What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-08-07 compared with 2020-05-08 · 108 added, 85 removed, 292 unchanged (40% of the section changed)

6 unchanged sentences

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 97.7% of the Company's revenues for the three-month period ended March 31, 2020 .

Total revenues from the title segment accounted for 95.8% of the Company's revenues for the six-month period ended June 30, 2020.

Through ITIC and NITIC, the Company underwrites land title insurance for owners and mortgagees as a primary insurer.

40 unchanged sentences

Changes in either of these areas would likely impact the Company's results of operations.

An outbreak of a coronavirus ("COVID-19" or "the virus") has emerged and in March 2020 the World Health Organization declared it a pandemic.

This contagious disease outbreak has continued to spread across the globe and is impacting worldwide economic activity and financial markets.

The pandemic has had a negative impact on the real estate market and the value of marketable securities, including those held by the Company.

and other countries are experiencing an outbreak of a novel coronavirus which causes a disease designated as COVID-19 and, in March 2020, the World Health Organization declared it a pandemic.

This contagious disease outbreak has continued to spread across the globe, including in U.S.

states where the Company conducts business, and is impacting worldwide economic activity and financial markets.

In response, the U.S.

government and its agencies have taken a number of significant measures to provide monetary stimulus.

government and its agencies have taken a number of significant measures to provide fiscal and monetary stimulus.

Such actions include an unscheduled cut to the federal funds rate, the introduction of new programs to preserve market liquidity, extended unemployment and sick leave benefits, low-interest loans for working capital access and payroll assistance, and other relief measures for both workers and businesses.

The Company is fully operational and has not had any reductions in workforce.

The Company is fully operational and has not had any reductions in workforce during 2020.

A large portion of the Company's workforce is performing their job functions remotely.

The Company has not taken stimulus relief funding or added any other forms of debt.

The primary impact of the COVID-19 pandemic on the Company’s first quarter results was a reduction in value of the investment portfolio.

The Company did experience a slowdown in purchase activity towards the end of the first quarter and continuing on into the beginning of the second quarter, as the pandemic worsened and states and municipalities in which the Company conducts business implemented “stay at home” orders.

The impact of the slowing purchase activity has been somewhat offset by lower average mortgage interest rates leading to an increase in the volume of refinance activity, although it is unclear if refinance activity will remain elevated in future periods.

It is possible that net premiums written will decline in the second quarter, versus both the prior year period and the first quarter of 2020, due to the pandemic and the economic disruption it is causing.

Because of the inherent uncertainty regarding the duration and severity of the COVID-19 pandemic and its effects on the economy, as well as uncertainty regarding the effects of government measures to combat the spread of the virus, the Company is currently unable to predict what the ultimate impact of the pandemic on its business will be, or when real estate activity may return to normal.

The Company has implemented a number of measures to protect the health of its employees, to provide for the continuity of its business and to take prudent cost-saving actions during this unpredictable time of crisis, including moving its workforce to telecommuting and restricting business travel.

The Company has not taken stimulus relief funding or incurred any other forms of debt.

The primary impact of the COVID-19 pandemic on the Company’s first quarter results of operations was a reduction in value of the investment portfolio.

In the second quarter, the Company recognized income from changes in the estimated fair value of equity securities as the Company's equity holdings partially rebounded.

Purchase volume and refinance activity strengthened in the second quarter, as lower average mortgage interest rates, a tight real estate supply and pent-up demand spurred real estate activity.

It is unclear if real estate activity will remain as resilient in future periods.

It is possible that net premiums written could decline in the future due to the pandemic and the economic disruption it is causing.

Because of the inherent uncertainty regarding the duration and severity of the COVID-19 pandemic and its effects on the economy, as well as uncertainty regarding the effects of government measures already taken, and which may be taken or continued in the future, to combat the spread of the virus, the Company is currently unable to predict what the ultimate impact of the pandemic on its business will be.

The Company has implemented a number of measures to protect the health of its employees and to provide for the continuity of its business during this unpredictable time of crisis, including moving portions of its workforce to telecommuting and restricting business travel.

To help get mortgage transactions closed during the pandemic, temporary guidelines have been issued by several entities allowing certain technologies to be used to facilitate what would otherwise be traditional, in-person paper-based closings.

