The following discussion should be read in conjunction with the consolidated financial statements and the related notes in this report.
Other Services: Services other than title insurance provided by operating divisions of the Company that are not required to be reported separately are reported in a category called “All Other.” These other services include those offered by the Company and by its smaller wholly owned subsidiaries, Investors Title Exchange Corporation (“ITEC”), Investors Title Accommodation Corporation (“ITAC”), Investors Trust Company ("Investors Trust"), Investors Capital Management Company (“ICMC”) and Investors Title Management Services, Inc. (“ITMS”).
By the mid 2000’s, there had been a long-term trend of rising home values in the United States that resulted in inflated home values in many areas of the country. From 2001 to 2003, the Federal Reserve lowered short-term interest rates 13 times. Sales of homes reached record highs and lenders began to loosen their loan underwriting standards, particularly in the non-traditional loan markets. These lower underwriting standards, when combined with new methods of financing non-traditional loans, helped create a supply of inexpensive credit which led to a build up in mortgage loans to high-risk borrowers. Subsequently, there was a substantial increase in loan defaults and mortgage foreclosures in the U.S. economy. During September 2008, there were multiple financial firm failures, mergers or restructurings that led to a financial crisis and loss of confidence in the financial system. Lenders responded to the financial crisis by implementing stricter loan underwriting standards. In addition to these tighter lending standards, high unemployment and weakened consumer confidence have reduced the demand for homes. These factors have contributed to a lower demand for title insurance and a decline in premium volume.
In an attempt to stabilize the struggling economy, the U.S. government took steps to provide economic stimulus during the past two years. The Economic Stimulus Bill included an $8,000 tax credit available for certain first time home buyers for the purchase of a principal residence on or after January 1, 2009. On July 2, 2010, the President signed a law which extended the first-time homebuyer credit to persons who signed a binding purchase contract by April 30, 2010 and closed on the purchase of their residence by September 30, 2010. A similar credit of $6,500 was also extended for homebuyers who had owned their current home at least five of the prior eight years.
According to data published by Freddie Mac, the average 30-year fixed mortgage interest rate in the United States decreased to 4.69% for 2010, compared with 5.04% for 2009. Mortgage originations were $1,505 billion and $1,995 billion in 2010 and 2009, respectively. The Mortgage Bankers Association (“MBA”) January 14, 2011 Mortgage Finance Forecast projects 2011 mortgage originations to be $966 billion, a decrease of approximately 36% compared with 2010. In 2010 and 2009, refinancing activity accounted for approximately two thirds of all mortgage originations. In 2011, refinancing transactions are estimated to account for only one third of total mortgage originations due to forecasted increases in mortgage interest rates. Refinancing activity is projected to decrease 66% and purchasing activity is projected to increase 30% from 2010 levels. Many experts predict the overall state of the economy to improve in 2011. The Federal Reserve has announced that it will purchase more U.S. Treasury bonds in order to reduce long-term interest rates and federal lawmakers have agreed to extend certain provisions of the Bush-era tax cuts. According to the January 14, 2011 MBA Economic Forecast, projections show improvement in real gross domestic product, consumer spending, business and residential investments and the unemployment rate; however, due to foreclosures, tighter lending standards and continued high unemployment levels, real estate activity is expected to remain sluggish in 2011.
Historically, activity in real estate markets has varied over the course of market cycles in response to evolving economic factors. Operating results can vary from year to year based on cyclical market conditions and do not necessarily indicate the Company's future operating results and cash flows.
Management considers factors such as the Company’s historical claims experience, case reserve estimates on reported claims, large claims, actuarial projections and other relevant factors in determining its loss provision rates and the aggregate recorded expected liability for claims. In establishing reserves, actuarial projections are compared with recorded reserves to evaluate the adequacy of such recorded claims reserves and any necessary adjustments are then recorded in the current period’s income statement. As the most recent claims experience develops and new information becomes available, the loss reserve estimate related to prior periods will change to more accurately reflect updated and improved emerging data. The Company reflects any adjustments to reserves in the results of operations in the period in which new information (principally claims experience) becomes available.
The 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 2009 through 2010 have been the result of actual Company and industry experience during the calendar year and not changes in assumptions.
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 are recognized as expenses concurrent with recognition of related premium revenue.
