,” “General
Information - 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 19, 2010. 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” and “Compensation of Directors” in the Company’s
definitive Proxy Statement relating to the Annual Meeting of Shareholders to be
held on May 19, 2010 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 Certain
Beneficial Owners and Management” in the Company’s definitive Proxy Statement
relating to the Annual Meeting of Shareholders to be held on May 19, 2010 and is
incorporated by reference in this Form 10-K Annual Report.
The following table provides information about the Company’s compensation
plans under which equity securities are authorized for issuance as of December
31, 2009. The Company does not have any equity compensation plans that have not
been approved by its shareholders.
Equity Compensation Plan
Information
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities |
|
|
|
Number of Securities to |
|
Weighted-Average |
|
Remaining Available |
|
|
|
be Issued Upon Exercise |
|
Exercise Price of |
|
for Future Issuance |
|
|
|
of Outstanding Options, |
|
Outstanding Options, |
|
Under Equity |
| Plan Category |
|
Warrants and Rights |
|
Warrants and Rights |
|
Compensation Plans |
| Equity compensation plans
approved by |
|
|
|
|
|
|
|
|
|
|
|
|
|
| shareholders |
|
|
117,245 |
|
|
|
$ |
27.54 |
|
|
|
382,300 |
|
| Equity compensation plans not approved by |
|
|
|
|
|
|
|
|
|
|
|
|
|
| shareholders |
|
|
- |
|
|
|
|
- |
|
|
|
- |
|
| Total |
|
|
117,245 |
|
|
|
$ |
27.54 |
|
|
|
382,300 |
|
| 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 19, 2010 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 19, 2010 is incorporated by reference in this
Form 10-K Annual Report.
58
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
| (a)(1) |
Financial
Statements. |
|
|
|
|
|
The following financial statements are filed under Item 8 of this
Form 10-K Annual Report: |
|
|
Report of Independent Registered Public Accounting
Firm |
|
|
Management’s Report on Internal Control Over Financial
Reporting |
| |
Report of Independent Registered Public Accounting
Firm |
|
|
Consolidated Balance Sheets as of December 31, 2009 and
2008 |
|
|
Consolidated Statements of Income (Loss) for the Years Ended
December 31, 2009 and 2008 |
|
|
Consolidated Statements of Stockholders’ Equity for the Years Ended
December 31, 2009 and 2008 |
|
|
Consolidated Statements of Comprehensive Income (Loss) for the
Years Ended December 31, 2009 and 2008 |
|
|
Consolidated Statements of Cash Flows for the Years Ended December
31, 2009 and 2008 |
|
|
Notes to Consolidated Financial
Statements |
| (a)(2) |
Financial Statement
Schedules. |
|
|
|
|
|
The 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. |
59
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 5,
2010
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 5th day of March, 2010.
|
/s/ J. Allen Fine |
|
/s/ R. Horace Johnson |
|
| J. Allen Fine, Chairman of the Board and Chief |
|
R. Horace Johnson, Director |
|
| Executive Officer |
|
|
|
| (Principal Executive
Officer) |
|
|
|
| |
|
| /s/ James A. Fine, Jr. |
|
/s/ H. Joe King, Jr. |
|
| James A. Fine, Jr., President, Treasurer and |
|
H. Joe King, Jr., Director |
|
| Director (Principal Financial Officer
and |
|
|
|
| Principal Accounting
Officer) |
|
|
|
| |
|
| /s/ W. Morris Fine |
|
/s/ James R. Morton |
|
| W. Morris Fine, Executive Vice President, |
|
James R. Morton, Director |
|
| Secretary and Director |
|
|
|
| |
|
