ITIC_2014.03.31_10Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[ X ]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

OR
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ___________________  to ___________________

Commission File Number:  0-11774
 
INVESTORS TITLE COMPANY
(Exact name of registrant as specified in its charter)
North Carolina
56-1110199
(State of incorporation)
(I.R.S. Employer Identification No.)
                                        
121 North Columbia Street, Chapel Hill, North Carolina 27514
(Address of principal executive offices)  (Zip Code)

(919) 968-2200
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes     X    No        
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes    X    No        

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
Large accelerated filer
 
 
Accelerated filer
X
 
Non-accelerated filer
 
 
Smaller reporting company
 
 
 
 
 
 
 
(do not check if a smaller reporting company)
 
 
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   
Yes         No     X   

As of April 15, 2014, there were 2,036,831 common shares of the registrant outstanding.




INVESTORS TITLE COMPANY
AND SUBSIDIARIES

INDEX
 
PART I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements:
 
 
 
 
 
Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013
 
 
 
 
Consolidated Statements of Income For the Three Months Ended March 31, 2014 and 2013
 
 
 
 
 

 
 
Consolidated Statements of Stockholders’ Equity For the Three Months Ended March 31, 2014 and 2013
 
 
 
 
Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2014 and 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
Legal Proceedings
 
 
 
Risk Factors
 
 
 
 
 
 
 
 
 
 




PART I.   FINANCIAL INFORMATION

Item 1.  Financial Statements

Investors Title Company and Subsidiaries
Consolidated Balance Sheets
As of March 31, 2014 and December 31, 2013
(Unaudited)
 
March 31,
2014
 
December 31,
2013
Assets:
 
 
 
Investments in securities:
 
 
 
Fixed maturities, available-for-sale, at fair value (amortized cost: 2014: $86,681,267; 2013: $87,980,160)
$
90,859,563

 
$
91,445,413

Equity securities, available-for-sale, at fair value (cost: 2014: $23,045,751; 2013: $22,200,369)
36,286,771

 
36,144,065

Short-term investments
8,941,000

 
7,926,373

Other investments
7,485,688

 
7,247,831

Total investments
143,573,022

 
142,763,682

 
 
 
 
Cash and cash equivalents
20,592,694

 
23,626,761

Premium and fees receivable (less allowance for doubtful accounts: 2014: $3,000,909; 2013: $2,620,903)
7,480,771

 
8,750,224

Accrued interest and dividends
1,124,075

 
1,006,698

Prepaid expenses and other assets
7,163,324

 
7,466,141

Property, net
4,717,202

 
4,325,538

Current income taxes recoverable
676,045

 
366,772

Total Assets
$
185,327,133

 
$
188,305,816

 
 
 
 
Liabilities and Stockholders’ Equity
 

 
 

Liabilities:
 

 
 

Reserves for claims
$
36,465,000

 
$
35,360,000

Accounts payable and accrued liabilities
15,490,419

 
20,324,190

Deferred income taxes, net
4,017,438

 
4,013,983

Total liabilities
55,972,857

 
59,698,173

 
 
 
 
Commitments and Contingencies

 

 
 
 
 
Redeemable Noncontrolling Interest
480,546

 
545,489

 
 
 
 
Stockholders’ Equity:
 

 
 

Preferred stock (1,000,000 authorized shares; no shares issued)

 

Common stock - no par value (10,000,000 authorized shares; 2,036,831 and 2,037,135 shares issued and outstanding 2014 and 2013, respectively, excluding 291,676 shares for 2014 and 2013 of common stock held by the Company’s subsidiary)
1

 
1

Retained earnings
117,522,858

 
116,714,749

Accumulated other comprehensive income
11,350,871

 
11,347,404

Total stockholders’ equity
128,873,730

 
128,062,154

Total Liabilities and Stockholders’ Equity
$
185,327,133

 
$
188,305,816


See notes to the Consolidated Financial Statements.

1



Investors Title Company and Subsidiaries
Consolidated Statements of Income
For the Three Months Ended March 31, 2014 and 2013
(Unaudited)
 
Three Months Ended March 31,
 
2014
 
2013
Revenues:
 
 
 
Net premiums written
$
24,909,252

 
$
23,925,997

Investment income - interest and dividends
1,026,416

 
920,485

Net realized gain on investments
492,137

 
16,344

Other
2,026,269

 
1,985,447

Total Revenues
28,454,074

 
26,848,273

 
 
 
 
Operating Expenses:
 

 
 

Commissions to agents
15,456,278

 
13,489,431

Provision (benefit) for claims
2,375,383

 
(389,058
)
Salaries, employee benefits and payroll taxes
6,185,761

 
6,150,750

Office occupancy and operations
1,180,327

 
1,074,233

Business development
517,894

 
428,733

Filing fees, franchise and local taxes
189,600

 
180,570

Premium and retaliatory taxes
294,474

 
440,523

Professional and contract labor fees
688,058

 
575,337

Other
209,784

 
146,336

Total Operating Expenses
27,097,559

 
22,096,855

 
 
 
 
Income before Income Taxes
1,356,515

 
4,751,418

 
 
 
 
Provision for Income Taxes
371,000

 
1,365,000

 
 
 
 
Net Income
985,515

 
3,386,418

 
 
 
 
Loss (Income) Attributable to Redeemable Noncontrolling Interest
923

 
(9,688
)
 
 
 
 
Net Income Attributable to the Company
$
986,438

 
$
3,376,730

 
 
 
 
Basic Earnings per Common Share
$
0.48

 
$
1.65

 
 
 
 
Weighted Average Shares Outstanding – Basic
2,037,164

 
2,044,801

 
 
 
 
Diluted Earnings per Common Share
$
0.48

 
$
1.62

 
 
 
 
Weighted Average Shares Outstanding – Diluted
2,043,759

 
2,083,999

 
 
 
 
Cash Dividends Paid per Common Share
$
0.08

 
$
0.08


See notes to the Consolidated Financial Statements.

