Title Insurance
(Loss)
Profit Margin:
The Companys title insurance
profit margin varies according to a number of factors, including the volume and
type of real estate activity. (Loss) profit margins for the title insurance
segment were (1.4%), 8.6% and 12.7% in 2008, 2007 and 2006, respectively. The net
margins for 2008 and 2007 were primarily affected by the increase in the
provision for claims.
Commissions:
Agent commissions
represent the portion of premiums retained by agents pursuant to the terms of
their respective agency contracts. Commissions to agents decreased 2.5% from
2007 to 2008 primarily due to decreased premiums from agency operations in 2008
and increased 6.4% from 2006 to 2007 primarily due to an increasing percentage
of premiums originating from agency operations in 2007. Commission expense as a
percentage of net premiums written by agents was 70.4%, 71.3% and 70.6% in 2008,
2007 and 2006, respectively. Commission rates vary geographically.
Provisions for Claims:
The provision
for claims as a percentage of net premiums written was 23.9% in 2008, 14.5% in
2007 and 10.5% in 2006. The change in the loss provision estimate for calendar
year 2008 compared with 2007 resulted from unfavorable experience for policy
year 2008 primarily due to two large claims related to fraud and one large
mechanics lien claim totaling in the aggregate approximately $6.8 million. In
addition, the Company incurred unfavorable experience during 2008 for claims
related to policy year 2006 totaling approximately $1.9 million. Partially
offsetting the change in the loss provision estimate for calendar year 2008 was
favorable experience for policy year 2007 because of a reduction in large claim
activity. The change in estimate for calendar year 2007 compared with 2006
resulted primarily from policy year 2006, which incurred two large claims
resulting from mortgage fraud and theft. The additional loss provision as a
result of these two claims, in addition to the Companys expected loss
provision, was approximately $2.3 million. The increase in the loss provision in
2008 from the 2007 level resulted in approximately $6.0 million more in reserves
than would have been recorded at the lower 2007 level. If material occurrences
of mortgage-related fraud, mechanic lien claims and other similar types of
claims continue, the Companys ultimate loss estimates for recent policy years
could increase.
Lower than
expected loss payment experience was the primary reason for the Companys loss
provision rate in 2006. In 2006, there was favorable experience primarily
because of a reduction in large claim activity for policy year 2005. Calendar
year 2006 also included an increase for policy year 2006 due to claims activity
late in the calendar year. Management considers the loss provision ratios for
2008, 2007 and 2006 to be appropriate given the small volume of large claims,
the long-tail nature of title insurance claims and the inherent uncertainty in
title insurance loss emergence patterns.
The
provision for claims reflects actual payments of claims, net of recovery
amounts, plus adjustments to the specific and incurred but not reported claims
reserves, the latter of which are actuarially determined based on historical
claims experience. Payments of claims, net of recoveries, were $12,943,637,
$10,065,719 and $5,356,211 in 2008, 2007 and 2006, respectively.
Reserves
for Claims:
At December 31, 2008, the total
reserves for claims were $39,238,000. Of that total, $6,447,345 was reserved for
specific claims, and $32,790,655 was reserved for claims for which the Company
had no notice. Because of the uncertainty of future claims, changes in economic
conditions, and the fact that many claims do not materialize for several years,
reserve estimates are subject to variability. Changes in the expected liability
for claims for prior periods reflect the uncertainty of the claim environment,
as well as the limited predicting power of historical data. The Company
continually updates and refines its reserve estimates as current experience
develops and credible data emerges. Adjustments may be required as new
information develops which often varies from past experience.
Movements in
the reserves related to prior periods were primarily the result of changes to
estimates to better reflect the latest reported loss data, rather than as a
result of material changes to underlying key actuarial assumptions or
methodologies. Such changes include payments on claims closing during the year,
new details that emerge on still-open cases that cause claims adjusters to
increase or decrease the case reserve and the impact that these types of changes
have on the Companys total loss provision.
Salaries,
Employee Benefits and Payroll Taxes:
Salaries, employee benefits and payroll taxes were $19,605,500, $20,819,094 and
$20,036,079 for 2008, 2007 and 2006, respectively. Salaries and related costs
decreased $1.2 million, or 5.8% in 2008 compared with 2007. The decrease in 2008
was primarily due to a decline in bonuses and amounts accrued under employment
agreements. The increase in these costs in 2007 was primarily attributable
to
25
salary increases and additional personnel
costs related to staff hired by Investors Trust Company. On a consolidated
basis, salaries and employee benefits as a percentage of total revenues were
27.6%, 24.5% and 23.7% in 2008, 2007 and 2006, respectively. The increase in
salaries and employee benefits as a percentage of total revenues in 2008 was
primarily due to declining revenues outpacing cost reductions. The title
insurance segments total salaries and employee benefits accounted for 83.8%,
84.9% and 85.3% of total salaries for 2008, 2007, and 2006,
respectively.
Office Occupancy and
Operations:
Overall office occupancy and
operations as a percentage of total revenues was 7.2%, 6.6% and 6.6% in 2008,
2007 and 2006, respectively. The title insurance segments total office
occupancy and operations expense accounted for 88.6%, 90.2% and 90.9% in 2008,
2007 and 2006, respectively, of total office occupancy and operations
expense.
Premium
and Retaliatory Taxes:
Title insurance
companies are generally not subject to state income or franchise taxes. However,
in most states they are subject to premium and retaliatory taxes, as defined by
statute. Tax rates and bases vary from state to state. Premium and retaliatory
taxes as a percentage of net premiums written were 2.0%, 2.1% and 1.9% for the
years ended December 31, 2008, 2007 and 2006, respectively.
Professional and Contract Labor Fees:
Professional and contract labor fees for 2008 decreased $1.1 million compared
with 2007 primarily due to decreases in contract labor fees incurred, associated
with investments in infrastructure and technology in 2007.
Other
Expenses:
Other operating expenses primarily
include miscellaneous operating expenses of the trust division and other
miscellaneous expenses of the title segment. These amounts typically fluctuate
in relation with transaction volume of the title segment and the trust
division.
Exchange Services
The exchange
services segments total operating expenses as a percentage of the Companys
total expenses were 1.6%, 2.0% and 2.0% for 2008, 2007 and 2006, respectively.
The principal operating expenses of this segment are salaries, employee benefits
and payroll taxes.
Income Taxes
The benefit
for income taxes was $2,034,000 for the year ended December 31, 2008. The income
tax benefit in 2008 was a result of reflecting a lower effective tax rate,
primarily due to an increase in the proportion of tax-exempt investment income
to pre-tax loss. Income tax (benefit) expense as a percentage of (loss) earnings
before income taxes was 63.2%, 28.9% and 23.9% for the years ended December 31,
2008, 2007 and 2006, respectively.
During the
fourth quarter of 2007, management discovered certain understatements in the
provision for income taxes in its financial statements in 2006 and the first
three quarters of 2007 as a result of certain taxable municipal bonds that had
been previously misclassified as tax-exempt by the Companys custodian bank. The
additional amount of the increase in income taxes in the fourth quarter related
to the misclassification was approximately $425,000 related to the 2006 tax year
and approximately $325,000 related to the first three quarters of
2007.
The Company
monitors the realizability of recognized, impairment and unrecognized losses
recorded through December 31, 2008. The Company believes it is more likely than
not that the tax benefits associated with those losses will be realized.
However, this determination is a judgment and could be impacted by further
market fluctuations. Information regarding the components of the income tax
expense and items included in the reconciliation of the effective rate with the
federal statutory rate can be found in Note 8 to the accompanying Consolidated
Financial Statements.
Net (Loss) Income
The Company
reported net loss for 2008 of $1,182,799, or $0.50 per share on a diluted basis.
The Company reported net income for 2007 of $8,402,335, or $3.35 per share on a
diluted basis, compared to $13,185,434, or $5.14 per share on a diluted basis,
for 2006.
26
Liquidity and Capital
Resources
Liquidity:
Although cash flow
generated from operating activities declined from 2007 to 2008, primarily due to
the decrease in net income between periods, cash and cash equivalents at year
end increased 72% to approximately $5.2 million, due mainly to significant cash
provided by investing activities for 2008. The net increase in cash provided by
investing activities for 2008 was, in turn, due primarily to significantly
reduced purchases of investment securities. The Companys ability to offset
reductions in cash provided by operations by reducing securities investments,
however, is limited by the need to maintain adequate financial condition,
capital and claims-paying ability.
Due to the
Companys historical consistent ability to generate positive cash flows from its
consolidated operations and investment income, management believes that funds
generated from operations will enable the Company to adequately meet its current
operating needs for the foreseeable future. However, there can be no assurance
that future experience will be similar to historic experience, since they are
influenced by such factors as the interest rate environment, the Companys
claims-paying ability and its financial strength ratings. The Company is unaware
of any trend that is likely to result in material adverse liquidity changes, but
continually assesses its capital allocation strategy. The Companys cash
requirements include general operating expenses, income taxes, capital
expenditures, dividends on its common stock declared by the Board of Directors
and share repurchases. In addition to operational liquidity, the Company
maintains a high degree of liquidity within its investment portfolio in the form
of short-term investments and other readily marketable securities.
The majority
of the Companys investment portfolio is considered as available-for-sale. The
Company reviews the status of each of its securities quarterly to determine
whether an other-than-temporary impairment has occurred. The Companys criteria
generally includes the degree to which the fair value of a security is less than
80% of its amortized cost and the investment grade of the security, as well as
how long the security has been in an unrealized loss position. The Companys
securities that have had an unrealized loss in excess of one year are primarily
investment-grade, long-term bonds and equities that the Company has the ability
and intent to hold until a recovery of fair value, which may be until maturity
for fixed income securities.
Cash
Flows:
Net cash flows provided by operating
activities were $1,309,473, $10,354,960 and $18,554,831 in 2008, 2007 and 2006,
respectively. Cash flows from operations have been the primary source of
financing for expanding operations, additions to property and equipment,
dividends to shareholders, and other requirements. The net decrease in cash flow
from operations in 2008 and 2007 was primarily the result of the decrease in net
income.
The
principal non-operating use of cash and cash equivalents in 2008 was for
repurchases of common stock. The principal non-operating uses of cash and cash
equivalents for the two-year period ended December 31, 2007 were primarily for
additions to the investment portfolio and, to a lesser extent, repurchases of
common stock and capital expenditures. The net effect of all activities on total
cash and cash equivalents was an increase of $2,154,284 for 2008, and decreases
of $457,670 for 2007 and $11,150,049 for 2006. As of December 31, 2008, the
Company held cash and cash equivalents of $5,155,046, short-term investments of
$15,725,513 and fixed maturities securities of $88,160,181.
As noted
previously, the Companys operating results and cash flows are heavily dependent
on the real estate market, particularly in the title insurance segment. The
Companys business has certain fixed costs such as personnel, and changes in the
real estate market are monitored closely and operating expenses such as staffing
levels are managed and adjusted accordingly. The Company believes that its
significant working capital position and management of operating expenses, along
with its product diversification efforts will aid its ability to manage cash
resources through declines in the real estate market.
Payment
of Dividends:
The Company believes that all
anticipated cash requirements for current operations will be met from internally
generated funds, through cash dividends and distributions from subsidiaries and
cash generated by investment securities. The Companys significant sources of
funds are dividends and distributions from its subsidiaries. The holding company
receives cash from its subsidiaries in the form of dividends and as
reimbursements for operating and other administrative expenses. The
reimbursements are executed within the guidelines of management agreements
between the holding company and its subsidiaries. The Companys ability to pay
dividends and operating expenses is dependent on funds received from the
insurance subsidiaries, which are subject to regulation in the states in which
they do business. As of December 31, 2008, approximately $55,987,000 of the
consolidated stockholders equity represented net assets of the Companys
subsidiaries that cannot be transferred in the form of dividends, loans or
advances to the parent company under statutory regulations without prior
insurance
27
department approval. These regulations,
among other things, require prior regulatory approval of the payment of
dividends and other intercompany transfers. The Company believes, however, that
amounts available for transfer from the insurance and other subsidiaries are
adequate to meet the Companys operating needs.
Purchase
of Company Stock:
On November 10, 2008, the
Board of Directors of the Company approved the purchase of an additional 394,582
shares pursuant to the Plan, such that there was authority remaining under the
Plan to purchase up to an aggregate of 500,000 shares of the Companys common
stock pursuant to the Plan immediately after the approval. Pursuant to this
approval, the Company purchased 130,450 shares in the twelve months ended
December 31, 2008, 111,437 shares in the twelve months ended December 31, 2007
and 51,949 shares in the twelve months ended December 31, 2006 at an average per
share price of $45.78, $41.82 and $43.85, respectively.
Capital
Expenditures:
During 2009, the Company has
plans for various capital improvement projects, including hardware purchases and
several software development projects and are anticipated to be funded via cash
flows from operations. All material anticipated capital expenditures are subject
to periodic review and revision and may vary depending on a number of
factors.
Off-Balance Sheet Arrangements and
Contractual Obligations
As a service
to its customers, the Company, through ITIC, administers escrow and trust
deposits representing earnest money received under real estate contracts,
undisbursed amounts received for settlement of mortgage loans and indemnities
against specific title risks. Cash held by the Company for these purposes was
approximately $14,492,000 and $23,665,000 as of December 31, 2008 and 2007,
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 these
deposits.
In addition,
in administering tax-deferred property exchanges, ITEC serves as a qualified
intermediary for exchanges, holding the net sales proceeds from relinquished
property to be used for purchase of replacement property. ITAC serves as
exchange accommodation titleholder and, through limited liability companies that
are wholly owned subsidiaries of ITAC, holds property for exchangers in reverse
exchange transactions. Like-kind exchange deposits and reverse exchange property
held by the Company for the purpose of completing such transactions totaled
$88,124,000 and $115,515,000 as of December 31, 2008 and 2007, respectively.
These amounts are not considered assets of the Company for accounting purposes
and, therefore, are excluded from the accompanying consolidated balance sheets.
Exchange services revenues include earnings on these deposits; therefore,
investment income is shown as exchange services revenue, rather than investment
income. The Company remains contingently liable to customers for the transfers
of property, disbursements of proceeds, and the return on the proceeds at the
agreed upon rate.
External
assets managed by the Investors Trust Company totaled over $500,000,000 for the
years ended December 31, 2008 and 2007. These amounts are not considered assets
of the Company and, therefore, are excluded from the accompanying consolidated
balance sheets.
It is not
the general practice of the Company to enter into off-balance sheet
arrangements; nor is it the policy of the Company to issue guarantees to third
parties. Off-balance sheet arrangements are generally limited to the future
payments under noncancelable operating leases, payments due under various
agreements with third party service providers, and unaccrued obligations
pursuant to certain executive employment agreements.
The
following table summarizes the Companys future estimated cash payments under
existing contractual obligations at December 31, 2008, including payments due by
period:
Contractual
Obligations
|
|
|
|
|
Payments due by
period
|
|
|
|
|
|
|
|
|
Less
than 1
|
|
|
|
|
|
More
than 5
|
|
|
Total
|
|
year
|
|
1 - 3 years
|
|
3 - 5 years
|
|
years
|
Operating lease obligations
|
|
$
|
1,376,412
|
|
$
|
710,419
|
|
$
|
607,115
|
|
$
|
58,878
|
|
$
|
-
|
|
Reserves for claims
|
|
|
39,238,000
|
|
|
7,613,000
|
|
|
12,275,000
|
|
|
9,625,000
|
|
|
9,725,000
|
|
Other obligations
|
|
|
588,775
|
|
|
438,300
|
|
|
150,475
|
|
|
-
|
|
|
-
|
|
Obligations under executive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
employment
plans and agreements
|
|
|
6,574,000
|
|
|
2,455,701
|
|
|
-
|
|
|
-
|
|
|
4,118,299
|
|
FIN48
Liability
|
|
|
86,502
|
|
|
87,646
|
|
|
(1,144)
|
|
|
-
|
|
|
-
|
|
Total
|
|
$
|
47,863,689
|
|
$
|
11,305,066
|
|
$
|
13,031,446
|
|
$
|
9,683,878
|
|
$
|
13,843,299
|
|
28
As of
December 31, 2008, the Company had a claims reserve of $39,238,000. The amounts
and timing of these obligations are estimated and are not set contractually.
Nonetheless, based on historical insurance claim experience, the Company
anticipates the above payment patterns.
Recent Accounting
Standards
In December
2007, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 160, Noncontrolling Interests in
Consolidated Financial Statements an amendment of ARB No. 51 (SFAS 160).
SFAS 160 amends Accounting Research Bulletin No. 51 to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008, with earlier adoption prohibited. The Company is currently evaluating the
effect of adopting this new Statement and anticipates that the Statement will
not have a significant impact on the reporting of the Companys results of
operations.
In May 2008,
the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles (SFAS 162). This Statement identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in accordance with GAAP. With the issuance of this Statement, the FASB
concluded that the GAAP hierarchy should be directed toward the entity and not
its auditor, and reside in the accounting literature established by the FASB.
This Statement is effective 60 days following the SECs approval of the Public
Company Accounting Oversight Board amendments to Audit Standards AU Section 411,
The Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles. The Company is currently evaluating the effect of adopting this new
Statement and anticipates that the Statement will not have a significant impact
on the reporting of the Companys results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
In the
context of Item 7A, market risk refers to the risk of loss arising from adverse
changes in financial instrument market rates and prices, such as fluctuations in
interest rates and prices. The Companys primary exposure to market risk relates
to the impact of adverse changes in the fair value of financial instruments as a
result of changes in interest rates and equity market prices of its investment
portfolio. Increases in interest rates diminish the value of fixed income
securities and preferred stock, and decreases in stock market values diminish
the value of common stocks held. The fair value of the majority of marketable
securities is determined based on quoted market prices for those
securities.
Corporate Oversight
The Company
generates substantial investable funds from its two insurance subsidiaries. In
formulating and implementing policies for investing new and existing funds, the
Company has emphasized maximizing total after-tax return on capital and earnings
while ensuring the safety of funds under management and adequate liquidity. The
Companys Board of Directors oversees investment risk management processes. The
Company seeks to invest premiums and other income to create future cash flows
that will fund future claims, employee benefits and expenses, and earn stable
margins across a wide variety of interest rate and economic scenarios. The Board
of Directors has established specific investment policies that define the
overall framework for managing market and other investment risks, including the
accountabilities and controls over these activities. The Company may rebalance
its existing asset portfolios or change the character of future investments from
time to time to manage its exposure to market risk within defined tolerance
ranges. The Company also discusses risk management in various places throughout
this Annual Report on Form 10-K, including in Item 7.
