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Item 7. Management’s Discussion and Analysis

2021-03-15 compared with 2020-03-11 · 175 added, 176 removed, 320 unchanged (52% of the section changed)

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The following discussion should be read in conjunction with the Consolidated Financial Statements and the related notes in this report.

Forward-looking statements are based on certain assumptions and expectations of future events that are subject to a number of risks and uncertainties.

The following discussion may contain forward-looking statements.

These 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.

See the sections in this Annual Report on Form 10-K titled “Safe Harbor and Forward-Looking Statements” and “Risk Factors” included in Part I, Item 1A that could affect forward-looking statements.

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”).

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The Company’s exchange services division, consisting of the operations of ITEC and ITAC, provides customer services in connection with tax-deferred real property exchanges.

ITEC acts as a qualified intermediary in tax-deferred exchanges of property held for productive use in a trade or business or for investment, and its income is derived from fees for handling exchange transactions and interest earned on client deposits held by the Company.

ITEC acts as a qualified intermediary in tax-deferred exchanges of real property held for productive use in a trade or business or for investment, and its income is derived from fees for handling exchange transactions and interest earned on client deposits held by the Company.

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 time the old property is sold and the new property is purchased, and accepting the formal identification of the replacement property within the required identification period.

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Business Trends and Recent Conditions;

COVID-19 Pandemic

The housing market is heavily influenced by government policies and overall economic conditions.

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

and other countries continue to experience the outbreak of the COVID-19 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 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, mortgage loan forbearance actions, 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 did not have 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 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 last three quarters and the full-year 2020, the Company recognized income from changes in the estimated fair value of equity securities as the Company's equity holdings rebounded.

Purchase volume and refinance activity were strong in the third and fourth quarters, as lower average mortgage interest rates, a tight real estate supply and pent-up demand spurred real estate activity and prices.

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, and/or provide additional economic stimulus, the Company is currently unable to predict what the ultimate impact of the pandemic on its business will be.

Regulatory Environment

In efforts to provide transparency, the Federal Open Market Committee (“FOMC”) of the Federal Reserve issues disclosures on a periodic basis that include projections of the federal funds rate and expected actions.

At the December 2015 meeting, the FOMC voted to raise the federal funds rate for the first time since December 2008 to a target range between 0.25% and 0.50%.

Since December 2015, the FOMC has voted on several occasions to increase the federal funds rate, most recently at the December 2018 meeting to a target range between 2.25% and 2.50%.

However, due to developments impacting the economic outlook, as well as muted inflation pressures, at the July 2019 meeting, the FOMC reversed course and decided to lower the target range for the federal funds rate to between 2.00% and 2.25%.

The FOMC has elected to lower the target rate at subsequent meetings, most recently to a target range between 1.00% and 1.25%.

Any future adjustments to the rate are expected to be based on realized and expected economic developments to achieve maximum employment and inflation near the FOMC’s symmetric 2.0% objective.

The Federal Open Market Committee (“FOMC”) of the Federal Reserve issues disclosures on a periodic basis that include projections of the federal funds rate and expected actions.

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 normal economic situations, future adjustments to the rate are expected to be based on realized and expected economic developments to achieve maximum employment and inflation near the FOMC's symmetric long-term 2.0% objective.

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.

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Although the Company regularly monitors such proposals, 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.

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

The timing and nature of any reforms are currently unknown;

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, especially with the changes in the presidential administration and Congress in January 2021;

however, any changes to the CFPB could affect the Company and its results of operations.

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The Mortgage Bankers Association's (“MBA”) January 20, 2021 Mortgage Finance Forecast (“MBA Forecast”) projects 2021 purchase activity to increase 10.5% to $1,574 billion and refinance activity to decrease 46.7% to $1,145 billion, resulting in a decrease in total mortgage originations of 23.9% to $2,719 billion, all from 2020 levels.

In 2019 , purchase activity accounted for 61.5% of all mortgage originations and is projected to represent 68.2% of all mortgage originations in 2020 .

According to data published by Freddie Mac, the average 30-year fixed mortgage interest rate in the United States was 3.9% , 4.5% and 4.0% for the years ended December 31, 2019 , 2018 and 2017 , respectively.

Per the MBA Forecast, refinancing is expected to be lower over the next 3-year period as mortgage interest rates gradually climb to a projected 4.1% by the fourth quarter of 2022.

In 2020, purchase activity accounted for 39.9% of all mortgage originations and is projected in the MBA Forecast to represent 57.9% of all mortgage originations in 2021.

The MBA Forecast is projecting continued decreases in total mortgage originations for 2022 and 2023.

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 3.1% and 3.9% for the years ended December 31, 2020 and 2019, respectively.

Per the MBA Forecast, mortgage interest rates are projected to increase over the subsequent 3-year period, reaching 4.4% by 2023.

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

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Critical Accounting Estimates and Policies

This discussion and analysis of the Company’s financial condition and results of operations is based upon the Company’s accompanying Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States.

This discussion and analysis of the Company’s financial condition and results of operations is based upon the Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States.

The Company’s management makes various estimates and judgments when applying policies affecting the preparation of the Consolidated Financial Statements.

Actual results could differ from those estimates.

Significant accounting policies of the Company are discussed in Note 1 to the accompanying Consolidated Financial Statements.

