What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-10 compared with 2021-11-09 · 99 added, 107 removed, 295 unchanged (41% 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 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.

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 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 94.5% of the Company's revenues for the nine-month period ended September 30, 2021.

Total revenues from the title segment accounted for 96.9% of the Company's revenues for the three-month period ended March 31, 2022.

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

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Mortgage refinance activity tends to be influenced less by seasonality and more by economic cycles, with activity levels increasing during times of falling interest rates.

Services other than title insurance provided by operating divisions of the Company are not reported separately, but rather are reported collectively in a category called “All Other”.

Services other than title insurance provided by operating divisions of the Company are not reported separately, but rather are reported collectively in a segment called “All Other”.

These other services include those offered by the Company and by its wholly owned subsidiaries, Investors Title Exchange Corporation (“ITEC”), Investors Title Accommodation Corporation (“ITAC”), Investors Trust Company (“Investors Trust”) and Investors Title Management Services, Inc.

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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 has continued through the first three quarters 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 future periods.

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, and when or if normal economic activity and business operations will resume.

It is expected that progress on vaccination levels will continue to reduce the effects of the public health crisis on the economy and, in light of the increasing percentage of vaccinated individuals, many previously implemented restrictions have gradually been lifted.

Despite the availability of vaccines, COVID-19 (including its variant strains) continues to spread across the globe, including in U.S.

Changes in either of these areas, in addition to ongoing supply constraints and volatility in the cost and availability of building materials, could impact the Company's results of operations in future periods.

Despite the widespread availability of vaccines, COVID-19 (including its variant strains) continues to impact U.S.

states where the Company conducts business.

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In response, the U.S.

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

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

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 three quarters of 2021.

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

Many such actions have lapsed or otherwise been reduced as time has passed since the onset of the pandemic.

The Company has remained fully operational throughout the pandemic and did not have any reductions in workforce.

A large number of the Company's employees are 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 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 gover nmental 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.

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 of employees becoming ill, quarantined, or otherwise unable to work or travel due to illness or gover nmental 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 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, the Company is currently unable to predict the ultimate impact of the pandemic.

The ongoing military conflict between Russia and Ukraine has created additional volatile market conditions and uncertainties in the global economy.

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.

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

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, although recent comments by several members of the FOMC have indicated the potential for future rate increases.

Further, the FOMC hinted that they will begin tapering asset purchases, potentially as early as the fourth quarter of 2021, if economic progress continues.

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.

With inflation having run persistently below the 2.0% goal in recent years, the current period of elevated inflation is not necessarily problematic to the FOMC's long-term inflation objective.

In March 2020, the FOMC lowered the target federal funds rate twice by a total of 150 basis points in response to risk posed to economic activity by COVID-19, resulting in a target federal funds rate range between 0.00% and 0.25%.

The FOMC had maintained this target range until March 2022, when the target federal funds rate range was increased to between 0.25% and 0.50%.

The target federal funds rate range was raised again in May 2022, when the FOMC increased the target range to between 0.75% and 1.00%.

Further, the FOMC noted in the May 2022 meeting that it anticipates that ongoing increases in the target range will be appropriate, and announced steps to begin reducing its balance sheet holdings.

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

In 2008, the federal government took control of the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) in an effort to keep these government-sponsored entities from failing.

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

In recent years, the Consumer Financial Protection Bureau (“CFPB”), Office of the Comptroller of Currency and the Federal Reserve have issued memoranda to banks that communicated those agencies’ heightened focus on vetting third-party providers.

In recent years, the Consumer Financial Protection Bureau (“CFPB”), Office of the Comptroller of Currency and the Federal Reserve have issued memorandums to banks that communicated those agencies’ heightened focus on vetting third-party providers.

Such increased regulatory involvement may affect the Company's agents and approved providers.

