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 (“NITIC”). Total revenues from the title segment accounted for 95.3% of the Company’s revenues in 2015. Through ITIC and NITIC, 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.
In efforts to stimulate the economy, the Federal Reserve announced in September 2012 Quantitative Easing, “QE3,” in which it would purchase mortgage-backed securities and longer-term Treasury securities. Through QE3, the Federal Reserve initially purchased mortgage-backed securities at a rate of $40 billion per month and longer-term Treasury securities at a rate of $45 billion per month. Beginning in 2014, the Federal Open Market Committee ("FOMC") of the Federal Reserve steadily reduced the purchase of securities, and, at the end of October 2014, the FOMC concluded the QE3 program.
In an effort to expand home ownership for lower-income buyers, the Federal Housing Authority (“FHA”) announced in January 2015 that it would cut its rates on mortgage insurance premiums. Mortgage insurance premium rates for 30-year FHA insured mortgages with less than a 5% down payment decreased from 1.35% to 0.85%. Mortgage insurance premium rates for 30-year FHA insured mortgages with more than a 5% down payment decreased from 1.30% to 0.80%. The new rates took effect on January 26, 2015 and will not apply to borrowers with existing mortgages, unless refinanced, or to 15-year mortgages.
The 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 Company’s reserves for claims are 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, 2015 is represented by the reserve for claims totaling $37,788,000 in the accompanying Consolidated Balance Sheets. Of that total, approximately $5,066,000 was reserved for specific claims which have been reported to the Company, and approximately $32,722,000 was reserved for IBNR claims.
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 those years 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. During the third quarter of 2013, certain actuarial inputs were changed to provide a more refined IBNR reserve estimate. The Company considered these modifications in actuarial inputs to be a change in estimate. The Company believes that these changes in actuarial inputs were necessary in response to favorable reserve development and claims experience incurred in several policy years reported in the 2013 calendar year. The approximate impact of the change in estimate for the year ended December 31, 2013 was a reduction of $2,200,000 to the reserves for claims in the Consolidated Balance Sheets, and in the Consolidated Statements of Income, a decrease of $2,200,000 to the provision (benefit) for claims, an increase of $750,000 in the provision for income taxes and an increase of approximately $1,450,000 in net income, or $0.71 per basic share and $0.70 per diluted share, compared with the amounts that would have been recorded under the Company’s prior estimate. This change in estimate, coupled with several historical policy years which continued to emerge favorably in comparison with prior expectations, contributed to a benefit in the claims provision for 2013. The change in estimate was primarily driven by the following:
The Company assumes the reported liability for known claims and IBNR, in the aggregate, will be comparable to its historical claims experience unless factors, such as loss experience and charged premium rates, change significantly. 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 loss provision rate is set to provide for losses on current year policies and changes in prior year estimates.
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 2013 through 2015 have been the result of actual Company and industry experience during the calendar year in addition to changes in assumptions for 2013.
Despite the variability of such estimates, management believes that, based on historical claims experience and actuarial analysis, the Company’s reserves are adequate to cover claim losses resulting from pending and future claims for policies issued through December 31, 2015. 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.
Generally, the Company’s premium revenues from certain agency operations include accruals based on estimates. These accruals estimate unreported agency premiums related to transactions which have settled as of the balance sheet date. Accruals for premiums from certain agencies are necessary because of the lag between policy effective dates and the reporting of these transactions to the Company by the agents. The current lag time used in the Company’s estimates typically ranges between 0 and 180 days after the policy effective date, with the majority of agencies reporting within 60 to 90 days. The lag time is reviewed periodically to monitor accruals. To determine the estimated premiums, the Company uses historical experience, as well as other factors, to make certain assumptions about the average elapsed time between the policy effective date and the date the policies are reported. From time to time, the Company adjusts the inputs to the calculation of these estimates as agents report transactions and information on more current trends becomes available. In addition to estimating revenues, the Company also estimates and accrues agent commissions, claims provisions, premium taxes, income taxes, and other expenses associated with the estimated revenues which have been accrued. The Company reflects any adjustments to the accruals in the result of operations in the period in which new information becomes available.
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.
