Notes to Consolidated Financial Statements
1. Basis of Presentation and Summary of Significant Accounting Policies
Description of Business
– Investors Title Company’s (the “Company”) primary business, and only reportable segment, is title insurance. The title insurance segment, through its
two
subsidiaries, Investors Title Insurance Company (“ITIC”) and National Investors Title Insurance Company (“NITIC”), is licensed to insure titles to residential, institutional, commercial and industrial properties. The Company issues title insurance policies primarily through approved attorneys from underwriting offices and through independent issuing agents in
22
states and the District of Columbia, primarily in the eastern half of the United States. The majority of the Company’s business is concentrated in Georgia, North Carolina, South Carolina, Texas and Virginia.
Principles of Consolidation and Basis of Presentation
– The accompanying Consolidated Financial Statements include the accounts and operations of Investors Title Company and its subsidiaries, and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). Earnings attributable to noncontrolling interests in majority-owned insurance agencies are recorded in the Consolidated Statements of Income. Noncontrolling interests representing the portion of equity not related to the Company's ownership interests are recorded in separate sections of the Consolidated Balance Sheets. All intercompany balances and transactions have been eliminated in consolidation.
Immaterial Classification Corrections
– In previous periods, certain commission revenue was improperly classified as net premiums written. The issue was identified in
2017
and, accordingly, the Consolidated Statements of Income have been corrected. The correction resulted in a decrease to previously reported net premiums written and an increase to other revenues of
$1,526,230
and
$566,213
for
2016
and
2015
, respectively. The immaterial classification correction had no impact to the Company’s financial position or results of operations 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 Company’s Consolidated Statements of Cash Flows, cash equivalents are highly liquid instruments with remaining 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 at purchase 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 with unrealized gains and losses, net of tax and adjusted for other-than-temporary declines in fair value, reported as accumulated other comprehensive income. As of
December 31, 2017
and
2016
, all investments in securities are classified as available-for-sale. 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 Company’s 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 for further information regarding investments in securities and fair value.
Short-term Investments
Short-term investments are comprised of money market accounts which are invested in short-term funds, commercial paper, certificates of deposit, 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.
Other Investments
Other investments consist primarily of investments in title insurance agencies structured as limited liability companies (“LLCs”), which are accounted for under the equity or cost methods of accounting. The aggregate cost of the Company’s cost method investments totaled
$5,438,745
and
$4,744,402
at
December 31, 2017
and
2016
, respectively. The Company monitors any events or changes in circumstances that may have had a significant adverse effect on the fair value of these investments and makes any necessary adjustments.
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. Properties acquired in settlement of claims are included in prepaid expenses and other assets in the Consolidated Balance Sheets.
Property and Equipment
Property and equipment are recorded at cost and are depreciated principally under the straight-line method over the estimated useful lives (
3
to
25
years) of the respective assets. Maintenance and repairs are charged to operating expenses and improvements are capitalized.
Reserve for Claims
The total reserve for all reported and unreported losses the Company incurred through
December 31, 2017
is represented by the reserve for claims. The Company’s reserve for unpaid losses and loss adjustment expenses is 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 reserve is adequate to cover claim losses resulting from pending and future claims for policies issued through
December 31, 2017
. 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 reserve 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 (benefit) for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. The Company provides for deferred income taxes (benefits) for the tax consequences in future years of temporary differences between the financial statements’ carrying values and the tax bases of assets and liabilities using currently enacted tax rates. The Company establishes a valuation allowance 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 for further information regarding income taxes.
Premiums Written and Commissions to Agents
Generally, title insurance premiums are recognized at the time of settlement of the related real estate transaction, as the earnings process is then considered complete, irrespective of the timing of issuance of a title insurance policy or commitment. Expenses typically associated with premiums, including agent commissions, premium taxes, and provision for future claims are recognized concurrent with recognition of related premium revenue.
Allowance for Doubtful Accounts
Company management continually evaluates the collectability of receivables and provides an allowance for doubtful accounts equal to estimated losses expected to be incurred in the collection of premiums and fees receivable. Changes to the allowance for doubtful accounts are reflected within net premiums written in the Consolidated Statements of Income. Amounts are charged off in the period they are deemed to be uncollectible.
Quarterly, the Company evaluates the collectability of receivables. Premiums not collected within
7 months
are fully reserved. Write-offs of receivables have not been material to the Company.
Exchange Services Revenue
Fees are recognized at the signing of a binding agreement and investment earnings are recognized as they are earned. Exchange services revenue is included in other revenues in the Consolidated Statements of Income.
Fair Values of Financial Instruments
The carrying amounts reported in the Consolidated Balance Sheets for cash and cash equivalents, short-term investments, premium and fees receivable, accrued interest and dividends, accounts payable, commissions payable, reinsurance payable and current income taxes recoverable/payable approximate fair value due to the short-term nature of these assets and liabilities. Estimated fair values for the majority of investment securities are based on quoted market prices. Refer to Note 3 for further information regarding investments in securities and fair value.
Comprehensive Income
The Company’s accumulated other comprehensive income is comprised of unrealized holding gains/losses on available-for-sale securities, net of tax, and unrecognized prior service cost and unrealized gains/losses associated with postretirement benefit liabilities, net of tax. Accumulated other comprehensive income as of
December 31, 2017
consists of
$16,002,382
of unrealized holding gains on available-for-sale securities and
$57,556
of unrecognized actuarial losses associated with postretirement benefit liabilities. Accumulated other comprehensive income as of
December 31, 2016
consists of
$11,870,647
of unrealized holding gains on available-for-sale securities and
$109,200
of unrecognized actuarial losses associated with postretirement benefit liabilities. Accumulated other comprehensive income as of
December 31, 2015
consists of
$11,597,741
of unrealized holding gains on available-for-sale securities and
$114,726
of unrecognized prior service cost and unrecognized actuarial losses associated with postretirement benefit liabilities.
Share-Based Compensation
The Company accounts for share-based compensation in accordance with the fair value based principles required by the Financial Accounting Standards Board (“FASB”). Share-based compensation cost is generally measured at the grant date, based on the estimated fair value of the award, and is recognized as an expense over the employee’s requisite service period.
As the 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. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The excess tax benefit related to stock appreciation rights included in income taxes payable was
$142,280
,
$32,293
and
$26,875
in 2017, 2016 and 2015, respectively.
Goodwill
Goodwill represents the excess of cost over fair value of identifiable net assets acquired and assumed in a business combination. The fair value of the Company’s goodwill is principally based on values obtained from a third party valuation service. Goodwill is reviewed for impairment at least annually or when events or changes in circumstances indicate the carrying value may not be recoverable.
Other Intangible Assets
The Company’s other intangible assets consist of non-compete agreements, referral relationships and a tradename resulting from agency acquisitions; all of which are recorded at the acquisition date fair value. The fair value of the Company’s other intangible assets is principally based on values obtained from a third party valuation service. These assets are amortized on a straight-line basis over their useful lives, which range from
1
to
30
years; noting that the amortization of certain non-compete contracts will start at a future date when the related employment agreements are terminated. Other intangible assets are reviewed for impairment at least annually or when events or changes in circumstances indicate the carrying value may not be recoverable.
Title Plants
Title plants represent a historical record of matters affecting title to parcels of land in a particular geographic area. Title plants are recorded at the cost incurred to construct or obtain and organize historical title information to the point it can be used to perform title searches. Costs incurred to maintain, update and operate title plants are expensed as incurred. Title plants are not amortized as they are considered to have an indefinite life with no diminishment of value if properly maintained; but are subject to impairment evaluation, which the Company performs on at least an annual basis.
Subsequent Events
The Company has evaluated and concluded that there were no material subsequent events requiring adjustment or disclosure to its Consolidated Financial Statements.
Recently Issued Accounting Standards
In February 2018, the FASB issued Accounting Standards Update ("ASU") 2018-02,
Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
. ASU 2018-02 is intended to help organizations reclassify certain stranded income tax effects in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act (“TCJA”). Under the ASU, entities will have the option to reclassify tax effects within other comprehensive income to retained earnings in each period in which the effect of the change in the federal corporate tax rate under the TCJA is recorded. The update is effective for annual periods beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted upon issuance of the standard, and the Company expects to adopt the standard during 2018. The Company is currently evaluating the impact that the recently issued accounting standard will have on the Company's financial position and results of operations, but does not expect it to have a material impact.
In March 2017, the FASB issued ASU 2017-08,
Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.
ASU 2017-08 is intended to enhance the accounting for the amortization of premiums for purchased callable debt securities. Specifically, the ASU shortens the amortization period for certain investments in callable debt securities purchased at a premium by requiring that the premium be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The update is effective for annual periods beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact that the recently issued accounting standard will have on the Company's financial position and results of operations, but does not expect it to have a material impact.
In March 2017, the FASB issued ASU 2017-07,
Compensation - Retirement Benefits (Topic 715)
. This update requires entities to (1) disaggregate the current service cost component from the other components of net benefit cost (the "other components") and present it with other current compensation costs for related employees in the income statement and (2) present the other components elsewhere in the income statement and outside of income from operations if that subtotal is presented. In addition, the ASU requires entities to disclose the income statement lines that contain the other components if they are not presented on appropriately described separate lines. The update is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. None of these amendments will have a material impact on the Company’s financial position or results of operations.
In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350)
. This update removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. As a result, under the ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, the ASU clarifies that an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The update is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. None of these amendments is expected to have a material impact on the Company's financial position or results of operations.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments – Credit Losses (Topic 326)
. ASU 2016-13 is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The update broadens the information that an entity must consider in developing its expected credit loss estimates, and is meant to better reflect an entity’s current estimate of all expected credit losses. In addition, this update amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The update is effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted as of fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact that the recently issued accounting standard will have on the Company's financial position and results of operations, but does not expect it to have a material impact. Currently, the Company's potential credit losses under this accounting standard relate to available-for-sale securities. The Company does not believe that the risk of credit losses, based on current available-for-sale security holdings, is material to the Company's financial statements as a whole. Please refer to Note 3 for further information about the Company's investments.