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Real Estate Environment

The Mortgage Bankers Association's ("MBA") October 17, 2021 Mortgage Finance Forecast (“MBA Forecast”) projects 2021 purchase activity to increase 7.1% to $1,587 billion and mortgage refinance activity to decrease 13.9% to $2,259 billion, resulting in a net decrease in total mortgage originations of 6.4% to $3,846 billion, all from 2020 levels.

The Mortgage Bankers Association's ("MBA") March 21, 2022 Mortgage Finance Forecast (“MBA Forecast”) projects 2022 purchase activity to increase 7.7% to $1,773 billion and mortgage refinance activity to decrease 63.3% to $861 billion, resulting in a net decrease in total mortgage originations of 34.0% to $2,634 billion, all from 2021 levels.

In 2021, purchase activity accounted for 41.2% of all mortgage originations and is projected in the MBA Forecast to represent 67.3% of all mortgage originations in 2022.

The MBA Forecast is projecting fewer total mortgage originations in 2023 and 2024, compared with 2022 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 3.2% for the nine-month periods ended September 30, 2021 and 2020, respectively.

Per the MBA Forecast, mortgage interest rates are projected to be 3.1% in the fourth quarter of 2021, and then further increase to 4.3% by 2023.

Due to the rapidly changing environment brought on by COVID-19, supply constraints and geopolitical conflicts, 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 3.8% and 2.9% for the three-month periods ended March 31, 2022 and 2021, respectively.

Per the MBA Forecast, mortgage interest rates are projected to increase to 4.5% in the fourth quarter of 2022.

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

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Actual results could differ from these estimates.

During the nine-month period ended September 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").

During the three-month period ended March 31, 2022, 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, 2021 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- and nine-month periods ended September 30, 2021 and 2020:

The following table presents certain unaudited Consolidated Statements of Operations data for the three-month periods ended March 31, 2022 and 2021:

Three Months Ended

September 30, Nine Months Ended

September 30,

(in thousands) 2022 2021

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Net Premiums Written

Net premiums written increased 26.5% and 40.5% for the three- and nine-month periods ended September 30, 2021 to $72.3 million and $201.3 million, compared with $57.2 million and $143.3 million for the same prior year periods.

The increases for the three- and nine-month periods ended September 30, 2021 were primarily driven by higher average home prices and continued low mortgage interest rates.

Net premiums written increased 2.7% for the three-month period ended March 31, 2022 to $63.1 million, compared with $61.5 million for the same prior year period.

The increase for the three-month period ended March 31, 2022 was primarily driven by higher average home prices and a higher level of purchase activity.

Total premiums include an estimate of premiums for policies that have been issued by branches and agents, but not reported to the Company as of the balance sheet date.

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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, 2021 and 2020:

Following is a breakdown of premiums generated by branch and agency operations for the three-month periods ended March 31, 2022 and 2021:

Three Months Ended

September 30, Nine Months Ended

September 30,

(in thousands, except percentages) 2022 % 2021 %

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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 19.4% and 37.9% for the three- and nine-month periods ended September 30, 2021, respectively, compared with the same prior year periods.

The increases for the three- and nine-month periods ended September 30, 2021 were primarily driven by higher average home prices and continued low mortgage interest rates.

Net premiums written from home and branch operations increased 0.3% for the three-month period ended March 31, 2022, compared with the same prior year period.

The increase for the three-month period ended March 31, 2022 was primarily driven by higher average home prices and a higher level of purchase activity.

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

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Title insurance commissions earned by the Company’s agents are recognized as expenses concurrently with premium recognition.

Agency net premiums written increased 29.1% and 41.4% for the three- and nine-month periods ended September 30, 2021, respectively, compared with the same prior year periods.

The increases for the three- and nine-month periods ended September 30, 2021 were primarily driven by higher average home prices and continued low mortgage interest rates.

Following is a schedule of net premiums written for the three- and nine-month periods ended September 30, 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 3.6% for the three-month period ended March 31, 2022, compared with the same prior year period.