29
Interest Rate Risk
Interest
rate risk is the risk that the Company will incur economic losses due to adverse
changes in interest rates. This risk arises from the Companys investments in
interest-sensitive debt securities. These securities are primarily fixed rate
municipal bonds and corporate bonds. The Company does not purchase such
securities for trading purposes. At December 31, 2008, the Company had
approximately $76 million in fixed rate bonds. The Company manages the interest
rate risk inherent in its assets by monitoring its liquidity needs and by
targeting a specific range for the portfolios duration or weighted-average
maturity.
To determine
the potential effect of interest rate risk on interest-sensitive assets, the
Company calculates the effect of a 10% change in prevailing interest rates
(rate shock) on the fair market value of these securities considering stated
interest rates and time to maturity. Based upon the information and assumptions
the Company uses in its calculation, management estimates that a 10% immediate,
parallel increase in prevailing interest rates would decrease the net fair
market value of its fixed rate debt securities by approximately $1.6 million.
The selection of a 10% immediate parallel increase in prevailing interest rates
should not be construed as a prediction by the Companys management of future
market events, but rather, to illustrate the potential impact of such an event.
To the extent that actual results differ from the assumptions utilized, the
Companys rate shock measures could be significantly impacted. Additionally, the
Companys calculation assumes that the current relationship between short-term
and long-term interest rates (the term structure of interest rates) will remain
constant over time. As a result, these calculations may not fully capture the
impact of nonparallel changes in the term structure of interest rates and/or large changes in interest rates.
Equity Price Risk
The Company
also holds investments in marketable equity securities, which exposes it to
market volatility, as discussed in Note 3 to the accompanying consolidated
financial statements. The sensitivity analysis presented does not consider the
effects that such adverse changes may have on overall economic activity, nor
does it consider additional actions the Company may take to mitigate its
exposure. Equity price risk is the risk that the Company will incur economic
losses due to adverse changes in a particular common stock or stock index. At
December 31, 2008, the Company had approximately $9.5 million in common stocks.
Equity price risk is addressed in part by varying the specific allocation of
equity investments over time pursuant to managements assessment of market and
business conditions and ongoing liquidity needs analysis. The Companys largest
equity exposure is a decline in the S&P 500; its portfolio of equity
instruments is similar to those that comprise this index. Based upon the
information and assumptions the Company used in its calculation, management
estimates that an immediate decrease in the S&P 500 of 10% would decrease
the net fair value of the Companys assets identified above by approximately
$950,000.
The
selection of a 10% immediate decrease in the S&P 500 should not be construed
as a prediction by the Companys management of future market events, but rather,
to illustrate the potential impact of such an event. The Companys exposure will
change as a result of changes in its mix of common stocks. Since this
calculation is based on historical performance, projecting future price
volatility using this method involves an inherent assumption that historical
volatility and correlation relationships will remain stable. Therefore, the
results noted above may not reflect the Companys actual experience if future
volatility and correlation relationships differ from such historical
relationships.
30
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
|
1.
|
|
Report of Independent Registered Public Accounting Firm
|
32
|
|
2.
|
|
Managements
Report on Internal Control Over Financial Reporting
|
33
|
|
3.
|
|
Report of Independent Registered Public Accounting
|
|
|
|
|
Firm on
Internal Control Over Financial Reporting
|
34
|
|
4.
|
|
Consolidated
Balance Sheets
|
35
|
|
5.
|
|
Consolidated Statements of Income (Loss)
|
36
|
|
6.
|
|
Consolidated
Statements of Stockholders Equity
|
37
|
|
7.
|
|
Consolidated Statements of Comprehensive Income (Loss)
|
38
|
|
8.
|
|
Consolidated
Statements of Cash Flows
|
39
|
|
9.
|
|
Notes to Consolidated Financial Statements
|
41
|
The
financial statements schedules meeting the requirements of Regulation S-X are
attached hereto as Schedules I, II, III, IV and V.
Selected Quarterly Financial
Data
2008
|
|
March 31
|
|
June 30
|
|
September 30
|
|
De
cember 31
|
|
Net premiums written
|
|
$
|
17,813,360
|
|
$
|
18,127,982
|
|
$
|
15,331,820
|
|
$
|
12,389,025
|
|
Net income (loss)
|
|
|
2,124,380
|
|
|
(273,934)
|
|
|
917,033
|
|
|
(3,950,275)
|
|
Basic earnings (loss) per common
share
|
|
|
.88
|
|
|
(.11)
|
|
|
.39
|
|
|
(1.72)
|
|
Diluted earnings (loss) per common
share
|
|
|
.87
|
|
|
(.11)
|
|
|
.39
|
|
|
(1.72)
|
|
|
2007
|
|
March 31
|
|
June 30
|
|
September 30
|
|
De
cember 31
|
|
Net premiums written
|
|
$
|
16,792,542
|
|
$
|
18,626,179
|
|
$
|
18,994,453
|
|
$
|
15,570,815
|
|
Net income
|
|
|
2,322,214
|
|
|
1,154,149
|
|
|
3,857,892
|
|
|
1,068,080
|
|
Basic earnings per common
share
|
|
|
.93
|
|
|
.46
|
|
|
1.56
|
|
|
.44
|
|
Diluted earnings per common
share
|
|
|
.92
|
|
|
.46
|
|
|
1.54
|
|
|
.43
|
|
31
Report of Independent Registered Public
Accounting Firm
To the Board of Directors and
Stockholders
Investors Title Company
Chapel Hill, North
Carolina
We have audited the accompanying
consolidated balance sheets of Investors Title Company and Subsidiaries as of
December 31, 2008 and 2007, and the related consolidated statements of income
(loss), comprehensive income (loss), stockholders equity and cash flows for
each of the years in the three-year period ended December 31, 2008. These
consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the
financial position of Investors Title Company and Subsidiaries as of December
31, 2008 and 2007, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 2008 in conformity
with accounting principles generally accepted in the United States of
America.
We have also audited, in accordance with
the standards of the Public Company Accounting Oversight Board (United States),
Investors Title Companys internal control over financial reporting as of
December 31, 2008, based on the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission, and our report dated March 6, 2009 expressed an
unqualified opinion.
March 6, 2009
High Point, North Carolina
32
Managements Report on Internal Control
over Financial Reporting
Management of Investors Title Company is
responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in the Exchange Act Rules 13a-15(f)
and 15(d)-15-(f). The Companys internal control over financial reporting has
been designed to provide reasonable assurance regarding the reliability of the
Companys financial reporting and the preparation of published financial
statements in accordance with generally accepted accounting
principles.
The Companys internal control over
financial reporting includes policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
transactions and dispositions of assets of the Company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with accounting principles generally accepted
in the United States of America, and that receipts and expenditures are being
made only in accordance with authorization of management and directors of the
Company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the Companys
assets that could have a material effect on the Companys consolidated financial
statements.
Because of its inherent limitation,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with policies or
procedures may deteriorate.
Management conducted an evaluation of the
effectiveness of the Companys internal control over financial reporting based
on the framework in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) and
concluded that internal controls over financial reporting are effective as of
December 31, 2008.
Managements assessment of the
effectiveness of the Companys internal control over financial reporting as of
December 31, 2008 has been audited by Dixon Hughes PLLC as independent
registered public accounting firm, as stated in their report which
follows.
33
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and
Stockholders
Investors Title Company
Chapel Hill, North
Carolina
We have audited Investors Title Company
and Subsidiaries (the Company) internal control over financial reporting as
of December 31, 2008, based on criteria established in
Internal
ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations
of the Treadway Commission. The Companys management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting
included in the accompanying Managements Report on Internal Controls over
Financial Reporting. Our responsibility is to express an opinion on the
Companys internal control over financial reporting based on our
audit.
We conducted our audit in accordance with
the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for
our opinion.
A companys internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. A companys internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys
assets that could have a material effect on the financial statements.
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, Investors Title Company
and Subsidiaries maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on criteria
established in
Internal ControlIntegrated
Framework
issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with
the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of Investors Title Company and Subsidiaries as
of December 31, 2008 and the related consolidated statements of income
(loss), comprehensive income (loss), stockholders equity, and cash flows for
the year then ended and our report dated March 6, 2009, expressed an unqualified opinion on those
consolidated financial statements.
March 6, 2009
High Point, North Carolina
34
Investors Title Company and
Subsidiaries
Consolidated Balance
Sheets
As of December
31,
|
|
2008
|
|
2007
|
|
Assets
|
|
|
|
|
|
|
|
Investments in securities (Notes 2 and 3):
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
|
|
|
|
|
Held-to-maturity, at amortized cost (fair value: 2008:
$462,580; 2007: $1,078,229)
|
|
$
|
451,681
|
|
$
|
1,052,535
|
|
Available-for-sale, at fair value (amortized cost: 2008:
$85,923,583; 2007: $89,228,010)
|
|
|
87,708,500
|
|
|
90,530,946
|
|
Equity securities, available-for-sale at fair value
(cost: 2008: $9,158,785; 2007: $10,283,458)
|
|
|
9,965,297
|
|
|
14,431,866
|
|
Short-term investments
|
|
|
15,725,513
|
|
|
21,222,533
|
|
Other investments (Note 16)
|
|
|
2,040,962
|
|
|
1,788,501
|
|
Total investments
|
|
|
115,891,953
|
|
|
129,026,381
|
|
|
|
Cash and cash equivalents (Note 15)
|
|
|
5,155,046
|
|
|
3,000,762
|
|
Premium and fees receivable (less allowance for doubtful
accounts:
|
|
|
|
|
|
|
|
2008: $1,297,000; 2007: $2,170,000) (Note
16)
|
|
|
4,933,797
|
|
|
6,900,968
|
|
Accrued interest and dividends
|
|
|
1,225,070
|
|
|
1,254,641
|
|
Prepaid expenses and other assets
|
|
|
1,215,146
|
|
|
1,276,806
|
|
Property acquired in settlement of
claims
|
|
|
395,734
|
|
|
278,476
|
|
Property, net (Note 4)
|
|
|
4,422,318
|
|
|
5,278,891
|
|
Current income taxes receivable (Note 8)
|
|
|
2,777,829
|
|
|
-
|
|
Deferred income taxes, net (Note 8)
|
|
|
3,841,295
|
|
|
2,625,495
|
|
Total
Assets
|
|
$
|
139,858,188
|
|
$
|
149,642,420
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Reserves for claims (Note 6)
|
|
$
|
39,238,000
|
|
$
|
36,975,000
|
|
Accounts payable and accrued liabilities (Note
10)
|
|
|
10,294,912
|
|
|
11,236,781
|
|
Commissions and reinsurance payable (Note
5)
|
|
|
467,388
|
|
|
406,922
|
|
Current income taxes payable (Note 8)
|
|
|
-
|
|
|
1,747,877
|
|
Total liabilities
|
|
|
50,000,300
|
|
|
50,366,580
|
|
|
|
Commitments and Contingencies (Notes 5, 9, 10 and
11)
|
|
|
|
|
|
|
|
Stockholders Equity (Notes 2, 3, 7, 12 and 14)
|
|
|
|
|
|
|
|
Class A Junior Participating preferred stock (shares
authorized 100,000; no shares issued)
|
|
|
-
|
|
|
-
|
|
Common stock-no par value (shares authorized 10,000,000;
2,293,268 and 2,411,318
|
|
|
|
|
|
|
|
shares issued and outstanding 2008 and 2007,
respectively, excluding 291,676 shares
|
|
|
|
|
|
|
|
for 2008 and 2007, respectively of common stock held by
the Companys subsidiary)
|
|
|
1
|
|
|
1
|
|
Retained earnings
|
|
|
88,248,452
|
|
|
95,739,827
|
|
Accumulated other comprehensive income (net unrealized
gain on investments, Note 8;
|
|
|
|
|
|
|
|
net unrealized loss on postretirement benefits, Note
10)
|
|
|
1,609,435
|
|
|
3,536,012
|
|
Total stockholders equity
|
|
|
89,857,888
|
|
|
99,275,840
|
|
Total Liabilities and
Stockholders Equity
|
|
$
|
139,858,188
|
|
$
|
149,642,420
|
|
See notes to the Consolidated Financial
Statements.
35
Investors Title Company and
Subsidiaries
Consolidated Statements of Income
(Loss)
For the Years Ended
December 31,
|
|
2008
|
|
2007
|
|
2006
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
Underwriting income
|
|
|
|
|
|
|
|
|
|
|
Premiums written (Note 5)
|
|
$
|
63,937,276
|
|
$
|
70,248,166
|
|
$
|
70,638,049
|
|
Less-premiums for reinsurance ceded (Note
5)
|
|
|
275,089
|
|
|
264,177
|
|
|
441,582
|
|
Net premiums written
|
|
|
63,662,187
|
|
|
69,983,989
|
|
|
70,196,467
|
|
Investment income-interest and dividends (Note
3)
|
|
|
4,558,735
|
|
|
5,197,178
|
|
|
4,326,335
|
|
Net realized (loss) gain on investments (Note
3)
|
|
|
(2,922,376)
|
|
|
921,871
|
|
|
551,058
|
|
Exchange services revenue
|
|
|
1,166,141
|
|
|
4,340,062
|
|
|
5,980,027
|
|
Other (Note 16)
|
|
|
4,658,574
|
|
|
4,499,187
|
|
|
3,607,829
|
|
Total Revenues
|
|
|
71,123,261
|
|
|
84,942,287
|
|
|
84,661,716
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
Commissions to agents
|
|
|
27,717,807
|
|
|
28,424,960
|
|
|
26,714,784
|
|
Provision for claims (Note 6)
|
|
|
15,206,637
|
|
|
10,134,719
|
|
|
7,405,211
|
|
Salaries, employee benefits and payroll taxes (Notes 7
and 10)
|
|
|
19,605,500
|
|
|
20,819,094
|
|
|
20,036,079
|
|
Office occupancy and operations (Note 9)
|
|
|
5,107,843
|
|
|
5,598,576
|
|
|
5,599,382
|
|
Business development
|
|
|
2,104,935
|
|
|
2,183,853
|
|
|
2,247,826
|
|
Filing fees and taxes, other than payroll and
income
|
|
|
587,235
|
|
|
531,777
|
|
|
573,395
|
|
Premium and retaliatory taxes
|
|
|
1,281,297
|
|
|
1,496,448
|
|
|
1,348,850
|
|
Professional and contract labor fees
|
|
|
1,684,208
|
|
|
2,789,878
|
|
|
2,659,238
|
|
Other
|
|
|
1,044,598
|
|
|
1,138,647
|
|
|
747,517
|
|
Total Operating Expenses
|
|
|
74,340,060
|
|
|
73,117,952
|
|
|
67,332,282
|
|
(Loss) Income before Income
Taxes
|
|
|
(3,216,799)
|
|
|
11,824,335
|
|
|
17,329,434
|
|
(Benefit) Provision for Income Taxes (Note 8)
|
|
|
(2,034,000)
|
|
|
3,422,000
|
|
|
4,144,000
|
|
Net (Loss)
Income
|
|
$
|
(1,182,799)
|
|
$
|
8,402,335
|
|
$
|
13,185,434
|
|
Basic (Loss)
Earnings per Common Share (Note 7)
|
|
$
|
(0.50)
|
|
$
|
3.39
|
|
$
|
5.22
|
|
Weighted Average
Shares Outstanding Basic
|
|
|
2,364,361
|
|
|
2,479,321
|
|
|
2,527,927
|
|
Diluted (Loss)
Earnings per Common Share (Note 7)
|
|
$
|
(0.50)
|
|
$
|
3.35
|
|
$
|
5.14
|
|
Weighted Average
Shares Outstanding Diluted
|
|
|
2,364,361
|
|
|
2,508,609
|
|
|
2,564,216
|
|
Cash Dividends
Paid per Common Share
|
|
$
|
0.28
|
|
$
|
0.24
|
|
$
|
0.24
|
|
See notes to the Consolidated Financial
Statements.
36
Investors Title Company and
Subsidiaries
Consolidated Statements of
Stockholders Equity
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
Total
|
|
|
Common Stock
|
|
Retained
|
|
Comprehensive
|
|
Stockholders
|
|
For
the Years Ended December 31, 2006, 2007 and 2008
|
Shares
|
|
Amount
|
|
Earnings
|
|
Income
|
|
Equity
|
|
Balance, January 1, 2006
|
2,549,434
|
|
$
|
1
|
|
$
|
81,477,022
|
|
$
|
2,820,233
|
|
$
|
84,297,256
|
|
Net income
|
|
|
|
|
|
|
13,185,434
|
|
|
|
|
|
13,185,434
|
|
Dividends ($.24 per share)
|
|
|
|
|
|
|
(606,423)
|
|
|
|
|
|
(606,423)
|
|
Shares of common stock repurchased
|
(500)
|
|
|
|
|
|
(22,445)
|
|
|
|
|
|
(22,445)
|
|
Shares of common stock repurchased and retired
|
(51,449)
|
|
|
|
|
|
(2,255,735)
|
|
|
|
|
|
(2,255,735)
|
|
Issuance of common stock in payment of bonuses and
fees
|
500
|
|
|
|
|
|
21,826
|
|
|
|
|
|
21,826
|
|
Stock options exercised
|
9,340
|
|
|
|
|
|
219,342
|
|
|
|
|
|
219,342
|
|
Share-based compensation expense
|
|
|
|
|
|
|
91,209
|
|
|
|
|
|
91,209
|
|
Change in investment accounting method
|
|
|
|
|
|
|
24,378
|
|
|
|
|
|
24,378
|
|
Adjustment to initially apply FASB Statement No.