In March 2016, the FASB issued ASU 2016-09,
Compensation – Stock Compensation (Topic 718)
. ASU 2016-09 updated guidance to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The update is effective for annual periods beginning after December 15, 2016, and interim periods within that reporting period. The Company adopted this update on January 1, 2017 with no material impact to the Company's financial position or results of operations. All excess tax benefits and tax deficiencies are now recognized as income tax expense or benefit in the Consolidated Statements of Income. In addition, a reclassification was made on the Consolidated Statements of Cash Flows, as companies are now required to present excess tax benefits as an operating activity on the Consolidated Statements of Cash Flows rather than as a financing activity. The Company began recording all excess tax benefits and tax deficiencies as an income tax expense or benefit on a prospective basis. The amendments relating to the presentation of excess tax benefits within the Consolidated Statements of Cash Flows were adopted by the Company retrospectively.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. ASU 2016-02 updated guidance to improve financial reporting for leasing transactions. The core principle of the guidance is that lessees will be required to recognize assets and liabilities on the balance sheet for all leases with terms of more than twelve months. A lessee would recognize a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. The accounting applied by a lessor is largely unchanged from current GAAP, with some targeted improvements. Disclosures will be required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. In transition, both lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The update is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption was permitted for all entities upon issuance. The Company is currently evaluating the impact that the recently issued accounting standard will have on the Company's financial position and results of operations, but does not expect it to have a material impact. As of December 31, 2017, future minimum lease payments with terms of more than twelve months were approximately $3.6 million.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
. ASU 2016-01 updated guidance to enhance the reporting model for financial instruments. Among the main principles of the guidance applicable to the Company are provisions to: require equity investments, except those accounted for under the equity method of accounting or those that result in consolidation of the investee, to be measured at fair value with changes in fair value recognized in net income; simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, noting that when a qualitative assessment indicates that impairment exists that an entity is required to measure the investment at fair value; eliminate the requirement to disclose methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost; require entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; require separate presentation of financial assets and financial liabilities by measuring category and form of financial asset on the balance sheet or accompanying notes to the financial statements; and clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The update is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted for the provision requiring entities to recognize the fair value change from instrument-specific credit risk in other comprehensive income for financial liabilities measured using the fair value option in Accounting Standards Codification ("ASC") 825, and can be early adopted for financial statements of annual or interim periods that have not yet been issued or made available for issuance. The Company will be required to apply the update by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, with the amendments related to equity securities without readily determinable fair values being applied prospectively to equity investments that exist as of the date of adoption. While the Company expects the guidance to have an impact on the Company’s financial condition and results of operations once effective, the materiality of this impact will depend upon the level of volatility experienced within the Company’s equity portfolio.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
. ASU 2014-09 updated guidance to improve the comparability of revenue recognition practices for entities that either enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards such as insurance contracts or lease standards. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For public entities, this update originally became effective for interim and annual reporting periods beginning after December 15, 2016. In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
. ASU 2015-14 updated guidance to defer the effective date of the standard by one year. Based on the Company’s evaluation of ASU 2014-09, there will be no significant changes to revenue recognition practices upon adoption.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period and accompanying notes. Actual results could differ materially from those estimates and assumptions used. The more significant of these estimates and assumptions include the following:
Claims
– The Company’s reserve for claims is established using estimated amounts required to settle claims for which notice has been received (reported) and the amount estimated to be required to satisfy incurred claims of policyholders which may be reported in the future (incurred but not reported, or “IBNR”). A provision for estimated future claims payments is recorded at the time policy revenue is recorded as a percentage of premium income. By their nature, title claims can often be complex, vary greatly in dollar amounts, vary in number due to economic and market conditions such as an increase in mortgage foreclosures, and involve uncertainties as to ultimate exposure. In addition, some claims may require a number of years to settle and determine the final liability for indemnity and loss adjustment expense. The payment experience may extend for more than
20
years after the issuance of a policy. Events such as fraud, defalcation and multiple property defects can substantially and unexpectedly cause increases in estimates of losses. Due to the length of time over which claim payments are made and regularly occurring changes in underlying economic and market conditions, these estimates are subject to variability.
Management considers factors such as the Company’s historical claims experience, case reserve estimates on reported claims, large claims, actuarial projections and other relevant factors in determining its loss provision rates and the aggregate recorded expected liability for claims. In establishing the reserve, actuarial projections are compared with recorded reserves to evaluate the adequacy of such recorded claims reserves and any necessary adjustments are then recorded in the current period’s income statement. As the most recent claims experience develops and new information becomes available, the loss reserve estimate related to prior periods will change to more accurately reflect updated and improved emerging data. The Company reflects any adjustments to the reserve in the results of operations in the period in which new information (principally claims experience) becomes available.
The Company’s reserve for claims is 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 have been incurred but not reported (“IBNR”).
Premiums written
– Premium revenues from certain agency operations include accruals for transactions which have settled but have not been reported as of the balance sheet date. These accruals are based on estimates of the typical lag time between settlement of real estate transactions and the agent’s reporting of these transactions to the Company. Reporting lag times vary by market. In certain markets, the lag time may be very short, but in others, can be as high as
100
days. The Company reviews and adjusts lag time estimates periodically, using historical experience and other factors, and reflects any adjustments in the result of operations in the period in which new information becomes available.
Impairments
– Securities are regularly evaluated and reviewed for differences between the cost and estimated fair value of each security for factors that may indicate that a decline in estimated fair value is other-than-temporary. When, in the opinion of management, a decline in the estimated fair value of an investment is considered to be other-than-temporary, such investment is written down to its estimated fair value. Some factors considered in evaluating whether or not a decline in estimated fair value is other-than-temporary include the duration and extent to which the estimated fair value has been less than cost; the probability that the Company will be unable to collect all amounts due under the contractual terms of the security; with respect to equity securities, whether the Company’s ability and intent to retain the investment for a period of time is sufficient to allow for a recovery in value; with respect to fixed maturity securities, whether the Company has the intent to sell or will more likely than not be required to sell a particular security before recovery in value; and the financial condition and prospects of the issuer (including credit ratings). These factors are reviewed quarterly and any material degradation in the prospect for recovery will be considered in the other-than-temporary impairment analysis. Such reviews are inherently uncertain and the value of the investment may not fully recover or may decline in future periods resulting in a realized loss. The estimated fair values of the majority of the Company’s investments are based on quoted market prices from independent pricing services.
2. Statutory Accounting and Restrictions on Consolidated Stockholders’ Equity and Investments
The Consolidated Financial Statements have been prepared in conformity with GAAP, which differ in some respects from statutory accounting practices prescribed or permitted in the preparation of financial statements for submission to insurance regulatory authorities.
Combined capital and surplus on a statutory basis was
$171,896,522
and
$152,700,227
as of
December 31, 2017
and
2016
, respectively. Net income on a statutory basis was
$18,766,527
,
$17,863,815
and
$13,621,174
for the twelve months ended
December 31, 2017
,
2016
and
2015
, respectively.
The Company has designated approximately
$57,301,000
and
$53,190,000
of retained earnings as of
December 31, 2017
and
2016
, respectively, as appropriated to reflect the required statutory premium and supplemental reserves. See Note 8 for the tax treatment of the statutory premium reserve.
As of
December 31, 2017
and
2016
, approximately
$102,082,000
and
$88,323,000
, respectively, of consolidated stockholders’ equity represents net assets of the Company’s subsidiaries that cannot be transferred in the form of dividends, loans or advances to the parent company under statutory regulations without prior insurance department approval. During 2018, the maximum distributions the insurance subsidiaries can make to the Company without prior approval from applicable regulators total approximately
$18,960,000
.
Bonds totaling approximately
$7,119,000
and
$6,843,000
at
December 31, 2017
and
2016
, respectively, are deposited with the insurance departments of the states in which business is conducted.
3. Investments and Estimated Fair Value
The aggregate estimated fair value, gross unrealized holding gains, gross unrealized holding losses, and cost or amortized cost for securities by major security type at December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair
Value
|
Fixed maturities, available-for-sale, at fair value:
|
|
|
|
|
|
|
|
Government obligations
|
$
|
1,042,921
|
|
|
$
|
—
|
|
|
$
|
951
|
|
|
$
|
1,041,970
|
|
General obligations of U.S. states, territories and political subdivisions
|
24,189,032
|
|
|
505,513
|
|
|
50,224
|
|
|
24,644,321
|
|
Special revenue issuer obligations of U.S. states, territories and political subdivisions
|
62,591,978
|
|
|
2,217,665
|
|
|
164,355
|
|
|
64,645,288
|
|
Corporate debt securities
|
12,490,154
|
|
|
528,218
|
|
|
8,868
|
|
|
13,009,504
|
|
Total
|
$
|
100,314,085
|
|
|
$
|
3,251,396
|
|
|
$
|
224,398
|
|
|
$
|
103,341,083
|
|
Equity securities, available-for-sale, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
$
|
26,002,619
|
|
|
$
|
21,376,110
|
|
|
$
|
11,903
|
|
|
$
|
47,366,826
|
|
Total
|
$
|
26,002,619
|
|
|
$
|
21,376,110
|
|
|
$
|
11,903
|
|
|
$
|
47,366,826
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper, money market funds and certificates of deposit
|
$
|
23,779,672
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23,779,672
|
|
Total
|
$
|
23,779,672
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23,779,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair
Value
|
Fixed maturities, available-for-sale, at fair value:
|
|
|
|
|
|
|
|
General obligations of U.S. states, territories and political subdivisions
|
$
|
29,374,774
|
|
|
$
|
440,628
|
|
|
$
|
298,533
|
|
|
$
|
29,516,869
|
|
Special revenue issuer obligations of U.S. states, territories and political subdivisions
|
57,459,818
|
|
|
1,619,444
|
|
|
502,135
|
|
|
58,577,127
|
|
Corporate debt securities
|
13,327,765
|
|
|
512,316
|
|
|
—
|
|
|
13,840,081
|
|
Total
|
$
|
100,162,357
|
|
|
$
|
2,572,388
|
|
|
$
|
800,668
|
|
|
$
|
101,934,077
|
|
Equity securities, available-for sale, at fair value:
|
|
|
|
|
|
|
|
Common stocks
|
$
|
24,836,032
|
|
|
$
|
16,392,210
|
|
|
$
|
48,983
|
|
|
$
|
41,179,259
|
|
Total
|
$
|
24,836,032
|
|
|
$
|
16,392,210
|
|
|
$
|
48,983
|
|
|
$
|
41,179,259
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds and certificates of deposit
|
$
|
6,558,840
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,558,840
|
|
Total
|
$
|
6,558,840
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,558,840
|
|
The special revenue category for both periods presented includes approximately
60
individual bonds with revenue sources from a variety of industry sectors.
