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Item 2. Management’s Discussion and Analysis

2021-05-10 compared with 2020-11-09 · 123 added, 136 removed, 268 unchanged (49% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations

The Company's Annual Report on Form 10-K for the year ended December 31, 2019 should be read in conjunction with the following discussion since it contains information which is important for evaluating the Company's operating results and financial condition.

Investors Title Company's (the "Company") Annual Report on Form 10-K for the year ended December 31, 2020 should be read in conjunction with the following discussion since it contains information which is important for evaluating the Company's operating results and financial condition.

In addition, the Company may make forward-looking statements in the following discussion and analysis.

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Actual results may vary.

See "Safe Harbor for Forward-Looking Statements" at the end of this discussion and analysis, as well as the sections titled "Risk Factors" in Part I, Item 1A of the Company's Annual Report on Form 10-K and Part II, Item 1A of this Quarterly Report on Form 10-Q for factors 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”).

Total revenues from the title segment accounted for 95.9% of the Company's revenues for the nine-month period ended September 30, 2020.

See "Safe Harbor for Forward-Looking Statements" at the end of this discussion and analysis, as well as the section titled "Risk Factors" in Part I, Item 1A of the Company's Annual Report on Form 10-K for factors that could affect forward-looking statements.

The Company is a holding company that engages primarily in issuing title insurance through two subsidiaries, Investors Title Insurance Company (“ITIC”) and National Investors Title Insurance Company (“NITIC”).

Total revenues from the title segment accounted for 95.9% of the Company's revenues for the three-month period ended March 31, 2021.

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

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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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The current real estate environment, including interest rates and general economic activity, typically influence the demand for real estate.

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

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.

Purchase volume and refinance activity were strong in the latter half of 2020, which continued into the first quarter of 2021.

For example, in 2020, sales of previously-owned U.S.

homes increased to their highest level in over a decade and the average rate on the benchmark 30-year fixed-rate home fell to record lows in January 2021.

These conditions have contributed to a housing market where demand currently exceeds supply.

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

While certain COVID-19 vaccines have been approved in recent months and are now available for use in the United States and certain other countries, we are unable to predict how widely utilized the vaccines will be, whether they will be effective in preventing the spread of COVID-19 (including its variant strains), and when or if normal economic activity and business operations will resume.

Despite increasing availability of vaccines, COVID-19 has continued to spread across the globe, including in U.S.

states where the Company conducts business.

The COVID-19 pandemic has negatively impacted worldwide economic activity and created significant volatility and disruptions of 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, 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 during 2020.

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 or the first quarter of 2021.

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 second and third quarters, 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 were strong in the third quarter, 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, 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.

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.

The COVID-19 pandemic has caused the Company to modify its business practices (including employee travel, employee work locations and cancellation of physical participation in meetings, events and conferences).

The COVID-19 pandemic and any of its variants could continue to affect the Company in a number of ways including, but not limited to, the impact on employees becoming ill, quarantined, or otherwise unable to work or travel due to illness or governmental restriction, potential decreases in net premiums written in the future, and future fluctuations in the Company's investment portfolio 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 (including any of its variants) 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 any of its variants, and/or provide additional economic stimulus, the Company is currently unable to predict the ultimate impact of the pandemic.

Regulatory Environment

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.

Starting in 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 rates at subsequent meetings.

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.

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%.

In response to risk posed to economic activity by COVID-19, the FOMC in March 2020 lowered the target federal funds rate twice by a total of 150 basis points.

As a result of these actions, the target federal funds rate now ranges 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.

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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 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;

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

however, the CFPB is expected to take a significantly more aggressive approach to using its rulemaking, supervision, and enforcement authorities under President Biden’s administration, and any changes to the CFPB could affect the Company and its results of operations.

