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 32 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"). Operating revenues from the title segment accounted for 96.3% of the Company's operating revenues in 2012. 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 cyclical nature of the residential and commercial real estate markets, and consequently, the land title industry, has historically caused fluctuations in revenues and profitability, and it is expected to continue to do so in the future. Additionally, there are seasonal influences in real estate activity and accordingly in revenue levels for title insurers.
In an attempt to stabilize the struggling housing market, the U.S. government took steps to provide economic stimulus during 2009 and 2010. In October 2011, the Federal Housing Agency (“FHA”) announced modifications to the Home Affordable Refinance Program (“HARP,”) that allows for easier refinancing of homes where mortgage values exceed property values, provided the borrower meets certain criteria. The revised version of HARP, also known as HARP 2.0, streamlines the underwriting process, removes the maximum loan-value restriction for 30-year fixed rate mortgages and reduces or eliminates risk-based fees charged by Fannie Mae and Freddie Mac. This plan is set to expire in December 2013.
According to data published by Freddie Mac, the average 30-year fixed mortgage interest rate in the United States was 3.66% and 4.45% for the years ended December 31, 2012 and 2011, respectively. Lower interest rates coupled with the HARP modifications resulted in increased levels of refinance activity during 2012 for the overall real estate industry. According to the MBA Forecast, refinancing is expected to decline through 2013 as interest rates climb to a projected 4.4% in the fourth quarter of 2013.
Currently, the U.S. economy is showing mixed signals with several federal programs in various stages. In June 2011, the Federal Reserve’s program of purchasing U.S. Treasury Bonds to reduce long-term interest rates, Quantitative Easing 2, ended. In September 2011, the Federal Reserve announced the “Operation Twist” program, which involved selling short-term Treasury bonds in exchange for the same amount of longer-term bonds. This program expired in the fourth quarter of 2012. In September 2012, the Federal Reserve announced a new round of Quantitative Easing, “QE 3,” in which it will purchase mortgage backed securities at a rate of $40 billion per month and, with the end of Operations Twist, $45 billion per month of longer-term Treasury securities. There is no stated end date associated with this round of Quantitative Easing. The Federal Reserve is also issuing disclosures on a periodic basis that include projections of the federal funds rate and expected actions. In December 2012, guidance stated that the federal fund rate will remain exceptionally low until unemployment is below 6.5% and inflation exceeds 2.5%.
There are key assumptions that materially affect the reserve estimates. 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, change significantly. The factors the Company considered for the recently completed fiscal year did not cause any of its key assumptions to change from assumptions used in the immediately preceding period. Also affecting the Company’s assumptions are large losses related to fraud and defalcation, as these can cause significant variances in loss emergence patterns. Management defines a large loss as one where incurred losses exceed $250,000. Due to the small volume of large claims, the long-tail nature of title insurance claims and the inherent uncertainty in loss emergence patterns, large claim activity can vary significantly between policy years. The estimated development of large claims by policy year is therefore subject to significant changes as experience develops. The Company has generally followed the same methodology for estimating loss reserves. The loss provision rate is set to provide for losses on current year policies and 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 2011 through 2012 have been the result of actual Company and industry experience during the calendar year and not changes in assumptions.
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, 2012. The ultimate settlement of policy and contract claims will likely vary from the reserve estimates included in the Company’s Consolidated Financial Statements. The Company continually reviews and adjusts its reserve estimates to reflect its loss experience and any new information that becomes available. There are no known claims that are expected to have a material adverse effect on the Company's financial position or operating results.
Quarterly, the Company evaluates the collectability of receivables. Premiums not collected within 6 months are fully reserved. Write-offs of receivables have not been material to the Company.
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 that are not classified as either trading securities or held-to-maturity securities, and, securities for which the Company has the intent and ability to hold 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, 2012 and 2011, all of the Company’s invested securities were classified as available-for-sale. Realized gains and losses on the sale of investments are determined using the specific identification method.
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 20.8% to $78,568,217 in 2012 compared with $65,043,360 in 2011. The increase in net agency premiums in 2012 relates primarily to increased real estate activity and new industry-wide premium charges in certain markets that went into effect during the second half of 2012.
Following is a schedule of net premiums written in select states where the Company’s two insurance subsidiaries ITIC and NITIC currently underwrite title insurance:
In formulating its investment strategy, the Company has emphasized after-tax income. The Company’s investments are primarily in bonds and, to a lesser extent, equity securities. The effective maturity of the majority of the bonds is within 10 years. The Company’s invested assets are managed to fund its obligations and evaluated to ensure long term stability of capital accounts.
