The following discussion should be read in conjunction with the Consolidated
Financial Statements and the related notes in this report. The following
discussion may contain forward-looking statements. These forward-looking
statements are based on certain assumptions and expectations of future events
that are subject to a number of risks and uncertainties. Actual results may
vary. See the sections in this Annual Report on Form 10-K titled “Safe Harbor
and Forward-Looking Statements” and “Risk Factors” included in Part I, Item 1A
that could affect forward-looking statements.
Overview
primarily in issuing title insurance through two subsidiaries,
Insurance Company
(“NITIC”). Total revenues from the title segment accounted for 94.3% of the
Company’s revenues in 2021. Through ITIC and NITIC, the Company underwrites land
title insurance for owners and mortgagees as a primary insurer.
Title insurance protects against loss or damage resulting from title defects
that affect real property. When real property is conveyed from one party to
another, occasionally there is an undisclosed defect in the title or a mistake
or omission in a prior deed, will or mortgage that may give a third party a
legal claim against such property. If a covered claim is made against real
property, title insurance provides indemnification against insured defects.
There are two basic types of title insurance policies – one for the mortgage
lender and one for the real property owner. A lender often requires the property
owner to purchase a lender’s title insurance policy to protect its position as a
holder of a mortgage loan, but the lender’s title insurance policy does not
protect the property owner. The property owner has to purchase a separate
owner’s title insurance policy to protect its investment.
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The Company issues title insurance policies through its home and branch offices
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. The ability to attract
and retain issuing agents is a key determinant of the Company’s growth in title
insurance premiums written.
Revenues for the title insurance segment primarily result from purchases of new
and existing residential and commercial real estate, refinance activity and
certain other types of mortgage lending such as home equity lines of credit.
Title insurance premiums vary from state to state and are subject to extensive
regulation. Statutes generally provide that rates must not be excessive,
inadequate or unfairly discriminatory. The process of implementing a rate change
in most states involves pre-approval by the applicable state insurance
regulator.
Volume is a factor in the Company’s profitability due to fixed operating costs
that are incurred by the Company regardless of title insurance premium volume.
The resulting operating leverage tends to amplify the impact of changes in
volume on the Company’s profitability. The Company’s profitability also depends,
in part, upon its ability to manage its investment portfolio to maximize
investment returns and to minimize risks such as interest rate changes, defaults
and impairments of assets.
The Company’s volume of title insurance premiums is affected by the overall
level of residential and commercial real estate activity, which includes
property sales, mortgage financing and mortgage refinancing. Real estate
activity, home sales and mortgage lending are cyclical in nature. Real estate
activity is affected by a number of factors, including the availability of
mortgage credit, the cost of real estate, consumer confidence, employment and
family income levels, and general
rate volatility is also an important factor in the level of residential and
commercial real estate activity.
The Company’s title insurance premiums in future periods are likely to fluctuate
due to these and other factors which are beyond management’s control.
Services other than title insurance provided by operating divisions of the
Company are not reported separately, but rather are reported collectively in a
category called “All Other”. These other services include those offered by the
Company and by its wholly owned subsidiaries,
Corporation
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. ITEC acts as a qualified intermediary in tax-deferred
exchanges of real property held for productive use in a trade or business or for
investment, and its income is derived from fees for handling exchange
transactions and interest earned on client deposits held by the Company. In its
role as qualified intermediary, ITEC coordinates the exchange aspects of the
real estate transaction, and its duties include drafting standard exchange
documents, holding the exchange funds between the time the old property is sold
and the new property is purchased, and accepting the formal identification of
the replacement property within the required identification period. ITAC
provides services as an exchange accommodation titleholder for accomplishing
“parking transactions” as set forth in the safe harbor contained in Internal
Revenue Procedure 2000-37. 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. 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.
The Company’s trust services division,
management and trust services to individuals, companies, banks and trusts.
ITMS offers various consulting and management services to provide clients with
the technical expertise to start and successfully operate a title insurance
agency.