Real Estate Environment

The Mortgage Bankers Association's ("MBA") October 21, 2020 Mortgage Finance Forecast (“MBA Forecast”), which includes COVID-19 considerations, projects 2020 purchase activity to increase 15.8% to $1,418 billion and mortgage refinance activity to increase 70.9% to $1,757 billion, resulting in a net increase in total mortgage originations of 40.9% to $3,175 billion, all from 2019 levels.

The Mortgage Bankers Association's ("MBA") March 19, 2021 Mortgage Finance Forecast (“MBA Forecast”) projects 2021 purchase activity to increase 16.4% to $1,668 billion and mortgage refinance activity to decrease 36.7% to $1,516 billion, resulting in a net decrease in total mortgage originations of 16.8% to $3,184 billion, all from 2020 levels.

In 2020, purchase activity accounted for 37.4% of all mortgage originations and is projected in the MBA Forecast to represent 52.4% of all mortgage originations in 2021.

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

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 3.2% and 4.0% for the nine-month periods ended September 30, 2020 and 2019, respectively.

Per the MBA Forecast, mortgage interest rates are projected to be 3.0% in the fourth quarter of 2020, and then increase to 3.6% by 2022.

According to data published by Freddie Mac, the average 30-year fixed mortgage interest rates in the United States were 2.9% and 3.5% for the three-month periods ended March 31, 2021 and 2020, respectively.

Per the MBA Forecast, mortgage interest rates are projected to reach 3.6% in the fourth quarter of 2021, and then will further increase to 5.0% 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

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

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

Actual results could differ from these estimates.

During the nine-month period ended September 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) :

Allowance for Credit Losses – Available-for-Sale Securities

For available-for-sale fixed maturity securities in an unrealized loss position, 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.

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.

Because the security’s amortized cost basis is adjusted to estimated fair value, there is no ACL in this situation.

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.

Changes in the allowance for credit losses 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.

During the three-month period ended March 31, 2021, the Company did not make any material 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, 2020 as filed with the Securities and Exchange Commission (the "SEC").

Results of Operations

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

The following table presents certain unaudited Consolidated Statements of Operations data for the three-month periods ended March 31, 2021 and 2020:

Three Months Ended

September 30, Nine Months Ended

September 30,

(in thousands) 2021 2020

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Other investment income 941 440

Net realized investment gains 186 423 327 1,199

Net realized investment gains (losses) 321 (412)

Changes in the estimated fair value of equity security investments 3,239 (14,458)

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54,763 38,430

Income before Income Taxes 18,857 10,019 28,250 25,252

Provision for Income Taxes 3,556 2,067 5,465 5,174

Net Income $ 15,301 $ 7,952 $ 22,785 $ 20,078

Income (Loss) before Income Taxes 17,315 (8,529)

Provision (Benefit) for Income Taxes 3,492 (1,518)

Net Income (Loss) $ 13,823 $ (7,011)

Insurance Revenues

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Net Premiums Written

Net premiums written increased 42.4% and 37.9% for the three- and nine-month periods ended September 30, 2020 to $57.2 million and $143.3 million, compared with $40.2 million and $103.9 million for the same prior year periods.

The increases for the three- and nine-month periods ended September 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.

Net premiums written increased 59.2% for the three-month period ended March 31, 2021 to $61.5 million, compared with $38.6 million for the same prior year period.

The increase for the three-month period ended March 31, 2021 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.

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

The following table includes a breakdown of premiums generated by branch and agency operations for the three-month periods ended March 31, 2021 and 2020:

Three Months Ended

September 30, Nine Months Ended

September 30,

(in thousands, except percentages) 2021 % 2020 %

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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 34.1% and 31.8% for the three- and nine-month periods ended September 30, 2020, compared with the same prior year periods.

The increases for the three- and nine-month periods ended September 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.

Net premiums written from home and branch operations increased 75.4% for the three-month period ended March 31, 2021, compared with the same prior year period.

The increase for the three-month period ended March 31, 2021 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 45.8% and 40.2% for the three- and nine-month periods ended September 30, 2020, compared with the same prior year periods.

