What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-09 compared with 2021-05-10 · 99 added, 95 removed, 296 unchanged (40% of the section changed)

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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 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.

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.

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.

Total revenues from the title segment accounted for 93.6% of the Company's revenues for the six-month period ended June 30, 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 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.

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.

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.

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.

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

However, variability of interest rates combined with ongoing supply constraints and volatility in the cost and availability of building materials in recent months could result in reduced purchase volumes during the second half of 2021.

While certain COVID-19 vaccines have been approved and are now generally 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.

In light of the increasing percentage of vaccinated individuals, many previously implemented restrictions have gradually been lifted.

While the number of new cases is significantly below the levels witnessed at the height of the pandemic, there has been a recent uptick in the number of new cases.

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

states where the Company conducts business.

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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 or the first quarter of 2021.

Such actions included 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 has remained fully operational throughout the pandemic and did not have any reductions in workforce during 2020 or the first half 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 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 pandemi c 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.

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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.

The FOMC has maintained this target range, although recent comments by several members of the FOMC have indicated the potential for future rate increases.

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.

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The timing and nature of any reforms are currently unknown;

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.

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 or other governmental entities could affect the Company and its results of operations.

Real Estate Environment

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.

The Mortgage Bankers Association's ("MBA") June 18, 2021 Mortgage Finance Forecast (“MBA Forecast”) projects 2021 purchase activity to increase 15.6% to $1,656 billion and mortgage refinance activity to decrease 24.5% to 1,809 billion, resulting in a net decrease in total mortgage originations of 9.5% to $3,465 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 47.8% of all mortgage originations in 2021.

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

The MBA Forecast is projecting fewer total mortgage originations in 2022 and 2023, compared with 2021 levels.

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 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.

According to data published by Freddie Mac, the average 30-year fixed mortgage interest rates in the United States were 2.9% and 3.4% for the six-month periods ended June 30, 2021 and 2020, respectively.

Per the MBA Forecast, mortgage interest rates are projected to be 3.5% in the fourth quarter of 2021, and then further increase to 4.9% 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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Actual results could differ from these estimates.

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").

During the six-month period ended June 30, 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 unaudited Consolidated Statements of Operations data for the three-month periods ended March 31, 2021 and 2020:

The following table presents certain unaudited Consolidated Statements of Operations data for the three- and six-month periods ended June 30, 2021 and 2020:

Three Months Ended

June 30, Six Months Ended

(in thousands) 2021 2020 2021 2020

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Other investment income 1,483 526 2,424 966

Net realized investment gains (losses) 321 (412)

Net realized investment gains 182 553 503 141

Changes in the estimated fair value of equity security investments 4,829 7,972 8,068 (6,486)

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59,673 43,826 114,436 82,256

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)

Income before Income Taxes 25,288 17,922 42,603 9,393

Provision for Income Taxes 5,506 3,427 8,998 1,909

Net Income $ 19,782 $ 14,495 $ 33,605 $ 7,484

Insurance Revenues

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Net Premiums Written

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.

Net premiums written increased 42.2% and 49.8% for the three- and six-month periods ended June 30, 2021 to $67.5 million and $129.0 million, compared with $47.5 million and $86.1 million for the same prior year periods.

The increases for the three- and six-month periods ended June 30, 2021 were primarily driven by lower average mortgage interest rates and an ongoing economic recovery continuing to drive strong levels of refinance activity and home sales.

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

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:

Following is a breakdown of premiums generated by branch and agency operations for the three- and six-month periods ended June 30, 2021 and 2020:

Three Months Ended

June 30, Six Months Ended

(in thousands, except percentages) 2021 % 2020 % 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 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.

Net premiums written from home and branch operations increased 31.4% and 50.5% for the three- and six-month periods ended June 30, 2021, respectively, compared with the same prior year periods.

The increases for the three- and six-month periods ended June 30, 2021 were primarily attributable to lower average mortgage interest rates and an ongoing economic recovery continuing to drive strong levels of refinance activity and home sales.

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 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:

Agency net premiums written increased 46.3% and 49.6% for the three- and six-month periods ended June 30, 2021, respectively, compared with the same prior year periods.

Following is a schedule of net premiums written for the three- and six-month periods ended June 30, 2021 and 2020 in select states in which the Company's two insurance subsidiaries, ITIC and NITIC, currently underwrite title insurance:

Three Months Ended

June 30, Six Months Ended

State (in thousands) 2021 2020 2021 2020

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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 $2.8 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.