Net Premiums and Title Orders: Net premiums written increased 2.3% in 2015 to $112,475,686 compared with $109,963,556 in 2014, and decreased 3.4% in 2014 compared with $113,886,266 in 2013. The volume of title orders increased 3.7% in 2015 to 211,200 compared with 203,657 in 2014, and decreased 15.4% in 2014 compared with 240,639 in 2013. The 2015 increase in net premiums and title orders versus the prior year is primarily attributable to an increase in the level of both purchase and refinance transactions. The 2014 decrease in net premiums and title orders versus the prior year is primarily attributable to a decline in the number of refinance transactions. Premiums written may not move proportionally with the level of title orders due to the mix of refinance and purchase transactions as well as the mix of premiums written by state, as rates vary by state. Refinance transactions typically have lower premium rates than purchase transactions.
Agency Relationship: The Company receives a significant percentage of its net premiums written from a single title agent, which was recently acquired by another title insurer. Net premiums written by such agent are for title insurance policies written in Texas. For further details, refer to Note 11 to the Notes to Consolidated Financial Statements herein.
Investment income was $4,531,319 in 2015 compared with $4,259,501 in 2014 and $3,894,608 in 2013. The increase in investment income in 2015 compared with 2014 was primarily due to higher levels of interest and dividends earned in conjunction with a higher average portfolio balance for both fixed maturities and equity securities during the current year. The increase in investment income in 2014 compared with 2013 was primarily due to higher levels of interest and dividends earned coupled with a larger portfolio of both fixed maturities and equity securities. 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.
The net realized (loss) gain on investments was $(116,163) for 2015 compared with $268,294 for 2014 and $195,800 for 2013. The net realized (loss) gain on investments included impairment charges of $984,128, $24,604, and $34,070 on certain investments and other assets that were deemed to be other-than temporarily-impaired in 2015, 2014 and 2013, respectively, offset by a net realized gain on the sales of investments and other assets of $867,965, $292,898 and $229,870 in 2015, 2014, and 2013, respectively. Management believes unrealized losses on remaining fixed income and equity securities at December 31, 2015 are temporary in nature.
Following is a summary of the Company’s operating expenses for 2015, 2014 and 2013. Intersegment eliminations have been netted; therefore, the individual segment amounts will not agree to Note 12 in the accompanying Consolidated Financial Statements.
Office Occupancy and Operations: Office occupancy and operations expenses primarily include office rent and utilities, depreciation, maintenance, telecommunications and insurance expenses. Overall office occupancy and operations expenses were $5,885,336, $5,049,962 and $4,430,220 for 2015, 2014 and 2013, respectively. As a percentage of total revenues, office occupancy and operations expenses were 4.6%, 4.1% and 3.5% for 2015, 2014 and 2013, respectively. The dollar increase in office occupancy and operations expense in 2015 compared with 2014 was primarily related to increases in depreciation, maintenance and telecommunications. The dollar increase in office occupancy and operations expense in 2014 compared with 2013 was primarily related to increases in hardware upgrade projects, depreciation, and office rent and utilities.
Business Development: Business development expenses primarily include marketing and travel-related expenses. Business development expenses increased to $2,373,270 in 2015 compared with $2,333,491 in 2014 and $2,145,639 in 2013, primarily due to increases in travel and marketing expenses.
Filing Fees, Franchise and Local Taxes: Filing fees, franchise and local tax expenses include insurance filing and licensing fees, franchise taxes, excise taxes and local taxes. Filing fees, franchise and local tax expenses were $732,985 in 2015 compared with $817,909 in 2014 and $681,935 in 2013.
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 with transaction volume of the title segment and the trust division. Other expenses increased to $884,438 in 2015, compared with $820,882 in 2014 and $755,407 in 2013.
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. Actual payments of claims, net of recoveries, were $3,367,494, $3,912,716 and $3,146,404 in 2015, 2014 and 2013, respectively.
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 and retaliatory tax rates vary from state to state; accordingly, the total premium and retaliatory tax incurred is dependent upon the geographical mix of insurance revenues. Premium and retaliatory taxes as a percentage of net premiums written were 1.9%, 1.7% and 2.2% in 2015, 2014 and 2013, respectively.
