What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-08 compared with 2022-08-09 · 109 added, 120 removed, 283 unchanged (45% of the section changed)

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

Investors Title Company's (the "Company") Annual Report on Form 10-K for the year ended December 31, 2021 should be read in conjunction with the following discussion since it contains information which is important for evaluating the Company's operating results and financial condition.

Investors Title Company's (the "Company") Annual Report on Form 10-K for the year ended December 31, 2021 (the "2021 Form 10-K") as filed with the Securities and Exchange Commission (the "SEC") should be read in conjunction with the following discussion since it contains information which is important for evaluating the Company's operating results and financial condition.

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

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Actual results may vary.

See "Safe Harbor for Forward-Looking Statements" at the end of this discussion and analysis, as well as the sections titled "Risk Factors" in Part I, Item 1A of the Company's Annual Report on Form 10-K 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 2021 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 97.1% of t he Company's revenues for the six-month period ended June 30, 2022.

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

Total revenues from the title segment accounted for 96.1% of t he Company's revenues for the nine-month period ended September 30, 2022.

Title insurance protects against loss or damage resulting from title defects that affect real property.

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The property owner has to purchase a separate owner’s title insurance policy to protect its investment.

The Company issues title insurance policies through its home and branch offices and through a network of agents.

The Company issues title insurance policies directly and through a network of agents.

Issuing agents are typically real estate attorneys, independent agents or subsidiaries of community and regional mortgage lending institutions, depending on local customs and regulations and the Company’s marketing strategy in a particular territory.

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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 group 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.

Services other than title insurance provided by operating divisions of the Company are not reported separately, but rather are reported collectively in a group 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.

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.

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Business Trends and Recent Conditions

COVID-19 Pandemic

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

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Changes in either of these areas, 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.

COVID-19 (including its variant strains) continues to impact U.S.

states where the Company conducts business.

The COVID-19 pandemic has negatively impacted worldwide economic activity and created significant volatility and disruptions of financial markets.

In response, the U.S.

government and its agencies 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.

Many such actions have lapsed or otherwise been reduced as time has passed since the onset of the pandemic and with the widespread availability of vaccines.

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 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.

COVID-19 – COVID-19 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.

The current period of inflation, as well as ongoing military conflict between Russia and Ukraine, has created additional volatile market conditions and uncertainties in the global economy.

These events have impacted and could continue to impact the Company in a number of ways including, but not limited to, future fluctuations in the Company's investment portfolio and potential decreases in net premiums written.

The Federal Open Market Committee (“FOMC”) of the Federal Reserve has been highly attentive to the risks that these events have created, and in response has been raising the target federal funds rate at recent meetings.

Although the federal funds rate does not directly impact mortgage interest rates, it can have a significant influence as lenders pass on the costs of rate increases to consumers.

Higher mortgage interest rates could impact the demand and pricing of real estate.

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.

The FOMC 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, 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 further raised at subsequent meetings, with the FOMC's most recent change increasing the target range in July 2022 to between 2.25% and 2.50%.

The FOMC has noted that it anticipates that ongoing increases in the target range will be appropriate and, in addition, decided to continue with balance sheet holdings reductions that began in May of 2022.

The target federal funds rate range was further raised at subsequent meetings, with the FOMC's most recent change increasing the target range in November 2022 to between 3.75% and 4.00%.

The FOMC has noted that it anticipates that ongoing increases in the target range will be appropriate and, in addition, has decided to continue with balance sheet holdings reductions that began in May of 2022.

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.

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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.

however, the CFPB has taken a significantly more aggressive approach to using its rulemaking, supervision, and enforcement authorities under President Biden’s administration.

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") June 10, 2022 Mortgage Finance Forecast (“MBA Forecast”) projects 2022 purchase activity to increase 2.1% to $1,681 billion and mortgage refinance activity to decrease 68.9% to $730 billion, resulting in a net decrease in total mortgage originations of 39.6% to $2,411 billion, all from 2021 levels.