The scheduled maturities of fixed maturity securities at
December 31, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
|
|
Amortized
Cost
|
|
Fair
Value
|
Due in one year or less
|
$
|
11,570,232
|
|
|
$
|
11,637,351
|
|
Due after one year through five years
|
38,510,415
|
|
|
39,352,750
|
|
Due five years through ten years
|
48,246,123
|
|
|
49,802,410
|
|
Due after ten years
|
1,987,315
|
|
|
2,548,572
|
|
Total
|
$
|
100,314,085
|
|
|
$
|
103,341,083
|
|
Earnings on investments for the years ended December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Fixed maturities
|
$
|
3,037,105
|
|
|
$
|
3,506,484
|
|
|
$
|
3,439,296
|
|
Equity securities
|
1,202,912
|
|
|
1,157,550
|
|
|
1,086,365
|
|
Invested cash and other short-term investments
|
201,780
|
|
|
19,982
|
|
|
5,605
|
|
Miscellaneous interest
|
2,650
|
|
|
473
|
|
|
53
|
|
Investment income
|
$
|
4,444,447
|
|
|
$
|
4,684,489
|
|
|
$
|
4,531,319
|
|
Gross realized gains and losses on sales of investments for the years ended December 31 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Gross realized gains:
|
|
|
|
|
|
Special revenue issuer obligations of U.S. states, territories and political subdivisions
|
$
|
139
|
|
|
$
|
161
|
|
|
$
|
—
|
|
Corporate debt securities
|
—
|
|
|
119,001
|
|
|
5,417
|
|
Common stocks and nonredeemable preferred stocks
|
1,487,420
|
|
|
953,491
|
|
|
1,572,636
|
|
Auction rate securities
|
—
|
|
|
74,996
|
|
|
—
|
|
Total
|
1,487,559
|
|
|
1,147,649
|
|
|
1,578,053
|
|
Gross realized losses:
|
|
|
|
|
|
General obligations of U.S. states, territories and political subdivisions
|
—
|
|
|
(535
|
)
|
|
(12,319
|
)
|
Special revenue issuer obligations of U.S. states, territories and political subdivisions
|
(100
|
)
|
|
(1,085
|
)
|
|
(397
|
)
|
Common stocks
|
(260,194
|
)
|
|
(173,357
|
)
|
|
(846,500
|
)
|
Other than temporary impairment of securities
|
(25,411
|
)
|
|
(233,941
|
)
|
|
(751,059
|
)
|
Total
|
(285,705
|
)
|
|
(408,918
|
)
|
|
(1,610,275
|
)
|
Net realized gain (loss)
|
$
|
1,201,854
|
|
|
$
|
738,731
|
|
|
$
|
(32,222
|
)
|
Net realized (loss) gain on other investments:
|
|
|
|
|
|
Impairments of other assets and investments
|
$
|
(182,667
|
)
|
|
$
|
—
|
|
|
$
|
(233,069
|
)
|
Net gain on other assets and investments
|
21,714
|
|
|
29,705
|
|
|
149,128
|
|
Total
|
$
|
(160,953
|
)
|
|
$
|
29,705
|
|
|
$
|
(83,941
|
)
|
Net realized gain (loss) on investments
|
$
|
1,040,901
|
|
|
$
|
768,436
|
|
|
$
|
(116,163
|
)
|
Realized gains and losses are determined on the specific identification method.
The following table presents the gross unrealized losses on investment securities and the estimated 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, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
12 Months or Longer
|
|
Total
|
December 31, 2017
|
Estimated Fair Value
|
|
Unrealized Loss
|
|
Estimated Fair Value
|
|
Unrealized Loss
|
|
Estimated Fair Value
|
|
Unrealized Loss
|
Government obligations
|
$
|
1,041,970
|
|
|
$
|
(951
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,041,970
|
|
|
$
|
(951
|
)
|
General obligations of U.S. states, territories and political subdivisions
|
4,560,021
|
|
|
(26,823
|
)
|
|
3,535,040
|
|
|
(23,401
|
)
|
|
8,095,061
|
|
|
(50,224
|
)
|
Special revenue issuer obligations of U.S. states, territories and political subdivisions
|
13,550,979
|
|
|
(61,127
|
)
|
|
4,022,310
|
|
|
(103,228
|
)
|
|
17,573,289
|
|
|
(164,355
|
)
|
Corporate debt securities
|
3,744,195
|
|
|
(8,868
|
)
|
|
—
|
|
|
—
|
|
|
3,744,195
|
|
|
(8,868
|
)
|
Total fixed maturity securities
|
$
|
22,897,165
|
|
|
$
|
(97,769
|
)
|
|
$
|
7,557,350
|
|
|
$
|
(126,629
|
)
|
|
$
|
30,454,515
|
|
|
$
|
(224,398
|
)
|
Equity securities
|
61,187
|
|
|
(11,903
|
)
|
|
—
|
|
|
—
|
|
|
61,187
|
|
|
(11,903
|
)
|
Total temporarily impaired securities
|
$
|
22,958,352
|
|
|
$
|
(109,672
|
)
|
|
$
|
7,557,350
|
|
|
$
|
(126,629
|
)
|
|
$
|
30,515,702
|
|
|
$
|
(236,301
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
General obligations of U.S. states, territories and political subdivisions
|
$
|
13,884,808
|
|
|
$
|
(298,533
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13,884,808
|
|
|
$
|
(298,533
|
)
|
Special revenue issuer obligations of U.S. states, territories and political subdivisions
|
16,161,906
|
|
|
(502,135
|
)
|
|
—
|
|
|
—
|
|
|
16,161,906
|
|
|
(502,135
|
)
|
Total fixed maturity securities
|
$
|
30,046,714
|
|
|
$
|
(800,668
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30,046,714
|
|
|
$
|
(800,668
|
)
|
Equity securities
|
380,400
|
|
|
(48,983
|
)
|
|
—
|
|
|
—
|
|
|
380,400
|
|
|
(48,983
|
)
|
Total temporarily impaired securities
|
$
|
30,427,114
|
|
|
$
|
(849,651
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30,427,114
|
|
|
$
|
(849,651
|
)
|
The decline in estimated fair value of the fixed maturity securities can be attributed primarily to changes in market interest rates and changes in credit spreads over Treasury securities. Because the Company does not have the intent to sell these securities and will likely not be compelled to sell them before it can recover its cost basis, the Company does not consider these investments to be other-than-temporarily impaired.
The unrealized losses related to holdings of equity securities were caused by market changes that the Company considers to be temporary. Since the Company has the intent and ability to hold these equity securities until a recovery of fair value, the Company does not consider these investments other-than-temporarily impaired.
Factors considered in determining whether a loss is temporary include the length of time and extent to which fair value has been below cost, the financial condition and prospects of the issuer (including credit ratings and analyst reports) and macro-economic changes. A total of
32
and
36
securities had unrealized losses at
December 31, 2017
and
December 31, 2016
, 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
2017
, the Company recorded other-than-temporary impairment charges in the amount of
$25,411
related to securities. During
2016
, the Company recorded other-than-temporary impairment charges in the amount of
$233,941
related to securities. During 2015, the Company recorded other-than-temporary impairment charges in the amount of
$751,059
related to securities. Other-than-temporary impairment charges are included in net realized gain (loss) on investments in the Consolidated Statements of Income.
Variable Interest Entities
The Company holds investments in variable interest entities (“VIEs”) that are not consolidated in the Company's financial statements as the Company is not the primary beneficiary. These entities are considered VIEs as the equity investors at risk, including the Company, do not have the power over the activities that most significantly impact the economic performance of the entities; this power resides with a third-party general partner or managing member that cannot be removed except for cause. The following table sets forth details about the Company's variable interest investments in VIEs, which are structured either as limited partnerships ("LPs") or limited liability companies ("LLCs"), as of December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Investment
|
|
Balance Sheet Classification
|
|
Carrying Value
|
|
Estimated Fair Value
|
|
Maximum Potential Loss (a)
|
Tax credit LPs
|
|
Other investments
|
|
$
|
905,179
|
|
|
$
|
905,179
|
|
|
$
|
1,325,000
|
|
Real estate LLCs or LPs
|
|
Other investments
|
|
5,355,874
|
|
|
5,849,112
|
|
|
7,700,000
|
|
Small business investment LPs
|
|
Other investments
|
|
3,750,677
|
|
|
3,806,600
|
|
|
9,400,000
|
|
Total
|
|
|
|
$
|
10,011,730
|
|
|
$
|
10,560,891
|
|
|
$
|
18,425,000
|
|
|
|
|
|
(a)
|
|
Maximum potential loss is calculated as the total investment in the LLC or LP including any capital commitments that may have not yet been called. The Company is not exposed to any loss beyond the total commitment of its investment.
|
Valuation of Financial Assets and Liabilities
The FASB has established a valuation hierarchy for disclosure of the inputs used to estimated measure fair value of financial assets and liabilities, such as securities. This hierarchy categorizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value.
