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 subsidiaries, principally ITIC and NITIC, lease office space in 37 locations throughout North Carolina, South Carolina, Texas, 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 sufficient for its present operations.
The Company’s exchange services division, consisting of the operations of ITEC and ITAC, provides customer services in connection with tax-deferred real property exchanges. ITEC acts as a qualified intermediary in tax-deferred exchanges of property held for productive use in a trade or business or for investment, and its income is derived from fees for handling exchange transactions and interest earned on client deposits held by the Company. 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 time the old property is sold and the new property is purchased, and accepting the formal identification of the replacement property within the required identification period. ITAC provides services as an exchange accommodation titleholder for accomplishing “parking transactions” as set forth in the safe harbor contained in Internal Revenue Procedure 2000-37. These transactions include reverse exchanges when taxpayers decide to acquire replacement property before selling the relinquished property, or “build to suit” exchanges, when improvements must be made to the replacement property before the taxpayer acquires the improved replacement property. The services provided by the Company’s exchange services division, ITEC and ITAC, 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 services division.
In recent years, the Consumer Financial Protection Bureau (“CFPB”), Office of the Comptroller of Currency and the Federal Reserve have issued memorandums to banks that communicated those agencies’ heightened focus on vetting third-party providers. Such increased regulatory involvement may affect the Company's agents and approved providers. Further proposals to change regulations governing insurance holding companies and the title insurance industry are often introduced in Congress, in state legislatures and before various insurance regulatory agencies. Although the Company regularly monitors such proposals, the likelihood and timing of passage of any such regulation, and the possible effects of any such regulation on the Company and its subsidiaries, cannot be determined at this time.
The Mortgage Bankers Association's (“MBA”) January 17, 2020 Mortgage Finance Forecast (“MBA Forecast”) projects 2020 purchase activity to increase 2.6% to $1,305 billion and refinance activity to decrease 23.5% to $609 billion, resulting in a decrease in total mortgage originations of 7.4% to $1,914 billion, all from 2019 levels. In 2019, purchase activity accounted for 61.5% of all mortgage originations and is projected to represent 68.2% of all mortgage originations in 2020.
According to data published by Freddie Mac, the average 30-year fixed mortgage interest rate in the United States was 3.9%, 4.5% and 4.0% for the years ended December 31, 2019, 2018 and 2017, respectively. Per the MBA Forecast, refinancing is expected to be lower over the next 3-year period as mortgage interest rates gradually climb to a projected 4.1% by the fourth quarter of 2022.
The Company’s reserve for claims is established using estimates of 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”). The total reserve for all losses incurred but unpaid as of December 31, 2019 is represented by the reserve for claims totaling $31.3 million in the accompanying Consolidated Balance Sheets. Of that total, approximately $3.8 million was reserved for specific claims which have been reported to the Company, and approximately $27.5 million was reserved for IBNR claims.
Management also considers actuarial analyses in evaluating the claims reserve. The actuarial methods used to evaluate the reserve are loss development methods, Bornhuetter-Ferguson 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 Bornhuetter-Ferguson method, a type of expected loss method, losses for each policy year are estimated based on an expected loss ratio derived directly from a previous estimate of ultimate loss for each policy year plus an additional provision for losses that have not been reported or paid as of the evaluation date. Bornhuetter-Ferguson methods produce more stable ultimate loss estimates than do loss development methods, which are more responsive to the current loss data but can lead to volatile results. 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, the Cape Cod methods give more weight to the results of the expected loss methods; for older policy years, more weight is given to the loss development method results.
Despite the variability of such estimates, management believes that, based on historical claims experience and actuarial analysis, the Company’s reserve for claims is adequate to cover claim losses resulting from pending and future claims for policies issued through December 31, 2019. The ultimate settlement of 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 material adverse effect on the Company’s financial position or operating results.
Quarterly, the Company evaluates the collectability of receivables. Premiums not collected within seven months are fully reserved. Write-offs of receivables have not been material to the Company.