Securities for which the Company has the intent and ability to hold to maturity are classified as held-to-maturity and are reported at cost, adjusted for amortization of premiums or accretion of discounts and other-than-temporary declines in fair value. Securities held principally for resale in the near term are classified as trading securities and recorded at fair values. Realized and unrealized gains and losses on trading securities are included in other income. Securities not classified as either trading or held-to-maturity are classified as available-for-sale and reported at fair value with unrealized gains and losses, adjusted for other-than-temporary declines in fair value, reported as accumulated other comprehensive income. As of December 31, 2010 and 2009, substantially all of the Company’s invested assets were classified as available-for-sale. Realized gains and losses on the sale of investments are determined using the specific identification method.
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. See Note 3 to the consolidated financial statements included in the Annual Report on Form 10-K for further information on the Company’s valuation techniques.
The Company recorded net deferred tax assets at December 31, 2010 and 2009 related primarily to reserves for claims, allowance for doubtful accounts, employee benefits and other-than-temporary impairment of assets. Based upon the Company's historical results of operations, the existing financial condition of the Company and management's assessment of all other available information, management believes that it is more likely than not that the benefit of these assets will be realized.
Net Premiums: Net premiums written decreased 1.1% in 2010 from 2009. Purchase transactions increased approximately 6.7% in 2010 from 2009 levels however, this was offset by a decrease of 13.9% in refinancing activity, resulting in an overall decrease in premium volume.
Title Orders: The volume of title orders decreased 3.5% in 2010 to 206,384 compared with 213,824 in 2009. The Company believes that the weak housing market and the decrease in refinancing activity were the primary reasons for the decline in order counts.
Title insurance companies typically issue title insurance policies directly through branch offices or through title agencies. Following is a breakdown of premiums generated by branch and agency operations for the years ended December 31:
Agency Net Premiums: Agents retain the majority of the title premium collected, with the balance remitted to the title underwriter for bearing the risk of loss in the event that a claim is made under the title insurance policy. Agency net premiums written as a percentage of total net premiums written were 70.8% and 65.5% in 2010 and 2009, respectively. Net premiums written from agency operations increased 6.9% in 2010 compared with 2009. The increase in the percentage of total premiums written by agencies in 2010 is primarily due to the Company’s strategy of growth through expansion of its agency base and the influence of local geographic trends.
Premiums for all other states increased primarily from the Company’s 2010 agency expansion into the State of Texas.
Investment income was $3,671,178 in 2010 compared with $3,783,116 in 2009. The decline in investment income in 2010 was due primarily to lower levels of interest earned on short-term funds and the maturity of older securities which yielded higher rates of interest relative to current investments. 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.
Profit Margin: The Company’s title insurance profit margin varies according to a number of factors, including the volume and type of real estate activity. Profit margins for the title insurance segment were 10.4% and 7.7% in 2010 and 2009, respectively.
Commissions: Agent commissions represent the portion of premiums retained by agents pursuant to the terms of their respective agency contracts. Commissions to agents increased 6.6% from 2009 to 2010 primarily due to increased premiums from agency operations in 2010. Commission expense as a percentage of net premiums written by agents was 71.7% and 71.9% in 2010 and 2009, respectively. Commission rates vary by the geographic area in which the commission is paid and may be influenced by state regulations.
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 $5,726,366 and $8,213,123 in 2010 and 2009, respectively.
Office Occupancy and Operations: Overall office occupancy and operations as a percentage of total revenues was 5.5% and 6.1% in 2010 and 2009, respectively. The decrease in office occupancy and operations expense in 2010 compared with 2009 was due primarily to decreases in depreciation related to assets becoming fully depreciated, telecommunications, rent and printing. Telecommunications, rent and printing decreased primarily due to initiatives to reduce operating costs.
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 2.1% and 2.0% for 2010 and 2009, respectively.
Business Development: Business development expenses for 2010 increased $146,531 compared with 2009 primarily due to increases in travel related expenses related to the expansion into the State of Texas and a higher level of marketing efforts.
The provision for income taxes was $2,243,000 and $1,087,000 for the years ended December 31, 2010 and 2009, respectively. Income tax expense as a percentage of earnings before income taxes was 26.0% and 18.4%, for the years ended December 31, 2010 and 2009, respectively. The increase for 2010 from 2009 was primarily due to a higher proportion of taxable to tax-exempt investment income. The effective income tax rate for both 2010 and 2009 was below the U.S. federal statutory income tax rate (34%), primarily due to the effect of tax exempt income. Tax-exempt income lowers the effective tax rate.
