Document


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 September 30, 2016

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 October 17, 2016, there were 1,884,283 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 September 30, 2016 and December 31, 2015
 
 
 
 
Consolidated Statements of Income For the Three and Nine Months Ended September 30, 2016 and 2015
 
 
 
 
Consolidated Statements of Comprehensive Income For the Three and Nine Months Ended September 30, 2016 and 2015
 

 
 
Consolidated Statements of Stockholders’ Equity For the Nine Months Ended September 30, 2016 and 2015
 
 
 
 
Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2016 and 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 September 30, 2016 and December 31, 2015
(Unaudited)
 
September 30,
2016
 
December 31,
2015
Assets:
 
 
 
Investments in securities:
 
 
 
Fixed maturities, available-for-sale, at fair value (amortized cost: 2016: $105,240,488; 2015: $102,015,826)
$
111,038,924

 
$
106,066,384

Equity securities, available-for-sale, at fair value (cost: 2016: $24,958,456; 2015: $23,855,873)
39,834,879

 
37,513,464

Short-term investments
3,925,296

 
6,865,406

Other investments
10,626,505

 
10,106,828

Total investments
165,425,604

 
160,552,082

 
 
 
 
Cash and cash equivalents
26,898,991

 
21,790,068

Premium and fees receivable
9,358,570

 
8,392,697

Accrued interest and dividends
1,389,526

 
1,004,126

Prepaid expenses and other assets
10,931,270

 
12,634,105

Property, net
7,843,079

 
7,148,951

Current income taxes recoverable
1,261,289

 

Total Assets
$
223,108,329

 
$
211,522,029

 
 
 
 
Liabilities and Stockholders’ Equity
 

 
 

Liabilities:
 

 
 

Reserves for claims
$
35,536,000

 
$
37,788,000

Accounts payable and accrued liabilities
24,705,653

 
25,043,588

Current income taxes payable

 
210,355

Deferred income taxes, net
10,749,877

 
5,703,006

Total liabilities
70,991,530

 
68,744,949

 
 
 
 
Commitments and Contingencies

 

 
 
 
 
Stockholders’ Equity:
 

 
 

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

 

Common stock – no par value (10,000,000 authorized shares; 1,884,283 and 1,949,797 shares issued and outstanding 2016 and 2015, respectively, excluding 291,676 shares for 2016 and 2015 of common stock held by the Company's subsidiary)
1

 
1

Retained earnings
138,575,372

 
131,186,866

Accumulated other comprehensive income
13,449,558

 
11,483,015

Total stockholders’ equity attributable to the Company
152,024,931

 
142,669,882

Noncontrolling interests
91,868

 
107,198

Total stockholders' equity
152,116,799

 
142,777,080

Total Liabilities and Stockholders’ Equity
$
223,108,329

 
$
211,522,029


See notes to the Consolidated Financial Statements.

1



Investors Title Company and Subsidiaries
Consolidated Statements of Income
For the Three and Nine Ended September 30, 2016 and 2015
(Unaudited)
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
 
2016
 
2015
2016
 
2015
Revenues:
 
 
 
 
 
 
Net premiums written
$
36,511,373

 
$
30,945,532

$
87,810,602

 
$
86,372,154

Investment income – interest and dividends
1,160,983

 
1,117,529

3,478,999

 
3,427,055

Net realized gain (loss) on investments
439,326

 
(338,631
)
574,328

 
601,336

Other
2,890,023

 
2,816,828

7,827,509

 
7,924,329

Total Revenues
41,001,705

 
34,541,258

99,691,438

 
98,324,874

 
 
 
 
 
 
 
Operating Expenses:
 

 
 
 
 
 
Commissions to agents
18,739,151

 
16,898,323

45,946,379

 
48,393,553

(Benefit) provision for claims
(1,067,853
)
 
703,979

(403,982
)
 
3,621,401

Salaries, employee benefits and payroll taxes
8,300,823

 
6,957,874

22,945,972

 
21,101,955

Office occupancy and operations
1,496,948

 
1,342,288

4,526,710

 
4,089,806

Business development
608,532

 
568,189

1,695,180

 
1,633,358

Filing fees, franchise and local taxes
191,574

 
134,880

688,731

 
572,621

Premium and retaliatory taxes
673,551

 
573,336

1,559,631

 
1,684,674

Professional and contract labor fees
523,504

 
661,879

1,599,603

 
1,926,469

Other
157,308

 
264,012

629,539

 
708,918

Total Operating Expenses
29,623,538

 
28,104,760

79,187,763

 
83,732,755

 
 
 
 
 
 
 
Income before Income Taxes
11,378,167

 
6,436,498

20,503,675

 
14,592,119

 
 
 
 
 
 
 
Provision for Income Taxes
3,249,000

 
1,941,000

6,040,000

 
4,250,000

 
 
 
 
 
 
 
Net Income
8,129,167

 
4,495,498

14,463,675

 
10,342,119

 
 
 
 
 
 
 
Net (Gain) Loss Attributable to Noncontrolling Interests
(2,228
)
 
(4,536
)
6,684

 
(4,536
)
 
 
 
 
 
 
 
Net Income Attributable to the Company
$
8,126,939

 
$
4,490,962

$
14,470,359

 
$
10,337,583

 
 
 
 
 
 
 
Basic Earnings per Common Share
$
4.30

 
$
2.28

$
7.55

 
$
5.18

 
 
 
 
 
 
 
Weighted Average Shares Outstanding – Basic
1,888,870

 
1,967,923

1,915,468

 
1,995,120

 
 
 
 
 
 
 
Diluted Earnings per Common Share
$
4.29

 
$
2.28

$
7.53

 
$
5.17

 
 
 
 
 
 
 
Weighted Average Shares Outstanding – Diluted
1,895,592

 
1,972,233

1,921,999

 
2,000,043

 
 
 
 
 
 
 
Cash Dividends Paid per Common Share
$
0.20

 
$
0.08

$
0.52

 
$
0.24


See notes to the Consolidated Financial Statements.