2



Investors Title Company and Subsidiaries
Consolidated Statements of Comprehensive Income
For the Three Months Ended March 31, 2014 and 2013
(Unaudited)
 
Three Months Ended March 31,
 
2014
 
2013
Net income
$
985,515

 
$
3,386,418

Other comprehensive income (loss), before tax:
 

 
 

Amortization (accretion) related to prior year service cost
554

 
(380
)
Amortization of unrecognized loss

 
1,573

Unrealized gains on investments arising during the period
502,505

 
2,398,989

Reclassification adjustment for sales of securities included in net income
(502,199
)
 
(34,829
)
Reclassification adjustment for write-downs of securities included in net income
10,062

 
18,485

Other comprehensive income, before tax
10,922

 
2,383,838

Income tax expense related to postretirement health benefits
188

 
405

Income tax expense related to unrealized gains on investments arising during the year
176,573

 
828,745

Income tax benefit related to reclassification adjustment for sales of securities included in net income
(173,092
)
 
(11,989
)
Income tax expense related to reclassification adjustment for write-downs of securities included in net income
3,786

 
7,127

Net income tax expense on other comprehensive income
7,455

 
824,288

Other comprehensive income
3,467

 
1,559,550

Comprehensive Income
$
988,982

 
$
4,945,968

Comprehensive (loss) income attributable to redeemable noncontrolling interest
923

 
(9,688
)
Comprehensive Income Attributable to the Company
$
989,905

 
$
4,936,280


See notes to the Consolidated Financial Statements.

3



Investors Title Company and Subsidiaries
Consolidated Statements of Stockholders’ Equity
For the Three Months Ended March 31, 2014 and 2013
(Unaudited)
 
Common Stock
 
Retained Earnings

 
Accumulated
Other
Comprehensive
Income

 
Total
Stockholders’
Equity

 
Shares
 
Amount
 
 
 
Balance, January 1, 2013
2,043,359

 
$
1

 
$
105,820,459

 
$
8,818,430

 
$
114,638,890

Net income attributable to the Company
 

 
 

 
3,376,730

 
 

 
3,376,730

Dividends ($0.08 per share)
 

 
 

 
(163,677
)
 
 

 
(163,677
)
Shares of common stock repurchased and retired
(1,791
)
 
 

 
(114,958
)
 
 

 
(114,958
)
Stock options and stock appreciation rights exercised
4,400

 
 

 
166,585

 
 

 
166,585

Share-based compensation expense
 

 
 

 
17,737

 
 

 
17,737

Amortization related to postretirement health benefits
 

 
 

 
 

 
788

 
788

Net unrealized gain on investments
 

 
 

 
 

 
1,558,762

 
1,558,762

Other
 
 
 
 
22,438

 
 
 
22,438

Balance, March 31, 2013
2,045,968

 
$
1

 
$
109,125,314

 
$
10,377,980

 
$
119,503,295

 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2014
2,037,135

 
$
1

 
$
116,714,749

 
$
11,347,404

 
$
128,062,154

Net income attributable to the Company
 

 
 

 
986,438

 
 

 
986,438

Dividends ($0.08 per share)
 

 
 

 
(162,946
)
 
 

 
(162,946
)
Shares of common stock repurchased and retired
(500
)
 
 

 
(39,825
)
 
 

 
(39,825
)
Stock options and stock appreciation rights exercised
196

 
 

 
(19
)
 
 

 
(19
)
Share-based compensation expense
 

 
 

 
21,572

 
 

 
21,572

Amortization related to postretirement health benefits
 

 
 

 
 

 
366

 
366

Net unrealized gain on investments
 

 
 

 
 

 
3,101

 
3,101

Income tax benefit from share-based compensation
 

 
 

 
2,889

 
 

 
2,889

Balance, March 31, 2014
2,036,831

 
$
1

 
$
117,522,858

 
$
11,350,871

 
$
128,873,730


See notes to the Consolidated Financial Statements.

4



Investors Title Company and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2014 and 2013
(Unaudited)
 
Three Months Ended March 31,
 
2014
 
2013
Operating Activities
 
 
 
Net income
$
985,515

 
$
3,386,418

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation
202,843

 
139,324

Amortization, net
272,617

 
161,803

Amortization related to postretirement benefits obligation
554

 
1,193

Share-based compensation expense related to stock options
21,572

 
17,737

Increase in allowance for doubtful accounts on premiums receivable
380,006

 
95,716

Net realized gain on investments
(492,137
)
 
(16,344
)
Net earnings from other investments
(196,406
)
 
(379,696
)
Provision (benefit) for claims
2,375,383

 
(389,058
)
(Benefit) provision for deferred income taxes
(4,000
)
 
799,000

Changes in assets and liabilities:
 

 
 

Decrease in receivables
889,447

 
1,537,769

Decrease in other assets
46,072

 
214,586

Increase in current income taxes recoverable
(309,273
)
 

Decrease in accounts payable and accrued liabilities
(4,833,772
)
 
(2,547,550
)
Decrease in current income taxes payable

 
(962,058
)
Payments of claims, net of recoveries
(1,270,383
)
 
(380,942
)
Net cash (used in) provided by operating activities
(1,931,962
)
 
1,677,898

 
 
 
 
Investing Activities
 

 
 

Purchases of available-for-sale securities
(2,242,850
)
 
(9,601
)
Purchases of short-term securities
(3,117,062
)
 
(6,286,175
)
Purchases of other investments
(556,563
)
 
(321,231
)
Proceeds from sales and maturities of available-for-sale securities
3,328,386

 
4,470,026

Proceeds from sales and maturities of short-term securities
2,102,435

 
14,326

Proceeds from sales and distributions of other investments
241,977

 
504,500

Proceeds from sales of other assets

 
4,832

Purchases of property
(594,507
)
 
(273,381
)
Net cash used in investing activities
(838,184
)
 
(1,896,704
)
 
 
 
 
Financing Activities
 

 
 

Repurchases of common stock
(39,825
)
 
(114,958
)
Exercises of stock options and SARs
(19
)
 
166,585

Distributions to noncontrolling interest
(64,020
)
 

Excess tax benefits related to exercise of stock options and SARs
2,889

 
22,439

Dividends paid
(162,946
)
 
(163,677
)
Net cash used in financing activities
(263,921
)
 
(89,611
)
 
 
 
 
Net Decrease in Cash and Cash Equivalents
(3,034,067
)
 
(308,417
)
Cash and Cash Equivalents, Beginning of Period
23,626,761

 
20,810,018

Cash and Cash Equivalents, End of Period
$
20,592,694

 
$
20,501,601


5




Consolidated Statements of Cash Flows, continued
 
 
Three Months Ended March 31,
 
2014
 
2013
Supplemental Disclosures:
 
 
 
Cash Paid During the Year for:
 
 
 
Income tax payments, net
$
681,700

 
$
1,507,100

Non Cash Investing and Financing Activities
 
 
 
Non cash net unrealized gain on investments, net of deferred tax provision of $(7,267) and $(823,883) for 2014 and 2013, respectively
$
(3,101
)
 
$
(1,558,762
)

See notes to the Consolidated Financial Statements.