The Mortgage Bankers Association's ("MBA") September 19, 2022 Mortgage Finance Forecast (“MBA Forecast”) projects 2022 purchase activity to decrease 13.2% to $1,618 billion and mortgage refinance activity to decrease 72.6% to $706 billion, resulting in a net decrease in total mortgage originations of 47.6% to $2,324 billion, all from 2021 levels.

In 2021, purchase activity accounted for 42.0% of all mortgage originations and is projected in the MBA Forecast to represent 69.6% of all mortgage originations in 2022.

In addition, according to data published by Freddie Mac, the average 30-year fixed mortgage interest rates in the United States were 4.5% and 2.9% for the six-month periods ended June 30, 2022 and 2021, respectively.

According to data published by Freddie Mac, the average 30-year fixed mortgage interest rates in the United States were 4.9% and 2.9% for the nine-month periods ended September 30, 2022 and 2021, respectively.

The FOMC has noted that it anticipates that ongoing increases in the federal funds rate will be appropriate in response to the current inflationary environment, with mortgage rates typically moving in conjunction with the federal funds rate.

Per the MBA Forecast, mortgage interest rates are projected to be at or over 5.0% for the remainder of 2022, before decreasing in both 2023 and 2024.

Per the MBA Forecast, mortgage interest rates are projected to stay at or around 5.5% for the remainder of 2022, before decreasing in both 2023 and 2024.

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

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Actual results could differ from these estimates.

During the six-month period ended June 30, 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").

During the nine-month period ended September 30, 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 2021 Form 10-K.

Results of Operations

The following table presents certain unaudited Consolidated Statements of Operations data for the three- and six-month periods ended June 30, 2022 and 2021:

The following table presents certain unaudited Consolidated Statements of Operations data for the three- and nine-month periods ended September 30, 2022 and 2021:

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(in thousands) 2022 2021 2022 2021

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Net Premiums Written

Net premiums written increased 3.1% and 2.9% for the three- and six-month periods ended June 30, 2022 to $69.6 million and $132.8 million, respectively, compared with $67.5 million and $129.0 million for the same prior year periods.

The increases for the three- and six-month periods ended June 30, 2022 were primarily driv en by higher average home prices and increased premiums in our Texas market.

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.

Net premiums written decreased 7.9% and 1.0% for the three- and nine-month periods ended September 30, 2022 to $66.7 million and $199.4 million, respectively, compared with $72.3 million and $201.3 million for the same prior year periods.

The decreases for the three- and nine-month periods ended September 30, 2022 were primarily driv en by an overall decline in the level of real estate transaction volume following the rise in mortgage interest rates, partially offset by higher average home prices and increased premiums in our Texas market.

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

To determine the estimated premiums, the Company uses historical experience, as well as other factors, to make certain assumptions about the average elapsed time between the policy effective date and the date the policies are reported.

From time to time, the Company adjusts the inputs to the estimation process as branches and agents report transactions and new information becomes available.

From time to time, the Company adjusts the inputs to the estimation process as reported transactions and new information becomes available from direct and agency business.

In addition to estimating revenues, the Company also estimates and accrues agent commissions, claims provision, premium taxes, income taxes, and other expenses associated with the estimated revenues that have been accrued.

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

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 six-month periods ended June 30, 2022 and 2021:

Title insurance companies typically issue title insurance policies directly or through title agencies.

Following is a breakdown of premiums generated by direct and agency operations for the three- and nine-month periods ended September 30, 2022 and 2021, with certain balances for 2021 reclassified to conform to the 2022 presentation:

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(in thousands, except percentages) 2022 % 2021 % 2022 % 2021 %

Home and Branch $ 16,161 23.2 $ 17,048 25.2 $ 33,579 25.3 $ 34,408 26.7

Direct $ 21,818 32.7 $ 21,803 30.1 $ 68,478 34.3 $ 61,619 30.6

Agency 44,840 67.3 50,542 69.9 130,931 65.7 139,730 69.4

Total $ 66,658 100.0 $ 72,345 100.0 $ 199,409 100.0 $ 201,349 100.0

Home and Branch Office Net Premiums – In the Company's home and branch operations, the Company issues a title insurance policy and retains the entire premium, as no commissions are paid in connection with these policies.