158,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of tax
|
|
|
|
|
|
|
|
|
|
(40,810)
|
|
|
(40,810)
|
|
Net
unrealized gain on investments
|
|
|
|
|
|
|
|
|
|
361,631
|
|
|
361,631
|
|
Balance, December 31,
2006
|
2,507,325
|
|
$
|
1
|
|
$
|
92,134,608
|
|
$
|
3,141,054
|
|
$
|
95,275,663
|
|
Net
income
|
|
|
|
|
|
|
8,402,335
|
|
|
|
|
|
8,402,335
|
|
Dividends ($.24 per share)
|
|
|
|
|
|
|
(595,808)
|
|
|
|
|
|
(595,808)
|
|
Shares of common stock repurchased and retired
|
(111,437)
|
|
|
|
|
|
(4,660,259)
|
|
|
|
|
|
(4,660,259)
|
|
Issuance of common stock in payment of bonuses and
fees
|
40
|
|
|
|
|
|
1,998
|
|
|
|
|
|
1,998
|
|
Stock options exercised
|
15,390
|
|
|
|
|
|
365,284
|
|
|
|
|
|
365,284
|
|
Share-based compensation expense
|
|
|
|
|
|
|
91,669
|
|
|
|
|
|
91,669
|
|
Amortization related to FASB Statement No. 158
|
|
|
|
|
|
|
|
|
|
11,736
|
|
|
11,736
|
|
Accumulated post-retirement benefit obligation
adjustment
|
|
|
|
|
|
|
|
|
|
(31,734)
|
|
|
(31,734)
|
|
Net
unrealized gain on investments
|
|
|
|
|
|
|
|
|
|
414,956
|
|
|
414,956
|
|
Balance, December 31,
2007
|
2,411,318
|
|
$
|
1
|
|
$
|
95,739,827
|
|
$
|
3,536,012
|
|
$
|
99,275,840
|
|
Net
loss
|
|
|
|
|
|
|
(1,182,799)
|
|
|
|
|
|
(1,182,799)
|
|
Dividends ($.28 per share)
|
|
|
|
|
|
|
(661,862)
|
|
|
|
|
|
(661,862)
|
|
Shares of common stock repurchased and retired
|
(130,450)
|
|
|
|
|
|
(5,972,043)
|
|
|
|
|
|
(5,972,043)
|
|
Issuance of common stock in payment of bonuses and
fees
|
40
|
|
|
|
|
|
1,946
|
|
|
|
|
|
1,946
|
|
Stock options exercised
|
12,360
|
|
|
|
|
|
230,801
|
|
|
|
|
|
230,801
|
|
Share-based compensation expense
|
|
|
|
|
|
|
92,582
|
|
|
|
|
|
92,582
|
|
Amortization related to FASB Statement No. 158
|
|
|
|
|
|
|
|
|
|
13,456
|
|
|
13,456
|
|
Accumulated post retirement benefit obligation
adjustment
|
|
|
|
|
|
|
|
|
|
(67,221)
|
|
|
(67,221)
|
|
Net
unrealized loss on investments
|
|
|
|
|
|
|
|
|
|
(1,872,812)
|
|
|
(1,872,812)
|
|
Balance, December 31,
2008
|
2,293,268
|
|
$
|
1
|
|
$
|
88,248,452
|
|
$
|
1,609,435
|
|
$
|
89,857,888
|
|
See notes to the Consolidated Financial
Statements.
37
Investors Title Company and
Subsidiaries
Consolidated Statements of
Comprehensive Income (Loss)
For the Years Ended December
31,
|
|
2008
|
|
2007
|
|
2006
|
|
Net (loss) income
|
|
$
|
(1,182,799)
|
|
$
|
8,402,335
|
|
$
|
13,185,434
|
|
Other comprehensive (loss) income, before
tax:
|
|
|
|
|
|
|
|
|
|
|
Amortization related to prior year service cost
|
|
|
20,388
|
|
|
20,388
|
|
|
-
|
|
Amortization of unrecognized gain
|
|
|
-
|
|
|
(2,604)
|
|
|
-
|
|
Accumulated post retirement benefit obligation adjustment
|
|
|
(101,850)
|
|
|
(48,082)
|
|
|
-
|
|
Unrealized (losses) gains on investments arising during
the year
|
|
|
(5,782,291)
|
|
|
1,555,828
|
|
|
1,098,165
|
|
Less: reclassification adjustment for losses (gains) realized in
net
|
|
|
|
|
|
|
|
|
|
|
(loss) income
|
|
|
2,922,376
|
|
|
(921,871)
|
|
|
(551,058)
|
|
Other
comprehensive (loss) income, before tax
|
|
|
(2,941,377)
|
|
|
603,659
|
|
|
547,107
|
|
Income tax benefit related to FASB Statement No. 158
|
|
|
(27,696)
|
|
|
(10,300)
|
|
|
-
|
|
Income tax (benefit) expense related to unrealized
(losses) gains on
|
|
|
|
|
|
|
|
|
|
|
investments
arising during the tax year
|
|
|
(1,992,602)
|
|
|
551,029
|
|
|
372,836
|
|
Income tax (benefit) expense related to reclassification adjustment
for
|
|
|
|
|
|
|
|
|
|
|
(losses) gains realized in net (loss) income
|
|
|
1,005,498
|
|
|
(332,028)
|
|
|
(187,360)
|
|
Net
income tax (benefit) expense on other comprehensive (loss) income
|
|
|
(1,014,800)
|
|
|
208,701
|
|
|
185,476
|
|
Other comprehensive (loss) income
|
|
|
(1,926,577)
|
|
|
394,958
|
|
|
361,631
|
|
Comprehensive (loss)
income
|
|
$
|
(3,109,376)
|
|
$
|
8,797,293
|
|
$
|
13,547,065
|
|
See notes to the Consolidated Financial
Statements.
38
Investors Title Company and
Subsidiaries
Consolidated Statements of Cash
Flows
For the Years Ended December
31,
|
|
2008
|
|
2007
|
|
2006
|
|
Operating
Activities
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(1,182,799)
|
|
$
|
8,402,335
|
|
$
|
13,185,434
|
|
Adjustments to reconcile net (loss)
income to net cash provided by
|
|
|
|
|
|
|
|
|
|
|
operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
920,840
|
|
|
1,183,155
|
|
|
1,146,509
|
|
Amortization, net
|
|
|
313,377
|
|
|
274,944
|
|
|
197,972
|
|
Amortization related to FASB Statement No. 158
|
|
|
20,388
|
|
|
17,784
|
|
|
-
|
|
Issuance of common stock in payment of bonuses and fees
|
|
|
1,946
|
|
|
1,998
|
|
|
21,826
|
|
Share-based compensation expense related to stock
options
|
|
|
92,582
|
|
|
91,669
|
|
|
91,209
|
|
Allowance for doubtful accounts on premiums receivable
|
|
|
(873,000)
|
|
|
42,000
|
|
|
(316,000)
|
|
Net loss (gain) on disposals of property
|
|
|
221,148
|
|
|
(15,264)
|
|
|
22,650
|
|
Other property transactions
|
|
|
200,000
|
|
|
-
|
|
|
-
|
|
Net realized loss (gain) on investments
|
|
|
2,922,376
|
|
|
(921,871)
|
|
|
(551,058)
|
|
Net
earnings from other investments
|
|
|
(694,570)
|
|
|
(556,082)
|
|
|
(299,982)
|
|
Provision for claims
|
|
|
15,206,637
|
|
|
10,134,719
|
|
|
7,405,211
|
|
Benefit for deferred income taxes
|
|
|
(201,000)
|
|
|
(304,000)
|
|
|
(232,000)
|
|
Changes in assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
Decrease
in receivables and other assets
|
|
|
2,761,823
|
|
|
60,509
|
|
|
1,283,662
|
|
(Increase) in current income taxes receivable
|
|
|
(2,777,829)
|
|
|
-
|
|
|
-
|
|
(
Decrease)
increase in accounts payable and accrued
liabilities
|
|
|
(991,398)
|
|
|
650,707
|
|
|
2,547,774
|
|
Increase
(
decrease) in commissions and
reinsurance payable
|
|
|
60,466
|
|
|
(63,546)
|
|
|
28,370
|
|
(
Decrease)
increase in current income taxes payable
|
|
|
(1,747,877)
|
|
|
1,421,622
|
|
|
(620,535)
|
|
Payments of claims, net of recoveries
|
|
|
(12,943,637)
|
|
|
(10,065,719)
|
|
|
(5,356,211)
|
|
Net cash provided by operating activities
|
|
|
1,309,473
|
|
|
10,354,960
|
|
|
18,554,831
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
Purchases of available-for-sale securities
|
|
|
(17,461,053)
|
|
|
(53,409,065)
|
|
|
(55,092,700)
|
|
Purchases of short-term securities
|
|
|
(2,396,338)
|
|
|
(17,073,905)
|
|
|
(1,934,879)
|
|
Purchases of other investments
|
|
|
(565,271)
|
|
|
(443,084)
|
|
|
(480,291)
|
|
Proceeds from sales and maturities of available-for-sale
securities
|
|
|
18,764,347
|
|
|
63,607,086
|
|
|
26,428,538
|
|
Proceeds from maturities of held-to-maturity
securities
|
|
|
611,000
|
|
|
149,000
|
|
|
461,000
|
|
Proceeds from sales and maturities of short-term securities
|
|
|
7,893,358
|
|
|
312,282
|
|
|
4,731,702
|
|
Proceeds from sales and distributions of other
investments
|
|
|
887,287
|
|
|
1,248,317
|
|
|
749,331
|
|
Other investment transactions
|
|
|
-
|
|
|
-
|
|
|
(65,622)
|
|
Purchases of property
|
|
|
(493,681)
|
|
|
(463,828)
|
|
|
(1,902,619)
|
|
Proceeds from disposals of property
|
|
|
8,266
|
|
|
151,350
|
|
|
42,236
|
|
Other
property transactions
|
|
|
-
|
|
|
-
|
|
|
23,685
|
|
Net cash provided by (used in) investing
activities
|
|
|
7,247,915
|
|
|
(5,921,847)
|
|
|
(27,039,619)
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
Repurchases of common stock
|
|
|
(5,972,043)
|
|
|
(4,660,259)
|
|
|
(2,278,180)
|
|
Exercise of options
|
|
|
230,801
|
|
|
365,284
|
|
|
219,342
|
|
Dividends paid
|
|
|
(661,862)
|
|
|
(595,808)
|
|
|
(606,423)
|
|
Net cash used in financing activities
|
|
|
(6,403,104)
|
|
|
(4,890,783)
|
|
|
(2,665,261)
|
|
39
Consolidated Statements of Cash Flows,
continued
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December
31,
|
|
2008
|
|
2007
|
|
2006
|
|
Net Increase (Decrease) in
Cash and Cash Equivalents
|
|
$
|
2,154,284
|
|
$
|
(457,670)
|
|
$
|
(11,150,049)
|
|
Cash and Cash Equivalents, Beginning of
Year
|
|
|
3,000,762
|
|
|
3,458,432
|
|
|
14,608,481
|
|
Cash and Cash Equivalents, End of
Year
|
|
$
|
5,155,046
|
|
$
|
3,000,762
|
|
$
|
3,458,432
|
|
Supplemental Disclosures
|
|
|
|
|
|
|
|
|
|
|
Cash Paid During the Year
for
|
|
|
|
|
|
|
|
|
|
|
Income
Taxes (net of refunds)
|
|
$
|
2,775,000
|
|
$
|
2,288,000
|
|
$
|
4,989,000
|
|
Non
cash net unrealized (gain) loss on investments, net of deferred tax
|
|
|
|
|
|
|
|
|
|
|
benefit (provision) of $987,103, ($219,001) and
($185,475) for 2008, 2007 and
|
|
|
|
|
|
|
|
|
|
|
2006, respectively
|
|
$
|
1,872,812
|
|
$
|
(414,956)
|
|
$
|
(361,631)
|
|
Adjustments to apply FASB Statement No. 158, net of
deferred tax
|
|
|
|
|
|
|
|
|
|
|
provision of ($34,629), ($16,348) and ($21,024) for
2008, 2007 and
|
|
|
|
|
|
|
|
|
|
|
2006, respectively
|
|
$
|
101,850
|
|
$
|
48,082
|
|
$
|
61,834
|
|
See notes to the Consolidated Financial
Statements.
40
Investors Title Company and
Subsidiaries
Notes to Consolidated Financial Statements
1. Basis of Presentation and Summary of
Significant Accounting Policies
Description of Business
Investors
Title Companys (the Company) two primary business segments are title
insurance and exchange services. The Companys title insurance segment, through
its two subsidiaries, Investors Title Insurance Company (ITIC) and Northeast
Investors Title Insurance Company (NE-ITIC), is licensed to insure titles to
residential, institutional, commercial and industrial properties. The Company
issues title insurance policies primarily through approved attorneys from
underwriting offices and through independent issuing agents in 23 states and the
District of Columbia primarily in the eastern half of the United States. The
majority of the Companys business is concentrated in Illinois, Kentucky,
Michigan, New York, North Carolina, Pennsylvania, South Carolina, Tennessee,
Virginia and West Virginia. Investors Title Exchange Corporation (ITEC) acts
as an intermediary in tax-deferred exchanges of property held for productive use
in a trade or business or for investments, while Investors Title Accommodation
Corporation (ITAC) provides services for accomplishing reverse exchanges when
taxpayers decide to acquire replacement property before selling the relinquished
property.
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
Reclassification
Certain 2007 and 2006
amounts in the accompanying consolidated financial statements have been
reclassified to conform to the 2008 classifications. These reclassifications had
no effect on stockholders equity or net income as previously
reported.
Significant Accounting
Policies
The significant accounting policies
of the Company are summarized below.
Cash and Cash
Equivalents
For the
purpose of presentation in the Companys statements of cash flows, cash
equivalents are highly liquid instruments with original maturities of three
months or less. The carrying amount of cash and cash equivalents is a reasonable
estimate of fair value due to the short-term maturity of these
instruments.
Investments in
Securities
Securities
for which the Company has the intent and ability to hold to maturity are
classified as held-to-maturity and reported at cost, adjusted for amortization
of premiums or accretion of discounts, and other-than-temporary declines in fair
value. Securities held principally for resale in the near term are classified as
trading securities and recorded at fair values. Realized and unrealized gains
and losses on trading securities are included in other income. Securities not
classified as either trading or held-to-maturity are classified as
available-for-sale and reported at fair value, adjusted for other-than-temporary
declines in fair value, with unrealized gains and losses, net of tax, reported
as accumulated other comprehensive income. Securities are regularly reviewed for
differences between the cost and estimated fair value of each security for
factors that may indicate that a decline in fair value is other-than-temporary.
Some factors considered in evaluating whether or not a decline in fair value is
other-than-temporary include the duration and extent to which the fair value has
been less than cost and the Companys ability and intent to retain the
investment for a period of time sufficient to allow for a recovery in value.
Such reviews are inherently uncertain and the value of the investment may not
fully recover or may decline in future periods resulting in a realized loss.
Fair values of the majority of investments are based on quoted market prices.
Realized gains and losses are determined on the specific identification method.
Refer to Note 3.
Short-term
Investments
Short-term
investments comprise money market accounts which are invested in short-term
funds, time deposits with banks and savings and loan associations, and other
investments expected to have maturities or redemptions greater than three months
and less than twelve months. The Company monitors any events or changes in
circumstances that may have a significant adverse effect on the fair value of
these investments.
41
Other Investments
Other
investments consist primarily of investments through LLC structures, which are
accounted for under the equity or cost method of accounting. The aggregate cost
of the Companys cost method investments totaled $821,617 at December 31, 2008.
The Company monitors any events or changes in circumstances that may have had a
significant adverse effect on the fair value of these investments and makes any
necessary adjustments.
Property Acquired in Settlement of
Claims
Property
acquired in settlement of claims is held for sale and valued at the lower of
cost or market. Adjustments to reported estimated realizable values and realized
gains or losses on dispositions are recorded as increases or decreases in claim
costs.
Property and
Equipment
Property and
equipment are recorded at cost and are depreciated principally under the
straight-line method over the estimated useful lives (three to twenty-five
years) of the respective assets. Maintenance and repairs are charged to
operating expenses and improvements are capitalized.
Reserves for
Claims
The total
reserve for all reported and unreported losses the Company incurred through
December 31, 2008 is represented by the reserves for claims. The Companys
reserves for unpaid losses and loss adjustment expenses are established using
estimated amounts required to settle claims for which notice has been received
(reported) and the amount estimated to be required to satisfy incurred claims of
policyholders which may be reported in the future. Despite the variability of
such estimates, management believes that the reserves are adequate to cover
claim losses resulting from pending and future claims for policies issued
through December 31, 2008. The Company continually reviews and adjusts its
reserve estimates as necessary to reflect its loss experience and any new
information that becomes available. Adjustments resulting from such reviews may
be significant.
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 acquiring company carries assets at the lower of cost or estimated
realizable value, net of any indebtedness on the property.
Income Taxes
The Company
makes certain estimates and judgments in determining income tax expense for
financial statement purposes. These estimates and judgments occur in the
calculation of certain tax assets and liabilities which arise from differences
in the timing of recognition of revenue and expense for tax and financial
statement purposes. The Company provides for deferred income taxes (benefits)
for the tax consequences on future years on temporary differences between the
financial statements carrying values and the tax bases of assets and
liabilities using currently enacted tax rates. The Company establishes valuation
allowances if it believes that it is more likely than not that some or all of
its deferred tax assets will not be realized. Refer to Note 8.
Premiums Written and Commissions to
Agents
Premiums are
generally recorded and recognized as revenue at the time of closing of the
related transaction as the earnings process is considered complete. Title
insurance commissions earned by the Companys agents are recognized as expense
concurrently with premium recognition.
Exchange Services
Revenue
Fees are
recognized at the signing of a binding agreement and investment earnings are
recognized as they are earned.
42
Fair Values of Financial
Instruments
The carrying
amounts reported in the consolidated balance sheets for cash and cash
equivalents, short-term investments, premiums receivable, accrued interest and
dividends, accounts payable, commissions and reinsurance payable and current
income taxes payable approximate cost, which is what is reflected on the
consolidated balance sheets due to the short-term nature of these assets and
liabilities. Fair values for the majority of investment securities are based on
quoted market prices. Auction Rate Securities, (ARS) are valued using
discounted cash flow models to determine the estimated fair value of these
investments. Some of the inputs to ARS model are unobservable in the market and
are significant.
In September
2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 157, Fair Value Measurements, (SFAS 157), which was effective for fiscal years beginning
after November 15, 2007 and for interim periods within those years. This
Statement defines fair value, establishes a framework for measuring fair value
and expands the related disclosure requirements. Relative to SFAS 157, the FASB
recently issued Financial Staff Position (FSP) 157-1, 157-2 and 157-3. FSP 157-1 amends SFAS 157 to exclude
SFAS No. 13, Accounting for Leases, and its related interpretive accounting
pronouncements that address leasing transactions, while FSP 157-2 delays the
effective date of the application of SFAS 157 to fiscal years beginning after
November 15, 2008 for all nonfinancial assets and nonfinancial liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis. FSP 157-3 clarifies the application of SFAS 157
as it relates to the valuation of financial assets in a market that is not
active for those financial assets. This FSP is effective immediately and
includes those periods for which financial statements have not been issued. The
Company adopted SFAS 157 as of January 1, 2008.