| /s/ David L. Francis |
|
/s/ A. Scott Parker III |
| David L. Francis, Director |
|
A. Scott Parker III, Director |
| |
| /s/ Richard M. Hutson, II |
|
|
| Richard M. Hutson, II, Director |
|
|
60
SCHEDULE
I
INVESTORS TITLE COMPANY AND
SUBSIDIARIES
SUMMARY OF INVESTMENTS – OTHER THAN INVESTMENTS IN RELATED PARTIES
As
of December 31, 2009
|
|
|
|
|
|
|
|
|
|
Amount
at |
|
|
|
|
|
|
|
|
|
|
which shown in |
|
|
|
|
|
|
|
|
|
|
the Balance |
| Type of
Investment |
Cost
(1) |
|
Market
Value |
|
Sheet
(2) |
| Fixed Maturities: |
|
|
|
|
|
|
|
|
|
|
|
| Bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
States, municipalities & political
subs |
$ |
70,313,741 |
|
|
$ |
73,011,042 |
|
|
$ |
73,011,042 |
|
|
All other corporate
bonds |
|
14,735,742 |
|
|
|
15,792,144 |
|
|
|
15,792,144 |
|
| Short-term investments |
|
20,717,434 |
|
|
|
20,717,434 |
|
|
|
20,717,434 |
|
|
Total fixed maturities |
|
105,766,917 |
|
|
|
109,520,620 |
|
|
|
109,520,620 |
|
| |
| Equity
Securities: |
|
|
|
|
|
|
|
|
|
|
|
| Common Stocks: |
|
|
|
|
|
|
|
|
|
|
|
|
Public Utilities |
|
533,369 |
|
|
|
736,925 |
|
|
|
736,925 |
|
|
Banks, trust and insurance
companies |
|
137,580 |
|
|
|
158,274 |
|
|
|
158,274 |
|
|
Industrial, miscellaneous and all
other |
|
7,152,793 |
|
|
|
10,426,912 |
|
|
|
10,426,912 |
|
| Nonredeemable preferred stocks |
|
418,025 |
|
|
|
532,190 |
|
|
|
532,190 |
|
|
Total equity securities |
|
8,241,767 |
|
|
|
11,854,301 |
|
|
|
11,854,301 |
|
| |
| Other Investments |
|
1,002,220 |
|
|
|
1,002,220 |
|
|
|
1,002,220 |
|
| Total investments per the consolidated balance
sheet |
$ |
115,010,904 |
|
|
$ |
122,377,141 |
|
|
$ |
122,377,141 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
61
SCHEDULE
II
INVESTORS TITLE COMPANY (PARENT
COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
AS OF DECEMBER 31, 2009 AND 2008
|
|
2009 |
|
2008 |
| Assets |
|
|
|
|
|
|
|
| Cash and cash
equivalents |
$ |
1,017,465 |
|
|
$ |
1,476,574 |
|
|
Investments in fixed maturities, available-for-sale |
|
18,350,376 |
|
|
|
13,975,353 |
|
| Investments in equity
securities, available-for-sale |
|
98,640 |
|
|
|
89,100 |
|
|
Short-term investments |
|
11,396,807 |
|
|
|
14,391,860 |
|
| Investments in affiliated
companies |
|
63,075,321 |
|
|
|
55,363,938 |
|
|
Other investments |
|
327,100 |
|
|
|
470,481 |
|
| Other receivables |
|
189,070 |
|
|
|
710,860 |
|
|
Income taxes receivable |
|
437,100 |
|
|
|
1,054,569 |
|
| Accrued interest and
dividends |
|
172,529 |
|
|
|
218,070 |
|
|
Property, net |
|
2,805,308 |
|
|
|
2,914,630 |
|
| Deferred income taxes,
net |
|
98,873 |
|
|
|
243,298 |
|
| Total Assets |
$ |
97,968,589 |
|
|
$ |
90,908,733 |
|
| |
|
| Liabilities and Stockholders’ Equity
Liabilities: |
|
|
|
|
|
|
|
| Accounts payable and accrued
liabilities |
$ |
709,512 |
|
|
$ |
1,050,845 |
|
|
Total liabilities |
|
709,512 |
|
|
|
1,050,845 |
|
| |
|
| 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; 2,285,289 |
|
|
|
|
|
|
|
|
and 2,293,268 shares issued and
outstanding 2009 and 2008, |
|
|
|
|
|
|
|
|
respectively, excluding 291,676 shares
for 2009 and |
|
|
|
|
|
|
|
|
2008 of common stock held by the
Company’s subsidiary) |
|
1 |
|
|
|
1 |
|
| Retained earnings |
|
92,528,818 |
|
|
|
88,248,452 |
|
| Accumulated other comprehensive
income |
|
4,730,258 |
|
|
|
1,609,435 |
|
|
Total stockholders’
equity |
|
97,259,077 |
|
|
|
89,857,888 |
|
| Total Liabilities and Stockholders’
Equity |
$ |
97,968,589 |
|
|
$ |
90,908,733 |
|
| |
See notes to condensed
financial statements.
