INVESTORS TITLE CO – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
year ended
discussion since it contains information which is important for evaluating the
Company's operating results and financial condition.
In addition, the Company may make forward-looking statements in the following
discussion and analysis. 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 "Safe Harbor for
Forward-Looking Statements" at the end of this discussion and analysis, as well
as the sections titled "Risk Factors" in Part I, Item 1A of the Company's Annual
Report on Form 10-K for factors that could affect forward-looking statements.
Overview
The Company is a holding company that engages primarily in issuing title
insurance through two subsidiaries,
and
the title segment accounted for 96.9% of the Company's revenues for the
three-month period ended
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.
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.
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 quarters tend to be more active. Mortgage refinance
activity tends to be influenced less by seasonality and more by economic cycles,
with activity levels increasing during times of falling interest rates.
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Services other than title insurance provided by operating divisions of the
Company are not reported separately, but rather are reported collectively in a
segment called "All Other". These other services include those offered by the
Company and by its wholly owned subsidiaries,
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 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.
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, in addition to ongoing supply constraints and
volatility in the cost and availability of building materials, could impact the
Company's results of operations in future periods.
Despite the widespread availability of vaccines, COVID-19 (including its variant
strains) continues to impact
The COVID-19 pandemic has negatively impacted worldwide economic activity and
created significant volatility and disruptions of financial markets. In
response, the
measures to provide fiscal and monetary stimulus. Such actions included an
unscheduled cut to the federal funds rate, the introduction of new programs to
preserve market liquidity, extended unemployment and sick leave benefits,
mortgage loan forbearance actions, low-interest loans for working capital access
and payroll assistance, and other relief measures for both workers and
businesses. Many such actions have lapsed or otherwise been reduced as time has
passed since the onset of the pandemic. The Company has remained fully
operational throughout the pandemic and did not have any reductions in
workforce. A large number of the Company's employees are performing their job
functions remotely. The Company has not taken stimulus relief funding or
incurred any other forms of debt.
The COVID-19 pandemic has caused the Company to modify its business practices
(including employee travel, employee work locations and cancellation of physical
participation in meetings, events and conferences). The COVID-19 pandemic and
any of its variants could continue to affect the Company in a number of ways
including, but not limited to, the impact of employees becoming ill,
quarantined, or otherwise unable to work or travel due to illness or
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 and its
effects on the economy, as well as uncertainty regarding the effects of
government measures already taken, and which may be taken or continued in the
future, to combat the spread of the virus and any of its variants, the Company
is currently unable to predict the ultimate impact of the pandemic.
The ongoing military conflict between
volatile market conditions and uncertainties in the global economy.
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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, resulting in a target federal funds rate range
between 0.00% and 0.25%. The
2022
and 0.50%. The target federal funds rate range was raised again in
when the
the
increases in the target range will be appropriate, and announced steps to begin
reducing its balance sheet holdings. In normal economic situations, future
adjustments to the
realized and expected economic developments to achieve maximum employment and
inflation near the
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.
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 7.7% to
billion
41.2% of all mortgage originations and is projected in the MBA Forecast to
represent 67.3% of all mortgage originations in 2022. The MBA Forecast is
projecting fewer total mortgage originations in 2023 and 2024, compared with
2022 levels. Due to the rapidly changing environment brought on by COVID-19,
supply constraints and geopolitical conflicts, these projections and the impact
of actual future developments on the Company could be subject to material
change.
According to data published by Freddie Mac, the average 30-year fixed mortgage
interest rates in
periods ended
mortgage interest rates are projected to increase to 4.5% in the fourth quarter
of 2022.
Historically, activity in real estate markets has varied over the course of
market cycles by geographic region and in response to evolving economic factors.
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.
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Critical Accounting Estimates and Policies
The preparation of the Company's unaudited Consolidated Financial Statements
requires management to make estimates and judgments that affect the reported
amounts of certain assets, liabilities, revenues, expenses and related
disclosures regarding contingencies and commitments. Actual results could differ
from these estimates. During the three-month period ended
Company did not make any material changes to its critical accounting policies as
previously disclosed in Management's Discussion and Analysis in the Company's
Annual Report on Form 10-K for the year ended
the
Results of Operations
The following table presents certain unaudited Consolidated Statements of
Operations data for the three-month periods ended
Three Months Ended
March 31,
(in thousands) 2022 2021
Revenues:
Net premiums written $ 63,125 $ 61,477
Escrow and other title-related fees 5,064 2,798
Non-title services 2,426 2,078
Interest and dividends 915 1,016
Other investment income 1,337 941
Net realized investment gains 1,747 321
Changes in the estimated fair value of equity security
investments (5,915) 3,239
Other 299 208
Total Revenues 68,998 72,078
Operating Expenses:
Commissions to agents 29,857 30,542
Provision for claims 176 1,591
Personnel expenses 21,254 16,153
Office and technology expenses 4,368 2,742
Other expenses 5,550 3,735
Total Operating Expenses 61,205 54,763
Income before Income Taxes 7,793 17,315
Provision for Income Taxes 1,608 3,492
Net Income $ 6,185 $ 13,823
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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 revenues are
discussed separately below.