The increase for the three-month period ended March 31, 2022 was primarily driven by higher average home prices and a higher level of purchase activity.

Following is a schedule of net premiums written for the three-month periods ended March 31, 2022 and 2021 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) 2022 2021

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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 title insurance policies including settlement, examination and closing fees.

Escrow and other title-related fee revenues were $3.9 million and $10.1 million for the three- and nine-month periods ended September 30, 2021, respectively, compared with $2.2 million and $6.0 million for the same prior year periods.

The increases for the three- and nine-month periods ended September 30, 2021 were mainly due to increases in commission income and title ancillary services.

Escrow and other title-related fee revenues were $5.1 million for the three-month period ended March 31, 2022, compared with $2.8 million for the same prior year period.

The increase for the three-month period ended March 31, 2022 was mainly due to growth in independent agent markets and products which support title insurance.

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 $2.4 million and $6.9 million for the three- and nine-month periods ended September 30, 2021, respectively, compared with $2.0 million and $6.5 million for the same prior year periods.

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

The increase for the nine-month period ended September 30, 2021, was primarily related to increases in trust fee income and agency management services income, partially offset by a decline in exchange services income.

Non-title service revenues were $2.4 million for the three-month period ended March 31, 2022, compared with $2.1 million for the same prior year period.

The increase for the three-month period ended March 31, 2022 was primarily related to increases in like-kind exchange activity and trust management fee income.

Investment-Related Revenues

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The Company’s investment strategy emphasizes after-tax income and principal preservation.

The Company’s investments are primarily in fixed maturity securities and, to a lesser extent, equity securities.

The Company’s investments are primarily in fixed maturity securities and equity securities.

The average effective maturity of the majority of the fixed maturity securities is less than 10 years.

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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 and commercial paper.

The Company also invests in short-term investments that typically include money market funds, and, at times, the Company has or could invest in U.S.

Treasury bills, commercial paper and certificates of deposit.

The Company strives to maintain a high quality investment portfolio.

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

Interest and dividends were $893 thousand and $2.8 million for the three- and nine-month periods ended September 30, 2021, respectively, compared with $1.1 million and $3.3 million for the same prior year periods.

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

Interest and dividends were $915 thousand for the three-month period ended March 31, 2022, compared with $1.0 million for the same prior year period.

The decrease in 2022 was primarily related to lower interest income received due to lower average balances of 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 $2.2 million and $4.6 million for the three- and nine-month periods ended September 30, 2021, respectively, compared with $1.3 million and $2.2 million for the same prior year periods.

Other investment income was $1.3 million for the three-month period ended March 31, 2022, compared with $0.9 million 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.

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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 $268 thousand and $771 thousand for the three- and nine-month periods ended September 30, 2021, respectively, compared with $186 thousand and $327 thousand for the same prior year periods.

The net realized investment gain 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.

There were no impairment charges recorded in 2021.

Management believes unrealized losses on the remaining fixed maturity securities at September 30, 2021 are temporary in nature.

The net realized investment gains were $1.7 million for the three-month period ended March 31, 2022, compared with $321 thousand for the same prior year period.

There were no impairment charges recorded in 2022 or 2021.

Management believes unrealized losses on the remaining fixed maturity securities at March 31, 2022 are temporary in nature.

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

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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 $(802) thousand and $7.3 million for the three- and nine-month periods ended September 30, 2021, respectively, compared with $3.6 million and $(2.9) million for the same prior year periods.

Changes in the estimated fair value of equity security investments were $(5.9) million for the three-month period ended March 31, 2022, compared with $3.2 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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Other revenues primarily include gains and losses on the disposal of fixed assets and miscellaneous revenues.

Other revenues were $217 thousand and $4.6 million for the three- and nine-month periods ended September 30, 2021, respectively, compared with $185 thousand and $443 thousand for the same prior year periods.