62
SCHEDULE
II
INVESTORS TITLE COMPANY (PARENT
COMPANY)
CONDENSED FINANCIAL INFORMATION OF
REGISTRANT
STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
|
2009 |
|
2008 |
| Revenues: |
|
|
|
|
|
|
|
| Investment income-interest and dividends |
$ |
740,345 |
|
|
$ |
985,277 |
|
| Net realized loss on
investments |
|
(273,987) |
|
|
|
(120,093) |
|
| Rental income |
|
735,548 |
|
|
|
717,044 |
|
| Miscellaneous income |
|
45,334 |
|
|
|
37,139 |
|
| Total |
|
1,247,240 |
|
|
|
1,619,367 |
|
| Operating Expenses: |
|
|
|
|
|
|
|
| Salaries, employee benefits, and payroll taxes |
|
382,383 |
|
|
|
320,258 |
|
| Office occupancy and
operations |
|
341,926 |
|
|
|
356,072 |
|
| Business development |
|
37,010 |
|
|
|
46,130 |
|
| Taxes-other than payroll and
income |
|
203,300 |
|
|
|
155,510 |
|
| Professional fees |
|
220,066 |
|
|
|
243,394 |
|
| Other expenses |
|
87,113 |
|
|
|
98,236 |
|
| Total |
|
1,271,798 |
|
|
|
1,219,600 |
|
| |
| Equity in Net Income (Loss) of
Affiliated Cos. |
|
4,677,337 |
|
|
|
(1,634,566) |
|
| Income (Loss) Before Income
Taxes |
|
4,652,779 |
|
|
|
(1,234,799) |
|
| Benefit for Income
Taxes |
|
(176,000) |
|
|
|
(52,000) |
|
| Net Income (Loss) |
$ |
4,828,779 |
|
|
$ |
(1,182,799) |
|
| Basic Earnings (Loss) per Common
Share |
$ |
2.11 |
|
|
$ |
(0.50) |
|
| Weighted Average Shares
Outstanding-Basic |
|
2,291,816 |
|
|
|
2,364,361 |
|
| Diluted Earnings (Loss) Per Common
Share |
$ |
2.10 |
|
|
$ |
(0.50) |
|
| Weighted Average Shares
Outstanding-Diluted |
|
2,299,429 |
|
|
|
2,364,361 |
|
| |
See notes to condensed
financial statements.
63
SCHEDULE
II
INVESTORS TITLE COMPANY (PARENT
COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
|
2009 |
|
2008 |
| Operating Activities: |
|
|
|
|
|
|
|
| Net income (loss) |
$ |
4,828,779 |
|
|
$ |
(1,182,799) |
|
|
Adjustments to reconcile net income (loss) to net cash provided |
|
|
|
|
|
|
|
|
by operating activities: |
|
|
|
|
|
|
|
|
Equity in net (earnings) loss of
affiliated companies |
|
(4,677,337) |
|
|
|
1,634,566 |
|
|
Depreciation |
|
124,681 |
|
|
|
124,334 |
|
|
Premium (accretion) amortization,
net |
|
(13,801) |
|
|
|
12,582 |
|
|
Issuance of common stock in payment of
bonuses and fees |
|
- |
|
|
|
1,946 |
|
|
Share-based compensation expense related
to stock options |
|
33,530 |
|
|
|
- |
|
|
Net loss on disposals of
property |
|
1,525 |
|
|
|
- |
|
|
Net realized loss on
investments |
|
273,987 |
|
|
|
120,093 |
|
|
Benefit for deferred income
taxes |
|
(73,000) |
|
|
|
(119,000) |
|
|
Decrease (increase) in
receivables |
|
521,790 |
|
|
|
(419,469) |
|
|
Decrease in income taxes
receivable-current |
|
617,469 |
|
|
|
200,588 |
|
|
Decrease (increase) in other
assets |
|
45,541 |
|
|
|
(4,002) |
|
|
(Decrease) increase in accounts payable
and accrued liabilities |
|
(341,333) |
|
|
|
126,398 |
|
|
Net cash provided by operating activities |
|
1,341,831 |
|
|
|
495,237 |
|
| Investing Activities: |
|
|
|
|
|
|
|
| Capital contribution to
affiliated companies |
|
- |
|
|
|
(125,000) |
|
|
Dividends received from affiliated companies |
|
135,831 |
|
|
|
5,083,607 |
|
| Purchases of
available-for-sale securities |
|
(1,003,476) |
|
|
|
(7,437,280) |
|
