What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-14 compared with 2022-03-14 · 96 added, 129 removed, 363 unchanged (38% of the section changed)

14 unchanged sentences

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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These transactions include reverse exchanges when taxpayers decide to acquire replacement property before selling the relinquished property, or “build to suit” exchanges, when improvements must be made to the replacement property before the taxpayer acquires the improved replacement property.

The services provided by the Company’s exchange services division, ITEC and ITAC, are pursuant to provisions in the Internal Revenue Code.

The services provided by the Company’s exchange services division, ITEC and ITAC, are pursuant to provisions in the IRC.

From time to time, these laws are subject to review and changes, which may negatively affect the demand for tax-deferred exchanges in general, and consequently, the revenues and profitability of the Company’s exchange services division.

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

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

Purchase volume and refinance activity were strong in 2021 and 2020, 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 reductions 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.

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

In response, the U.S.

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

Such actions have 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.

The Company has remained fully operational throughout the pandemic and did not have any reductions in workforce during 2021 or 2020.

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 (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.

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 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 governmental 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 have impacted 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.

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 the Federal Reserve disclosure issued on January 26, 2022 indicated that the FOMC expects that it will soon be appropriate to raise the target range.

Further, the FOMC decided that it will continue to taper ongoing asset purchases, potentially bringing these purchases to an end in March 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.

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.

The primary functions of Fannie Mae and Freddie Mac are to provide liquidity to the nation's mortgage finance system by purchasing mortgages on the secondary market, pooling them and selling them as mortgage-backed securities.

In order to securitize, Fannie Mae and Freddie Mac typically require the purchase of title insurance for loans they acquire.

Since the federal takeover, there have been various discussions and proposals regarding their reform.

Changes to these entities could impact the entire mortgage loan process and, as a result, could affect the demand for title insurance.

The timing and results of reform are currently unknown;

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 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.

Further proposals to change regulations governing insurance holding companies and the title insurance industry are often introduced in Congress, in state legislatures and before various insurance regulatory agencies.

Although the Company regularly monitors such proposals, the likelihood and timing of passage of any such regulation, and the possible effects of any such regulation on the Company and its subsidiaries, cannot be determined at this time.

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.

Any changes to the CFPB or other governmental entities could affect the Company and its results of operations.

The FOMC issues disclosures on a periodic basis that include projections of the federal funds rate and expected actions.

The FOMC had maintained a target range between 0.00% and 0.25% from March 2020 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 February 2023 to between 4.50% and 4.75%.

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 norm al 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.

Real Estate Environment

The Mortgage Bankers Association's (“MBA”) January 21, 2022 Mortgage Finance Forecast (“MBA Forecast”) projects 2022 purchase activity to increase 5.7% to $1,739 billion and refinance activity to decrease 63.3% to $861 billion, resulting in a decrease in total mortgage originations of 34.9% to $2,600 billion, all from 2021 levels.

The Mortgage Bankers Association's (“MBA”) January 19, 2023 Mortgage Finance Forecast (“MBA Forecast”) projects 2023 purchase activity to decrease 8.8% to $1,439 billion and refinance activity to decrease 32.7% to $449 billion, resulting in a decrease in total mortgage originations of 15.9% to $1,888 billion, all from 2022 levels.

In 2022, purchase activity accounted for 70.3% of all mortgage originations and is projected in the MBA Forecast to represent 76.2% of all mortgage originations in 2023.

Due to the rapidly changing environment brought on by COVID-19, as well as other potential factors, 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 5.3% and 3.0% for the years ended December 31, 2022 and 2021, respectively.

Per the MBA Forecast, mortgage interest rates are projected to increase over the subsequent 3-year period, reaching 4.3% in 2024.

Per the MBA Forecast, mortgage interest rates are projected to decrease over the subsequent 3-year period, reaching 4.4% in 2025.

Due to the rapidly changing environment that has continued to be influenced 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.