Escrow and other title-related fee revenues were $3.5 million and $6.3 million for the three- and six-month periods ended June 30, 2021, respectively, compared with $2.0 million and $3.9 million for the same prior year periods.

The increases for the three- and six-month periods ended June 30, 2021 were mainly due to 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 $2.1 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.

Non-title service revenues were $2.4 million and $4.5 million for the three- and six-month periods ended June 30, 2021, respectively, compared with $2.0 million and $4.5 million for the same prior year periods.

The increase for the three-month period ended June 30, 2021 was primarily related to increases in exchange services income, trust fee income and agency management services income.

For the six-month period ended June 30, 2021, revenue was virtually unchanged from the same prior year period as increases in trust fee income and agency management services income was partially offset by a decline in exchange 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 money market funds, commercial paper, certificates of deposit and Treasury bills.

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

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 $1.0 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.

Interest and dividends were $898 thousand and $1.9 million for the three- and six-month periods ended June 30, 2021, respectively, compared with $1.1 million and $2.3 million for the same prior year periods.

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

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 limited liability companies ("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 value of these investments and makes any necessary adjustments.

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.

Other investment income was $1.5 million and $2.4 million for the three- and six-month periods ended June 30, 2021, respectively, compared with $526 thousand and $966 thousand for the same prior year periods.

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

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

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 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.

The net realized investment gains were $182 thousand and $503 thousand for the three- and six-month periods ended June 30, 2021, respectively, compared with $553 thousand and $141 thousand for the same prior year periods.

The net realized investment gains for the six-month period ended June 30, 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 March 31, 2021 are temporary in nature.

Management believes unrealized losses on the remaining fixed maturity securities at June 30, 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 $3.2 million for the three-month period ended March 31, 2021, compared with $(14.5) million for the same prior year period.

Changes in the estimated fair value of equity security investments were $4.8 million and $8.1 million for the three- and six-month periods ended June 30, 2021, respectively, compared with $8.0 million and $(6.5) million for the same prior year periods.

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

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Other Revenues

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.

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

Other revenues were $4.1 million and $4.4 million for the three- and six-month periods ended June 30, 2021, respectively, compared with $120 thousand and $258 thousand for the same prior year periods.

The increase for the three- and six-month periods ended June 30, 2021 primarily related to a gain on the sale of a property.

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 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.

Operating expenses increased 36.2% and 39.1% for the three- and six-month periods ended June 30, 2021, respectively, compared with the same prior year periods.

The increases for the three- and six-month periods ended June 30, 2021 were primarily due to increases in commissions to agents and personnel expenses.

Following is a summary of the Company's operating expenses for the three- and six-month periods ended June 30, 2021 and 2020.

Inter-segment eliminations have been netted;

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Three Months Ended

June 30, Six Months Ended

(in thousands, except percentages) 2021 % 2020 % 2021 % 2020 %

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Total $ 59,673 100.0 $ 43,826 100.0 $ 114,436 100.0 $ 82,256 100.0

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.

On a combined basis, after-tax profit margins were 23.3% and 21.4% for the three- and six-month periods ended June 30, 2021, respectively, compared with 23.5% and 8.2% for the same prior year periods.

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

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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 $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.

Personnel expenses were $15.9 million and $32.1 million for the three- and six-month periods ended June 30, 2021, respectively, compared with $12.2 million and $24.1 million for the same prior year periods.

On a consolidated basis, personnel expenses as a percentage of total revenues were 18.7% and 20.4% for the three- and six-month periods ended June 30, 2021, respectively, compared with 19.8% and 26.2% for the same prior year period.

The increases in personnel expenses for the three- and six-month periods ended June 30, 2021 were primarily due to staffing additions in support of strategic growth initiatives and volume increases.

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 $2.7 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.

Office and technology expenses were $3.2 million and $6.0 million for the three- and six-month periods ended June 30, 2021, respectively, compared with $2.5 million and $4.9 million for the same prior year periods.

The increases for the three- and six-month periods ended June 30, 2021 were primarily related to ongoing investments in software and technology related initiatives.

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

Other expenses were $3.7 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.

Other expenses were $4.8 million and $8.5 million for the three- and six-month periods ended June 30, 2021, respectively, compared with $3.0 million and $6.2 million for the same prior year periods.

The increases for the three- and six-month periods ended June 30, 2021 were primarily related to increases in premium-related taxes and licensing, professional services, and title and service fees.

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 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.

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-month period ended March 31, 2021.