Comprehensive
Income
The
Companys accumulated other comprehensive income is comprised of unrealized
holding gains on available-for-sale securities, net of tax, and unrecognized
prior service cost and unrealized gains/losses associated with FASB Statement
No. 158 related to postretirement benefit liabilities, net of tax.
Stock-Based Compensation
The Company
adopted the provisions of Statement of Financial Accounting Standards No. 123R
(SFAS 123R) on January 1, 2006, the first day of the Companys fiscal year
2006, using a modified prospective application, which provides for certain
changes to the method for valuing share-based compensation. Under the modified
prospective application, prior periods are not revised for comparative purposes.
The valuation provisions of SFAS 123R apply to new awards and to awards that are
outstanding on the effective date and subsequently modified or cancelled.
Estimated compensation expense for awards outstanding at the effective date are
recognized over their remaining service period using the compensation cost
calculated under FASB Statement No. 123, Accounting for Stock-Based
Compensation (SFAS 123). Under SFAS 123R, share-based compensation cost is
generally measured at the grant date, based on the estimated fair value of the
award, and is recognized as expense over the employees requisite service
period.
As
share-based compensation expense recognized in the consolidated statements of
income is based on awards ultimately expected to vest, it has been reduced for
estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the
time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates.
Prior to
adopting the provisions of SFAS 123R, the Company recorded estimated
compensation expense for employee stock options based upon their intrinsic value
on the date of grant pursuant to Accounting Principles Board Opinion No. 25,
(APB 25), Accounting for Stock Issued to Employees, and provided the
required pro forma disclosures of SFAS 123. Because the Company established the
exercise price based on the fair market value of the Companys stock at the date
of grant, the stock options had no intrinsic value upon grant, and therefore no
estimated expense was recorded prior to adopting SFAS 123R. Each accounting
period, the Company reported the potential dilutive impact of stock options in
its diluted earnings per common share using the treasury-stock method.
Out-of-the-money stock options (i.e., the average stock price during the period
was below the exercise price of the stock option) were not included in diluted
earnings per common share as their effect was anti-dilutive.
43
Recent Accounting
Standards
In December
2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statementsan amendment of Accounting Research Bulletin (ARB) No. 51 (SFAS 160). SFAS 160 amends
ARB 51 to establish accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. This
Statement requires the recognition of a noncontrolling interest (minority
interest) as equity in the consolidated financial statements and separate from
the parents equity. The amount of net income attributable to the noncontrolling
interest will be included in consolidated net income on the face of the income
statement. It also amends certain of ARB No. 51s consolidation procedures for
consistency with the requirements of SFAS 141(R). SFAS 160 is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008, with earlier adoption prohibited. The Company is
currently evaluating the effect of adopting this new Statement and anticipates
that the Statement will not have a significant impact on the reporting of the
Companys results of operations.
In May 2008,
the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles (SFAS 162). This Statement identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in accordance with GAAP. With the issuance of this statement, the FASB
concluded that the GAAP hierarchy should be directed toward the entity and not
its auditor, and, reside in the accounting literature established by the FASB,
as opposed to the American Institute of Certified Public Accountants (AICPA)
Statement on Auditing Standards No. 69, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles. This Statement is
effective 60 days following the SECs approval of the Public Company Accounting
Oversight Board amendments to Audit Standards AU Section 411, The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting Principles. The
Company is currently evaluating the effect of adopting this new Statement and
anticipates that the Statement will not have a significant impact on the
reporting of the Companys results of operations.
Use of Estimates and
Assumptions
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosures of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period and accompanying notes. Actual results could differ
materially from those estimates and assumptions used.
Claims
The
Companys reserves for claims are established using estimated amounts required
to settle claims for which notice has been received (reported) and the amount
estimated to be required to satisfy incurred claims of policyholders which may
be reported in the future (incurred but not reported, (IBNR)). In accordance
with the requirements of paragraph 17 of Statement of Financial Accounting
Standards No. 60, a provision for estimated future claims payments is recorded
at the time policy revenue is recorded. The Company records the claims provision
as a percentage of premium income. By their nature, title claims can often be
complex, vary greatly in dollar amounts, vary in number due to economic and
market conditions such as an increase in mortgage foreclosures; and involve
uncertainties as to ultimate exposure. In addition, some claims may require a
number of years to settle and determine the final liability for indemnity and
loss adjustment expense. The payment experience may extend for more than twenty
years after the issuance of a policy. Events such as fraud, defalcation and
multiple property defects can substantially and unexpectedly cause increases in
estimates of losses. Due to the length of time over which claim payments are
made and regularly occurring changes in underlying economic and market
conditions, these estimates are subject to variability.
Management
considers factors such as the Companys historical claims experience, case
reserve estimates on reported claims, large claims, actuarial projections and
other relevant factors in determining loss provision rates and the aggregate
recorded expected liability for claims. In establishing reserves, actuarial
projections are compared with recorded reserves to evaluate the adequacy of such
recorded claims reserves and any necessary adjustments are then recorded in
current operations. As the most recent claims experience develops and new
information becomes
44
available, the loss reserve estimate
related to prior periods will change to more accurately reflect updated and
improved emerging data. The Company reflects any adjustments to reserves in the
results of operations in the period in which new information (principally claims
experience) becomes available.
Impairments
The Company
considers relevant facts and circumstances in evaluating whether a credit or
interest-rate related impairment of a security is other than temporary. Relevant
facts and circumstances include the extent and length of time the fair value of
an investment has been below cost.
There are a
number of risks and uncertainties inherent in the process of monitoring
impairments and determining if an impairment is other than temporary. These
risks and uncertainties include the risk that the economic outlook will be worse
than expected or have more of an impact on the issuer than anticipated, the risk
that the Companys assessment of an issuers ability to meet all of its
contractual obligations will change based on changes in the characteristics of
that issuer, the risk that information obtained by the Company or changes in
other facts and circumstances leads management to change its intent to hold the
security to maturity or until it recovers in value and the risk that management
is making decisions based on misstated information in the financial statements
provided by issuers.
2. Statutory Restrictions on
Consolidated Stockholders Equity and Investments
The Company
has designated approximately $40,638,016 and $39,879,000 of retained earnings as
of December 31, 2008 and 2007, respectively, as appropriated to reflect the
required statutory premium reserve. See Note 8 for the tax treatment of the
statutory premium reserve.
As of
December 31, 2008 and 2007 approximately $55,987,000 and $63,219,000,
respectively, of consolidated stockholders equity represents net assets of the
Companys subsidiaries that cannot be transferred in the form of dividends,
loans or advances to the parent company under statutory regulations without
prior insurance department approval.
Bonds
totaling approximately $6,540,000 and $6,471,000 at December 31, 2008 and 2007
respectively, are on deposit with the insurance departments of the states in
which business is conducted.
45
3. Investments in
Securities
The
aggregate fair value, gross unrealized holding gains, gross unrealized holding
losses, and amortized cost for securities by major security type at December 31
were as follows:
|
|
|
|
|
Gross
|
|
Gross
|
|
Estimated
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
December 31, 2008
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
Fixed Maturities-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity, at amortized cost-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
451,681
|
|
$
|
10,899
|
|
$
|
-
|
|
$
|
462,580
|
|
Total
|
|
$
|
451,681
|
|
$
|
10,899
|
|
$
|
-
|
|
$
|
462,580
|
|
Fixed Maturities-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
72,818,413
|
|
$
|
2,178,686
|
|
$
|
986,503
|
|
$
|
74,010,596
|
|
Corporate debt securities
|
|
|
13,105,170
|
|
|
606,001
|
|
|
13,267
|
|
|
13,697,904
|
|
Total
|
|
$
|
85,923,583
|
|
$
|
2,784,687
|
|
$
|
999,770
|
|
$
|
87,708,500
|
|
Equity Securities, available-for-sale at fair
value-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks and nonredeemable preferred stocks
|
|
$
|
9,158,785
|
|
$
|
1,446,389
|
|
$
|
639,877
|
|
$
|
9,965,297
|
|
Total
|
|
$
|
9,158,785
|
|
$
|
1,446,389
|
|
$
|
639,877
|
|
$
|
9,965,297
|
|
Short-term investments-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit and other
|
|
$
|
15,725,513
|
|
$
|
-
|
|
$
|
-
|
|
$
|
15,725,513
|
|
Total
|
|
$
|
15,725,513
|
|
$
|
-
|
|
$
|
-
|
|
$
|
15,725,513
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
Estimated
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
December 31, 2007
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
Fixed Maturities-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity, at amortized cost-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
1,052,535
|
|
$
|
25,694
|
|
$
|
-
|
|
$
|
1,078,229
|
|
Total
|
|
$
|
1,052,535
|
|
$
|
25,694
|
|
$
|
-
|
|
$
|
1,078,229
|
|
Fixed Maturities-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
85,019,914
|
|
$
|
1,158,282
|
|
$
|
38,824
|
|
$
|
86,139,372
|
|
Corporate debt securities
|
|
|
4,208,096
|
|
|
183,478
|
|
|
-
|
|
|
4,391,574
|
|
Total
|
|
$
|
89,228,010
|
|
$
|
1,341,760
|
|
$
|
38,824
|
|
$
|
90,530,946
|
|
Equity Securities, available-for sale at fair
value-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks and nonredeemable preferred stocks
|
|
$
|
10,283,458
|
|
$
|
4,610,111
|
|
$
|
461,703
|
|
$
|
14,431,866
|
|
Total
|
|
$
|
10,283,458
|
|
$
|
4,610,111
|
|
$
|
461,703
|
|
$
|
14,431,866
|
|
Short-term investments-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit and other
|
|
$
|
21,222,533
|
|
$
|
-
|
|
$
|
-
|
|
$
|
21,222,533
|
|
Total
|
|
$
|
21,222,533
|
|
$
|
-
|
|
$
|
-
|
|
$
|
21,222,533
|
|
|
|
The
scheduled maturities of fixed maturity securities at December 31, 2008
were as follows:
|
|
|
|
|
|
|
|
|
Available-for-Sale
|
|
Held-to-Maturity
|
|
|
|
Amortized
|
|
Fair
|
|
Amortized
|
|
Fair
|
|
|
|
Cost
|
|
Value
|
|
Cost
|
|
Value
|
|
Due in one year or less
|
|
$
|
4,956,056
|
|
$
|
4,985,818
|
|
$
|
-
|
|
$
|
-
|
|
Due after one year through five years
|
|
|
24,670,000
|
|
|
25,447,610
|
|
|
7,000
|
|
|
7,294
|
|
Due five years through ten
years
|
|
|
37,521,273
|
|
|
38,916,390
|
|
|
444,681
|
|
|
455,286
|
|
Due
after ten years
|
|
|
18,776,254
|
|
|
18,358,682
|
|
|
-
|
|
|
-
|
|
Total
|
|
$
|
85,923,583
|
|
$
|
87,708,500
|
|
$
|
451,681
|
|
$
|
462,580
|
|
46
Earnings on investments for the
years ended December 31 were as follows:
|
2008
|
|
2007
|
|
2006
|
|
Fixed maturities
|
$
|
3,415,009
|
|
$
|
4,241,522
|
|
$
|
3,784,337
|
|
Equity
securities
|
|
266,860
|
|
|
255,467
|
|
|
254,110
|
|
Invested cash and other short-term investments
|
|
779,468
|
|
|
643,654
|
|
|
277,006
|
|
Miscellaneous interest
|
|
97,398
|
|
|
56,535
|
|
|
10,882
|
|
Investment income
|
$
|
4,558,735
|
|
$
|
5,197,178
|
|
$
|
4,326,335
|
|
|
|
Gross realized gains and losses on sales of
available-for-sale securities for the years ended December 31 are
summarized as follows:
|
|
|
|
|
2008
|
|
2007
|
|
|
2006
|
|
Gross realized gains:
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
$
|
25,203
|
|
$
|
23,926
|
|
$
|
20,380
|
|
Common stocks and nonredeemable preferred stocks
|
|
295,992
|
|
|
900,855
|
|
|
611,906
|
|
Total
|
|
321,195
|
|
|
924,781
|
|
|
632,286
|
|
Gross realized losses:
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
(363,633)
|
|
|
-
|
|
|
-
|
|
Common stocks and nonredeemable preferred stocks
|
|
(2,759,845)
|
|
|
(413,058)
|
|
|
(97,478)
|
|
Total
|
|
(3,123,478)
|
|
|
(413,058)
|
|
|
(97,478)
|
|
Net realized (loss)
gain
|
$
|
(2,802,283)
|
|
$
|
511,723
|
|
$
|
534,808
|
|
Also
included in net realized (loss) gain on sales of investments in the Consolidated
Statements of Income for the years ended December 31, 2008, 2007 and 2006 is
($120,093), $410,148 and $16,250, respectively, of gains (losses) from the sale
of other investments.
The
following table presents the gross unrealized losses on investment securities
and the fair value of the related securities, aggregated by investment category
and length of time that individual securities have been in a continuous loss
position at December 31, 2008 and 2007.
|
|
Less tha
n
12 M
onths
|
|
12 Mon
ths
or Lo
nger
|
|
T
ot
al
|
|
December 31, 2008
|
|
Fair Value
|
|
Unrealized loss
|
|
Fair Value
|
|
Unreal
ized loss
|
|
Fair Value
|
|
Unrealized loss
|
|
Obligations of states and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
political subdivisions
|
|
$
|
15,380,629
|
|
$
|
(984,180)
|
|
$
|
777,257
|
|
$
|
(15,590)
|
|
$
|
16,157,886
|
|
$
|
(999,770)
|
|
Total Fixed Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
$
|
15,380,629
|
|
$
|
(984,180)
|
|
$
|
777,257
|
|
$
|
(15,590)
|
|
$
|
16,157,886
|
|
$
|
(999,770)
|
|
Equity Securities
|
|
|
3,002,004
|
|
|
(559,410)
|
|
|
337,970
|
|
|
(80,467)
|
|
|
3,339,974
|
|
|
(639,877)
|
|
Total temporarily
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
impaired securities
|
|
$
|
18,382,633
|
|
$
|
(1,543,590)
|
|
$
|
1,115,227
|
|
$
|
(96,057)
|
|
$
|
19,497,860
|
|
$
|
(1,639,647)
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
political subdivisions
|
|
$
|
5,798,040
|
|
$
|
(20,164)
|
|
$
|
5,460,380
|
|
$
|
(18,660)
|
|
$
|
11,258,420
|
|
$
|
(38,824)
|
|
Total Fixed Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
$
|
5,798,040
|
|
$
|
(20,164)
|
|
$
|
5,460,380
|
|
$
|
(18,660)
|
|
$
|
11,258,420
|
|
$
|
(38,824)
|
|
Equity Securities
|
|
|
2,652,452
|
|
|
(425,176)
|
|
|
174,927
|
|
|
(36,527)
|
|
|
2,827,379
|
|
|
(461,703)
|
|
Total temporarily
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
impaired securities
|
|
$
|
8,450,492
|
|
$
|
(445,340)
|
|
$
|
5,635,307
|
|
$
|
(55,187)
|
|
$
|
14,085,799
|
|
$
|
(500,527)
|
|
As of
December 31, 2008, the Company held $16,157,886 in fixed maturity securities
with unrealized losses of $999,770. Due to the disruption in 2008 which reduced
liquidity and led to wider spreads, the Company saw an increase in unrealized
losses in its securities portfolio. The maturity duration of the debt securities
range from less than one to more than ten years. The decline in fair value of
the fixed maturity securities can be attributed primarily to changes in market
interest rates and changes in spreads over treasury securities. Because the
Company has the intent and ability to hold these securities until a recovery of
fair value, which may be maturity, the Company does not consider these
investments to be other-than-temporarily impaired.
47
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 at December 31, 2008.
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 67 and 57 securities had unrealized losses at
December 31, 2008 and December 31, 2007, 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 2008, the Company recorded an other-than-temporary impairment charge in
the amount of approximately $1.2 million related to securities.
Valuation Hierarchy
. SFAS 157 establishes a valuation hierarchy
for disclosure of the inputs to valuation used to measure fair value. This
hierarchy prioritizes 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 Companys own assumptions used to measure assets and liabilities at fair
value.
The
following table presents, by level, the financial assets carried at fair value
measured on a recurring basis as of December 31, 2008. 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.
Available-for-sale securities
|
|
|
Car
rying
Balance
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fixed maturities
|
|
|
$
|
87,708,500
|
|
$
|
-
|
|
$
|
80,111,580
|
|
$
|
7,596,920
|
|
Equity
|
|
|
|
9,965,297
|
|
|
9,965,297
|
|
|
-
|
|
|
-
|
|
Total
|
|
|
$
|
97,673,797
|
|
$
|
9,965,297
|
|
$
|
80,111,580
|
|
$
|
7,596,920
|
|
The
following table presents a reconciliation of the Companys assets measured at
fair value using significant unobservable inputs (Level 3) as defined in SFAS
157 for the year ended December 31, 2008:
|
Changes in fair value during the year
ended December 31, 2008:
|
|
Level 3
|
|
|
Beginning balance at January 1, 2008
|
|
$
|
-
|
|
|
Transfers into
Level 3
|
|
|
8,087,630
|
|
|
Unrealized loss - included in other comprehensive income
|
|
|
(490,710)
|
|
|
Ending balance at December 31,
2008
|
|
$
|
7,596,920
|
|
Valuation Techniques
. A financial instruments classification
within the valuation hierarchy is based upon the lowest level of input that is
significant to the fair value measurement.
Equity
securities are measured at fair value using quoted active market prices and are
classified within Level 1 of the valuation hierarchy. The fair value of fixed
maturity investments included in the Level 2 category was based on the market
values obtained from pricing services.
The Level 2
category generally includes corporate bonds, agency bonds and municipal bonds. A
number of the Companys investment grade corporate bonds are frequently traded
in markets that are not active or use valuation models, which use observable
market inputs, in addition to traded prices. Substantially all of these model
input assumptions are directly observable in the marketplace or can be derived
or supported by observable market data.