Significant accounting policies of the Company are discussed in Note 1 to the Consolidated Financial Statements.

Following are the accounting estimates and policies considered critical to the Company.

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The Company’s reserve for claims is established using estimates of amounts required to settle claims for which notice has been received (reported) and the amount estimated to be required to satisfy incurred claims of policyholders which may be reported in the future (incurred but not reported, or “IBNR”).

The total reserve for all losses incurred but unpaid as of December 31, 2019 is represented by the reserve for claims totaling $31.3 million in the accompanying Consolidated Balance Sheets.

The total reserve for all losses incurred but unpaid as of December 31, 2020 is represented by the reserve for claims totaling $33.6 million in the Consolidated Balance Sheets included in Item 8 of this Annual Report on Form 10-K (the “Consolidated Balance Sheets”).

Of that total, approximately $3.6 million was reserved for specific claims which have been reported to the Company, and approximately $30.0 million was reserved for IBNR claims.

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Management considers factors such as the Company’s historical claims experience, case reserve estimates on reported claims, large claims, actuarial projections and other relevant factors in determining its loss provision rates and the aggregate recorded expected liability for claims.

In establishing the reserve, actuarial projections are compared with recorded reserves to evaluate the adequacy of such recorded claims reserves and any necessary adjustments are then recorded in the current period’s income statement.

As the most recent claims experience develops and new information becomes available, the loss reserve estimate related to prior periods will change to more accurately reflect updated and improved emerging data.

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Despite the variability of such estimates, management believes that, based on historical claims experience and actuarial analysis, the Company’s reserve for claims is adequate to cover claim losses resulting from pending and future claims for policies issued through December 31, 2020.

The ultimate settlement of claims will likely vary from the reserve estimates included in the Company’s Consolidated Financial Statements.

The ultimate settlement of claims will likely vary from the reserve estimates included in the accompanying Consolidated Financial Statements.

The Company continually reviews and adjusts its reserve estimates to reflect its loss experience and any new information that becomes available.

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Quarterly, the Company evaluates the collectability of receivables.

Premiums not collected within seven months are fully reserved.

Write-offs of receivables have not been material to the Company.

Valuation and Impairment of Investments in Securities

Investments in Fixed Maturity Securitie s – Fixed maturity securities are classified as available-for-sale and reported at estimated fair value with unrealized gains and losses, net of tax and adjusted for other-than-temporary declines in fair value, and reported as accumulated other comprehensive income.

Investments in Fixed Maturity Securitie s – Fixed maturity securities are classified as available-for-sale and reported at estimated fair value with unrealized gains and losses, net of tax and adjusted for other-than-temporary declines in fair value, reported as accumulated other comprehensive income.

Securities are regularly reviewed for differences between the cost and estimated fair value of each security for factors that may indicate that a decline in fair value is other-than-temporary.

Some factors considered in evaluating whether or not a decline in fair value is other-than-temporary include the duration and extent to which the fair value has been less than cost and the Company’s ability and intent to retain the investment for a period of time sufficient to allow for a recovery in value.

Such reviews are inherently uncertain and the value of the investment may not fully recover or may decline in future periods resulting in a realized loss.

In evaluating available-for-sale fixed maturity securities in unrealized loss positions for impairment and the criteria regarding its intent or requirement to sell such securities, the Company considers the extent to which estimated fair value is less than amortized cost, whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuers’ financial condition, among other factors.

If the Company intends to sell an available-for-sale security in an unrealized loss position, or determines that it is more likely than not that the Company will be required to sell the security before it recovers its amortized cost basis, the security is impaired and it is written down to estimated fair value with all losses recognized in earnings.

For available-for-sale fixed maturity securities in an unrealized loss position for which the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security, the Company evaluates the securities to determine whether the decline in the estimated fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors.

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 earnings.

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

Changes in the ACL are recorded as provision for (or reversal of) credit loss expense.

Losses are charged against the ACL when management believes the uncollectability of an available-for-sale fixed maturity security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Accrued interest receivable is excluded from the estimate of credit losses.

Impairment reviews are inherently uncertain and the value of the investment may not fully recover or may decline in future periods resulting in a realized loss.

Realized gains and losses are determined on the specific identification method.

Refer to Note 3 to the Consolidated Financial Statements included in this Annual Report on Form 10-K for further information about the Company’s investments in fixed maturity securities.

Refer to Note 3 to the Consolidated Financial Statements for further information about the Company’s investments in fixed maturity securities.

Investments in Equity Securities – Equity securities represent ownership interests held by the Company in entities for investment purposes.

Prior to January 1, 2018, these equity securities were classified as available-for-sale and were carried at estimated fair value on the Company’s Consolidated Balance Sheets.

Unrealized holding gains and losses from changes in the estimated fair values of available-for-sale equity securities were reported in accumulated other comprehensive income.

Effective January 1, 2018, unrealized holding gains and losses are reported in the Consolidated Statements of Income as changes in the estimated fair value of equity security investments.

As a result, other-than-temporary impairments will no longer be considered for equity securities.

Unrealized holding gains and losses are reported in the Consolidated Statements of Operations as changes in the estimated fair value of equity security investments.

Realized investment gains and losses from sales are recorded on the trade date and are determined using the specific identification method.