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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. Regulatory reform and initiatives by various governmental
agencies, including the
changes, could impact lending standards or the processes and procedures used by
the Company. 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
The COVID-19 pandemic has negatively impacted worldwide economic activity and
created significant volatility and disruptions of financial markets. In
response, the
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
governmental restriction, potential decreases in net premiums written in the
future, and future fluctuations in the Company’s investment portfolio due to the
pandemic and the economic disruption it is causing. Because of the inherent
uncertainty regarding the duration and severity of the COVID-19 pandemic
(including any of its variants) and its effects on the economy, as well as
uncertainty regarding the effects of government measures already taken, and
which may be taken or continued in the future, to combat the spread of the virus
and any of its variants, and/or provide additional economic stimulus, the
Company is currently unable to predict the ultimate impact of the pandemic.
Regulatory Environment
The
disclosures on a periodic basis that include projections of the federal funds
rate and expected actions. In
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
target range, although the
indicated that the
target range. Further, the
asset purchases, potentially bringing these purchases to an end in
In normal economic situations, future adjustments to the
monetary policy are expected to be based on realized and expected economic
developments to achieve maximum employment and inflation near the
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
the Comptroller of Currency
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
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.
21
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The timing and nature of any reforms are currently unknown; however, the
expected to take a significantly more aggressive approach to using its
rulemaking, supervision, and enforcement authorities under
affect the Company and its results of operations.
Real Estate Environment
The
Forecast (“MBA Forecast”) projects 2022 purchase activity to increase 5.7% to
resulting in a decrease in total mortgage originations of 34.9% to
billion
all mortgage originations and is projected in the MBA Forecast to represent
66.9% of all mortgage originations in 2022. 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
interest rates are projected to increase over the subsequent 3-year period,
reaching 4.3% in 2024.
Historically, activity in real estate markets has varied over the course of
market cycles by geographic region and in response to evolving economic factors.
Operating results can vary from year to year based on cyclical market conditions
and do not necessarily indicate the Company’s future operating results and cash
flows.
Critical Accounting Estimates and Policies
The Consolidated Financial Statements of the Company are prepared in conformity
with
operates. This preparation requires management to make estimates and
assumptions, that affect the amounts reported in the financial statements and
accompanying notes. These estimates and assumptions are based on information
available as of the date of the financial statements; accordingly, as this
information changes, actual results could differ from the estimates and
assumptions reflected in the financial statements. Certain estimates inherently
have a greater reliance on the use of assumptions and judgments and, as such,
have a greater possibility of producing results that could be materially
different than originally reported. Management believes the following estimates
are both important to the portrayal of the Company’s financial condition and
results of operations and require subjective or complex judgments and,
therefore, management considers the following to be critical accounting
estimates.
Reserve for Claim Losses
The Company’s reserve for claims is established using estimates of amounts
required to settle claims for which notice has been received (reported) and the
amount estimated to be required to satisfy incurred claims of policyholders
which may be reported in the future (incurred but not reported, or “IBNR”). The
total reserve for all losses incurred but unpaid as of
represented by the reserve for claims totaling
Balance Sheets included in Item 8 of this Annual Report on Form 10-K (the
“Consolidated Balance Sheets”). Of that total, approximately
reserved for specific claims which have been reported to the Company, and
approximately
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. This loss provision rate is set to provide
for losses on current year policies. By their nature, title claims can often be
complex, vary greatly in dollar amounts, vary in number due to economic and
market conditions such as an increase in mortgage foreclosures, and involve
uncertainties as to ultimate exposure. In addition, some claims may require a
number of years to settle and determine the final liability for indemnity and
loss adjustment expense. The payment experience may extend for more than 20
years after the issuance of a policy. Events such as fraud, defalcation and
multiple property defects can substantially and unexpectedly cause increases in
estimates of losses. Due to the length of time over which claim payments are
made and regularly occurring changes in underlying economic and market
conditions, these estimates are subject to variability.
Management considers factors such as the Company’s historical claims experience,
case reserve estimates on reported claims, large claims, actuarial projections
and other relevant factors in determining its loss provision rates and the
aggregate recorded expected liability for claims. 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. 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. The Company reflects any
adjustments to the reserve in the results of operations in the period in which
new information (principally claims experience) becomes available.
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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. Also affecting the Company’s assumptions are large losses related
to fraud and defalcation, as these can cause significant variances in loss
emergence patterns. Management defines a large loss as one where incurred losses
exceed
of title insurance claims and the inherent uncertainty in loss emergence
patterns, large claim activity can vary significantly between policy years. The
estimated development of large claims by policy year is therefore, subject to
significant changes as experience develops. The loss provision rate is set to
provide for losses on current year policies and changes in prior year estimates.