The Company recorded net deferred tax liabilities at December 31, 2019 and 2018. The deferred tax liabilities recorded during both periods primarily relate to net unrealized gains on investments, the excess of tax over book depreciation, intangible assets, and the recorded reserve for claims, net of statutory premium reserves. Refer to Note 8 to the Consolidated Financial Statements in this Annual Report on Form 10-K for further information on the Company’s deferred taxes.
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. Real estate activity is 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. Interest rate volatility is also an important factor in the level of residential and commercial real estate activity. The Company’s premiums in future periods are likely to fluctuate due to these and other factors which are beyond management’s control.
Net premiums written increased 5.6% in 2019 to $145.8 million, compared with $138.1 million in 2018, and decreased 1.7% in 2018, compared with $140.5 million in 2017. The increase in 2019, compared with 2018, was primarily due to favorable interest rates, higher home prices, and higher levels of both refinance and refinance activity. The decrease in 2018, compared with 2017, was primarily due to a decline in refinance activity, partially offset by an increase in purchase activity and higher real estate values.
Agency net premiums written increased 8.7% in 2019 to $105.2 million, compared with $96.8 million in 2018, and decreased 3.3% in 2018, compared with $100.1 million in 2017. The increase in 2019, compared with 2018, was primarily the result of favorable interest rates increasing refinancing levels. The decrease in 2018, compared with 2017, was primarily attributable to lower levels of refinance activity following increases in mortgage interest rates.
Revenue from non-title services includes trust services, agency management services and exchange services income. Non-title service revenues increased 40.1% in 2019 to $9.9 million, compared with $7.1 million in 2018, and increased 15.6% in 2018, compared with $6.1 million in 2017. The increases in 2019 and 2018, compared with the respective prior years, related to increases in all major components of non-title services, particularly exchange services revenue.
Investment related revenues include interest and dividends, other investment income, net realized investment gains (losses) and changes in the estimated fair value of equity security 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. As a result of the interaction of these factors and considerations, the net realized investment gain or loss can vary significantly from period to period.
The securities in the Company’s investment portfolio are subject to economic conditions and market risks. The Company considers relevant facts and circumstances in evaluating whether a credit or interest-related impairment of a fixed maturity 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.
The Company adopted Accounting Standards Update 2016-01, Financial Instruments, on January 1, 2018. Among other provisions, the update requires all changes in the estimated fair value of equity securities to be recognized in the Consolidated Statement of Income, without regard as to whether a decline in value is deemed to be temporary or other-than-temporary. The Company’s net income may in turn experience more variation as changes in the estimated fair value will impact the Consolidated Statement of Income.
Other revenues primarily include state tax credit income, gains and losses on the disposal of fixed assets and miscellaneous revenues. Other revenues were $678 thousand in 2019, compared with $470 thousand for 2018, and $460 thousand for 2017.
Following is a summary of the Company’s operating expenses for 2019, 2018 and 2017. Intersegment eliminations have been netted; therefore, the individual segment amounts will not agree to Note 12 in the accompanying Consolidated Financial Statements.
On a combined basis, the after-tax profit margins were 17.1%, 14.0% and 15.9% in 2019, 2018 and 2017, respectively. The Company continually strives to enhance its competitive strengths and market position, including ongoing initiatives to manage its operating expenses.
Office and Technology Expenses: Office and technology expenses primarily include facilities expenses, software and hardware expenses, depreciation expenses, telecommunications expenses, and business insurance. Office and technology expenses were $9.3 million, $8.8 million and $8.2 million for 2019, 2018 and 2017, respectively. The increases in office and technology expenses in 2019 and 2018, compared with their respective prior years, were primarily related to increases in software, depreciation and increased facilities expenses.