Net premiums written from home and branch operations decreased 5.2% and 2.4% for the three- and six-month periods ended June 30, 2022, respectively, compared with the same prior year periods.

The decreases for the three- and six-month periods ended June 30, 2022, were primarily driven by lower levels of purchase and refinance activity, partially offset by higher average home prices.

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

as a result, the home and branch office net premiums written are primarily for North Carolina title insurance policies.

Agency Net Premiums – When a policy is written through a title agency, the premium is shared between the agency and the underwriter.

Direct Net Premiums – The Company's direct business consists of operations at the home office, branch offices, and wholly owned title insurance agencies.

In the Company's direct operations, the Company issues a title insurance policy and retains the entire premium, as no commissions are recognized in connection with these policies.

Net premiums written from direct operations increased 0.1% and 11.1% for the three- and nine-month periods ended September 30, 2022, respectively, compared with the same prior year periods.

The increases for the three- and nine-month periods ended September 30, 2022 and 2021 were driven by higher average home prices and increased premiums written by wholly owned agencies in our Texas market, partially offset by a decline in transaction volume associated with higher mortgage interest rates.

Agency Net Premiums – When a policy is written through a non-wholly owned title agency, the premium is shared between the agency and the underwriter.

The agent retains a majority of the premium as a commission and remits the net amount to the Company.

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

Agency net premiums written increased 5.9% and 4.8% for the three- and six-month periods ended June 30, 2022, compared with the same prior year periods.

The increases for the three- and six-month periods ended June 30, 2022 were primarily driven by higher average home prices and increased premiums in our Texas market.

Following is a schedule of net premiums written for the three- and six-month periods ended June 30, 2022 and 2021 in select states in which the Company's two insurance subsidiaries, ITIC and NITIC, currently underwrite title insurance:

Agency net premiums written decreased 11.3% and 6.3% for the three- and nine-month periods ended September 30, 2022, compared with the same prior year periods.

Following is a schedule of net premiums written for the three- and nine-month periods ended September 30, 2022 and 2021 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

September 30, Nine Months Ended

September 30,

State (in thousands) 2022 2021 2022 2021

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Net Premiums Written $ 66,658 $ 72,345 $ 199,409 $ 201,349

The increases in net premiums written in the state of Texas for the three- and six-month periods ended June 30, 2022 were impacted by recent acquisitions of title insurance agencies doing business in the state of Texas.

The increases in net premiums written in the state of Texas for the three- and nine-month periods ended September 30, 2022 primarily resulted from the Company's recent acquisitions of title insurance agencies doing business in the state of Texas.

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

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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 $6.2 million and $11.3 million for the three- and six-month periods ended June 30, 2022, respectively, compared with $3.5 million and $6.3 million for the same prior year periods.

The increases for the three- and six-month periods ended June 30, 2022 were mainly due to a larger share of business that generates escrow income, and fee income associated with commercial activity.

Escrow and other title-related fee revenues were $6.0 million and $17.2 million for the three- and nine-month periods ended September 30, 2022, respectively, compared with $3.9 million and $10.1 million for the same prior year periods.

The increases for the three- and nine-month periods ended September 30, 2022 were mainly due to a larger share of business in markets that generate escrow income, and fee income associated with commercial activity.

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 $2.8 million and $5.3 million for the three- and six-month periods ended June 30, 2022, respectively, compared with $2.4 million and $4.5 million for the same prior year periods.

The increases for the three- and six-month periods ended June 30, 2022 were primarily related to higher levels of property exchange transaction volumes.

Non-title service revenues were $3.9 million and $9.1 million for the three- and nine-month periods ended September 30, 2022, respectively, compared with $2.4 million and $6.9 million for the same prior year periods.