The Company believes it is more likely than not that the tax benefits associated with recognized, impairment and unrecognized losses recorded through December 31, 2010 will be realized. However, this judgment could be impacted by further market fluctuations. Information regarding the components of the income tax expense and items included in the reconciliation of the effective rate with the federal statutory rate can be found in Note 8 to the accompanying Consolidated Financial Statements.
Liquidity: Cash flows from operating activities decreased from 2009 to 2010, primarily due to a recovery of current income taxes receivable in 2009, a decrease in premiums collected in 2010 coupled with an increase in receivables and other assets, partially offset by an increase in accounts payable and accrued liabilities. Cash and cash equivalents at year end decreased approximately $600,000 from the prior year to approximately $8,100,000, due to cash provided by operating activities in 2009.
The maximum dividend permitted by law is not necessarily indicative of an insurer’s actual ability to pay dividends, which may be constrained by regulatory and business considerations, such as the impact of dividends on surplus, which could affect an insurer’s ratings. Further, depending on regulatory and business conditions, the Company may in the future need to retain cash in its underwriters in order to maintain their ratings or their statutory capital position. Such requirements could be the result of adverse financial results, changes in interpretation of statutory accounting requirements by regulators, reserve charges or investment losses.
Purchase of Company Stock: On November 10, 2008, the Board of Directors of the Company approved the purchase of an additional 394,582 shares pursuant to the Company’s stock repurchase plan, such that there was authority remaining under the plan to purchase up to an aggregate of 500,000 shares of the Company's common stock pursuant to the plan immediately after the approval. Pursuant to this approval, the Company purchased 12,138 shares in the twelve months ended December 31, 2010 and 13,754 shares in the twelve months ended December 31, 2009 at an average per share price of $31.21 and $31.11, respectively.
Capital Expenditures: During 2011, the Company has plans for various capital improvement projects, including hardware purchases and software projects that are anticipated to be funded via cash flows from operations. All material anticipated capital expenditures are subject to periodic review and revision and may vary depending on a number of factors.
In February 2010, the Financial Accounting Standards Board (“FASB”) updated the reporting requirements for subsequent events to no longer require the inclusion of a date through which events have been evaluated in the notes to the financial statements. This update was effective immediately and did not have an impact on the Company’s financial condition or results of operations.
In January 2010, the FASB updated the requirements for fair value measurements and disclosures to provide for additional disclosure related to transfers in and out of securities valuation hierarchy Levels 1 and 2, and to require companies to present Level 3 securities purchases, sales, issuances and settlements on a gross rather than net basis. Refer to Note 3 for a discussion of valuation hierarchy levels. The new disclosures are clarifications of existing disclosures and are effective for interim and annual reporting periods beginning after December 15, 2009, except that the disclosures requiring the presentation of Level 3 securities trading activity on a gross basis are effective for fiscal years beginning after December 15, 2010. This update did not have an impact on the Company’s financial condition or results of operations.
We have audited the accompanying consolidated balance sheets of Investors Title Company and Subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We were not engaged to examine management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010, included in the accompanying Management’s Report on Internal Control Over Financial Reporting and, accordingly, we do not express an opinion thereon.
Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the framework in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and concluded that the Company’s internal control over financial reporting was effective as of December 31, 2010.
Reclassification-Certain 2009 amounts in the accompanying consolidated financial statements have been reclassified to conform to the 2010 classifications. These reclassifications had no effect on stockholders’ equity or net income as previously reported.
Other investments consist primarily of investments in title insurance agencies structured as limited liability companies (“LLCs”), which are accounted for under the equity or cost method of accounting. The aggregate cost of the Company’s cost method investments totaled $1,107,115 and $902,022 at December 31, 2010 and December 31, 2009, respectively. The Company monitors any events or changes in circumstances that may have had a significant adverse effect on the fair value of these investments and makes any necessary adjustments.
The Company makes certain estimates and judgments in determining income tax expense (benefit) for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. The Company provides for deferred income taxes (benefits) for the tax consequences in future years of temporary differences between the financial statements' carrying values and the tax bases of assets and liabilities using currently enacted tax rates. The Company establishes valuation allowances if it believes that it is more likely than not that some or all of its deferred tax assets will not be realized. Refer to Note 8.