After-Tax Profit Margin: The Company’s title insurance after-tax profit margin varies according to a number of factors, including the volume and type of real estate activity. After-tax profit margins for the title insurance segment were 16.7%, 14.9% and 16.9% in 2019, 2018 and 2017, respectively. The increase in after-tax margin in 2019, compared with 2018, was primarily related to increases in revenues from changes in the estimated fair value of equity security investments and net premiums written, partially offset by increases in commissions to agents, the provision (benefit) for claims and personnel expenses. The decrease in after-tax margin in 2018, compared with 2017, was primarily related to a decrease in revenues from changes in the estimated fair value of equity security investments, slightly lower premiums and increased personnel expenses, partially offset by a decrease in commissions to agents and a benefit for claims.
Commissions to Agents: Agent commissions represent the portion of premiums retained by agents pursuant to the terms of their respective agency contracts. In 2019, commissions to agents increased 10.6% to $72.8 million, compared with $65.8 million in 2018, and decreased 4.2% in 2018, compared with $68.6 million in 2017. Commission expense as a percentage of net premiums written by agents was 69.2%, 67.9% and 68.6% in 2019, 2018 and 2017, respectively. Commission expense for 2019 and 2018, when compared to the respective prior year periods, moved commensurate with agent net premiums written. Commissions expense as a percentage of net premiums changed in 2019 and 2018, when compared to the respective prior year periods, primarily due to changes in geographic mix. Commission rates vary by market due to local practice, competition and state regulations.
Reserve for Claims: At December 31, 2019, the total reserve for claims was $31.3 million. Of that total, approximately $3.8 million was reserved for specific claims, and approximately $27.5 million 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.
The provision for income taxes was $8.4 million, $5.2 million and $4.6 million for 2019, 2018 and 2017, respectively. Income tax expense as a percentage of earnings before income taxes was 21.0%, 19.2% and 15.1% for 2019, 2018 and 2017, respectively. The U.S. federal statutory tax rate for 2019 and 2018 was 21%, and 35% for 2017. On December 22, 2017, the TCJA, was enacted into law. That legislation, among other changes, reduced the federal corporate income tax rate from 35% to 21%, effective January 1, 2018. As required under generally accepted accounting principles, the Company’s deferred tax assets and liabilities were revalued at the newly enacted U.S. corporate income tax rate, and the impact was recognized in the provision for income taxes in the fourth quarter of 2017. The revaluation resulted in a benefit of approximately $5.3 million recorded for the year ended December 31, 2017.
The effective income tax rates for 2019 and 2018 were primarily impacted by changes in tax-exempt income, as tax exempt lowers the effective tax rate. The effective income tax rate for 2017 was below the federal statutory tax rate primarily due to the revaluation of deferred tax assets and liabilities, as well as tax-exempt income.
The Company believes it is more likely than not that the tax benefits associated with recognized impairments and unrecognized losses recorded through December 31, 2019 will be realized. However, this judgment could be impacted by further market fluctuations. Information regarding the components of income tax expense and the 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.
Cash Flows: Net cash flows provided by operating activities were $20.9 million, $24.4 million and $19.9 million for 2019, 2018 and 2017, respectively. Cash flows from operating activities decreased in 2019, from 2018, primarily due to net income declining when adjusted for non-cash items, such as changes in the estimated fair value of equity security investments, and the timing of income tax disbursements, partially offset by an increase in the provision for claims, net of payments of claims. Cash flows from operating activities increased in 2018, from 2017, primarily due to the timing of tax payments and changes in the estimated fair value of equity security investments, partially offset by a lower net income and a benefit for claims.
Capital Expenditures: Capital expenditures were approximately $1.5 million, $1.9 million and $2.9 million during 2019, 2018 and 2017, respectively. The Company has plans for various capital improvement projects, including increased investment in a number of technology and system development initiatives and hardware purchases which 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.
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 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 approximately $214.6 million and $308.7 million as of December 31, 2019 and 2018, respectively. These exchange deposits are held at third-party financial institutions. Exchange deposits 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 revenue includes earnings on these deposits; therefore, investment income is shown as other revenue rather than investment income. These like-kind exchange funds are primarily invested in money market and other short-term investments.