Entities involved in the real estate industry, including the Company, are expected to continue to evaluate the evolving COVID-19 situation and may take additional measures to adapt as the situation developments.

Businesses involved in the real estate industry, including the Company, are expected to continue to evaluate the evolving COVID-19 situation and may take additional measures to adapt as the situation developments.

Regulatory Environment

6 unchanged sentences

However, in response to risk posed to economic activity by COVID-19, on March 15, 2020, the FOMC lowered the target range between 0.00% and 0.25%.

The FOMC has maintained this target range, and expects to continue to do so until it is confident that the U.S.

economy has weathered recent events and is on track to meet its goals.

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 these government-sponsored entities from failing.

10 unchanged sentences

In recent periods, both the President and certain members of Congress have indicated a desire for reform of the CFPB.

The Supreme Court of the United States has ruled that the structure of the CFPB is unconstitutional, but has allowed the work of the agency to continue.

The timing and nature of any reforms are currently unknown;

1 unchanged sentence

Real Estate Environment

The Mortgage Bankers Association's ("MBA") April 2, 2020 Mortgage Finance Forecast (“MBA Forecast”), which includes COVID-19 considerations, projects 2020 purchase activity to decrease 2.4% to $ 1,242 billion and mortgage refinance activity to increase 31.4% to $ 1,184 billion, resulting in a net increase in total mortgage originations of 11.6% to $ 2,426 billion, all from 2019 levels.

The Mortgage Bankers Association's ("MBA") July 15, 2020 Mortgage Finance Forecast (“MBA Forecast”), which includes COVID-19 considerations, projects 2020 purchase activity to increase 2.2% to $1,300 billion and mortgage refinance activity to increase 68.3% to $1,516 billion, resulting in a net increase in total mortgage originations of 29.6% to $2,816 billion, all from 2019 levels.

In 2019, purchase activity accounted for 58.5% of all mortgage originations and is projected in the MBA Forecast to represent 46.2% of all mortgage originations in 2020.

The MBA Forecast is, however, projecting decreases in mortgage originations for 2021 and 2022.

Due to the rapidly changing environment brought on by COVID-19, these projections and the impact of actual future developments on the Company could be subject to material change.

According to data published by Freddie Mac, the average 30-year fixed mortgage interest rates in the United States were 3.5% and 4.4% for the three-month periods ended March 31, 2020 and 2019 , respectively.

Per the MBA Forecast, mortgage interest rates are projected to be 3.5% in the fourth quarter of 2020 , and then will gradually increase to 3.8% by 2022.

According to data published by Freddie Mac, the average 30-year fixed mortgage interest rates in the United States were 3.4% and 4.2% for the six-month periods ended June 30, 2020 and 2019, respectively.

Per the MBA Forecast, mortgage interest rates are projected to be 3.3% in the fourth quarter of 2020, and then increase to 3.7% by 2022.

Historically, activity in real estate markets has varied over the course of market cycles by geographic region and in response to evolving economic factors.

3 unchanged sentences

Actual results could differ from these estimates.

During the three-month period ended March 31, 2020 , the Company made the following changes to 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, 2019 as filed with the Securities and Exchange Commission.

During the six-month period ended June 30, 2020, the Company made the following changes to 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, 2019 as filed with the Securities and Exchange Commission.

The Company has updated the following accounting policies due to the adoption of Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326) :

2 unchanged sentences

Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes.

Credit-related impairment is recognized as an allowance for credit losses (“ACL”) on the Consolidated Balance Sheets, limited to the amount by which the amortized cost basis exceeds the estimated fair value, with a corresponding adjustment to the Consolidated Statements of Operations.

Both the ACL and the adjustment to net income may be reversed if conditions change.

Both the ACL and the adjustment to the Consolidated Statements of Operations may be reversed if conditions change.

However, if the Company intends to sell an impaired available-for-sale fixed maturity security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount must be recognized in earnings with a corresponding adjustment to the security’s amortized cost basis.