The increase for the nine-month period ended September 30, 2021 primarily related to a gain on the sale of a property.

Other revenues were $299 thousand for the three-month period ended March 31, 2022, compared with $208 thousand for the same prior year period.

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 29.1% and 35.4% for the three- and nine-month periods ended September 30, 2021, respectively, compared with the same prior year periods.

The increases for the three- and nine-month periods ended September 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 nine-month periods ended September 30, 2021 and 2020.

Operating expenses increased 11.8% for the three-month period ended March 31, 2022, compared with the same prior year period.

The increase for the three-month period ended March 31, 2022 was primarily due to increases in personnel expenses, partially offset by a decrease in claims expense.

Other categories of operating expenses were 7.4% higher than the prior period, primarily to support expansion of our geographic footprint as well as ongoing strategic technology initiatives.

Following is a summary of the Company's operating expenses for the three-month periods ended March 31, 2022 and 2021.

Inter-segment eliminations have been netted;

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Three Months Ended

September 30, Nine Months Ended

September 30,

(in thousands, except percentages) 2022 % 2021 %

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Total $ 61,205 100.0 $ 54,763 100.0

On a combined basis, after-tax profit margins were 17.8% and 20.2% for the three- and nine-month periods ended September 30, 2021, respectively, compared with 22.6% and 14.3% for the same prior year periods.

On a combined basis, the after-tax profit margin was 9.0% for the three-month period ended March 31, 2022, compared with 19.2% 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 $15.5 million and $47.5 million for the three- and nine-month periods ended September 30, 2021, respectively, compared with $12.6 million and $36.6 million for the same prior year periods.

On a consolidated basis, personnel expenses as a percentage of total revenues were 19.0% and 19.9% for the three- and nine-month periods ended September 30, 2021, respectively, compared with 18.6% and 23.0% for the same prior year period.

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

Personnel expenses were $21.3 million for the three-month period ended March 31, 2022, compared with $16.2 million for the same prior year period.

On a consolidated basis, personnel expenses as a percentage of total revenues were 30.8% for the three-month period ended March 31, 2022, compared with 22.4% for the same prior year period.

The increase in personnel expenses for the three-month period ended March 31, 2022 was primarily due to expansion of our presence in key markets, overall staff growth to support higher transaction volumes, and increased employee benefit and contract labor costs.

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 $3.2 million and $9.1 million for the three- and nine-month periods ended September 30, 2021, respectively, compared with $2.5 million and $7.3 million for the same prior year periods.

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

Office and technology expenses were $4.4 million for the three-month period ended March 31, 2022, compared with $2.7 million for the same prior year period.

The increase for the three-month period ended March 31, 2022 was primarily related to ongoing investments in software and technology related initiatives and increased facilities expenses associated with staffing additions.

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 $4.8 million and $13.3 million for the three- and nine-month periods ended September 30, 2021, respectively, compared with $3.1 million and $9.3 million for the same prior year periods.

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

Other expenses were $5.6 million for the three-month period ended March 31, 2022, compared with $3.7 million for the same prior year period.

The increase for the three-month period ended March 31, 2022 was primarily related to increases in title and service fees, travel-related expenses and professional 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 29.2% and 39.7% for the three- and nine-month periods ended September 30, 2021, respectively, compared with the same prior year periods.

Commission expense as a percentage of net premiums written by agents was 69.8% and 69.0% for the three- and nine-month periods ended September 30, 2021, respectively, compared with 69.7% and 69.9% 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, 2021.

Commissions to agents decreased 2.2% for the three-month period ended March 31, 2022, compared with the same prior year period.

Commission expense as a percentage of net premiums written by agents was 65.3% for the three-month period ended March 31, 2022, compared with 69.2% 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 changes in geographic mix and an increase in the level of intercompany commissions as a percentage of total premiums, with intercompany commissions being eliminated for wholly owned affiliated agents upon consolidation.

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

Provision for Claims – The provision for claims increased 28.4% and 12.8% for the three- and nine-month periods ended September 30, 2021, respectively, compared with the same prior year periods.

The provision for claims as a percentage of net premiums written was 2.8% and 2.5% for the three- and nine-month periods ended September 30, 2021, respectively, compared with 2.7% and 3.1% for the same prior year periods.

The increases in the provision for claims for the three- and nine-month periods ended September 30, 2021 were primarily due to additional underwriting risks caused by the increase in premiums written.

Provision for Claims – The provision for claims decreased 88.9% for the three-month period ended March 31, 2022, compared with the same prior year period.

The provision for claims as a percentage of net premiums written was 0.3% for the three-month period ended March 31, 2022, compared with 2.6% for the same prior year period.

The decrease in the provision for claims for the three-month period ended March 31, 2022 was primarily due to a higher level of favorable loss development in the current period.

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 $1.8 million and $2.3 million for the nine-month periods ended September 30, 2021 and 2020, respectively.

At September 30, 2021, the total reserve for claims was $36.8 million.

Actual payments of claims, net of recoveries, were $564 thousand and $613 thousand for the three-month periods ended March 31, 2022 and 2021, respectively.

At March 31, 2022, the total reserve for claims was $36.4 million.

Of that total, approximately $3.9 million was reserved for specific claims, and approximately $32.5 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 $3.9 million and $12.9 million for the three- and nine-month periods ended September 30, 2021, respectively, compared with $3.6 million and $5.5 million for the same prior year periods.

Income tax expense, including federal and state taxes, as a percentage of income before income taxes was 21.3% and 21.2% for the three- and nine-month periods ended September 30, 2021, compared with 18.9% and 19.3% 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 income, relative to tax exempt income.

The provision for income taxes was $1.6 million for the three-month period ended March 31, 2022, compared with $3.5 million for the same prior year period.

Income tax expense, including federal and state taxes, as a percentage of income before income taxes was 20.6% for the three-month period ended March 31, 2022, compared with 20.2% for the same prior year period.

The effective income tax rates for both 2022 and 2021 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, 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 March 31, 2022 will be realized.

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

Liquidity and Capital Resources

The Company’s current cash requirements primarily include general operating expenses (including the payment of title claims), income taxes, capital expenditures and dividends on its common stock.

The Company’s material cash requirements include general operating expenses, contractual and other obligations for the future payment of title claims, employment agreements, lease agreements, income taxes, capital expenditures, dividends on its common stock and other contractual commitments for goods and services needed for operations.

All other arrangements entered into by the Company are not reasonably likely to have a material effect on liquidity or the availability of capital resources.

Cash flows from operations have historically been the primary source of financing for expanding operations, whether through organic growth or outside investments.

The Company believes its balances of cash, short-term investments and other readily marketable securities, along with cash flows generated by ongoing operations, will be sufficient to satisfy its cash requirements over the next 12 months and thereafter, including the funding of operating activities and commitments for investing and financing activities.

There are currently no known trends that the Company believes will materially impact the Company’s capital resources, nor is the Company anticipating any material changes in the mix or relative cost of such resources.

The Company evaluates nonorganic growth opportunities, such as mergers and acquisitions, from time to time in the ordinary course of business.

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

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

Throughout the entirety of the pandemic, the Company has remained fully operational and has not had any reductions in workforce.

A large number of the Company's employees are 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 $35.7 million and $21.9 million for the nine-month periods ended September 30, 2021 and 2020, respectively.

Cash flows provided by operating activities differ 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 for the nine-month period ended September 30, 2021, compared with net cash being used in investing activities in the prior year period.

Net cash provided by investing activities increased due to proceeds received from investments outpacing purchase activity during the current year period.

Cash Flows – Net cash flows provided by operating activities were $1.3 million and $8.2 million for the three-month periods ended March 31, 2022 and 2021, respectively.

Cash flows provided by operating activities differ 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, the timing of disbursements for taxes, claims 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, the issuance of dividends and repurchases of common stock.

Net cash was used in investing activities for the three-month period ended March 31, 2022, compared with net cash being provided by investing activities in the prior year period, due to a decline in proceeds received from investment sales and maturities during the current year period.

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, 2021, the Company held cash and cash equivalents of $48.5 million, short-term investments of $51.2 million, available-for-sale fixed maturity securities of $82.3 million and equity securities of $69.5 million.

The net effect of all activities on total cash and cash equivalents was an increase of $34.8 million in 2021.

As of March 31, 2022, the Company held cash and cash equivalents of $37.3 million, short-term investments of $58.6 million, available-for-sale fixed maturity securities of $67.7 million and equity securities of $69.9 million.

The net effect of all activities on total cash and cash equivalents was an increase of $142 thousand in 2022.

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

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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, 2021, both ITIC and NITIC met the minimum capital, surplus and reserve requirements for each state in which they are licensed.

As of March 31, 2022, 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 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.

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

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

The Company is 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 common stock and/or conserving cash.

The Company is carefully monitoring the COVID-19 situation, the conflict in Ukraine, and other trends that could potentially 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 common 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 did not purchase any shares in the nine-month periods ended September 30, 2021 or 2020.

Pursuant to the Company’s ongoing purchase program, the Company did not purchase any shares in the three-month periods ended March 31, 2022 or 2021.

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 $6.8 million for the nine-month period ended September 30, 2021.

Capital Expenditures – Capital expenditures were approximately $908 thousand for the three-month period ended March 31, 2022.

In 2022, 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 September 30, 2021, the Company had a claims reserve totaling $36.8 million.

Contractual Obligations - As of March 31, 2022, the Company had a claims reserve totaling $36.4 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 September 30, 2021 and December 31, 2020, were $13.4 million and $12.5 million, respectively, which includes postretirement compensation and health benefits, and were calculated based on the terms of the contracts.

The amounts accrued for these agreements at March 31, 2022 and December 31, 2021, were $14.2 million and $13.4 million, respectively, which includes postretirement compensation and health benefits, and were calculated based on the terms of the contracts.

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

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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 September 30, 2021 is $3.4 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.

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, 2022 is $5.8 million, which includes lease payments related to options to extend or cancel the lease term if the Company determined at the date of adoption that the lease was expected to be renewed or extended.

Information about leases can be found in Note 12 to the unaudited Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

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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 $525.2 million and $237.9 million as of September 30, 2021 and December 31, 2020, respectively.

Like-kind exchange deposits and reverse exchange property held by the Company for the purpose of completing such transactions totaled approximately $571.4 million and $763.9 million as of March 31, 2022 and December 31, 2021, 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 the unaudited Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

No recent accounting pronouncements are expected to have a material impact on the Company’s financial position and results of operations.

Please refer to Note 1 in the unaudited Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further information regarding the Company’s basis of presentation and significant accounting policies.

Safe Harbor for Forward-Looking Statements

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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, including its variants, or other pandemics;

• the impact of COVID-19, including its variants, or other pandemics, climate change, severe weather conditions or the occurrence of another catastrophic event;

• 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;

• the potential impact of inflation;

• the impact of the ongoing military conflict between Russia and Ukraine;

• potential reform of government sponsored entities;

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• significant competition that the Company’s operating subsidiaries face, including the Company’s ability to develop and offer products and services that meet changing industry standards in a timely and cost-effective manner and expansion into new geographic locations;

• the Company’s reliance upon the North Carolina, Texas and Georgia markets for a significant portion of its premiums;

• the Company’s reliance upon the North Carolina, Texas, Georgia and South Carolina markets for a significant portion of its premiums;

• compliance with government regulation, including pricing regulation, and significant changes to applicable regulations or in their application by regulators;

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

For more details on factors that could affect expectations, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, 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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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