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 33 locations throughout North Carolina, South Carolina, Texas 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.
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”). Revenues from the title segment accounted for 96.2% of the Company’s insurance and other services revenues in 2013. 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.
The Company’s exchange services division, ITEC and ITAC, provides customer services in connection with tax-deferred real property exchanges. 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. An exchange accommodation offers a vehicle for accommodating a reverse exchange when the taxpayer must acquire replacement property before selling the relinquished property.
The Mortgage Bankers Association's (“MBA”) January 14, 2014 Mortgage Finance Forecast (the “MBA Forecast”) projects 2014 mortgage originations to decrease 36.4% from 2013 levels to $1,116 billion, with purchasing activity increasing 3.8% to $677 billion and refinancing activity decreasing 60.1% to $440 billion. In 2013, refinancing activity accounted for 62.8% of all mortgage originations and is projected to represent 39.4% of mortgage originations in 2014.
In September 2012, the Federal Reserve announced Quantitative Easing, “QE 3,” in which it would purchase mortgage-backed securities at a rate of $40 billion per month and longer-term Treasury securities at a rate of $45 billion per month. In December 2013, former Federal Reserve Chairman Bernanke announced that beginning in January 2014, the Federal Open Market Committee (“FOMC”) of the Federal Reserve would begin to modestly taper the pace of asset purchases. The monthly purchase amount was reduced to $35 billion for mortgage-backed securities and $40 billion for per month for longer-term Treasury securities. Furthermore, it was stated that if incoming economic information supported the FOMC's expectations regarding labor market conditions and inflation, the Federal Reserve would likely further reduce the pace of asset purchases in the future; however, decisions regarding the Federal Reserve's asset purchases remain contingent on meeting FOMC expectations. There is no stated end date associated with this round of Quantitative Easing. The FOMC is also issuing disclosures on a periodic basis that include projections of the federal funds rate and expected actions. At the December 2013 meeting, the FOMC reaffirmed their intent to keep the federal funds rate exceptionally low, between 0% and 0.25%, so long as the unemployment exceeds 6.5%, short-term inflation does not exceed 2.5% and longer-term inflation is within their range of acceptability.
The January 2014 Economic and Mortgage Finance Commentary predicts a 2014 overall economic growth of approximately 2.5% and a decline in the unemployment rate to 6.7%. As a result of the economic growth, the 10 Year Treasury rate is expected to increase to an average of 3.2% in 2014. Continued growth in home prices and housing starts are also expected in 2014.
On November 20, 2013, the Consumer Financial Protection Bureau (“CFPB”), which enforces Real Estate Settlement Procedures Act (“RESPA”), the primary federal regulatory guidance covering the real estate settlement industry, released a final rule to integrate mortgage disclosures under the RESPA and the Truth in Lending Act (“TILA”). The final rule goes into effect in August 2015. Under this rule, the early disclosure forms required by TILA and the good faith estimate, required by RESPA, have been combined into one form, titled the Loan Estimate. The final disclosure required by TILA and the HUD-1 settlement statement required by RESPA have been combined into one form, titled the Closing Disclosure. The Company is currently assessing the impact that this rule will have on both direct and agency operations in terms of processes and procedures, systems and compliance costs.
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 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 for claims, an increase of approximately $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 recent policy years which continued to emerge favorably in comparison with prior expectations, contributed to a benefit in the claims provision this quarter. The change in estimate was primarily driven by the following:
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 2011 through 2013 have been the result of actual Company and industry experience during the calendar year in addition to changes in assumptions for 2013.
Generally, the Company’s premium revenues from 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 lag time has historically been between 30 and 120 days, with the majority of agencies reporting within
60 to 90 days. The lag time is reviewed periodically to monitor accruals. The accrual of premium revenues is based on historical data that includes transactional volume, fluctuations in the real estate market and the mix between refinance and purchase transactions. There have been no material changes in historical estimates during the periods presented.
Title insurance premiums are closely related to the level of real estate activity and real estate values. The availability of credit 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 of real estate, 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.
Agency Net Premiums: When a policy is written through a title agency, the agency retains 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. Net premiums written by agencies increased 13.4% in 2013 to $89,074,664 compared with $78,568,217 in 2012 and increased 20.8% in 2012 compared with $65,043,360 in 2011. The increase in 2013 net agency premiums primarily reflects increases in purchase transactions and average home values in many parts of the nation. The increase in net agency premiums in 2012 primarily reflects increases in purchase and refinance activity and new industry-wide premium charges in certain markets that went into effect during the second half of 2012.