5 unchanged sentences

Results of Operations

The following table presents certain Consolidated Statements of Operations data for the three-month periods ended March 31, 2020 and 2019 :

The following table presents certain Consolidated Statements of Operations data for the three- and six-month periods ended June 30, 2020 and 2019:

Three Months Ended

June 30, Six Months Ended

(in thousands) 2020 2019 2020 2019

4 unchanged sentences

Other investment income 526 926 966 1,336

Net realized investment (losses) gains

Net realized investment gains (losses) 553 (14) 141 776

Changes in the estimated fair value of equity security investments 7,972 1,142 (6,486) 5,812

Other 120 90 258 405

Total Revenues

61,748 42,733 91,649 82,679

Operating Expenses:

5 unchanged sentences

Total Operating Expenses

(Loss) Income before Income Taxes

(Benefit) Provision for Income Taxes

Net (Loss) Income

43,826 35,813 82,256 67,446

Income before Income Taxes 17,922 6,920 9,393 15,233

Provision for Income Taxes 3,427 1,420 1,909 3,107

Net Income $ 14,495 $ 5,500 $ 7,484 $ 12,126

Insurance Revenues

2 unchanged sentences

Net Premiums Written

Net premiums written increased 34.1% for the three-month period ended March 31, 2020 to $38.6 million , compared with $28.8 million for the same prior year period.

The increase for the three-months ended March 31, 2020 was primarily driven by strong purchase volume throughout most of the quarter and lower average mortgage interest rates leading to an increase in the volume of refinance activity.

Net premiums written increased 35.7% and 35.0% for the three- and six-month periods ended June 30, 2020 to $47.5 million and $86.1 million, compared with $35.0 million and $63.8 million for the same prior year periods.

The increases for the three- and six-month periods ended June 30, 2020 were primarily driven by increased refinance activity and strong purchase volume as lower average mortgage interest rates continued to spur real estate activity.

Title insurance companies typically issue title insurance policies directly through home and branch offices or through title agencies.

Following is a breakdown of premiums generated by branch and agency operations for the three-month periods ended March 31, 2020 and 2019 :

Following is a breakdown of premiums generated by branch and agency operations for the three- and six-month periods ended June 30, 2020 and 2019:

Three Months Ended

June 30, Six Months Ended

(in thousands, except percentages) 2020 % 2019 % 2020 % 2019 %

Home and Branch $ 12,973 27.3 $ 10,388 29.7 $ 22,868 26.6 $ 17,554 27.5

Agency 34,506 72.7 24,590 70.3 63,238 73.4 46,219 72.5

$ 47,479 100.0 $ 34,978 100.0 $ 86,106 100.0 $ 63,773 100.0

Home and Branch Office Net Premiums – In the Company's home and branch operations, the Company issues a title 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 38.1% for the three-month period ended March 31, 2020 , compared with the same prior year period.

The increase for the three-month period ended March 31, 2020 was primarily attributable to strong purchase volume throughout most of the quarter and lower average mortgage interest rates driving an increase in the volume of refinance transactions.

Net premiums written from home and branch operations increased 24.9% and 30.3% for the three- and six-month periods ended June 30, 2020, compared with the same prior year periods.

The increases for the three- and six-month periods ended June 30, 2020 were primarily attributable to increased refinance activity and strong purchase volume as lower average mortgage interest rates continued to spur real estate activity.

All of the Company's home office operations and the majority of branch offices are located in North Carolina;

6 unchanged sentences

The Company reflects any adjustments to the accruals in the results of operations in the period in which new information becomes available.

Agency net premiums written increased 32.8% for the three-month period ended March 31, 2020 , compared with the same prior year period.

The increase for the three-month period ended March 31, 2020 was primarily attributable to strong purchase volume throughout most of the quarter and a higher volume of refinance activity due to lower average mortgage interest rates.

Following is a schedule of net premiums written for the three-month periods ended March 31, 2020 and 2019 in select states in which the Company's two insurance subsidiaries, ITIC and NITIC, currently underwrite title insurance:

Agency net premiums written increased 40.3% and 36.8% for the three- and six-month periods ended June 30, 2020, compared with the same prior year periods.