|
Purchases of short-term securities |
|
(19,062) |
|
|
|
(2,006,477) |
|
| Purchases of and net earnings
from other investments |
|
(133,192) |
|
|
|
(15,789) |
|
|
Proceeds from sales and maturities of available-for-sale
securities |
|
905,000 |
|
|
|
10,900,000 |
|
| Proceeds from sales of
short-term securities |
|
3,014,115 |
|
|
|
736,694 |
|
|
Proceeds from sales and distributions from other investments |
|
2,587 |
|
|
|
41,250 |
|
| Purchases of
property |
|
(16,884) |
|
|
|
- |
|
|
Transfer of auction rate securities from affiliated companies |
|
(3,708,280) |
|
|
|
- |
|
|
Net cash (used in) provided by investing
activities |
|
(823,361) |
|
|
|
7,177,005 |
|
| Financing Activities: |
|
|
|
|
|
|
|
| Retirement of common
stock |
|
(427,875) |
|
|
|
(5,972,043) |
|
|
Exercise of options |
|
91,873 |
|
|
|
230,801 |
|
| Dividends paid (net dividends
paid to affiliated company of |
|
|
|
|
|
|
|
|
$81,669 in 2009 and
2008) |
|
(641,577) |
|
|
|
(661,862) |
|
|
Net cash used in financing
activities |
|
(977,579) |
|
|
|
(6,403,104) |
|
| Net (Decrease) Increase in Cash and Cash
Equivalents |
|
(459,109) |
|
|
|
1,269,138 |
|
| Cash and Cash Equivalents, Beginning of
Year |
|
1,476,574 |
|
|
|
207,436 |
|
| Cash and Cash Equivalents, End of
Year |
$ |
1,017,465 |
|
|
$ |
1,476,574 |
|
| |
| Supplemental
Disclosures: |
|
|
|
|
|
|
|
| Cash Paid (Refunded) During the Year
For |
|
|
|
|
|
|
|
| Income Taxes (net of refunds) |
$ |
(1,045,000) |
|
|
$ |
(473,000) |
|
| Non cash net unrealized (gain) loss on
investments, net of deferred tax (provision) |
|
|
|
|
|
|
|
|
benefit of ($1,658,674) and $987,103 for
2009 and 2008, respectively |
$ |
(3,116,134) |
|
|
$ |
1,872,812 |
|
| |
See notes to condensed
financial statements.
64
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 |
2009 |
|
2008 |
| Investors Title Insurance Company,
net* |
$ |
- |
|
|
$ |
4,928,607 |
|
| Investors Title Accommodation Corporation |
|
- |
|
|
|
5,000 |
|
| Investors Title Management Services,
Inc. |
|
110,000 |
|
|
|
- |
|
| Investors Title Capital Management Corporation |
|
37,500 |
|
|
|
35,000 |
|
| Investors Title Commercial
Agency |
|
70,000 |
|
|
|
115,000 |
|
|
|
$ |
217,500 |
|
|
$ |
5,083,607 |
|
| |
| * |
|
Total dividends
of $0 and $5,010,276 paid to the Parent Company in 2009 and 2008, netted
with dividends of $81,669 received from the Parent in 2009 and
2008. |
65
SCHEDULE
III
INVESTORS TITLE COMPANY AND
SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
|
|
|
|
Future |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy |
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits |
|
|
|
Policy |
|
|
|
|
|
|
|
Benefit |
|
|
|
|
|
|
|
|
|
|
Deferred |
|
Losses, |
|
|
|
Claims |
|
|
|
|
|
|
|
Claims, |
|
Amortization of |
|
|
|
|
|
|
|
|
Policy |
|
Claims and |
|
|
|
and |
|
|
|
|
Net |
|
Losses and |
|
Deferred Policy |
|
Other |
|
|
|
|
|
Acquisition |
|
Loss |
|
Unearned |
|
Benefits |
|
Premium |
|
Investment |
|
Settlement |
|
Acquisition |
|
Operating |
|
Premiums |
| Segment |
|
Cost |
|
Expenses |
|
Premiums |
|
Payable |
|
Revenue |
|
Income |
|
Expenses |
|
Costs |
|
Expenses |
|
Written |
| Year Ended December