Company management continually evaluates the collectibility of receivables and provides an allowance for doubtful accounts equal to estimated losses expected to be incurred in the collection of amounts receivable.
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, 2010 consists of $5,675,516 of unrealized holding gains on available-for-sale securities and $13,189 of unrecognized prior service cost and unrealized gains associated with postretirement benefit liabilities. Accumulated other comprehensive income as of December 31, 2009 consists of $4,840,142 of unrealized holding gains on available-for-sale securities and $(109,884) of unrecognized prior service cost and unrealized losses associated with postretirement benefit liabilities.
In June 2009, the FASB changed the methodology used to determine whether or not an entity is a primary beneficiary with respect to a variable interest entity and introduced a requirement to reassess on an ongoing basis whether an entity is the primary beneficiary of a variable interest entity. This update was implemented January 1, 2010, and did not have an impact on the Company’s financial condition or results of operations. As a result of this update, the Company evaluated its variable interests in other entities which it has an equity ownership position, and has determined that it does not have an interest in any variable interest entities.
The Company's reserves for claims are established using estimated amounts required to settle claims for which notice has been received (reported) and the amount estimated to be required to satisfy incurred claims of policyholders which may be reported in the future (incurred but not reported, or “IBNR”). A provision for estimated future claims payments is recorded at the time policy revenue is recorded as a percentage of premium income. By their nature, title claims can often be complex, vary greatly in dollar amounts, vary in number due to economic and market conditions such as an increase in mortgage foreclosures, and involve uncertainties as to ultimate exposure. In addition, some claims may require a number of years to settle and determine the final liability for indemnity and loss adjustment expense. The payment experience may extend for more than 20 years after the issuance of a policy. Events such as fraud, defalcation and multiple property defects can substantially and unexpectedly cause increases in estimates of losses. Due to the length of time over which claim payments are made and regularly occurring changes in underlying economic and market conditions, these estimates are subject to variability.
Securities are regularly evaluated and reviewed for differences between the cost and estimated fair value of each security for factors that may indicate that a decline in fair value is other-than-temporary. When, in the opinion of management, a decline in the fair value of an investment is considered to be other-than-temporary, such investment is written down to its fair value. Some factors considered in evaluating whether or not a decline in fair value is other-than-temporary include the duration and extent to which the fair value has been less than cost, the probability that the Company will be unable to collect all amounts due under the contractual terms of the security; with respect to equity securities, whether the Company’s ability and intent to retain the investment for a period of time sufficient to allow for a recovery in value; with respect to fixed maturity securities, whether the Company has the intent to sell or will more likely than not be required to sell a particular security before recovery in value; and the financial condition and prospects of the issuer (including credit ratings). These factors are reviewed quarterly and any material degradation in the prospect for recovery will be considered in the other-than-temporary impairment analysis. Such reviews are inherently uncertain and the value of the investment may not fully recover or may decline in future periods resulting in a realized loss. The fair values of the majority of the Company’s investments are based on quoted market prices from independent pricing services.
The scheduled maturities of fixed maturity securities at December 31, 2010 were as follows:
As of December 31, 2010, the Company held $8,086,081 in fixed maturity securities with unrealized losses of $189,427. As of December 31, 2009, the Company held $11,626,793 in fixed maturity securities with unrealized losses of $676,038. 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.
The Level 2 category includes fixed maturity investments such as corporate bonds, U.S. government and agency bonds and municipal bonds. Their fair value is principally based on market values obtained from a third party pricing service. Factors that are used in determining their 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 the pricing service, although as discussed below, the Company does consult other price resources when confirming that the prices it obtains reflect the fair values of the instruments in accordance with 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, 2010 and 2009, the Company did not adjust any Level 2 fair values.
A number of the Company’s investment grade corporate bonds are frequently traded in active markets, and trading prices are consequently available for these securities. However, these securities were classified as Level 2 because the third party pricing service from which the Company has obtained fair values for these instruments uses valuation models which use observable market inputs in addition to traded prices. Substantially all of the input assumptions used in the service’s model are observable in the marketplace or can be derived or supported by observable market data.