The
Companys investments in student loan auction rate securities (ARS) are its
only Level 3 assets, and were transferred from Level 2 because quoted prices
from broker-dealers were unavailable due to the failure of auctions. Valuations
using discounted cash flow models were used to determine the estimated fair
value of these investments as of December 31, 2008. Some of the inputs to this
model are unobservable in the market and are significant.
ARS were
structured to provide purchase and sale liquidity through a Dutch auction
process. Due to the increasingly stressed and liquidity-constrained environment
in money markets, the auction process for ARS began failing in February 2008 as
broker-dealers ceased supporting auctions with their own capital. All of the Companys
ARS are rated investment grade, comprised entirely of student loan ARS and are
substantially guaranteed by government-sponsored enterprises, and the Company
continues to receive interest income.
48
4. Property and
Equipment
Property and equipment and estimated
useful lives at December 31 are summarized as follows:
|
2008
|
|
2007
|
Land
|
$
|
1,107,582
|
|
$
|
1,107,582
|
Title plant
|
|
-
|
|
|
200,000
|
Office buildings and improvements (25
years)
|
|
3,173,432
|
|
|
3,178,632
|
Furniture, fixtures and equipment (3 to 10
years)
|
|
5,476,101
|
|
|
6,129,659
|
Automobiles (3 years)
|
|
667,659
|
|
|
586,297
|
Total
|
|
10,424,774
|
|
|
11,202,170
|
Less
accumulated depreciation
|
|
(6,002,456
)
|
|
|
(5,923,279
)
|
Property
and equipment, net
|
$
|
4,422,318
|
|
$
|
5,278,891
|
5. Reinsurance
The Company
assumes and cedes reinsurance with other insurance companies in the normal
course of business. Premiums assumed and ceded were approximately $167,000 and
$275,000, respectively, for 2008, $43,000 and $264,000, respectively, for 2007
and $22,000 and $442,000, respectively, for 2006. Ceded reinsurance is comprised
of excess of loss treaties, which protects against losses over certain amounts.
The Company remains liable to the insured for claims under ceded insurance
policies in the event that the assuming insurance companies are unable to meet
their obligations under these contracts. The Company has not paid or recovered
any reinsured losses during the three years ended December 31, 2008.
6. Reserves for Claims
Changes in
the reserves for claims for the years ended December 31 are summarized as
follows based on the year in which the policies were written:
|
2008
|
|
2007
|
|
2006
|
Balance, beginning of
year
|
$
|
36,975,000
|
|
$
|
36,906,000
|
|
$
|
34,857,000
|
Provisions related to:
|
|
|
|
|
|
|
|
|
Current year
|
|
15,564,722
|
|
|
9,787,529
|
|
|
9,845,776
|
Prior years
|
|
(358,085
)
|
|
|
347,190
|
|
|
(2,440,565
)
|
Total provision charged to operations
|
|
15,206,637
|
|
|
10,134,719
|
|
|
7,405,211
|
Claims paid, net of recoveries,
related to:
|
|
|
|
|
|
|
|
|
Current year
|
|
(5,937,616
)
|
|
|
(624,484
)
|
|
|
(618,965
)
|
Prior years
|
|
(7,006,021
)
|
|
|
(9,441,235
)
|
|
|
(4,737,246
)
|
Total claims paid, net of recoveries
|
|
(12,943,637
)
|
|
|
(10,065,719
)
|
|
|
(5,356,211
)
|
Balance, end of year
|
$
|
39,238,000
|
|
$
|
36,975,000
|
|
$
|
36,906,000
|
The Company
continually refines its reserve estimates as current loss experience develops
and credible data emerges. Movements in the reserves related to prior periods
were primarily the result of changes to estimates to better reflect the latest
reported loss data.
The
provision for claims as a percentage of net premiums written was 23.9%, 14.5%
and 10.5% in 2008, 2007 and 2006, respectively. The change in estimate for
calendar year 2008 resulted primarily from policy year 2008, which incurred
three large claims totaling approximately $6,800,000. In addition, the Company incurred
unfavorable experience during 2008 for claims related to policy year 2006. The change in estimate for
calendar year 2007 resulted primarily from policy year 2006, which incurred two
large fraud-related claims. The change in estimate for calendar year 2006
resulted primarily from lower than expected large claims payments for 2005. Due
to variances between actual and expected loss payments, loss development is
subject to significant variability. A large claim is defined as a claim with
incurred losses exceeding $250,000. Due to the small volume of large claims, the
long-tail nature of title insurance claims and the
inherent uncertainty in loss emergence patterns, large claim activity can vary
significantly between policy years. The estimated development of large claims by
policy year is therefore subject to significant changes as experience
develops.
49
In
managements opinion, the reserves are adequate to cover claim losses which
might result from pending and future claims.
7. Earnings (Loss) Per Share and Stock
Options
Basic
earnings per common share is computed by dividing net income by the
weighted-average number of common shares outstanding during the reporting
period. Diluted earnings per common share is computed by dividing net income by
the combination of dilutive potential common stock, comprised of shares issuable
under the Companys share-based compensation plans and the weighted-average
number of common shares outstanding during the reporting period. Dilutive common
share equivalents includes the dilutive effect of in-the-money share-based
awards, which are calculated based on the average share price for each period
using the treasury stock method. Under the treasury stock method, the exercise
price of a share-based award, the amount of compensation cost, if any, for
future service that the Company has not yet recognized, and the amount of
estimated tax benefits that would be recorded in additional paid-in capital, if
any, when the share-based awards are exercised are assumed to be used to
repurchase shares in the current period. The incremental dilutive potential
common shares, calculated using the treasury stock method were 29,288, and
36,289 for 2007 and 2006, respectively.
The
following table sets forth the computation of basic and diluted earnings per
share for the years ended December 31:
For the Years Ended December 31,
|
2008
|
|
2007
|
|
2006
|
Net (loss) income
|
$
|
(1,182,799
)
|
|
$
|
8,402,335
|
|
$
|
13,185,434
|
Weighted average common shares
outstanding - Basic
|
|
2,364,361
|
|
|
2,479,321
|
|
|
2,527,927
|
Incremental shares
outstanding assuming
|
|
|
|
|
|
|
|
|
the exercise of dilutive stock options and SARS (share
settled)
|
|
-
|
|
|
29,288
|
|
|
36,289
|
Weighted average common shares outstanding - Diluted
|
|
2,364,361
|
|
|
2,508,609
|
|
|
2,564,216
|
Basic earnings per common share
|
$
|
(0.50
)
|
|
$
|
3.39
|
|
$
|
5.22
|
Diluted earnings per common share
|
$
|
(0.50
)
|
|
$
|
3.35
|
|
$
|
5.14
|
Due to a net
loss in 2008, the treasury stock method for the calculation of diluted shares is
not appropriate. In 2007, 3,000 Stock Appreciation Rights
(SARS) were excluded from the computation of diluted earnings per share
because their exercise price was greater than the stock price and therefore
considered anti-dilutive. All outstanding options and SARS during 2006 were
included in the computation of diluted earnings per share because the options
exercise prices were less than or equal to the average market price of the
common shares.
The Company
has adopted Employee Stock Option Purchase Plans (the Plans) under which
options or SARS to purchase shares (not to exceed 500,000 shares) of the
Companys 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 are predominantly incentive stock options, are exercisable and vest
immediately or within one year or at 10% to 20% per year beginning on the date
of grant and generally expire in five to ten years. All SARS issued to date have
been share settled only. There were not any shares issued from SARS exercised in
2008, 2007 or 2006.
50
A summary of share-based award
transactions for all share-based award plans follows:
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
Number
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
of Shares
|
|
Pr
ice
|
|
Term (years)
|
|
Value
|
Outstanding as of January 1, 2006
|
82,001
|
|
|
$
|
20.50
|
|
|
|
|
|
SARS
granted
|
3,000
|
|
|
|
43.78
|
|
|
|
|
|
Options exercised
|
(9,340
)
|
|
|
|
17.21
|
|
|
|
|
|
Options
cancelled/forfeited/expired
|
(1,610
)
|
|
|
|
22.12
|
|
|
|
|
|
Outstanding as of December 31, 2006
|
74,051
|
|
|
$
|
21.82
|
|
4.34
|
|
$
|
2,338,246
|
SARS
granted
|
3,000
|
|
|
|
49.04
|
|
|
|
|
|
Options exercised
|
(15,390
)
|
|
|
|
23.74
|
|
|
|
|
|
Options
cancelled/forfeited/expired
|
(1,181
)
|
|
|
|
17.38
|
|
|
|
|
|
Outstanding as of December 31, 2007
|
60,480
|
|
|
$
|
22.77
|
|
4.11
|
|
$
|
1,377,390
|
SARS
granted
|
3,000
|
|
|
|
47.88
|
|
|
|
|
|
Options exercised
|
(12,360
)
|
|
|
|
18.67
|
|
|
|
|
|
Options
cancelled/forfeited/expired
|
(4,050
)
|
|
|
|
29.96
|
|
|
|
|
|
Outstanding as of December 31, 2008
|
47,070
|
|
|
$
|
24.83
|
|
3.67
|
|
$
|
666,079
|
|
Exercisable as of December 31, 2008
|
33,475
|
|
|
$
|
26.29
|
|
3.72
|
|
$
|
439,377
|
|
Unvested as of December 31, 2008
|
13,595
|
|
|
$
|
21.26
|
|
3.53
|
|
$
|
226,702
|
The
aggregate intrinsic value is calculated as the difference between the exercise
price of the underlying awards and the quoted price of the Companys common
stock at December 31, 2008. In 2006 and 2007, there were no options or SARS excluded from the
calculation as all options and SARS were in the money. The intrinsic value of
options exercised during 2008 was approximately $327,000.
The following tables summarize
information about fixed stock options outstanding at December 31, 2008:
|
|
|
|
|
|
|
|
O
ptions
Outstanding at Yea
r-End
|
|
Options Exercisable at Year-En
d
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Average
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Number
|
|
Remaining
|
|
Exercise
|
|
Number
|
|
Exercise
|
Range of Exercise Price
s
|
|
Outstanding
|
|
Contractual Life
|
|
Price
|
|
Exercisable
|
|
Price
|
$
|
10.00
|
|
-
|
|
$
|
12.00
|
|
8,870
|
|
1.4
|
|
$
|
11.29
|
|
6,155
|
|
$
|
11.19
|
|
|
13.06
|
|
-
|
|
|
15.58
|
|
5,350
|
|
2.2
|
|
|
14.93
|
|
3,750
|
|
|
14.90
|
|
|
17.25
|
|
-
|
|
|
19.35
|
|
2,150
|
|
3.2
|
|
|
18.96
|
|
1,100
|
|
|
18.93
|
|
|
20.00
|
|
-
|
|
|
22.75
|
|
13,500
|
|
3.5
|
|
|
21.24
|
|
7,750
|
|
|
20.99
|
|
|
25.28
|
|
-
|
|
|
36.79
|
|
9,200
|
|
5.5
|
|
|
31.05
|
|
7,470
|
|
|
31.05
|
|
$
|
10.00
|
|
-
|
|
$
|
36.79
|
|
39,070
|
|
3.3
|
|
$
|
20.30
|
|
26,225
|
|
$
|
20.60
|
|
|
|
|
|
|
|
|
|
|
|
SARS Outstanding at Year
-End
|
|
SARS Exer
cisable at Year-End
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Average
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Number
|
|
Remaining
|
|
Exercise
|
|
Number
|
|
Exercise
|
Range of Exercise Prices
|
|
Outstanding
|
|
Contractual Life
|
|
Price
|
|
Exercisable
|
|
Price
|
$
|
43.78
|
|
-
|
|
$
|
49.04
|
|
8,000
|
|
5.4
|
|
$
|
46.96
|
|
7,250
|
|
$
|
46.87
|
|
In 2008, 9,365 options and SARS
vested with a fair value of approximately $91,000.
During the
second quarter of 2008, the Company issued 3,000 share settled SARS to the
directors of the Company. SARS give the holder the right to receive stock in the
appreciation in the value of shares of stock from the grant date for a specified
period of time, and as a result, are accounted for as equity instruments. As
such, these were valued using the Black-Scholes option valuation model. The fair
value of each award is estimated on the date of grant
51
using the Black-Scholes option valuation
model with the weighted-average assumptions noted in the following table.
Expected volatilities are based on both the implied and historical volatility of
the Companys stock. The Company uses historical data to estimate option
exercise and employee termination within the valuation model. The expected term
of awards represents the period of time that options granted are expected to be
outstanding. The interest rate for periods during the expected life of the award
is based on the U.S. Treasury yield curve in effect at the time of the grant.
The weighted-average fair value for the SARS issued was $12.263 and was
estimated using the following weighted-average assumptions:
|
|
2008
|
|
Expected Life in Years
|
5.0
|
|
Volatility
|
24.17
%
|
|
Interest Rate
|
3.09
%
|
|
Yield
Rate
|
0.60
%
|
The fair
value of each SAR granted is estimated on the date of grant using the
Black-Scholes option pricing method with the following weighted-average
assumptions:
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
Expected Life in Years
|
|
5.0
|
|
5.0
|
|
5.0
|
|
|
Volatility
|
|
24
%
|
|
25
%
|
|
27
%
|
|
|
Interest Rate
|
|
3.1
%
|
|
4.6
%
|
|
5.0
%
|
|
|
Yield
Rate
|
|
0.6
%
|
|
0.5
%
|
|
0.6
%
|
|
There was
approximately $93,000 of compensation expense relating to shares vesting on or
before December 31, 2008 included in salaries, employee benefits and payroll
taxes of the consolidated statements of income (loss). As of December 31, 2008,
there was approximately $155,000 of total unrecognized compensation cost related
to unvested share-based compensation arrangements granted under the Companys
stock awards plans. That cost is expected to be recognized over a
weighted-average period of 1.2 years.
The
estimated weighted-average grant-date fair value of SARS granted for the years
ended December 31 was as follows:
For
the Years Ended December 31,
|
|
2008
|
|
2007
|
|
2006
|
|
Exercise price equal to market price on
date of grant:
|
|
|
|
|
|
|
|
|
|
|
Weighted-average market price
|
|
$
|
47.88
|
|
$
|
49.04
|
|
$
|
43.78
|
|
Weighted-average grant-date fair value
|
|
|
12.26
|
|
|
14.68
|
|
|
13.96
|
|
There are no
stock options or SARS granted where the exercise price is less than the market
price on the date of grant.
8. Income Taxes
The components of income tax
(benefit) expense for the years ended December 31 are summarized as
follows:
For the Years Ended December 31,
|
|
2008
|
|
2007
|
|
2006
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(1,857,000
)
|
|
$
|
3,489,000
|
|
$
|
4,042,000
|
State
|
|
|
24,000
|
|
|
237,000
|
|
|
334,000
|
Total
|
|
|
(1,833,000
)
|
|
|
3,726,000
|
|
|
4,376,000
|
Deferred (benefit)
expense:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(147,097
)
|
|
|
(315,518
)
|
|
|
(210,552
)
|
State
|
|
|
(53,903
)
|
|
|
11,518
|
|
|
(21,448
)
|
Total
|
|
|
(201,000
)
|
|
|
(304,000
)
|
|
|
(232,000
)
|
Total
|
|
$
|
(2,034,000
)
|
|
$
|
3,422,000
|
|
$
|
4,144,000
|
For state
income tax purposes, ITIC and NE-ITIC generally pay only a gross premium tax
found in premium and retaliatory taxes in the consolidated statements of income
(loss).
52
At December
31, the approximate tax effect of each component of deferred income tax assets
and liabilities is summarized as follows:
For
the Years Ended December 31,
|
2008
|
|
2007
|
Deferred income tax assets:
|
|
|
|
|
|
Recorded reserves for claims, net of statutory premium
reserves
|
$
|
847,755
|
|
$
|
1,209,018
|
Accrued benefits and retirement services
|
|
2,568,958
|
|
|
2,359,699
|
FASB Statement No. 158
|
|
59,022
|
|
|
31,325
|
Other-than-temporary impairment of assets
|
|
428,609
|
|
|
-
|
Reinsurance and commissions payable
|
|
18,263
|
|
|
32,829
|
Allowance for doubtful accounts
|
|
440,980
|
|
|
737,800
|
Net operating loss carryforward
|
|
83,000
|
|
|
64,000
|
Excess of book over tax depreciation
|
|
73,594
|
|
|
10,125
|
Other
|
|
260,205
|
|
|
221,784
|
Total
|
|
4,780,386
|
|
|
4,666,580
|
Deferred income tax liabilities:
|
|
|
|
|
|
Net unrealized gain on investments
|
|
867,044
|
|
|
1,854,147
|
Discount accretion on tax-exempt obligations
|
|
18,984
|
|
|
24,515
|
Other
|
|
53,063
|
|
|
162,423
|
Total
|
|
939,091
|
|
|
2,041,085
|
Net deferred income tax assets
|
$
|
3,841,295
|
|
$
|
2,625,495
|
At December
31, 2008 and 2007, no valuation allowance was recorded. Based upon the Companys
historical results of operations, the existing financial condition of the
Company and managements assessment of all other available information,
management believes that it is more likely than not that the benefit of these
net deferred income tax assets will be realized.
A
reconciliation of income tax as computed for the years ended December 31 at the
U.S. federal statutory income tax rate (34%) to income tax expense
follows:
For the Years Ended December
31,
|
2008
|
|
2007
|
|
2006
|
Anticipated income tax
(benefit) expense
|
$
|
(1,093,712
)
|
|
$
|
4,020,274
|
|
$
|
5,892,008
|
Increase (reduction) related
to:
|
|
|
|
|
|
|
|
|
State income taxes, net of federal income tax benefit
|
|
15,840
|
|
|
156,420
|
|
|
220,400
|
Tax-exempt interest income (net of amortization)
|
|
(970,303
)
|
|
|
(1,247,536
)
|
|
|
(2,044,576
)
|
Misclassified tax-exempt interest related to prior
years
|
|
-
|
|
|
425,000
|
|
|
-
|
Other, net
|
|
14,175
|
|
|
67,842
|
|
|
76,168
|
(Benefit) provision for income taxes
|
$
|
(2,034,000
)
|
|
$
|
3,422,000
|
|
$
|
4,144,000
|
During the
fourth quarter of 2007, the Company discovered certain understatements in the
provision for income taxes in its financial statements in 2006 and the first
three quarters of 2007 relating to taxable municipal bonds that had been
previously misclassified as tax exempt by the Companys custodian
bank.
The Company
adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes an interpretation of FASB Statement No. 109,
(FIN 48) on January 1, 2007. This interpretation requires that the Company
recognize in its financial statements the impact of a tax position if that
position is more likely than not of being sustained on an audit, based on the
technical merits of the position. As a result of the implementation of FIN 48,
the Company made a comprehensive review of its uncertain tax positions in
accordance with recognition standards established by FIN 48. In this regard, an
uncertain tax position represents the Companys expected treatment of a tax
position taken in a filed tax return, or planned to be taken in a future tax
return, that has not been reflected in measuring income tax expense for
financial reporting purposes.
The amount
of unrecognized tax benefit or liability may increase or decrease in the future
for various reasons, including adding amounts for current tax year positions,
expiration of open income tax returns due to the statute of limitation, changes
in managements judgment about the level of uncertainty, status of examinations,
litigation and legislative activity and the additions or eliminations of
uncertain tax positions.
53
The
Companys policy is to report interest and penalties related to unrecognized tax
benefits or liabilities in the Consolidated Statements of Income. As of December
31, 2008, there was $14,710 related to interest and $10,258 related to penalties
recorded in other operating expenses.
The Company,
or one of its subsidiaries, files income tax returns in the U.S. federal
jurisdiction and various states. With few exceptions, the Company is no longer
subject to U.S. federal or state and local examinations by taxing authorities
for years before 2005.
The following table sets forth the
total amounts of unrecognized tax benefits.
Balance as of January 1,
2008
|
$
|
123,605
|
Additions related to prior years
|
|
10,437
|
Reductions related to prior
years
|
|
(47,540)
|
Settlements
|
|
-
|
Balance as of December 31,
2008
|
$
|
86,502
|
In the
balance of unrecognized tax benefits at December 31, 2008, approximately $87,000
relates to tax positions and interest for which the statute of limitations will
expire within the next 12 months. Of the total unrecognized tax benefits,
approximately $62,000 represents the amount that if recognized, would favorably
affect the effective tax rate in future periods. Included in the $87,000 are
penalties and interest in the amount of approximately $25,000.
9. Leases
The Company
leases certain office facilities and equipment under operating leases. Rental
expense also includes occasional rental of automobiles. Rent expense totaled
approximately $964,000, $930,000 and $889,000 in 2008, 2007 and 2006,
respectively. The future minimum lease payments under operating leases that have
initial or remaining noncancelable lease terms in excess of one year as of
December 31, 2008, are summarized as follows:
Year Ended:
|
|
|
2009
|
$
|
710,419
|
2010
|
|
422,292
|
2011
|
|
184,823
|
2012
|
|
58,878
|
2013
|
|
-
|
Total
|
$
|
1,376,412
|
10. Retirement Agreements and Other
Postretirement Benefit Plan
In 2008, the
Company adopted a 401(k) savings plan. To participate, individuals must be
employed for one full year and work at least 1,000 hours annually. The Company
makes a 3% Safe Harbor contribution and also has the option annually to make a
discretionary profit share contribution. Individuals may elect to make
contributions up to the maximum deductible amount as determined by the Internal
Revenue Code. Expenses related to the 401(k) for 2008 were approximately
$513,000. Prior to 2008, the company had a Simplified Employee Pension Plan,
where after three years of service, employees were eligible to participate.
Contributions, which were made at the discretion of the Company, were based on
the employees salary, but in no case did such contribution exceed $45,000
annually per employee. All contributions were deposited in Individual Retirement
Accounts for participants. Contributions expensed under this plan were
approximately $878,000, $712,000 for 2007 and 2006, respectively.
In November
2003, ITIC, a wholly owned subsidiary of the Company, entered into employment
agreements with the Chief Executive Officer, Chief Financial Officer and the
Chief Operating Officer of ITIC. These individuals also serve as the Chief
Executive Officer, President and Executive Vice President, respectively, of the
Company. The agreements provide compensation and life, health, dental and vision
benefits upon the occurrence of specific events, including death, disability,
retirement, termination without cause or upon a change in control. The
agreements provide for annual salaries to be fixed by the Compensation Committee
and, among other benefits, ITIC shall make quarterly contributions pursuant to a
supplemental executive retirement account on behalf of each executive equal to
22% of the base salary and bonus paid to each during such quarter through
September 30, 2008. The obligation to make contributions to the
supplemental executive
retirement agreements has expired and has been removed from
54
the amended and restated employment
agreement effective January 1, 2009. The employment agreements also prohibit each
of these executives from competing with ITIC and its parent, subsidiaries and
affiliates in the state of North Carolina while employed by ITIC and for a
period of two years following termination of their employment. In addition,
during the second quarter of 2004, ITIC entered into nonqualified deferred
compensation plan agreements with these executives. The amount accrued for these
agreements at December 31, 2008 and 2007 was approximately $6,574,000 and
$5,496,000, respectively, which includes postretirement compensation and health
benefits, and was calculated based on the terms of the contract. These executive
contracts are accounted for on an individual contract basis. On December 24,
2008, the executive contracts were amended effective January, 1, 2009 to bring
them into compliance with Section 409A of the Internal Revenue Code, and to
permit a special 2008 distribution election as permitted under Section 409A. The
special distribution election provided that each participant may elect, no later
than December 31, 2008, to receive a one-time lump sum distribution on January
15, 2009 of all amounts in the participants account. Payouts in January 2009
associated with this distribution were approximately $2,456,000. In addition,
the nonqualified deferred compensation agreement was amended and restated to
terminate all company contributions to this plan beginning January 1, 2009. In
connection with such termination, the employment agreements were amended and
restated to provide for an annual cash payment to the officers equal to the
amounts the Company would have contributed to their accounts under its 401(k)
Plan if such contributions were not limited by the federal tax laws, less the
amount of any contributions that the Company actually make to their accounts
under the Companys 401(k) Plan.
On November
17, 2003, ITIC entered into employment agreements with key executives that
provide for the continuation of certain employee benefits upon retirement. The
executive employee benefits include health insurance, dental insurance, vision
insurance and life insurance. The plan is unfunded. Estimated future benefit
payouts expected to be paid for each of the next five years are $3,226 in 2009,
$3,441 in 2010, $3,646 in 2011, $4,530 in 2012, $5,600 in 2013 and $53,481 in
the next five years thereafter.
Cost of the Companys postretirement
benefit plan included the following components:
|
2008
|
|
2007
|
|
2006
|
Net periodic benefit
cost
|
|
|
|
|
|
|
|
|
Service cost benefits earned during the year
|
$
|
17,335
|
|
$
|
13,974
|
|
$
|
14,227
|
Interest cost on projected benefit obligation
|
|
19,044
|
|
|
14,646
|
|
|
14,061
|
Amortization of unrecognized prior service cost
|
|
20,388
|
|
|
20,388
|
|
|
20,388
|
Amortization of unrecognized gains
|
|
-
|
|
|
(2,604
)
|
|
|
(1,665
)
|
Net periodic benefit cost at end of year
|
$
|
56,767
|
|
$
|
46,404
|
|
$
|
47,011
|
Under the
disclosure provisions of SFAS 158, the Company is required to recognize the
funded status (i.e., the difference between the fair value of the plan assets
and the accumulated postretirement benefit obligations of its benefit plan in
its consolidated balance sheet, with a corresponding adjustment to accumulated
other comprehensive income, net of tax. The net amount in accumulated other
comprehensive income is $ 173,594 ($114,573 net of tax) and $92,132 ($60,808 net
of tax) for December 31 2008 and 2007, respectively, and represents the net
unrecognized actuarial losses and unrecognized prior service costs. The effects
of adopting the provisions of SFAS 158 on the Companys consolidated balance
sheets at December 31, 2008 and 2007 are presented in the following
table:
|
2008
|
|
2007
|
Funded
status
|
|
|
|
|
|
Actuarial present value of future
benefits:
|
|
|
|
|
|
Fully eligible active employee
|
$
|
(41,001
)
|
|
$
|
(34,622
)
|
Non-eligible active employees
|
|
(429,648
)
|
|
|
(297,798
)
|
Plan assets
|
|
-
|
|
|
-
|
Funded status of accumulated postretirement benefit
obligation, recognized in
|
|
|
|
|
|
other liabilities
|
$
|
(470,649
)
|
|
$
|
(332,420
)
|
55
Development
of the accumulated postretirement benefit obligation for the years ended
December 31, 2008 and 2007 includes the following:
|
2008
|
|
2007
|
Accrued postretirement benefit
obligation at beginning of year
|
$
|
(240,288
)
|
|
$
|
(193,884
)
|
Service cost benefits earned during the year
|
|
(17,335
)
|
|
|
(13,974
)
|
Interest cost on projected benefit
obligation
|
|
(19,044
)
|
|
|
(14,646
)
|
Amortization cost, net
|
|
(20,388
)
|
|
|
(17,784
)
|
Unrecognized prior service
cost
|
|
(93,963
)
|
|
|
(114,351
)
|
Unrecognized loss
(gain)
|
|
(79,631
)
|
|
|
22,219
|
Funded status
of accumulated postretirement benefit obligation at end of
year
|
$
|
(470,649
)
|
|
$
|
(332,420
)
|
|
|
|
|
|
|
The changes in amounts related
to accumulated other comprehensive income, pre-tax, is as
follows:
|
|
|
|
|
|
|
|
2008
|
|
2007
|
Balance at beginning of year
|
$
|
92,132
|
|
$
|
61,834
|
Components of Accumulated Other Comprehensive Income
|
|
|
|
|
|
Unrecognized prior service cost
|
|
(20,388
)
|
|
|
(20,388
)
|
Unrecognized gain
|
|
101,850
|
|
|
50,686
|
Balance at end of
year
|
$
|
173,594
|
|
$
|
92,132
|
|
|
|
|
|
|
For 2009, the amounts in
accumulated other comprehensive income, pre-tax, to be recognized as
components of net periodic benefit costs are:
|
|
|
|
|
|
|
|
Projected
|
|
|
|
|
2009
|
|
|
|
Amortization of unrecognized prior service
cost
|
$
|
20,388
|
|
|
|
Amortization of unrecognized
loss
|
|
2,014
|
|
|
|
Net periodic benefit cost at
end of year
|
$
|
22,402
|
|
|
|
Weighted-average
actuarial assumptions used to determine benefit obligations at December 31 were:
Assumed health care cost trend rates
do have an effect on the amounts reported for the postretirement benefit plan.
The following illustrates the effects on the net periodic postretirement benefit
cost and the accumulated postretirement benefit obligation of a one percentage
point increase and one percentage point decrease in the assumed health care cost
trend rate as of December 31, 2008:
|
|
One-
|
|
One-
|
|
|
Percentage
|
|
Percentage
|
|
|
Point
|
|
Point
|
|
|
In
crease
|
|
D
ecrease
|
1.
|
Net periodic postretirement benefit cost
|
|
|
|
|
|
|
Effect on the
service cost component
|
$
|
6,084
|
|
$
|
(4,651
)
|
|
Effect on interest
cost
|
|
6,328
|
|
|
(4,869
)
|
|
Total effect on the net periodic
postretirement benefit cost
|
$
|
12,412
|
|
$
|
(9,520
)
|
2.
|
Accumulated postretirement benefit obligation (including
active
|
|
|
|
|
|
|
employees who are not fully eligible)
|
|
|
|
|
|
|
Effect on those
currently receiving benefits (retirees and spouses)
|
$
|
-
|
|
$
|
-
|
|
Effect on active fully eligible
|
|
2,896
|
|
|
(2,629
)
|
|
Effect on actives not yet
eligible
|
|
107,156
|
|
|
(82,044
)
|
|
Total effect on the accumulated
postretirement benefit obligation
|
$
|
110,052
|
|
$
|
(84,673
)
|
1
1. Commitments and Contingencies
The Company
and its subsidiaries are involved in various routine legal proceedings that are
incidental to their business. In the Companys 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 Companys consolidated financial condition or
operations.
56
Escrows and Like-Kind
Exchanges
As a service
to its customers, the Company, through ITIC, administers escrow and trust
deposits representing earnest money received under real estate contracts,
undisbursed amounts received for settlement of mortgage loans and indemnities
against specific title risks. Cash held by the Company for these purposes was
approximately $14,492,000 and $23,665,000 as of December 31, 2008 and 2007,
respectively. In administering tax-deferred property exchanges, the Companys
subsidiary, ITEC, serves as a qualified intermediary for exchanges, holding the
net proceeds from sales transactions from relinquished property to be used for
purchase of replacement property. Another Company subsidiary, ITAC, serves as
exchange accommodation titleholder and, through limited liability companies
that are wholly owned subsidiaries of ITAC, holds
property for exchangers in reverse exchange transactions. Like-kind exchange
deposits and reverse exchange property totaled approximately $88,124,000 and
$115,515,000 as of December 31, 2008 and 2007, respectively. These amounts are
not considered assets of the Company and, therefore, are excluded from the
accompanying consolidated balance sheets. Exchange services revenues include
earnings on these deposits; therefore, investment income is shown as exchange
services revenue, rather than investment income. The Company remains
contingently liable for the disposition of these deposits and for the transfers
of property, disbursements of proceeds and the return on the proceeds at the
agreed upon rate. These like-kind exchange funds are primarily invested in money
market and other short-term investments, including $4.4 million of auction rate
securities (ARS), at December 31, 2008. At December 31, 2008, ITEC had
recorded a liability of approximately $209,000 as a result of impairment of
assets specifically related to funds held. The Company does not believe the
current illiquidity of these securities will impact its operations, as it
believes it has sufficient capital to provide continuous and immediate liquidity
as necessary.
12. Statutory Accounting
The
consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America which
differ in some respects from statutory accounting practices prescribed or
permitted in the preparation of financial statements for submission to insurance
regulatory authorities.
Consolidated
stockholders equity on a statutory basis was $82,305,151 and $93,079,819 as of
December 31, 2008 and 2007, respectively. Net (loss) income on a statutory basis
was $(3,148,117), $7,980,954 and $11,684,065 for the twelve months ended
December 31, 2008, 2007 and 2006.
13. Segment Information
Consistent
with SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information
,
the Company has aggregated its operating segments into two reportable
segments: 1) title insurance services; and 2) tax-deferred exchange 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 residential, institutional, commercial
and industrial properties.
The
tax-deferred exchange services segment acts as an intermediary in tax-deferred
exchanges of property held for productive use in a trade or business or for
investments and serves as exchange accommodation titleholder, holding property
for exchangers in reverse exchange transactions. Revenues are derived from fees
for handling exchange transactions.
57
Provided
below is selected financial information about the Companys operations by
segment for the three years ended December 31, 2008, 2007 and 2006:
|
Title
|
|
Exchange
|
|
All
|
|
Intersegment
|
|
|
|
2008
|
Insurance
|
|
Services
|
|
Other
|
|
Elimination
|
|
Total
|
Operating
revenues
|
$
|
65,507,644
|
|
$
|
1,163,569
|
|
$
|
3,594,694
|
|
$
|
(779,005
)
|
|
$
|
69,486,902
|
Investment income
|
|
3,576,758
|
|
|
37,839
|
|
|
1,025,807
|
|
|
(81,669
)
|
|
|
4,558,735
|
Net realized loss on investments
|
|
(2,661,018
)
|
|
|
-
|
|
|
(261,358
)
|
|
|
-
|
|
|
(2,922,376
)
|
Total revenues
|
$
|
66,423,384
|
|
$
|
1,201,408
|
|
$
|
4,359,143
|
|
$
|
(860,674
)
|
|
$
|
71,123,261
|
Operating expenses
|
|
69,901,591
|
|
|
1,214,363
|
|
|
4,003,111
|
|
|
(779,005
)
|
|
|
74,340,060
|
(Loss) income before taxes
|
$
|
(3,478,207
)
|
|
$
|
(12,955
)
|
|
$
|
356,032
|
|
$
|
(81,669
)
|
|
$
|
(3,216,799
)
|
Assets
|
$
|
102,408,285
|
|
$
|
480,159
|
|
$
|
36,969,744
|
|
$
|
-
|
|
$
|
139,858,188
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
$
|
71,827,793
|
|
$
|
4,340,062
|
|
$
|
3,485,281
|
|
$
|
(829,898
)
|
|
$
|
78,823,238
|
Investment
income
|
|
4,024,900
|
|
|
29,501
|
|
|
1,212,779
|
|
|
(70,002
)
|
|
|
5,197,178
|
Net realized gain on investments
|
|
513,252
|
|
|
-
|
|
|
408,619
|
|
|
-
|
|
|
921,871
|
Total revenues
|
$
|
76,365,945
|
|
$
|
4,369,563
|
|
$
|
5,106,679
|
|
$
|
(899,900
)
|
|
$
|
84,942,287
|
Operating expenses
|
|
68,896,939
|
|
|
1,546,437
|
|
|
3,504,474
|
|
|
(829,898
)
|
|
|
73,117,952
|
Income before taxes
|
$
|
7,469,006
|
|
$
|
2,823,126
|
|
$
|
1,602,205
|
|
$
|
(70,002
)
|
|
$
|
11,824,335
|
Assets
|
$
|
111,384,663
|
|
$
|
1,210,438
|
|
$
|
37,047,319
|
|
$
|
-
|
|
$
|
149,642,420
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
$
|
71,733,764
|
|
$
|
5,980,027
|
|
$
|
2,915,065
|
|
$
|
(844,533
)
|
|
$
|
79,784,323
|
Investment
income
|
|
3,759,367
|
|
|
18,138
|
|
|
619,231
|
|
|
(70,401
)
|
|
|
4,326,335
|
Net realized gain on investments
|
|
551,058
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
551,058
|
Total revenues
|
$
|
76,044,189
|
|
$
|
5,998,165
|
|
$
|
3,534,296
|
|
$
|
(914,934
)
|
|
$
|
84,661,716
|
Operating expenses
|
|
63,667,391
|
|
|
1,419,923
|
|
|
3,089,501
|
|
|
(844,533
)
|
|
|
67,332,282
|
Income before taxes
|
$
|
12,376,798
|
|
$
|
4,578,242
|
|
$
|
444,795
|
|
$
|
(70,401
)
|
|
$
|
17,329,434
|
Assets
|
$
|
114,599,621
|
|
$
|
1,087,383
|
|
$
|
27,829,374
|
|
$
|
-
|
|
$
|
143,516,378
|
For 2008,
operating revenues in the Exchange Services Segment includes a loss of $2,572
related to the disposal of assets.