31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Title Insurance |
|
- |
|
$ |
39,490,000 |
|
- |
|
$ |
319,625 |
|
$ |
62,155,251 |
|
$ |
3,074,153 |
|
$ |
8,465,123 |
|
- |
|
$ |
52,687,501 |
|
N/A |
| All Other |
|
- |
|
|
- |
|
- |
|
|
- |
|
|
- |
|
|
708,963 |
|
|
- |
|
- |
|
|
4,239,757 |
|
N/A |
|
|
|
- |
|
$ |
39,490,000 |
|
- |
|
$ |
319,625 |
|
$ |
62,155,251 |
|
$ |
3,783,116 |
|
$ |
8,465,123 |
|
- |
|
$ |
56,927,258 |
|
|
| |
| Year Ended December
31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Title Insurance |
|
- |
|
$ |
39,238,000 |
|
- |
|
$ |
467,388 |
|
$ |
63,662,187 |
|
$ |
3,495,088 |
|
$ |
15,206,637 |
|
- |
|
$ |
54,019,867 |
|
N/A |
| All Other |
|
- |
|
|
- |
|
- |
|
|
- |
|
|
- |
|
|
1,063,647 |
|
|
- |
|
- |
|
|
5,113,556 |
|
N/A |
|
|
|
- |
|
$ |
39,238,000 |
|
- |
|
$ |
467,388 |
|
$ |
63,662,187 |
|
$ |
4,558,735 |
|
$ |
15,206,637 |
|
- |
|
$ |
59,133,423 |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
SCHEDULE
IV
INVESTORS TITLE COMPANY AND
SUBSIDIARIES
REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
|
|
|
|
|
|
|
|
|
|
Assumed |
|
|
|
|
|
|
|
|
|
|
|
|
Ceded to |
|
from |
|
|
|
|
Percentage of |
|
|
|
Gross |
|
Other |
|
Other |
|
|
|
|
Amount Assumed |
|
|
|
Amount |
|
Companies |
|
Companies |
|
Net
Amount |
|
to Net |
| Year Ended December
31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Title Insurance |
|
$ |
62,239,124 |
|
|
$ |
95,523 |
|
|
$ |
11,650 |
|
|
$ |
62,155,251 |
|
0.02% |
| |
| Year Ended December
31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Title Insurance |
|
$ |
63,770,383 |
|
|
$ |
275,089 |
|
|
$ |
166,893 |
|
|
$ |
63,662,187 |
|
0.26% |
67
SCHEDULE
V
INVESTORS TITLE COMPANY AND
SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
|
|
|
|
Additions |
|
Additions |
|
|
|
|
|
|
|
Balance at |
|
Charged to |
|
Charged to |
|
|
|
|
|
|
|
Beginning of |
|
Costs and |
|
Other Accounts |
|
Deductions – |
|
Balance at |
| Description |
|
Period |
|
Expenses |
|
– Describe |
|
Describe* |
|
End of
Period |
| 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Premium Receivable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Provision |
|
$ |
1,297,000 |
|
$ |
7,981,290 |
|
$
- |
|
$ |
(7,792,290) |
(a) |
|
$ |
1,486,000 |
|
| Reserves for Claims |
|
$ |
39,238,000 |
|
$ |
8,465,123 |
|
$
- |
|
$ |
(8,213,123) |
(b) |
|
$ |
39,490,000 |
|
| |
|
| 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Premium Receivable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Provision |
|
$ |
2,170,000 |
|
$ |
7,397,511 |
|
$
- |
|
$ |
(8,270,511) |
(a) |
|
$ |
1,297,000 |
|
| Reserves for Claims |
|
$ |
36,975,000 |
|
$ |
15,206,637 |
|
$
- |
|
$ |
(12,943,637) |
(b) |
|
$ |
39,238,000 |
|
|
|
(a) |
|
Cancelled premiums |
| |
(b) |
|
Payments of claims, net of
recoveries |
68
INDEX TO EXHIBITS
| Exhibit |
|
|
| Number |
|
Description |
|
| 3(i) |
|
Articles of Incorporation dated January
22, 1973, incorporated by reference to Exhibit 4.1 to Form S-8 filed
August 10, 2009, File No. 333-161209 |
| |
| 3(ii) |
|
Articles of Amendment to the Articles of
Incorporation, dated February 8, 1973, incorporated by reference to
Exhibit 4.2 to Form S-8 filed August 10, 2009, File No.