2



Investors Title Company and Subsidiaries
Consolidated Statements of Comprehensive Income
For the Three and Nine Months Ended September 30, 2016 and 2015
(Unaudited)
 
Three Months Ended
 September 30,
Nine Months Ended
September 30,
 
2016
 
2015
2016
 
2015
Net income
$
8,129,167

 
$
4,495,498

$
14,463,675

 
$
10,342,119

Other comprehensive (loss) income, before tax:


 


 
 
 
Amortization related to prior year service cost

 
1,098


 
3,293

Amortization of unrecognized loss
2,235

 
878

6,705

 
2,635

Unrealized (losses) gains on investments arising during the period
(769,328
)
 
(2,359,495
)
3,518,286

 
(4,223,992
)
Reclassification adjustment for sales of securities included in net income
(545,925
)
 
(458,058
)
(785,517
)
 
(1,390,070
)
Reclassification adjustment for write-downs of securities included in net income
118,703

 
657,755

233,941

 
668,904

Other comprehensive (loss) income, before tax
(1,194,315
)
 
(2,157,822
)
2,973,415

 
(4,939,230
)
Income tax expense related to postretirement health benefits
759

 
672

2,279

 
2,016

Income tax (benefit) expense related to unrealized (losses) gains on investments arising during the period
(280,327
)
 
(809,994
)
1,193,241

 
(1,446,083
)
Income tax benefit related to reclassification adjustment for sales of securities included in net income
(185,316
)
 
(156,447
)
(268,548
)
 
(474,198
)
Income tax expense related to reclassification adjustment for write-downs of securities included in net income
40,555

 
225,293

79,900

 
229,093

Net income tax (benefit) expense on other comprehensive (loss) income
(424,329
)
 
(740,476
)
1,006,872

 
(1,689,172
)
Other comprehensive (loss) income
(769,986
)
 
(1,417,346
)
1,966,543

 
(3,250,058
)
Comprehensive Income
$
7,359,181

 
$
3,078,152

$
16,430,218

 
$
7,092,061

Comprehensive (income) loss attributable to noncontrolling interests
(2,228
)
 
(4,536
)
6,684

 
(4,536
)
Comprehensive Income Attributable to the Company
$
7,356,953

 
$
3,073,616

$
16,436,902

 
$
7,087,525


See notes to the Consolidated Financial Statements.

3



Investors Title Company and Subsidiaries
Consolidated Statements of Stockholders’ Equity
For the Nine Months Ended September 30, 2016 and 2015
(Unaudited)
 
Common Stock
 
Retained Earnings

 
Accumulated
Other
Comprehensive
Income

 
Noncontrolling
Interests

 
Total
Stockholders’
Equity

 
Shares
 
Amount
 
 
 
 
Balance, January 1, 2015
2,023,270

 
$
1

 
$
124,707,196

 
$
12,856,509

 
$

 
$
137,563,706

Net income attributable to the Company
 

 
 

 
10,337,583

 
 

 
 
 
10,337,583

Dividends ($0.24 per share)
 

 
 

 
(477,392
)
 
 

 
 
 
(477,392
)
Shares of common stock repurchased and retired
(72,044
)
 
 

 
(5,166,846
)
 
 

 
 
 
(5,166,846
)
Stock options and stock appreciation rights exercised
2,192

 
 

 
54,988

 
 

 
 
 
54,988

Share-based compensation expense
 

 
 

 
102,707

 
 

 
 
 
102,707

Amortization related to postretirement health benefits
 

 
 

 
 

 
3,912

 
 
 
3,912

Net unrealized loss on investments
 

 
 

 
 

 
(3,253,970
)
 
 
 
(3,253,970
)
Net effect of changes in ownership
 
 
 
 
 
 
 
 
127,050

 
127,050

Net gain attributable to noncontrolling interests
 
 
 
 
 
 
 
 
4,536

 
4,536

Income tax benefit from share-based compensation
 
 
 
 
26,875

 
 
 
 
 
26,875

Balance, September 30, 2015
1,953,418

 
$
1

 
$
129,585,111

 
$
9,606,451

 
$
131,586

 
$
139,323,149

 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2016
1,949,797

 
$
1

 
$
131,186,866

 
$
11,483,015

 
$
107,198

 
$
142,777,080

Net income attributable to the Company
 

 
 

 
14,470,359

 
 

 
 
 
14,470,359

Dividends ($0.52 per share)
 

 
 

 
(993,534
)
 
 

 
 
 
(993,534
)
Shares of common stock repurchased and retired
(66,803
)
 
