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ITIC > SEC Filings for ITIC > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for INVESTORS TITLE CO



Quarterly Report

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

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


Investors Title Company (the "Company") is a holding company that engages primarily in issuing title insurance through two subsidiaries, Investors Title Insurance Company ("ITIC") and National Investors Title Insurance Company ("NITIC"). Total revenues from the title segment accounted for 95.1% of the Company's revenues in the first three months of 2014. Through ITIC and NITIC, the Company underwrites land title insurance for owners and mortgagees as a primary insurer. Title insurance protects against loss or damage resulting from title defects that affect real property.

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

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

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

The Company's exchange services division, ITEC and ITAC, provides customer services in connection with tax-deferred real property exchanges. ITEC serves as a qualified intermediary in like-kind exchanges of real or personal property under Section 1031 of the Internal Revenue Code of 1986, as amended. In its role as qualified intermediary, ITEC coordinates the exchange aspects of the real estate transaction, and its duties include drafting standard exchange documents, holding the exchange funds between the sale of the old property and the purchase of the new property, and accepting the formal identification of the replacement property within the required identification period. ITAC serves as exchange accommodation titleholder in reverse exchanges. An exchange accommodation offers a vehicle for accommodating a reverse exchange when the taxpayer must acquire replacement property before selling the relinquished property. The Company's trust services division, Investors Trust and ICMC, provides investment management and trust services to individuals, companies, banks and trusts. In July 2013, Investors Trust assumed responsibility for the management of all accounts previously managed by ICMC.
ITMS offers various consulting services to provide clients with the technical expertise to start and successfully operate a title insurance agency.

Business Trends and Recent Conditions

Beginning in 2008, the United States economy experienced one of the worst economic downturns in history. Events leading to the recession were primarily the collapse of the housing market and frozen credit markets, prompting the federal government to take unprecedented monetary and fiscal action in an attempt to slow the economic rate of decline and instill consumer confidence. The economy has been slowly recovering from this downturn with the Dow Jones Industrial Average setting and remaining near the all-time high, housing values rebounding and the unemployment rate lowering.
The Mortgage Bankers Association's ("MBA") April 8, 2014 Mortgage Finance Forecast projects 2014 mortgage originations to decrease 39.3% from 2013 levels to $1,065 billion, with purchasing activity decreasing 0.9% to $646 billion and refinancing activity decreasing 62.0% to $419 billion. In 2013, refinancing activity accounted for 62.8% of all mortgage originations and is projected to represent 39.3% of mortgage originations in 2014.
According to data published by Freddie Mac, the average 30-year fixed mortgage interest rate in the United States was 4.36% and 3.50% for the three months ended March 31, 2014 and 2013, respectively. According to the MBA Forecast, refinancing activity is expected to be significantly lower in 2014 as mortgage interest rates continue to climb to a projected 5.0% in the fourth quarter of 2014.
In September 2012, the Federal Reserve announced Quantitative Easing, "QE 3," in which it would purchase mortgage-backed securities at a rate of $40 billion per month and longer-term Treasury securities at a rate of $45 billion per month. During the first three months of 2014, the Federal Open Market Committee ("FOMC") of the Federal Reserve reduced the pace of asset purchases two times to bring the total monthly purchases to $30 billion for mortgage-backed securities and $35 billion for longer-term Treasury securities. In March 2014, the FOMC announced that beginning in April, it would further reduce the pace of asset purchases to $25 billion for mortgage-backed securities and $30 billion per month for longer-term Treasury securities. Furthermore, it was stated that if incoming economic information supported the FOMC's expectations regarding labor market conditions and inflation, the Federal Reserve would likely further reduce the pace of asset purchases in the future; however, decisions regarding the Federal Reserve's asset purchases remain contingent on meeting FOMC expectations. There is no stated end date associated with this round of Quantitative Easing. The FOMC is also issuing disclosures on a periodic basis that include projections of the federal funds rate and expected actions. At the March 2014 meeting, the FOMC reaffirmed their intent to keep the federal funds rate exceptionally low, between 0% and 0.25% so long as progress is made toward their employment and inflation objectives.
The Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac") are both government sponsored entities whose primary functions are to provide liquidity to the nation's mortgage finance system by purchasing mortgages on the secondary market, pooling them and selling them as mortgage-backed securities. In order to securitize, Fannie Mae and Freddie Mac typically require the purchase of title insurance for loans that they acquire. In 2008, the federal government took control of both Fannie Mae and Freddie Mac. Since taking control, there have been various discussions and proposals regarding their reform, including most recently, proposals drafted by members of the U.S. Senate Banking Committee and the U.S. House of Representatives Financial Services Committee. Changes to these entities could impact the entire mortgage loan process and as a result, could affect the demand for title insurance. The timing and results of reform are currently unknown; however, any changes to these entities could impact the Company and its results of operations.
The MBA April 8, 2014 Economic Forecast projects 2014 real gross domestic product growth of approximately 2.4% and a decline in the unemployment rate to 6.2%. As a result of the economic growth, the 10-Year Treasury rate is expected to increase to an average of 3.0% in 2014. Continued growth in home prices and housing starts are also expected in 2014.

On November 20, 2013, the Consumer Financial Protection Bureau ("CFPB"), which enforces the Real Estate Settlement Procedures Act ("RESPA"), the primary federal regulatory guidance covering the real estate settlement industry, released a final rule to integrate mortgage disclosures under the RESPA and the Truth in Lending Act ("TILA"). The final rule goes into effect in August 2015. Under this rule, the early disclosure forms required by TILA and the good faith estimate, required by RESPA, have been combined into one form, titled the Loan Estimate. The final disclosure required by TILA and the HUD-1 settlement statement required by RESPA have been combined into one form, titled the Closing Disclosure. The Company is currently assessing the impact that this rule will have on both direct and agency operations in terms of processes and procedures, systems and compliance costs.
Effective January 10, 2014, TILA's Regulation Z requires a lender to assess each borrower's ability to meet the obligations of the prospective mortgage. Within this rule, there is also a provision that requires the lender to determine if the mortgage is a "Qualified Mortgage." The key features of a Qualified Mortgage are that it (1) not have excessive upfront points and fees; (2) not have toxic loan features such as interest only, negative amortization or balloon payment provisions; and (3) limits the borrower's debt-to-income ratio. The lender must include all fees paid to an affiliate of the lender in the points and fees calculation. The Company and its subsidiaries are not involved in mortgage lending; however, this rule could have an adverse impact on mortgage lending activity and consequentially could potentially reduce title insurance premium volume.
The CFPB, Office of the Comptroller of Currency and the Federal Reserve have issued memorandums to banks which have heightened their focus on vetting third party providers and may affect the Company's agents and approved providers. Further proposals to change regulations governing insurance holding companies and the title insurance industry are often introduced in Congress, in state legislatures and before various insurance regulatory agencies. The Company regularly monitors such proposals, but the likelihood and timing of passage of any such regulation, and the possible effects of any such regulation on the Company and its subsidiaries cannot be determined at this time. Historically, activity in real estate markets has varied over the course of market cycles by geographic region and 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 regarding contingencies and commitments. Actual results could differ from these estimates. During the three months ended March 31, 2014, the Company did not make any 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, 2013 as filed with the Securities and Exchange Commission.

Results of Operations

The following table presents certain income statement data for the three months
ended March 31, 2014 and 2013:
For the Three Months Ended,                      March 31, 2014      March 31, 2013
Net premiums written                            $     24,909,252    $    23,925,997
Investment income - interest and dividends             1,026,416            920,485
Net realized gain on investments                         492,137             16,344
Other                                                  2,026,269          1,985,447
Total Revenues                                        28,454,074         26,848,273

Operating Expenses:
Commissions to agents                                 15,456,278         13,489,431
Provision (benefit) for claims                         2,375,383           (389,058 )
Salaries, employee benefits and payroll taxes          6,185,761          6,150,750
Office occupancy and operations                        1,180,327          1,074,233
Business development                                     517,894            428,733
Filing fees, franchise and local taxes                   189,600            180,570
Premium and retaliatory taxes                            294,474            440,523
Professional and contract labor fees                     688,058            575,337
Other                                                    209,784            146,336
Total Operating Expenses                              27,097,559         22,096,855

Income before Income Taxes                             1,356,515          4,751,418

Provision for Income Taxes                               371,000          1,365,000

Net Income Attributable to the Company          $        986,438    $     3,376,730

Insurance and Other Services Revenues

Insurance and other services 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 insurance and other services revenues and are discussed separately under "Investment Related Revenues" below.

Title Orders - Title orders issued decreased 20.5% in the first three months of 2014 to 45,971 compared with 57,803 title orders in the same period in 2013. The decrease in title orders from 2013 is primarily attributable to a significant decline in refinance transactions, partially offset by an increase in purchase transactions. Title orders did not move proportionally with premiums due to a higher proportion of purchase transactions. Purchase transactions typically have higher premium rates than refinance 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 three months ended March 31, 2013 and 2012:

                          Three Months Ended March 31,
                      2014          %         2013          %
Home and Branch   $  4,831,679     19.4   $  5,783,629     24.2
Agency              20,077,573     80.6     18,142,368     75.8
Total             $ 24,909,252    100.0   $ 23,925,997    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 decreased 16.5% for the three months ended March 31, 2014, compared with the prior year period. The decrease in 2014 net premiums for home and branch operations primarily reflects a significant decrease in refinance transactions, partially offset by an increase in purchase transactions. All of the Company's home office operations and the majority of its 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, the agent retains 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 10.7% for the three months ended March 31, 2014, compared with the prior year period. The increase in 2014 net agency premiums primarily reflects an increase in purchase transactions in Texas.

Following is a schedule of net premiums written for the three months ended March 31, 2014 and 2013 in select states in which the Company's two insurance subsidiaries, ITIC and NITIC, currently write insurance:

                          Three Months Ended March 31,
State                        2014               2013
Texas                  $    11,621,721     $  4,920,989
North Carolina               6,298,033        7,534,866
South Carolina               1,503,075        2,321,050
Georgia                      1,194,156          674,620
Virginia                       823,605        1,266,895
Michigan                       817,244        1,319,545
All Others                   2,671,439        5,919,722
  Premiums                  24,929,273       23,957,687
Reinsurance Assumed             28,472              500
Reinsurance Ceded              (48,493 )        (32,190 )
Net Premiums Written   $    24,909,252     $ 23,925,997

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 $2,026,269 for the three month periods ended March 31, 2014, compared with $1,985,447 in the prior year period. The increase for the three months ended March 31, 2014, primarily related to increases in income from trust and investment management services and exchange revenues, partially offset by decreases in earnings of unconsolidated affiliates and other fee income.

Investment Related Revenues

Investment income and realized gains and losses from investments are included in investment related 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 $1,026,416 for the three months ended March 31, 2014, compared with $920,485 for the same period in 2013. The increase in investment income for the three months ended March 31, 2014 was due primarily to higher levels of interest and dividends received in conjunction with a larger portfolio of both fixed maturities and equity securities.

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 on investments was $492,137 for the three months ended March 31, 2014 compared with $16,344 for the same period in 2013. The 2014 year-to-date gain includes impairment charges of $10,062 on certain investments that were deemed to be other-than-temporarily impaired, offset by net realized gains on the sales of investments and other assets of $502,199. The 2013 year-to-date gain includes impairment charges of $18,485 on certain investments that were deemed to be other-than-temporarily impaired, offset by net realized gains on the sales of investments and other assets of $34,829. Management believes unrealized losses on remaining fixed income and equity securities at March 31, 2014 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 impairments are 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 security until it recovers in value, and the risk that management is making decisions based on misstated information in the financial statements provided by issuers.


The Company's operating expenses consist primarily of commissions to agents, provision for claims, salaries, employee benefits and payroll taxes, provision for claims and office occupancy and operations. Operating expenses increased 22.6% for the three months ended March 31, 2014, compared with the same period in 2013. Expenses increased primarily due to increases in the provision for claims and commissions to agents.

Following is a summary of the Company's operating expenses for the three months ended March 31, 2014 and 2013. 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 March 31,
                      2014          %         2013          %
Title Insurance   $ 25,437,122     93.9   $ 20,558,171     93.0
All Other            1,660,437      6.1      1,538,684      7.0
Total             $ 27,097,559    100.0   $ 22,096,855    100.0

On a combined basis, after-tax profit margins were 3.5% for the three months ended March 31, 2014, and 12.6% for the three months ended March 31, 2013, respectively.

Commissions - Agent commissions represent the portion of premiums retained by agents pursuant to the terms of their respective agency contracts. Commissions to agents increased 14.6% for the three months ended March 31, 2014 compared with the same prior year period. Commission expense as a percentage of net premiums written by agents was 77.0% for the three months ended March 31, 2014, compared with 74.4% for the same period in 2013. Commissions increased at a higher rate than premiums because there was a greater portion of agent business than in the prior year period. Commission rates may vary due to geographic locations, different levels of premium rate structures and state regulations.

Provision (Benefit) for Claims - The provision (benefit) for claims as a percentage of net premiums written was 9.5% for the three months ended March 31, 2014, compared with (1.6)% and for the same period in 2013. During the three months ended March 31, 2014, there were a few large claims related to older policy years that contributed to the increase in the claims provision. Positive legal developments in several claim matters and a significant recovery in the prior year period also contributed to an unfavorable period to period comparison.

The increase in the loss provision rate for the three months ended March 31, 2014 from the 2013 level resulted in approximately $2,780,000 more in reserves than would have been recorded at the lower 2013 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 . . .

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