A financial instrument’s classification within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement—consequently, if there are multiple significant valuation inputs that are categorized in different levels of the hierarchy, the instrument’s hierarchy level is the lowest level (with Level 3 being the lowest level) within which any significant input falls.
Debt and Equity Securities
The Level 1 category includes equity securities that are measured at estimated fair value using quoted active market prices.
The Level 2 category includes fixed maturity investments such as corporate bonds, U.S. government and agency bonds and municipal bonds. Estimated fair value is principally based on market values obtained from a third party pricing service. Factors that are used in determining estimated fair market value include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. The Company receives one quote per security from a third party pricing service, although as discussed below, the Company does consult other pricing resources when confirming that the prices it obtains reflect the estimated fair values of the instruments in accordance with ASC 820
, Fair Value Measurements and Disclosures
. Generally, quotes obtained from the pricing service for instruments classified as Level 2 are not adjusted and are not binding. As of December 31, 2017 and December 31, 2016, the Company did not adjust any Level 2 fair values.
A number of the Company’s investment grade corporate bonds are frequently traded in active markets, and trading prices are consequently available for these securities. However, these securities are classified as Level 2 because the pricing service from which the Company has obtained estimated fair values for these instruments uses valuation models that use observable market inputs in addition to trading prices. Substantially all of the input assumptions used in the service’s model are observable in the marketplace or can be derived or supported by observable market data.
The Company did not carry any Level 3 category debt or equity investment securities as of December 31, 2017 and 2016.
The following table presents, by level, the financial assets carried at estimated fair value measured on a recurring basis as of
December 31, 2017
and
2016
. The table does not include cash on hand and also does not include assets that are measured at historical cost or any basis other than fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Short-term investments
|
$
|
23,779,672
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23,779,672
|
|
Equity securities:
|
|
|
|
|
|
|
|
Common stocks
|
47,366,826
|
|
|
—
|
|
|
—
|
|
|
47,366,826
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
Obligations of U.S. states, territories and political subdivisions*
|
—
|
|
|
90,331,579
|
|
|
—
|
|
|
90,331,579
|
|
Corporate debt securities*
|
—
|
|
|
13,009,504
|
|
|
—
|
|
|
13,009,504
|
|
Total
|
$
|
71,146,498
|
|
|
$
|
103,341,083
|
|
|
$
|
—
|
|
|
$
|
174,487,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Short-term investments
|
$
|
6,558,840
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,558,840
|
|
Equity securities:
|
|
|
|
|
|
|
|
Common stocks
|
41,179,259
|
|
|
—
|
|
|
—
|
|
|
41,179,259
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
Obligations of U.S. states, territories and political subdivisions*
|
—
|
|
|
88,093,996
|
|
|
—
|
|
|
88,093,996
|
|
Corporate debt securities*
|
—
|
|
|
13,840,081
|
|
|
—
|
|
|
13,840,081
|
|
Total
|
$
|
47,738,099
|
|
|
$
|
101,934,077
|
|
|
$
|
—
|
|
|
$
|
149,672,176
|
|
*Denotes fair market value obtained from pricing services.
There were no transfers into or out of Levels 1 and 2 during the period.
To help ensure that estimated fair value determinations are consistent with ASC 820, prices from our pricing services go through multiple review processes to ensure appropriate pricing. Pricing procedures and inputs used to price each security include, but are not limited to, the following: unadjusted quoted market prices for identical securities such as stock market closing prices; non-binding quoted prices for identical securities in markets that are not active; interest rates; yield curves observable at commonly quoted intervals; volatility; prepayment speeds; loss severity; credit risks and default rates. The Company reviews the procedures and inputs used by its pricing services, and verifies a sample of the services’ quotes by comparing them to values obtained from other pricing resources. In the event the Company disagrees with a price provided by its pricing services, the respective service reevaluates the price to corroborate the market information and then reviews inputs to the evaluation in light of potentially new market data. The Company believes that these processes and inputs result in appropriate classifications and estimated fair values consistent with ASC 820.
Other Financial Instruments
The Company uses various financial instruments in the normal course of its business. In the measurement of the estimated fair value of certain financial instruments, other valuation techniques were utilized if quoted market prices were not available. These derived fair value estimates are significantly affected by the assumptions used. Additionally, ASC 820 excludes from its scope certain financial instruments including those related to insurance contracts, pension and other postretirement benefits, and equity method investments.
In estimating the fair value of the financial instruments presented, the Company used the following methods and assumptions:
Cash and cash equivalents
The carrying amount for cash and cash equivalents is a reasonable estimate of fair value due to the short-term maturity of these investments.
Cost-basis investments
The estimated fair value of cost-basis investments is calculated from the book value of the underlying entities, which is not materially different from the fair value of the underlying entity. These items are included in other investments in the Consolidated Balance Sheets.
Accrued interest and dividends
The carrying amount for accrued interest and dividends is a reasonable estimate of fair value due to the short-term maturity of these assets.
The carrying amounts and estimated fair values of other financial instruments (see previous table for investments carried at estimated fair value) as of
December 31, 2017
and
2016
are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
Carrying Value
|
|
Estimated Fair
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Cash and cash equivalents
|
$
|
20,214,468
|
|
|
$
|
20,214,468
|
|
|
$
|
20,214,468
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Cost-basis investments
|
5,438,745
|
|
|
5,710,184
|
|
|
—
|
|
|
—
|
|
|
5,710,184
|
|
Accrued interest and dividends
|
1,099,879
|
|
|
1,099,879
|
|
|
1,099,879
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
26,753,092
|
|
|
$
|
27,024,531
|
|
|
$
|
21,314,347
|
|
|
$
|
—
|
|
|
$
|
5,710,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
Carrying Value
|
|
Estimated Fair
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Cash and cash equivalents
|
$
|
27,928,472
|
|
|
$
|
27,928,472
|
|
|
$
|
27,928,472
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Cost-basis investments
|
4,244,402
|
|
|
4,497,665
|
|
|
—
|
|
|
—
|
|
|
4,497,665
|
|
Accrued interest and dividends
|
1,035,152
|
|
|
1,035,152
|
|
|
1,035,152
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
33,208,026
|
|
|
$
|
33,461,289
|
|
|
$
|
28,963,624
|
|
|
$
|
—
|
|
|
$
|
4,497,665
|
|
4. Property and Equipment
Property and equipment and estimated useful lives at December 31 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Land
|
$
|
1,122,582
|
|
|
$
|
1,122,582
|
|
Office buildings and improvements (25 years)
|
4,406,117
|
|
|
4,399,448
|
|
Furniture, fixtures and equipment (3 to 10 years)
|
12,993,387
|
|
|
10,444,355
|
|
Automobiles (3 years)
|
891,001
|
|
|
971,235
|
|
Total
|
19,413,087
|
|
|
16,937,620
|
|
Less accumulated depreciation
|
(9,240,183
|
)
|
|
(8,184,154
|
)
|
Property and equipment, net
|
$
|
10,172,904
|
|
|
$
|
8,753,466
|
|
Included within furniture, fixtures and equipment is software developed by the Company for internal use. Capitalized costs include both direct and indirect costs, such as payroll costs of employees associated with developing software, incurred during the software development stage.
5. Reinsurance
The Company assumes and cedes reinsurance with other insurance companies in the normal course of business. Premiums assumed and ceded were approximately
$3,000
and
$264,000
, respectively, for
2017
,
$17,000
and
$141,000
, respectively, for
2016
and
$34,000
and
$215,000
, respectively, for
2015
. Ceded reinsurance is comprised of excess of loss treaties, which outline the conditions in which the reinsurance company will pay claims and protect against losses over certain agreed 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, 2017
.
6. Reserve for Claims
Changes in the reserve for claims for the years ended December 31 are summarized as follows based on the year in which the policies were written:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Balance, beginning of period
|
$
|
35,305,000
|
|
|
$
|
37,788,000
|
|
|
$
|
36,677,000
|
|
Provision (benefit) related to:
|
|
|
|
|
|
Current year
|
7,431,586
|
|
|
6,673,036
|
|
|
7,295,013
|
|
Prior years
|
(4,120,506
|
)
|
|
(6,430,083
|
)
|
|
(2,816,519
|
)
|
Total provision charged to operations
|
3,311,080
|
|
|
242,953
|
|
|
4,478,494
|
|
Claims paid, net of recoveries, related to:
|
|
|
|
|
|
Current year
|
(74,885
|
)
|
|
(102,501
|
)
|
|
(97,116
|
)
|
Prior years
|
(3,740,195
|
)
|
|
(2,623,452
|
)
|
|
(3,270,378
|
)
|
Total claims paid, net of recoveries
|
(3,815,080
|
)
|
|
(2,725,953
|
)
|
|
(3,367,494
|
)
|
Balance, end of year
|
$
|
34,801,000
|
|
|
$
|
35,305,000
|
|
|
$
|
37,788,000
|
|
The Company continually refines its reserve estimates as current loss experience develops and credible data emerges. Movements in the reserve related to prior periods were primarily the result of changes to estimates to better reflect the latest reported loss data. The 2017 increase in the provision for claims compared with 2016 primarily related to higher levels of favorable loss development in 2016. The 2016 calendar year change in the provision relating to prior years resulted mostly from changes to certain actuarial inputs and favorable development in 2016 versus the prior year related primarily to policy years 2009 through 2015. Due to variances between actual and expected loss payments, loss development is subject to significant variability.
The Company does not recognize claim recoveries until an actual payment has been received by the Company. The Company realized claim recoveries of approximately
$570,000
,
$1,040,000
and
$467,000
during
2017
,
2016
and
2015
, respectively.