There are a number of risks and uncertainties inherent in the process of monitoring impairments and determining if an impairment is other-than-temporary. These risks and uncertainties include the risk that the economic outlook will be worse than expected or have more of an impact on the issuer than anticipated, the risk that the Company's assessment of an issuer's ability to meet all of its contractual obligations will change based on changes in the characteristics of that issuer, the risk that information obtained by the Company or changes in other facts and circumstances leads management to change its intent to hold the equity security until it recovers in value or its intent to sell the debt security, and the risk that management is making decisions based on misstated information in the financial statements provided by issuers.
The Company’s operating expenses consist primarily of commissions to agents, salaries, employee benefits and payroll taxes, provisions for claims and office occupancy and operations. Operating expenses in 2012 increased 21.9% compared with 2011 primarily due to increases in commissions, salaries, employee benefits and payroll taxes, provision for claims and professional and contract labor fees.
Following is a summary of the Company's operating expenses for 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 9.6% and 7.6% in 2012 and 2011, respectively. The Company continually strives to enhance its competitive strengths and market position, including ongoing initiatives to reduce its operating expenses.
Commissions: Agent commissions represent the portion of premiums retained by agents pursuant to the terms of their respective agency contracts. Commissions to agents increased 19.8% to $59,427,070 in 2012 from $49,596,250 in 2011. This increase was primarily due to an increase in agency business. Commission expense as a percentage of net premiums written by agents was 75.6% and 76.3% in 2012 and 2011, respectively. Commission rates may vary due to geographic locations, different levels of premium rate structures and state regulations.
Reserves for Claims: At December 31, 2012, the total reserve for claims was $39,078,000. Of that total, approximately $5,166,000 was reserved for specific claims, and approximately $33,912,000 was reserved for claims for which the Company had no notice. Because of the uncertainty of future claims, changes in economic conditions and the fact that many claims do not materialize for several years, reserve estimates are subject to variability.
Office Occupancy and Operations: Overall office occupancy and operations as a percentage of total revenues was 3.4% and 4.1% in 2012 and 2011, respectively. The dollar increase in office occupancy and operations expense in 2012 compared with 2011 was due primarily to increases in rent, office supplies, telecommunications, equipment and postage, all related to increased business activity.
The provision for income taxes was $4,889,000 and $2,565,000 for the years ended December 31, 2012 and 2011, respectively. Income tax expense as a percentage of earnings before income taxes was 30.4% and 27.0%, for the years ended December 31, 2012 and 2011, respectively. The increase for 2012 from 2011 was primarily due to a higher proportion of taxable to tax-exempt investment income. The effective income tax rate for both 2012 and 2011 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.
Net cash flows provided by operating activities were $8,707,514 and $9,007,159 for 2012 and 2011, respectively. Cash flows from operating activities decreased from 2011 to 2012, primarily due to the 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 2012, the Company had a higher level of investment purchase activity and fewer repurchases of shares of common stock compared with the same period in 2011.
The net effect of all activities on total cash and cash equivalents was an increase of $2,767,760 for 2012 and an increase of $9,925,227 for 2011. As of December 31, 2012, the Company held cash and cash equivalents of $20,810,018, short-term investments of $13,567,648, fixed maturity securities of $81,936,978 and equity securities of $28,510,933.
The Company's ability to pay dividends and operating expenses is dependent on funds received from the insurance subsidiaries, which are subject to regulation in the states in which they do business. Each state regulates the extent to which title underwriters can pay dividends or make distributions. As of December 31, 2012, approximately $76,167,000 of the consolidated stockholders' equity represented net assets of the Company's subsidiaries that cannot be transferred in the form of dividends, loans or advances to the parent company under statutory regulations without prior approval from the respective state insurance department. These regulations require prior regulatory approval of the payment of dividends and other intercompany transfers. The Company believes, however, that amounts available for transfer from the insurance and other subsidiaries are adequate to meet the Company's current operating needs.
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 $55,580,000 and $35,359,000 as of December 31, 2012 and 2011, 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 administered by the Investors Trust Company totaled over $650,000,000 and $600,000,000 for each of the years ended December 31, 2012 and 2011. These amounts are not considered assets of the Company and, therefore, are excluded from the accompanying Consolidated Balance Sheets.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 14, 2013, expressed an unqualified opinion.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended December 31, 2012, and our report dated March 14, 2013, expressed an unqualified opinion on those 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 Illinois, Kentucky, Michigan, Nebraska, New York, North Carolina, Pennsylvania, South Carolina, Tennessee, Texas and Virginia.
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 methods of accounting. The aggregate cost of the Company’s cost method investments totaled $1,778,115 and $1,210,687 at December 31, 2012 and December 31, 2011, 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 total reserve for all reported and unreported losses the Company incurred through December 31, 2012 is represented by the reserves for claims. The Company's reserves for unpaid losses and loss adjustment expenses are established using estimated amounts required to settle claims for which notice has been received (reported) and the amount estimated to be required to satisfy incurred claims of policyholders which may be reported in the future. Despite the variability of such estimates, management believes that the reserves are adequate to cover claim losses resulting from pending and future claims for policies issued through December 31, 2012. 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.