 

 
(6,219,670
)
 
 

 
 
 
(6,219,670
)
Stock options and stock appreciation rights exercised
1,289

 
 

 
(200
)
 
 

 
 
 
(200
)
Share-based compensation expense
 

 
 

 
99,755

 
 

 
 
 
99,755

Amortization related to postretirement health benefits
 

 
 

 
 

 
4,426

 
 
 
4,426

Net unrealized gain on investments
 

 
 

 
 

 
1,962,117

 
 
 
1,962,117

Purchase of noncontrolling interest of subsidiary
 
 
 
 
 
 
 
 
(8,646
)
 
(8,646
)
Additional paid-in capital from purchase of noncontrolling interest of subsidiary
 
 
 
 
(496
)
 
 
 
 
 
(496
)
Net loss attributable to noncontrolling interests
 
 
 
 
 
 
 
 
(6,684
)
 
(6,684
)
Income tax benefit from share-based compensation
 

 
 

 
32,292

 
 

 
 
 
32,292

Balance, September 30, 2016
1,884,283

 
$
1

 
$
138,575,372

 
$
13,449,558

 
$
91,868

 
$
152,116,799


See notes to the Consolidated Financial Statements.

4



Investors Title Company and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2016 and 2015
(Unaudited)
 
Nine Months Ended September 30,
 
2016
 
2015
Operating Activities
 
 
 
Net income
$
14,463,675

 
$
10,342,119

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

 
 

Depreciation
994,619

 
654,838

Amortization, net
624,882

 
542,841

Amortization related to postretirement benefits obligation
6,705

 
5,928

Share-based compensation expense related to stock options
99,755

 
102,707

Net gain on disposals of property
(10,677
)
 
(30,374
)
Net realized gain on investments
(574,328
)
 
(601,336
)
Net earnings from other investments
(1,120,640
)
 
(1,774,927
)
(Benefit) provision for claims
(403,982
)
 
3,621,401

Provision for deferred income taxes
4,040,000

 
1,909,000

Changes in assets and liabilities:
 

 
 

Increase in receivables
(965,873
)
 
(457,484
)
Decrease (increase) in other assets
1,265,172

 
(1,110,322
)
Increase in current income taxes recoverable
(1,261,289
)
 

(Decrease) increase in accounts payable and accrued liabilities
(337,935
)
 
1,150,634

(Decrease) increase in current income taxes payable
(210,355
)
 
156,487

Payments of claims, net of recoveries
(1,848,018
)
 
(2,401,401
)
Net cash provided by operating activities
14,761,711

 
12,110,111

 
 
 
 
Investing Activities
 

 
 

Purchases of available-for-sale securities
(15,066,182
)
 
(5,794,149
)
Purchases of short-term investments
(1,890,826
)
 
(11,642,357
)
Purchases of other investments
(1,974,275
)
 
(3,164,415
)
Purchase of noncontrolling interest of subsidiary
(9,142
)
 

Proceeds from sales and maturities of available-for-sale securities
10,711,195

 
16,212,924

Proceeds from sales and maturities of short-term investments
4,830,935

 
335,084

Proceeds from sales and distributions of other investments
2,594,042

 
3,167,494

Purchase of subsidiary

 
(72,600
)
Proceeds from sales of other assets
10,647

 
113,238

Purchases of property
(1,742,225
)
 
(2,313,052
)
Proceeds from the sale of property
64,155

 
74,395

Net cash used in investing activities
(2,471,676
)
 
(3,083,438
)
 
 
 
 
Financing Activities
 

 
 

Repurchases of common stock
(6,219,670
)
 
(5,166,846
)
Exercises of stock options and SARs
(200
)
 
54,988

Excess tax benefits related to exercise of stock options and SARs
32,292

 
26,875

Dividends paid
(993,534
)
 
(477,392
)
Net cash used in financing activities
(7,181,112
)
 
(5,562,375
)
 
 
 
 
Net Increase in Cash and Cash Equivalents
5,108,923

 
3,464,298

Cash and Cash Equivalents, Beginning of Period
21,790,068

 
15,826,515

Cash and Cash Equivalents, End of Period
$
26,898,991

 
$
19,290,813


5




Consolidated Statements of Cash Flows, continued
 
 
Nine Months Ended September 30,
 
2016
 
2015
Supplemental Disclosures:
 
 
 
Cash Paid During the Year for:
 
 
 
Income tax payments, net
$
3,736,100

 
$
2,727,700

Non Cash Investing and Financing Activities:
 
 
 
Non cash net unrealized (gain) loss on investments, net of deferred tax (provision) benefit of $(1,004,593) and $1,691,188 for 2016 and 2015, respectively
$
(1,962,117
)
 
$
3,253,970


See notes to the Consolidated Financial Statements.

6



INVESTORS TITLE COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2016
(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, 2015 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 noncontrolling interests in majority-owned title insurance agencies are recorded in the Consolidated Statements of Income. Noncontrolling interests representing the portion of equity not related to the Company's ownership interests are recorded in separate sections of the Consolidated Balance Sheets. All intercompany balances and transactions have been eliminated in consolidation.

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 September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

Allowance for Doubtful Accounts – Company management continually evaluates the collectability of receivables and provides an allowance for doubtful accounts equal to estimated losses expected to be incurred in the collection of premiums and fees receivable.