6



INVESTORS TITLE COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2014
(Unaudited)

Note 1 - Basis of Presentation and Significant Accounting Policies

Reference should be made to the "Notes to Consolidated Financial Statements" appearing in the Annual Report on Form 10-K for the year ended December 31, 2013 of Investors Title Company (the “Company”) for a complete description of the Company’s significant accounting policies.

Principles of Consolidation – The accompanying unaudited Consolidated Financial Statements include the accounts and operations of Investors Title Company and its subsidiaries, and have been prepared in accordance with generally accepted accounting principles for interim financial information, with the instructions to Form 10-Q and with Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted. Earnings attributable to the Company's redeemable noncontrolling interest in a majority-owned insurance agency are recorded in the Consolidated Statements of Income. The redeemable noncontrolling interest representing the portion of equity not related to the Company's ownership interest is recorded as redeemable equity in a separate section of the Consolidated Balance Sheets. All intercompany balances and transactions have been eliminated in consolidation.

In the opinion of management, all adjustments considered necessary for a fair presentation of the financial position, results of operations and cash flows of the Company in the accompanying unaudited Consolidated Financial Statements have been included.  All such adjustments are of a normal recurring nature.  Operating results for the quarter ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

Reclassification Certain 2013 amounts in the accompanying unaudited Consolidated Financial Statements have been reclassified to conform to the 2014 classifications. These reclassifications had no effect on stockholders’ equity or net income as previously reported.

Immaterial Classification Correction During the three months ended March 31, 2013, the Company realized $22,439 in excess tax benefits associated with the exercise of stock options and stock appreciation rights (“SARs”). Such amounts were mistakenly classified as part of operating activities rather than financing activities. Accordingly, the Consolidated Statements of Cash Flows have been corrected. The correction resulted in a decrease to previously reported operating cash flows and an increase to financing cash flows in the amount of $22,439 for the three months ended March 31, 2013. There was no impact to the Consolidated Balance Sheets, Consolidated Statements of Income, Consolidated Statements of Comprehensive Income, Consolidated Statements of Stockholders’ Equity or to the Company’s cash position.

Use of Estimates and Assumptions – The preparation of the Company’s Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (“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.  Actual results could differ from those estimates and assumptions used.

Subsequent Events – The Company has concluded that there were no material subsequent events requiring adjustment to or disclosure in its Consolidated Financial Statements.

Recently Issued Accounting Standards – No pending or recent accounting standards were issued during 2014 that would have a material impact on the Company's financial condition or results of operation.


7



Note 2 - Reserves for Claims

Transactions in the reserves for claims for the three months ended March 31, 2014 and the year ended December 31, 2013 are summarized as follows:
 
March 31, 2014
 
December 31, 2013
Balance, beginning of period
$
35,360,000

 
$
39,078,000

Provision (benefit), charged to operations
2,375,383

 
(571,596
)
Payments of claims, net of recoveries
(1,270,383
)
 
(3,146,404
)
Ending balance
$
36,465,000

 
$
35,360,000


The total reserve for all reported and unreported losses the Company incurred through March 31, 2014 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 claims that have been incurred but not yet reported ("IBNR"). Despite the variability of such estimates, management believes that the reserves are adequate to cover claim losses which might result from pending and future claims under policies issued through March 31, 2014.  Management continually reviews and adjusts its reserve estimates to reflect its loss experience and any new information that becomes available.  Adjustments resulting from such reviews may be significant.

A summary of the Company’s loss reserves, broken down into its components of known title claims and IBNR, follows:
 
March 31, 2014
 
%
 
December 31, 2013
 
%
Known title claims
$
5,259,119

 
14.4
 
$
4,670,809

 
13.2
IBNR
31,205,881

 
85.6
 
30,689,191

 
86.8
Total loss reserves
$
36,465,000

 
100.0
 
$
35,360,000

 
100.0

Claims and losses paid are charged to the reserves for claims. Although claims losses are typically paid in cash, occasionally claims are settled by purchasing the interest of the insured or the claimant in the real property. When this event occurs, the Company carries assets at the lower of cost or estimated realizable value, net of any indebtedness on the property.

Note 3 - Earnings Per Common Share and Share Awards

Basic earnings per common share is computed by dividing net income attributable to the Company by the weighted-average number of common shares outstanding during the reporting period.  Diluted earnings per common share is computed by dividing net income attributable to the Company by the combination of dilutive potential common stock, comprised of shares issuable under the Company’s share-based compensation plans and the weighted average number of common shares outstanding during the reporting period.  Dilutive common share equivalents include the dilutive effect of in-the-money share-based awards, which are calculated based on the average share price for each period using the treasury stock method.  Under the treasury stock method, when share-based awards are exercised, (a) the exercise price of a share-based award; (b) the amount of compensation cost, if any, for future service that the Company has not yet recognized; and (c) the amount of estimated tax benefits that would be recorded in retained earnings, if any, are assumed to be used to repurchase shares in the current period.  The number of incremental dilutive potential common shares, calculated using the treasury stock method, was 6,595 and 39,198 for the three months ended March 31, 2014 and 2013, respectively.

The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31:
 
Three months ended March 31,
 
2014
 
2013
Net income attributable to the Company
$
986,438

 
$
3,376,730

Weighted average common shares outstanding – Basic
2,037,164

 
2,044,801

Incremental shares outstanding assuming the exercise of dilutive stock options and SARs (share-settled)
6,595

 
39,198

Weighted average common shares outstanding – Diluted
2,043,759

 
2,083,999

Basic earnings per common share
$
0.48

 
$
1.65

Diluted earnings per common share
$
0.48

 
$
1.62


There were no potential shares excluded from the computation of diluted earnings per share for the three months ended March 31, 2014 and 2013 as all share-based awards were "in-the-money."

8



 
The Company has adopted employee stock award plans under which restricted stock, and options or SARs to acquire shares (not to exceed 500,000 shares) of the Company's stock, may be granted to key employees or directors of the Company at a price not less than the market value on the date of grant.  SARs and options (which have predominantly been incentive stock options) awarded under the plans thus far generally expire in five to ten years and are exercisable and vest: immediately; within one year; or at 10% to 20% per year beginning on the date of grant.  All SARs issued to date have been share-settled only.