Following is a schedule of net premiums written for the three- and nine-month periods ended September 30, 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 53.5% for the three-month period ended March 31, 2021, compared with the same prior year period.

The following table contains a schedule of net premiums written for the three-month periods ended March 31, 2021 and 2020 in select states in which the Company's two insurance subsidiaries, ITIC and NITIC, currently underwrite title insurance:

Three Months Ended

September 30, Nine Months Ended

September 30,

State (in thousands) 2021 2020

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South Carolina 5,348 3,481

Virginia 2,122 1,686 5,725 4,316

All Others 12,773 9,301

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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 $2.2 million and $6.0 million for the three- and nine-month periods ended September 30, 2020, respectively, compared with $2.4 million and $5.6 million for the same prior year periods.

The decrease for the three-month period ended September 30, 2020 primarily related to lower commission income.

The increase for the nine-month period ended September 30, 2020 primarily related to higher fee income.

Escrow and other title-related fee revenues were $2.8 million for the three-month period ended March 31, 2021, compared with $1.8 million for the same prior year period.

The increase for the three-month period ended March 31, 2021 was commensurate with the growth in premiums.

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 $2.0 million and $6.5 million for the three- and nine-month periods ended September 30, 2020, compared with $2.5 million and $7.4 million for the same prior year periods.

The decreases in 2020 primarily related to decreased exchange services income due to the impact of changes in the interest rate environment.

Non-title service revenues were $2.1 million for the three-month period ended March 31, 2021, compared with $2.5 million for the same prior year period.

The decrease in 2021 was primarily due to the impact of low interest rates on exchange services income.

Investment-Related Revenues

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.

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

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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 money market funds, certificates of deposit and Treasury bills.

The Company also invests in short-term investments that include money market funds, commercial paper, certificates of deposit and Treasury bills.

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 $1.1 million and $3.3 million for the three- and nine-month periods ended September 30, 2020, respectively, compared with $1.2 million and $3.6 million for the same prior year periods.

The decreases in 2020 were primarily related to lower interest rates on fixed maturity securities.

Interest and dividends were $1.0 million for the three-month period ended March 31, 2021, compared with $1.2 million for the same prior year period.

The decrease in 2021 was primarily related to lower interest rates on fixed maturity securities and lower levels of dividends received.

Other Investment Income

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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 $1.3 million and $2.2 million for the three- and nine-month periods ended September 30, 2020, respectively, compared with $708 thousand and $2.0 million for the same prior year periods.

Other investment income was $941 thousand for the three-month period ended March 31, 2021, compared with $440 thousand for the same prior year period.

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

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 included in net realized investment gains are affected by assessments of securities’ valuation for other-than-temporary impairment.

Additionally, the amounts included in 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 gains were $186 thousand and $327 thousand for the three- and nine-month periods ended September 30, 2020, respectively, compared with $423 thousand and $1.2 million for the same prior year periods.

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

The net realized investment gains were $321 thousand for the three-month period ended March 31, 2021, compared with net realized investment losses of $412 thousand for the same prior year period.

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

There were no impairment charges recorded in 2021.

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

Management believes unrealized losses on the remaining fixed maturity securities at March 31, 2021 are temporary in nature.

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

The Company considers relevant facts and circumstances in evaluating whether a credit or interest-related impairment of a fixed maturity security is other-than-temporary.

Relevant facts and circumstances include the extent and length of time the fair value of an investment has been below cost.

There are a number of risks and uncertainties inherent in the process of monitoring impairments and determining if an impairment is other-than-temporary.

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Changes in the Estimated Fair Value of Equity Security Investments

Changes in the estimated fair value of equity security investments were $3.6 million and $(2.9) million for the three- and nine-month periods ended September 30, 2020, respectively, compared with $406 thousand and $6.2 million for the same prior year periods.

Changes in the estimated fair value of equity security investments were $3.2 million for the three-month period ended March 31, 2021, compared with $(14.5) million for the same prior year period.