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 – On October 12, 2016, National Investors Holdings, LLC ("NIH"), a subsidiary of the Company, entered into a stock purchase agreement (the "Purchase Agreement") to acquire all of the outstanding shares of University Title Company (“University”). University is a title insurance agency doing business in the State of Texas. On October 31, 2016, NIH closed the transaction, paying $10 million plus a $918,000 adjustment for University’s net cash position at closing to the shareholders of University. The transaction is being financed with a $6 million principal amount loan from a bank and cash on hand.  The loan bears interest at the London Interbank Offered Rate (“LIBOR”) plus 1.752%, matures on December 27, 2016 and is secured by assets of the Company pursuant to a Commercial Security Agreement.
 
Recently Issued Accounting Standards – In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326). ASU 2016-13 is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The update broadens the information that an entity must consider in developing its expected credit loss estimates, and is meant to better reflect an entity’s current estimate of all expected credit losses. In addition, this update amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The update is effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years.  Early adoption is permitted as of fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact that the recently issued accounting standard will have on the Company's financial position and results of operations, but does not expect it to have a material impact.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718). ASU 2016-09 updated guidance to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows.  The update is effective for annual periods beginning after December 15, 2016, and interim periods within those fiscal years.  Early adoption is permitted.  The Company is currently evaluating the impact that the recently issued accounting standard will have on the Company's financial position and results of operations, but does not expect it to have a material impact.

7




In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 updated guidance to improve financial reporting for leasing transactions. The core principle of the guidance is that lessees will be required to recognize assets and liabilities on the balance sheet for all leases with terms of more than twelve months. A lessee would recognize a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. The accounting applied by a lessor is largely unchanged from current GAAP, with some targeted improvements. Disclosures will be required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. In transition, both lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The update is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption was permitted for all entities upon issuance. The Company is currently evaluating whether or not the recently issued accounting standard will have a material impact on the Company's financial position or results of operations.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 updated guidance to enhance the reporting model for financial instruments. Among the main principles of the guidance applicable to the Company are provisions to: require equity investments, except those accounted for under the equity method of accounting or those that result in consolidation of the investee, to be measured at fair value with changes in fair value recognized in net income; simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, noting that when a qualitative assessment indicates that impairment exists that an entity is required to measure the investment at fair value; eliminate the requirement to disclose methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost; require entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; require separate presentation of financial assets and financial liabilities by measuring category and form of financial asset on the balance sheet or accompanying notes to the financial statements; and clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The update is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted for the provision requiring entities to recognize the fair value change from instrument-specific credit risk in other comprehensive income for financial liabilities measured using the fair value option in Accounting Standards Codification ("ASC") 825, and can be early adopted for financial statements of annual or interim periods that have not yet been issued or made available for issuance. The Company will be required to apply the update by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, with the amendments related to equity securities without readily determinable fair values being applied prospectively to equity investments that exist as of the date of adoption. The guidance is expected to have a material impact on the Company’s financial condition and results of operations once effective, primarily resulting from fluctuations in security exchanges or markets.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. ASU 2015-02 updated guidance to change the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments: modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs") or voting interest entities; eliminate the presumption that a general partner should consolidate a limited partnership; affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and provide a scope exception from consolidation guidance for reporting entities that are required to comply with or operate in accordance with certain requirements similar to those for registered money market funds. For public entities, this update was effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. The Company adopted this update on January 1, 2016 with no impact to the Company's financial position or results of operations. Certain investments previously considered voting interest entities are considered VIEs under this update. However, since the Company is not considered the primary beneficiary, none of the investments are consolidated. Refer to Note 6 for additional disclosure.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 updated guidance to improve the comparability of revenue recognition practices for entities that either enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards such as insurance contracts or lease standards. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For public entities, this update originally became effective for interim and annual reporting periods beginning after December 15, 2016. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. ASU 2015-14 updated guidance to defer the effective date of the standard by one year. Early adoption is not permitted, although public entities are permitted to elect to adopt the amendments on the original effective date. The Company is currently evaluating the impact that the recently issued accounting standard will have on the Company's financial position and results of operations, but does not expect it to have a material impact.

8




Note 2 – Reserves for Claims

Transactions in the reserves for claims for the nine-month period ended September 30, 2016 and the year ended December 31, 2015 are summarized as follows:
 
September 30, 2016
 
December 31, 2015
Balance, beginning of period
$
37,788,000

 
$
36,677,000

(Benefit) provision, charged to operations
(403,982
)
 
4,478,494

Payments of claims, net of recoveries
(1,848,018
)
 
(3,367,494
)
Ending balance
$
35,536,000

 
$
37,788,000


The total reserve for all reported and unreported losses the Company incurred through September 30, 2016 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 title insurance policies issued through September 30, 2016. 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:
 
September 30, 2016
 
%
 
December 31, 2015
 
%
Known title claims
$
4,694,784

 
13.2
 
$
5,066,469

 
13.4
IBNR
30,841,216

 
86.8
 
32,721,531

 
86.6
Total loss reserves
$
35,536,000

 
100.0
 
$
37,788,000

 
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 services 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 following table sets forth the computation of basic and diluted earnings per share for the three- and nine-month periods ended September 30:
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
2016
 
2015
2016
 
2015
Net income attributable to the Company
$
8,126,939

 
$
4,490,962

$
14,470,359

 
$
10,337,583

Weighted average common shares outstanding – Basic
1,888,870

 
1,967,923

1,915,468

 
1,995,120

Incremental shares outstanding assuming the exercise of dilutive stock options and SARs (share-settled)
6,722

 
4,310

6,531

 
4,923

Weighted average common shares outstanding – Diluted
1,895,592

 
1,972,233

1,921,999

 
2,000,043

Basic earnings per common share
$
4.30

 
$
2.28

$
7.55

 
$
5.18

Diluted earnings per common share
$
4.29

 
$
2.28

$
7.53

 
$
5.17



9



There were 7,500 and 4,500 potential shares excluded from the computation of diluted earnings per share for the three-month and nine-month periods ended September 30, 2015, respectively. There were no potential shares excluded from the computation of diluted earnings per share for the three-month and nine-month periods ended September 30, 2016. Potential shares that were excluded from the computations had exercise prices that were greater than the stock price and were therefore considered antidilutive.
 
The Company has adopted employee stock award plans under which restricted stock, and options or stock appreciation rights ("SARs") 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. There is currently one active plan from which the Company may grant share-based awards. The awards eligible to be granted under the active plan are limited to SARs, and the maximum aggregate number of shares of common stock of the Company available pursuant to the plan for the grant of SARs is 250,000 shares.

As of September 30, 2016, the only outstanding awards under the plans were SARs expiring in five to seven years from the date of grant, all of which vest and are exercisable within one year of 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, 2015
21,000

 
$
51.30

 
3.64
 
$
453,510

SARs granted
4,500

 
73.00

 
 
 
 

SARs exercised
(2,000
)
 
47.88

 
 
 
 

Options exercised
(1,500
)
 
36.79

 
 
 
 

Outstanding as of December 31, 2015
22,000

 
$
57.04

 
3.93
 
$
945,055

SARs granted
4,500

 
93.87

 
 
 
 

SARs exercised
(2,000
)
 
32.00

 
 
 
 

Outstanding as of September 30, 2016
24,500

 
$
65.85

 
4.10
 
$
824,390

 
 
 
 
 
 
 
 
Exercisable as of September 30, 2016
22,250

 
$
63.02

 
3.85
 
$
811,723

 
 
 
 
 
 
 
 
Unvested as of September 30, 2016
2,250

 
$
93.87

 
6.63
 
$
12,667


During the second quarters of both 2016 and 2015, the Company issued a total of 4,500 share-settled SARs to the directors of the Company. SARs give the holder the right to receive stock equal to the appreciation in the value of shares of stock from the grant date for a specified period of time, and as a result, are accounted for as equity instruments. The fair value of each award is estimated on the date of grant using the Black-Scholes option valuation model with the weighted average assumptions noted in the table shown below. Expected volatilities are based on both the implied and historical volatility of the Company's stock. The Company uses historical data to project SAR exercises and pre-exercise forfeitures within the valuation model. The expected term of awards represents the period of time that SARs granted are expected to be outstanding. The interest rate assumed for the expected life of the award is based on the U.S. Treasury yield curve at the time of the grant. The weighted average fair values for the SARs issued during 2016 and 2015 were $28.75 and $31.16, respectively.

The weighted average fair values for SARs issued during 2016 and 2015 were estimated using the weighted average assumptions shown in the table below:
 
2016
 
2015
Expected life in years
7.0

 
7.0

Volatility
28.9
%
 
40.7
%
Interest rate
1.7
%
 
2.0
%
Yield rate
0.7
%
 
0.4
%

There was approximately $100,000 and $103,000 of compensation expense relating to SARs or options vesting on or before September 30, 2016 and 2015, respectively, included in salaries, employee benefits and payroll taxes in the Consolidated Statements of Income. As of September 30, 2016, there was $65,000 of unrecognized compensation cost related to unvested share-based compensation arrangements granted under the Company’s stock award plans.


10



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 September 30, 2016 and 2015:
Three Months Ended September 30, 2016
Title
Insurance
 
All
Other
 
Intersegment
Eliminations
 
Total
Insurance and other services revenues
$
38,285,551

 
$
1,666,214

 
$
(550,369
)
 
$
39,401,396

Investment income
1,079,118

 
140,201

 
(58,336
)
 
1,160,983

Net realized gain (loss) on investments
439,501

 
(175
)
 

 
439,326

Total revenues
$
39,804,170

 
$
1,806,240

 
$
(608,705
)
 
$
41,001,705

Operating expenses
28,487,268

 
1,669,217

 
(532,947
)
 
29,623,538

Income before income taxes
$
11,316,902

 
$
137,023

 
$
(75,758
)
 
$
11,378,167

Total assets
$
180,436,004

 
$
42,672,325

 
$

 
$
223,108,329

Three Months Ended September 30, 2015
Title
Insurance
 
All
Other
 
Intersegment
Eliminations
 
Total
Insurance and other services revenues
$
32,583,093

 
$
1,684,088

 
$
(504,821
)
 
$
33,762,360

Investment income
1,000,839

 
140,024

 
(23,334
)
 
1,117,529

Net realized loss on investments
(309,874
)
 
(28,757
)
 