14. Stockholders Equity
On November
12, 2002, the Companys Board of Directors amended the Companys Articles of
Incorporation, creating a series of Class A Junior Participating Preferred Stock
(the Class A Preferred Stock). There are 1,000,000 shares of Preferred Stock
authorized and 100,000 of these shares have been designated Class A Junior
Participating Preferred Stock. The Class A Junior Participating Preferred Stock
is senior to common stock in dividends or distributions of assets upon
liquidations, dissolutions or winding up of the Company. Dividends on the Class
A Preferred Stock are cumulative and accrue from the quarterly dividend payment
date. Each share of Class A Preferred Stock entitles the holder thereof to 100
votes on all matters submitted to a vote of shareholders of the Company. These
shares were reserved for issuance under the Shareholder Rights Plan (the
Plan), which was adopted on November 21, 2002, by the Companys Board of
Directors. Under the terms of the Plan, the Companys common stock acquired by a
person or a group buying 15% or more of the Companys common stock would be
diluted, except in transactions approved by the Board of Directors.
In
connection with the Plan, the Companys Board of Directors declared a dividend
distribution of one right (a Right) for each outstanding share of the
Companys common stock paid on December 16, 2002, to shareholders of record at
the close of business on December 2, 2002. Each Right entitles the registered
holder to purchase from the Company a unit (a Unit) consisting of one
one-hundredth of a share of Class A Preferred Stock at a purchase price of $80
per Unit. Under the Plan, the Rights detach and become exercisable upon the
earlier of (a) ten (10) days following public announcement that a person or
group of affiliated or associated persons has acquired, or obtained the right to
acquire, beneficial ownership of 15% or more of the outstanding shares of the
Companys common stock, or (b) ten (10) business days following the commencement
of, or first public announcement of the intent of a person or
58
group to commence, a tender offer or
exchange offer that would result in a person or group beneficially owning 15% or
more of such outstanding shares of the Companys common stock. The exercise
price, the kind and the number of shares covered by each right are subject to
adjustment upon the occurrence of certain events described in the
Plan.
If the
Company is acquired in a merger or consolidation in which the Company is not the
surviving corporation, or the Company engages in a merger or consolidation in
which the Company is the surviving corporation and the Companys common stock is
changed or exchanged, or more than 50% of the Companys assets or earning power
is sold or transferred, the Rights entitle a holder (other than the acquiring
person or group) to buy, at the exercise price, stock of the acquiring company
having a market value equal to twice the exercise price. Following an
acquisition by such person or group of 50% or more of the outstanding common
stock, the Companys Board of Directors may exchange the Rights (other than the
Rights owned by such person or group), in whole or in part, at an exchange ratio
of one share of the Companys common stock, or one one-hundredth of a share of
Preferred Stock, per Right.
The Rights
expire on November 11, 2012, and are redeemable upon action by the Board of
Directors at a price of $0.01 per right at any time before they become
exercisable. Until the Rights become exercisable, they are evidenced only by the
common stock certificates and are transferred with and only with such
certificates.
15. Concentration of
Risk
Financial
instruments that potentially subject the Company to concentrations of credit
risk consist primarily of cash and cash equivalents. The Company invests its
cash and cash equivalents into high credit quality security instruments.
Deposits which exceed $250,000 at each institution are not insured by the
Federal Deposit Insurance Corporation. Of the $5.2 million in cash and cash
equivalents on the Consolidated Balance Sheets at December 31, 2008, $5.4
million was not insured by the Federal Deposit Insurance Corporation. The total
amount not insured is higher than cash and cash equivalents due to larger bank
than book balances.
The Company
generates a significant amount of title insurance premiums in North Carolina. In
2008, 2007 and 2006, North Carolina accounted for 47.9%, 49.2% and 49.8% of
total direct title premiums, respectively.
16. Related Party
Transactions
During 2008,
the Company repurchased 106,000 shares of common stock at a value of
approximately $4,922,000 from a non-employee director and family member of that
director. The shares were repurchased in three separate transactions pursuant to
the purchase plan that was publicly announced on June 5, 2000. The shares were
purchased at the current bid price on the day of each transaction.
The Company
has investments in unconsolidated affiliates in limited liability companies that
are accounted for under the equity method of accounting. The following table
sets forth the approximate values by year found within each financial statement
classification:
Financial
Statement Classification,
|
|
|
|
|
|
|
|
|
|
Consolidated Balance
Sheets
|
|
2008
|
|
2007
|
|
|
|
Other investments
|
|
$
|
1,146,000
|
|
$
|
841,000
|
|
|
|
Premium and fees
receivable
|
|
|
432,000
|
|
|
401,000
|
|
|
|
|
Financial
Statement Classification,
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Income
(Loss)
|
|
2008
|
|
2007
|
|
2006
|
Other income
|
|
$
|
1,175,000
|
|
$
|
953,000
|
|
$
|
633,000
|
59
ITEM 9.
|
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None
ITEM 9A. CONTROLS AND
PROCEDURES
Disclosure Controls and
Procedures
An
evaluation was performed by the Companys management, including its Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Companys disclosure controls and procedures. Based
on that evaluation, the Companys Chief Executive Officer and Chief Financial
Officer concluded that the Companys disclosure controls and procedures were
effective as of December 31, 2008 for the purpose of providing reasonable
assurance that the information required to be disclosed in the reports the
Company files or submits under the Securities Exchange Act of 1934 (the Act)
(i) is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms and (ii) is accumulated and communicated
to the Companys management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosures.
Changes in Internal Control Over
Financial Reporting
During the
quarter ended December 31, 2008, there were no changes in the Companys internal
control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over
financial reporting.
Reports of Management and Independent
Registered Public Accounting Firm on Internal Control Over Financial
Reporting
Management
has assessed, and the Companys independent registered public accounting firm,
Dixon Hughes PLLC, has audited, the Companys internal control over financial
reporting as of December 31, 2008. The unqualified reports of management and
Dixon Hughes PLLC thereon are included in Item 8 of this Annual Report on Form
10-K and are incorporated by reference herein.
ITEM 9B. OTHER
INFORMATION
There was no
information required to be disclosed in a report on Form 8-K during the fourth
quarter of the year that has not been reported.
60
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS
AND CORPORATE GOVERNANCE
The
information called for by this item is incorporated by reference to the material
under the captions Proposals Requiring Your Vote, General Information -
Section 16(a) Beneficial Ownership Reporting Compliance, Corporate Governance
Board of Directors and Committees The Audit Committee and Corporate
Governance Code of Business Conduct and Ethics in the Companys definitive
Proxy Statement for the Annual Meeting of Shareholders to be held on May 20,
2009. Other information with respect to the executive officers of the Company is
included at the end of Part I of this Form 10-K Annual Report under the separate
caption Executive Officers of the Company.
ITEM 11. EXECUTIVE
COMPENSATION
The
information called for by this item is set forth under the captions Executive
Compensation, Compensation of Directors, Corporate Governance Compensation
Committee Interlocks and Insider Participation and Compensation Committee
Report in the Companys definitive Proxy Statement relating to the Annual
Meeting of Shareholders to be held on May 20, 2009 and is incorporated by
reference in this Form 10-K Annual Report.
ITEM 12.
|
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
The
information pertaining to securities ownership of certain beneficial owners and
management is set forth under the caption Stock Ownership of Certain Beneficial
Owners and Management in the Companys definitive Proxy Statement relating to
the Annual Meeting of Shareholders to be held on May 20, 2009 and is
incorporated by reference in this Form 10-K Annual Report.
The
following table provides information about the Companys compensation plans
under which equity securities are authorized for issuance as of December 31,
2008. The Company does not have any equity compensation plans that have not been
approved by its shareholders.
Equity Compensation Plan
Information
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
Number of Securities to
|
|
Weighted-Average
|
|
Remaining Available
|
|
|
be Issued Upon Exercise
|
|
Exercise Price of
|
|
for Future Issuance
|
|
|
of Outstanding Options,
|
|
Outstanding Options,
|
|
Under Equity
|
Plan Category
|
|
Warrants and Rights
|
|
Warrants and R
ights
|
|
Compensation Plans
|
Equity compensation plans approved by
|
|
|
|
|
|
|
|
|
|
|
|
|
shareholders
|
|
|
47,070
|
|
|
$
|
24.83
|
|
|
|
237,701
|
|
Equity compensation plans not approved by
|
|
|
|
|
|
|
|
|
|
|
|
|
shareholders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
47,070
|
|
|
$
|
24.83
|
|
|
|
237,701
|
|
ITEM 13.
|
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
|
The
information called for by this item is set forth under the captions Certain
Relationships and Related Transactions and Corporate Governance Independent
Directors set forth in the Companys definitive Proxy Statement relating to the
Annual Meeting of Shareholders to be held on May 20, 2009 and is incorporated by
reference in this Form 10-K Annual Report.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES
The
information pertaining to principal accountant fees and services is set forth
under the caption Independent Registered Public Accounting Firm in the
Companys definitive Proxy Statement relating to the Annual Meeting of
Shareholders to be held on May 20, 2009 is incorporated by reference in this
Form 10-K Annual Report.
61
PART IV
ITEM 15. EXHIBITS AND FINANCIAL
STATEMENT SCHEDULES
(a)(1)
Financial Statements
.
The
following financial statements are filed under Item 8 of this Form 10-K Annual
Report:
Report of Independent Registered
Public Accounting Firm
Managements
Report on Internal Control Over Financial Reporting
Report of Independent Registered
Public Accounting Firm on Internal Control Over Financial Reporting
Consolidated Balance Sheets as of
December 31, 2008 and 2007
Consolidated Statements of Income
(Loss) for the Years Ended December 31, 2008, 2007 and 2006
Consolidated Statements of
Stockholders Equity for the Years Ended December 31, 2008, 2007 and
2006
Consolidated
Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2008,
2007 and 2006
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and
2006
Notes to Consolidated
Financial Statements
(a)(2)
Financial Statement Schedules.
Following is a list of financial
statement schedules filed as part of this Form 10-K Annual Report:
Schedule
Number
|
|
Description
|
I
|
|
Summary of
Investments - Other Than Investments in Related Parties
|
II
|
|
Condensed
Financial Information of Registrant
|
III
|
|
Supplementary
Insurance Information
|
IV
|
|
Reinsurance
|
V
|
|
Valuation and
Qualifying Accounts
|
All other
schedules are omitted, as the required information either is not applicable, is
not required, or is presented in the consolidated financial statements or the
notes thereto.
(a)(3)
Exhibits.
The exhibits
filed as a part of this report and incorporated herein by reference to other
documents are listed in the Index to Exhibits to this Annual Report on Form
10-K.
62
SIGNATURES
Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INVESTORS TITLE
COMPANY
|
|
(Registrant)
|
By:
|
/s/ J. Allen
Fine
|
|
J.
Allen Fine, Chairman and Chief Executive
|
Officer
(Principal Executive
Officer)
|
March 9, 2009
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities indicated on
the 9th day of March, 2009.
/s/ J.
Allen Fine
|
|
/s/ James R.
Morton
|
|
J. Allen Fine,
Chairman of the Board and Chief
|
|
James R. Morton,
Director
|
|
Executive
Officer
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
/s/
James A. Fine, Jr.
|
|
/s/ A.
Scott Parker III
|
|
James A. Fine,
Jr., President, Treasurer and
|
|
A. Scott Parker
III, Director
|
|
Director
(Principal Financial Officer
and
|
|
|
|
Principal
Accounting Officer)
|
|
|
|
|
|
/s/ W.
Morris Fine
|
|
/s/ H.
Joe King, Jr.
|
|
W. Morris Fine,
Executive Vice President,
|
|
H. Joe King,
Jr., Director
|
|
Secretary and
Director
|
|
|
|
|
|
|
|
/s/
David L. Francis
|
|
/s/ R.
Horace Johnson
|
|
David L.
Francis, Director
|
|
R. Horace
Johnson, Director
|
|
|
|
/s/
Richard M. Hutson, II
|
|
|
|
Richard M.
Hutson, II, Director
|
|
|
|
63
SCHEDULE I
INVESTORS TITLE COMPANY AND
SUBSIDIARIES
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
AS OF DECEMBER 31,
2008
|
|
|
|
|
|
|
|
|
|
Amount at
|
|
|
|
|
|
|
|
|
|
|
which
shown in
|
|
|
|
|
|
|
|
|
|
|
the
Balance
|
Type of
Investment
|
|
Cost (1)
|
|
Market Value
|
|
Sheet (2)
|
Fixed Maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
States, municipalities & political
subs
|
|
$
|
73,270,094
|
|
|
$
|
74,473,176
|
|
|
$
|
74,462,277
|
|
All other corporate bonds
|
|
|
13,105,170
|
|
|
|
13,697,904
|
|
|
|
13,697,904
|
|
Short-term investments
|
|
|
15,725,513
|
|
|
|
15,725,513
|
|
|
|
15,725,513
|
|
Total fixed maturities
|
|
|
102,100,777
|
|
|
|
103,896,593
|
|
|
|
103,885,694
|
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stocks:
|
|
|
|
|
|
|
|
|
|
|
|
|
Public utilities
|
|
|
540,630
|
|
|
|
529,741
|
|
|
|
529,741
|
|
Banks, trust and insurance companies
|
|
|
34,884
|
|
|
|
86,100
|
|
|
|
86,100
|
|
Industrial, miscellaneous and all other
|
|
|
8,165,246
|
|
|
|
8,886,081
|
|
|
|
8,886,081
|
|
Nonredeemable preferred stocks
|
|
|
418,025
|
|
|
|
463,375
|
|
|
|
463,375
|
|
Total equity securities
|
|
|
9,158,785
|
|
|
|
9,965,297
|
|
|
|
9,965,297
|
|
|
Other Investments
|
|
|
895,173
|
|
|
|
895,173
|
|
|
|
895,173
|
|
Total investments per the consolidated balance sheet (3)
|
|
$
|
112,154,735
|
|
|
$
|
114,757,063
|
|
|
$
|
114,746,164
|
|
|
(1)
|
|
Fixed maturities are
shown at amortized cost and equity securities are shown at original
cost
|
|
(2)
|
|
Bonds of states,
municipalities and political subdivisions are shown at amortized cost for
held-to-maturity bonds and fair value for available-for-sale bonds. Equity
securities are shown at fair value
|
|
(3)
|
|
The above summary
of investments does not include investments in related parties accounted
for under the equity method of accounting in the amount of
$1,145,789.
|
64
SCHEDULE II
INVESTORS TITLE COMPANY (PARENT
COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
AS OF
DECEMBER 31, 2008 AND 2007
|
|
2008
|
|
2007
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
1,476,574
|
|
|
$
|
207,436
|
|
Investments
in fixed maturities, available-for-sale
|
|
|
13,975,353
|
|
|
|
17,707,623
|
|
Investments
in equity securities, available-for-sale
|
|
|
89,100
|
|
|
|
250,950
|
|
Short-term
investments
|
|
|
14,391,860
|
|
|
|
13,122,076
|
|
Investments
in affiliated companies
|
|
|
55,363,938
|
|
|
|
63,628,499
|
|
Other
investments
|
|
|
470,481
|
|
|
|
461,835
|
|
Other
receivables
|
|
|
710,860
|
|
|
|
291,391
|
|
Income taxes
receivable
|
|
|
1,054,569
|
|
|
|
1,255,157
|
|
Accrued
interest and dividends
|
|
|
218,070
|
|
|
|
214,068
|
|
Property,
net
|
|
|
2,914,630
|
|
|
|
3,038,964
|
|
Deferred
income taxes, net
|
|
|
243,298
|
|
|
|
22,288
|
|
Total Assets
|
|
$
|
90,908,733
|
|
|
$
|
100,200,287
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
1,050,845
|
|
|
$
|
924,447
|
|
Total liabilities
|
|
|
1,050,845
|
|
|
|
924,447
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Class A
Junior Participating preferred stock - no par value
|
|
|
|
|
|
|
|
|
(shares authorized 100,000; no shares
issued)
|
|
|
-
|
|
|
|
-
|
|
Common
stock-no par (shares authorized 10,000,000; 2,293,268
|
|
|
|
|
|
|
|
|
and 2,411,318 shares issued and outstanding 2008 and
2007,
|
|
|
|
|
|
|
|
|
respectively, excluding 291,676 shares for 2008
and
|
|
|
|
|
|
|
|
|
2007 of common stock held by the Companys
subsidiary)
|
|
|
1
|
|
|
|
1
|
|
Retained
earnings
|
|
|
88,248,452
|
|
|
|
95,739,827
|
|
Accumulated
other comprehensive income
|
|
|
1,609,435
|
|
|
|
3,536,012
|
|
Total stockholders equity
|
|
|
89,857,888
|
|
|
|
99,275,840
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
90,908,733
|
|
|
$
|
100,200,287
|
|
See notes to condensed financial
statements.
65
SCHEDULE II
INVESTORS TITLE COMPANY (PARENT
COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
|
|
2008
|
|
2007
|
|
2006
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
income-interest and dividends
|
|
$
|
985,277
|
|
|
$
|
1,146,168
|
|
|
$
|
561,400
|
|
Net realized (loss) gain on investments
|
|
|
(120,093)
|
|
|
|
406,623
|
|
|
|
-
|
|
Rental
income
|
|
|
717,044
|
|
|
|
736,713
|
|
|
|
735,431
|
|
Miscellaneous income (loss)
|
|
|
37,139
|
|
|
|
81,938
|
|
|
|
(115,883)
|
|
Total
|
|
|
1,619,367
|
|
|
|
2,371,442
|
|
|
|
1,180,948
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries,
employee benefits, and payroll taxes
|
|
|
320,258
|
|
|
|
-
|
|
|
|
-
|
|
Office occupancy and operations
|
|
|
356,072
|
|
|
|
345,389
|
|
|
|
345,859
|
|
Business
development
|
|
|
46,130
|
|
|
|
64,278
|
|
|
|
69,372
|
|
Taxes-other than payroll and income
|
|
|
155,510
|
|
|
|
138,687
|
|
|
|
79,871
|
|
Professional
fees
|
|
|
243,394
|
|
|
|
141,297
|
|
|
|
141,500
|
|
Other expenses
|
|
|
98,236
|
|
|
|
105,873
|
|
|
|
114,240
|
|
Total
|
|
|
1,219,600
|
|
|
|
795,524
|
|
|
|
750,842
|
|
|
Equity in Net (Loss) Income of Affiliated Cos.
|
|
|
(1,634,566)
|
|
|
|
7,336,417
|
|
|
|
12,710,328
|
|
(Loss) Income
Before Income Taxes
|
|
|
(1,234,799)
|
|
|
|
8,912,335
|
|
|
|
13,140,434
|
|
(Benefit) Provision for Income Taxes
|
|
|
(52,000)
|
|
|
|
510,000
|
|
|
|
(45,000)
|
|
Net (Loss)
Income
|
|
$
|
(1,182,799)
|
|
|
$
|
8,402,335
|
|
|
$
|
13,185,434
|
|
Basic (Loss) Earnings per Common Share
|
|
$
|
(0.50)
|
|
|
$
|
3.39
|
|
|
$
|
5.22
|
|
Weighted
Average Shares Outstanding-Basic
|
|
|
2,364,361
|
|
|
|
2,479,321
|
|
|
|
2,527,927
|
|
Diluted (Loss) Earnings Per Common Share
|
|
$
|
(0.50)
|
|
|
$
|
3.35
|
|
|
$
|
5.14
|
|
Weighted
Average Shares Outstanding-Diluted
|
|
|
2,364,361
|
|
|
|
2,508,609
|
|
|
|
2,564,216
|
|
See notes to condensed financial
statements.