Other revenues primarily include other fee income, trust income, management services income, exchange services income, and income related to the Company’s equity method investments. Other revenues were $8,274,823, $7,701,340 and $5,532,228 in 2013, 2012 and 2011, respectively. The increase in 2013 was primarily related to increases in other fee income and income from trust and investment management services, partially offset by a decline in earnings of unconsolidated affiliates. The increase in 2012 was primarily related to increases in earnings of unconsolidated affiliates, other fee income, income from trust and investment management services and exchange services income.
Investment income and realized gains and losses from investments are included in investment-related revenues.
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 $7,022,000 and $6,700,000 at December 31, 2013 and 2012, respectively, are deposited with the insurance departments of the states in which business is conducted.
Investment income was $3,894,608 in 2013 compared with $3,980,411 in 2012 and $3,595,036 in 2011. The decrease in investment income in 2013 was due primarily to lower levels of interest earned on fixed maturities and short-term funds, partially offset by an increase in dividends associated with an increase in the portfolio of equity securities. The increase in investment income in 2012 was due primarily to an increase in dividends associated with an increase in the portfolio of equity securities, partially offset by lower levels of interest earned on fixed maturities and 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.
The net realized gain on investments was $195,800 for 2013 compared with $1,066,239 for 2012 and $28,559 for 2011. The net realized gain on investments included impairment charges of $34,070, $99,940, and $325,391 on certain investments and other assets that were deemed to be other-than temporarily-impaired in 2013, 2012 and 2011, respectively, offset by net realized gains on the sales of investments and other assets of $229,870, $1,166,179 and $353,950 in 2013, 2012, and 2011, respectively. Management believes unrealized losses on remaining fixed income and equity securities at December 31, 2013 are temporary in nature.
Following is a summary of the Company’s operating expenses for 2013, 2012 and 2011. Intersegment eliminations have been netted; therefore, the individual segment amounts will not agree to Note 13 in the accompanying Consolidated Financial Statements.
On a combined basis, the after-tax profit margins were 11.6%, 9.6% and 7.6% in 2013, 2012 and 2011, respectively. The Company continually strives to enhance its competitive strengths and market position, including ongoing initiatives to reduce its operating expenses.
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 were 2.2%, 1.8% and 2.1% in 2013, 2012 and 2011, respectively.
Net cash flows provided by operating activities were $16,251,090, $8,707,514 and $9,007,159 for 2013, 2012 and 2011, respectively. Cash flows from operating activities increased from 2012 to 2013, primarily due to increases in net income and the deferred tax provision, accelerated collection of receivables, the timing of payable disbursements and lower claims payments, partially offset by a benefit in the provision for claims and increases in other assets and taxes payable. The net decrease in cash flow from operations in 2012 from 2011 was primarily due to an increase in receivables, partially offset by an increase in net income. Cash flows from operations have historically been the primary source of financing for expanding operations, additions to property and equipment, dividends to shareholders, and operating requirements.
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 2013, the Company had higher levels of investment purchase activity and lower levels of investment sales and maturities compared with 2012. In 2012, the Company had a higher level of investment purchase activity and fewer repurchases of shares of common stock compared with 2011.
The net effect of all activities on total cash and cash equivalents was an increase of $2,816,743 for 2013 and an increase of $2,767,760 for 2012 and an increase of $9,925,227 for 2011. As of December 31, 2013, the Company held cash and cash equivalents of $23,626,761, short-term investments of $7,926,373, fixed maturity securities of $91,445,413 and equity securities of $36,144,065.
As of December 31, 2013, the Company had a claims reserve of $35,360,000. The amounts and timing of these obligations are estimated and not set contractually. Nonetheless, based on historical insurance claim 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.
In July 2013, the FASB updated guidance to eliminate diversity in practice relating to the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, similar tax loss or a tax credit carryforward exists. The main
provision of the update requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, be presented in the financial statements as a reduction to deferred tax assets for a net operating loss carryforward, a similar tax loss or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position, or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, in which case the unrecognized tax benefit should be presented as a liability. For public entities, this update becomes effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted, and the Company elected to adopt this new guidance in the third quarter of 2013. This update did not have an impact on the Company’s financial condition or results of operations.
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 financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
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.
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, Illinois, Kentucky, Michigan, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Texas and Virginia.
Significant Accounting Policies - The significant accounting policies of the Company are summarized below.