Following is a schedule of net premiums written for the three- and six-month periods ended June 30, 2020 and 2019 in select states in which the Company's two insurance subsidiaries, ITIC and NITIC, currently underwrite title insurance:

Three Months Ended

June 30, Six Months Ended

State (in thousands) 2020 2019 2020 2019

North Carolina $ 18,098 $ 14,456 $ 32,041 $ 24,661

Texas 8,462 6,235 15,979 12,350

Georgia 4,899 3,572 9,404 6,771

South Carolina 4,158 3,068 7,639 6,339

Virginia 1,951 1,452 3,603 2,630

All Others 9,990 6,290 17,639 11,272

Premiums Written

47,558 35,073 86,305 64,023

Reinsurance Assumed — — 3 —

1 unchanged sentence

Net Premiums Written

$ 47,479 $ 34,978 $ 86,106 $ 63,773

Escrow and Other Title-Related Fees

Escrow and other title-related fees consists primarily of commission income, escrow and other various fees associated with the issuance of a title insurance policy including settlement, examination and closing fees.

Escrow and other title-related fee revenues were $1.8 million for the three-month period ended March 31, 2020 , compared with $1.3 million for the same prior year period.

The increase in 2020 primarily related to increased fee and commission income.

Escrow and other title-related fee revenues were $2.0 million and $3.9 million for the three- and six-month periods ended June 30, 2020, respectively, compared with $1.9 million and $3.2 million for the same prior year periods.

The increases in 2020 primarily related to increased fee and commission income.

Revenue from Non-Title Services

Revenue from non-title services includes trust services, agency management services and exchange services income.

Non-title service revenues were $2.5 million for the three-month period ended March 31, 2020 , compared with $2.4 million for the same prior year period.

The increase in 2020 related to increased revenue from all major components of non-title services, particularly exchange and agency management services revenue.

Non-title service revenues were $2.0 million and $4.5 million for the three- and six-month periods ended June 30, 2020, compared with $2.5 million and $4.9 million for the same prior year periods.

The decreases in 2020 related to decreased exchange services income.

Investment-Related Revenues

Investment-related revenues include interest and dividends, other investment income, net realized investment (losses) gains and changes in the estimated fair value of equity security investments.

Investment-related revenues include interest and dividends, other investment income, net realized investment gains (losses) and changes in the estimated fair value of equity security investments.

Interest and Dividends

12 unchanged sentences

Interest and investment income levels are primarily a function of general market performance, interest rates and the amount of cash available for investment.

Interest and dividends were $1.2 million for the three-month period ended March 31, 2020 , compared with $1.3 million for the same prior year period.

The decrease in 2020 was primarily related to less interest earned due to a lower portfolio balance of fixed maturity securities and lower interest rates.

Interest and dividends were $1.1 million and $2.3 million for the three- and six-month periods ended June 30, 2020, respectively, compared with $1.2 million and $2.4 million for the same prior year periods.

The decreases in 2020 were primarily related to less interest earned by fixed maturity securities due to lower interest rates.

Other Investment Income

2 unchanged sentences

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.

Other investment income was $440 thousand for the three-month period ended March 31, 2020 , compared with $410 thousand for the same prior year period.

Other investment income was $526 thousand and $966 thousand for the three- and six-month periods ended June 30, 2020, respectively, compared with $926 thousand and $1.3 million for the same prior year periods.

Changes in other investment income are impacted by fluctuations in the carrying value of the underlying investment and or distributions received.

Net Realized Investment (Losses) Gains

Net Realized Investment Gains (Losses)

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 (losses) gains are affected by assessments of securities’ valuation for other-than-temporary impairment.

Additionally, the amounts of net realized investment gains (losses) are affected by assessments of securities’ valuation for other-than-temporary impairment.

As a result of the interaction of these factors and considerations, the net realized investment gain or loss can vary significantly from period to period.

The net realized investment (losses) gains were $(412) thousand for the three-month period ended March 31, 2020 , compared with $790 thousand for the same prior year period.

The net realized investment (losses) gains for the three-month period ended March 31, 2020 included impairment charges of $482 thousand of certain fixed maturity securities the Company determined were other-than-temporarily impaired.

The net realized investment gains (losses) were $553 thousand and $141 thousand for the three- and six-month periods ended June 30, 2020, respectively, compared with $(14) thousand and $776 thousand for the same prior year periods.

The net realized investment gains (losses) for the six-month period ended June 30, 2020 included impairment charges of $482 thousand of certain fixed maturity securities the Company determined were other-than-temporarily impaired.

There were no impairment charges recorded in 2019.

Management believes unrealized losses on remaining fixed maturity securities at March 31, 2020 are temporary in nature.

Management believes unrealized losses on remaining fixed maturity securities at June 30, 2020 are temporary in nature.

The securities in the Company’s investment portfolio are subject to economic conditions and market risks.

7 unchanged sentences

Changes in the Estimated Fair Value of Equity Security Investments

Changes in the estimated fair value of equity security investments were $(14.5) million for the three-month period ended March 31, 2020 , compared with $4.7 million for the same prior year period.

Changes in the estimated fair value of equity security investments were $8.0 million and $(6.5) million for the three- and six-month periods ended June 30, 2020, respectively, compared with $1.1 million and $5.8 million for the same prior year periods.

Such fluctuations are the result of changes in general market conditions during the respective periods.

1 unchanged sentence

stock market indices substantially declined due to economic slowdowns and uncertainty resulting from COVID-19.

The major stock market indices partially recovered the first quarter losses during the second quarter of 2020.

Other Revenues

Other revenues primarily include state tax credit income, gains and losses on the disposal of fixed assets and miscellaneous revenues.

Other revenues were $138 thousand for the three-month period ended March 31, 2020 , compared with $315 thousand for the same prior year period.

The decrease in 2020 primarily related to a decline in state tax credit income.

Other revenues were $120 thousand and $258 thousand for the three- and six-month periods ended June 30, 2020, respectively, compared with $90 thousand and $405 thousand for the same prior year periods.

The decrease for the six-month period ended June 30, 2020 primarily related to a decline in state tax credit income.

The Company's operating expenses consist primarily of commissions to agents, personnel expenses, office and technology expenses and the provision for claims.

Operating expenses increased 21.5% for the three-month period ended March 31, 2020 , compared with the same prior year period.

The increase for the three-month period ended March 31, 2020 was primarily due to increases in commissions to agents, the provision for claims and other expenses.

Following is a summary of the Company's operating expenses for the three-month periods ended March 31, 2020 and 2019 .

Operating expenses increased 22.4% and 22.0% for the three- and six-month periods ended June 30, 2020, respectively, compared with the same prior year periods.

The increases for the three- and six-month periods ended June 30, 2020 were primarily due to increases in commissions to agents and personnel expenses.

Following is a summary of the Company's operating expenses for the three- and six-month periods ended June 30, 2020 and 2019.

Inter-segment eliminations have been netted;

1 unchanged sentence

Three Months Ended

June 30, Six Months Ended

(in thousands, except percentages) 2020 % 2019 % 2020 % 2019 %

Title Insurance $ 41,519 94.7 $ 33,359 93.1 $ 77,637 94.4 $ 62,786 93.1

On a combined basis, the after-tax profit margin was (23.4)% for the three-month period ended March 31, 2020 , compared with 16.6% for the same prior year period.

All Other 2,307 5.3 2,454 6.9 4,619 5.6 4,660 6.9

$ 43,826 100.0 $ 35,813 100.0 $ 82,256 100.0 $ 67,446 100.0

On a combined basis, after-tax profit margins were 23.5% and 8.2% for the three- and six-month periods ended June 30, 2020, respectively, compared with 12.9% and 14.7% for the same prior year periods.

The Company continually strives to enhance its competitive strengths and market position, including ongoing initiatives to manage its operating expenses.

1 unchanged sentence

Personnel Expenses – Personnel expenses include base salaries, benefits and payroll taxes, bonuses paid to employees and contract labor expenses.

Personnel expenses were $11.8 million for the three-month period ended March 31, 2020 , compared with $11.6 million for the same prior year period.

On a consolidated basis, personnel expenses as a percentage of total revenues was 39.5% for the three-month period ended March 31, 2020 , compared with 29.1% for the same prior year period.

The increase in personnel expenses for the three-month period ended March 31, 2020 was primarily related to normal inflationary increases in salaries and benefits, growth in staffing levels associated with higher activity levels and targeted investments in key areas of our business, and continued support of multi-year technology initiatives.

The increase in expense as a percentage of total revenues related to the significant decrease in revenues due to the changes in the estimated fair value of equity security investments.

Personnel expenses were $12.2 million and $24.1 million for the three- and six-month periods ended June 30, 2020, respectively, compared with $11.7 million and $23.3 million for the same prior year periods.

On a consolidated basis, personnel expenses as a percentage of total revenues were 19.8% and 26.2% for the three- and six-month periods ended June 30, 2020, respectively, compared with 27.3% and 28.2% for the same prior year period.

The increases in personnel expenses for the three- and six-month periods ended June 30, 2020 were primarily related to normal inflationary increases in salaries and benefits and targeted staffing increases to support growth initiatives.

Office and Technology Expenses – Office and technology expenses primarily include facilities expenses, software and hardware expenses, depreciation expense, telecommunications expenses, and business insurance.

Office and technology expenses were $2.4 million for the three-month period ended March 31, 2020 , compared with $2.2 million for the same prior year period.

The increase in 2020 was primarily related to ongoing investments in software and technology related initiatives.

Office and technology expenses were $2.5 million and $4.9 million for the three- and six-month periods ended June 30, 2020, respectively, compared with $2.2 million and $4.5 million for the same prior year periods.

The increases for the three- and six-month periods ended June 30, 2020 were primarily related to ongoing investments in software and technology related initiatives.

Other Expenses – Other expenses primarily include business development expenses, premium-related taxes and licensing, professional services, title and service fees, amortization of intangible assets and other general expenses.

Other expenses were $3.1 million for the three-month period ended March 31, 2020 , compared with $2.5 million for the same prior year period.

The increase in 2020 was primarily related to increases in premium-related taxes and licensing, title and service fees and professional services.

Other expenses were $3.0 million and $6.2 million for the three- and six-month periods ended June 30, 2020, respectively, compared with $3.2 million and $5.7 million for the same prior year periods.

The decrease for the three-month period ended June 30, 2020 was primarily related to a decrease in business development expenses on account of travel restrictions from COVID-19, partially offset by increases in professional services and premium-related taxes and licensing.

The increase for the six-month period ended June 30, 2020 was primarily related to increases in premium-related taxes and licensing and professional services, partially offset by a decline in business development expenses.

Title Insurance

Commissions to Agents – Agent commissions represent the portion of premiums retained by agents pursuant to the terms of their respective agency contracts.

Commissions to agents increased 34.1% for the three-month period ended March 31, 2020 , compared with the same prior year period.

Commission expense as a percentage of net premiums written by agents was 70.3% for the three-month period ended March 31, 2020 , compared with 69.6% for the same prior year period.

The change in commission expense, and commission expense as a percentage of net premiums written, was primarily related to increased premiums written by agents and changes in geographic mix for the three-month period ended March 31, 2020 .

Commissions to agents increased 48.0% and 41.3% for the three- and six-month periods ended June 30, 2020, respectively, compared with the same prior year periods.

Commission expense as a percentage of net premiums written by agents was 69.8% and 70.0% for the three- and six-month periods ended June 30, 2020, respectively, compared with 66.2% and 67.8% for the same prior year periods.

The changes in commission expense, and commission expense as a percentage of net premiums written, were primarily related to increased premiums written by agents and changes in geographic mix for the three- and six-month periods ended June 30, 2020.

Commission rates vary by market due to local practice, competition and state regulations.

Provision for Claims – The provision for claims as a percentage of net premiums written was 2.3% for the three-month period ended March 31, 2020 , compared with 0.8% for the same prior year period.

The increase in the provision for claims for the three-month period ended March 31, 2020 , compared with the same prior year period, primarily related to the increase in premium volume and less favorable loss development in the current period.

Provision for Claims – The provision for claims as a percentage of net premiums written was 4.2% and 3.4% for the three- and six-month periods ended June 30, 2020, respectively, compared with 6.9% and 4.1% for the same prior year periods.

Notwithstanding premium volume increases in the current year, claims expense decreased for the three-month period ended June 30, 2020 as a result of a large claim in the prior year quarter and increased for the six-month period ended June 30, 2020 due to the recognition of favorable loss development in the prior year.

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 $832 thousand and $571 thousand for the three-month periods ended March 31, 2020 and 2019 , respectively.

At March 31, 2020 , the total reserve for claims was $31.4 million .

Actual payments of claims, net of recoveries, were $1.5 million and $1.3 million for the six-month periods ended June 30, 2020 and 2019, respectively.

At June 30, 2020, the total reserve for claims was $32.7 million.

Of that total, approximately $4.0 million was reserved for specific claims, and approximately $28.7 million was reserved for claims for which the Company had no notice.

4 unchanged sentences

Adjustments may be required as new information develops, which often varies from past experience.

The (benefit) provision for income taxes was $(1.5) million for the three-month period ended March 31, 2020 , compared with $1.7 million for the same prior year period.

Income tax benefit, including federal and state taxes, as a percentage of loss before income taxes was 17.8% for the three-month period ended March 31, 2020 , compared with income tax expense as a percentage of income before income taxes of 20.3% for the same prior year period.

The provision for income taxes was $3.4 million and $1.9 million for the three- and six-month periods ended June 30, 2020, respectively, compared with $1.4 million and $3.1 million for the same prior year periods.

Income tax expense, including federal and state taxes, as a percentage of income before income taxes was 19.1% and 20.3% for the three- and six-month periods ended June 30, 2020, compared with 20.5% and 20.4% for the same prior year periods.

The effective income tax rates for both 2020 and 2019 differ from the U.S.

1 unchanged sentence

Tax-exempt income lowers the effective tax rate.

The Company believes it is more likely than not that the tax benefits associated with recognized impairments and unrecognized losses recorded through March 31, 2020 will be realized.

The Company believes it is more likely than not that the tax benefits associated with recognized impairments and unrecognized losses recorded through June 30, 2020 will be realized.

However, this judgment could be impacted by further market fluctuations.

10 unchanged sentences

including the duration and severity of the pandemic, actions taken to contain the spread of the virus, and regulatory actions taken as a result of the outbreak.

Currently, the Company is fully operational and has not had any reductions in workforce.

Currently, the Company is fully operational and has not had any reductions in workforce during 2020.

A large portion of the Company's workforce is performing their job functions remotely.

The Company has not taken stimulus relief funding or added any other forms of debt.

Cash Flows – Net cash flows provided by (used in) operating activities were $2.0 million and $(847) thousand for the three-month periods ended March 31, 2020 and 2019 , respectively.

The Company has not taken stimulus relief funding or incurred any other forms of debt.

Cash Flows – Net cash flows provided by operating activities were $16.0 million and $761 thousand for the three- and six-month periods ended June 30, 2020 and 2019, respectively.

Cash flows provided by operating activities increased in 2020 from 2019, primarily due to net income increasing when adjusted for non-cash items, such as changes in the estimated fair value of equity security investments, and the timing of payable disbursements.

This was partially offset by changes in other assets and deferred income taxes.

This was partially offset by changes in other assets and the timing of the collection of receivables.

Cash flows from non-operating activities have historically consisted of purchases and proceeds from investing activities and the payment of dividends.

1 unchanged sentence

The Company maintains a high degree of liquidity within its investment portfolio in the form of cash, short-term investments and other readily marketable securities.

As of March 31, 2020 , the Company held cash and cash equivalents of $25.3 million , short-term investments of $15.6 million , available-for-sale fixed maturity securities of $101.4 million and equity securities of $48.0 million .

The net effect of all activities on total cash and cash equivalents was a decrease of $625 thousand in 2020 .

As of June 30, 2020, the Company held cash and cash equivalents of $29.7 million, short-term investments of $24.7 million, available-for-sale fixed maturity securities of $102.1 million and equity securities of $55.8 million.

The net effect of all activities on total cash and cash equivalents was an increase of $3.8 million in 2020.

Capital Resources – The amount of capital resources the Company maintains is influenced by state regulation, the need to maintain superior financial ratings from third-party rating agencies and other marketing and operational considerations.