The increases for the three- and nine-month periods ended September 30, 2022 were primarily related to increases in like-kind exchange revenues.

Investment-Related Revenues

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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 $911 thousand and $1.8 million for the three- and six-month periods ended June 30, 2022, respectively, compared with $898 thousand and $1.9 million for the same prior year periods.

In 2022, the Company has purchased higher levels of short-term investments due to the downturns in other investment vehicles utilized by the Company and uncertainty in the investment market.

Interest and dividends were $1.2 million and $3.1 million for the three- and nine-month periods ended September 30, 2022, respectively, compared with $893 thousand and $2.8 million for the same prior year periods.

Interest and investment income levels are primarily a function of general market performance, interest rates and the amount of cash available for investments that meet the Company's investment policy.

Other Investment Income

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

Other investment income was $1.1 million and $2.4 million for the three- and six-month periods ended June 30, 2022, respectively, compared with $1.5 million and $2.4 million for the same prior year periods.

Other investment income was $2.2 million and $4.6 million for the three- and nine-month periods ended September 30, 2022, respectively, compared with $2.2 million and $4.6 million for the same prior year periods.

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

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Dispositions of equity securities at a realized gain or loss reflect such factors as industry sector allocation decisions, ongoing assessments of issuers’ business prospects and tax planning considerations.

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

Additionally, the amounts included in net realized investment gains are affected by assessments of securities’ valuation for 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 $2.0 million and $3.8 million for the three- and six-month periods ended June 30, 2022, respectively, compared with $182 thousand and $503 thousand for the same prior year periods.

The Company recorded impairment charges of $127 thousand on certain fixed maturity securities where the intent to hold has changed in the three-month period ended June 30, 2022.

The net realized investment gains were $2.5 million and $6.3 million for the three- and nine-month periods ended September 30, 2022, respectively, compared with $268 thousand and $771 thousand for the same prior year periods.

The Company recorded impairment charges of $35 thousand and $162 thousand on certain fixed maturity securities where the intent to hold has changed in the three- and nine-month periods ended September 30, 2022.

There were no impairment charges recorded in 2021.

Management believes unrealized losses on the remaining fixed maturity securities at June 30, 2022 are temporary in nature.

Management believes unrealized losses on the remaining fixed maturity securities at September 30, 2022 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.

The Company considers relevant facts and circumstances in evaluating whether a credit or interest-related impairment of a fixed maturity security has occurred.

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

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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 $(12.2) million and $(18.1) million for the three- and six-month periods ended June 30, 2022, respectively, compared with $4.8 million and $8.1 million for the same prior year period.

Changes in the estimated fair value of equity security investments were $(4.6) million and $(22.7) million for the three- and nine-month periods ended September 30, 2022, respectively, compared with $(802) thousand and $7.3 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 primarily include miscellaneous income and gains and losses on the disposal of fixed assets and real estate.

Other revenues were $348 thousand and $647 thousand for the three- and six-month periods ended June 30, 2022, respectively, compared with $4.1 million and $4.4 million for the same prior year periods.

The decreases for the three- and six-month periods ended June 30, 2022 were primarily related to a gain on the sale of a property recorded in 2021.

Other revenues were $277 thousand and $924 thousand for the three- and nine-month periods ended September 30, 2022, respectively, compared with $217 thousand and $4.6 million for the same prior year periods.

The decrease for the nine-month period ended September 30, 2022 was primarily related to a gain on the sale of a property recorded in 2021.

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 13.9% and 12.9% for the three- and six-month periods ended June 30, 2022, compared with the same prior year periods.

The increases for the three- and six-month periods ended June 30, 2022 were primarily due to increases in personnel expenses, title fees, and office and technology expenses.

Following is a summary of the Company's operating expenses for the three- and six-month periods ended June 30, 2022 and 2021.

Operating expenses increased 7.8% and 11.1% for the three- and nine-month periods ended September 30, 2022, compared with the same prior year periods.

The increases for the three- and nine-month periods ended September 30, 2022 were primarily due to increases in personnel expenses, title fees, and office and technology expenses.

Following is a summary of the Company's operating expenses for the three- and nine-month periods ended September 30, 2022 and 2021.

Inter-segment eliminations have been netted;

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

therefore, the individual segment amounts will not agree to Note 4 to the unaudited Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(in thousands, except percentages) 2022 % 2021 % 2022 % 2021 %

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Total $ 67,910 100.0 $ 62,979 100.0 $ 197,064 100.0 $ 177,415 100.0

On a combined basis, the after-tax profit margins were 3.2% and 6.1% for the three- and six-month periods ended June 30, 2022, respectively, compared with 23.3% and 21.4% for the same prior year periods.

The decreases for the three- and six-month periods ended June 30, 2022 were primarily due to negative changes in the estimated fair value of equity security investments during the current year periods and a gain on the sale of property in the same prior year periods.

On a combined basis, the after-tax profit margins were 10.1% and 7.5% for the three- and nine-month periods ended September 30, 2022, respectively, compared with 17.8% and 20.2% for the same prior year periods.

The decreases for the three- and nine-month periods ended September 30, 2022 were primarily due to reductions in the estimated fair value of equity security investments during the current year periods, a gain on the sale of property in the same prior year periods, and increases in total expenses that outpaced the changes in revenue.

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 $20.9 million and $42.2 million for the three- and six-month periods ended June 30, 2022, respectively, compared with $15.9 million and $32.1 million for the same prior year periods.

On a consolidated basis, personnel expenses as a percentage of total revenues were 29.5% and 30.1% for the three- and six-month periods ended June 30, 2022, respectively, compared with 18.7% and 20.4% for the same prior year periods.

The increases in personnel expenses for the three- and six-month periods ended June 30, 2022 were primarily due to staffing of new offices, hiring to support growth initiatives, and increased employee benefit costs.

Personnel expenses were $21.6 million and $63.7 million for the three- and nine-month periods ended September 30, 2022, respectively, compared with $15.5 million and $47.5 million for the same prior year periods.

On a consolidated basis, personnel expenses as a percentage of total revenues were 27.7% and 29.3% for the three- and nine-month periods ended September 30, 2022, respectively, compared with 19.0% and 19.9% for the same prior year periods.

The increases in personnel expenses for the three- and nine-month periods ended September 30, 2022 were primarily due to staffing of new offices, hiring to support growth initiatives, and increased employee benefit costs.

Increases in staffing levels are the result of both organic growth and rec ent acquisitions of title insurance agencies, as the Company continues expansion of its geographic footprint.

Employee headcount increased by 40.2% as of September 30, 2022, when compared to the same prior year period, primarily due to the Company's continued expansion efforts in the Texas market.

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 $4.3 million and $8.7 million for the three- and six-month periods ended June 30, 2022, respectively, compared with $3.2 million and $6.0 million for the same prior year periods.

The increases for the three- and six-month periods ended June 30, 2022 were primarily in support of expanding the Company's geographic footprint and various ongoing technology initiatives.

Office and technology expenses were $4.3 million and $12.9 million for the three- and nine-month periods ended September 30, 2022, respectively, compared with $3.2 million and $9.1 million for the same prior year periods.

The increases for the three- and nine-month periods ended September 30, 2022 were primarily in support of expanding the Company's geographic footprint, the result of adding new office locations due to both organic growth and recent acquisitions of title insurance agencies, and various ongoing technology 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 $7.6 million and $13.2 million for the three- and six-month periods ended June 30, 2022, respectively, compared with $4.8 million and $8.5 million for the same prior year periods.

The increases for the three- and six-month periods ended June 30, 2022 were primarily related to increases in title and service fees, business development expenses and professional service fees.