A summary of share-based award transactions for all share-based award plans follows:
 
Number
Of Shares
 
Weighted
Average
Exercise
Price
 
Average
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic
Value
Outstanding as of January 1, 2013
98,150

 
$
30.74

 
3.17
 
$
2,871,710

SARs granted
3,000

 
71.59

 
 
 
 

SARs exercised
(79,500
)
 
28.77

 
 
 
 

Options exercised
(2,650
)
 
28.63

 
 
 
 

Options/SARs canceled/forfeited/expired

 

 
 
 
 

Outstanding as of December 31, 2013
19,000

 
$
45.74

 
3.43
 
$
669,610

SARs granted

 

 
 
 
 

SARs exercised
(500
)
 
49.04

 
 
 
 

Options exercised

 

 
 
 
 

Options/SARs canceled/forfeited/expired

 

 
 
 
 

Outstanding as of March 31, 2014
18,500

 
$
45.65

 
3.27
 
$
559,660

 
 
 
 
 
 
 
 
Exercisable as of March 31, 2014
18,500

 
$
45.65

 
3.27
 
$
559,660


There was approximately $22,000 and $18,000 of compensation expense relating to SARs or options vesting on or before March 31, 2014 and 2013, included in salaries, employee benefits and payroll taxes in the Consolidated Statements of Income.

There have been no stock options or SARs granted where the exercise price was less than the market price on the date of grant.

Note 4 – Segment Information

The Company has one reportable segment, title insurance services.  The remaining immaterial segments have been combined into a group called “All Other.”

The title insurance segment primarily issues title insurance policies through approved attorneys from underwriting offices and through independent issuing agents. Title insurance policies insure titles to real estate.

Provided below is selected financial information about the Company's operations by segment for the periods ended March 31, 2014 and 2013:

Three Months Ended March 31, 2014
Title
Insurance
 
All
Other
 
Intersegment
Eliminations
 
Total
Insurance and other services revenues
$
25,807,450

 
$
1,453,301

 
$
(325,230
)
 
$
26,935,521

Investment income
928,512

 
121,238

 
(23,334
)
 
1,026,416

Net realized gain on investments
437,608

 
54,529

 

 
492,137

Total revenues
$
27,173,570

 
$
1,629,068

 
$
(348,564
)
 
$
28,454,074

Operating expenses
25,724,928

 
1,680,440

 
(307,809
)
 
27,097,559

Income (loss) before income taxes
$
1,448,642

 
$
(51,372
)
 
$
(40,755
)
 
$
1,356,515

Total assets
$
143,241,843

 
$
42,085,290

 
$

 
$
185,327,133


9



Three Months Ended March 31, 2013
Title
Insurance
 
All
Other
 
Intersegment
Eliminations
 
Total
Insurance and other services revenues
$
25,028,558

 
$
1,226,251

 
$
(343,365
)
 
$
25,911,444

Investment income
848,655

 
95,164

 
(23,334
)
 
920,485

Net realized gain (loss) on investments
31,601

 
(15,257
)
 

 
16,344

Total revenues
$
25,908,814

 
$
1,306,158

 
$
(366,699
)
 
$
26,848,273

Operating expenses
20,865,372

 
1,557,427

 
(325,944
)
 
22,096,855

Income (loss) before income taxes
$
5,043,442

 
$
(251,269
)
 
$
(40,755
)
 
$
4,751,418

Total assets
$
136,734,324

 
$
37,401,725

 
$

 
$
174,136,049


Note 5 – Retirement Agreements and Other Postretirement Benefits

The Company’s subsidiary, Investors Title Insurance Company, is party to employment agreements with key executives that provide for the continuation of certain employee benefits and other payments due under the agreements upon retirement estimated to total $6,852,000 and $6,580,000 as of March 31, 2014 and December 31, 2013, respectively.  The executive employee benefits include health insurance, dental, vision and life insurance and are unfunded.  These amounts are classified as accounts payable and accrued liabilities in the Consolidated Balance Sheets.  The following sets forth the net periodic benefits cost for the executive benefits for the periods ended March 31, 2014 and 2013:
 
Three Months Ended March 31,
 
2014
 
2013
Service cost – benefits earned during the period
$
3,667

 
$
3,946

Interest cost on the projected benefit obligation
7,618

 
7,103

Amortization (accretion) of unrecognized prior service cost
554

 
(380
)
Amortization of unrecognized losses

 
1,573

Net periodic benefits costs
$
11,839

 
$
12,242

 
Note 6 - Fair Value Measurement
 
Valuation of Financial Assets and Liabilities
 
The Financial Accounting Standards Board ("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.

A financial instrument’s classification within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement – consequently, if there are multiple significant valuation inputs that are categorized in different levels of the hierarchy, the instrument’s hierarchy level is the lowest level (with Level 3 being the lowest level) within which any significant input falls.

Debt and Equity Securities

The Level 1 category includes equity securities that are measured at fair value using quoted active market prices.

The Level 2 category includes fixed maturity investments such as corporate bonds, U.S. government and agency bonds and municipal bonds.  Fair value is principally based on market values obtained from a third party pricing service.  Factors that are used in determining fair market value include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data.  The Company receives one quote per security from a third party pricing service, although as discussed below, the Company does consult other pricing resources when confirming that the prices it obtains reflect the fair values of the instruments in accordance with Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures.  Generally, quotes obtained from the pricing service for instruments classified as Level 2 are not adjusted and are not binding.  As of March 31, 2014 and December 31, 2013, the Company did not adjust any Level 2 fair values.

10



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 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 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 March 31, 2014 and December 31, 2013,  with approximately 97.0% as of March 31, 2014 and December 31, 2013, 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 March 31, 2014 and December 31, 2013:
 
2014
 
2013
Cumulative probability of earning maximum rate until maturity
—%
 
—%
Cumulative probability of principal returned prior to maturity
95.5%
 
95.6%
Cumulative probability of default at some future point
4.5%
 
4.4%

Significant increases or decreases in any of the inputs in isolation could result in significant changes to the fair value measurement.  Generally, increases in default probabilities and liquidity risk premiums lower the fair market value while increases in principal being returned and earning maximum rates increase fair market values.