The Level 3 category only includes the Company’s investments in student loan ARS because quoted prices were unavailable due to the failure of auctions. Some of the inputs to this model are unobservable in the market and are significant-therefore, the Company utilizes another third party pricing service to assist in the determination of fair market value of these securities. That 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, 2010 and 2009:
Based upon these inputs and assumptions, the pricing service provides a range of values to the Company for its ARS. The Company records the fair value based on the midpoint of the range and believes that this valuation is the most reasonable estimate of fair value. In 2010 and 2009, the difference in the low and high values of the ranges was approximately three percent of the carrying value of the Company’s ARS.
The following table presents, by level, the financial assets carried at fair value measured on a recurring basis as of December 31, 2010 and 2009. 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.
There were no transfers into or out of Levels 1 and 2 during 2010. The following table presents a reconciliation of the Company’s assets measured at fair value using significant unobservable inputs (Level 3) as defined for the period ended December 31, 2010 and 2009:
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 claim recoveries, as well as changes to estimates to better reflect the latest reported loss data. The Company does not recognize claim recoveries until an actual payment has been received by the Company. During 2010, the Company realized claim recoveries of approximately $3,100,000 related to prior periods. Of these 2010 claim recoveries, approximately $1,540,000 pertains to a recovery under the Company’s fidelity bond related to a defalcation that occurred in 2008.
The provision for claims as a percentage of net premiums written was 7.2% and 13.6% in 2010 and 2009, respectively. The change in estimate for calendar year 2010 from 2009 resulted mostly from claim recoveries increasing from $1,347,000 in 2009 to $3,100,000 in 2010. Additional decreases to the provision for claims resulted from a decrease in premium volume and a favorable adjustment to the current year loss provision rate. Not considering the claim recoveries, there was unfavorable development in 2010 versus prior year related primarily to policy years 2005 and 2006, offset by favorable development for policy year 2009. Due to variances between actual and expected loss payments, loss development is subject to significant variability.
A summary of the Company’s loss reserves, broken down into its components of known title claims and IBNR claims follows:
In management's opinion, the reserves are adequate to cover claim losses which might result from pending and future claims.
Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per common share is computed by dividing net income by the combination of dilutive potential common stock, comprised of shares issuable under the Company’s share-based compensation plans and the weighted-average number of common shares outstanding during the reporting period. Dilutive common share equivalents includes the dilutive effect of in-the-money share-based awards, which are calculated based on the average share price for each period using the treasury stock method. Under the treasury stock method, the exercise price of a share-based award, the amount of compensation cost, if any, for future service that the Company has not yet recognized, and the amount of estimated tax benefits that would be recorded in additional paid-in capital, if any, when the share-based awards are exercised are assumed to be used to repurchase shares in the current period. The incremental dilutive potential common shares, calculated using the treasury stock method was 5,190 and 7,613 for 2010 and 2009, respectively. The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31:
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, 2010. The intrinsic values of options exercised during 2010 and 2009 were approximately $158,000 and $89,000, respectively.
During the second quarter of 2010, the Company issued 3,000 share settled SARs to select officers and directors of the Company. During the first and second quarter of 2009, the Company issued 78,000 share settled SARs to select officers and directors of the Company. SARs give the holder the right to receive stock equal to the appreciation in the value of shares of stock from the grant date for a specified period of time, and as a result, are accounted for as equity instruments. As such, the SARs were valued using the Black-Scholes option valuation model. The fair value of each award is estimated on the date of grant using the Black-Scholes option valuation model with the weighted-average assumptions noted in the following table. Expected volatilities are based on both the implied and historical volatility of the Company’s stock. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of awards represents the period of time that options granted are expected to be outstanding. The interest rate for periods during the expected life of the award is based on the U.S. Treasury yield curve in effect at the time of the grant.
At December 31, 2010 and 2009, no valuation allowance was recorded. Based upon the Company’s historical results of operations, the existing financial condition of the Company and management’s assessment of all other available information, management believes that it is more likely than not that the benefit of these net deferred income tax assets will be realized.
In accounting for uncertainty in income taxes, the Company is required to recognize in its financial statements the impact of a tax position if that position is more likely than not of being sustained on an audit, based on the technical merits of the position. As a result of the implementation, the Company made a comprehensive review of its uncertain tax positions in accordance with recognition standards. In this regard, an uncertain tax position represents the Company’s expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. There were no unrecognized tax benefits or liabilities as of December 31, 2010.