333-161209 |
| |
| 3(iii) |
|
Articles of Amendment to Articles of
Incorporation, dated May 14, 1987, incorporated by reference to Exhibit
4.3 to Form S-8 filed August 10, 2009, File No. 333-161209 |
| |
| 3(iv) |
|
Articles of Amendment to Articles of
Incorporation, incorporated by reference to Exhibit 3(iii) to the
Quarterly Report on Form 10-Q for the quarter ended June 30,
2002 |
| |
| 3(v) |
|
Articles of Amendment to Articles of
Incorporation, incorporated by reference to Exhibit 3(iv) to the Quarterly
Report on Form 10-Q for the quarter ended March 31, 2003 |
| |
| 3(vi) |
|
Amended and Restated Bylaws,
incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K
dated November 12, 2007 |
| |
| 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, as amended and restated effective May 17, 2006, incorporated by
reference to Exhibit 10.1 to Form 8-K filed on May 23, 2006 |
| |
| 10(vii)* |
|
Form of Nonqualified Stock Option
Agreement under the 2001 Stock Option and Restricted Stock Plan,
incorporated by reference to Exhibit 10(i) to Form 10-Q for the quarter
ended March 31, 2006 |
| |
| 10(viii)* |
|
Form of Nonqualified Stock Option
Agreement to Non-employee Directors under the 2001 Stock Option and
Restricted Stock Plan, incorporated by reference to Exhibit 10(ii) to Form
10-Q for the quarter ended March 31, 2006 |
| |
| 10(ix)* |
|
Form of Incentive Stock Option Agreement
under the 2001 Stock Option and Restricted Stock Plan, incorporated by
reference to Exhibit 10(iii) to Form 10-Q for the quarter ended March 31,
2006 |
69
| 10(x)* |
|
Form of Stock Appreciation Right Award
Agreement under 2001 Stock Option and Restricted Stock Plan, incorporated
by reference to Exhibit 10.1 to Form 8-K filed on May 23,
2006 |
| |
| 10(xi)* |
|
Form of Investors Title Company Stock
Appreciation Rights Agreement under 2001 Stock Option and Restricted Stock
Plan, incorporated by reference to Exhibit 10.1 to Form 8-K filed on March
6, 2009 |
| |
| 10(xii)* |
|
Amended and Restated Employment
Agreement effective January 1, 2009 for J. Allen Fine, incorporated by
reference to Exhibit 10(vii) to Form 10-K for the year ended December 31,
2008 |
| |
| 10(xiii)* |
|
Amended and Restated Employment
Agreement effective January 1, 2009 for James A. Fine, Jr., incorporated
by reference to Exhibit 10(viii) to Form 10-K for the year ended December
31, 2008 |
| |
| 10(xiv)* |
|
Amended and Restated Employment
Agreement effective January 1, 2009 for W. Morris Fine, incorporated by
reference to Exhibit 10(ix) to Form 10-K for the year ended December 31,
2008 |
| |
| 10(xv)* |
|
Amended and Restated Death Benefit Plan
Agreement effective January 1, 2009 for J. Allen Fine, incorporated by
reference to Exhibit 10(x) to Form 10-K for the year ended December 31,
2008 |
| |
| 10(xvi)* |
|
Amended and Restated Death Benefit Plan
Agreement effective January 1, 2009 for James A. Fine, Jr., incorporated
by reference to Exhibit 10(xi) to Form 10-K for the year ended December
31, 2008 |
| |
| 10(xvii)* |
|
Death Benefit Plan Agreement effective
January 1, 2009 for W. Morris Fine, incorporated by reference to Exhibit
10(xii) to Form 10-K for the year ended December 31, 2008 |
| |
| 10(xviii)* |
|
Amended and Restated Nonqualified
Deferred Compensation Plan effective January 1, 2009, incorporated by
reference to Exhibit 10(xiii) to Form 10-K for the year ended December 31,
2008 |
| |
| 10(xix)* |
|
Amended and Restated Nonqualified
Supplemental Retirement Benefit Plan effective January 1, 2009,
incorporated by reference to Exhibit 10(xiv) to Form 10-K for the year
ended December 31, 2008 |
| |
| 10(xx)* |
|
2009 Stock Appreciation Right Plan,
incorporated by reference to Appendix A to the Company’s Proxy Statement
dated May 26, 2009 |
| |
| 21 |
|
Subsidiaries of Registrant, filed
herewith |
| |
| 23 |
|
Consent of Independent Registered Public
Accounting Firm, filed herewith |
| |
| 31(i) |
|
Certification of Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed
herewith |
| |
| 31(ii) |
|
Certification of Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed
herewith |
| |
| 32 |
|
Certification of Chief Executive Officer
and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, filed herewith |
* - Management contract
or compensatory plan or arrangement.
70