Based upon these inputs and assumptions, the pricing service provides a range of values to the Company for its ARS.  The Company records the fair value based on the midpoint of the range and believes that this valuation is the most reasonable estimate of fair value.  In 2014 and 2013, the difference in the low and high values of the ranges was between approximately zero and four 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 March 31, 2014 and December 31, 2013.  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.
As of March 31, 2014
Level 1
 
Level 2
 
Level 3
 
Total
Short-term Investments
$
8,941,000

 
$

 
$

 
$
8,941,000

Equity Securities
 

 
 

 
 

 
 

Common stock and nonredeemable preferred stock
36,286,771

 

 

 
36,286,771

Fixed Maturities
 

 
 

 
 

 
 

Obligations of states and political subdivisions*

 
70,915,065

 

 
70,915,065

Corporate debt securities*

 
19,011,098

 
933,400

 
19,944,498

Total
$
45,227,771

 
$
89,926,163

 
$
933,400

 
$
136,087,334

As of December 31, 2013
Level 1
 
Level 2
 
Level 3
 
Total
Short-term Investments
$
7,926,373

 
$

 
$

 
$
7,926,373

Equity Securities
 
 
 
 
 
 
 
Common stock and nonredeemable preferred stock
36,144,065

 

 

 
36,144,065

Fixed Maturities
 
 
 
 
 
 
 
Obligations of states and political subdivisions*

 
72,091,721

 

 
72,091,721

Corporate debt securities*

 
18,417,992

 
935,700

 
19,353,692

Total
$
44,070,438

 
$
90,509,713

 
$
935,700

 
$
135,515,851


*Denotes fair market value obtained from pricing services.

11




There were no transfers into or out of Levels 1, 2 or 3 during the period.

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.

Other Financial Instruments

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.
 
In estimating the fair value of the financial instruments presented, the Company used the following methods and assumptions:
 
Cash and cash equivalents
 
The carrying amount for cash and cash equivalents is a reasonable estimate of fair value due to the short-term maturity of these investments.
 
Cost-basis investments
 
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 market value of the underlying entity. These items are included in prepaid expenses and other assets in the Consolidated Balance Sheets.
 
Accrued dividends and interest
 
The carrying amount for accrued dividends and interest is a reasonable estimate of fair value due to the short-term maturity of these assets.
 
Contingent consideration
 
The fair value of contingent consideration was estimated based on the discounted value of 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 10. This item is included in accounts payable and accrued liabilities in the Consolidated Balance Sheets.
 
The carrying amounts and fair values of these financial instruments (please note investments are disclosed in a previous table) as of March 31, 2014 and December 31, 2013 are presented in the following table:
As of March 31, 2014
Carrying Value
 
Estimated Fair
Value
 
Level 1
 
Level 2
 
Level 3
Financial Assets
 
 
 
 
 
 
 
 
 
Cash
$
20,592,694

 
$
20,592,694

 
$
20,592,694

 
$

 
$

Cost-basis investments
2,268,417

 
2,478,305

 

 

 
2,478,305

Accrued dividends and interest
1,124,075

 
1,124,075

 
1,124,075

 

 

Total Financial Assets
$
23,985,186

 
$
24,195,074

 
$
21,716,769

 
$

 
$
2,478,305

Financial Liabilities
 

 
 

 
 

 
 

 
 

Contingent consideration
$
341,250

 
$
341,250

 
$

 
$

 
$
341,250

Total Financial Liabilities
$
341,250

 
$
341,250

 
$

 
$

 
$
341,250


12



As of December 31, 2013
Carrying Value
 
Estimated Fair
Value
 
Level 1
 
Level 2
 
Level 3
Financial Assets
 
 
 
 
 
 
 
 
 
Cash
$
23,626,761

 
$
23,626,761

 
$
23,626,761

 
$

 
$

Cost-basis investments
1,927,429

 
2,069,302

 

 

 
2,069,302

Accrued dividends and interest
1,006,698

 
1,006,698

 
1,006,698

 

 

Total Financial Assets
$
26,560,888

 
$
26,702,761

 
$
24,633,459

 
$

 
$
2,069,302

Financial Liabilities
 

 
 

 
 

 
 

 
 

Contingent consideration
$
341,250

 
$
341,250

 
$

 
$

 
$
341,250

Total Financial Liabilities
$
341,250

 
$
341,250

 
$

 
$

 
$
341,250

 
The following table presents a reconciliation of the Company’s assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3), which are all ARS securities, for the period ended March 31, 2014 and the year ended December 31, 2013:
Changes in fair value during the period ended:
2014
 
2013
Beginning balance at January 1
$
935,700

 
$
932,200

Redemptions and sales

 

Realized gain – included in net realized gain on investments

 

Unrealized (loss) gain - included in other comprehensive income
(2,300
)
 
3,500

Ending balance, net
$
933,400

 
$
935,700


The following table presents a reconciliation of the Company’s liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3), consisting solely of contingent acquisition consideration, for the period ended March 31, 2014 and the year ended December 31, 2013:
Changes in fair value during the period ended:
2014
 
2013
Beginning balance at January 1
$
341,250

 
$
691,250

Addition of contingent consideration

 

Payment for contingent consideration

 
(350,000
)
Ending balance, net
$
341,250

 
$
341,250

 
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 March 31, 2014 and December 31, 2013. The following table summarizes the corresponding estimated fair value hierarchy of such investments at March 31, 2014 and December 31, 2013 and the related impairments recognized:
As of March 31, 2014
Valuation
Method
 
Impaired
 
Level 1
 
Level 2
 
Level 3
 
Total at
Estimated
Fair
Value
 
Impairment
Losses
Cost method investments
Fair Value
 
Yes
 
$

 
$

 
$
22,682

 
$
22,682

 
$
(10,062
)
Total cost method investments
 
 
 
 
$

 
$

 
$
22,682

 
$
22,682

 
$
(10,062
)
As of December 31, 2013
Valuation
Method
 
Impaired
 
Level 1
 
Level 2
 
Level 3
 
Total at
Estimated
Fair
Value
 
Impairment
Losses
Cost method investments
Fair Value
 
Yes
 
$

 
$

 
$
32,744

 
$
32,744

 
$
(34,070
)
Total cost method investments
 
 
 
 
$

 
$

 
$
32,744

 
$
32,744

 
$
(34,070
)