Management also considers actuarial analyses in evaluating the claims reserve.
The actuarial methods used to evaluate the reserve are loss development methods,
Bornhuetter-Ferguson methods and
actuarial methods for estimating ultimate losses and, therefore, loss reserves.
In the loss development method, each policy year’s paid or incurred losses are
projected to an ultimate level using loss development factors. In the
Bornhuetter-Ferguson method, a type of expected loss method, losses for each
policy year are estimated based on an expected loss ratio derived directly from
a previous estimate of ultimate loss for each policy year plus an additional
provision for losses that have not been reported or paid as of the evaluation
date. Bornhuetter-Ferguson methods produce more stable ultimate loss estimates
than do loss development methods, which are more responsive to the current loss
data but can lead to volatile results. The
the Bornhuetter-Ferguson method, blends the results of the loss development and
expected loss methods. For more recent policy years, the
more weight to the results of the expected loss methods; for older policy years,
more weight is given to the loss development method results.
The key actuarial assumptions are principally loss development factors and
expected loss ratios. The selected loss development factors are based on a
combination of the Company’s historical loss experience and title industry loss
experience. Expected loss ratios are estimated for each policy year based on the
Company’s own experience and title industry loss ratios. When updated data is
incorporated into the actuarial models, the resulting loss development factors
and expected loss ratios will likely change from the prior values. Changes in
these values for historical policy years have generally been the result of
actual Company and industry experience during the calendar years.
If one or more of the variables or assumptions used changed such that the
Company’s recorded loss ratio, or loss provision as a percentage of net title
premiums, increased or decreased three loss ratio percentage points, the impact
on after-tax income for the year ended
(in thousands)
Increase in loss ratio of three percentage points
Decrease in loss ratio of three percentage points
Company management believes that using a sensitivity of three loss percentage
points for the loss ratio provides a reasonable benchmark for analysis of the
calendar year loss provision of the Company based on historical loss ratios by
year.
Despite the variability of such estimates, management believes that, based on
historical claims experience and actuarial analysis, the Company’s reserve for
claims is adequate to cover claim losses resulting from pending and future
claims for policies issued through
claims will likely vary from the reserve estimates included in the accompanying
Consolidated Financial Statements. The Company continually reviews and adjusts
its reserve estimates to reflect its loss experience and any new information
that becomes available. There are no known claims that are expected to have a
material adverse effect on the Company’s financial position or operating
results.
Premiums Written and Commissions to Agents
Generally, title insurance premiums are recognized at the time of settlement of
the related real estate transaction, as the earnings process is then considered
complete, irrespective of the timing of the issuance of a title insurance policy
or commitment. 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.
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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. 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. From time to
time, the Company adjusts the inputs to the estimation process as branches and
agents report transactions and new information becomes available. The Company
reviews and adjusts lag time estimates periodically, using historical experience
and other factors, and reflects any adjustments in the result of operations in
the period in which new information becomes available.
Quarterly, the Company evaluates the collectability of receivables. Write-offs
of receivables have not been material to the Company.
Valuation, Impairment and Credit Losses of Investments in Securities
Investments in
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. 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. Credit-related impairment is recognized as an allowance for
credit losses (“ACL”) on the Consolidated Balance Sheets, limited to the amount
by which the amortized cost basis exceeds the estimated fair value, with a
corresponding adjustment to earnings.
Both the ACL and the adjustment to the Consolidated Statements of Operations may
be reversed if conditions change. 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. Accrued interest receivable is excluded from the
estimate of credit losses. Impairment reviews are inherently uncertain and the
value of the investment may not fully recover or may decline in future periods
resulting in a realized loss. Realized gains and losses are determined on the
specific identification method. Refer to Note 3 to the Consolidated Financial
Statements for further information about the Company’s investments in fixed
maturity securities.
Investments in
interests held by the Company in entities for investment purposes. Unrealized
holding gains and losses are reported in the Consolidated Statements of
Operations as changes in the estimated fair value of equity security
investments. Realized investment gains and losses from sales are recorded on the
trade date and are determined using the specific identification method. Refer to
Note 3 to the Consolidated Financial Statements for further information about
the Company’s investments in equity securities.
Other Investments: Other investments consist of investments in real estate and
unconsolidated affiliated entities, typically structured as limited liability
companies (“LLCs”), without readily determinable fair values.
Real estate investments are reported at amortized cost. The Company monitors any
events or changes in circumstances that may have had a significant adverse
effect on the fair value of real estate investments and makes any necessary
adjustments, with any reductions in the carrying amount of these investments
recorded in net realized investment gains in the Consolidated Statement of
Operations when recognized.
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. 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. The Company monitors any
events or changes in circumstances that may have had a significant adverse
effect on the estimated fair value of these investments and makes any necessary
adjustments.
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The fair values of the majority of the Company’s investments are based on quoted
market prices from independent pricing services. Refer to Note 3 to the
Consolidated Financial Statements for further information about the Company’s
valuation techniques.
Deferred Taxes
The Company recorded net deferred tax liabilities at
The deferred tax liabilities recorded during both periods primarily relate to
net unrealized gains on investments, the excess of tax over book depreciation,
intangible assets, and the recorded statutory premium reserve, net of reserve
for claims. Refer to Note 8 to the Consolidated Financial Statements for further
information on the Company’s deferred taxes.
Cyclicality and Seasonality
Real estate activity, home sales and mortgage lending are cyclical in nature.
Title insurance premiums are closely related to the level of real estate
activity and the average price of real estate sales. Real estate activity is
affected by a number of factors, including the availability of mortgage credit,
the cost of real estate, consumer confidence, employment and family income
levels, and general
is also an important factor in the level of residential and commercial real
estate activity. The Company’s premiums in future periods are likely to
fluctuate due to these and other factors which are beyond management’s control.
Historically, the title insurance business tends to be seasonal as well as
cyclical. Because home sales are typically strongest in periods of favorable
weather, the first calendar quarter tends to have the lowest activity levels,
while the spring and summer seasons tend to be more active. Refinance activity
is generally less seasonal, but is subject to interest rate fluctuations.
Results of Operations
The following table presents certain Consolidated Statements of Operations data
for the years ended
For the Years Ended December 31, (in thousands) 2021 2020
Revenues:
Net premiums written$ 273,885 $ 205,418 Escrow and other title-related fees 13,678 8,321 Non-title services 9,667 8,693 Interest and dividends 3,773 4,393 Other investment income 6,920 3,723 Net realized investment gains 1,869 333 Changes in the estimated fair value of equity security investments 14,934 4,904 Other 4,772 623 Total Revenues 329,498 236,408 Operating Expenses: Commissions to agents 142,815 106,807 Provision for claims 5,686 5,204 Personnel expenses 64,193 51,929 Office and technology expenses 13,059 9,951 Other expenses 18,813 12,856 Total Operating Expenses 244,566 186,747 Income before Income Taxes 84,932 49,661 Provision for Income Taxes 17,912 10,241 Net Income$ 67,020 $ 39,420 25
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Insurance Revenues
Insurance revenues include net premiums written and escrow and other
title-related income that includes escrow fees, commissions and settlement fees.
Non-title services revenue, investment-related revenues and other income are
discussed separately below. The following is a summary of the Company’s total
revenue broken out between the title insurance segment and all other income with
intersegment eliminations netted with each segment; therefore, the individual
segment amounts will not agree to Note 12 in the accompanying Consolidated
Financial Statements.
(in thousands, except percentages) 2021 % 2020 % Title Insurance$ 310,592 94.3$ 226,480 95.8 All Other 18,906 5.7 9,928 4.2 Total$ 329,498 100.0$ 236,408 100.0 Net Premiums Written
Net premiums written increased 33.3% in 2021 to
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. 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. 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
(in thousands, except percentages) 2021 % 2020 % Home and Branch$ 68,585 25.0$ 53,204 25.9 Agency 205,300 75.0 152,214 74.1 Total$ 273,885 100.0$ 205,418 100.0
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
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
premiums written are primarily for
Agency Net Premiums: When a policy is written through a 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
million
attributable to higher average home prices and continued low mortgage interest
rates.
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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: State (in thousands) 2021 2020 North Carolina$ 99,049 $ 75,697 Texas 62,557 38,350 Georgia 34,619 23,502 South Carolina 24,981 18,752 All Others 53,197 49,410 Premiums Written 274,403 205,711 Reinsurance Assumed - 3 Reinsurance Ceded (518) (296) Net Premiums Written$ 273,885 $ 205,418
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
commission income.
Revenue from Non-Title Services
Revenue from non-title services includes trust services, agency management
services and exchange services income. Non-title service revenues increased
11.2% in 2021 to
in 2021, compared with 2020, primarily related to increases in exchange services
income, trust fee income and agency management services income.
Investment Related Revenues
Investment related revenues include interest and dividends, other investment
income, net realized investment gains and changes in the estimated fair value of
equity security investments.
Interest and Dividends
The Company derives a substantial portion of its income from investments in
fixed maturity securities, which are primarily municipal and corporate fixed
maturity securities, and equity securities. The Company’s investment policy is
designed to comply with regulatory requirements and to balance the competing
objectives of asset quality and investment returns. The Company’s title
insurance subsidiaries are required by statute to maintain minimum levels of
investments in order to protect the interests of policyholders. Fixed maturity
securities totaling approximately
2021
the states in which business is conducted.
The Company’s investment strategy emphasizes after-tax income and principal
preservation. The Company’s investments are primarily in fixed maturity
securities and, to a lesser extent, equity securities. The average effective
maturity of the majority of the fixed maturity securities is less than 10 years.
The Company’s invested assets are managed to fund its obligations and evaluated
to ensure long term stability of capital accounts.
As the Company generates cash from operations, it is invested in accordance with
the Company’s investment policy and corporate goals. The Company’s investment
policy has been designed to balance multiple goals, including the assurance of a
stable source of income from interest and dividends, the preservation of
principal, and the provision of liquidity sufficient to meet insurance
underwriting and other obligations as they become payable in the future.
Securities purchased may include a combination of taxable or tax-exempt fixed
maturity securities and equity securities. The Company also invests in
short-term investments that typically include money market funds, and at times,
the Company has or could invest in
certificates of deposit. The Company strives to maintain a high quality
investment portfolio. Interest and investment income levels are primarily a
function of general market performance, interest rates and the amount of cash
available for investment.
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Interest and dividends were
2020. 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. 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.
Other Investment Income
Other investment income consists primarily of income related to investments in
unconsolidated affiliates, typically structured as LLCs, accounted for under
either the equity method of accounting or the measurement alternative for
investments that do not have readily determinable fair values. The measurement
alternative method requires investments without readily determinable fair values
to be recorded at cost, less impairments, and plus or minus any changes
resulting from observable price changes. The Company monitors any events or
changes in circumstances that may have had a significant adverse effect on the
fair value of these investments and makes any necessary adjustments.
Other investment income was
2020. Changes in other investment income are impacted by fluctuations in the
carrying value of the underlying investment and or distributions received.
Net Realized Investment Gains
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. 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
thousand
charges of
determined were other-than-temporarily impaired, offset by a net realized gain
on the sales of investments and other assets of
impairment charges recorded in 2021. Management believes unrealized losses on
the remaining fixed maturity securities at
related and are temporary in nature.
The securities in the Company’s investment portfolio are subject to economic
conditions and market risks. The Company considers relevant facts and
circumstances in evaluating whether a credit or interest-related impairment of a
fixed maturity security is other-than-temporary. Relevant facts and
circumstances include the extent and length of time the fair value of an
investment has been below cost.
There are a number of risks and uncertainties inherent in the process of
monitoring impairments and determining if an impairment is other-than-temporary.
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;
the risk that the Company’s assessment of an issuer’s ability to meet all of its
contractual obligations will change based on changes in the characteristics of
that issuer; the risk that information obtained by the Company or changes in
other facts and circumstances leads management to change its intent to sell the
fixed maturity security; and the risk that management is making decisions based
on inaccurate information in the financial statements provided by issuers.
Changes in the Estimated Fair Value of Equity Security Investments
Changes in the estimated fair value of equity security investments were
million
changes in general market conditions during the respective periods.
Other Income
Other income primarily include gains and losses on the disposal of assets,
rental income from real estate investments and miscellaneous revenues. Other
income was
increase in 2021, compared with 2020, primarily related to a gain on the sale of
a property.
28
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Expenses
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.
Following is a summary of the Company’s operating expenses for 2021 and 2020.
Intersegment eliminations have been netted; therefore, the individual segment
amounts will not agree to Note 12 in the accompanying Consolidated Financial
Statements.
(in thousands, except percentages) 2021 % 2020 % Title Insurance$ 234,573 95.9$ 177,784 95.2 All Other 9,993 4.1 8,963 4.8 Total$ 244,566 100.0$ 186,747 100.0
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.
Personnel Expenses: Personnel expenses include base salaries, benefits and
payroll taxes, bonuses paid to employees and contract labor expenses. Personnel
expenses were
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. On a consolidated basis, personnel expenses as a
percentage of total revenues were 19.5% and 22.0% in 2021 and 2020,
respectively.
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
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.
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
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.
Commissions to Agents: 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
written by agents was 69.6% and 70.2% in 2021 and 2020, 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.
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 as a percentage of net premiums written was
2.1% and 2.5% in 2021 and 2020, 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
the higher 2020 level. Loss provision rates are subject to variability and are
reviewed and adjusted as experience develops.
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
29
——————————————————————————–
Reserve for Claims: At
million
claims, and approximately
Company had no notice. Because of the uncertainty of future claims, changes in
economic conditions and the fact that many claims do not materialize for several
years, reserve estimates are subject to variability.
Changes from prior periods in the expected liability for claims reflect the
uncertainty of the claims environment, as well as the limited predictive power
of historical data. The Company continually updates and refines its reserve
estimates as current experience develops and credible data emerges. Such data
includes payments on claims closed during the quarter, new details that emerge
on open cases that cause claims adjusters to increase or decrease the case
reserves, and the impact that these types of changes have on the Company’s total
loss provision. Adjustments may be required as new information develops which
often varies from past experience.
Income Taxes
The provision for income taxes was
2020, respectively. Income tax expense, including federal and state taxes, as a
percentage of income before income taxes was 21.1% and 20.6% for 2021 and 2020,
respectively. The effective income tax rates for both 2021 and 2020 differ from
the
tax-exempt income and state taxes. 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
further market fluctuations. 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.
Liquidity and Capital Resources
The Company’s material cash requirements include general operating expenses,
contractual and other obligations for the future payment of title claims,
employment agreements, lease agreements, income taxes, capital expenditures,
dividends on its common stock and other contractual commitments for goods and
services needed for operations. All other arrangements entered into by the
Company are not reasonably likely to have a material effect on liquidity or the
availability of capital resources. Cash flows from operations have historically
been the primary source of financing for expanding operations, whether through
organic growth or outside investments. The Company believes its balances of
cash, short-term investments and other readily marketable securities, along with
cash flows generated by ongoing operations, will be sufficient to satisfy its
cash requirements over the next 12 months and thereafter, including the funding
of operating activities and commitments for investing and financing activities.
There are currently no known trends that the Company believes will materially
impact the Company’s capital resources, nor is the Company anticipating any
material changes in the mix or relative cost of such resources.
The Company evaluates nonorganic growth opportunities, such as mergers and
acquisitions, from time to time in the ordinary course of business. Because of
the episodic nature of these events, related incremental liquidity and capital
resource needs can be difficult to predict.
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;
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 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.
Cash Flows: Net cash flows provided by operating activities were
and
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.
30
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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 the fourth quarters of 2021 and 2020, the Company paid
special cash dividends in the amounts of
respectively, in addition to regular cash dividends. Total dividends paid per
share were
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
of
fixed maturity securities of
million
an increase of
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.
The Company’s significant sources of funds are dividends and distributions from
its subsidiaries, primarily its two title insurance subsidiaries. Cash is
received from its subsidiaries in the form of dividends and as reimbursements
for operating and other administrative expenses that it incurs. The
reimbursements are executed within the guidelines of management agreements
between the Company and its subsidiaries.
The ability of the Company’s title insurance subsidiaries to pay dividends to
the Company is subject to state regulation from their respective states of
domicile. Each state regulates the extent to which title underwriters can pay
dividends or make distributions and requires prior regulatory approval of the
payment of dividends and other intercompany transfers. The maximum dividend
permitted by law is not necessarily indicative of an insurer’s actual ability to
pay dividends. 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
met the minimum capital, surplus and reserve requirements for each state in
which they are licensed.
As of
shareholders’ equity represented net assets of the Company’s subsidiaries that
are restricted by regulation from being transferred in the form of dividends,
loans or advances to the parent company without prior approval from the
respective state insurance department. The Company believes, however, that
amounts available for transfer from the insurance and other subsidiaries are
adequate to meet the Company’s current operating needs.
During 2022, the maximum distributions the insurance subsidiaries can make to
the Company without prior approval from applicable regulators total
approximately
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. For instance, the Company’s capital
resources help it maintain high ratings from insurance company rating agencies.
Superior ratings strengthen the Company’s ability to compete with larger, well
known title insurers with national footprints.
A strong financial position provides the necessary flexibility to fund potential
acquisition activity, to invest in the Company’s core business, and to minimize
the financial impact of potential adverse developments. Adverse developments
that generally require additional capital include adverse financial results,
changes in statutory accounting requirements by regulators, reserve charges,
investment losses or costs incurred to adapt to a changing regulatory
environment, including costs related to
industry.
The Company bases its capitalization levels in part on net coverage retained.
Since the Company’s geographical focus has been and continues to be concentrated
in states with average premium rates typically lower than the national average,
capitalization relative to premiums will usually appear higher than industry
averages.
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. 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.
31
——————————————————————————–
Purchase of Company Stock: On
Company approved the purchase of an additional 163,335 shares pursuant to the
Company’s repurchase plan, such that there was authority remaining under the
plan to purchase up to an aggregate of 500,000 shares of the Company’s common
stock pursuant to the plan immediately after this approval. Unless terminated
earlier by resolution of the Board of Directors, the plan will expire when all
shares authorized for purchase under the plan have been purchased. Pursuant to
the Company’s ongoing purchase program, the Company purchased no shares in 2021.
In 2020, the Company purchased 25 shares at an average per share prices of
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
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. 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
reserve totaling
estimated and not set contractually. Events such as fraud, defalcation, and
multiple property title defects can substantially and unexpectedly cause
increases in both the amount and timing of estimated title insurance loss
payments and loss cost trends whereby increases or decreases in inflationary
factors (including the value of real estate) will influence the ultimate amount
of title insurance loss payments and could increase total obligations and
influence claim payout patterns. Due to the length of time over which claim
payments are made and regularly occurring changes in underlying economic and
market conditions, claim estimates are subject to variability and future
payments could increase or decrease from these estimated amounts in the future.
ITIC, a wholly owned subsidiary of the Company, has entered into employment
agreements with certain executive officers. The amounts accrued for these
agreements at
health benefits, and were calculated based on the terms of the contracts. These
executive contracts are accounted for on an individual contract basis. As
payments are based upon the occurrence of specific events, including death,
disability, retirement, termination without cause or upon a change in control,
payment periods are currently uncertain. Information regarding retirement
agreements and other postretirement benefit plans can be found in Note 10 to the
Consolidated Financial Statements.
The Company enters into lease agreements that are primarily used for office
space. These leases are accounted for as operating leases. A portion of the
Company’s current leases include an option to extend or cancel the lease term,
and the exercise of such an option is solely at the Company’s discretion. The
total of undiscounted future minimum lease payments under operating leases that
have initial or remaining noncancelable lease terms in excess of one year as of
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.
In the normal course of business, the Company enters into other contractual
commitments for goods and services needed for operations. Such commitments are
not expected to have a material adverse effect on the Company’s liquidity.
32
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Off-Balance Sheet Arrangements
As a service to its customers, the Company, through ITIC, administers escrow and
trust deposits representing earnest money received under real estate contracts,
undisbursed amounts received for settlement of mortgage loans and indemnities
against specific title risks. Cash held by the Company for these purposes was
approximately
respectively. These amounts are not considered assets of the Company and,
therefore, are excluded from the Consolidated Balance Sheets. 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. Like-kind exchange
deposits and reverse exchange property held by the Company for the purpose of
completing such transactions totaled approximately
million
are held at third-party financial institutions. Exchange deposits are not
considered assets of the Company and, therefore, are excluded from the
Consolidated Balance Sheets; however, the Company remains contingently liable
for the disposition of the transfers of property, disbursements of proceeds and
the return on the proceeds at the agreed upon rate. Exchange services revenue
includes earnings on these deposits; 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.
External assets under management of
approximately
2020, respectively. These amounts are not considered assets of the Company and,
therefore, are excluded from the Consolidated Balance Sheets.
It is not the general practice of the Company to enter into off-balance sheet
arrangements or issue guarantees to third parties. The Company does not have any
material source of liquidity or financing that involves off-balance sheet
arrangements. 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
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
material impact on the Company’s financial position and results of operations.
In
(Topic 321), Investments –
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
periods within those fiscal years. The Company adopted this update on
2021
operations.
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