66
SCHEDULE II
INVESTORS TITLE COMPANY (PARENT
COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
|
|
2008
|
|
2007
|
|
2006
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(1,182,799)
|
|
|
$
|
8,402,335
|
|
|
$
|
13,185,434
|
|
Adjustments
to reconcile net (loss) income to net cash provided
|
|
|
|
|
|
|
|
|
|
|
|
|
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net loss (earnings) of
subsidiaries
|
|
|
1,634,566
|
|
|
|
(7,336,417)
|
|
|
|
(12,710,328)
|
|
Depreciation
|
|
|
124,334
|
|
|
|
124,686
|
|
|
|
124,030
|
|
Amortization, net
|
|
|
12,582
|
|
|
|
15,946
|
|
|
|
(820)
|
|
Issuance of common stock in payment of bonuses and
fees
|
|
|
1,946
|
|
|
|
1,998
|
|
|
|
5,013
|
|
Net realized loss (gain) on investments
|
|
|
120,093
|
|
|
|
(406,623)
|
|
|
|
-
|
|
(Benefit) provision for deferred income
taxes
|
|
|
(119,000)
|
|
|
|
5,000
|
|
|
|
(55,000)
|
|
(Increase) decrease in receivables
|
|
|
(419,469)
|
|
|
|
118,627
|
|
|
|
(205,760)
|
|
Decrease (increase) in income taxes
receivable-current
|
|
|
200,588
|
|
|
|
(378,491)
|
|
|
|
356,796
|
|
(Increase) decrease in other assets
|
|
|
(4,002)
|
|
|
|
47,725
|
|
|
|
(153,593)
|
|
Increase in accounts payable and accrued
liabilities
|
|
|
126,398
|
|
|
|
30,572
|
|
|
|
260,468
|
|
Net cash provided by operating activities
|
|
|
495,237
|
|
|
|
625,358
|
|
|
|
806,240
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
contribution to subsidiaries
|
|
|
(125,000)
|
|
|
|
-
|
|
|
|
(115,000)
|
|
Return of
capital contributions from subsidiaries
|
|
|
-
|
|
|
|
-
|
|
|
|
80,000
|
|
Dividends
received from subsidiaries
|
|
|
5,083,607
|
|
|
|
13,122,720
|
|
|
|
9,446,950
|
|
Purchases of
available-for-sale securities
|
|
|
(7,437,280)
|
|
|
|
(31,721,740)
|
|
|
|
(21,310,774)
|
|
Purchases of
short-term securities
|
|
|
(2,006,477)
|
|
|
|
(11,658,044)
|
|
|
|
(1,459,550)
|
|
Purchases of
and net earnings from other investments
|
|
|
(15,789)
|
|
|
|
(94,737)
|
|
|
|
-
|
|
Proceeds from
sales and maturities of available-for-sale securities
|
|
|
10,900,000
|
|
|
|
33,900,000
|
|
|
|
13,600,000
|
|
Proceeds from
sales of short-term securities
|
|
|
736,694
|
|
|
|
-
|
|
|
|
-
|
|
Proceeds from
sales and distributions from other investments
|
|
|
41,250
|
|
|
|
742,822
|
|
|
|
216,190
|
|
Purchases of
property
|
|
|
-
|
|
|
|
(12,551)
|
|
|
|
(18,151)
|
|
Net cash provided by investing activities
|
|
|
7,177,005
|
|
|
|
4,278,470
|
|
|
|
439,665
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of
common stock
|
|
|
(5,972,043)
|
|
|
|
(4,660,259)
|
|
|
|
(2,255,735)
|
|
Exercise of
options
|
|
|
230,801
|
|
|
|
365,284
|
|
|
|
55,272
|
|
Dividends
paid (net dividends paid to subsidiary of $81,669,
|
|
|
|
|
|
|
|
|
|
|
|
|
$70,002 and $70,401 in 2008, 2007 and 2006,
respectively)
|
|
|
(661,862)
|
|
|
|
(595,808)
|
|
|
|
(606,423)
|
|
Net cash used in financing activities
|
|
|
(6,403,104)
|
|
|
|
(4,890,783)
|
|
|
|
(2,806,886)
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
|
|
1,269,138
|
|
|
|
13,045
|
|
|
|
(1,560,981)
|
|
Cash and Cash
Equivalents, Beginning of Year
|
|
|
207,436
|
|
|
|
194,391
|
|
|
|
1,755,372
|
|
Cash and Cash Equivalents, End of Year
|
|
$
|
1,476,574
|
|
|
$
|
207,436
|
|
|
$
|
194,391
|
|
|
Supplemental Disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Paid
(Refunded) During the Year For
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes
(net of refunds)
|
|
$
|
(473,000)
|
|
|
$
|
889,000
|
|
|
$
|
343,000
|
|
|
Non cash net
unrealized loss (gain) on investments, net of deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
tax (benefit) provision of $987,103, ($219,001) and
($185,475) for 2008,
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 and 2006, respectively
|
|
$
|
1,872,812
|
|
|
$
|
(414,956)
|
|
|
$
|
(361,631)
|
|
See notes to condensed financial
statements.
67
SCHEDULE II
INVESTORS TITLE COMPANY AND
SUBSIDIARIES
CONDENSED FINANCIAL
INFORMATION OF REGISTRANT
NOTES TO THE CONDENSED FINANCIAL
STATEMENTS
1.
|
|
The accompanying
condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto of Investors Title
Company and Subsidiaries.
|
|
2.
|
|
Cash dividends paid to
Investors Title Company by its wholly owned subsidiaries were as
follows:
|
Subsidiaries
|
|
2008
|
|
2007
|
|
2006
|
Investors Title Insurance Company, net*
|
|
$
|
4,928,607
|
|
|
$
|
10,662,720
|
|
|
$
|
4,976,950
|
|
Investors Title
Exchange Corporation
|
|
|
-
|
|
|
|
2,250,000
|
|
|
|
4,125,000
|
|
Investors Title Accommodation Corporation
|
|
|
5,000
|
|
|
|
25,000
|
|
|
|
170,000
|
|
Investors Title
Management Services, Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
60,000
|
|
Investors Title Capital Management Corporation
|
|
|
35,000
|
|
|
|
60,000
|
|
|
|
-
|
|
Investors Title
Commercial Agency
|
|
|
115,000
|
|
|
|
125,000
|
|
|
|
115,000
|
|
|
|
$
|
5,083,607
|
|
|
$
|
13,122,720
|
|
|
$
|
9,446,950
|
|
*
|
|
Total dividends of $5,010,276,
$10,732,722 and $5,047,351 paid to the Parent Company in 2008, 2007 and
2006, respectively, netted with dividends of $81,669, $70,002 and $70,401
received from the Parent in 2008, 2007 and 2006,
respectively.
|
68
SCHEDULE III
INVESTORS TITLE COMPANY AND
SUBSIDIARIES
SUPPLEMENTARY INSURANCE
INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND
2006
|
|
|
|
Future
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
|
|
|
|
Policy
|
|
|
|
|
|
|
|
|
|
Benefit
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
Losses,
|
|
|
|
Claims
|
|
|
|
|
|
|
|
|
|
Claims,
|
|
Amortization of
|
|
|
|
|
|
|
|
|
Policy
|
|
Claims and
|
|
|
|
and
|
|
|
|
|
|
Net
|
|
Losses and
|
|
Deferred Policy
|
|
Other
|
|
|
|
|
Acquisition
|
|
Loss
|
|
Unearned
|
|
Benefits
|
|
Premium
|
|
Investment
|
|
Settlement
|
|
Acquisition
|
|
Operating
|
|
Premiums
|
Segment
|
|
Cost
|
|
Expenses
|
|
Premiums
|
|
Payable
|
|
Revenue
|
|
Income
|
|
Expenses
|
|
Costs
|
|
Expenses
|
|
Written
|
Year Ended
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Title Insurance
|
|
-
|
|
$
|
39,238,000
|
|
|
-
|
|
$
|
467,388
|
|
|
$
|
63,662,187
|
|
|
$
|
3,495,088
|
|
|
$
|
15,206,637
|
|
|
-
|
|
$
|
54,019,867
|
|
|
N/A
|
Exchange
Services
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
37,840
|
|
|
|
-
|
|
|
-
|
|
|
1,160,070
|
|
|
N/A
|
All Other
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
1,025,807
|
|
|
|
-
|
|
|
-
|
|
|
3,953,486
|
|
|
N/A
|
|
|
-
|
|
$
|
39,238,000
|
|
|
-
|
|
$
|
467,388
|
|
|
$
|
63,662,187
|
|
|
$
|
4,558,735
|
|
|
$
|
15,206,637
|
|
|
-
|
|
$
|
59,133,423
|
|
|
|
|
Year Ended
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Title Insurance
|
|
-
|
|
$
|
36,975,000
|
|
|
-
|
|
$
|
406,922
|
|
|
$
|
69,983,989
|
|
|
$
|
3,954,898
|
|
|
$
|
10,134,719
|
|
|
-
|
|
$
|
58,034,137
|
|
|
N/A
|
Exchange
Services
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
29,501
|
|
|
|
-
|
|
|
-
|
|
|
1,480,094
|
|
|
N/A
|
All Other
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
1,212,779
|
|
|
|
-
|
|
|
-
|
|
|
3,469,002
|
|
|
N/A
|
|
|
-
|
|
$
|
36,975,000
|
|
|
-
|
|
$
|
406,922
|
|
|
$
|
69,983,989
|
|
|
$
|
5,197,178
|
|
|
$
|
10,134,719
|
|
|
-
|
|
$
|
62,983,233
|
|
|
|
|
Year Ended
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Title Insurance
|
|
-
|
|
$
|
36,906,000
|
|
|
-
|
|
$
|
470,468
|
|
|
$
|
70,196,467
|
|
|
$
|
3,688,966
|
|
|
$
|
7,405,211
|
|
|
-
|
|
$
|
55,557,492
|
|
|
N/A
|
Exchange
Services
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
18,138
|
|
|
|
-
|
|
|
-
|
|
|
1,346,743
|
|
|
N/A
|
All Other
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
619,231
|
|
|
|
-
|
|
|
-
|
|
|
3,022,836
|
|
|
N/A
|
|
|
-
|
|
$
|
36,906,000
|
|
|
-
|
|
$
|
470,648
|
|
|
$
|
70,196,467
|
|
|
$
|
4,326,335
|
|
|
$
|
7,405,211
|
|
|
-
|
|
$
|
59,927,071
|
|
|
|
69
SCHEDULE IV
INVESTORS TITLE COMPANY AND
SUBSIDIARIES
REINSURANCE
FOR THE YEARS ENDED
DECEMBER 31, 2008, 2007 AND 2006
|
|
|
|
|
|
|
|
|
|
Assumed
|
|
|
|
|
|
|
|
|
|
|
|
Ceded
to
|
|
from
|
|
|
|
|
Percentage
of
|
|
|
|
|
|
|
Other
|
|
Other
|
|
|
|
|
Amount
Assumed
|
|
|
Gross Amoun
t
|
|
Co
mpanies
|
|
Companies
|
|
Net Amount
|
|
to Net
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Title
Insurance
|
|
$
|
63,770,383
|
|
|
$
|
275,089
|
|
|
$
|
166,893
|
|
|
$
|
63,662,187
|
|
0.26%
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Title
Insurance
|
|
$
|
70,205,350
|
|
|
$
|
264,177
|
|
|
$
|
42,816
|
|
|
$
|
69,983,989
|
|
0.06%
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Title
Insurance
|
|
$
|
70,615,891
|
|
|
$
|
441,582
|
|
|
$
|
22,158
|
|
|
$
|
70,196,467
|
|
0.03%
|
70
SCHEDULE V
INVESTORS TITLE COMPANY AND
SUBSIDIARIES
VALUATION AND QUALIFYING
ACCOUNTS
FOR THE YEARS ENDED DECEMBER
31, 2008, 2007 AND 2006
|
|
|
|
|
Additions
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
Charged to
|
|
Charged
to
|
|
|
|
|
|
|
|
|
|
|
Beginning of
|
|
Costs
and
|
|
Other Accounts
|
|
Deductions
|
|
Balance at End
|
Description
|
|
Period
|
|
Expenses
|
|
De
scr
ibe
|
|
Describe*
|
|
of Period
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium
Receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Provision
|
|
$
|
2,170,000
|
|
$
|
7,397,511
|
|
$ -
|
|
$
|
(8,270,511)
|
(a)
|
|
$
|
1,297,000
|
|
Reserves for
Claims
|
|
$
|
36,975,000
|
|
$
|
15,206,637
|
|
$ -
|
|
$
|
(12,943,637)
|
(b)
|
|
$
|
39,238,000
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium
Receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
Provision
|
|
$
|
2,128,000
|
|
$
|
5,298,809
|
|
$ -
|
|
$
|
(5,256,809)
|
(a)
|
|
$
|
2,170,000
|
|
Reserves for
Claims
|
|
$
|
36,906,000
|
|
$
|
10,134,719
|
|
$ -
|
|
$
|
(10,065,719)
|
(b)
|
|
$
|
36,975,000
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium
Receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
Provision
|
|
$
|
2,444,000
|
|
$
|
4,927,691
|
|
$ -
|
|
$
|
(5,243,691)
|
(a)
|
|
$
|
2,128,000
|
|
Reserves for
Claims
|
|
$
|
34,857,000
|
|
$
|
7,405,211
|
|
$ -
|
|
$
|
(5,356,211)
|
(b)
|
|
$
|
36,906,000
|
|
|
(a)
|
|
Cancelled
premiums
|
|
(b)
|
|
Payments of claims,
net of recoveries
|
71
INDEX TO EXHIBITS
Exhibit
|
|
|
Number
|
|
Description
|
|
3(i)
|
|
Articles of Incorporation dated January 22, 1973,
incorporated by reference to Exhibit 1 to Form 10 dated June 12,
1984
|
|
|
|
3(ii)
|
|
Bylaws (amended and restated November 12, 2007),
incorporated by reference to Exhibit 3.1 to the Registrants Current
Report on Form 8-K dated November 12, 2007, File No. 0-11774
|
|
|
|
4
|
|
Rights Agreement, dated as of November 12, 2002, between
Investors Title Company and Central Carolina Bank, a division of National
Bank of Commerce, incorporated by reference to Exhibit 1 to Form 8-A filed
November 15, 2002
|
|
|
|
10(i)
|
|
1997 Stock Option and Restricted Stock Plan,
incorporated by reference to Exhibit 10(viii) to Form 10-K for the year
ended December 31, 1996
|
|
|
|
10(ii)
|
|
Form of Nonqualified Stock Option Agreement to
Non-employee Directors dated May 13, 1997 under the 1997 Stock Option and
Restricted Stock Plan, incorporated by reference to Exhibit 10(ix) to Form
10-Q for the quarter ended June 30, 1997
|
|
|
|
10(iii)
|
|
Form of Nonqualified Stock Option Agreement under 1997
Stock Option and Restricted Stock Plan, incorporated by reference to
Exhibit 10(x) to Form 10-K for the year ended December 31,
1997
|
|
|
|
10(iv)
|
|
Form of Incentive Stock Option Agreement under 1997
Stock Option and Restricted Stock Plan, incorporated by reference to
Exhibit 10(xi) to Form 10-K for the year ended December 31,
1997
|
|
|
|
10(v)
|
|
Form of Amendment to Incentive Stock Option Agreement
between Investors Title Company and George Abbitt Snead incorporated by
reference to Exhibit 10(xii) to Form 10-Q for the quarter ended June 30,
2000
|
|
|
|
10(vi)
|
|
2001 Stock Option and Restricted Stock Plan,
incorporated by reference to Exhibit 10(xiii) to Form 10-K for the year
ended December 31, 2000
|
|
|
|
10(vii)
|
|
Amended and Restated Employment Agreement effective
January 1, 2009 for J. Allen Fine
|
|
|
|
10(viii)
|
|
Amended and Restated Employment Agreement effective
January 1, 2009 for James A. Fine, Jr.
|
|
|
|
10(ix)
|
|
Amended and Restated Employment Agreement effective
January 1, 2009 for W. Morris Fine
|
|
|
|
10(x)
|
|
Amended and Restated Death Benefit Plan Agreement
effective January 1, 2009 for J. Allen Fine
|
|
|
|
10(xi)
|
|
Amended and Restated Death Benefit Plan Agreement
effective January 1, 2009 for James A. Fine, Jr.
|
|
|
|
10(xii)
|
|
Death Benefit Plan Agreement effective January 1, 2009
for W. Morris Fine
|
|
|
|
10(xiii)
|
|
Amended and Restated Nonqualified Deferred Compensation
Plan effective January 1, 2009
|
|
|
|
10(xiv)
|
|
Amended and Restated Nonqualified Supplemental
Retirement Benefit Plan effective January 1, 2009
|
|
|
|
21
|
|
Subsidiaries of Registrant, incorporated by reference to
Exhibit 21 to Form 10-K for the year ended December 31, 2003
|
|
|
|
23
|
|
Consent of Independent Registered Public Accounting
Firm
|
|
|
|
31(i)
|
|
Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
31(ii)
|
|
Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
32
|
|
Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
72
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