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

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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 and third quarters 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 $185 thousand and $443 thousand for the three- and nine-month periods ended September 30, 2020, respectively, compared with $145 thousand and $550 thousand for the same prior year periods.

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

Other revenues primarily include miscellaneous revenues and gains and losses on the disposal of fixed assets.

Other revenues were $208 thousand for the three-month period ended March 31, 2021, compared with $138 thousand for the same prior year period.

The increase for the three-month period ended March 31, 2021 primarily related to 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 28.6% and 24.4% for the three- and nine-month periods ended September 30, 2020, respectively, compared with the same prior year periods.

The increases for the three- and nine-month periods ended September 30, 2020 were primarily due to increases in commissions to agents, claims expense and personnel expenses.

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

Operating expenses increased 42.5% for the three-month period ended March 31, 2021, compared with the same prior year period.

The increase for the three-month period ended March 31, 2021 was primarily due to increases in commissions to agents, personnel expenses and claims expense.

Following is a summary of the Company's operating expenses for the three-month periods ended March 31, 2021 and 2020.

Inter-segment eliminations have been netted;

therefore, the individual segment amounts will not agree to Note 4 in the accompanying Consolidated Financial Statements.

therefore, the individual segment amounts will not agree to Note 4 in the accompanying unaudited Consolidated Financial Statements.

Three Months Ended

September 30, Nine Months Ended

September 30,

(in thousands, except percentages) 2021 % 2020 %

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Total $ 54,763 100.0 $ 38,430 100.0

On a combined basis, after-tax profit margins were 22.6% and 14.3% for the three- and nine-month periods ended September 30, 2020, respectively, compared with 16.6% and 15.4% for the same prior year periods.

On a combined basis, the after-tax profit margin was 19.2% for the three-month period ended March 31, 2021, compared with (23.4)% for the same prior year period.

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

Personnel expenses were $12.6 million and $36.6 million for the three- and nine-month periods ended September 30, 2020, respectively, compared with $11.6 million and $34.9 million for the same prior year periods.

On a consolidated basis, personnel expenses as a percentage of total revenues were 18.6% and 23.0% for the three- and nine-month periods ended September 30, 2020, respectively, compared with 24.1% and 26.7% for the same prior year period.

The increases in personnel expenses for the three- and nine-month periods ended September 30, 2020 were primarily related to normal inflationary increases in salaries, benefits and higher staffing levels to accommodate volume growth and targeted staffing increases to support growth initiatives.

Personnel expenses were $16.2 million for the three-month period ended March 31, 2021, compared with $11.8 million for the same prior year period.

On a consolidated basis, personnel expenses as a percentage of total revenues were 22.4% for the three-month period ended March 31, 2021, compared with 39.5% for the same prior year period.

The increase in personnel expenses for the three-month period ended March 31, 2021 was 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.

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 $2.5 million and $7.3 million for the three- and nine-month periods ended September 30, 2020, respectively, compared with $2.4 million and $6.8 million for the same prior year periods.

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

Office and technology expenses were $2.7 million for the three-month period ended March 31, 2021, compared with $2.4 million for the same prior year period.

The increase for the three-month period ended March 31, 2021 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 $3.1 million and $9.3 million for the three- and nine-month periods ended September 30, 2020, respectively, compared with $3.1 million and $8.8 million for the same prior year periods.

The increase for the nine-month period ended September 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.

Other expenses were $3.7 million for the three-month period ended March 31, 2021, compared with $3.1 million for the same prior year period.

The increase for the three-month period ended March 31, 2021 was primarily related to increases in premium-related taxes and licensing, and title and service fees, 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 45.9% and 43.1% for the three- and nine-month periods ended September 30, 2020, respectively, compared with the same prior year periods.

Commission expense as a percentage of net premiums written by agents was 69.7% and 69.9% for the three- and nine-month periods ended September 30, 2020, respectively, compared with 69.6% and 68.5% 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 nine-month periods ended September 30, 2020.