 
(338,631
)
Total revenues
$
33,274,058

 
$
1,795,355

 
$
(528,155
)
 
$
34,541,258

Operating expenses
27,001,636

 
1,590,524

 
(487,400
)
 
28,104,760

Income before income taxes
$
6,272,422

 
$
204,831

 
$
(40,755
)
 
$
6,436,498

Total assets
$
160,754,846

 
$
41,790,756

 
$

 
$
202,545,602

Nine Months Ended September 30, 2016
Title
Insurance
 
All
Other
 
Intersegment
Eliminations
 
Total
Insurance and other services revenues
$
92,055,531

 
$
5,137,268

 
$
(1,554,688
)
 
$
95,638,111

Investment income
3,206,093

 
424,578

 
(151,672
)
 
3,478,999

Net realized gain on investments
513,624

 
60,704

 

 
574,328

Total revenues
$
95,775,248

 
$
5,622,550

 
$
(1,706,360
)
 
$
99,691,438

Operating expenses
75,766,983

 
4,923,205

 
(1,502,425
)
 
79,187,763

Income before income taxes
$
20,008,265

 
$
699,345

 
$
(203,935
)
 
$
20,503,675

Total assets
$
180,436,004

 
$
42,672,325

 
$

 
$
223,108,329

Nine Months Ended September 30, 2015
Title
Insurance
 
All
Other
 
Intersegment
Eliminations
 
Total
Insurance and other services revenues
$
90,824,523

 
$
4,803,604

 
$
(1,331,644
)
 
$
94,296,483

Investment income
3,061,857

 
435,200

 
(70,002
)
 
3,427,055

Net realized gain (loss) on investments
604,093

 
(2,757
)
 

 
601,336

Total revenues
$
94,490,473

 
$
5,236,047

 
$
(1,401,646
)
 
$
98,324,874

Operating expenses
80,214,039

 
4,798,097

 
(1,279,381
)
 
83,732,755

Income before income taxes
$
14,276,434

 
$
437,950

 
$
(122,265
)
 
$
14,592,119

Total assets
$
160,754,846

 
$
41,790,756

 
$

 
$
202,545,602



11



Note 5 – Retirement Agreements and Other Postretirement Benefits

The Company’s subsidiary, Investors Title Insurance Company ("ITIC"), is a 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 $8,463,000 and $7,818,000 as of September 30, 2016 and December 31, 2015, 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 September 30, 2016 and 2015:
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
 
2016
 
2015
2016
 
2015
Service cost – benefits earned during the year
$
2,545

 
$
4,187

$
7,635

 
$
12,561

Interest cost on the projected benefit obligation
8,781

 
7,693

26,343

 
23,079

Amortization of unrecognized prior service cost

 
1,098


 
3,293

Amortization of unrecognized losses
2,235

 
878

6,705

 
2,635

Net periodic benefits costs
$
13,561

 
$
13,856

$
40,683

 
$
41,568


Note 6 – Investments and Estimated Fair Value

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 September 30, 2016
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
$
31,751,299

 
$
1,114,177

 
$
2,072

 
$
32,863,404

Special revenue issuer obligations of U.S. states, territories and political subdivisions
56,651,943

 
3,751,576

 
15,241

 
60,388,278

Corporate debt securities
16,837,246

 
950,115

 
119

 
17,787,242

Total
$
105,240,488

 
$
5,815,868

 
$
17,432

 
$
111,038,924

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

 
 

 
 

 
 

Common stocks
$
24,958,456

 
$
14,974,237

 
$
97,814

 
$
39,834,879

Total
$
24,958,456

 
$
14,974,237

 
$
97,814

 
$
39,834,879

Short-term investments:
 

 
 

 
 

 
 

Money market funds and certificates of deposit
$
3,925,296

 
$

 
$

 
$
3,925,296

Total
$
3,925,296

 
$

 
$

 
$
3,925,296


12



As of December 31, 2015
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
$
31,883,439

 
$
987,595

 
$
11,734

 
$
32,859,300

Special revenue issuer obligations of U.S. states, territories and political subdivisions
52,202,815

 
2,604,152

 
26,127

 
54,780,840

Corporate debt securities
17,004,985

 
539,832

 
58,473

 
17,486,344

Auction rate securities
924,587

 
15,313

 

 
939,900

Total
$
102,015,826

 
$
4,146,892

 
$
96,334

 
$
106,066,384

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

 
 

 
 

 
 

Common stocks and nonredeemable preferred stocks
$
23,855,873

 
$
13,785,968

 
$
128,377

 
$
37,513,464

Total
$
23,855,873

 
$
13,785,968

 
$
128,377

 
$
37,513,464

Short-term investments:
 

 
 

 
 

 
 

Money market funds and certificates of deposit
$
6,865,406

 
$

 
$

 
$
6,865,406

Total
$
6,865,406

 
$

 
$

 
$
6,865,406


The special revenue category for both periods presented includes approximately 60 individual bonds with revenue sources from a variety of municipal sectors.