The Company leases certain office facilities and equipment under operating leases. Rental expense also includes occasional rental of automobiles. Rent expense totaled approximately $773,000 and $887,000 in 2010 and 2009, respectively. The future minimum lease payments under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2010, are summarized as follows:
In November 2003, ITIC, a wholly owned subsidiary of the Company, entered into employment agreements with the Chief Executive Officer, Chief Financial Officer and the Chief Operating Officer of ITIC. These individuals also serve as the Chairman, President and Executive Vice President, respectively, of the Company. The agreements provide compensation and life, health, dental and vision benefits upon the occurrence of specific events, including death, disability, retirement, termination without cause or upon a change in control. The agreements provide for annual salaries to be fixed by the Compensation Committee and, among other benefits, required ITIC to make quarterly contributions pursuant to a supplemental executive retirement account on behalf of each executive equal to 22% of the base salary and bonus paid to each during each quarter through September 30, 2008. The obligation to make contributions to the supplemental executive retirement agreements has expired and has been removed from the amended employment agreement effective January 1, 2009. The employment agreements also prohibit each of these executives from competing with ITIC and its parent, subsidiaries and affiliates in the State of North Carolina while employed by ITIC and for a period of two years following termination of their employment.
In addition, during the second quarter of 2004, ITIC entered into nonqualified deferred compensation plan agreements with these executives. The amount accrued for all agreements at December 31, 2010 and 2009 was approximately $5,134,000 and $4,826,000, respectively, which includes postretirement compensation and health benefits, and was calculated based on the terms of the contract. Both the 2010 and 2009 accruals are included in the accounts payable and accrued liability 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 to permit a special 2008 distribution election as permitted under Section 409A. The special distribution election provided that each participant may elect, no later than December 31, 2008, to receive a one-time lump sum distribution on January 15, 2009 of all amounts in the participant’s account. Payouts in January 2009 associated with this distribution were approximately $2,456,000. In addition, the nonqualified deferred compensation agreement was amended and restated to terminate all Company contributions to this plan beginning January 1, 2009. In connection with such termination, the employment agreements were amended and restated to provide for an annual cash payment to the officers equal to the amounts the Company would have contributed to their accounts under its 401(k) Plan if such contributions were not limited by the federal tax laws, less the amount of any contributions that the Company actually makes to their accounts under the Company’s 401(k) Plan.
On November 17, 2003, ITIC entered into employment agreements with key executives that provide for the continuation of certain employee benefits upon retirement. The executive employee benefits include health insurance, dental insurance, vision insurance and life insurance. The benefits are unfunded. Estimated future benefit payouts expected to be paid for each of the next five years are $3,507 in 2011, $4,520 in 2012, $5,742 in 2013, $6,254 in 2014, $6,749 in 2015 and $73,340 in the next five years thereafter.
Development of the accumulated postretirement benefit obligation for the years ended December 31, 2010 and 2009 includes the following:
A class action lawsuit is pending in the United States District Court for the Southern District of West Virginia against several title insurance companies, including Investors Title Insurance Company, entitled Backel v. Fidelity National Title Insurance et al. (6:2008-CV-00181). The plaintiff in this case contends a lack of meaningful oversight by agencies with which title insurance rates are filed and approved. There are further allegations that the title insurance companies have conspired to fix title insurance rates. The plaintiffs seek monetary damages, including treble damages, as well as injunctive relief. Similar suits have been filed in other jurisdictions, several of which, have already been dismissed. In West Virginia, the case has been placed on the inactive list pending the resolution of the bankruptcy of LandAmerica Financial Group, Inc. The Company believes that this case is without merit, and intends to vigorously defend against the allegations. At this stage in the litigation, the Company does not have the ability to make a reasonable range of estimates in regards to potential loss amounts, if any.
Regulation. The Company’s title insurance and trust subsidiaries are regulated by various federal, state and local governmental agencies and are subject to various audits and inquiries. It is the opinion of management that these audits and inquiries will not have a material impact on the Company’s consolidated financial condition or operations.
The Company does business with unconsolidated LLCs that it has investments in that are accounted for under the equity method of accounting. These unconsolidated companies are primarily title insurance agencies. The following table sets forth the approximate values by year found within each financial statement classification: