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ITIC > SEC Filings for ITIC > Form 10-Q on 8-Aug-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 10-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 95.5% of the Company's revenues in the first six 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, 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 gradually 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") June 19, 2014 Mortgage Finance Forecast ("MBA Forecast") projects 2014 mortgage originations to decrease 41.8% from 2013 levels to $1,021 billion, purchase activity to decrease 8.7% to $595 billion and refinance activity to decrease 61.4% to $426 billion. In 2013, refinance activity accounted for 62.8% of all mortgage originations and is projected to represent 41.7% 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 4.29% and 3.60% for the six months ended June 30, 2014 and 2013, respectively. According to the MBA Forecast, refinance activity is expected to be significantly lower in 2014 as mortgage interest rates continue to climb to a projected 4.7% in the fourth quarter of 2014. In efforts to stimulate the economy, the Federal Reserve announced in September 2012, Quantitative Easing, "QE3," in which it would purchase mortgage-backed securities and longer-term Treasury securities. Through QE3, the Federal Reserve initially purchased mortgage-backed securities at a rate of $40 billion per month and longer-term Treasury securities at a rate of $45 billion per month. Beginning in 2014, the Federal Open Market Committee ("FOMC") of the Federal Reserve has been steadily tapering the purchases of securities. In June 2014, the FOMC announced that beginning in July, it would reduce the pace of asset purchases to $15 billion for mortgage-backed securities and $20 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 upon 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 June 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.
In 2008, the federal government took control of The Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac") in an effort to keep the government sponsored entities from failing. The primary functions of Fannie Mae and Freddie Mac 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. Since taking control, there have been various discussions and proposals regarding their reform. 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.

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. Overall, the economy has been recovering from the downturn with positive projections going forward. The MBA June 20, 2014 Economic and Mortgage Finance Commentary projects 2014 real gross domestic product growth of approximately 2.2% and a decline in the unemployment rate to 6.0% by the end of 2014. The 10-Year Treasury rate is expected to increase slightly to 2.8% in the fourth quarter of 2014, the result of the FOMC taper and international unrest creating demand for safer U.S. Treasury securities. Positive trends in home prices are expected to continue, but the combination of higher interest rates, new regulations and low housing inventories will impact transactional volume. 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 six months ended June 30, 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 and six
months ended June 30, 2014 and 2013:
                                     For the Three Months Ended June
                                                   30,                    For the Six Months Ended June 30,
                                          2014              2013                2014                2013
Net premiums written                 $  29,849,853     $ 30,429,761     $       54,759,105     $ 54,355,758
Investment income - interest and
dividends                                1,039,435          925,047              2,065,851        1,845,532
Net realized gain on investments            92,082           55,272                584,219           71,616
Other                                    2,240,183        2,283,320              4,266,452        4,268,767
Total Revenues                          33,221,553       33,693,400             61,675,627       60,541,673

Operating Expenses:
Commissions to agents                   18,346,381       17,608,789             33,802,659       31,098,220
Provision for claims                       294,281          996,870              2,669,664          607,812
Salaries, employee benefits and
payroll taxes                            6,454,930        6,249,723             12,640,691       12,400,473
Office occupancy and operations          1,246,644        1,026,108              2,426,971        2,100,341
Business development                       511,763          452,353              1,029,657          881,086
Filing fees, franchise and local
taxes                                      225,343          188,950                414,943          369,520
Premium and retaliatory taxes              546,091          530,524                840,565          971,047
Professional and contract labor
fees                                       666,909          535,207              1,354,967        1,110,544
Other                                      250,167          234,826                459,951          381,162
Total Operating Expenses                28,542,509       27,823,350             55,640,068       49,920,205

Income before Income Taxes               4,679,044        5,870,050              6,035,559       10,621,468

Provision for Income Taxes               1,281,000        1,846,000              1,652,000        3,211,000

Net Income Attributable to the
Company                              $   3,373,598     $  4,005,675     $        4,360,036     $  7,382,405

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 19.4% in the first six months of 2014 to 99,126 compared with 122,992 title orders in the same period in 2013. The decrease in title orders from 2013 is primarily attributable to a decline in refinance 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 and six months ended June 30, 2014 and 2013:

                         For the Three Months Ended June 30,                    For the Six Months Ended June 30,
                      2014           %           2013           %           2014           %           2013           %
Home and Branch  $  6,275,362      21.0 %   $  7,332,764      24.1 %   $ 11,107,041      20.3 %   $ 13,116,393      24.1 %
Agency             23,574,491      79.0 %     23,096,997      75.9 %     43,652,064      79.7 %     41,239,365      75.9 %
Total            $ 29,849,853     100.0 %   $ 30,429,761     100.0 %   $ 54,759,105     100.0 %   $ 54,355,758     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 14.4% and 15.3% for the three and six months ended June 30, 2014, respectively, compared with the same prior year periods. The decrease in 2014 net premiums for home and branch operations primarily reflects a 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 2.1% and 5.9% for the three and six months ended June 30, 2014, respectively, compared with the same prior year periods. The increase in 2014 net agency premiums primarily reflects an increase in in purchase transactions for Texas policies.

Following is a schedule of net premiums written for the three and six months ended June 30, 2014 and 2013 in select states in which the Company's two insurance subsidiaries, ITIC and NITIC, currently write insurance:

                          Three Months Ended June 30,         Six Months Ended June 30,
State                        2014              2013             2014             2013
Texas                  $   11,351,769     $  6,378,120     $ 22,973,490     $ 11,299,109
North Carolina              8,359,773        9,590,855       14,657,806       17,125,721
South Carolina              1,651,129        2,354,504        3,154,204        4,675,554
Virginia                    1,385,055        1,465,820        2,208,660        2,732,715
Michigan                    1,129,068        1,727,908        1,946,312        3,047,453
Georgia                       730,882          573,038        1,925,038        1,247,658
All Others                  5,254,755        8,401,033        7,926,194       14,320,755
  Premiums                 29,862,431       30,491,278       54,791,704       54,448,965
Reinsurance Assumed                 -            2,970           28,472            3,470
Reinsurance Ceded             (12,578 )        (64,487 )        (61,071 )        (96,677 )
Net Premiums Written   $   29,849,853     $ 30,429,761     $ 54,759,105     $ 54,355,758

Texas premiums have increased due to the strength of the Texas market, while the declines in most states primarily relates to the shift in the mix of business from refinance to purchase and the decline in refinance transactions.

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 $2,240,183 and $4,266,452 for the three and six month periods ended June 30, 2014, respectively, compared with $2,283,320 and $4,268,767 for the same prior year periods. The decrease for the three months ended June 30, 2014, primarily related to a decrease in fee income partially offset by increases in exchange services revenues, trust income and management services income. The decrease for the six months ended June 30, 2014 primarily related to decreases in fee income and earnings of unconsolidated affiliates, partially offset by increases in trust income, exchange services revenues and management services 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 $1,039,435 and $2,065,851 for the three and six months ended June 30, 2014, respectively, compared with $925,047 and $1,845,532 for the same periods in 2013. The increase in investment income for the three and six months ended June 30, 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.

The net realized gain on investments was $92,082 and $584,219 for the three and six months ended June 30, 2014, respectively, compared with $55,272 and $71,616 for the same periods 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 $594,281. The 2013 year-to-date gain includes impairment charges of $34,070 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 $105,686. Management believes unrealized losses on remaining fixed income and equity securities at June 30, 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, and office occupancy and operations. Operating expenses increased 2.6% and 11.5% for the three and six months ended June 30, 2014, respectively, compared with the same periods in 2013. For the three months ended June 30, 2014, expenses increased primarily due to increases in commissions, office occupancy and operations, and salaries, employee benefits and payroll taxes, partially offset by a decrease in the provision for claims. For the six months ended June 30, 2014, expenses increased primarily due to increases in commissions to agents and the provision for claims.

Following is a summary of the Company's operating expenses for the three and six . . .

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