External assets under management of Investors Trust Company totaled approximately $568.6 million and $474.4 million as of December 31, 2019 and 2018, respectively. These amounts are not considered assets of the Company and, therefore, are excluded from the accompanying Consolidated Balance Sheets.
The following table summarizes the Company’s future estimated cash payments under existing contractual obligations at December 31, 2019, including, payments due by period:
As of December 31, 2019, the Company had a claims reserve totaling $31.3 million. The amounts and timing of these obligations are estimated and not set contractually. Nonetheless, based on historical insurance claims experience, the Company anticipates the payments shown in the Contractual Obligations table. 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. Due to the length of time over which claim payments are made and regularly occurring changes in underlying economic and market conditions, claim estimates are subject to variability and future payments could increase or decrease from these estimated amounts in the future.
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842). ASU 2016-02 updated guidance to improve financial reporting for leasing transactions. The core principle of the guidance is that lessees will be required to recognize assets and liabilities on the balance sheet for all leases with terms of more than twelve months. A lessee will recognize a liability to make lease payments and a right-of-use ("ROU") asset representing its right to use the underlying asset for the lease term. Disclosures are required by lessees to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. In transition, lessees are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, with certain practical expedients available. The update was effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted this update on January 1, 2019 with no material impact on the Company's Consolidated Statements of Income or the Consolidated Statements of Cash Flows. The update did have a material impact on the Company's Consolidated Balance Sheets, which included the recognition of operating lease ROU assets and operating lease liabilities. Refer to Note 1 and Note 9 to the accompanying Consolidated Financial Statements for further information regarding the Company's accounting for leases.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). ASU 2016-13 is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The update broadens the information that an entity must consider in developing its expected credit loss estimates, and is meant to better reflect an entity’s current estimate of all expected credit losses. In addition, this update amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The update is effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted as of fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company has evaluated the impact that the recently issued accounting standard will have on the Company's financial position and results of operations, and does not expect it to have a material impact. Currently, the Company's potential credit losses under this accounting standard relate to fixed maturity securities. The Company does not believe that the risk of credit losses, based on current fixed maturity securities holdings, is material to the Company's consolidated financial statements as a whole. Refer to Note 3 to the accompanying Consolidated Financial Statements for further information about the Company's investments.
We have audited the accompanying consolidated balance sheets of Investors Title Company and Subsidiaries (the Company) as of December 31, 2019 and 2018, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019 and the related consolidated notes and schedules (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements of the Company as of December 31, 2019 and 2018, and for each of the three years in the period ended December 31, 2019, and our report dated March 11, 2020, expressed an unqualified opinion on those consolidated financial statements.
Investments in Fixed Maturity Securities: Fixed maturity securities are classified as available-for-sale and reported at estimated fair value with unrealized gains and losses, net of tax and adjusted for other-than-temporary declines in fair value, reported in accumulated other comprehensive income. Securities are regularly reviewed for differences between the cost and estimated fair value 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. Realized gains and losses are determined on the specific identification method. Refer to Note 3 for further information about the Company’s investments in fixed maturity securities.
Quarterly, the Company evaluates the collectability of receivables. Premiums not collected within 7 months are fully reserved. Write-offs of receivables have not been material to the Company.
Fees are recognized at the signing of a binding agreement and investment earnings are recognized as they are earned. Exchange services revenue is included in non-title services in the Consolidated Statements of Income.