The provision for claims as a percentage of net premiums written was
2.4%
,
0.2%
and
4.0%
in
2017
,
2016
and
2015
, respectively.
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.
A summary of the Company’s loss reserve, broken down into its components of known title claims and IBNR, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
%
|
|
2016
|
|
%
|
Known title claims
|
$
|
4,646,422
|
|
|
13.4
|
|
$
|
4,405,343
|
|
|
12.5
|
IBNR
|
30,154,578
|
|
|
86.6
|
|
30,899,657
|
|
|
87.5
|
Total loss reserve
|
$
|
34,801,000
|
|
|
100.0
|
|
$
|
35,305,000
|
|
|
100.0
|
In management’s opinion, the reserve is adequate to cover claim losses which might result from pending and future claims.
7. Earnings Per Common Share and Share Awards
Basic earnings per common share is computed by dividing net income attributable to the Company by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per common share is computed by dividing net income attributable to the Company by the combination of dilutive potential common stock, comprised of shares issuable under the Company’s share-based compensation plans and the weighted average number of common shares outstanding during the reporting period. Dilutive common share equivalents include the dilutive effect of in-the-money share-based awards, which are calculated based on the average share price for each period using the treasury stock method. Under the treasury stock method, when share-based awards are exercised, (a) the exercise price of a share-based award; and (b) the amount of compensation cost, if any, for future services that the Company has not yet recognized.
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,
|
2017
|
|
2016
|
|
2015
|
Net income attributable to the Company
|
$
|
25,706,502
|
|
|
$
|
19,523,118
|
|
|
$
|
12,533,905
|
|
Weighted average common shares outstanding – Basic
|
1,886,354
|
|
|
1,907,675
|
|
|
1,984,360
|
|
Incremental shares outstanding assuming the exercise of dilutive stock options and SARs (share-settled)
|
9,517
|
|
|
7,382
|
|
|
5,439
|
|
Weighted average common shares outstanding – Diluted
|
1,895,871
|
|
|
1,915,057
|
|
|
1,989,799
|
|
Basic earnings per common share
|
$
|
13.63
|
|
|
$
|
10.23
|
|
|
$
|
6.32
|
|
Diluted earnings per common share
|
$
|
13.56
|
|
|
$
|
10.19
|
|
|
$
|
6.30
|
|
There were
4,500
potential shares excluded from the computation of diluted earnings per share in
2017
. There were no potential shares excluded from the computation of diluted earnings per share in
2016
and
2015
.
The Company historically has adopted employee stock award plans under which restricted stock, and options or stock appreciation rights ("SARs") of the Company's stock may be granted to key employees or directors of the Company at a price not less than the market value on the date of grant. There is currently one active plan from which the Company may grant share-based awards. The awards eligible to be granted under the active plan are limited to SARs, and the maximum aggregate number of shares of common stock of the Company available pursuant to the plan for the grant of SARs is
250,000
shares.
A summary of share-based award transactions for all share-based award plans follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
Of Shares
|
|
Weighted
Average
Exercise
Price
|
|
Average
Remaining
Contractual
Term (Years)
|
|
Aggregate
Intrinsic
Value
|
Outstanding as of January 1, 2015
|
21,000
|
|
|
$
|
51.30
|
|
|
3.64
|
|
$
|
453,510
|
|
SARs granted
|
4,500
|
|
|
73.00
|
|
|
|
|
|
|
SARs exercised
|
(2,000
|
)
|
|
47.88
|
|
|
|
|
|
|
Options exercised
|
(1,500
|
)
|
|
36.79
|
|
|
|
|
|
|
Outstanding as of December 31, 2015
|
22,000
|
|
|
$
|
57.04
|
|
|
3.93
|
|
$
|
945,055
|
|
SARs granted
|
4,500
|
|
|
93.87
|
|
|
|
|
|
|
SARs exercised
|
(2,000
|
)
|
|
32.00
|
|
|
|
|
|
Outstanding as of December 31, 2016
|
24,500
|
|
|
$
|
65.85
|
|
|
3.85
|
|
$
|
836,640
|
|
SARs granted
|
4,500
|
|
|
192.71
|
|
|
|
|
|
|
SARs exercised
|
(4,000
|
)
|
|
36.38
|
|
|
|
|
|
|
Outstanding as of December 31, 2017
|
25,000
|
|
|
$
|
93.40
|
|
|
3.98
|
|
$
|
2,623,720
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2017
|
23,875
|
|
|
$
|
88.72
|
|
|
3.87
|
|
$
|
2,617,375
|
|
|
|
|
|
|
|
|
|
Unvested as of December 31, 2017
|
1,125
|
|
|
$
|
192.71
|
|
|
6.38
|
|
$
|
6,345
|
|
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock at
December 31, 2017
. The intrinsic values of SARs exercised during
2017
,
2016
and
2015
were approximately
$473,000
,
$117,000
and
$104,000
, respectively.
There were
no
options outstanding at
December 31, 2017
. The following table summarizes information about SARs outstanding at
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SARs Outstanding at Year-End
|
|
SARs Exercisable at Year-End
|
Range of Exercise Prices
|
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Contractual Life
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
$
|
40.00
|
|
|
—
|
|
$
|
49.99
|
|
|
1,000
|
|
|
0.38
|
|
$
|
41.50
|
|
|
1,000
|
|
|
$
|
41.50
|
|
50.00
|
|
|
—
|
|
59.99
|
|
|
3,000
|
|
|
1.37
|
|
50.50
|
|
|
3,000
|
|
|
50.50
|
|
60.00
|
|
|
—
|
|
69.99
|
|
|
4,500
|
|
|
3.39
|
|
68.70
|
|
|
4,500
|
|
|
68.70
|
|
70.00
|
|
|
—
|
|
79.99
|
|
|
7,500
|
|
|
3.58
|
|
72.44
|
|
|
7,500
|
|
|
72.44
|
|
90.00
|
|
|
—
|
|
99.99
|
|
|
4,500
|
|
|
5.38
|
|
93.87
|
|
|
4,500
|
|
|
93.87
|
|
190.00
|
|
|
—
|
|
199.99
|
|
|
4,500
|
|
|
6.38
|
|
192.71
|
|
|
3,375
|
|
|
192.71
|
|
$
|
40.00
|
|
|
—
|
|
$
|
199.99
|
|
|
25,000
|
|
|
3.98
|
|
$
|
93.40
|
|
|
23,875
|
|
|
$
|
88.72
|
|
In
2017
,
4,500
SARs vested with a fair value of
$219,315
.
During the second quarters of
2017
,
2016
and
2015
, the Company issued share-settled SARs to the directors of the Company. SARs give the holder the right to receive stock equal to the appreciation in the value of shares of stock from the grant date for a specified period of time, and as a result, are accounted for as equity instruments. The fair value of each award is estimated on the date of grant using the Black-Scholes option valuation model with the weighted average assumptions noted in the table shown below. Expected volatilities are based on both the implied and historical volatility of the Company’s stock. The Company uses historical data to project SAR exercises and pre-exercise forfeitures within the valuation model. The expected term of awards represents the period of time that SARs granted are expected to be outstanding. The interest rate assumed for the expected life of the award is based on the U.S. Treasury yield curve in effect at the time of the grant. The weighted average fair values for the SARs issued during
2017
,
2016
and
2015
were
$55.40
,
$28.75
and
$31.16
, respectively, and were estimated using the weighted average assumptions shown in the table below.
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Expected Life in Years
|
7.0
|
|
7.0
|
|
7.0
|
Volatility
|
26.2%
|
|
28.9%
|
|
40.7%
|
Interest Rate
|
2.0%
|
|
1.7%
|
|
2.0%
|
Yield Rate
|
0.8%
|
|
0.7%
|
|
0.4%
|
There was approximately
$219,000
,
$132,000
and
$138,000
of compensation expense relating to SARs or options vesting on or before
December 31, 2017
,
2016
and
2015
, respectively, included in salaries, employee benefits and payroll taxes in the Consolidated Statements of Income. As of
December 31, 2017
, there was approximately
$62,000
of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the Company’s stock award plans. That cost is expected to be recognized over a weighted average period of approximately
3 months
.
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,
|
2017
|
|
2016
|
|
2015
|
Exercise price equal to market price on date of grant:
|
|
|
|
|
|
Weighted average market price
|
$
|
192.71
|
|
|
$
|
93.87
|
|
|
$
|
73.00
|
|
Weighted average grant-date fair value
|
$
|
55.40
|
|
|
$
|
28.75
|
|
|
$
|
31.16
|
|
There have been
no
stock options or SARs granted where the exercise price was less than the market price on the date of grant.
8. Income Taxes
The components of income tax expense for the years ended December 31 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
2017
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
|
Federal
|
$
|
9,163,000
|
|
|
$
|
5,745,000
|
|
|
$
|
4,179,000
|
|
State
|
71,000
|
|
|
81,000
|
|
|
34,000
|
|
Total current
|
9,234,000
|
|
|
5,826,000
|
|
|
4,213,000
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(4,649,054
|
)
|
|
2,755,777
|
|
|
976,624
|
|
State
|
(14,946
|
)
|
|
34,223
|
|
|
38,376
|
|
Total deferred
|
(4,664,000
|
)
|
|
2,790,000
|
|
|
1,015,000
|
|
Total
|
$
|
4,570,000
|
|
|
$
|
8,616,000
|
|
|
$
|
5,228,000
|
|
For state income tax purposes, ITIC and NITIC generally pay only a gross premium tax found in premium and retaliatory taxes in the Consolidated Statements of Income.
On December 22, 2017, the TCJA, was enacted into law. The new tax legislation, among other changes, reduces the federal corporate income tax rate from
35%
to
21%
, effective January 1, 2018. As required under generally accepted accounting principles, the Company’s deferred tax assets and liabilities were revalued at the newly enacted U.S. corporate income tax rate. The impact was recognized in the Company’s provision for income taxes in the fourth quarter of 2017. The revaluation resulted in a benefit of approximately
$5.3 million
, or
$2.82
per diluted share.
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,
|
2017
|
|
2016
|
Deferred income tax assets:
|
|
|
|
Accrued benefits and retirement services
|
$
|
2,448,598
|
|
|
$
|
3,625,943
|
|
Other-than-temporary impairment of assets
|
265,178
|
|
|
429,167
|
|
Allowance for doubtful accounts
|
102,015
|
|
|
122,477
|
|
Net operating loss carryforward
|
33,000
|
|
|
15,000
|
|
Postretirement benefit obligation
|
18,318
|
|
|
56,259
|
|
Other
|
878,195
|
|
|
418,335
|
|
Total
|
3,745,304
|
|
|
4,667,181
|
|
Deferred income tax liabilities:
|
|
|
|
Net unrealized gain on investments
|
5,193,029
|
|
|
6,207,324
|
|
Recorded reserve for claims, net of statutory premium reserves
|
4,126,388
|
|
|
4,985,984
|
|
Intangible assets
|
1,337,909
|
|
|
2,525,511
|
|
Excess of tax over book depreciation
|
1,042,205
|
|
|
1,303,710
|
|
Other
|
671,532
|
|
|
762,908
|
|
Total
|
12,371,063
|
|
|
15,785,437
|
|
Net deferred income tax liabilities
|
$
|
(8,625,759
|
)
|
|
$
|
(11,118,256
|
)
|
At
December 31, 2017
and
2016
, no valuation allowance was recorded. Based upon the Company’s historical results of operations, the existing financial condition of the Company and management’s assessment of all other available information, management believes that it is more likely than not that the benefit of these deferred income tax assets will be realized.
A reconciliation of income tax as computed for the years ended December 31 at the U.S. federal statutory income tax rate of
35%
for 2017,
34.6%
for 2016 and
34.4%
for 2015, respectively, to income tax expense follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
2017
|
|
2016
|
|
2015
|
Anticipated income tax expense
|
$
|
10,594,700
|
|
|
$
|
9,733,482
|
|
|
$
|
6,115,306
|
|
Increase (decrease) related to:
|
|
|
|
|
|
State income taxes, net of federal income tax benefit
|
46,150
|
|
|
52,974
|
|
|
22,304
|
|
Tax-exempt interest income (net of amortization)
|
(1,298,251
|
)
|
|
(1,074,504
|
)
|
|
(981,712
|
)
|
Tax Cuts and Jobs Act
|
(5,341,521
|
)
|
|
—
|
|
|
—
|
|
Other, net
|
568,922
|
|
|
(95,952
|
)
|
|
72,102
|
|
Provision for income taxes
|
$
|
4,570,000
|
|
|
$
|
8,616,000
|
|
|
$
|
5,228,000
|
|
In accounting for uncertainty in income taxes, the Company is required to recognize in its financial statements the impact of a tax position if that position is more likely than not of being sustained on an audit, based on the technical merits of the position. In this regard, an uncertain tax position represents the Company’s expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. There were no unrecognized tax benefits or liabilities as of
December 31, 2017
.
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 expiration of the applicable statute of limitations, changes in management’s judgment about the level of uncertainty, status of examinations, litigation and legislative activity and the additions or eliminations of uncertain tax positions.
The Company’s policy is to report interest and penalties related to income taxes in the other line item in the Consolidated Statements of Income.
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 2014.
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
$1,232,000
,
$896,000
, and
$793,000
in
2017
,
2016
and
2015
, 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, 2017
, are summarized as follows:
|
|
|
|
|
Year Ended:
|
|
2018
|
$
|
1,190,734
|
|
2019
|
1,018,685
|
|
2020
|
861,763
|
|
2021
|
766,584
|
|
2022
|
588,720
|
|
Thereafter
|
340,462
|
|
Total
|
$
|
4,766,948
|
|
10. Retirement Agreements and Other Postretirement Benefit Plan
The Company has a 401(k) savings plan. In order to participate in the plan, individuals must have worked at the Company for at least
3
months. In order to be eligible for employer contributions, 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) plan were approximately
$1,577,000
,
$810,000
and
$741,000
for
2017
,
2016
and
2015
, 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 Chief Operating Officer of ITIC. These individuals also serve as the Chairman, President and Executive Vice President, respectively, of the Company. The agreements provide compensation and life, health, dental and vision benefits upon the occurrence of specific events, including death, disability, retirement, termination without cause or upon a change in control. The employment agreements also prohibit each of these executives from competing with ITIC and its parent, subsidiaries and affiliates in North Carolina while employed by ITIC and for a period of
two
years following termination of their employment.
In addition, during the second quarter of 2004, ITIC entered into nonqualified deferred compensation plan agreements with these executives. The amount accrued for all agreements at
December 31, 2017
and
2016
was approximately
$9,492,000
and
$8,487,000
, respectively, which includes postretirement compensation and health benefits, and was calculated based on the terms of the contract. Both the
2017
and
2016
accruals are included in the accounts payable and accrued liabilities line item of the Consolidated Balance Sheets. These executive contracts are accounted for on an individual contract basis. On December 24, 2008, the executive contracts were amended effective January 1, 2009 to bring them into compliance with Section 409A of the Internal Revenue Code, and were amended and restated to provide for an annual cash payment to the officers equal to the amounts the Company would have contributed to their accounts under its 401(k) plan if such contributions were not limited by the federal tax laws, less the amount of any contributions that the Company actually makes to their accounts under the Company’s 401(k) plan.
On November 17, 2003, ITIC entered into employment agreements with key executives that provide for the continuation of certain employee benefits upon retirement. The executive employee benefits include health insurance, dental insurance, vision insurance and life insurance. The benefits are unfunded. Estimated future benefit payouts expected to be paid for each of the next five years are
$11,789
in
2018
,
$13,343
in
2019
,
$14,913
in
2020
,
$16,501
in
2021
,
$24,250
in
2022
and
$174,283
in the next five years thereafter.
Cost of the Company’s postretirement benefits included the following components and is presented in the salaries, employee benefits and payroll taxes line of its Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Net periodic benefit cost
|
|
|
|
|
|
Service cost – benefits earned during the year
|
$
|
—
|
|
|
$
|
10,180
|
|
|
$
|
16,748
|
|
Interest cost on the projected benefit obligation
|
36,869
|
|
|
35,123
|
|
|
30,772
|
|
Amortization of unrecognized prior service cost
|
—
|
|
|
—
|
|
|
4,390
|
|
Amortization of unrecognized loss
|
8,612
|
|
|
8,941
|
|
|
3,514
|
|
Net periodic benefits cost at end of year
|
$
|
45,481
|
|
|
$
|
54,244
|
|
|
$
|
55,424
|
|
The Company is required to recognize the funded status (i.e., the difference between the fair value of the assets and the accumulated postretirement benefit obligations of its postretirement benefits) 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
$(87,191)
,
$(57,556)
net of tax, for
December 31, 2017
, and
$(165,437)
,
$(109,200)
net of tax, for
December 31, 2016
, and represents the net unrecognized actuarial losses and unrecognized prior service costs. The effects of the funded status on the Company’s Consolidated Balance Sheets at
December 31, 2017
and
2016
are presented in the following table:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Funded status
|
|
|
|
Actuarial present value of future benefits:
|
|
|
|
Fully eligible active employee
|
$
|
(895,727
|
)
|
|
$
|
(928,492
|
)
|
Non-eligible active employees
|
—
|
|
|
—
|
|
Plan assets
|
—
|
|
|
—
|
|
Funded status of accumulated postretirement benefit obligation, recognized in other liabilities
|
$
|
(895,727
|
)
|
|
$
|
(928,492
|
)
|
Development of the accumulated postretirement benefit obligation for the years ended
December 31, 2017
and
2016
includes the following:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Accrued postretirement benefit obligation at beginning of year
|
$
|
(928,492
|
)
|
|
$
|
(882,623
|
)
|
Service cost – benefits earned during the year
|
—
|
|
|
(10,180
|
)
|
Interest cost on projected benefit obligation
|
(36,869
|
)
|
|
(35,123
|
)
|
Actuarial gain (loss)
|
69,634
|
|
|
(566
|
)
|
Accrued postretirement benefit obligation at end of year
|
$
|
(895,727
|
)
|
|
$
|
(928,492
|
)
|
The changes in amounts related to accumulated other comprehensive income, pre-tax, are as follows:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Balance at beginning of year
|
$
|
165,437
|
|
|
$
|
173,812
|
|
Components of accumulated other comprehensive income:
|
|
|
|
Unrecognized prior service cost
|
—
|
|
|
—
|
|
Amortization of loss, net
|
(8,612
|
)
|
|
(8,941
|
)
|
Actuarial (gain) loss
|
(69,634
|
)
|
|
566
|
|
Balance at end of year
|
$
|
87,191
|
|
|
$
|
165,437
|
|
The amounts currently in accumulated other comprehensive income, pre-tax, that will be reclassified to the Consolidated Statements of Income and recognized as components of net periodic benefit costs in
2018
are:
|
|
|
|
|
|
Projected
2018
|
Amortization of unrecognized prior service cost
|
$
|
—
|
|
Amortization of unrecognized loss
|
—
|
|
Net periodic benefit cost at end of year
|
$
|
—
|
|
Assumed health care cost trend rates do have an effect on the amounts reported for the postretirement benefit obligations. The following illustrates the effects on the net periodic postretirement benefit cost (“NPPBC”) and the accumulated postretirement benefit obligation (“APBO”) of a one percentage point increase and one percentage point decrease in the assumed health care cost trend rate as of
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
One
Percentage
Point
Increase
|
|
One
Percentage
Point
Decrease
|
Net periodic postretirement benefit cost
|
|
|
|
Effect on the service cost component
|
$
|
—
|
|
|
$
|
—
|
|
Effect on interest cost
|
6,761
|
|
|
(5,305
|
)
|
Total effect on the net periodic postretirement benefit cost
|
$
|
6,761
|
|
|
$
|
(5,305
|
)
|
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
|
187,814
|
|
|
(147,367
|
)
|
Effect on actives not yet eligible
|
—
|
|
|
—
|
|
Total effect on the accumulated postretirement benefit obligation
|
$
|
187,814
|
|
|
$
|
(147,367
|
)
|
11. Commitments and Contingencies
Legal Proceedings.
The Company and its subsidiaries are involved in legal proceedings that are incidental to their business. In the Company’s opinion, based on the present status of these proceedings, any potential liability of the Company or its subsidiaries with respect to these legal proceedings, will not, in the aggregate, be material to the Company’s consolidated financial condition or operations.
Regulation
. The Company’s title insurance and trust subsidiaries are regulated by various federal, state and local governmental agencies and are subject to various audits and inquiries. It is the opinion of management based on its present expectations that these audits and inquiries will not have a material impact on the Company’s consolidated financial condition or operations.
Escrow and Trust Deposits
. As a service to its customers, the Company, through ITIC, administers escrow and trust deposits representing earnest money received under real estate contracts, undisbursed amounts received for settlement of mortgage loans and indemnities against specific title risks. Cash held by the Company for these purposes was approximately
$20,880,000
and
$18,032,000
as of
December 31, 2017
and
2016
, 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.
Like-Kind Exchange Proceeds
. In administering tax-deferred property exchanges, the Company’s subsidiary, Investors Title Exchange Corporation (“ITEC”), serves as a qualified intermediary for exchanges, holding the net sales proceeds from relinquished property to be used for purchase of replacement property. Another Company subsidiary, Investors Title Accommodation Corporation (“ITAC”), serves as exchange accommodation titleholder and, through limited liability companies 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
$184,985,000
and
$202,184,000
as of
December 31, 2017
and
2016
, respectively. These amounts are not considered assets of the Company and, therefore, are excluded from the accompanying Consolidated Balance Sheets; however, the Company remains contingently liable for the disposition of the transfers of property, disbursements of proceeds and the return on the proceeds at the agreed upon rate. Exchange services revenue includes earnings on these deposits; therefore, investment income is shown as other revenue rather than investment income. These like-kind exchange funds are primarily invested in money market and other short-term investments.
12. Segment Information
The Company has
one
reportable segment, title insurance services. The remaining immaterial segments have been combined into a group called “All Other.”
The title insurance segment primarily issues title insurance policies through approved attorneys from underwriting offices and through independent issuing agents. Title insurance policies insure titles to real estate.
Provided below is selected financial information about the Company’s operations by segment for the periods ended
December 31, 2017
,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
Title
Insurance
|
|
All
Other
|
|
Intersegment
Eliminations
|
|
Total
|
Insurance and other services revenues
|
$
|
154,333,311
|
|
|
$
|
7,530,496
|
|
|
$
|
(5,699,859
|
)
|
|
$
|
156,163,948
|
|
Investment income
|
4,992,127
|
|
|
546,105
|
|
|
(1,093,785
|
)
|
|
4,444,447
|
|
Net realized gain on investments
|
931,635
|
|
|
109,266
|
|
|
—
|
|
|
1,040,901
|
|
Total revenues
|
$
|
160,257,073
|
|
|
$
|
8,185,867
|
|
|
$
|
(6,793,644
|
)
|
|
$
|
161,649,296
|
|
Operating expenses
|
129,095,939
|
|
|
7,912,962
|
|
|
(5,630,175
|
)
|
|
131,378,726
|
|
Income before income taxes
|
$
|
31,161,134
|
|
|
$
|
272,905
|
|
|
$
|
(1,163,469
|
)
|
|
$
|
30,270,570
|
|
Total assets
|
$
|
193,827,920
|
|
|
$
|
55,084,939
|
|
|
$
|
—
|
|
|
$
|
248,912,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
Title
Insurance
|
|
All
Other
|
|
Intersegment
Eliminations
|
|
Total
|
Insurance and other services revenues
|
$
|
128,408,746
|
|
|
$
|
6,808,392
|
|
|
$
|
(2,177,649
|
)
|
|
$
|
133,039,489
|
|
Investment income
|
4,329,605
|
|
|
564,891
|
|
|
(210,007
|
)
|
|
4,684,489
|
|
Net realized gain on investments
|
644,850
|
|
|
123,586
|
|
|
—
|
|
|
768,436
|
|
Total revenues
|
$
|
133,383,201
|
|
|
$
|
7,496,869
|
|
|
$
|
(2,387,656
|
)
|
|
$
|
138,492,414
|
|
Operating expenses
|
105,885,770
|
|
|
6,583,157
|
|
|
(2,107,965
|
)
|
|
110,360,962
|
|
Income before income taxes
|
$
|
27,497,431
|
|
|
$
|
913,712
|
|
|
$
|
(279,691
|
)
|
|
$
|
28,131,452
|
|
Total assets
|
$
|
183,763,655
|
|
|
$
|
45,174,467
|
|
|
$
|
—
|
|
|
$
|
228,938,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
Title
Insurance
|
|
All
Other
|
|
Intersegment
Eliminations
|
|
Total
|
Insurance and other services revenues
|
$
|
118,144,981
|
|
|
$
|
6,479,484
|
|
|
$
|
(1,839,549
|
)
|
|
$
|
122,784,916
|
|
Investment income
|
4,073,857
|
|
|
574,132
|
|
|
(116,670
|
)
|
|
4,531,319
|
|
Net realized loss on investments
|
(13,603
|
)
|
|
(102,560
|
)
|
|
—
|
|
|
(116,163
|
)
|
Total revenues
|
$
|
122,205,235
|
|
|
$
|
6,951,056
|
|
|
$
|
(1,956,219
|
)
|
|
$
|
127,200,072
|
|
Operating expenses
|
104,594,829
|
|
|
6,598,055
|
|
|
(1,769,865
|
)
|
|
109,423,019
|
|
Income before income taxes
|
$
|
17,610,406
|
|
|
$
|
353,001
|
|
|
$
|
(186,354
|
)
|
|
$
|
17,777,053
|
|
Total assets
|
$
|
163,582,898
|
|
|
$
|
47,939,131
|
|
|
$
|
—
|
|
|
$
|
211,522,029
|
|
13. Stockholders’ Equity
On November 12, 2002, the Company’s Board of Directors amended the Company’s Articles of Incorporation, creating a series of Class A Junior Participating Preferred Stock (the “Class A Preferred Stock”). The Class A Preferred Stock is senior to common stock in dividends or distributions of assets upon liquidations, dissolutions or winding up of the Company. Dividends on the Class A Preferred Stock are cumulative and accrue from the quarterly dividend payment date. Each share of Class A Preferred Stock entitles the holder thereof to
100
votes on all matters submitted to a vote of shareholders of the Company. These shares were reserved for issuance under the Shareholder Rights Plan (the “Plan”), which was adopted on November 21, 2002, by the Company’s Board of Directors. Under the terms of the Plan, the Company’s common stock acquired by a person or a group buying
15%
or more of the Company’s common stock would be diluted, except in transactions approved by the Board of Directors.
In connection with the Plan, the Company’s Board of Directors declared a dividend distribution of one right (a “Right”) for each outstanding share of the Company’s 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. 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 Company’s common stock, or (b) ten (10) business days following the commencement of, or first public announcement of the intent of a person or 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 Company’s 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 any person or group of affiliated or associated persons acquires beneficial ownership of
15%
or more of the outstanding common stock, each holder of a Right (other than the acquiring person or group) will have the right to buy, at the exercise price, common stock of the Company having a market value of twice the exercise price. 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 Company’s common stock is changed or exchanged, or more than
50%
of the Company’s 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. At any time after a person or group of affiliated or associated persons has acquired beneficial ownership of
15%
or more of the outstanding common stock and prior to the acquisition by such person or group of
50%
or more of the outstanding common stock, the Company’s 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 Company’s common stock, or one one-hundredth of a share of Preferred Stock, per Right.
The Rights 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.
On October 31, 2012, the Plan was amended to, among other things, extend the expiration date of the plan from November 11, 2012 to October 31, 2022 and increase the exercise price of the stock purchase rights from
$80
per unit to
$220
per unit. In connection with the amendments to the shareholders’ rights plan, the Board of Directors of the Company also amended the Company’s Articles of Incorporation to increase the number of shares designated under the rights plan as Series A Participating Preferred Stock from
100,000
shares to
200,000
shares. There were
1,000,000
shares of Preferred Stock authorized as of
December 31, 2017
and
2016
, with
200,000
, being designated Class A Junior Participating Preferred Stock.
14. Concentration of Credit 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 (“FDIC”). Of the
$20.2 million
in cash and cash equivalents at
December 31, 2017
,
$19.3 million
was not insured by the FDIC. Of the
$27.9 million
in cash and cash equivalents at
December 31, 2016
,
$27.1 million
was not insured by the FDIC. The Company mitigates the risk of having cash and cash equivalents not insured by the FDIC by monitoring the credit quality of the financial institutions in which the funds are held.
15. Business Concentration
The Company generates a significant amount of title insurance premiums in North Carolina, Texas and South Carolina. In
2017
,
2016
and
2015
, North Carolina accounted for
38.3%
,
35.5%
and
32.5%
of total title premiums, respectively. In
2017
,
2016
and
2015
, Texas accounted for
19.1%
,
20.0%
and
22.5%
of total title premiums, respectively. In
2017
,
2016
and
2015
, South Carolina accounted for
10.3%
,
10.1%
and
10.1%
of total title premiums, respectively.
16. Related Party Transactions
The Company does business with, and has investments in, unconsolidated limited liability companies that are primarily title insurance agencies. The Company utilizes the equity method to account for its investments in these limited liability companies. The following table sets forth the approximate values by year found within each financial statement classification:
|
|
|
|
|
|
|
|
|
Financial Statement Classification,
|
2017
|
|
2016
|
Consolidated Balance Sheets
|
|
Other investments
|
$
|
6,594,000
|
|
|
$
|
6,437,000
|
|
Premiums and fees receivable
|
$
|
720,000
|
|
|
$
|
56,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Statement Classification,
|
|
|
|
Consolidated Statements of Income
|
2017
|
|
2016
|
|
2015
|
Net premiums written
|
$
|
14,355,000
|
|
|
$
|
15,016,000
|
|
|
$
|
14,015,000
|
|
Other income
|
$
|
2,240,000
|
|
|
$
|
2,317,000
|
|
|
$
|
2,618,000
|
|
Commissions to agents
|
$
|
9,864,000
|
|
|
$
|
10,394,000
|
|
|
$
|
9,700,000
|
|
17. Business Combinations, Intangible Assets and Goodwill
Recent Business Combinations
In October 2016, National Investors Holdings, LLC ("NIH"), a subsidiary of the Company, acquired all of the outstanding shares of a title insurance agency doing business in Texas. NIH paid
$10 million
plus a
$918,000
adjustment for the title insurance agency’s net cash position at closing.
Intangible Assets
The fair values of intangible assets recognized as the result of title insurance agency acquisitions, all Level 3 inputs, are principally based on values obtained from a third party valuation service. In accordance with ASC 350,
Intangibles – Goodwill and Other
, management determined that certain events and changes in circumstances occurred during 2017 that indicated a portion of the carrying amount of the Company’s intangible assets may not be recoverable. Therefore, net identifiable intangible assets of
$153,667
were impaired during 2017.
Identifiable intangible assets consist of the following as of December 31:
|
|
|
|
|
|
|
|
Year Ended:
|
2017
|
2016
|
Referral relationships
|
$
|
6,416,215
|
|
$
|
6,416,215
|
|
Non-complete agreements
|
1,405,685
|
|
1,405,685
|
|
Tradename
|
560,000
|
|
560,000
|
|
Total
|
8,381,900
|
|
8,381,900
|
|
Accumulated amortization
|
(1,374,461
|
)
|
(475,110
|
)
|
Identifiable intangible assets, net
|
$
|
7,007,439
|
|
$
|
7,906,790
|
|
The following table provides the estimated aggregate amortization expense for each of the five succeeding fiscal years:
|
|
|
|
|
Year Ended:
|
|
2018
|
$
|
642,253
|
|
2019
|
568,920
|
|
2020
|
568,920
|
|
2021
|
561,587
|
|
2022
|
524,920
|
|
Thereafter
|
4,140,839
|
|
Total
|
$
|
7,007,439
|
|
Goodwill and Title Plant
As of
December 31, 2017
and
2016
, the Company recognized
$4,349,851
in goodwill and
$690,000
in a title plant, net of impairments, as the result of title agency acquisitions. The fair values of goodwill and the title plant, both Level 3 inputs, are principally based on values obtained from a third party valuation service. In accordance with ASC 350,
Intangibles – Goodwill and Other
, management determined that certain events and changes in circumstances occurred during 2017 that indicated a portion of the carrying amount of the Company’s goodwill may not be recoverable. Therefore, goodwill of
$29,000
was impaired during
2017
.
18. Accumulated Other Comprehensive Income
The following tables provide changes in the balances of each component of accumulated other comprehensive income, net of tax, for the periods ended
December 31, 2017
,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
Unrealized Gains and Losses
On Available-for-Sale
Securities
|
|
Postretirement
Benefits Plans
|
|
Total
|
Beginning balance at January 1
|
$
|
11,870,647
|
|
|
$
|
(109,200
|
)
|
|
$
|
11,761,447
|
|
Other comprehensive income before reclassifications
|
4,922,796
|
|
|
45,958
|
|
|
4,968,754
|
|
Amounts reclassified from accumulated other comprehensive income
|
(791,061
|
)
|
|
5,686
|
|
|
(785,375
|
)
|
Net current-period other comprehensive income
|
4,131,735
|
|
|
51,644
|
|
|
4,183,379
|
|
Ending balance
|
$
|
16,002,382
|
|
|
$
|
(57,556
|
)
|
|
$
|
15,944,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
Unrealized Gains and Losses
On Available-for-Sale
Securities
|
|
Postretirement
Benefits Plans
|
|
Total
|
Beginning balance at January 1
|
$
|
11,597,741
|
|
|
$
|
(114,726
|
)
|
|
$
|
11,483,015
|
|
Other comprehensive income (loss) before reclassifications
|
758,021
|
|
|
(374
|
)
|
|
757,647
|
|
Amounts reclassified from accumulated other comprehensive income
|
(485,115
|
)
|
|
5,900
|
|
|
(479,215
|
)
|
Net current-period other comprehensive income
|
272,906
|
|
|
5,526
|
|
|
278,432
|
|
Ending balance
|
$
|
11,870,647
|
|
|
$
|
(109,200
|
)
|
|
$
|
11,761,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
Unrealized Gains and Losses
On Available-for-Sale
Securities
|
|
Postretirement
Benefits Plans
|
|
Total
|
Beginning balance at January 1
|
$
|
12,934,497
|
|
|
$
|
(77,988
|
)
|
|
$
|
12,856,509
|
|
Other comprehensive loss before reclassifications
|
(1,355,316
|
)
|
|
(41,954
|
)
|
|
(1,397,270
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
18,560
|
|
|
5,216
|
|
|
23,776
|
|
Net current-period other comprehensive loss
|
(1,336,756
|
)
|
|
(36,738
|
)
|
|
(1,373,494
|
)
|
Ending balance
|
$
|
11,597,741
|
|
|
$
|
(114,726
|
)
|
|
$
|
11,483,015
|
|
The following tables provide significant amounts reclassified out of each component of accumulated other comprehensive income for the periods ended
December 31, 2017
,
2016
and
2015
:
|
|
|
|
|
|
|
2017
|
|
|
|
Details about Accumulated Other
Comprehensive Income Components
|
Amount Reclassified from
Accumulated Other
Comprehensive Income
|
|
Affected Line Item in the Consolidated
Statements of Income
|
Unrealized gains and losses on available-for-sale securities:
|
|
|
|
Net realized gain on investment
|
$
|
1,227,265
|
|
|
|
Other-than-temporary impairments
|
(25,411
|
)
|
|
|
Total
|
$
|
1,201,854
|
|
|
Net realized gain (loss) on investments
|
Tax
|
(410,793
|
)
|
|
Provision for Income Taxes
|
Net of Tax
|
$
|
791,061
|
|
|
|
Amortization related to postretirement benefit plans:
|
|
|
|
|
Prior year service cost
|
$
|
—
|
|
|
|
Unrecognized loss
|
(8,612
|
)
|
|
|
Total
|
$
|
(8,612
|
)
|
|
(a)
|
Tax
|
2,926
|
|
|
Provision for Income Taxes
|
Net of Tax
|
$
|
(5,686
|
)
|
|
|
Reclassifications for the period
|
$
|
785,375
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
Details about Accumulated Other
Comprehensive Income Components
|
Amount Reclassified from
Accumulated Other
Comprehensive Income
|
|
Affected Line Item in the Consolidated
Statements of Income
|
Unrealized gains and losses on available-for-sale securities:
|
|
|
|
Net realized gain on investment
|
$
|
972,672
|
|
|
|
Other-than-temporary impairments
|
(233,941
|
)
|
|
|
Total
|
$
|
738,731
|
|
|
Net realized gain (loss) on investments
|
Tax
|
(253,616
|
)
|
|
Provision for Income Taxes
|
Net of Tax
|
$
|
485,115
|
|
|
|
Amortization related to postretirement benefit plans:
|
|
|
|
|
Prior year service cost
|
$
|
—
|
|
|
|
Unrecognized loss
|
(8,941
|
)
|
|
|
Total
|
$
|
(8,941
|
)
|
|
(a)
|
Tax
|
3,041
|
|
|
Provision for Income Taxes
|
Net of Tax
|
$
|
(5,900
|
)
|
|
|
Reclassifications for the period
|
$
|
479,215
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
Details about Accumulated Other
Comprehensive Income Components
|
Amount Reclassified from
Accumulated Other
Comprehensive Income
|
|
Affected Line Item in the Consolidated
Statements of Income
|
Unrealized gains and losses on available-for-sale securities:
|
|
|
|
Net realized gain on investment
|
$
|
718,837
|
|
|
|
Other-than-temporary impairments
|
(751,059
|
)
|
|
|
Total
|
$
|
(32,222
|
)
|
|
Net realized gain (loss) on investments
|
Tax
|
13,662
|
|
|
Provision for Income Taxes
|
Net of Tax
|
$
|
(18,560
|
)
|
|
|
Amortization related to postretirement benefit plans:
|
|
|
|
|
Prior year service cost
|
$
|
(4,390
|
)
|
|
|
Unrecognized loss
|
(3,514
|
)
|
|
|
Total
|
$
|
(7,904
|
)
|
|
(a)
|
Tax
|
2,688
|
|
|
Provision for Income Taxes
|
Net of Tax
|
$
|
(5,216
|
)
|
|
|
Reclassifications for the period
|
$
|
(23,776
|
)
|
|
|
|
|
(a)
|
These accumulated other comprehensive income components are not reclassified to net income in their entirety in the same reporting period. The amounts are presented within salaries, employee benefits and payroll taxes on the Consolidated Statements of Income as amortized. Amortization related to postretirement benefit plans is included in the computation of net periodic pension costs, as discussed in Note 10.
|