Commissions to agents increased 51.3% for the three-month period ended March 31, 2021, compared with the same prior year period.

Commission expense as a percentage of net premiums written by agents was 69.2% for the three-month period ended March 31, 2021, compared with 70.3% for the same prior year period.

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

Provision for Claims – The provision for claims increased 57.2% and 23.3% for the three- and nine-month periods ended September 30, 2020, respectively, compared with the same prior year periods.

The provision for claims as a percentage of net premiums written was 2.7% and 3.1% for the three- and nine-month periods ended September 30, 2020, respectively, compared with 2.5% and 3.5% for the same prior year periods.

The increases in the provision for claims expenses for the three- and nine-month periods ended September 30, 2020 were primarily due to additional underwriting risks caused by the increase in premiums written.

A reduction in favorable loss development, compared to the prior year period, also impacted the nine-month period ended September 30, 2020.

Provision for Claims – The provision for claims increased 75.6% for the three-month period ended March 31, 2021, compared with the same prior year period.

The provision for claims as a percentage of net premiums written was 2.6% for the three-month period ended March 31, 2021, compared with 2.3% for the same prior year period.

The increase in the provision for claims for the three-month period ended March 31, 2021 was primarily due to additional underwriting risks caused by the increase in premiums written, partially offset by a higher level of favorable loss development related to recent policy years.

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 $2.3 million and $3.5 million for the nine-month periods ended September 30, 2020 and 2019, respectively.

At September 30, 2020, the total reserve for claims was $33.5 million.

Actual payments of claims, net of recoveries, were $613 thousand and $832 thousand for the three-month periods ended March 31, 2021 and 2020, respectively.

At March 31, 2021, the total reserve for claims was $34.6 million.

Of that total, approximately $3.5 million was reserved for specific claims, and approximately $31.1 million was reserved for claims for which the Company had no notice.

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

The provision for income taxes was $3.6 million and $5.5 million for the three- and nine-month periods ended September 30, 2020, respectively, compared with $2.1 million and $5.2 million for the same prior year periods.

Income tax expense, including federal and state taxes, as a percentage of income before income taxes was 18.9% and 19.3% for the three- and nine-month periods ended September 30, 2020, compared with 20.6% and 20.5% for the same prior year periods.

The provision (benefit) for income taxes was $3.5 million for the three-month period ended March 31, 2021, compared with $(1.5) million for the same prior year period.

Income tax expense (benefit), including federal and state taxes, as a percentage of income (loss) before income taxes was 20.2% for the three-month period ended March 31, 2021, compared with 17.8% for the same prior year period.

The increase in the income tax expense (benefit) as a percentage of income (loss) before income taxes primarily relates to a higher percentage of taxable, relative to tax exempt, income.

The effective income tax rates for both 2021 and 2020 differ from the U.S.

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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 September 30, 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 March 31, 2021 will be realized.

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

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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.

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.

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 its variants, regulatory actions taken as a result of the outbreak and the availability and rate of vaccinations.

Currently, the Company is fully operational and has not had any reductions in workforce during 2021 or 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.

Cash Flows – Net cash flows provided by operating activities were $21.9 million and $10.0 million for the nine-month periods ended September 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 tax and payable disbursements.

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

Cash Flows – Net cash flows provided by operating activities were $8.2 million and $2.0 million for the three-month periods ended March 31, 2021 and 2020, respectively.

Cash flows provided by operating activities increased in the first quarter of 2021 from the comparable period in 2020, 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 provision for deferred income taxes, and changes in other assets;

partially offset by the timing of payable disbursements.

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

Net cash was used in investing activities in 2020, compared with net cash being provided by investing activities in the prior year period, due to purchase activity of investments outpacing proceeds received from investments.

Net cash was provided by investing activities in the first quarter of 2021, compared with net cash being used in investing activities in the prior year period, due to proceeds received from investments outpacing purchases of investments.