Refer to Note 3 to the Consolidated Financial Statements included in this Annual Report on Form 10-K for further information about the Company’s investments in equity securities.

Other Investments – Other investments consist of investments in unconsolidated affiliated entities, typically structured as limited liability companies ("LLC's"), without readily determinable fair values.

Refer to Note 3 to the Consolidated Financial Statements for further information about the Company’s investments in equity securities.

Other Investments – Other investments consist of investments in unconsolidated affiliated entities, typically structured as limited liability companies (“LLCs”), without readily determinable fair values.

Other investments are accounted for under either the equity method or the measurement alternative method.

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The Company monitors any events or changes in circumstances that may have had a significant adverse effect on the estimated fair value of these investments and makes any necessary adjustments.

Securities are regularly evaluated and reviewed for differences between the cost and estimated fair value of each security for factors that may indicate that a decline in estimated fair value is other-than-temporary.

When, in the opinion of management, a decline in the estimated fair value of an investment is considered to be other-than-temporary, such investment is written down to its estimated fair value.

Some factors considered in evaluating whether or not a decline in estimated fair value is other-than-temporary include, but are not limited to:

the duration and extent to which the fair value has been less than cost;

whether the Company’s ability and intent to retain the investment for a period of time is sufficient to allow for a recovery in value;

whether the Company has the intent to sell or will more likely than not be required to sell a particular security before recovery in value.

These factors are reviewed quarterly and any material degradation in the prospect for recovery will be considered in the other-than-temporary impairment analysis.

Such reviews are inherently uncertain and the value of the investment may not fully recover or may decline in future periods resulting in a realized loss.

The fair values of the majority of the Company’s investments are based on quoted market prices from independent pricing services.

Refer to Note 3 to the Consolidated Financial Statements included in this Annual Report on Form 10-K for further information about the Company’s valuation techniques.

Refer to Note 3 to the Consolidated Financial Statements for further information about the Company’s valuation techniques.

Deferred Taxes

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The deferred tax liabilities recorded during both periods primarily relate to net unrealized gains on investments, the excess of tax over book depreciation, intangible assets, and the recorded reserve for claims, net of statutory premium reserves.

Refer to Note 8 to the Consolidated Financial Statements in this Annual Report on Form 10-K for further information on the Company’s deferred taxes.

Refer to Note 8 to the Consolidated Financial Statements for further information on the Company’s deferred taxes.

Cyclicality and Seasonality

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Results of Operations

The following table presents certain income statement data for the years ended December 31, 2019 , 2018 and 2017 :

The following table presents certain Consolidated Statement of Operations data for the years ended December 31, 2020 and 2019:

For the Years Ended December 31, (in thousands) 2020 2019

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Other investment income 3,723 3,191

Net realized investment gains (losses)

Net realized investment gains 333 1,340

Changes in the estimated fair value of equity security investments 4,904 10,303

Other 623 678

Total Revenues 236,408 183,502

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Commissions to agents 106,807 72,780

Provision (benefit) for claims

Provision for claims 5,204 3,532

Personnel expenses 51,929 46,058

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Provision for Income Taxes 10,241 8,365

Net Income Attributable to the Company

Net Income $ 39,420 $ 31,458

Insurance Revenues

Insurance revenues include net premiums written and other title-related income that includes escrow and settlement fees.

Insurance revenues include net premiums written and escrow and other title-related income that includes escrow fees, commissions and settlement fees.

Non-title services revenue, investment-related revenues and other revenues are discussed separately below.

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Title Insurance $ 226,480 95.8 $ 170,374 92.8

All Other 9,928 4.2 13,128 7.2

Total $ 236,408 100.0 $ 183,502 100.0

Net Premiums Written

Net premiums written increased 5.6% in 2019 to $145.8 million , compared with $138.1 million in 2018 , and decreased 1.7% in 2018 , compared with $140.5 million in 2017 .

The increase in 2019 , compared with 2018 , was primarily due to favorable interest rates, higher home prices, and higher levels of both refinance and refinance activity.

The decrease in 2018 , compared with 2017 , was primarily due to a decline in refinance activity, partially offset by an increase in purchase activity and higher real estate values.

Net premiums written increased 40.8% in 2020 to $205.4 million, compared with $145.8 million in 2019.

The increase in 2020, compared with 2019, was 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.

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Home and Branch $ 53,204 25.9 $ 40,638 27.9

Agency 152,214 74.1 105,204 72.1

Total $ 205,418 100.0 $ 145,842 100.0

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 1.6% in 2019 to $40.6 million , compared with $41.3 million in 2018 , and increased 2.2% in 2018 , compared with $40.4 million in 2017 .

The decrease in net premiums written from home and branch operations for 2019 , compared with 2018 , was primarily due to a shift in market mix from purchase transactions to refinance transactions.

The increase in net premiums written from home and branch operations for 2018 , compared with 2017 , was primarily due to an increase in purchase activity and higher real estate values, partially offset by a decline in refinance activity.

Net premiums written from home and branch operations increased 30.9% in 2020 to $53.2 million, compared with $40.6 million in 2019.

The increase in net premiums written from home and branch operations for 2020, compared with 2019, was 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;

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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 8.7% in 2019 to $105.2 million , compared with $96.8 million in 2018 , and decreased 3.3% in 2018 , compared with $100.1 million in 2017 .

