Investors Title Company — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Investors Title primarily underwrites title insurance through ITIC and NITIC; title insurance represented 96.1% of nine-month revenue. Financial figures below are in millions unless noted.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $78.0 | $81.4 | $217.9 | $238.5 |
| Net premiums written | $66.7 | $72.3 | $199.4 | $201.3 |
| Operating expenses | $67.9 | $63.0 | $197.1 | $177.4 |
| Income before tax | $10.1 | $18.4 | $20.8 | $61.0 |
| Net income | $7.9 | $14.5 | $16.4 | $48.1 |
| Diluted EPS | $4.17 | $7.63 | $8.63 | $25.34 |
| After-tax profit margin, as reported | 10.1% | 17.8% | 7.5% | 20.2% |
Cash flow and liquidity: Nine-month operating cash flow was $20.3 million, down from $35.7 million. Investing activities used $13.4 million, versus $1.7 million provided in 2021; financing activities used $2.7 million, mainly dividends. Cash rose $4.2 million to $41.4 million. At September 30, the company also held $80.8 million in short-term investments, $55.3 million in available-for-sale fixed maturities and $52.7 million in equity securities. Management said available liquidity and operating cash flows should meet requirements over the next 12 months and thereafter. The company reports no debt.
Balance sheet: Total assets were $332.8 million, compared with $331.5 million at year-end 2021; total liabilities were $93.8 million and stockholders’ equity was $239.0 million. The claims reserve was $37.6 million. Investments’ accumulated other comprehensive balance shifted from $3.2 million of income at year-end to a $0.8 million loss, largely reflecting unrealized investment losses.
Material changes and management commentary
- Revenue fell 4.2% in Q3 and 8.6% year to date; net income declined 45.4% and 66.0%, respectively. Net premiums decreased 7.9% in Q3 and 1.0% year to date, primarily as higher mortgage rates reduced transaction volume.
- Equity-investment fair-value changes were losses of $4.6 million in Q3 and $22.7 million year to date, versus losses of $0.8 million and a gain of $7.3 million in the comparable periods. This was a major drag on reported results. Net realized investment gains were $2.5 million in Q3 and $6.3 million year to date; 2022 included $162,000 of fixed-maturity impairment charges.
- Expenses rose 7.8% in Q3 and 11.1% year to date. Personnel expense increased to $63.7 million year to date, attributed to new offices, growth-related hiring, acquisitions and higher benefits; headcount was up 40.2% year over year. Office and technology and other expenses also increased.
- Escrow and other title-related fees increased to $17.2 million year to date from $10.1 million; non-title services rose to $9.1 million from $6.9 million. Management attributed growth principally to business mix, commercial activity and like-kind exchange revenue.
- The company acquired a Texas title agency during the first nine months. Texas premiums increased, while premiums declined in several other reported markets. Management also cited higher short-term investment purchases amid market declines and uncertainty.
- Title claims provision decreased 31.2% year to date to $3.5 million, reflecting geographic mix and favorable loss development. The reserve includes $4.0 million for known claims and $33.6 million for incurred-but-not-reported claims; management considers it adequate but notes estimates may change materially.
Outlook, risks and contingencies
The filing gives no formal company earnings or revenue guidance. Management emphasized that results depend on cyclical real-estate activity, mortgage rates, transaction volumes and operating leverage. It cited inflation, the Russia-Ukraine conflict, COVID-19, market volatility and rising rates as sources of uncertainty. The MBA forecast cited in the filing projected 2022 purchase activity down 13.2%, refinancing down 72.6%, and total mortgage originations down 47.6% from 2021; these are third-party projections, not company guidance.
Other risks include investment losses, claim-reserve uncertainty, fraud, cybersecurity events, regulation, competition, dependence on key markets and agents, and execution of growth or acquisitions. Legal proceedings and regulatory audits were described as not expected to have a material effect. The company remains contingently responsible for customer escrow and exchange funds excluded from its balance sheet; like-kind exchange deposits and reverse-exchange property totaled approximately $477.9 million, down from $763.9 million at year-end. The filing reported no material subsequent events and no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective.
The company paid $2.62 million in dividends during the first nine months and repurchased 629 shares. Management anticipated increasing repurchases during the remainder of 2022 and first half of 2023, subject to market price, cash availability and alternative uses of funds.
Important facts for investors to verify
- Whether title transaction volumes and premiums continue to weaken as mortgage rates rise, and how Texas growth offsets declines elsewhere.
- How much future earnings volatility may result from equity-security fair-value changes and whether unrealized fixed-maturity losses recover.
- Whether expense growth, especially personnel and technology costs, moderates relative to revenue.
- Whether claims development supports the $37.6 million reserve, particularly the $33.6 million IBNR component.
- How acquisition integration, regulatory capital requirements and contingent responsibility for escrow and exchange funds affect liquidity and capital allocation.