Other expenses were $6.6 million and $19.8 million for the three- and nine-month periods ended September 30, 2022, respectively, compared with $4.8 million and $13.3 million for the same prior year periods.

The increases for the three- and nine-month periods ended September 30, 2022 were primarily related to increases in title and service fees, technology fees and business development expenses.

Title Insurance

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

Commissions to agents decreased 1.5% and 1.9% for the three- and six-month periods ended June 30, 2022, respectively, compared with the same prior year periods.

Commission expense as a percentage of net premiums written by agents was 63.3% and 64.2% for the three- and six-month periods ended June 30, 2022, compared with 68.0% and 68.6% 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 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.

Commissions to agents decreased 10.9% and 5.2% for the three- and nine-month periods ended September 30, 2022, respectively, compared with the same prior year periods.

Commission expense as a percentage of net premiums written by agents was 74.7% and 74.2% for the three- and nine-month periods ended September 30, 2022, compared with 74.3% and 73.3% 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 the decreases in agent premium volume and changes in geographic mix.

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

Provision for Claims – The provision for claims decreased 8.8% and 50.9% for the three- and six-month periods ended June 30, 2022, respectively, compared with the same prior year periods.

The provision for claims as a percentage of net premiums written was 1.9% and 1.1% for the three- and six-month periods ended June 30, 2022, compared with 2.1% and 2.3% for the same prior year periods.

The decreases in the provision for claims for the three- and six-month periods ended June 30, 2022 were primarily due to changes in the geographic mix for underwriting risk and higher levels of favorable loss development in the six-month period ended June 30, 2022.

Provision for Claims – The provision for claims decreased 1.4% and 31.2% for the three- and nine-month periods ended September 30, 2022, respectively, compared with the same prior year periods.

The provision for claims as a percentage of net premiums written was 2.9% and 1.7% for the three- and nine-month periods ended September 30, 2022, compared with 2.8% and 2.5% for the same prior year periods.

The decrease in the provision for claims for the nine-month period ended September 30, 2022 was primarily due to changes in the geographic mix for underwriting risk and higher levels of favorable loss development in 2022.

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 $1.6 million and $1.3 million for the six-month periods ended June 30, 2022 and 2021, respectively.

At June 30, 2022, the total reserve for claims was $36.6 million.

Actual payments of claims, net of recoveries, were $2.6 million and $1.8 million for the nine-month periods ended September 30, 2022 and 2021, respectively.

At September 30, 2022, the total reserve for claims was $37.6 million.

Of that total, approximately $4.0 million was reserved for specific claims, and approximately $33.6 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 $674 thousand and $2.3 million for the three- and six-month periods ended June 30, 2022, respectively, compared with $5.5 million and $9.0 million for the same prior year periods.

Income tax expense, including federal and state taxes, as a percentage of income before income taxes was 22.8% and 21.2% for the three- and six-month periods ended June 30, 2022, respectively, compared with 21.8% and 21.1% for the same prior year periods.

The provision for income taxes was $2.2 million and $4.5 million for the three- and nine-month periods ended September 30, 2022, respectively, compared with $3.9 million and $12.9 million for the same prior year periods.

Income tax expense, including federal and state taxes, as a percentage of income before income taxes was 21.6% and 21.4% for the three- and nine-month periods ended September 30, 2022, respectively, compared with 21.3% and 21.2% for the same prior year periods.

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 June 30, 2022 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 September 30, 2022 will be realized.

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

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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 except as otherwise disclosed in the Business Trends and Recent Conditions;

COVID-19 Pandemic section of this Management's Discussion and Analysis.

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’s operating results and cash flows are heavily dependent on the real estate market.

The Company’s business has certain fixed costs such as personnel;

The Company’s business has certain fixed costs;

therefore, changes in the real estate market are monitored closely, and operating expenses such as staffing levels are managed and adjusted accordingly.

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, 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 $8.3 million and $16.5 million for the six-month periods ended June 30, 2022 and 2021, respectively.