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

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Critical Accounting Estimates and Policies

The Consolidated Financial Statements of the Company are prepared in conformity with U.S.

GAAP and follow general practices within the industries in which it operates.

The Consolidated Financial Statements of the Company are prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) and follow general practices within the industries in which it operates.

This preparation requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.

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A provision for estimated future claims payments is recorded at the time the related policy revenue is recorded.

The Company records the claims provision as a percentage of net premiums written.

The Company records the claims provision estimate as a percentage of net premiums written.

In making loss estimates, management determines a loss provision rate, which it then applies to net premiums written.

This loss provision rate is set to provide for losses on current year policies.

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

Loss ratios for earlier years tend to be more reliable than recent policy years as those years are more fully developed.

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

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The Company initially reserves for each known claim based upon an assessment of specific facts and updates the reserve amount as necessary over the course of administering each claim.

Loss ratios for earlier years tend to be more reliable than recent policy years, as those years are more fully developed.

In making loss estimates, management determines a loss provision rate, which it then applies to net premiums written.

The Company assumes the reported liability for known claims and IBNR, in the aggregate, will be comparable to its historical claims experience unless factors, such as loss experience and charged premium rates, change significantly.

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Expenses typically associated with premiums, including agent commissions, premium taxes, and a provision for future claims are recognized concurrent with recognition of related premium revenue.

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.

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.

Reporting lag times vary by market.

In certain markets, the lag time may be very short, but in others, can be as high as 100 days.

In certain markets, the lag time may be very short, but in others, can be as high as three months.

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

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Valuation, Impairment and Credit Losses of Investments in Securities

Investments in Fixed Maturity Securitie s:

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

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

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

Investments in Fixed Maturity Securities:

Fixed maturity securities are classified as available-for-sale and reported at estimated fair value with unrealized gains and losses, net of tax, reported as accumulated other comprehensive income.

Securities are regularly reviewed for differences between the cost and estimated fair value of each security indicating impairment.

Factors considered in determining whether the impairment is credit-related include the financial condition and prospects of the issuer (including credit ratings and analyst reports) and macro-economic changes.

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

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

Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes.

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

Any impairment that is not credit-related is recognized in other comprehensive loss, net of applicable taxes.

Credit-related impairment is recognized as an allowance for credit losses (“ACL”) on the Consolidated Balance Sheets, limited to the amount by which the amortized cost basis exceeds the estimated fair value, with a corresponding adjustment to earnings.

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

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

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

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

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

The measurement alternative method is used when an investment does not qualify for the equity method or the practical expedient in Accounting Standards Codification Topic 820, which estimates fair value using the net asset value per share.

The measurement alternative method is used when an investment does not qualify for the equity method or an estimated fair value using the net asset value per share.

Under the measurement alternative method, investments are recorded at cost, less any impairment and plus or minus any changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer.

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Net Premiums Written

Net premiums written increased 33.3% in 2021 to $273.9 million, compared with $205.4 million in 2020.

The increase in 2021, compared with 2020, was primarily driven by higher average home prices and continued low mortgage interest rates.

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 9.2% in 2022 to $248.6 million, compared with $273.9 million in 2021.

The decrease in 2022, compared with 2021, was primarily driven by an overall decline in the level of real estate transaction volumes resulting from higher average mortgage interest rates.

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.

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 years ended December 31:

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

Following is a breakdown of net premiums generated by direct and agency operations for the years ended December 31, 2022 and 2021, with certain balances for 2021 reclassified to conform to the 2022 presentation.

(in thousands, except percentages) 2022 % 2021 %

Home and Branch $ 68,585 25.0 $ 53,204 25.9

Direct $ 85,676 34.5 $ 82,085 30.0

Agency 162,956 65.5 191,800 70.0

Total $ 248,632 100.0 $ 273,885 100.0

Home and Branch Office Net Premiums:

In the Company’s home and branch operations, the Company issues the insurance policy and retains the entire premium, as no commissions are paid in connection with these policies.

Net premiums written from home and branch operations increased 28.9% in 2021 to $68.6 million, compared with $53.2 million in 2020.

The increase in net premiums written from home and branch operations for 2021, compared with 2020, was primarily attributable to higher average home prices and continued low mortgage interest rates.

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 Prem iums:

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 4.4% in 2022 to $85.7 million, compared with $82.1 million in 2021.

The increase in net premiums written from direct operations for 2022, compared with 2021, was primarily attributable to 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 34.9% in 2021 to $205.3 million, compared with $152.2 million in 2020.

The increase in 2021, compared with 2020, was primarily attributable to higher average home prices and continued low mortgage interest rates.

Agency net premiums written decreased 15.0% in 2022 to $163.0 million, compared with $191.8 million in 2021.

The decrease in 2022, compared with 2021, was primarily attributable to 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.

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

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Texas 72,278 62,557

Georgia 34,619 23,502

South Carolina 23,454 24,981

Georgia 22,954 34,619

All Others 41,987 53,197

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Net Premiums Written $ 248,632 $ 273,885

The increase in net premiums written in the state of Texas in 2022, compared with 2021, 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.

Escrow and Other Title-Related Fees

Escrow and other title-related fees consists primarily of commission income, escrow and other various fees associated with the issuance of a title insurance policy including settlement, examination and closing fees.

In 2021, escrow and other title-related fee revenue increased 64.4% to $13.7 million, compared with $8.3 million in 2020, primarily due to increases in title ancillary services and commission income.

In 2022, escrow and other title-related fee revenue increased 58.8% to $21.7 million, compared with $13.7 million in 2021, primarily 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

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Non-title service revenues increased 50.2% in 2022 to $14.5 million, compared with $9.7 million in 2021.

The increase in 2021, compared with 2020, primarily related to increases in exchange services income, trust fee income and agency management services income.

The increase in 2022, compared with 2021, 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.

In 2022, ongoing evaluation of changing business and financial market conditions led to portions of cash flow from operations, and certain amounts resulting from sales and maturities in the company’s investment portfolio, to be invested in short term investments to take advantage of elevated short-term interest rates.

Interest and dividends were $4.7 million in 2022, compared with $3.8 million in 2021.

The decrease in 2021, compared with 2020, was primarily due to lower interest rates, lower average balances of fixed maturity securities and lower levels of dividends received.

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

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

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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 $1.9 million for 2021, compared with $333 thousand for 2020.

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

The net realized investment gains were $9.7 million for 2022, compared with $1.9 million for 2021.

The net realized gain on the sales of investments and other assets of $9.9 million in 2022 was partially offset by impairment charges of $172 thousand for certain fixed maturity securities where the intent to hold had changed in 2022.

There were no impairment charges recorded in 2021.

Management believes unrealized losses on the remaining fixed maturity securities at December 31, 2021 are not credit related and are temporary in nature.

Management believes unrealized losses on the remaining fixed maturity securities at December 31, 2022 are not credit-related.

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.

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

There are a number of risks and uncertainties inherent in the process of monitoring impairments and determining if an impairment exists.

These risks and uncertainties include the risk that the economic outlook will be worse than expected or have more of an impact on the issuer than anticipated;

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

Other income primarily include gains and losses on the disposal of assets, rental income from real estate investments and miscellaneous revenues.

Other income was $4.8 million in 2021, compared with $623 thousand for 2020.

The increase in 2021, compared with 2020, primarily related to a gain on the sale of a property.

All major indices experienced significant declines in 2022.

Other income primarily includes gains and losses on the disposal of assets, rental income from real estate investments and miscellaneous revenues.

Other income was $1.1 million in 2022, compared with $4.8 million for 2021.

The decrease in 2022, compared with 2021, primarily related to a gain on the sale of a property 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 31.0% in 2021, compared with 2020, primarily due to increases in commissions to agents and personnel expenses.

Operating expenses increased 3.6% in 2022, compared with 2021, primarily due to increases in personnel, office, technology and other operating expenses, partially offset by a decrease in commissions to agents.

Following is a summary of the Company’s operating expenses for 2022 and 2021.

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Total $ 253,284 100.0 $ 244,566 100.0

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

On a combined basis, the after-tax profit margins were 20.3% and 16.7% in 2021 and 2020, respectively.

The increase in after-tax margin in 2021, compared with 2020, was primarily related to an increase in total revenue that outpaced the increase in expenses.

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

Total Company

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Personnel expenses were $85.3 million and $64.2 million for 2022 and 2021, respectively.

Personnel expenses increased by approximately 23.6% in 2021, compared with 2020, primarily due to staffing additions in support of strategic growth initiatives and volume increases.

Personnel expenses increased by 32.9% in 2022, compared with 2021, primarily due to staffing of new offices and hiring to support growth initiatives.

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

Employee headcount increased by 16.5%, when compared to the same prior year period, primarily due to the Company's continued expansion efforts in the Texas market.

On a consolidated basis, personnel expenses as a percentage of total revenues were 30.1% and 19.5% in 2022 and 2021, respectively.

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Office and technology expenses were $17.3 million and $13.1 million for 2022 and 2021, respectively.

The increase in office and technology expenses in 2021, compared with 2020, was primarily related to ongoing investments in software and technology related initiatives.

The increase in office and technology expenses in 2022, compared with 2021, was 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:

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Other expenses were $24.8 million and $18.8 million for 2022 and 2021, respectively.

The increase in 2021, compared with 2020, was primarily related to higher premiums increasing premium-related taxes, licensing, title and service fees, increased professional services fees related to ongoing investments in software and technology initiatives and increased travel-related expenses.

The increase in 2022, compared with 2021, was primarily related to increases in title and service fees, technology fees, business development expenses, and amortization of intangible assets.

Title Insurance

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

In 2021, commissions to agents increased 33.7% to $142.8 million, compared with $106.8 million in 2020.

In 2022, commissions to agents decreased 14.9% to $121.6 million, compared with $142.8 million in 2021.

Commission expense as a percentage of net premiums written by agents was 74.6% and 74.5% in 2022 and 2021, respectively.

The increase in commission expense, when comparing 2021 with 2020, was primarily related to increased premiums written by agents and changes in geographic mix.

The decrease in commission expense, when comparing 2022 with 2021, was commensurate with the decrease in agent premium volume.

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

Provision for Claims :

The provision for claims increased 9.3% in 2021, compared to 2020.

The provision for claims decreased 25.2% in 2022, compared to 2021.

The provision for claims as a percentage of net premiums written was 1.7% and 2.1% in 2022 and 2021, respectively.

The dollar increase in the provision for claims in 2021, compared with 2020, was primarily due to additional underwriting risks resulting from premium increases .

The decrease in the loss provision rate in 2021, from the 2020 level, resulted in approximately $1.3 million less in reserves than would have been recorded at the higher 2020 level.

The dollar decrease in the provision for claims in 2022, compared with 2021, was primarily due to reductions in net premiums written and the impact of changes in the geographical mix for underwriting risk.

The decrease in the loss provision rate in 2022, from the 2021 level, resulted in approximately $907 thousand less in reserves than would have been recorded at the higher 2021 level.

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

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

After-Tax Profit Margin

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

On a combined basis, the after-tax profit margins were 8.4% and 20.3% in 2022 and 2021, respectively.

The decrease in after-tax margin in 2022, compared with 2021, was primarily related to a decrease in total revenue and an increase in expenses.

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

Liquidity and Capital Resources

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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 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 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 pandemic, the Company has remained fully operational and has not had any reductions in workforce during 2021 or 2020.

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.

Net cash flows provided by operating activities were $36.2 million and $51.9 million for 2022 and 2021, respectively.

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Cash flows from non-operating activities have historically consisted of purchases and proceeds from investing activities, the issuance of dividends and repurchases of common stock.

In 2021, the Company received more investment proceeds, had lower investment purchase activity and more dividends paid when compared to 2020.

In 2022, the Company had higher investment purchase activity and lower dividends paid when compared to 2021.

In the fourth quarters of 2022 and 2021, the Company paid special cash dividends in the amounts of $3.00 and $18.00 per share, respectively, in addition to regular cash dividends.

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As of December 31, 2022, the Company held cash and cash equivalents of $35.3 million, short-term investments of $103.6 million, available-for-sale fixed maturity securities of $54.0 million and equity securities of $51.7 million.

The net effect of all activities on total cash and cash equivalents was an increase of $23.4 million for 2021.

The net effect of all activities on total cash and cash equivalents was a decrease of $1.9 million for 2022.

Capital Resources:

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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, 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.

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, inflation, 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:

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Unless terminated earlier by resolution of the Board of Directors, the plan will expire when all shares authorized for purchase under the plan have been purchased.

Pursuant to the Company’s ongoing purchase program, the Company purchased no shares in 2021.

In 2020, the Company purchased 25 shares at an average per share prices of $173.44.

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.

Pursuant to the Company’s ongoing purchase program, the Company purchased 945 shares at an average per share price of $141.01 in 2022.

No shares were purchased in 2021.

Capital Expenditures :

Capital expenditures were approximately $6.5 million and $3.2 million during 2021 and 2020, respectively.

The increase in 2021 related primarily to system development initiative expenses.

Capital expenditures were approximately $5.7 million and $6.5 million during 2022 and 2021, respectively, with the higher 2021 expenditures related primarily to system development initiative expenses.

The Company has plans for various capital improvement projects, including increased investment in a number of technology and system development initiatives and hardware purchases which are anticipated to be funded via cash flows from operations.

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

These leases are accounted for as operating leases.

These leases are accounted for as operating leases, with lease expense recognized on a straight-line basis over the term of the lease.

The Company occasionally assumes equipment lease agreements through business acquisitions.

These leases are accounted for as finance leases.

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

The total of undiscounted future minimum lease payments under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2021 is $4.1 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 leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2022 is $5.2 million, which includes lease payments related to options to extend or cancel the lease term if the Company determined at the date of adoption that the lease was expected to be renewed or extended.

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

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

In addition, in administering tax-deferred like-kind exchanges pursuant to § 1031 of the Internal Revenue Code, ITEC serves as a qualified intermediary for exchanges, holding the net sales proceeds from relinquished property to be used for purchase of replacement property.

ITAC serves as exchange accommodation titleholder and, through LLCs that are wholly owned subsidiaries of ITAC, holds property for exchangers in reverse exchange transactions.

In addition, in administering tax-deferred like-kind exchanges pursuant to § 1031 of the IRC, ITEC serves as a qualified intermediary for exchanges, holding the net sales proceeds from relinquished property to be used for purchase of replacement property.

ITAC serves as exchange accommodation titleholder and, through LLCs that are wholly owned subsidiaries of ITAC, holds property 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 $432.0 million and $763.9 million as of December 31, 2022 and 2021, respectively.

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

Recent Accounting Standards

Recently Adopted Accounting Standards

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2019-12, Simplifying the Accounting for Income Taxes .

ASU 2019-12 was intended to reduce the complexity in accounting for income taxes during interim and annual periods and provide clarity on income tax situations where a diversity in practice had developed.

The update was effective for annual and interim periods in fiscal years beginning after December 15, 2020.

The Company adopted this update on January 1, 2021, with no material impact on the Company's financial position and results of operations.

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

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

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

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

The Company adopted this update on January 1, 2021, with no material impact on the Company's financial position and results of operations.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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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-K

Item 7. Management’s Discussion and Analysis