At inception, the Company determines if an arrangement is a lease. The Company enters into lease agreements that are primarily used for office space, and all current leases are accounted for as operating leases. Amounts related to operating leases are included in operating lease right-of-use ("ROU") assets and operating lease liabilities on the Company's Consolidated Balance Sheets. Operating lease ROU assets represent the Company’s right to use an underlying asset for the stated lease term. Operating lease liabilities represent the Company’s obligation to make lease payments arising from an operating lease. Operating lease ROU assets and liabilities are recognized at the date of the lease commencement, and are based on the present value of lease payments over the lease term. In addition, the Company elected certain practical expedients and therefore (a) chose not to reassess whether any expired or existing contracts are, or contain, leases, (b) chose not to reassess the lease classification for any expired or existing leases, and (c) chose not to reassess initial direct costs for any expired or existing leases. The Company's current leases do not provide an implicit interest rate, thus the Company utilized the average rate over a 10-year term based upon the Moody's seasoned Aaa corporate bond yields in determining the present value of lease payments. A portion of the Company's current leases includes an option to extend or cancel the lease term. The exercise of such an option is solely at the Company's discretion. The operating lease liability recorded in the Consolidated Balance Sheets includes lease payments related to options to extend or cancel the lease term if the Company determined at the date of adoption that the lease was expected to be renewed or extended. A lease expense is recognized on a straight-line basis over the lease term. Adjustments for straight-line rental expense for the periods presented are not material and as such, the lease expense recognized was reflected in cash used in operating activities for the respective periods. Refer to Note 9 for further information about the Company's leases.
The Company has designated approximately $37.3 million and $35.9 million of retained earnings as of December 31, 2019 and 2018, respectively, as appropriated to reflect the required statutory premium and supplemental reserves. Refer to Note 8 for the tax treatment of the statutory premium reserve.
Fixed maturity securities totaling approximately $7.1 million and $6.7 million at December 31, 2019 and 2018, respectively, are deposited with the insurance departments of the states in which business is conducted.
The following table presents the gross unrealized losses on fixed maturity securities and the estimated 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, 2019 and 2018, respectively.
Unrealized holding gains and losses are reported in the Consolidated Statements of Income as changes in the estimated fair value of equity security investments.
The FASB has established a valuation hierarchy for disclosure of the inputs used to measure estimated fair value of financial assets and liabilities, such as securities. This hierarchy categorizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs 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 Level 1 category includes equity securities and U.S. Treasury securities that are measured at estimated fair value using quoted active market prices.
The following table presents, by level, equity investments and other financial instruments at estimated fair values as of December 31, 2019 and December 31, 2018:
The Company does not recognize claim recoveries until an actual payment has been received by the Company. The Company realized claim recoveries of approximately $815 thousand, $1.9 million and $570 thousand during 2019, 2018 and 2017, respectively.
The provision (benefit) for claims as a percentage of net premiums written was 2.4%, (0.2)% and 2.4% in 2019, 2018 and 2017, respectively.
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. The intrinsic values of SARs exercised during 2019, 2018 and 2017 were approximately $364 thousand, $153 thousand and $473 thousand, respectively.
In 2019, 4 thousand SARs vested with a fair value of approximately $264 thousand.
During the second quarters of 2019, 2018 and 2017, the Company issued share-settled SARs to the 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. 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 table shown below. Expected volatilities are based on both the implied and historical volatility of the Company’s stock. The Company uses historical data to project SAR exercises and pre-exercise forfeitures within the valuation model. The expected term of awards represents the period of time that SARs granted are expected to be outstanding. The interest rate assumed for 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 values for the SARs issued during 2019, 2018 and 2017 were $51.88, $78.61 and $55.40, respectively, and were estimated using the weighted average assumptions shown in the table below.
There was approximately $264 thousand, $327 thousand and $219 thousand of compensation expense relating to SARs vesting on or before December 31, 2019, 2018 and 2017, respectively, included in personnel expenses in the Consolidated Statements of Income. As of December 31, 2019, there was approximately $58 thousand of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the Company’s stock award plans. That cost is expected to be recognized over a weighted average period of approximately 3 months.
* On December 22, 2017, the TCJA, was enacted into law. This tax legislation, among other changes, reduced the federal corporate income tax rate from 35.0% to 21.0%, effective January 1, 2018. As required under generally accepted accounting principles, the Company’s deferred tax assets and liabilities were revalued at the newly enacted U.S. corporate income tax rate. The impact was recognized in the Company’s provision for income taxes in the fourth quarter of 2017. The revaluation resulted in a benefit of approximately $5.3 million, or $2.82 per diluted share.