Cash Flows – Net cash flows provided by operating activities were $20.3 million and $35.7 million for the nine-month periods ended September 30, 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 and property, 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 six-month period ended June 30, 2022, compared with net cash being provided by investing activities in the prior year period, due primarily to the purchase of a subsidiary, a decrease in proceeds from the sale of property, and an increase in purchases of investments, net of proceeds from investment sales and maturities.

Net cash was used in investing activities for the nine-month period ended September 30, 2022, compared with net cash being provided by investing activities in the prior year period, due primarily to an increase in purchases of investments, net of proceeds from investment sales and maturities, the purchase of a subsidiary during the current year period, and a decrease in proceeds from the sale of property.

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 June 30, 2022, the Company held cash and cash equivalents of $35.5 million, short-term investments of $71.3 million, available-for-sale fixed maturity securities of $61.4 million and equity securities of $54.9 million.

The net effect of all activities on total cash and cash equivalents was a decrease of $1.7 million in 2022.

As of September 30, 2022, the Company held cash and cash equivalents of $41.4 million, short-term investments of $80.8 million, available-for-sale fixed maturity securities of $55.3 million and equity securities of $52.7 million.

The net effect of all activities on total cash and cash equivalents was an increase of $4.2 million 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 June 30, 2022, both ITIC and NITIC met the minimum capital, surplus and reserve requirements for each state in which they are licensed.

As of September 30, 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 impact of COVID-19, ongoing inflationary pressures 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.

However, with any continued impact of COVID-19, ongoing inflationary pressures 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.

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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 the six-month periods ended June 30, 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 $2.5 million for the six-month period ended June 30, 2022 .

Pursuant to the Company’s ongoing purchase program, the Company purchased 629 shares in the nine-month periods ended September 30, 2022 and did not repurchase any shares in the corresponding period in 2021.

The Company anticipates increasing its purchases under the repurchase plan during the remainder of 2022 and first half of 2023, subject to 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 Expend itures – Capital expenditures were approximately $4.0 million for the nine-month period ended September 30, 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 June 30, 2022, the Company had a claims reserve totaling $36.6 million.

Contractual Obligations - As of September 30, 2022, the Company had a claims reserve totaling $37.6 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 June 30, 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.

The amounts accrued for these agreements at September 30, 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 June 30, 2022 is $5.9 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.

The total of undiscounted future minimum lease payments under operating leases that have initial or remaining noncancelable lease terms in excess of one year after 2022 is $6.3 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 $484.4 million and $763.9 million as of June 30, 2022 and December 31, 2021, respectively.

Like-kind exchange deposits and reverse exchange property held by the Company for the purpose of completing such transactions totaled approximately $477.9 million and $763.9 million as of September 30, 2022 and December 31, 2021, respectively.

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

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therefore, investment income is shown as non-title services rather than investment income.

These like-kind exchange funds are primarily invested in money market and other short-term investments.

These like-kind exchange funds are primarily invested in money market funds and other short-term investments.

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

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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.

Please refer to Note 1 to the unaudited Consolidated Financial Statements included 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

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

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

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

All statements that address expectations or projections about the future, including statements about the Company’s strategy for growth, product and service development, market share position, claims, expenditures, financial results and cash requirements, are forward-looking statements.

Without limitation, projected developments in mortgage interest rates and the overall economic environment set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Business Trends and Recent Conditions;

COVID-19 Pandemic” constitute forward-looking statements.

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

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, 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 inflation;

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

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• the impact of cyberattacks (including ransomware attacks) and other cybersecurity events, including damage to the Company's reputation in the event of a serious IT breach or failure;

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

• unanticipated adverse changes in securities markets could result in material losses to the Company's investments;

• 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 r eliance upon the North Carolina, Texas, Georgia and South Carolina marke ts for a significant portion of its premiums;

• the Company’s r eliance 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, 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.

For more details on factors that could affect expectations, see the 2021 Form 10-K, 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.

You should consider the possibility that actual results may differ materially from our forward-looking statements.

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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