Investors Title Company — Q1 2019 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2019, compared with the same period in 2018. The company primarily underwrites title insurance, with additional exchange, trust and agency-management services. Title operations are seasonal and sensitive to real-estate and mortgage activity.
Key financial results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total revenue | $39.946 million | $33.776 million |
| Income before taxes | $8.313 million | $5.225 million |
| Net income attributable to the company | $6.626 million | $4.176 million |
| Diluted earnings per share | $3.49 | $2.20 |
| Operating cash flow | $(0.847) million | $(0.519) million |
- Revenue increased 18.3%; net income attributable to the company rose about 58.6%. After-tax profit margin was 16.6%, versus 12.4% a year earlier.
- Investment-related results were a major contributor: the company recorded a $4.670 million unrealized gain on equity investments, compared with a $0.642 million unrealized loss in Q1 2018. Net realized investment gains were $0.790 million, versus $0.153 million.
- Net premiums written declined 2.6% to $28.795 million. Home-and-branch premiums fell 16.8%, while agency premiums increased 3.3%. Non-title services revenue rose to $2.388 million from $1.592 million, primarily due to exchange services.
- Operating expenses increased 10.8% to $31.633 million. Agent commissions rose 7.4%; the claims provision was $0.226 million, compared with a $1.406 million benefit in Q1 2018. Management attributed the change in claims results primarily to less favorable development in the current quarter.
Financial position and liquidity
- At March 31, 2019, cash and cash equivalents were $22.052 million; short-term investments were $29.696 million; total investments were $184.464 million; and total assets were $252.990 million.
- Total liabilities were $70.261 million and stockholders’ equity was $182.729 million. The filing states the company does not carry debt. Liabilities include a $31.384 million claims reserve and $4.927 million of operating lease liabilities.
- Cash increased $3.358 million during the quarter. Investing activities provided $4.972 million; financing activities used $0.767 million, including $0.755 million of dividends. Operating activities used $0.847 million, principally reflecting timing of payments in accounts payable and accrued liabilities.
- Management says it maintains a liquid investment portfolio and believes operating cash flows can meet foreseeable operating needs, while noting that results and cash flows depend heavily on real-estate activity. Both title insurance subsidiaries met minimum capital, surplus and reserve requirements in their licensed states.
Changes, outlook and risks
- Results improved year over year, but the increase in total revenue and earnings included substantial equity-market gains; meanwhile, title premiums declined and the claims result was less favorable than in Q1 2018.
- The company adopted lease accounting guidance on January 1, 2019. It recognized $4.925 million in operating lease right-of-use assets and $4.927 million in lease liabilities; management said adoption materially affected the balance sheet but not income or cash flows.
- The filing provides no company-specific earnings or revenue guidance. It cites an MBA forecast of 5.0% growth in 2019 purchase activity and a 9.4% decline in refinancing activity, with total mortgage originations projected to rise 1.0%; these are external industry forecasts, not company guidance.
- Key risks include real-estate and mortgage-volume cycles, interest rates, geographic concentration, competition, regulation, investment-market volatility, technology and cybersecurity, and the possibility that claims reserves prove inadequate. Management considers the claims reserve adequate, but estimates may change as new information emerges.
- Legal proceedings and regulatory reviews are described as not expected to have a material effect. The company also administers customer escrow and trust funds and held approximately $269.4 million of like-kind exchange deposits and reverse-exchange property off balance sheet at quarter end; it remains contingently responsible for their disposition and related obligations.
Investor verification priorities
- Assess how much earnings growth is repeatable apart from the $4.670 million unrealized equity gain and higher realized investment gains.
- Track premium trends by channel and market, particularly weaker home-and-branch premiums and the effect of geographic mix on agent commissions.
- Review claims-reserve development, including the $28.310 million estimate for incurred-but-not-reported claims, and subsequent claims experience.
- Monitor operating cash flow, real-estate and mortgage activity, and the company’s substantial off-balance-sheet exchange and escrow responsibilities.