The Company enters into lease agreements that are primarily used for office space. These leases are accounted for as operating leases, with lease expense recognized on a straight-line basis over the term of the lease.
A portion of the Company's current leases include an option to extend or cancel the lease term. The exercise of such an option is solely at the Company's discretion. The operating lease liability recorded in the Consolidated Balance Sheets includes lease payments related to options to extend or cancel the lease term if the Company determined at the date of adoption that the lease was expected to be renewed or extended. The Company, in determining the present value of lease payments, utilized the average rate over a 10-year term based upon the Moody's seasoned Aaa corporate bond yields, as explicit rates of interest were not readily determinable in the lease contracts. The Company does not carry debt; thus no incremental borrowing rate was available to the Company.
Lease expense is included in office and technology expenses in the Consolidated Statements of Income. Information regarding the Company’s operating leases is as follows:
In addition, during the second quarter of 2004, ITIC entered into nonqualified deferred compensation plan agreements with these executives. The amounts accrued for all agreements at December 31, 2019 and 2018 were approximately $12.2 million and $10.9 million, respectively, which includes postretirement compensation and health benefits, and was calculated based on the terms of the contract. Both the 2019 and 2018 accruals are included in the accounts payable and accrued liabilities line item of the Consolidated Balance Sheets. 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 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.
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 Sheets, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The net amount in accumulated other comprehensive income is $(82) thousand, $(32) thousand net of tax, for December 31, 2019, and $(41) thousand, $(32) thousand net of tax, for December 31, 2018, 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, 2019 and 2018 are presented in the following table:
The amounts currently in accumulated other comprehensive income, pre-tax, that will be reclassified to the Consolidated Statements of Income and recognized as components of net periodic benefit costs in 2020 are:
Provided below is selected financial information about the Company’s operations by segment for the periods ended December 31, 2019, 2018 and 2017:
On October 31, 2012, the Plan was amended to, among other things, extend the expiration date of the plan from November 11, 2012 to October 31, 2022 and increase the exercise price of the stock purchase rights from $80 per unit to $220 per unit. In connection with the amendments to the Plan, the Board of Directors of the Company also amended the Company’s Articles of Incorporation to increase the number of shares designated under the rights plan as Series A Preferred Stock from 100 thousand shares to 200 thousand shares. There were 1.0 million shares of Preferred Stock authorized as of December 31, 2019 and 2018, with 200 thousand being designated Series A Preferred Stock.
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 thousand at each institution are not insured by the Federal Deposit Insurance Corporation (“FDIC”). Of the $25.9 million in cash and cash equivalents at December 31, 2019, $24.6 million was not insured by the FDIC. Of the $18.7 million in cash and cash equivalents at December 31, 2018, $17.6 million was not insured by the FDIC. The Company mitigates the risk of having cash and cash equivalents not insured by the FDIC by monitoring the credit quality of the financial institutions in which the funds are held.
The estimated fair values of intangible assets recognized as the result of title insurance agency acquisitions, all Level 3 inputs, are principally based on values obtained from a third-party valuation service. In accordance with ASC 350, Intangibles - Goodwill and Other, management determined that no events or changes in circumstances occurred during the periods ended December 31, 2019 and 2018 that would indicate that carrying amounts may not be recoverable, and therefore determined that no identifiable intangible assets were impaired.
As of December 31, 2019, the Company has reported $4.4 million in goodwill and $690 thousand in a title plant, net of impairments, as the result of title agency acquisitions. The title plant is included with other assets in the Consolidated Balance Sheets. The estimated fair values of goodwill and the title plant, both Level 3 inputs, are principally based on values obtained from a third-party valuation service at the time of acquisition. In accordance with ASC 350, Intangibles - Goodwill and Other, management determined that no events or changes in circumstances occurred during the periods ended December 31, 2019 and 2018 that would indicate the carrying amounts may not be recoverable, and therefore concluded that neither goodwill nor the title plant were impaired.
The following tables provide changes in the balances of each component of accumulated other comprehensive income, net of tax, for the periods ended December 31, 2019, 2018 and 2017: