Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
ITIC > SEC Filings for ITIC > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for INVESTORS TITLE CO | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for INVESTORS TITLE CO


13-Nov-2012

Quarterly Report


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

The Company's 2011 Annual Report on Form l0-K should be read in conjunction with the following discussion since it contains important information for evaluating the Company's operating results and financial condition.

Overview

Investors Title Company (the "Company") is a holding company that engages primarily in issuing title insurance through two subsidiaries, Investors Title Insurance Company ("ITIC") and National Investors Title Insurance Company ("NITIC"). Operating revenues from the title segment accounted for 96.1% of the Company's operating revenues in the first nine months of 2012. Through ITIC and NITIC, the Company underwrites land title insurance for owners and mortgagees as a primary insurer. Title insurance protects against loss or damage resulting from title defects that affect real property.

There are two basic types of title insurance policies - one for the mortgage lender and one for the real estate owner. A lender often requires property owners to purchase title insurance to protect its position as a holder of a mortgage loan, but the lender's title insurance policy does not protect the property owner. The property owner has to purchase a separate owner's title insurance policy to protect his investment. When real property is conveyed from one party to another, occasionally there is an undisclosed defect in the title or a mistake or omission in a prior deed, will or mortgage that may give a third party a legal claim against such property. If a claim is made against real property, title insurance provides indemnification against insured defects.

The Company issues title insurance policies through issuing agencies and also directly through home and branch offices. Issuing agents are typically real estate attorneys or subsidiaries of community and regional mortgage lending institutions, depending on local customs and regulations and the Company's marketing strategy in a particular territory. The ability to attract and retain issuing agents is a key determinant of the Company's growth in premiums written.

Revenues for this segment result from purchases of new and existing residential and commercial real estate, refinance activity and certain other types of mortgage lending such as home equity lines of credit.

Volume is a factor in the Company's profitability due to fixed operating costs which are incurred by the Company regardless of premium volume. The resulting operating leverage tends to amplify the impact of changes in volume on the Company's profitability. The Company's profitability also depends, in part, upon its ability to manage its investment portfolio to maximize investment returns and minimize risks such as interest rate changes, defaults and impairments of assets.

The Company's volume of title insurance premiums is affected by the overall level of residential and commercial real estate activity, which includes sales, mortgage financing and mortgage refinancing. In turn, real estate activity is affected by a number of factors, including the availability of mortgage credit, the cost of real estate, consumer confidence, employment and family income levels and general United States economic conditions. Interest rate volatility is also an important factor in the level of residential and commercial real estate activity.


The cyclical nature of the residential and commercial real estate markets - and consequently, the land title industry - has historically caused fluctuations in revenues and profitability, and it is expected to continue to do so in the future. Additionally, there are seasonal influences in real estate activity and accordingly in revenue levels for title insurers.

Services other than title insurance provided by operating divisions of the Company that are not required to be reported separately are reported in a category called "All Other." These other services include those offered by the Company and by its wholly owned subsidiaries, Investors Title Exchange Corporation ("ITEC"), Investors Title Accommodation Corporation ("ITAC"), Investors Trust Company ("Investors Trust"), Investors Capital Management Company ("ICMC") and Investors Title Management Services, Inc. ("ITMS").

The Company's exchange services division, ITEC and ITAC, provides customer services in connection with tax-deferred real property exchanges. ITEC serves as a qualified intermediary in like-kind exchanges of real or personal property under Section 1031 of the Internal Revenue Code of 1986, as amended. In its role as qualified intermediary, ITEC coordinates the exchange aspects of the real estate transaction, and its duties include drafting standard exchange documents, holding the exchange funds between the sale of the old property and the purchase of the new property, and accepting the formal identification of the replacement property within the required identification period. ITAC serves as exchange accommodation titleholder in reverse exchanges. An exchange accommodation offers a vehicle for accommodating a reverse exchange when the taxpayer must acquire replacement property before selling the relinquished property.

In conjunction with Investors Trust, ICMC provides investment management and trust services to individuals, companies, banks and trusts. ITMS offers various consulting services to provide clients with the technical expertise to start and successfully operate a title insurance agency.

Business Trends and Recent Conditions

By the mid 2000's, there had been a long-term trend of rising home values in the United States that resulted in inflated home values in many areas of the country. From 2001 to 2003, the Federal Reserve lowered short-term interest rates 13 times. Home sales reached record highs and simultaneously, lenders began to loosen their loan underwriting standards, particularly with non-traditional loan products. Lower underwriting standards and innovative loan products increased the supply of mortgage credit and resulted in more mortgage loans to high-risk borrowers. As a result, loan defaults and mortgage foreclosures increased. Beginning in September 2008, many financial firms failed or restructured, contributing to a widespread financial crisis in the United States. Lenders responded to the financial crisis by implementing stricter loan underwriting standards, which, combined with high unemployment and weakened consumer confidence, reduced the demand for homes.

In an attempt to stabilize the struggling economy, the U.S. government took steps to provide economic stimulus during 2009 and 2010. In October 2011, changes to the Home Affordable Refinance Program ("HARP") were announced by the Federal Housing Agency ("FHA") that allow for easier refinancing of homes where mortgage values exceed property values provided the borrower meets certain criteria. The revised version of HARP streamlines the underwriting process, removes the maximum loan-value restriction for 30-year fixed rate mortgages and reduces or eliminates risk-based fees charged by Fannie Mae and Freddie Mac. This plan is set to expire in December 2013.


In February 2012, the President announced new initiatives that would permit homeowners with privately held mortgages to refinance them into loans backed by the FHA new industry standards for mortgage servicers. This initiative has been referred to the United States Congressional House Committee on Financial Services for review.

The Mortgage Bankers Association ("MBA") September 18, 2012 Mortgage Finance Forecast (the "MBA Forecast") projects 2012 mortgage originations to increase 16.2% from 2011 levels to $1,466 billion, with purchasing activity increasing 0.5% to $406 billion and refinancing activity increasing 23.5% to $1,060 billion. In 2011, refinancing activity accounted for 68.0% of all mortgage originations and is projected to represent 72.3% of mortgage originations in 2012.

According to data published by Freddie Mac, the average 30-year fixed mortgage interest rate in the United States was 3.75% for the nine months ended September 30, 2012, compared with 4.61% for the nine months ended September 30, 2011. Lower interest rates coupled with the HARP modifications resulted in increased levels of refinance activity for the first nine months of 2012 for the overall real estate industry. According to the MBA Forecast, refinancing is expected to decline in the fourth quarter of 2012 and continue declining through 2013 and, as published in the September 2012 MBA Economic and Mortgage Finance Commentary (the "MBA Commentary"), mortgage interest rates are expected to remain under 4% through mid-2013.

Currently, the U.S. economy is showing mixed signals with several federal programs in various stages. The Federal Reserve's program of purchasing U.S. Treasury Bonds to reduce long-term interest rates, Quantitative Easing 2, ended in the second quarter of 2011. In September 2011, the Federal Reserve announced "Operation Twist," which involves selling short-term Treasury bonds in exchange for the same amount of longer-term bonds. The intent is to push down yields on long-term bonds, noting that mortgage rates tend to track the yield on 10-year Treasury Notes. Operation Twist is scheduled to expire at the end of 2012. The Federal Reserve is also issuing disclosures on a periodic basis that includes projections of the federal funds rate and expected actions. In September 2012, guidance stated that the federal fund rate will remain exceptionally low through mid-2015, which is an extension from the prior estimate of late 2014. In September 2012, the Federal Reserve announced a new round of Quantitative Easing, "QE 3," in which it will purchase mortgage backed securities at a rate of $40 billion per month. There is no stated end date associated with this round of Quantitative Easing.

Meanwhile, if federal lawmakers do not act on current legislation, extended unemployment benefits, the payroll tax holiday and lower marginal tax rates on ordinary income, capital gains and dividends will all expire at the end of 2012. Negotiations are in process concerning possible reforms of the U.S. mortgage financing system, including Fannie Mae and Freddie Mac. According to the MBA Commentary there has been continued weakness in the U.S. job market and slowing of global and domestic economic growth due to continued uncertainty in Europe and other emerging markets. Despite increasing home prices and greater real estate activity, the overall economic outlook remains uncertain, which could result in continued volatility in the real estate market.


Historically, activity in real estate markets has varied over the course of market cycles in response to evolving economic factors. Operating results can vary from year to year based on cyclical market conditions and do not necessarily indicate the Company's future operating results and cash flows.

Critical Accounting Estimates and Policies

The preparation of the Company's Consolidated Financial Statements requires management to make estimates and judgments that affect the reported amounts of certain assets, liabilities, revenues, expenses and related disclosures surrounding contingencies and commitments.

Actual results could differ from these estimates. During the first nine months of September 30, 2012, the Company made no material changes in its critical accounting policies as previously disclosed in Management's Discussion and Analysis in the Company's Annual Report on Form 10-K for the year ended December 31, 2011 as filed with the Securities and Exchange Commission.

Results of Operations

For the quarter ended September 30, 2012, net premiums written increased 21.0% to $29,018,123, investment income increased 8.5% to $962,573, total revenues increased 23.6% to $32,277,408 and net income attributable to the Company increased 29.4% to $3,158,185, all compared with the same quarter in 2011. Net income per basic common share increased from $1.15 in the quarter ended September 30, 2011 to $1.52 in the same quarter of 2012. Net income per diluted common share increased from $1.14 in the quarter ended September 30, 2011 to $1.50 in the same quarter of 2012.

For the nine months ended September 30, 2012, net premiums written increased 13.6% to $71,927,113, investment income increased 10.7% to $2,949,752, total revenues increased 15.6% to $80,772,007 and net income attributable to the Company increased 57.1% to $7,939,812, all compared with the same period in 2011. Net income per basic common share increased from $2.34 for the nine months ended September 30, 2011 to $3.80 in the same period of 2012. Net income per diluted common share increased from $2.32 for the nine months ended September 30, 2011 to $3.74 in the same period of 2012.

Operating Revenues

Operating revenues include net premiums written plus other fee income, trust income, management services income and exchange services income. Investment income and realized investment gains and losses are not included in operating revenues and are discussed separately under "Non-Operating Revenues" below.

Title Orders. The volume of title orders issued increased 14.2% in the first nine months of 2012 to 176,301 compared with 154,421 title orders in the same period in 2011. The increase in title orders from 2011 is attributable to increased real estate activity, with the Company experiencing increases in both refinancing and purchasing transactions.


Title insurance companies typically issue title insurance policies directly through home and branch offices or through title agencies. Following is a breakdown of net premiums generated by home and branch offices and agency operations for the quarters ended September 30:

                                   Three Months Ended September 30,                            Nine Months Ended September 30,
                            2012             %            2011             %            2012             %            2011             %
Home and Branch         $  6,559,658        22.6      $  4,387,971        18.3      $ 17,546,488        24.4      $ 12,061,485        19.1
Agency                    22,458,465        77.4        19,598,621        81.7        54,380,625        75.6        51,241,717        80.9
Total                   $ 29,018,123       100.0      $ 23,986,592       100.0      $ 71,927,113       100.0      $ 63,303,202       100.0

Home and Branch Office Net Premiums. In the Company's home and branch operations, the Company issues the insurance policy and retains the entire premium, as no commissions are paid in connection with these policies. Net premiums written from home and branch operations increased 49.5% and 45.5% for the three and nine months ended September 30, 2012, respectively, compared with the prior year periods. The increase in 2012 for home and branch operations primarily reflects increased real estate activity and new industry-wide premium charges in the State of North Carolina that became effective March 1, 2012. All of the Company's home office operations and the majority of branch offices are located in North Carolina; as a result, the home and branch office net premiums written are primarily for North Carolina policies.

Agency Net Premiums. When a policy is written through a title agency, agents retain the majority of the title premium collected, with the balance remitted to the title underwriter for bearing the risk of loss in the event that a claim is made under the title insurance policy. Agency net premiums written increased 14.6% and 6.1% for the three and nine months ended September 30, 2012, respectively, compared with the prior year periods. The increase in net premiums for the three months ended September 30, 2012 was primarily due to increased real estate activity and to new industry-wide premium charges in certain markets that went into effect during the quarter. The increase in the net premiums for the nine months ended September 30, 2012 was primarily due to increased real estate activity. The increases for the three and nine months ended September 30, 2012 were partially offset by declines in Texas premiums.


Following is a schedule of net premiums written for the three and nine months ended September 30, 2012 and 2011 in select states in which the Company's two insurance subsidiaries, ITIC and NITIC, currently write insurance:

                           Three Months Ended                 Nine Months Ended
                              September 30,                     September 30,
State                     2012             2011             2012             2011
North Carolina        $  8,653,839     $  5,843,439     $ 23,044,493     $ 15,910,699
Texas                    7,370,731        9,511,966       16,196,627       23,377,875
South Carolina           2,519,351        1,635,568        6,221,784        4,772,162
Virginia                 1,484,316        1,090,708        4,036,494        3,027,555
Michigan                 1,600,299          859,889        3,756,166        3,508,465
Other States             7,455,504        5,078,348       18,837,624       12,828,709
  Direct Premiums       29,084,040       24,019,918       72,093,188       63,425,465
Reinsurance Assumed              -                -           15,659           10,496
Reinsurance Ceded          (65,917 )        (33,326 )       (181,734 )       (132,759 )
  Net Premiums        $ 29,018,123     $ 23,986,592     $ 71,297,113     $ 63,303,202

Other Revenues

Other revenues primarily include other fee income, trust income, management services income, exchange services income, and income related to the Company's equity method investments. Other revenues were $2,196,922 and $5,537,323 for the three and nine months ended September 30, 2012, respectively, compared with $1,443,310 and $3,968,828 in the prior year periods. The increase in 2012 was primarily related to increases in earnings of unconsolidated affiliates, income from trust and investment management services, other fee income and exchange services income.

Non-operating Revenues

Investment income and realized gains and losses from investments are included in non-operating revenues.

Investment Income. The Company derives a substantial portion of its income from investments in municipal and corporate bonds and equity securities. The Company's title insurance subsidiaries are required by statute to maintain minimum levels of investments in order to protect the interests of policyholders.

In formulating its investment strategy, the Company has emphasized after-tax income. The Company's investments are primarily in bonds and, to a lesser extent, equity securities. The effective maturity of the majority of the bonds is within 10 years. The Company's invested assets are managed to fund its obligations and evaluated to ensure long term stability of capital accounts.

As the Company generates cash from operations, it is invested in accordance with the Company's investment policy and corporate goals. The Company's investment policy has been designed to balance multiple goals, including the assurance of a stable source of income from interest and dividends, the preservation of principal, and the provision of liquidity sufficient to meet insurance underwriting and other obligations as they become payable in the future. Securities purchased may include a combination of taxable bonds, tax-exempt bonds and equity securities. The Company strives to maintain a high quality investment portfolio. Interest and investment income levels are primarily a function of general market performance, interest rates and the amount of cash available for investment.


Investment income was $962,573 and $2,949,752 for the three and nine months ended September 30, 2012, respectively, compared with $887,055 and $2,665,245 for the same periods in 2011. The increase in investment income in 2012 was due primarily to an increase in the portfolio of equity securities offset by lower levels of interest earned on fixed maturities and short-term funds. See Note 7 in the accompanying Consolidated Financial Statements for the major categories of investments, scheduled maturities, amortized cost, fair values of investment securities and earnings by security category.

Net Realized Gain (Loss) on Investments. Dispositions of equity securities at a realized gain or loss reflect such factors as industry sector allocation decisions, ongoing assessments of issuers' business prospects and tax planning considerations. Additionally, the amounts of net realized investment gains and losses are affected by assessments of securities' valuation for other-than-temporary impairment. As a result of the interaction of these factors and considerations, net realized investment gains or losses can vary significantly from period to period.

Net realized gain (loss) on investments was $99,790 and $357,819 for the three and nine months ended September 30, 2012, compared with $(200,087) and $(79,172) for the same periods in 2011. The 2012 year-to-date gain includes impairment charges of $76,539 on certain investments that were deemed to be other-than-temporarily impaired, offset by net realized gains on the sales of investments, other assets and property acquired in the settlement of claims of $434,358. The 2011 year-to-date loss included impairment charges of $258,481 on certain investments and other assets that were deemed to be other-than-temporarily impaired, offset by net realized gains on the sales of investments and property acquired in the settlement of claims of $179,309. Management believes unrealized losses on remaining fixed income and equity securities at September 30, 2012 are temporary in nature.

The securities in the Company's portfolio are subject to economic conditions and market risks. The Company considers relevant facts and circumstances in evaluating whether a credit or interest-related impairment of a security is other-than-temporary. Relevant facts and circumstances include the extent and length of time the fair value of an investment has been below cost.

There are a number of risks and uncertainties inherent in the process of monitoring impairments and determining if an impairment is other-than-temporary. These risks and uncertainties include the risk that the economic outlook will be worse than expected or have more of an impact on the issuer than anticipated, the risk that the Company's assessment of an issuer's ability to meet all of its contractual obligations will change based on changes in the characteristics of that issuer, the risk that information obtained by the Company or changes in other facts and circumstances leads management to change its intent to hold the equity security until it recovers in value or its intent to sell the debt security, and the risk that management is making decisions based on misstated information in the financial statements provided by issuers.


Expenses

The Company's operating expenses consist primarily of commissions to agents, salaries, employee benefits and payroll taxes, provision for claims and office occupancy and operations. Operating expenses increased 21.6% and 10.3% for the three and nine months ended September 30, 2012, respectively, compared with the same periods in 2011. The increase in operating expenses for the three and nine months ended September 30, 2012 resulted primarily from increases in the provision for claims, commissions to agents, salaries, employee benefits and payroll taxes, and professional and contract labor fees.

Following is a summary of the Company's operating expenses for the three and nine months ended September 30, 2012 and 2011. Inter-segment eliminations have been netted; therefore, the individual segment amounts will not agree to Note 4 in the accompanying Consolidated Financial Statements.

                                    Three Months Ended September 30,                            Nine Months Ended September 30,
                             2012             %            2011             %            2012             %            2011             %
Title Insurance          $ 26,546,058        96.3      $ 21,431,935        94.6      $ 65,707,068        94.6      $ 59,194,388        93.9
All Other                   1,013,435         3.7         1,223,470         5.4         3,782,184         5.4         3,817,238         6.1
Total                    $ 27,559,493       100.0      $ 22,655,405       100.0      $ 69,489,252       100.0      $ 63,011,626       100.0

On a combined basis, after-tax profit margins were 9.8% for both three and nine months ended September 30, 2012, and 9.3% and 7.2% for the three and nine months ended September 30, 2011.

Commissions. Agent commissions represent the portion of premiums retained by agents pursuant to the terms of their respective agency contracts. Commissions to agents increased 11.1% and 3.4% for the three and nine months ended September 30, 2012 from the prior year periods due to an increase in agency business. Commission expense as a percentage of net premiums written by agents was 75.0% and 74.8% for the three and nine months ended September 30, 2012, respectively, compared with 77.4% and 76.8% for the same periods in 2011. Commission rates may vary due to geographic locations, different levels of premium rate structures and state regulations.

Provision for Claims. The provision for claims as a percentage of net premiums written was 8.4% and 6.2% for the three and nine months ended September 30, 2012 versus 1.5% and 3.6% for the same periods in 2011. The increase in the provision for claims as a percentage of net premiums written for the three months ended September 30, 2012 was primarily due to significant favorable loss development experienced during the prior year quarter, shifting to unfavorable loss development in the current year quarter, and an increase in the relative share of North Carolina premiums as a percentage of the total premiums. The loss provision rate in North Carolina trends higher due to relatively low premium rates compared with the Company's other markets. The increase in the provision for claims for the nine months ended September 30, 2012 was primarily due to significant favorable loss development experienced in the prior year period as well as the increase in North Carolina premiums during the current year.

The increase in the loss provision rate for the nine months ended September 30, 2012 from the 2011 level resulted in approximately $1,810,000 more in reserves than would have been recorded at the lower 2011 level. Loss provision ratios are subject to variability and are reviewed and adjusted as experience develops.


Title claims are typically reported and paid within the first several years of policy issuance. The provision for claims reflects actual payments of claims, net of recovery amounts, plus adjustments to the specific and incurred but not reported claims reserves, the latter of which are actuarially determined based on historical claims experience. Actual payments of claims, net of recoveries, were $3,414,523 and $2,951,959 for the nine months ended September 30, 2012 and 2011, respectively.

Reserves for Claims. At September 30, 2012, the total reserve for claims was $39,006,000. Of that total, approximately $5,926,000 was reserved for specific claims, and approximately $33,080,000 was reserved for claims for which the . . .

  Add ITIC to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for ITIC - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.