The increase in 2019 , compared with 2018 , was primarily the result of favorable interest rates increasing refinancing levels.

The decrease in 2018 , compared with 2017 , was primarily attributable to lower levels of refinance activity following increases in mortgage interest rates.

Agency net premiums written increased 44.7% in 2020 to $152.2 million, compared with $105.2 million in 2019.

The increase in 2020, compared with 2019, was primarily attributable to increased refinance activity and strong purchase volume, as lower average mortgage interest rates continued to spur real estate activity.

The following is a schedule of net premiums written in select states in which the Company’s two insurance subsidiaries, ITIC and NITIC, currently underwrite title insurance:

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North Carolina $ 75,697 $ 57,132

Texas 38,350 26,652

Georgia 23,502 16,422

South Carolina 18,752 13,796

All Others 49,410 32,249

Premiums Written 205,711 146,251

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In 2020, escrow and other title-related fee revenue increased 11.3% to $8.3 million, compared with $7.5 million in 2019, primarily due to an increase in fee income, partially offset by a decline in commission income.

In 2018 , escrow and other title-related fees increased 3.0% , from $6.9 million in 2017 , primarily due to an increase in fee income, partially offset by a decline in 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 increased 40.1% in 2019 to $9.9 million , compared with $7.1 million in 2018 , and increased 15.6% in 2018 , compared with $6.1 million in 2017 .

The increases in 2019 and 2018 , compared with the respective prior years, related to increases in all major components of non-title services, particularly exchange services revenue.

Non-title service revenues decreased 12.4% in 2020 to $8.7 million, compared with $9.9 million in 2019.

The decrease in 2020, compared with 2019, primarily related to decreased exchange services income due to the impact of lower interest rates, partially offset by increased agency management and trust services income.

Investment Related Revenues

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.

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

Interest and Dividends

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Securities purchased may include a combination of taxable or tax-exempt fixed maturity securities and equity securities.

The Company also invests in short-term investments that include commercial paper and money market funds.

The Company also invests in short-term investments that include money market funds, U.S.

Treasury bills, commercial paper and certificates of deposit.

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.

Interest and dividends were $4.8 million in 2019 , compared with $4.6 million in 2018 and $4.4 million in 2017 .

The increases in 2019 and 2018 , compared with the respective prior years, were primarily due to increases in dividends received from equity securities due to higher portfolio balances.

Interest and dividends were $4.4 million in 2020, compared with $4.8 million in 2019.

The decrease in 2020, compared with 2019, was primarily due to lower interest rates on fixed maturity securities.

Refer to Note 3 in the accompanying Consolidated Financial Statements for the major categories of investments, scheduled maturities, amortized costs, estimated fair values of investment securities and earnings by security category.

Other Investment Income

Other investment income consists primarily of income related to investments in unconsolidated affiliates, typically structured as limited liability companies ("LLC's"), accounted for under either the equity method of accounting or the measurement alternative for investments that do not have readily determinable fair values.

Other investment income consists primarily of income related to investments in unconsolidated affiliates, typically structured as LLCs, accounted for under either the equity method of accounting or the measurement alternative for investments that do not have readily determinable fair values.

The measurement alternative method requires investments without readily determinable fair values to be recorded at cost, less impairments, and plus or minus any changes resulting from observable price changes.

The Company monitors any events or changes in circumstances that may have had a significant adverse effect on the fair values of these investments and makes any necessary adjustments.

Other investment income was $3.2 million in 2019 , compared with $3.1 million in 2018 and $2.2 million in 2017 .

Other investment income was $3.7 million in 2020, compared with $3.2 million in 2019.

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

Net Realized Investment Gains (Losses)

Net Realized Investment Gains

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 included in net realized investment gains 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 gains (losses) were $1.3 million for 2019 , $(110) thousand for 2018 and $1.0 million for 2017 .

The net realized investment gains (losses) in 2017 included impairment charges of $208 thousand, on certain equity investments and other assets that were deemed to be other-than-temporarily impaired , offset by a net realized gain on the sales of investments and other assets of $1.2 million.

There were no impairments recorded in 2019 and 2018 .

The net realized investment gains were $333 thousand for 2020, compared with $1.3 million for 2019.

The net realized investment gains in 2020 included impairment charges of $482 thousand for certain fixed maturity securities the Company determined were other-than-temporarily impaired, offset by a net realized gain on the sales of investments and other assets of $815 thousand.

There were no impairments recorded in 2019.

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

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Changes in the Estimated Fair Value of Equity Security Investments

The Company adopted Accounting Standards Update 2016-01, Financial Instruments , on January 1, 2018.

Among other provisions, the update requires all changes in the estimated fair value of equity securities to be recognized in the Consolidated Statement of Income, without regard as to whether a decline in value is deemed to be temporary or other-than-temporary.

The Company’s net income may in turn experience more variation as changes in the estimated fair value will impact the Consolidated Statement of Income.

The changes in estimated fair value of equity security investments were $10.3 million in 2019 and $(4.1) million in 2018 .

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

Changes in the estimated fair value of equity security investments were $4.9 million in 2020 and $10.3 million in 2019.

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

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 $678 thousand in 2019 , compared with $470 thousand for 2018 , and $460 thousand for 2017 .

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

Operating expenses increased 11.2% in 2019 , compared with 2018 , primarily due to increases in commissions to agents, the provision (benefit) for claims and personnel expenses.

Operating expenses decreased 1.6% in 2018 , compared with 2017 , due to decreases in the provision (benefit) for claims and commissions to agents, partially offset by increases in personnel, office and technology, and other expenses.

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

Other revenues were $623 thousand in 2020, compared with $678 thousand for 2019.

The decrease in 2020, compared with 2019, primarily related to a decline in state tax credit income, partially offset by an increase in miscellaneous revenues.

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 30.0% in 2020, compared with 2019, primarily due to increases in commissions to agents, personnel expenses and the provision for claims.

Following is a summary of the Company’s operating expenses for 2020 and 2019.

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Title Insurance $ 177,784 95.2 $ 134,667 93.7

All Other 8,963 4.8 9,012 6.3

Total $ 186,747 100.0 $ 143,679 100.0

The Company’s after-tax profit margin varies according to a number of factors, including the volume and type of real estate activity.

On a combined basis, the after-tax profit margins were 16.7% and 17.1% in 2020 and 2019, respectively.

The decrease in after-tax margin in 2020, compared with 2019, was primarily related to increases in expenses from commissions to agents, personnel expenses and the provision for claims, partially offset by an increase in revenue from net premiums written.

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

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

Personnel expenses were $46.1 million , $43.6 million and $39.9 million for 2019 , 2018 and 2017 , respectively.

Personnel expenses increased by approximately 5.8% in 2019 , from 2018 , and 9.1% in 2018 , from 2017 .

The increases in 2019 , compared with 2018 , and 2018 , compared with 2017 , were 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.

Personnel expenses were $51.9 million and $46.1 million for 2020 and 2019, respectively.

Personnel expenses increased by approximately 12.7% in 2020, compared with 2019, primarily due to additions to staffing in support of strategic growth initiatives, additional staffing required to support volume increases, and increased levels of incentive compensation.

On a consolidated basis, personnel expenses as a percentage of total revenues were 22.0% and 25.1% in 2020 and 2019, respectively.

Office and Technology Expenses:

Office and technology expenses primarily include facilities expenses, software and hardware expenses, depreciation expenses, telecommunications expenses, and business insurance.

Office and technology expenses were $9.3 million , $8.8 million and $8.2 million for 2019 , 2018 and 2017 , respectively.

The increases in office and technology expenses in 2019 and 2018 , compared with their respective prior years, were primarily related to increases in software, depreciation and increased facilities 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 $10.0 million and $9.3 million for 2020 and 2019, respectively.

The increase in office and technology expenses in 2020, compared with 2019, was 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 $12.1 million , $11.4 million and $11.3 million for 2019 , 2018 and 2017 , respectively.

The increase in 2019 , compared with 2018 , was primarily related to an increase in title and service fees associated with the increase in insurance revenues.

In 2018 , there were marginal increases, compared with 2017 , in several miscellaneous expense categories, partially offset by a decline in the amortization of intangible assets.

Other expenses were $12.9 million and $12.1 million for 2020 and 2019, respectively.

The increase in 2020, compared with 2019, was primarily related to increases in premium-related taxes and licensing, title and service fees and professional services, partially offset by a decline in business development expenses.

Title Insurance

After-Tax Profit Margin :

The Company’s title insurance after-tax profit margin varies according to a number of factors, including the volume and type of real estate activity.

After-tax profit margins for the title insurance segment were 16.7%, 14.9% and 16.9% in 2019 , 2018 and 2017 , respectively.

The increase in after-tax margin in 2019 , compared with 2018 , was primarily related to increases in revenues from changes in the estimated fair value of equity security investments and net premiums written, partially offset by increases in commissions to agents, the provision (benefit) for claims and personnel expenses.

The decrease in after-tax margin in 2018 , compared with 2017 , was primarily related to a decrease in revenues from changes in the estimated fair value of equity security investments, slightly lower premiums and increased personnel expenses, partially offset by a decrease in commissions to agents and a benefit for claims.

Commissions to Agents :

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

In 2019 , commissions to agents increased 10.6% to $72.8 million , compared with $65.8 million in 2018 , and decreased 4.2% in 2018 , compared with $68.6 million in 2017 .

In 2020, commissions to agents increased 46.8% to $106.8 million, compared with $72.8 million in 2019.

Commission expense as a percentage of net premiums written by agents was 70.2% and 69.2% in 2020 and 2019, respectively.

Commission expense for 2019 and 2018 , when compared to the respective prior year periods, moved commensurate with agent net premiums written.

Commissions expense as a percentage of net premiums changed in 2019 and 2018 , when compared to the respective prior year periods, primarily due to changes in geographic mix.

The increases in commission expense, and commission expense as a percentage of net premiums written, when comparing 2020 with 2019, were primarily related to increased premiums written by agents and changes in geographic mix.

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

Provision (Benefit) for Claims :

The provision (benefit) for claims as a percentage of net premiums written was 2.4% , (0.2)% and 2.4% in 2019 , 2018 and 2017 , respectively.

The increase in the provision (benefit) for claims in 2019, compared with 2018, was due to less favorable loss development and higher incurred claims in the current year period.

A benefit for claims was recorded in 2018 , primarily due to favorable loss experience, which resulted in the decrease in the provision (benefit) for claims in 2018, compared with 2017.

The increase in the loss provision rate in 2019 , from the 2018 level, resulted in approximately $3.9 million more in reserves than would have been recorded at the lower 2018 level.

Provision for Claims :

The provision for claims as a percentage of net premiums written was 2.5% and 2.4% in 2020 and 2019, respectively.

The increase in the provision for claims in 2020, compared with 2019, was primarily due to additional underwriting risks caused by the increase in premiums written and a reduction in favorable loss development.

The increase in the loss provision rate in 2020, from the 2019 level, resulted in approximately $229 thousand more in reserves than would have been recorded at the lower 2019 level.

Loss provision rates are subject to variability and are reviewed and adjusted as experience develops.

Title claims are typically reported and paid within the first several years of policy issuance.

The provision (benefit) for claims reflects actual payments of claims, net of recovery amounts, plus adjustments to the specific and incurred but not reported claims reserves, the latter of which are actuarially determined based on historical claims experience.

Actual payments of claims, net of recoveries, were $3.9 million , $2.7 million and $3.8 million in 2019 , 2018 and 2017 , respectively.

The provision for claims reflects actual payments of claims, net of recovery amounts, plus adjustments to the specific and incurred but not reported claims reserves, the latter of which are actuarially determined based on historical claims experience.

Actual payments of claims, net of recoveries, were $3.0 million and $3.9 million in 2020 and 2019, respectively.

Reserve for Claims:

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The Company continually updates and refines its reserve estimates as current experience develops and credible data emerges.

Such data includes payments on claims closed during the quarter, new details that emerge on open cases that cause claims adjusters to increase or decrease the case reserves, and the impact that these types of changes have on the Company’s total loss provision (benefit).

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

The provision for income taxes was $8.4 million , $5.2 million and $4.6 million for 2019 , 2018 and 2017 , respectively.

Income tax expense as a percentage of earnings before income taxes was 21.0% , 19.2% and 15.1% for 2019 , 2018 and 2017 , respectively.

federal statutory tax rate for 2019 and 2018 was 21%, and 35% for 2017.

On December 22, 2017, the TCJA, was enacted into law.

That legislation, among other changes, reduced the federal corporate income tax rate from 35% to 21%, effective January 1, 2018.

As required under generally accepted accounting principles, the Company’s deferred tax assets and liabilities were revalued at the newly enacted U.S.

corporate income tax rate, and the impact was recognized in the provision for income taxes in the fourth quarter of 2017.

The revaluation resulted in a benefit of approximately $5.3 million recorded for the year ended December 31, 2017.

The effective income tax rates for 2019 and 2018 were primarily impacted by changes in tax-exempt income, as tax exempt lowers the effective tax rate.

The effective income tax rate for 2017 was below the federal statutory tax rate primarily due to the revaluation of deferred tax assets and liabilities, as well as tax-exempt income.

The provision for income taxes was $10.2 million and $8.4 million for 2020 and 2019, respectively.

Income tax expense, including federal and state taxes, as a percentage of income before income taxes was 20.6% and 21.0% for 2020 and 2019, respectively.

The effective income tax rate for 2020 differs from the U.S.

federal statutory income tax rate of 21% primarily due to changes in tax-exempt income, as 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 December 31, 2020 will be realized.

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

Information regarding the components of income tax expense and the items included in the reconciliation of the effective rate with the federal statutory rate can be found in Note 8 to the accompanying Consolidated Financial Statements.

Liquidity and Capital Resources

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The Company believes that its significant working capital position and management of operating expenses will aid its ability to manage cash resources through fluctuations in the real estate market.

Net cash flows provided by operating activities were $20.9 million , $24.4 million and $19.9 million for 2019 , 2018 and 2017 , respectively.

Cash flows from operating activities decreased in 2019, from 2018, primarily due to net income declining when adjusted for non-cash items, such as changes in the estimated fair value of equity security investments, and the timing of income tax disbursements, partially offset by an increase in the provision for claims, net of payments of claims.

Cash flows from operating activities increased in 2018, from 2017, primarily due to the timing of tax payments and changes in the estimated fair value of equity security investments, partially offset by a lower net income and a benefit for claims.

The extent to which COVID-19 impacts the Company's future operations will depend on future developments which cannot be predicted with certainty at this time, 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 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 incurred any other forms of debt.

Net cash flows provided by operating activities were $34.1 million and $20.9 million for 2020 and 2019, respectively.

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

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, the issuance of dividends and repurchases of common stock.

In 2019, the Company had higher levels of proceeds received from investments and investment purchase activity, with less dividends paid, compared with 2018.

In 2018, the Company had higher levels of proceeds received from investments, investment purchase activity and dividends paid, compared with 2017.

In 2020, the Company had more dividends paid and a net shift to investment purchases outpacing investment proceeds, compared with net investment proceeds outpacing investment purchases in 2019.

In the fourth quarters of 2020 and 2019, the Company paid special cash dividends in the amounts of $15.00 and $8.00 per share, respectively, in addition to regular cash dividends.

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As of December 31, 2020, the Company held cash and cash equivalents of $13.7 million, short-term investments of $15.2 million, available-for-sale fixed maturity securities of $117.7 million and equity securities of $64.9 million.

The net effect of all activities on total cash and cash equivalents was an increase of $7.3 million for 2019 , a decrease of $1.5 million for 2018 , and a decrease of $7.7 million for 2017 .

The net effect of all activities on total cash and cash equivalents was a decrease of $12.2 million for 2020.

Capital Resources:

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

As of December 31, 2019 , approximately $ 103.5 million of the consolidated stockholders’ equity represented net assets of the Company’s subsidiaries that are restricted by regulation from being transferred in the form of dividends, loans or advances to the parent company without prior approval from the respective state insurance department.

As of December 31, 2020, approximately $104.1 million of the consolidated shareholders’ equity represented net assets of the Company’s subsidiaries that are restricted by regulation from being transferred in the form of dividends, loans or advances to the parent company without prior approval from the respective state insurance department.

The Company believes, however, that amounts available for transfer from the insurance and other subsidiaries are adequate to meet the Company’s current operating needs.

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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, 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.

The Company is unaware of any trend that is likely to result in material adverse liquidity changes, but continually assesses its capital allocation strategy, including decisions relating to repurchasing the Company’s stock and/or conserving cash.

The Company is carefully monitoring the COVID-19 situation and any other trends that are likely to result in material adverse liquidity changes, and will continually assess its capital allocation strategy, including decisions relating to payment of dividends, repurchasing the Company’s stock and/or conserving cash.

Purchase of Company Stock :

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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 109 shares in the twelve months ended December 31, 2019 , 149 shares in the twelve months ended December 31, 2018 , and 1,333 shares in the twelve months ended December 31, 2017 , at average per share prices of $165.08, $195.87 and $183.67, respectively.

Pursuant to the Company’s ongoing purchase program, the Company purchased 25 shares in 2020 and 109 shares in 2019, at average per share prices of $173.44 and $165.08, 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 $1.5 million , $1.9 million and $2.9 million during 2019 , 2018 and 2017 , respectively.

Capital expenditures were approximately $3.2 million and $1.5 million during 2020 and 2019, respectively.

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.

All material anticipated capital expenditures are subject to periodic review and revision and may vary depending on a number of factors.

Contractual Obligations :

As of December 31, 2020, the Company had a claims reserve totaling $33.6 million.

The amounts and timing of these obligations are estimated and not set contractually.

Events such as fraud, defalcation, and multiple property title defects can substantially and unexpectedly cause increases in both the amount and timing of estimated title insurance loss payments and loss cost trends whereby increases or decreases in inflationary factors (including the value of real estate) will influence the ultimate amount of title insurance loss payments and could increase total obligations and influence claim payout patterns.

Due to the length of time over which claim payments are made and regularly occurring changes in underlying economic and market conditions, claim estimates are subject to variability and future payments could increase or decrease from these estimated amounts in the future.

ITIC, a wholly owned subsidiary of the Company, has entered into employment agreements with certain executive officers.

The amounts accrued for these agreements at December 31, 2020 and 2019 were approximately $12.5 million and $12.2 million, respectively, which includes postretirement compensation and health benefits, and was calculated based on the terms of the contracts.

These executive contracts are accounted for on an individual contract basis.

As payments are based upon the occurrence of specific events, including death, disability, retirement, termination without cause or upon a change in control, payment periods are currently uncertain.

Information regarding retirement agreements and other postretirement benefit plans can be found in Note 10 to the Consolidated Financial Statements.

The Company enters into lease agreements that are primarily used for office space.

These leases are accounted for as operating leases.

A portion of the Company's current leases include an option to extend or cancel the lease term, and the exercise of such an option is solely at the Company's discretion.

The total of undiscounted future minimum lease payments under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2020 is $2.8 million, which includes lease payments related to options to extend or cancel the lease term if the Company determined at the date of adoption that the lease was expected to be renewed or extended.

Information leases can be found in Note 9 to the Consolidated Financial Statements.

In the normal course of business, the Company enters into other contractual commitments for goods and services needed for operations.

Such commitments are not expected to have a material adverse effect on the Company’s liquidity.

Off-Balance Sheet Arrangements

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Cash held by the Company for these purposes was approximately $16.5 million and $21.5 million as of December 31, 2020 and 2019, respectively.

These amounts are not considered assets of the Company and, therefore, are excluded from the accompanying Consolidated Balance Sheets.

These amounts are not considered assets of the Company and, therefore, are excluded from the Consolidated Balance Sheets.

However, the Company remains contingently liable for the disposition of these deposits.

In addition, in administering tax-deferred property exchanges, ITEC serves as a qualified intermediary for exchanges, holding the net sales proceeds from relinquished property to be used for purchase of replacement property.

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.

ITAC serves as exchange accommodation titleholder and, through LLCs 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 $237.9 million and $214.6 million as of December 31, 2020 and 2019, respectively.

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

Exchange deposits are not considered assets of the Company and, therefore, are excluded from the accompanying Consolidated Balance Sheets;

Exchange deposits are not considered assets of the Company and, therefore, are excluded from the Consolidated Balance Sheets;

however, the Company remains contingently liable for the disposition of the transfers of property, disbursements of proceeds and the return on the proceeds at the agreed upon rate.