The Company believes it is more likely than not that the tax benefits associated with recognized impairments and unrecognized losses recorded through December 31, 2015 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 from non-operating activities have historically consisted of purchases and proceeds from investing activities, repurchases of common stock and the issuance of dividends. In 2015, the Company had a lower level of investment purchase activity, a higher level of proceeds from the sales and maturities of investments, and a higher level of common stock repurchases compared with 2014. In 2014, the Company had a higher level of investment purchase activity, a comparable level of proceeds from sales and maturities of investments, and a lower level of common stock repurchases compared with 2013.
The Company maintains a high degree of liquidity within its investment portfolio, classified as available for sale, in the form of cash, short-term investments, and other readily marketable securities. As of December 31, 2015, the Company held cash and cash equivalents of $21,790,068, short-term investments of $6,865,406, fixed maturity securities of $106,066,384 and equity securities of $37,513,464. The net effect of all activities on total cash and cash equivalents was an increase of $5,963,553 for 2015, a decrease of $7,800,246 for 2014, and an increase of $2,816,743 for 2013.
The ability of the Company's title insurance subsidiaries to pay dividends to the Company is subject to state regulation from their respective states of domicile. Each state regulates the extent to which title underwriters can pay dividends or make distributions and requires prior regulatory approval of the payment of dividends and other intercompany transfers. The maximum dividend permitted by law is not necessarily indicative of an insurer’s actual ability to pay dividends. Depending on regulatory conditions, the Company may in the future need to retain cash in its title insurance subsidiaries in order to maintain their statutory capital position. As of December 31, 2015, both ITIC and NTIIC met the minimum capital, surplus and reserve requirements for each state in which they are licensed.
During 2016, the maximum distributions the insurance subsidiaries can make to the Company without prior approval from applicable regulators total approximately $14,352,000.
Capital Expenditures: Capital expenditures were approximately $2,743,000, $2,017,000 and $1,424,000 during 2015, 2014 and 2013, respectively. The increases in capital expenditures for 2015 and 2014 compared with 2013 primarily relates to capital improvement projects, including increased investment in a number of technology and system development initiatives and hardware purchases 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.
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 $171,010,000 and $82,477,000 as of December 31, 2015 and 2014, 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 under management by the Investors Trust Company totaled approximately $440,000,000 for the years ended December 31, 2015 and 2014. 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, 2015, including, payments due by period:
In February 2015, the FASB updated guidance to change the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments: modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs") or voting interest entities; eliminate the presumption that a general partner should consolidate a limited partnership; affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and provide a scope exception from consolidation guidance for reporting entities that are required to comply with or operate in accordance with certain requirements similar to those for registered money market funds. For public entities, this update becomes effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Early adoption is permitted. The Company is currently evaluating the impact that the recently issued accounting standard will have on the Company's financial position and results of operations, but does not expect it to have a material impact.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2015 and 2014, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
We have audited Investors Title Company’s (the Company) internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). 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 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.
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 (“NITIC”), 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 22 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 Georgia, Michigan, North Carolina, South Carolina, Texas and Virginia.
Principles of Consolidation and Basis of Presentation - The accompanying Consolidated Financial Statements include the accounts and operations of Investors Title Company and its subsidiaries, and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). Earnings attributable to noncontrolling interests in majority-owned insurance agencies, including redeemable noncontrolling interests, are recorded in the Consolidated Statements of Income. Noncontrolling interests representing the portion of equity not related to the Company's ownership interests are recorded in separate sections of the Consolidated Balance Sheets. All intercompany balances and transactions have been eliminated in consolidation.
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. Properties acquired in settlement of claims are included in prepaid expenses and other assets in the Consolidated Balance Sheets.
Total reserves for all reported and unreported losses the Company incurred through December 31, 2015 are 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, 2015. 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.
Generally, title insurance premiums are recognized at the time of closing of the related real estate 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, taxes and a provision for claims losses are recognized as expenses concurrent with recognition of related premium revenue.
The carrying amounts reported in the Consolidated Balance Sheets for cash and cash equivalents, short-term investments, premium and fees receivable, accrued interest and dividends, accounts payable, commissions payable, reinsurance payable and current income taxes recoverable/payable approximate fair value due to the short-term nature of these assets and liabilities. Estimated 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 for determining the fair value of ARS are unobservable in the securities markets and are significant. Refer to Note 3 for further information regarding investments in securities and fair value.