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.
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 payable approximate fair value due to the short-term nature of these assets and liabilities. Fair values for the majority of investment securities are based on quoted market prices. Auction rate securities (“ARS”) are valued using discounted cash flow models to determine the estimated fair value of these investments. Some of the inputs to determining the fair value of ARS are unobservable in the securities markets and are significant. 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, 2012 consists of $8,920,883 of unrealized holding gains on available-for-sale securities and $102,453 of unrecognized prior service cost and unrecognized actuarial losses associated with postretirement benefit liabilities. Accumulated other comprehensive income as of December 31, 2011 consists of $7,563,541 of unrealized holding gains on available-for-sale securities and $54,376 of unrecognized prior service cost and unrealized losses associated with postretirement benefit liabilities.
The Company accounts for share-based compensation in accordance with the fair value based principles required by the Financial Accounting Standards Board (“FASB”). Estimated compensation expense for awards outstanding at the effective date is recognized over their remaining service period using the compensation cost. Share-based compensation cost is generally measured at the grant date, based on the estimated fair value of the award, and is recognized as an expense over the employee’s requisite service period.
In June 2011, the FASB updated requirements relating to the presentation of comprehensive income. In December 2011, the FASB issued a subsequent update to defer those changes in the June 2011 update that relate to the presentation of reclassification adjustments. All other requirements of the June 2011 update are not affected by the December 2011 update. The amendments were being made to allow the FASB time to re-deliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. On February 5, 2013, the FASB did add new disclosure requirements for items reclassified out of accumulated other comprehensive income. This update will become effective for fiscal years, and interim periods within those years, beginning after December 15, 2012. The guidance is not expected to have an impact on the Company’s financial condition or results of operations.
The scheduled maturities of fixed maturity securities at December 31, 2012 were as follows:
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, 2012 and 2011.
As of December 31, 2012, the Company held $2,551,215 in equity securities with unrealized losses of $91,237. As of December 31, 2011, the Company held $1,061,202 in equity securities with unrealized losses of $41,823. 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 7 and 13 securities had unrealized losses at December 31, 2012 and December 31, 2011, 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 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 intent not to sell. Other-than-temporary impairment charges are included in net realized gain on investments in the Consolidated Statements of Income.
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, 2012 and 2011:
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 2012 and 2011, the difference in the low and high values of the ranges was approximately zero and three percent of the carrying value of the Company’s ARS.
The Company’s ARS portfolio is comprised entirely of investment grade student loan ARS. The par value of the ARS bonds was $1,000,000 and $5,000,000 as of December 31, 2012 and 2011, respectively, with approximately 97.0% and 79.6% as of December 31, 2012 and 2011, respectively, guaranteed by the U.S. Department of Education.
The following table presents, by level, the financial assets carried at fair value measured on a recurring basis as of December 31, 2012 and 2011. 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.
There were no transfers into or out of Levels 1 and 2 during the period.
The Company uses various financial instruments in the normal course of its business. In the measurement of the fair value of certain financial instruments, other valuation techniques were utilized if quoted market prices were not available. These derived fair value estimates are significantly affected by the assumptions used. Additionally, ASC 820 excludes from its scope certain financial instruments including those related to insurance contracts, pension and other postretirement benefits, and equity method investments.
The fair value of the contingent consideration was estimated based on the discounted value of the future cash flows. Contingent consideration consists of additional monies the Company may become obligated to pay based on the future performance of a business the Company acquired, as discussed in Note 18.
Certain cost method investments are measured at estimated fair value on a non-recurring basis, such as investments that are determined to be other-than temporarily impaired during the period and recorded at estimated fair value in the Consolidated Financial Statements as of December 31, 2012 and 2011. The following table summarizes the corresponding estimated fair value hierarchy of such investments at December 31, 2012 and 2011 and the related impairments recognized:
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. There were no potential shares excluded from the computation of diluted earnings per share in 2012.
The Company has adopted employee stock award plans (the "Plans") under which restricted stock, and options or stock appreciation rights (“SARs”) to purchase shares (not to exceed 500,000 shares) of the Company's stock, may be granted to key employees or directors of the Company at a price not less than the market value on the date of grant. SARs and options (which have predominantly been incentive stock options) awarded under the Plans thus far are exercisable and vest immediately or within one year or at 10% to 20% per year beginning on the date of grant and generally expire in five to ten years. All SARs issued to date have been share-settled only. No SARs were exercised in 2012 or 2011.
In 2012, 3,900 options and SARs vested with a fair value of $64,700.