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 September 30, 2020, the Company held cash and cash equivalents of $41.5 million, short-term investments of $22.5 million, available-for-sale fixed maturity securities of $98.4 million and equity securities of $58.9 million.

As of March 31, 2021, the Company held cash and cash equivalents of $23.0 million, short-term investments of $30.5 million, available-for-sale fixed maturity securities of $103.0 million and equity securities of $64.6 million.

The net effect of all activities on total cash and cash equivalents was an increase of $9.2 million in 2021.

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

As of March 31, 2021, 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.

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

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 – On November 9, 2015, the Board of Directors of the Company approved the purchase of an additional 163,335 shares pursuant to the Company’s repurchase plan, such that there was authority remaining under the plan to purchase up to an aggregate of 500,000 shares of the Company’s common stock pursuant to the plan immediately after this approval.

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 nine-month periods ended September 30, 2020 and 2019, respectively.

Pursuant to the Company’s ongoing purchase program, the Company did not purchase any shares in either of the three-month periods ended March 31, 2021 and 2020.

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 $2.2 million for the nine-month period ended September 30, 2020.

Capital Expenditures – Capital expenditures were approximately $1.6 million for the three-month period ended March 31, 2021.

In 2021, 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 March 31, 2021, the Company had a claims reserve totaling $34.6 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 March 31, 2021 and December 31, 2020 were approximately $13.3 million and $12.5 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 5 to the unaudited 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 March 31, 2021 is $2.9 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 about leases can be found in Note 12 to the unaudited 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

As a service to its customers, the Company, through ITIC, administers escrow and trust deposits representing earnest money received under real estate contracts, undisbursed amounts received for settlement of mortgage loans and indemnities against specific title risks.

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 accompanying unaudited 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.

In addition, in administering tax-deferred like-kind exchanges pursuant to § 1031 of the Internal Revenue Code, 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.

Like-kind exchange deposits and reverse exchange property held by the Company for the purpose of completing such transactions totaled approximately $179.5 million and $214.6 million as of September 30, 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 $247.9 million and $237.9 million as of March 31, 2021 and December 31, 2020, 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 accompanying unaudited 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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These like-kind exchange funds are primarily invested in money market and other short-term investments.

External assets under management of Investors Trust Company are not considered assets of the Company and, therefore, are excluded from the accompanying Consolidated Balance Sheets.

External assets under management of Investors Trust Company are not considered assets of the Company and, therefore, are excluded from the accompanying unaudited 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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Recent Accounting Standards

For a description of recent accounting pronouncements, please refer to Note 1 in Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

For a description of recent accounting pronouncements, please refer to Note 1 in Notes to unaudited Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

Safe Harbor for Forward-Looking Statements

This Quarterly Report on Form 10-Q, as well as information included in future filings by the Company with the Securities and Exchange Commission (the "SEC") and information contained in written material, press releases and oral statements issued by or on behalf of the Company, contains, or may contain, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that reflect management’s current outlook for future periods.

This Quarterly Report on Form 10-Q, as well as information included in future filings by the Company with the SEC and information contained in written material, press releases and oral statements issued by or on behalf of the Company, contains, or may contain, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that reflect management’s current outlook for future periods.

These statements may be identified by the use of words such as “plan,” “expect,” “aim,” “believe,” “project,” “anticipate,” “intend,” “estimate,” “should,” “could,” “would” and other expressions that indicate future events and trends.

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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 COVID-19, or other pandemics;

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

• changes in interest rates and real estate values;

• changes in general economic, business, and political conditions, including the performance of the financial and real estate markets and the impact of the 2020 U.S.

presidential election;

• changes in general economic, business, and political conditions, including the performance of the financial and real estate markets;

• potential reform of government sponsored entities;

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

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 further updated 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, 2020, including under the heading "Risk Factors".

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.

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Quantitative and Qualitative Disclosures About Market Risk

For the quarter ended September 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.

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-Q

Item 2. Management’s Discussion and Analysis