The Company’s accumulated other comprehensive income is comprised of unrealized holding gains/losses 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. Accumulated other comprehensive income as of December 31, 2015 consists of $11,597,741 of unrealized holding gains on available-for-sale securities and $114,726 of unrecognized prior service cost and unrecognized actuarial losses associated with postretirement benefit liabilities. Accumulated other comprehensive income as of December 31, 2014 consists of $12,934,497 of unrealized holding gains on available-for-sale securities and $77,988 of unrecognized prior service cost and unrecognized actuarial losses associated with postretirement benefit liabilities. Accumulated other comprehensive income as of December 31, 2013 consists of $11,395,757 of unrealized holding gains on available-for-sale securities and $48,353 of unrecognized prior service cost and unrecognized actuarial losses associated with postretirement benefit liabilities.
In May 2014, the FASB updated guidance to improve the comparability of revenue recognition practices for entities that either enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards such as insurance contracts or lease standards. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For public entities, this update originally became effective for interim and annual reporting periods beginning after December 15, 2016. In August 2015, the FASB updated guidance to defer the effective date of the standard by one year. Early adoption is not permitted, although public entities are permitted to elect to adopt the amendments on the original effective date. The Company is currently evaluating the impact that the recently issued accounting standard will have on the Company's financial position and results of operations, but does not expect it to have a material impact.
Premiums written - The Company’s premium revenues from certain agency operations include accruals based on estimates. These accruals estimate unreported agency premiums related to transactions which have settled as of the balance sheet date. Accruals for premiums from certain agencies are necessary because of the lag between policy effective dates and the reporting of these transactions to the Company by the agents. The current lag time used in the Company’s estimates typically ranges between 0 and 180 days after the policy effective date, with the majority of agencies reporting within 60 to 90 days. The lag time is reviewed periodically to monitor accruals. To determine the estimated premiums, the Company uses historical experience, as well as other factors, to make certain assumptions about the average elapsed time between the policy effective date and the date the policies are reported. From time to time, the Company adjusts the inputs to the calculation of these estimates as agents report transactions and information on more current trends becomes available. The Company reflects any adjustments to the accruals in the results of operations in the period in which new information becomes available.
Combined capital and surplus on a statutory basis was $133,363,375 and $127,314,429 as of December 31, 2015 and 2014, respectively. Net income on a statutory basis was $13,621,174, $9,737,634 and $11,858,699 for the twelve months ended December 31, 2015, 2014 and 2013, respectively.
The Company has designated approximately $50,508,000 and $48,423,000 of retained earnings as of December 31, 2015 and 2014, respectively, as appropriated to reflect the required statutory premium and supplemental reserves. See Note 8 for the tax treatment of the statutory premium reserve.
As of December 31, 2015 and 2014, approximately $89,489,000 and $90,384,000, 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. During 2016, the maximum distributions the insurance subsidiaries can make to the Company without prior approval from applicable regulators total approximately $14,352,000.
Bonds totaling approximately $7,159,000 and $7,060,000 at December 31, 2015 and 2014, respectively, are deposited with the insurance departments of the states in which business is conducted.
The Level 2 category includes fixed maturity investments such as corporate bonds, U.S. government and agency bonds and municipal bonds. Estimated fair value is principally based on market values obtained from a third party pricing service. Factors that are used in determining estimated fair market value include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. The Company receives one quote per security from a third party pricing service, although as discussed below, the Company does consult other pricing resources when confirming that the prices it obtains reflect the estimated fair values of the instruments in accordance with Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures. Generally, quotes obtained from the pricing service for instruments classified as Level 2 are not adjusted and are not binding. As of December 31, 2015 and December 31, 2014, the Company did not adjust any Level 2 fair values.
Significant increases or decreases in any of the inputs in isolation could result in significant changes to the estimated fair value measurement. Generally, increases in default probabilities and liquidity risk premiums lower the estimated fair market value while increases in principal being returned and earning maximum rates increase estimated fair market values.
Based upon these inputs and assumptions, the pricing service provides a range of values to the Company for its ARS. The Company records the estimated fair value based on the midpoint of the range and believes that this valuation is the most reasonable estimate of fair value. In 2015 and 2014, the difference in the low and high values of the ranges was approximately one and four percent of the carrying value of the Company’s ARS.
The following table presents, by level, the financial assets carried at estimated fair value measured on a recurring basis as of December 31, 2015 and 2014. 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. Level 3 assets are comprised solely of ARS.
The carrying amounts and fair values of these financial instruments (please note investments are disclosed in a previous table) as of December 31, 2015 and 2014 are presented in the following table:
The following table presents a reconciliation of the Company’s assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3), which are all ARS securities, for the twelve months ended December 31, 2015 and 2014:
The Company assumes and cedes reinsurance with other insurance companies in the normal course of business. Premiums assumed and ceded were approximately $34,000 and $215,000, respectively, for 2015, $38,000 and $140,000, respectively, for 2014 and $6,000 and $211,000, respectively, for 2013. Ceded reinsurance is comprised of excess of loss treaties, which outline the conditions in which the reinsurance company will pay claims and protect against losses over certain agreed amounts. The Company remains liable to the insured for claims under ceded insurance policies in the event that the assuming insurance companies are unable to meet their obligations under these contracts. The Company has not paid or recovered any reinsured losses during the three years ended December 31, 2015.
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 2015 calendar year change in the provision relating to prior years resulted mostly from changes to certain actuarial inputs and favorable development in 2015 versus the prior year related primarily to policy years 2009 through 2014. Due to variances between actual and expected loss payments, loss development is subject to significant variability.
The Company does not recognize claim recoveries until an actual payment has been received by the Company. The Company realized claim recoveries of approximately $467,000, $790,000 and $1,165,000 during 2015, 2014 and 2013, respectively.
The provision (benefit) for claims as a percentage of net premiums written was 4.0%, 4.8% and (0.5)% in 2015, 2014 and 2013, respectively.
During 2013 certain actuarial inputs were changed to reflect recent trends. The Company considers these modifications in actuarial inputs to be a change in estimate. The Company believes that these changes in actuarial inputs were necessary in response to favorable reserve development and claims experience incurred in several recent reporting periods. The approximate impact of this change in estimate for the year ended December 31, 2013 was a reduction of $2,200,000 to the reserves for claims in the Consolidated Balance Sheets, and in the Consolidated Statements of Income a decrease of $2,200,000 to the provision (benefit) for claims, an increase of $750,000 in the provision for income taxes and an increase of $1,450,000 in net income, or $0.71 per basic share and $0.70 per diluted share, compared with the amounts that would have been recorded under the Company’s prior estimate. This change in estimate, coupled with several recent policy years which continued to emerge favorably in comparison with prior expectations, contributed to a benefit in the claims provision for the 2013 year. The change in estimate was primarily driven by the following:
changing the specific weightings used in performing certain actuarial methods, including weighting between policy years and weighting of title industry loss data;
adjusting for premium rate changes and the Company’s improved underwriting efforts related to construction business; and
Basic earnings per common share is computed by dividing net income attributable to the Company by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per common share is computed by dividing net income attributable to the Company 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 include 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, when share-based awards are exercised, (a) the exercise price of a share-based award; (b) the amount of compensation cost, if any, for future service that the Company has not yet recognized; and (c) the amount of estimated tax benefits that would be recorded in additional paid-in capital, if any, are assumed to be used to repurchase shares in the current period. The incremental dilutive potential common shares, calculated using the treasury stock method, were 5,439, 5,774 and 20,459 for 2015, 2014 and 2013, respectively.
The Company has adopted employee stock award plans under which restricted stock, and options or stock appreciation rights (“SARs”) to acquire 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 generally expire in five to ten years from the date of grant and are exercisable and vest: immediately; within one year; or at 10% to 20% per year beginning on the date of grant. All SARs issued to date have been share-settled only.
In 2015, 4,500 SARs vested with a fair value of $137,762.
At December 31, 2015 and 2014, 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 deferred income tax assets will be realized.
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 2012.
The Company has a 401(k) savings plan. In order to participate in the plan, individuals must have worked at the Company for at least 3 months. In order to be eligible for employer contributions, 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) plan were approximately $741,000, $676,000 and $579,000 for 2015, 2014 and 2013, respectively.