The scheduled maturities of fixed maturity securities at September 30, 2016 were as follows:
 
Available-for-Sale
 
Amortized
Cost
 
Fair
Value
Due in one year or less
$
20,245,762

 
$
20,383,264

Due after one year through five years
34,757,122

 
36,493,362

Due five years through ten years
48,247,411

 
51,501,388

Due after ten years
1,990,193

 
2,660,910

Total
$
105,240,488

 
$
111,038,924



13



Realized gains and losses on investments for the nine-month periods ended September 30 are summarized as follows:
 
2016
 
2015
Gross realized gains from securities:
 

 
 

Special revenue issuer obligations of U.S. states, territories and political subdivisions
$
161

 
$

Corporate debt securities
20

 
5,417

Common stocks and nonredeemable preferred stocks
880,647

 
1,436,386

Auction rate securities
74,996

 

Total
$
955,824

 
$
1,441,803

Gross realized losses from securities:
 

 
 

General obligations of U.S. states, territories and political subdivisions
$
(533
)
 
$
(12,319
)
Special revenue issuer obligations of U.S. states, territories and political subdivisions
(1,085
)
 
(397
)
Common stocks and nonredeemable preferred stocks
(168,688
)
 
(39,017
)
Other-than-temporary impairment of securities
(233,941
)
 
(668,904
)
Total
$
(404,247
)
 
$
(720,637
)
Net realized gain from securities
$
551,577

 
$
721,166

Net realized gain (loss) on other investments:
 
 
 
Impairments of other investments
$

 
$
(233,069
)
Gains on other investments
22,751

 
113,239

Total
$
22,751

 
$
(119,830
)
Net realized gain on investments
$
574,328

 
$
601,336


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 September 30, 2016 and December 31, 2015:
 
Less than 12 Months
 
12 Months or Longer
 
Total
As of September 30, 2016
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
General obligations of U.S. states, territories and political subdivisions
$
3,594,415

 
$
(2,072
)
 
$

 
$

 
$
3,594,415

 
$
(2,072
)
Special revenue issuer obligations of U.S. states, territories and political subdivisions
1,737,905

 
(15,241
)
 

 

 
1,737,905

 
(15,241
)
Corporate debt securities
999,820

 
(119
)
 

 

 
999,820

 
(119
)
Total fixed income securities
$
6,332,140

 
$
(17,432
)
 
$

 
$

 
$
6,332,140

 
$
(17,432
)
Equity securities
$
806,984

 
$
(97,814
)
 
$

 
$

 
$
806,984

 
$
(97,814
)
Total temporarily impaired securities
$
7,139,124

 
$
(115,246
)
 
$

 
$

 
$
7,139,124

 
$
(115,246
)
 
Less than 12 Months
 
12 Months or Longer
 
Total
As of December 31, 2015
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
General obligations of U.S. states, territories and political subdivisions
$
1,758,345

 
$
(11,734
)
 
$

 
$

 
$
1,758,345

 
$
(11,734
)
Special revenue issuer obligations of U.S. states, territories and political subdivisions
1,672,217

 
(5,138
)
 
1,183,963

 
(20,989
)
 
2,856,180

 
(26,127
)
Corporate debt securities
6,981,275

 
(58,473
)
 

 

 
6,981,275

 
(58,473
)
Total fixed income securities
$
10,411,837

 
$
(75,345
)
 
$
1,183,963

 
$
(20,989
)
 
$
11,595,800

 
$
(96,334
)
Equity securities
$
5,533,667

 
$
(128,377
)
 
$

 
$

 
$
5,533,667

 
$
(128,377
)
Total temporarily impaired securities
$
15,945,504

 
$
(203,722
)
 
$
1,183,963

 
$
(20,989
)
 
$
17,129,467

 
$
(224,711
)

14




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.

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 10 and 30 securities had unrealized losses at September 30, 2016 and December 31, 2015, respectively. Reviews of the values of securities are inherently uncertain and the value of the investments may not fully recover, or may decline in future periods resulting in a realized loss. The Company recorded other-than-temporary impairment charges for debt and equity investments in the amount of $233,941 for the nine-month period ended September 30, 2016 and $668,904 for the nine-month period ended September 30, 2015. Other-than-temporary impairment charges are included in net realized gain on investments in the Consolidated Statements of Income.

Variable Interest Entities

The Company holds investments in VIEs that are not consolidated in the Company's financial statements as the Company is not the primary beneficiary. These entities are considered VIEs as the equity investors at risk, including the Company, do not have the power over the activities that most significantly impact the economic performance of the entities; this power resides with a third-party general partner or managing member that cannot be removed except for cause. The following table sets forth details about the Company's variable interest investments in VIEs, which are structured either as limited partnerships ("LPs") or limited liability companies ("LLCs"), as of September 30, 2016:
Type of Investment
 
Balance Sheet Classification
 
Carrying Value
 
Estimated Fair Value
 
Maximum Potential Loss (a)
  Tax credit LPs
 
Other investments
 
$
1,137,346

 
$
1,137,346

 
$
1,325,000

  Real estate LLCs or LPs
 
Other investments
 
3,838,897

 
4,323,037

 
6,350,000

  Small business investment LPs
 
Other investments
 
3,082,723

 
2,072,658

 
9,100,000

Total
 
 
 
$
8,058,966

 
$
7,533,041

 
$
16,775,000


(a)
 
Maximum potential loss is calculated as the total investment in the LLC or LP including any capital commitments that may have not yet been called. The Company is not exposed to any loss beyond the total commitment of its investment.