Commissions to agents increased 42.6% and 46.6% for the three- and six-month periods ended June 30, 2021, respectively, compared with the same prior year periods.

Commission expense as a percentage of net premiums written by agents was 68.0% and 68.6% for the three- and six-month periods ended June 30, 2021, respectively, compared with 69.8% and 70.0% for the same prior year periods.

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

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.

Provision for Claims – The provision for claims decreased 28.0% and increased 4.4% for the three- and six-month periods ended June 30, 2021, respectively, compared with the same prior year periods.

The provision for claims as a percentage of net premiums written was 2.1% and 2.3% for the three- and six-month periods ended June 30, 2021, respectively, compared with 4.2% and 3.4% for the same prior year periods.

The decrease in the provision for claims for the three-month period ended June 30, 2021 was driven by improved incurred claims experience and higher levels of favorable loss development related to prior policy years.

The increase in the provision for claims for the six-month period ended June 30, 2021 was primarily due to additional underwriting risks caused by the increase in premiums written.

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 $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.

Actual payments of claims, net of recoveries, were $1.3 million and $1.5 million for the six-month periods ended June 30, 2021 and 2020, respectively.

At June 30, 2021, the total reserve for claims was $35.3 million.

Of that total, approximately $3.2 million was reserved for specific claims, and approximately $32.1 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 (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 provision for income taxes was $5.5 million and $9.0 million for the three- and six-month periods ended June 30, 2021, respectively, compared with $3.4 million and $1.9 million for the same prior year periods.

Income tax expense, including federal and state taxes, as a percentage of income before income taxes was 21.8% and 21.1% for the three- and six-month periods ended June 30, 2021, compared with 19.1% and 20.3% for the same prior year periods.

The increases in income tax expense as a percentage of income before income taxes primarily relate 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 March 31, 2021 will be realized.

The Company believes it is more likely than not that the tax benefits associated with recognized impairments and unrecognized losses recorded through June 30, 2021 will be realized.

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

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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.

Throughout the pandemic, the Company has remained 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 $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 – Net cash flows provided by operating activities was $16.5 million and $16.0 million for the six-month periods ended June 30, 2021 and 2020, respectively.

Cash flows provided by operating activities differs from net income due to adjustments for non-cash items, such as changes in the estimated fair value of equity security investments, gains and losses on investments and property, the timing of disbursements for taxes and other accrued liabilities, and collections or changes in receivables and other assets.

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

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.

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

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

As of March 31, 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.

As of June 30, 2021, the Company held cash and cash equivalents of $31.6 million, short-term investments of $44.4 million, available-for-sale fixed maturity securities of $89.0 million and equity securities of $69.9 million.

The net effect of all activities on total cash and cash equivalents was an increase of $17.9 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 March 31, 2021, both ITIC and NITIC met the minimum capital, surplus and reserve requirements for each state in which they are licensed.

As of June 30, 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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Due to the Company’s historical ability to consistently generate positive cash flows from its consolidated operations and investment income, management believes that funds generated from operations will enable the Company to adequately meet its current operating needs for the foreseeable future.

However, especially with the onset 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.

However, especially with the continued spread of COVID-19 and its variants, 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.

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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 did not purchase any shares in either of the three-month periods ended March 31, 2021 and 2020.

Pursuant to the Company’s ongoing purchase program, the Company did not purchase any shares in either the six-month period ended June 30, 2021 or 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 $1.6 million for the three-month period ended March 31, 2021.

Capital Expenditures – Capital expenditures were approximately $6.1 million for the six-month period ended June 30, 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.

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Contractual Obligations :

As of March 31, 2021, the Company had a claims reserve totaling $34.6 million.

As of June 30, 2021, the Company had a claims reserve totaling $35.3 million.

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

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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.

The amounts accrued for these agreements at June 30, 2021 and December 31, 2020, were $13.4 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.

Information regarding retirement agreements and other postretirement benefit plans can be found in Note 5 to the unaudited Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

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

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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.

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 June 30, 2021 is $3.2 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 this Quarterly Report on Form 10-Q.

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

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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 $247.9 million and $237.9 million as of March 31, 2021 and December 31, 2020, respectively.

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 $370.5 million and $237.9 million as of June 30, 2021 and December 31, 2020, respectively.

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

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Recent Accounting Standards

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.

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

Safe Harbor for Forward-Looking Statements

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

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", as well as the additional risk factor set forth in Part II, Item 1A of this Quarterly Report.

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

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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