13



Note 7 – Investments in Securities

The aggregate estimated fair value, gross unrealized holding gains, gross unrealized holding losses and cost or amortized cost for securities by major security type are as follows:
As of March 31, 2014
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Fixed maturities, available-for-sale, at fair value –
 
 
 
 
 
 
 
General obligations of U.S. states, territories and political subdivisions
$
36,510,389

 
$
1,898,573

 
$
99,485

 
$
38,309,477

Special revenue obligations of U.S. states, territories and political subdivisions
31,030,924

 
1,670,211

 
95,547

 
32,605,588

Corporate debt securities
18,219,676

 
835,997

 
44,575

 
19,011,098

Auction rate securities
920,278

 
13,122

 

 
933,400

Total
$
86,681,267

 
$
4,417,903

 
$
239,607

 
$
90,859,563

Equity securities, available-for-sale, at fair value –
 

 
 

 
 

 
 

Common stocks and nonredeemable preferred stocks
$
23,045,751

 
$
13,336,223

 
$
95,203

 
$
36,286,771

Total
$
23,045,751

 
$
13,336,223

 
$
95,203

 
$
36,286,771

Short-term investments –
 

 
 

 
 

 
 

Certificates of deposit and other
$
8,941,000

 
$

 
$

 
8,941,000

Total
$
8,941,000

 
$

 
$

 
$
8,941,000

As of December 31, 2013
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Fixed maturities, available-for-sale, at fair value –
 
 
 
 
 
 
 
General obligations of U.S. states, territories and political subdivisions
$
38,449,309

 
$
1,922,862

 
$
184,351

 
$
40,187,820

Special revenue obligations of U.S. states, territories and political subdivisions
30,874,571

 
1,234,130

 
204,800

 
31,903,901

Corporate debt securities
17,736,608

 
789,840

 
108,456

 
18,417,992

Auction rate securities
919,672

 
16,028

 

 
935,700

Total
$
87,980,160

 
$
3,962,860

 
$
497,607

 
$
91,445,413

Equity securities, available-for-sale, at fair value –
 

 
 

 
 

 
 

Common stocks and nonredeemable preferred stocks
$
22,200,369

 
$
14,052,780

 
$
109,084

 
$
36,144,065

Total
$
22,200,369

 
$
14,052,780

 
$
109,084

 
$
36,144,065

Short-term investments –
 

 
 

 
 

 
 

Certificates of deposit and other
$
7,926,373

 
$

 
$

 
$
7,926,373

Total
$
7,926,373

 
$

 
$

 
$
7,926,373



14



The special revenue category for both periods presented includes 30 individual bonds with revenue sources from a variety of industry sectors.

The scheduled maturities of fixed maturity securities at March 31, 2014 were as follows:
 
Available-for-Sale
 
Amortized
Cost
 
Fair
Value
Due in one year or less
$
10,870,691

 
$
11,036,982

Due after one year through five years
51,926,203

 
54,685,354

Due five years through ten years
21,888,264

 
22,713,740

Due after ten years
1,996,109

 
2,423,487

Total
$
86,681,267

 
$
90,859,563


Realized gains and losses on investments for the three months ended March 31 are summarized as follows:
 
2014
 
2013
Gross realized gains:
 

 
 

General obligations of U.S. states, territories and political subdivisions
$

 
$

Corporate debt securities

 

Common stocks and nonredeemable preferred stocks
765,272

 
67,876

Auction rate securities

 

Total
$
765,272

 
$
67,876

Gross realized losses:
 

 
 

Common stocks and nonredeemable preferred stocks
$

 
$
(37,879
)
Other than temporary impairment of securities

 

Total
$

 
$
(37,879
)
Net realized gain from securities
$
765,272

 
$
29,997

Net realized gains (losses) on other investments:
 
 
 
Impairments of other investments
$
(10,062
)
 
$
(18,485
)
Gains on other investments

 
4,832

Losses on other investments
(263,073
)
 

Total
$
(273,135
)
 
$
(13,653
)
Net Realized Gain
$
492,137

 
$
16,344


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 securities, aggregated by investment category and length of time that individual securities have been in a continuous loss position at March 31, 2014 and December 31, 2013:
 
Less than 12 Months
 
12 Months or Longer
 
Total
As of March 31, 2014
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
General obligations of U.S. states, territories and political subdivisions
$
4,267,283

 
$
(99,485
)
 
$

 
$

 
$
4,267,283

 
$
(99,485
)
Special revenue obligations of U.S. states territories and political subdivisions
2,747,105

 
(95,547
)
 

 

 
2,747,105

 
(95,547
)
Corporate debt securities
4,008,820

 
(44,575
)
 

 

 
4,008,820

 
(44,575
)
Total fixed income securities
$
11,023,208

 
$
(239,607
)
 
$

 
$

 
$
11,023,208

 
$
(239,607
)
Equity securities
$
694,559

 
$
(50,595
)
 
$
236,408

 
$
(44,608
)
 
$
930,967

 
$
(95,203
)
Total temporarily impaired securities
$
11,717,767

 
$
(290,202
)
 
$
236,408

 
$
(44,608
)
 
$
11,954,175

 
$
(334,810
)

15



 
Less than 12 Months
 
12 Months or Longer
 
Total
As of December 31, 2013
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
General obligations of U.S. states, territories and political subdivisions
$
4,198,012

 
$
(184,351
)
 
$

 
$

 
$
4,198,012

 
$
(184,351
)
Special revenue obligations of U.S. states territories and political subdivisions
11,010,093

 
(204,800
)
 

 

 
11,010,093

 
(204,800
)
Corporate debt securities
5,942,570

 
(108,456
)
 

 

 
5,942,570

 
(108,456
)
Total fixed income securities
$
21,150,675

 
$
(497,607
)
 
$

 
$

 
$
21,150,675

 
$
(497,607
)
Equity securities
$
2,035,971

 
$
(72,998
)
 
$
244,929

 
$
(36,086
)
 
$
2,280,900

 
$
(109,084
)
Total temporarily impaired securities
$
23,186,646

 
$
(570,605
)
 
$
244,929

 
$
(36,086
)
 
$
23,431,575

 
$
(606,691
)

As of March 31, 2014, the Company held $11,023,208 in fixed maturity securities with unrealized losses of $239,607.  As of December 31, 2013, the Company held $21,150,675 in fixed maturity securities with unrealized losses of $497,607.  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 will likely 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 March 31, 2014, the Company held $930,967 in equity securities with unrealized losses of $95,203.  As of December 31, 2013, the Company held $2,280,900 in equity securities with unrealized losses of $109,084.  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 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 19 and 26 securities had unrealized losses at March 31, 2014 and December 31, 2013, 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 the three months ended March 31, 2014 and 2013, the Company recorded no other-than-temporary impairment charges for securities.  For the 2013 fiscal year, the Company recorded no other-than-temporary impairment charges. Other-than-temporary impairment charges are included in net realized gain on investments in the Consolidated Statements of Income.

Note 8 – Commitments and Contingencies

Legal Proceedings – A class action lawsuit is pending in the United States District Court for the Eastern District of Michigan, Southern Division, against several title insurance underwriters, including Investors Title Insurance Company, and several title insurance agents, entitled Bushman et al. v. R. Kevin Clinton, Treasurer of the State of Michigan, et al. (2:14-cv-10011-GCS-MAR).  Michigan law requires the seller of property to pay a transfer tax based on the total value of the property at the time of transfer.  Exemptions from the payment of this tax exist if (1) the property is the seller’s principal residence, and (2) the state equalized value (“SEV”) of the property at the time of purchase is greater than the SEV at the time of sale.  Plaintiffs contend that, notwithstanding this exemption, they were assessed, charged and paid the full transfer tax when they sold their property.  The plaintiffs seek an award of actual damages, statutory damages, attorneys’ fees and other relief as determined at trial.  Management believes that this case is without merit, and intends to vigorously defend against the allegations. At this stage in the litigation, management does not have the ability to make a reasonable range of estimates in regards to potential loss amounts, if any.

The Company and its subsidiaries are involved in other legal proceedings that are incidental to their business. In the Company’s opinion, based on the present status of these proceedings, any potential liability of the Company or its subsidiaries with respect to these legal proceedings, will not, in the aggregate, be material to the Company’s consolidated financial condition or operations.

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 based on its present expectations that these audits and inquiries will not have a material impact on the Company’s consolidated financial condition or operations.


16



Escrow and Trust Deposits – As a service to its customers, the Company, through Investors Title Insurance Company (“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.  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 these deposits.

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 $89,979,000 and $76,037,000 as of March 31, 2014 and December 31, 2013, 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.

Note 9 – Related Party Transactions

The Company does business with, and has investments in, unconsolidated limited liability companies that are primarily title insurance agencies.  The Company utilizes the equity method to account for its investment in these limited liability companies.  The following table sets forth the approximate values by year found within each financial statement classification:
Financial Statement Classification,
As of March 31, 2014
 
As of December 31, 2013
Consolidated Balance Sheets
 
Other investments
$
5,217,000

 
$
5,320,000

Premiums and fees receivable
$
568,000

 
$
657,000

 
Financial Statement Classification,
For the Three Months Ended March 31,
Consolidated Statements of Income
2014
 
2013
Net premiums written
$
2,291,000

 
$
3,417,000

Other income
$
349,000

 
$
525,000


During the second quarter of 2013, the Company repurchased 17,524 shares of Company common stock from officers of the Company at a price of $71.50 per share to cover withholding taxes payable by the officers upon the exercise of SARs. During the fourth quarter of 2013, the Company repurchased 28,130 shares of the Company common stock from officers of the Company at a price of $80.91 per share.

Note 10 – Acquisition

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 acquisition date fair value of the total consideration to be transferred was $1,041,250.  This fair value total was equal to $350,000 ITIC had already paid toward the purchase price, as well as $691,250 in estimated contingent payments.  As of March 31, 2014, management’s calculation of the fair value of consideration to be transferred is materially unchanged from the acquisition date amount. During the second quarter of 2013, ITIC paid an additional $350,000 toward the purchase price. The resulting contingent payments of $341,250 are categorized in the Consolidated Balance Sheets as accounts payable and accrued liabilities as of March 31, 2014 and December 31, 2013, respectively.


17



The contingent payment arrangement requires that the purchase price for the 70% majority interest be paid over the next two years and is 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.

As certain provisions of the membership interest purchase and sale agreement place the acquisition of the remaining 30% by ITIC out of ITIC’s control, the noncontrolling interest in United is deemed redeemable.  The redeemable noncontrolling interest is presented outside of permanent equity, as redeemable equity in the Consolidated Balance Sheets.  On the acquisition date, the fair value of the redeemable noncontrolling interest was $446,250. The fair value of the redeemable noncontrolling interest was based on the noncontrolling interest’s share of the value of net assets.

The following table provides a reconciliation of total redeemable equity for the periods ended March 31, 2014 and December 31, 2013:
 
Changes in fair value during the period ended:
March 31, 2014
 
December 31, 2013
Beginning balance at January 1
$
545,489

 
$
493,861

Redeemable noncontrolling interest resulting from subsidiary purchase

 

Net (loss) income attributable to redeemable noncontrolling interest
(923
)
 
88,528

Distributions to noncontrolling interest
(64,020
)
 
(36,900
)
Balance, net
$
480,546

 
$
545,489


Fair valuation methods used for the identifiable tangible net assets acquired in the 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 included 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 March 31, 2014 and December 31, 2013, accumulated amortization of intangible assets was $139,368 and $121,947, respectively.  Net intangible assets of $1,342,532 and $1,359,953 are categorized as prepaid expenses and other assets in the Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013.  In accordance with ASC 350, Intangibles––Goodwill and Other, management determined that no events or changes in circumstances occurred that would indicate the carrying amount may not be recoverable, and therefore determined that the intangible assets assigned to United were not impaired at March 31, 2014.