Net Premiums Written
Net premiums written increased 2.7% for the three-month period ended
2022
period. The increase for the three-month period ended
primarily driven by higher average home prices and a higher level of purchase
activity.
Total premiums include an estimate of premiums for policies that have been
issued by branches and agents, but not reported to the Company as of the balance
sheet date. 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
three-month periods ended
Three Months Ended
March 31,
(in thousands, except percentages) 2022 % 2021 %
Home and Branch $ 17,418 27.6 $ 17,360 28.2
Agency 45,707 72.4 44,117 71.8
Total $ 63,125 100.0 $ 61,477 100.0
Home and Branch Office Net Premiums - In the Company's home and branch
operations, the Company issues a title insurance policy and retains the entire
premium, as no commissions are paid in connection with these policies. Net
premiums written from home and branch operations increased 0.3% for the
three-month period ended
period. The increase for the three-month period ended
primarily driven by higher average home prices and a higher level of purchase
activity.
All of the Company's home office operations and the majority of branch offices
are located in
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 3.6% for the three-month period ended
compared with the same prior year period. The increase for the three-month
period ended
and a higher level of purchase activity.
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Following is a schedule of net premiums written for the three-month periods
ended
insurance subsidiaries, ITIC and NITIC, currently underwrite title insurance:
Three Months Ended
March 31,
State (in thousands) 2022 2021
North Carolina $ 24,339 $ 25,247
Texas 15,762 11,352
Georgia 6,972 6,890
South Carolina 5,388 5,348
All Others 10,894 12,773
Premiums Written 63,355 61,610
Reinsurance Assumed - -
Reinsurance Ceded (230) (133)
Net Premiums Written $ 63,125 $ 61,477
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 title insurance
policies including settlement, examination and closing fees. Escrow and other
title-related fee revenues were
increase for the three-month period ended
growth in independent agent markets and products which support title insurance.
Revenue from Non-Title Services
Revenue from non-title services includes trust services, agency management
services and exchange services income. Non-title service revenues were
million
million
ended
activity and trust management fee 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.
The Company's investment strategy emphasizes after-tax income and principal
preservation. The Company's investments are primarily in fixed maturity
securities and equity securities. The average effective maturity of the majority
of the fixed maturity securities is less than 10 years. The Company's invested
assets are managed to fund its obligations and evaluated to ensure long term
stability of capital accounts.
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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.
Interest and dividends were
decrease in 2022 was primarily related to lower interest income received due to
lower average balances of fixed maturity securities and lower levels of
dividends received.
Other Investment Income
Other investment income consists primarily of income related to investments in
unconsolidated affiliates, typically structured as limited liability companies
("LLCs"), accounted for under either the equity method of accounting or the
measurement alternative for investments that do not have readily determinable
fair values. The measurement alternative method requires investments without
readily determinable fair values to be recorded at cost, less impairments, and
plus or minus any changes resulting from observable price changes. The Company
monitors any events or changes in circumstances that may have had a significant
adverse effect on the fair value of these investments and makes any necessary
adjustments.
Other investment income was
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
ended
period. There were no impairment charges recorded in 2022 or 2021. Management
believes unrealized losses on the remaining fixed maturity securities at
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.
Changes in the Estimated Fair Value of Equity Security Investments
Changes in the estimated fair value of equity security investments were
million
million
changes in general market conditions during the respective periods.
Other Revenues
Other revenues primarily include gains and losses on the disposal of fixed
assets and miscellaneous revenues. Other revenues were
three-month period ended
same prior year period.
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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 11.8% for the three-month period ended
2022
period ended
expenses, partially offset by a decrease in claims expense. Other categories of
operating expenses were 7.4% higher than the prior period, primarily to support
expansion of our geographic footprint as well as ongoing strategic technology
initiatives.
Following is a summary of the Company's operating expenses for the three-month
periods ended
netted; therefore, the individual segment amounts will not agree to Note 4 in
the accompanying unaudited Consolidated Financial Statements.
Three Months Ended
March 31,
(in thousands, except percentages) 2022 % 2021 %
Title Insurance $ 58,487 95.6 $ 52,412 95.7
All Other 2,718 4.4 2,351 4.3
Total $ 61,205 100.0 $ 54,763 100.0
On a combined basis, the after-tax profit margin was 9.0% for the three-month
period ended
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
compared with
basis, personnel expenses as a percentage of total revenues were 30.8% for the
three-month period ended
year period. The increase in personnel expenses for the three-month period ended
overall staff growth to support higher transaction volumes, and increased
employee benefit and contract labor costs.
Office and Technology Expenses - Office and technology expenses primarily
include facilities expenses, software and hardware expenses, depreciation
expense, telecommunications expenses, and business insurance. Office and
technology expenses were
2022
for the three-month period ended
investments in software and technology related initiatives and increased
facilities expenses associated with staffing additions.
Other Expenses - Other expenses primarily include business development expenses,
premium-related taxes and licensing, professional services, title and service
fees, amortization of intangible assets and other general expenses. Other
expenses were
compared with
three-month period ended
title and service fees, travel-related expenses and professional service fees.
Commissions to Agents - Agent commissions represent the portion of premiums
retained by agents pursuant to the terms of their respective agency contracts.
Commissions to agents decreased 2.2% for the three-month period ended
2022
percentage of net premiums written by agents was 65.3% for the three-month
period ended
The changes in commission expense, and commission expense as a percentage of net
premiums written, were primarily related to changes in geographic mix and an
increase in the level of intercompany commissions as a percentage of total
premiums, with intercompany commissions being eliminated for wholly owned
affiliated agents upon consolidation. Commission rates vary by market due to
local practice, competition and state regulations.
Provision for Claims - The provision for claims decreased 88.9% for the
three-month period ended
period. The provision for claims as a percentage of net premiums written was
0.3% for the three-month period ended
same prior year period. The decrease in the provision for claims for the
three-month period ended
favorable loss development in the current period.
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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
2022
At
total, approximately
approximately
notice. Because of the uncertainty of future claims, changes in economic
conditions and the fact that claims may 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
Income tax expense, including federal and state taxes, as a percentage of income
before income taxes was 20.6% for the three-month period ended
compared with 20.2% for the same prior year period. The effective income tax
rates for both 2022 and 2021 differ from the
rate of 21% primarily due to the effect of 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
2022
market fluctuations.
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 entirety of the pandemic, the Company has remained fully operational and has
not had any reductions in workforce. A large number of the Company's employees
are performing their job functions remotely. The Company has not taken stimulus
relief funding or incurred any other forms of debt.
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Cash Flows - Net cash flows provided by operating activities were
and
respectively. Cash flows provided by operating activities differ from net income
due to adjustments for non-cash items, such as changes in the estimated fair
value of equity security investments, gains and losses on investments, the
timing of disbursements for taxes, claims and other accrued liabilities, and
collections or changes in receivables and other assets.
Cash flows from non-operating activities have historically consisted of
purchases and proceeds from investing activities, the issuance of dividends and
repurchases of common stock. Net cash was used in investing activities for the
three-month period ended
by investing activities in the prior year period, due to a decline in proceeds
received from investment sales and maturities during the current year period.
The Company maintains a high degree of liquidity within its investment portfolio
in the form of cash, short-term investments and other readily marketable
securities. As of
maturity securities of
net effect of all activities on total cash and cash equivalents was 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
the minimum capital, surplus and reserve requirements for each state in which
they are licensed.
While state regulations and the need to cover risks may set a minimum level for
capital requirements, other factors necessitate maintaining capital resources in
excess of the required minimum amounts. 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 impact of COVID-19 and the ongoing military
conflict between
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, the
conflict in
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
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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 did not purchase any shares
in the three-month periods ended
making further purchases under this plan from time to time in the future,
depending on such factors as the prevailing market price of the Company's common
stock, the Company's available cash and then existing alternative uses for such
cash.
Capital Expenditures - Capital expenditures were approximately
the three-month period ended
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
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
million
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 5 to the
unaudited Consolidated Financial Statements in this Quarterly Report on Form
10-Q.
The Company enters into lease agreements that are primarily used for office
space. 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
to extend or cancel the lease term if the Company determined at the date of
adoption that the lease was expected to be renewed or extended. Information
about leases can be found in Note 12 to the unaudited Consolidated Financial
Statements in this Quarterly Report on Form 10-Q.
In the normal course of business, the Company enters into other contractual
commitments for goods and services needed for operations. Such commitments are
not expected to have a material adverse effect on the Company's liquidity.
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. These amounts are not considered assets of the
Company and, therefore, are excluded from the accompanying unaudited
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
deposits are held at third-party financial institutions. Exchange deposits are
not considered assets of the Company and, therefore, are excluded from the
accompanying unaudited 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.
32
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External assets under management of
assets of the Company and, therefore, are excluded from the accompanying
unaudited 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
No recent accounting pronouncements are expected to have a material impact on
the Company's financial position and results of operations. Please refer to Note
1 in the unaudited Notes to Consolidated Financial Statements in this Quarterly
Report on Form 10-Q for further information regarding the Company's basis of
presentation and significant accounting policies.
33
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Safe Harbor for Forward-Looking Statements
This Quarterly Report on Form 10-Q, as well as information included in future
filings by the Company with the
material, press releases and oral statements issued by or on behalf of the
Company, contains, or may contain, "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, that reflect management's current outlook for
future periods. These statements may be identified by the use of words such as
"plan," "expect," "aim," "believe," "project," "anticipate," "intend,"
"estimate," "should," "could," "would" and other expressions that indicate
future events and trends. All statements that address expectations or
projections about the future, including statements about the Company's strategy
for growth, product and service development, market share position, claims,
expenditures, financial results and cash requirements, are forward-looking
statements. Without limitation, projected developments in mortgage interest
rates and the overall economic environment set forth in "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Business Trends
and Recent Conditions; COVID-19 Pandemic" constitute forward-looking statements.
Forward-looking statements are based on certain assumptions and expectations of
future events that are subject to a number of risks and uncertainties. Actual
future results and trends may differ materially from historical results or those
projected in any such forward-looking statements depending on a variety of
factors, including, but not limited to, the following:
•the impact of COVID-19, including its variants, or other pandemics, climate change, severe weather conditions or the occurrence of another catastrophic event; •changes in interest rates and real estate values; •changes in general economic, business, and political conditions, including the performance of the financial and real estate markets; •the potential impact of inflation; •the impact of the ongoing military conflict betweenRussia andUkraine ; •potential reform of government sponsored entities; •the level of real estate transaction volumes, the level of mortgage origination volumes (including refinancing), the mix of title insurance between markets with varying real estate values, changes to the insurance requirements of the participants in the secondary mortgage market, and the effect of these factors on the demand for title insurance; •the possible inadequacy of the provision for claims to cover actual claim losses; •the incidence of fraud-related losses; •the impact of cyberattacks (including ransomware attacks) and other cybersecurity events, including damage to the Company's reputation in the event of a serious IT breach or failure; •unanticipated adverse changes in securities markets could result in material losses to the Company's investments; •significant competition that the Company's operating subsidiaries face, including the Company's ability to develop and offer products and services that meet changing industry standards in a timely and cost-effective manner and expansion into new geographic locations; •the Company's reliance upon theNorth Carolina ,Texas ,Georgia andSouth Carolina markets for a significant portion of its premiums; •compliance with government regulation, including pricing regulation, and significant changes to applicable regulations or in their application by regulators; •the impact of governmental oversight of compliance of the Company's service providers, including the application of financial regulation designed to protect consumers; •possible downgrades from a rating agency, which could result in a loss of underwriting business; •the inability of the Company to manage, develop and implement technological advancements and prevent system interruptions or unauthorized system intrusions; •statutory requirements applicable to the Company's insurance subsidiaries that require them to maintain minimum levels of capital, surplus and reserves and that restrict the amount of dividends they may pay to the Company without prior regulatory approval; •the desire to maintain capital above statutory minimum requirements for competitive, marketing and other reasons; •heightened regulatory scrutiny and investigations of the title insurance industry; •the Company's dependence on key management and marketing personnel, the loss of whom could have a material adverse effect on the Company's business; •difficulty managing growth, whether organic or through acquisitions; •unfavorable economic or other conditions could cause the Company to record impairment charges for all or a portion of its goodwill and other intangible assets; •policies and procedures for the mitigation of risks may be insufficient to prevent losses; •the shareholder rights plan could discourage transactions involving actual or potential changes of control; and •other risks detailed elsewhere in this document and in the Company's other filings with theSEC . 34
--------------------------------------------------------------------------------
These and other risks and uncertainties may be described from time to time in
the Company's other reports and filings with the
factors that could affect expectations, see the Company's Annual Report on Form
10-K for the year ended
Factors". The Company is not under any obligation (and expressly disclaims any
such obligation) and does not undertake to update or alter any forward-looking
statements to reflect circumstances or events that occur after the date the
forward-looking statements are made. You should consider the possibility that
actual results may differ materially from our forward-looking statements.
Trisura Investor Presentation – May 2022
PORCH GROUP, INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
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