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 $(173,812), $(114,726) net of tax, for December 31, 2015, and $(118,150), $(77,988) net of tax, for December 31, 2014, 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, 2015 and 2014 are presented in the following table:
Development of the accumulated postretirement benefit obligation for the years ended December 31, 2015 and 2014 includes the following:
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, 2015:
Provided below is selected financial information about the Company’s operations by segment for the periods ended December 31, 2015, 2014 and 2013:
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 $21.8 million in cash and cash equivalents at December 31, 2015, $21.3 million was not insured by the FDIC. Of the $15.8 million in cash and cash equivalents at December 31, 2014, $15.3 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 Company generates a significant amount of title insurance premiums in Texas, North Carolina and South Carolina. In 2015, 2014 and 2013, Texas accounted for 22.4%, 36.5% and 26.8% of total title premiums, respectively. In 2015, 2014 and 2013, North Carolina accounted for 32.8%, 28.4% and 27.4% of total title premiums, respectively. In 2015, 2014 and 2013, South Carolina accounted for 10.1%, 7.7% and 11.4% of total title premiums, respectively.
In 2015, 2014 and 2013, the Company had one agent that accounted for 10.3%, 23.6% and 16.4% of net premiums written, respectively. This agent was acquired by another title insurer during 2015. Refer to Note 11 for further information.
During the second quarter of 2013, the Company repurchased 17,524 shares of Company common stock from officers of the Company at a price of $71.50 per share to cover withholding taxes payable by the officers upon the exercise of SARs. During the fourth quarter of 2013, the Company repurchased 28,130 shares of Company common stock from officers of the Company at a price of $80.01 per share.
In January 2012, ITIC entered into a membership interest purchase and sale agreement under which it agreed to acquire a majority ownership interest of United Title Agency Co., LLC (“United”). United, a Michigan limited liability company, is an insurance agency doing business in the State of Michigan. ITIC’s purchase of United was accounted for using the acquisition method required by ASC 805, Business Combinations. On April 2, 2012, ITIC purchased a 70% ownership interest in United, with both ITIC and the seller having the option to require ITIC to purchase the remaining 30% interest at a later date. ITIC purchased the 70% interest for a purchase price of $1,041,250. On May 21, 2014, ITIC purchased the remaining 30% ownership interest in United for an additional $515,275, making United a wholly owned subsidiary of ITIC.
The Company recognized the required identifiable intangible assets of United. There was no goodwill recorded as a result of the acquisition. The fair values of intangible assets, all Level 3 inputs, are principally based on values obtained from a third party valuation service. At closing of the initial acquisition, intangible assets included $645,685 relating to a non-compete contract resulting from the acquisition and $836,215 from referral relationships. The non-compete contract is being amortized over a 10-year period using the straight-line method, starting at a future date when the related employment agreement is terminated. The referral relationships are being amortized over a 12-year period using the straight-line method. At December 31, 2015 and 2014, accumulated amortization of intangible assets was $261,315 and $191,631, respectively. Net intangible assets of $1,220,585 and $1,290,269 are categorized as prepaid expenses and other assets in the Consolidated Balance Sheets as of December 31, 2015 and 2014. In accordance with ASC 350, Intangibles - Goodwill and Other, management determined that no events or changes in circumstances occurred that would indicate the carrying amount may not be recoverable, and therefore determined that the intangible assets assigned to United were not impaired at December 31, 2015.
The amortization of the non-compete contract will start at a future date when the related employment agreement is terminated. There are currently no plans to terminate the employment agreement, and the Company does not believe it is probable that termination of the employment agreement will occur within the calendar year. Assuming that the amortization of the non-complete agreement begins on the first day of 2017, estimated aggregate amortization expense for each of the five succeeding fiscal years are as follows:
A reconciliation of the noncontrolling interest equity of 1st Investors is presented in the Consolidated Statements of Stockholders’ Equity. The following table provides a reconciliation of total redeemable equity of United for the periods ended December 31, 2015, 2014 and 2013:
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, 2015, 2014 and 2013:
The following tables provide significant amounts reclassified out of each component of accumulated other comprehensive income for the periods ended December 31, 2015, 2014 and 2013:
These accumulated other comprehensive income components are not reclassified to net income in their entirety in the same reporting period. The amounts are presented within salaries, employee benefits and payroll taxes on the Consolidated Statements of Income as amortized. Amortization related to postretirement benefit plans is included in the computation of net periodic pension costs, as discussed in Note 10.