18



Note 11 – Accumulated Other Comprehensive Income

The following tables illustrates changes in the balances of each component of accumulated other comprehensive income, net of tax, for the periods ended March 31, 2014 and 2013:
Three Months Ended March 31, 2014
Unrealized Gains and Losses
On Available-for-Sale
Securities
 
Postretirement
Benefits Plans
 
 
Total
Beginning balance at January 1
$
11,395,757

 
$
(48,353
)
 
$
11,347,404

Other comprehensive income before reclassifications
325,932

 

 
325,932

Amounts reclassified from accumulated other comprehensive income
(322,831
)
 
366

 
(322,465
)
Net current-period other comprehensive income
3,101

 
366

 
3,467

Ending balance
$
11,398,858

 
$
(47,987
)
 
$
11,350,871

Three Months Ended March 31, 2013
Unrealized Gains and Losses
On Available-for-Sale
Securities
 
Postretirement
Benefits Plans
 
 
Total
Beginning balance at January 1
$
8,920,883

 
$
(102,453
)
 
$
8,818,430

Other comprehensive income before reclassifications
1,570,244

 

 
1,570,244

Amounts reclassified from accumulated other comprehensive income
(11,482
)
 
788

 
(10,694
)
Net current-period other comprehensive income
1,558,762

 
788

 
1,559,550

Ending balance
$
10,479,645

 
$
(101,665
)
 
$
10,377,980


The following tables provides significant amounts reclassified out of each component of accumulated other comprehensive income for the periods ended March 31, 2014 and 2013:
Three Months Ended March 31, 2014
 

 
Details about Accumulated Other
Comprehensive Income Components
Amount Reclassified from
Accumulated Other
Comprehensive Income

 Affected Line Item in the Consolidated
Statements of Income
Unrealized gains and losses on available-for-sale securities:
 

 
Net realized gain on investment
$
502,199


 
Other-than-temporary impairments
(10,062
)

 
Total
$
492,137


Net realized gain on investment
Tax
(169,306
)

Provision for Income Taxes
Net of Tax
$
322,831


 
Amortization related to postretirement benefit plans:
 


 
Prior year service cost
$
(554
)

 
Unrecognized gain (loss)


 
Total
$
(554
)

(a)
Tax
188


Provision for Income Taxes
Net of Tax
$
(366
)

 
Reclassifications for the period
$
322,465


 

19



Three Months Ended March 31, 2013
 
 
 
Details about Accumulated Other
Comprehensive Income Components
Amount Reclassified from
Accumulated Other
Comprehensive Income
 
 Affected Line Item in the Consolidated
Statements of Income
Unrealized gains and losses on available-for-sale securities:
 
 
 
Net realized gain on investment
$
34,829

 
 
Other-than-temporary impairments
(18,485
)
 
 
Total
$
16,344

 
Net realized gain on investment
Tax
(4,862
)
 
Provision for Income Taxes
Net of Tax
$
11,482

 
 
Accretion (amortization) related to postretirement benefit plans:
 

 
 
Prior year service cost
$
380

 
 
Unrecognized loss
(1,573
)
 
 
Total
$
(1,193
)
 
(a)
Tax
405

 
Provision for Income Taxes
Net of Tax
$
(788
)
 
 
Reclassifications for the period
$
10,694

 
 

(a)
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 and accretion related to postretirement benefit plans is included in the computation of net periodic pension costs, as discussed in Note 5.

20



Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

The Company's 2013 Annual Report on Form l0-K should be read in conjunction with the following discussion since it contains information which is important for evaluating the Company's operating results and financial condition.  Forward-looking statements are based on certain assumptions and expectations of future events that are subject to a number of risks and uncertainties.  Actual results may vary.

Overview

Investors Title Company (the "Company") is a holding company that engages primarily in issuing title insurance through two subsidiaries, Investors Title Insurance Company ("ITIC") and National Investors Title Insurance Company ("NITIC").  Total revenues from the title segment accounted for 95.1% of the Company's revenues in the first three months of 2014.  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.

There are two basic types of title insurance policies - one for the mortgage lender and one for the real estate owner.  A lender often requires property owners to purchase title insurance to protect its position as a holder of a mortgage loan, but the lender’s title insurance policy does not protect the property owner.  The property owner has to purchase a separate owner’s title insurance policy to protect their investment.  When real property is conveyed from one party to another, occasionally there is an undisclosed defect in the title or a mistake or omission in a prior deed, will or mortgage that may give a third party a legal claim against such property.  If a claim is made against real property, title insurance provides indemnification against insured defects.
The Company issues title insurance policies through issuing agencies and also directly through home and branch offices.  Issuing agents are typically real estate attorneys or subsidiaries of community and regional mortgage lending institutions, depending on local customs and regulations and the Company’s marketing strategy in a particular territory.  The ability to attract and retain issuing agents is a key determinant of the Company’s growth in premiums written.
Revenues for this segment primarily result from purchases of new and existing residential and commercial real estate, refinance activity and certain other types of mortgage lending such as home equity lines of credit.
Volume is a factor in the Company’s profitability due to fixed operating costs which are incurred by the Company regardless of premium volume.  The resulting operating leverage tends to amplify the impact of changes in volume on the Company’s profitability.  The Company’s profitability also depends, in part, upon its ability to manage its investment portfolio to maximize investment returns and minimize risks such as interest rate changes, defaults and impairments of assets.
The Company’s volume of title insurance premiums is affected by the overall level of residential and commercial real estate activity, which includes sales, mortgage financing and mortgage refinancing.  In turn, real estate activity is affected by a number of factors, including the availability of mortgage credit, the cost of real estate, consumer confidence, employment and family income levels and general United States economic conditions.  Interest rate volatility is also an important factor in the level of residential and commercial real estate activity.
Real estate activity, home sales and mortgage lending are cyclical in nature. Title insurance premiums are closely related to the level of real estate activity and the average price of real estate sales. The availability of funds to finance purchases directly affects real estate sales. Other factors include mortgage interest rates, consumer confidence, economic conditions, supply and demand and family income levels. The Company’s premiums in future periods are likely to fluctuate due to these and other factors which are beyond management’s control.

Historically, the title insurance business tends to be seasonal as well as cyclical. Because home sales are typically strongest in periods of favorable weather, the first calendar quarter tends to have the lowest activity levels, while the spring and summer quarters tend to be more active. Refinance activity is generally less seasonal, but is subject to interest rate fluctuations.

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 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”).

21



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 Company's trust services division, Investors Trust and ICMC, provides investment management and trust services to individuals, companies, banks and trusts. In July 2013, Investors Trust assumed responsibility for the management of all accounts previously managed by ICMC.
ITMS offers various consulting services to provide clients with the technical expertise to start and successfully operate a title insurance agency.

Business Trends and Recent Conditions

Beginning in 2008, the United States economy experienced one of the worst economic downturns in history. Events leading to the recession were primarily the collapse of the housing market and frozen credit markets, prompting the federal government to take unprecedented monetary and fiscal action in an attempt to slow the economic rate of decline and instill consumer confidence. The economy has been slowly recovering from this downturn with the Dow Jones Industrial