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External assets under management of Investors Trust Company totaled approximately $640.1 m illion and $568.6 million as of December 31, 2020 and 2019, respectively.

These amounts are not considered assets of the Company and, therefore, are excluded from the accompanying Consolidated Balance Sheets.

These amounts are not considered assets of the Company and, therefore, are excluded from the Consolidated Balance Sheets.

It is not the general practice of the Company to enter into off-balance sheet arrangements or issue guarantees to third parties.

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Other than items noted above, off-balance sheet arrangements are generally limited to the future payments due under various agreements with third-party service providers.

The following table summarizes the Company’s future estimated cash payments under existing contractual obligations at December 31, 2019 , including, payments due by period:

Payments due by period

Contractual Obligations Including Off-Balance Sheet Arrangements (in thousands)

Less than 1 year

More than 5 years

Reserve for claims

Obligations under executive employment plans and agreements

Operating lease obligations

Other obligations

As of December 31, 2019 , the Company had a claims reserve totaling $ 31.3 million .

The amounts and timing of these obligations are estimated and not set contractually.

Nonetheless, based on historical insurance claims experience, the Company anticipates the payments shown in the Contractual Obligations table.

Recent Accounting Standards

Recently Adopted Accounting Standards

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842) .

ASU 2016-02 updated guidance to improve financial reporting for leasing transactions.

The core principle of the guidance is that lessees will be required to recognize assets and liabilities on the balance sheet for all leases with terms of more than twelve months.

A lessee will recognize a liability to make lease payments and a right-of-use ("ROU") asset representing its right to use the underlying asset for the lease term.

Disclosures are required by lessees to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.

In transition, lessees are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, with certain practical expedients available.

The update was effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

The Company adopted this update on January 1, 2019 with no material impact on the Company's Consolidated Statements of Income or the Consolidated Statements of Cash Flows.

The update did have a material impact on the Company's Consolidated Balance Sheets, which included the recognition of operating lease ROU assets and operating lease liabilities.

Refer to Note 1 and Note 9 to the accompanying Consolidated Financial Statements for further information regarding the Company's accounting for leases.

In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20):

Premium Amortization on Purchased Callable Debt Securities.

ASU 2017-08 is intended to enhance the accounting for the amortization of premiums for purchased callable debt securities.

Specifically, the ASU shortens the amortization period for certain investments in callable debt securities purchased at a premium by requiring that the premium be amortized to the earliest call date.

The amendments do not require an accounting change for securities held at a discount;

the discount continues to be amortized to maturity.

The update was effective for annual periods beginning after December 15, 2018, and interim periods within those fiscal years.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326) .

ASU 2016-13 updated guidance to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.

The update broadened the information that an entity must consider in developing its expected credit loss estimates, and was meant to better reflect an entity’s current estimate of all expected credit losses.

In addition, this update amended the accounting for credit losses on available-for-sale fixed maturity securities and purchased financial assets with credit deterioration.

The update was effective for the Company for annual periods beginning after December 15, 2019, and interim periods within those fiscal years.

The Company adopted this update on January 1, 2020 with no material impact on the Company's financial position and results of operations.

Refer to Note 3 for further information about the Company's investments.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350).

This update removed the requirement to compare the implied fair value of goodwill with its carrying amount as part of step two of the goodwill impairment test.

As a result, under the ASU, an entity is required to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and must recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value;

however, the loss recognized must not exceed the total amount of goodwill allocated to that reporting unit.

In addition, the ASU clarified that an entity is required to consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.

The update was effective for the Company for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019.

The Company adopted this update on January 1, 2020 with no impact on the Company's financial position and results of operations.

Recently Issued Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) .

ASU 2016-13 is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.

The update broadens the information that an entity must consider in developing its expected credit loss estimates, and is meant to better reflect an entity’s current estimate of all expected credit losses.

In addition, this update amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.

The update is effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years.

Early adoption is permitted as of fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

The Company has evaluated the impact that the recently issued accounting standard will have on the Company's financial position and results of operations, and does not expect it to have a material impact.

Currently, the Company's potential credit losses under this accounting standard relate to fixed maturity securities.

The Company does not believe that the risk of credit losses, based on current fixed maturity securities holdings, is material to the Company's consolidated financial statements as a whole.

Refer to Note 3 to the accompanying Consolidated Financial Statements for further information about the Company's investments.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350).

This update removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test.

As a result, under the ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value;

however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

In addition, the ASU clarifies that an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.

The update is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019.

Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes .

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None of these amendments are expected to have a material impact on the Company's financial position or results of operations.

In January 2020, the FASB issued ASU 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815).

This update clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative immediately before applying or upon discontinuing the equity method.

In addition, this update clarifies that, when determining the accounting for certain forward contracts and purchased options, a company should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option.

The update is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.

Early adoption is permitted , including early adoption in an interim period, for periods for which financial statements have not yet been issued.

The Company is currently evaluating the impact that the recently issued accounting standard will have on the Company's financial position and results of operations, and does not expect it to have a material impact.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Item not required for smaller reporting companies.

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-K

Item 7. Management’s Discussion and Analysis