Short-term investments are comprised of 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.
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.
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 lag time has historically been between 30 and 120 days, with the majority of agencies reporting within 60 to 90 days. The lag time is reviewed periodically to monitor accruals. The accrual of premium revenues is based on historical data that includes transactional volume, fluctuations in the real estate market and the mix between refinance and purchase transactions. There have been no material changes in historical estimates during the periods presented.
Company management continually evaluates the collectability of receivables and provides an allowance for doubtful accounts equal to estimated losses expected to be incurred in the collection of amounts receivable. Changes to the allowance for doubtful accounts are reflected within net premiums written in the Consolidated Statements of Income. Amounts are charged off in the period they are deemed to be uncollectible.
In July 2013, the FASB updated guidance to eliminate diversity in practice relating to the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, similar tax loss or a tax credit carryforward exists. The main provision of the update requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, be presented in the financial statements as a reduction to deferred tax assets for a net operating loss carryforward, a similar tax loss or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position, or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, in which case the unrecognized tax benefit should be presented as a liability. For public entities, this update becomes effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted, and the Company elected to adopt this new guidance in the third quarter of 2013. This update did not have an impact on the Company’s financial condition or results of operations.
The preparation of financial statements in conformity with GAAP 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:
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 is 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.
As of December 31, 2013 and 2012, approximately $83,311,000 and $76,167,000, 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 $7,022,000 and $6,700,000 at December 31, 2013 and 2012, respectively, are deposited with the insurance departments of the states in which business is conducted.
The special revenue category for both periods presented includes over 30 individual bonds with revenue sources from a broad variety of industry sectors.
Realized gains and losses are determined on the specific identification method.
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, 2013 and 2012:
As of December 31, 2013, the Company held $21,150,675 in fixed maturity securities with unrealized losses of $497,607. As of December 31, 2012, the Company held $2,222,156 in fixed maturity securities with unrealized losses of $25,205. 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 likely will not be compelled to sell them before it can recover its cost basis, the Company does not consider these investments to be other-than-temporarily impaired.
As of December 31, 2013, the Company held $2,280,900 in equity securities with unrealized losses of $109,084. As of December 31, 2012, the Company held $2,551,215 in equity securities with unrealized losses of $91,237. 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 income securities until a recovery of fair value, the Company does not consider these investments other-than-temporarily impaired.
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 26 and 7 securities had unrealized losses at December 31, 2013 and December 31, 2012, 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 2013, the Company did not record any other-than-temporary impairment charges related to securities. During 2012, the Company recorded an other-than-temporary impairment charge in the amount of $93,436 related to securities. During 2011, the Company recorded an other-than-temporary impairment charge in the amount of $280,987 related to securities, of which, $101,861 was related to Level 3 ARS that have had a history of being below cost and a change in the intent not to sell. Other-than-temporary impairment charges are included in net realized gain on investments in the Consolidated Statements of Income.
The FASB has established a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value of financial assets and liabilities, such as securities. 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 Level 3 category only includes the Company’s investments in student loan auction rate securities (“ARS”) because quoted prices were unavailable due to the failure of auctions. The Company’s ARS portfolio is comprised entirely of investment grade student loan ARS. The par value of these securities was $1,000,000 as of December 31, 2013 and December 31, 2012, with approximately 97.0% as of December 31, 2013 and December 31, 2012, guaranteed by the U.S. Department of Education.
Some of the inputs to ARS valuation are unobservable in the market and are significant; therefore, the Company utilizes another third party pricing service to assist in the determination of the fair market value of these securities. This service uses a proprietary valuation model that considers factors such as the following: the financial standing of the issuer; reported prices and the extent of public trading in similar financial instruments of the issuer or comparable companies; the ability of the issuer to obtain required financing; changes in the economic conditions affecting the issuer; pricing by other dealers in similar securities; time to maturity; and interest rates. The following table summarizes some key assumptions the service used to determine fair value as of December 31, 2013 and 2012:
The following table presents, by level, the financial assets carried at fair value measured on a recurring basis as of December 31, 2013 and 2012. 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.