There was approximately $75,000 and $214,000 of compensation expense relating to shares vesting on or before December 31, 2012 and December 31, 2011, respectively, included in salaries, employee benefits and payroll taxes in the Consolidated Statements of Income. As of December 31, 2012, there was approximately $24,000 of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the Company’s stock awards plans. That cost is expected to be recognized over a weighted-average period of approximately 4 months.
At December 31, 2012 and 2011, 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.
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. 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, 2012.
The Company leases certain office facilities and equipment under operating leases. Rental expense also includes occasional rental of automobiles. Rent expense totaled approximately $692,000 and $623,000 in 2012 and 2011, 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, 2012, are summarized as follows:
The amounts currently in accumulated other comprehensive income, pre-tax, that will be recognized in as components of net periodic benefit costs in 2013 are:
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, 2012:
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, based on its present expectations, these audits and inquiries will not have a material impact on the Company’s consolidated financial condition or operations.
Escrow and Trust Deposits. As a service to its customers, the Company, through ITIC, administers escrow and trust deposits representing earnest money received under real estate contracts, undisbursed amounts received for settlement of mortgage loans and indemnities against specific title risks. Cash held by the Company for these purposes was approximately $11,689,000 and $15,562,000 as of December 31, 2012 and 2011, respectively. These amounts are not considered assets of the Company and are excluded from the accompanying Consolidated Balance Sheets. However, the Company remains contingently liable for the disposition of these deposits.
Combined capital and surplus on a statutory basis was $102,047,179 and $93,089,327 as of December 31, 2012 and 2011, respectively. Net income on a statutory basis was $11,035,792 and $6,416,684 for the twelve months ended December 31, 2012 and 2011, respectively.
On November 12, 2002, the Company's Board of Directors amended the Company's Articles of Incorporation, creating a series of Class A Junior Participating Preferred Stock (the "Class A Preferred Stock"). The Class A Preferred Stock is senior to common stock in dividends or distributions of assets upon liquidations, dissolutions or winding up of the Company. Dividends on the Class A Preferred Stock are cumulative and accrue from the quarterly dividend payment date. Each share of Class A Preferred Stock entitles the holder thereof to 100 votes on all matters submitted to a vote of shareholders of the Company. These shares were reserved for issuance under the Shareholder Rights Plan (the "Plan"), which was adopted on November 21, 2002, by the Company's Board of Directors. Under the terms of the Plan, the Company's common stock acquired by a person or a group buying 15% or more of the Company's common stock would be diluted, except in transactions approved by the Board of Directors.
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. On November 9, 2010, the Federal Deposit Insurance Corporation, (“FDIC”) issued a Final Rule implementing section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act that provides for unlimited insurance coverage of noninterest-bearing transaction accounts. Beginning December 31, 2010, through December 31, 2012, all noninterest bearing transaction accounts are fully insured, regardless of the balance of the account, at all FDIC insured institutions. All other deposits which exceed $250,000, including noninterest bearing transaction accounts prior to December 31, 2010, at each institution are not insured by the FDIC. Of the $20.8 million in cash and cash equivalents on the Consolidated Balance Sheets at December 31, 2012, $3.2 million was not insured by the FDIC. Of the $18.0 million in cash and cash equivalents at December 31, 2011, $1.2 million was not insured by the FDIC.
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 $20.8 million in cash and cash equivalents on the Consolidated Balance Sheets at December 31, 2012, $20.3 million was not insured by the FDIC after the expiration of unlimited coverage for noninterest-bearing transaction accounts.
The Company generates a significant amount of title insurance premiums in Texas and North Carolina. In 2012 and 2011, Texas accounted for 24.8% and 32.2% of total title premiums, respectively. In 2012 and 2011, North Carolina accounted for 30.5% and 26.6% of total title premiums, respectively.
The following table provides a reconciliation of total redeemable equity for the periods ended December 31, 2012 and 2011:
Fair valuation methods used for the identifiable tangible net assets acquired in that acquisition make use of discounted cash flows using current interest rates. The fair value of identifiable net tangible assets at the acquisition date was $5,600. Identifiable assets acquired include cash and fixed assets. Liabilities assumed consisted of notes payable.
The transaction was accounted for using the acquisition method required by ASC 805, Business Combinations. Accordingly, 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 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, 2012, accumulated amortization of intangible assets is $52,263. Net intangible assets of $1,429,637 are categorized as prepaid expenses and other assets in the Consolidated Balance Sheets as of December 31, 2012. In accordance with ASC 350, Intangibles--Goodwill and Other, the Company completed interim impairment testing and determined that the intangible assets assigned to United were not impaired at December 31, 2012.
In the Consolidated Statement 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.
The Company has not provided historical or pro forma financial information related to the United acquisition because none of the purchase price paid, assets acquired or income of United were significant to the Company under Rules 8-04 or 8-05 of the SEC’s Regulation S-X.