Valuation of Financial Assets and Liabilities
 
The FASB has established a valuation hierarchy for disclosure of the inputs used to measure estimated fair value of financial assets and liabilities, such as securities. This hierarchy categorizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs 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.


15



Debt and Equity Securities

The Level 1 category includes equity securities that are measured at estimated 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. Estimated fair value is principally based on market values obtained from a third party pricing service. Factors that are used in determining estimated fair market value include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. The Company receives one quote per security from a third party pricing service, although as discussed below, the Company does consult other pricing resources when confirming that the prices it obtains reflect the fair values of the instruments in accordance with ASC 820, Fair Value Measurements and Disclosures. Generally, quotes obtained from the pricing service for instruments classified as Level 2 are not adjusted and are not binding. As of September 30, 2016 and December 31, 2015, the Company did not adjust any Level 2 fair values.

A number of the Company’s investment grade corporate bonds are frequently traded in active markets, and trading prices are consequently available for these securities. However, these securities are classified as Level 2 because the pricing service from which the Company has obtained estimated fair values for these instruments uses valuation models that use observable market inputs in addition to trading 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 securities ("ARS") because quoted prices are unavailable due to failed auctions. The Company’s ARS portfolio, which was comprised entirely of an investment grade student loan ARS, was sold during the first quarter of 2016. The par value of this security was $1,000,000 as of December 31, 2015, with approximately 97.0% 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 utilized another third party pricing service to assist in the determination of the estimated fair market value of these securities. This service used a proprietary valuation model that considered 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 pricing service provided a range of values to the Company for its ARS. The Company recorded the estimated fair value based on the midpoint of the range and believes that this valuation is the most reasonable estimate of fair value. In 2015, the difference in the low and high values of the ranges was approximately one to four percent of the carrying value of the Company’s ARS.

The following table presents, by level, the financial assets carried at estimated fair value measured on a recurring basis as of September 30, 2016 and December 31, 2015. The table does not include cash on hand and also does not include assets that are measured at historical cost or any basis other than fair value. Level 3 assets are comprised solely of ARS.
As of September 30, 2016
Level 1
 
Level 2
 
Level 3
 
Total
Short-term investments
$
3,925,296

 
$

 
$

 
$
3,925,296

Equity securities:
 

 
 

 
 

 
 

Common stock
39,834,879

 

 

 
39,834,879

Fixed maturities:
 

 
 

 
 

 
 

Obligations of U.S. states, territories and political subdivisions*

 
93,251,682

 

 
93,251,682

Corporate debt securities*

 
17,787,242

 

 
17,787,242

Total
$
43,760,175

 
$
111,038,924

 
$

 
$
154,799,099


16



As of December 31, 2015
Level 1
 
Level 2
 
Level 3
 
Total
Short-term investments
$
6,865,406

 
$

 
$

 
$
6,865,406

Equity securities:
 
 
 
 
 
 
 
Common stock
37,513,464

 

 

 
37,513,464

Fixed maturities:
 
 
 
 
 
 
 
Obligations of U.S. states, territories and political subdivisions*

 
87,640,140

 

 
87,640,140

Corporate debt securities*

 
17,486,344

 
939,900

 
18,426,244

Total
$
44,378,870

 
$
105,126,484

 
$
939,900

 
$
150,445,254


*Denotes fair market value obtained from pricing services.

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, 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 respective 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 estimated 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 value of the underlying entity. These items are included in other investments 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.
 

17



The carrying amounts and estimated fair values of other financial instruments (see previous table for investments carried at estimated fair value) as of September 30, 2016 and December 31, 2015 are presented in the following table:
As of September 30, 2016
Carrying Value
 
Estimated Fair
Value
 
Level 1
 
Level 2
 
Level 3
Financial assets:
 
 
 
 
 
 
 
 
 
Cash
$
26,898,991

 
$
26,898,991

 
$
26,898,991

 
$

 
$

Cost-basis investments
4,119,328

 
4,367,372

 

 

 
4,367,372

Accrued dividends and interest
1,389,526

 
1,389,526

 
1,389,526

 

 

Total
$
32,407,845

 
$
32,655,889

 
$
28,288,517

 
$

 
$
4,367,372

As of December 31, 2015
Carrying Value
 
Estimated Fair
Value
 
Level 1
 
Level 2
 
Level 3
Financial assets:
 
 
 
 
 
 
 
 
 
Cash
$
21,790,068

 
$
21,790,068

 
$
21,790,068

 
$

 
$

Cost-basis investments
3,588,314

 
3,684,020

 

 

 
3,684,020

Accrued dividends and interest
1,004,126

 
1,004,126

 
1,004,126

 

 

Total
$
26,382,508

 
$
26,478,214

 
$
22,794,194

 
$

 
$
3,684,020


The following table presents a reconciliation of the Company’s assets measured at estimated fair value on a recurring basis using significant unobservable inputs (Level 3), which are all ARS securities, for the period ended September 30, 2016 and the year ended December 31, 2015:
Changes in fair value during the period ended:
2016
 
2015
Beginning balance at January 1
$
939,900

 
$
939,100

Redemptions and sales
(1,000,000
)
 

Realized gain – included in net realized gain on investments
74,996

 

Unrealized (loss) gain – included in other comprehensive income (loss)
(14,896
)
 
800