To help ensure that fair value determinations are consistent with ASC 820 fair value measurements, prices from our pricing services go through multiple review processes to ensure appropriate pricing. Pricing procedures and inputs used to price each security include, but are not limited to, the following: unadjusted quoted market prices for identical securities such as stock market closing prices; non-binding quoted prices for identical securities in markets that are not active; interest rates; yield curves observable at commonly quoted intervals; volatility; prepayment speeds; loss severity; credit risks and default rates. The Company reviews the procedures and inputs used by its pricing services and verifies a sample of the services’ quotes by comparing them to values obtained from other pricing resources. In the event the Company disagrees with a price provided by its pricing services, the service reevaluates the price to corroborate the market information and then reviews inputs to the evaluation in light of potentially new market data. The Company believes that these processes and inputs result in appropriate classifications and fair values consistent with ASC 820.
The estimated fair value of cost-basis investments is calculated from the book value of the underlying entities, which is not materially different from the fair value of the underlying entity.
The carrying amount for accrued dividends and interest is a reasonable estimate of fair value due to the short-term maturity of these assets.
The carrying amounts and fair values of these financial instruments (please note investments are disclosed in a previous table) as of December 31, 2013 and 2012 are presented in the following table:
The Company does not recognize claim recoveries until an actual payment has been received by the Company. The Company realized claim recoveries of approximately $1,165,000, $1,324,000 and $1,488,000 during 2013, 2012 and 2011, respectively.
The provision for claims as a percentage of net premiums written was (0.5)%, 5.9% and 4.1% in 2013, 2012 and 2011, respectively.
There were no potential shares excluded from the computation of diluted earnings per share in 2013 and 2012. In 2011, 11,500 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 following tables summarize information about fixed stock options outstanding at December 31, 2013:
In 2013, 3,250 options and SARs vested with a fair value of $79,755.
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 2013, 2012 and 2011 were $27.55, $18.84 and $15.55, respectively, and were estimated using the weighted average assumptions shown in the table below.
At December 31, 2013 and 2012, 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 leases certain office facilities and equipment under operating leases. Rental expense also includes occasional rental of automobiles. Rent expense totaled approximately $699,000, $692,000, and $623,000 in 2013, 2012 and 2011, respectively. The
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 $(73,246), $(48,353) net of tax, for December 31, 2013, and $(155,234), $(102,454) net of tax, for December 31, 2012, and represents
Development of the accumulated postretirement benefit obligation for the years ended December 31, 2013 and 2012 includes the following:
Like-Kind Exchanges Proceeds. In administering tax-deferred property exchanges, the Company’s subsidiary, Investors Title Exchange Corporation (“ITEC”), serves as a qualified intermediary for exchanges, holding the net sales proceeds from relinquished property to be used for purchase of replacement property. Another Company subsidiary, Investors Title Accommodation Corporation (“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 $76,037,000 and $55,580,000 as of December 31, 2013 and 2012, 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 other revenue rather than investment income. These like-kind exchange funds are primarily invested in money market and other short-term investments.
As scheduled, the unlimited insurance coverage for noninterest-bearing transaction accounts provided under the Dodd-Frank Wall Street Reform and Consumer Protection Act expired on December 31, 2012. Deposits held in noninterest-bearing transaction accounts are now aggregated with any interest-bearing deposits the owner may hold in the same ownership category, and the combined total insured up to at least $250,000. Of the $23.6 million in cash and cash equivalents at December 31, 2013, $23.1 million was not insured by the FDIC after the expiration of unlimited coverage for noninterest-bearing transaction accounts.
In January 2012, a subsidiary of the Company, 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. 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 not less than 27 months from the closing.
The contingent payment arrangement requires that the purchase price for the 70% majority interest be paid over the next 2 years and determined by multiplying United’s actual GAAP net income for the first full 24 calendar months subsequent to closing by an agreed upon factor. In no event will the purchase price for the majority interest exceed $1,041,250. The fair value of the contingent payment was derived using the Company’s best estimate (Level 3 inputs) of net income of approximately $859,000 during the 24-month period, discounted at a 15% rate, and limited to the contractual maximum. The amounts previously paid will be used to offset contingent payment amounts calculated for final consideration, and is eligible for refunding in part or in its entirety if greater than the final settlement amount.
In the event that ITIC purchases the remaining 30% interest, the purchase price of the redeemable noncontrolling interest will be calculated by multiplying United’s GAAP net income for the full 24 calendar months immediately preceding the written notice of the option exercise by an agreed upon factor. The agreement stipulates a minimum purchase price of $1,000,000 for the entire agency should this option be exercised.
In the Consolidated Statements of Income, revenues and expenses include the operations of United since April 2, 2012, which is the acquisition date. United was formed as a result of the Company’s acquisition, and had no net income prior to the acquisition date.
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.