6 unchanged sentences

Depending on regulatory conditions, the Company may in the future need to retain cash in its title insurance subsidiaries in order to maintain their statutory capital position.

As of March 31, 2020 , both ITIC and NITIC met the minimum capital, surplus and reserve requirements for each state in which they are licensed.

As of June 30, 2020, both ITIC and NITIC met the minimum capital, surplus and reserve requirements for each state in which they are licensed.

While state regulations and the need to cover risks may set a minimum level for capital requirements, other factors necessitate maintaining capital resources in excess of the required minimum amounts.

6 unchanged sentences

Due to the Company’s historical ability to consistently generate positive cash flows from its consolidated operations and investment income, management believes that funds generated from operations will enable the Company to adequately meet its current operating needs for the foreseeable future.

However, especially with the onset of COVID-19, there can be no assurance that future experience will be similar to historical experience, since it is influenced by such factors as the interest rate environment, real estate activity, the Company’s claims-paying ability and its financial strength ratings.

However, especially with the onset and continued spread of COVID-19, there can be no assurance that future experience will be similar to historical experience, since it is influenced by such factors as the interest rate environment, real estate activity, the Company’s claims-paying ability and its financial strength ratings.

In addition to operational and investment considerations, taking advantage of opportunistic external growth opportunities may necessitate obtaining additional capital resources.

2 unchanged sentences

Unless terminated earlier by resolution of the Board of Directors, the plan will expire when all shares authorized for purchase under the plan have been purchased.

Pursuant to the Company’s ongoing purchase program, the Company purchased 0 and 66 shares for the three-month periods ended March 31, 2020 and 2019 , respectively.

Pursuant to the Company’s ongoing purchase program, the Company purchased 0 and 66 shares for the six-month periods ended June 30, 2020 and 2019, respectively.

The Company anticipates making further purchases under this plan from time to time in the future, depending on such factors as the prevailing market price of the Company’s common stock, the Company’s available cash and then existing alternative uses for such cash.

Capital Expenditures – Capital expenditures were approximately $643 thousand for the three-month period ended March 31, 2020 .

Capital Expenditures – Capital expenditures were approximately $1.4 million for the six-month period ended June 30, 2020.

In 2020, the Company has plans for various capital improvement projects, including increased investment in a number of technology and system development initiatives and hardware purchases which are anticipated to be funded via cash flows from operations.

6 unchanged sentences

ITAC serves as exchange accommodation titleholder and, through limited liability companies that are wholly owned subsidiaries of ITAC, holds property for exchangers in reverse exchange transactions.

Like-kind exchange deposits and reverse exchange property held by the Company for the purpose of completing such transactions totaled approximately $223.6 million and $214.6 million as of March 31, 2020 and December 31, 2019 , respectively.

Like-kind exchange deposits and reverse exchange property held by the Company for the purpose of completing such transactions totaled approximately $171.4 million and $214.6 million as of June 30, 2020 and December 31, 2019, respectively.

These exchange deposits are held at third-party financial institutions.

17 unchanged sentences

Actual future results and trends may differ materially from historical results or those projected in any such forward-looking statements depending on a variety of factors, including, but not limited to, the following:

the impact of the coronavirus, or other pandemics;

• the impact of COVID-19, or other pandemics;

• changes in interest rates and real estate values;

21 unchanged sentences

These and other risks and uncertainties may be described from time to time in the Company's other reports and filings with the Securities and Exchange Commission.

For more details on factors that could affect expectations, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 , including under the heading "Risk Factors", as well as the additional risk factor set forth in Part II, Item 1A of this Quarterly Report.

For more details on factors that could affect expectations, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, including under the heading "Risk Factors", as supplemented in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, as well as the further updated risk factor set forth in Part II, Item 1A of this Quarterly Report.

The Company is not under any obligation (and expressly disclaims any such obligation) and does not undertake to update or alter any forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.

1 unchanged sentence

Quantitative and Qualitative Disclosures About Market Risk

For the quarter ended March 31, 2020 , there were no material changes in the Company’s market risks as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 .

For the quarter ended June 30, 2020, there were no material changes in the Company’s market risks as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis