The following discussion should be read in conjunction with the Consolidated Financial Statements and the Notes thereto and Selected Financial Data included elsewhere in this Annual Report.
Principles of Consolidation
The consolidated financial statements have been prepared in accordance with GAAP
and reflect the consolidated operations of the Company. The consolidated
financial statements include the accounts of
Overview
For a description of our business, including descriptions of segments, see the discussion under Business in Item 1 of Part I of this Annual Report, which is incorporated by reference into this Item 7 of Part II of this Annual Report.
COVID-19 Pandemic
Despite the widespread availability of vaccines, COVID-19 (including its variant
strains) continues to impact
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.
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Title
Our title insurance segment revenue is closely related to the level of real estate activity that includes sales, mortgage financing and mortgage refinancing. Declines in the level of real estate activity or the average price of real estate sales will adversely affect our title insurance revenues.
We believe that real estate activity is generally dependent on mortgage interest
rates, access and availability to mortgage debt, residential housing inventory,
home prices, commercial property supply and demand, and the general economic
conditions in the
As of the
The industry as a whole saw growth in total real estate transactions in 2021, largely due to a strong residential real estate market driven by increasing home prices and low mortgage interest rates. Mortgage rates remained historically low after emergency actions taken by the Federal reserve to reduce its benchmark interest rate in first quarter 2020. Despite the lingering impact of COVID-19 in 2021, purchase and refinance activity grew due to migration of out of dense urban areas into less populated geographies as well near historically low interest rates. Per MBA's Mortgage Finance Forecast, interest rates on a Freddie Mac 30-year, fixed rate mortgage averaged 3.1% in 2021.
See Item 1A of Part I of this Annual Report for further discussion of risk factors related to COVID-19.
Historically, real estate transactions have produced seasonal revenue fluctuations in the real estate industry. The first calendar quarter is typically the weakest quarter in terms of revenue due to the generally low volume of home sales during January and February. The second and third calendar quarters are typically the strongest quarters in terms of revenue, primarily due to a higher volume of residential transactions in the spring and summer months.
Real Estate Related
The Company acquired an equity interest in
On
For the year ended
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Results of Operations 2021 Compared to 2020
As of
The Company generated interest income of
As a result of the Company's acquisition of the title insurance operations, the
Company generated title premium and other title fee revenue of
Corporate general and administrative expenses are not directly allocable to
either of our reporting segments and consist primarily of wages and personnel
costs, legal and professional fees, insurance expense, and stock based
compensation. Corporate general and administrative expenses of
Our effective tax rate for the year ended
Financial Condition, Liquidity and Capital Resources
Sources of liquidity include cash on hand, cash interest earned on our cash on
hand and the S&L Note, earnings from our title insurance subsidiaries, and
dividends from our
Cash flows provided by operating activities differ from net income due to
adjustments for non-cash items, such as gains and losses on investments and
affiliates, impairment losses on note receivables, the timing of disbursements
for taxes, claims and other accrued liabilities, and collections or changes in
receivables and other assets. Net cash used in operations for the year ended
Cash provided by investing activities of
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Recent Accounting Pronouncements
In
Critical Accounting Policies
We have chosen accounting policies that are necessary to accurately and fairly report our operational and financial position. Below are the critical accounting policies that involve the most significant judgments and estimates used in the preparation of our financial statements.
Equity Investments - Long-term investments consist of investments in equity securities where our ownership is less than 50% and the Company has the ability to exercise significant influence, but not control, over the investee. These investments are classified in "Investment in affiliate" on the balance sheets. Investments accounted for under the equity method of accounting are initially recorded at cost and subsequently increases or decreases the investment by its proportionate share of the net income or loss and other comprehensive income or loss of the investee. For investments that do not have readily determinable fair values, the Company made an accounting policy election for a measurement alternative. Upon adoption of ASU 2016-01, the Company carries these investments at cost minus impairment, if any, plus or minus any changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
If the Company believes a decline in market value below cost is other than temporary, a loss is charged to earnings, which establishes a new cost basis for the security. The Company determination of whether an equity investment is other than temporarily impaired incorporates both quantitative and qualitative information. The Company considers a number of factors including, but not limited to, the length of time and the extent to which the fair value has been less than cost, the length of time expected for recovery, the financial condition of the investee, the reason for decline in fair value, the ability and intent to hold the investment to maturity, and other factors specific to the individual investment.
Fair Value of Assets Acquired and Liabilities Assumed in Business Combinations -
FASB Accounting Standards Codification ("ASC") Topic 805, Business Combinations,
requires an acquirer to recognize, separately from goodwill, the identifiable
assets acquired, liabilities assumed, and any noncontrolling interest in the
acquiree, and to measure these items generally at their acquisition date fair
values.
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Note Receivable - In accordance with the Financial Accounting Standard Board's
("FASB") Accounting Standards Codification ("ASC") Topic 810-40-5, upon the sale
of substantially all of the assets the Company recorded a gain on the
deconsolidation of a group of assets based on the difference between the fair
value of the consideration received and the carrying amount of the group of
assets. As the Subordinated Secured Promissory Note with Buyer in the principal
amount of approximately
The Company concluded, based on current information and events, including the
impact of COVID-19 on S&L's business and its customers, that the Company did not
believe it would be able to collect the amount due under the S&L Note and
determined that the note was other than temporarily impaired. The evaluation was
generally based on an assessment of the borrower's financial condition and the
adequacy of the collateral securing the S&L Note. Given the facts and
circumstances, the Company recorded an impairment loss of
Interest Income - Interest income is recorded on an accrual basis based on the effective interest rate method to the extent that we expect to collect such amounts.
Deferred taxes - We recognize deferred tax assets and liabilities based on the estimated future tax effects of differences between the financial statements and the tax basis of assets and liabilities given the enacted tax laws. We evaluate the need for a deferred tax asset valuation allowance by assessing whether it is more likely than not that the company will realize its deferred tax assets in the future. The assessment of whether or not a valuation allowance is required often requires significant judgment, including the forecast of future taxable income. Adjustments to the deferred tax valuation allowance are made to earnings in the period when such assessment is made.
In preparation of our financial statements, we exercise judgment in estimating the potential exposure to unresolved tax matters and apply a more likely than not criteria approach for recording tax benefits related to uncertain tax positions. While actual results could vary, we believe we have adequate tax accruals with respect to the ultimate outcome of such unresolved tax matters.
Long-lived assets - Property, plant and equipment is reviewed for possible impairment when events indicate that the carrying amount of an asset may not be recoverable. Assumptions and estimates used in the evaluation of impairment may affect the carrying value of long-lived assets, which could result in impairment charges in future periods that would lower our earnings. Our depreciation policy reflects judgments on the estimated remaining useful lives of assets.
Stock-Based Compensation - We record share-based payment awards at fair value on the grant date of the awards, based on the estimated number of awards that are expected to vest, over the vesting period. The fair value of stock options was determined using the Black-Scholes option-pricing model. The fair value of the restricted stock awards was based on the closing price of the Company's common stock on the date of the grant. For awards with performance conditions, we recognize compensation cost over the expected period to achieve the performance conditions, provided achievement of the performance conditions are deemed probable.
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. Fee income related to escrow and other closing services is recognized when the related services have been performed and completed. Rather than making estimates that could be subject to significant variance from actual premium and fee production, the Company recognizes revenues from those sources upon receipt. Such receipts can reflect up to a three to four month lag relative to the effective date of the underlying title policy, and are offset concurrently by production expenses and claim reserve provisions.
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Quarterly, the Company evaluates the collectability of receivables. Write-offs of receivables have not been material to the Company.
Reserve for Title Claims - The total reserve for all reported and unreported losses the Company incurred is represented by the reserve for title claims. The Company's reserve for unpaid losses and loss adjustment expenses (LAE) is established using estimated 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 that may be reported in the future ("IBNR"). The Company continually reviews and adjusts its reserve estimates as necessary to reflect its loss experience and any new information that becomes available. Adjustments resulting from such reviews may be significant.
Reinsurance - The accompanying balance sheets reflect reserves for claims gross of reinsurance ceded. The accompanying statements of operations reflect premiums and provision for claims net of reinsurance ceded. The reinsurance arrangements allow management to control exposure to potential claims arising from large risks and catastrophic events. Amounts recoverable from reinsurers are estimated in a manner consistent with the reserves associated with the reinsured policies. Reinsurance premiums, losses, and LAE are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance agreements.
Off-Balance Sheet Arrangements
We do not have transactions or relationships with "special purpose" entities, and we do not have any off-balance sheet financing other than normal operating leases for office space.
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